Social benefits cannot replace real reform

Social benefits can mean different things to many people. In their simplest form, they play a crucial role in providing vital support to those in greatest need. To many others they are associated with the luxury of retirement. According to the International Labour Organisation (ILO) "only 20 per cent of the world's population has adequate social security coverage and more than half lack any coverage at all". In the world's richest countries, social benefits have evolved to become large, bureaucratic and complex tools of politicians, and provide generous comforts with little regard to sustainability.

Unfortunately, democracies, by the nature in the way they are formed, haven't had the willpower to address this issue and evoke change, as evidenced by the problems looming on Europe's horizon. The perpetual election cycle and race for votes hinders the ability to tackle the problem. In bad times social benefits are harder to pay for yet in greater need, in good times reform is swept aside and ignored. Political denial and a failure to address longer-term secular economic and demographic trends mean that the next decade will bring with it some difficult decisions for western governments.

A recent article by New York currency trader, John Taylor, highlighted the early foundations of European social benefits, put in place by Otto von Bismark, German chancellor in the 1880s. These reforms including wage, retirement and health care entitlements were eloquently used to cap the growing popularity of socialism and communism, securing his power for another decade.

These original principles have grown into structural economic headwinds now facing Europe. As demographics rapidly change — life expectancies increase and populations age — the ratio of retirees to workers increases and social luxuries bestowed by governments become increasingly unaffordable. Retirement ages are too low and pension funds aren't capitalised adequately to pay out what they've promised. Public health care services are expensive, all too often inefficient and in most cases funded by inappropriate levels of taxation.

Although at the outset politicians greatly enjoyed the support they received as champions of new social policies, governments are realising that generous social benefits and welfare systems established throughout the 20th century are now less viable.

In a recent report, Jim Reid, a strategist at Deutsche Bank, regards current social benefit policies as "a legacy from an era where life expectancy and the cost of aging was significantly lower". As much as politicians would like to ignore, a secular paradigm shift is underway and brings with it inconvenient truths and very sensitive topics of debate.

These challenges require policy makers to make difficult, unpopular decisions. Generally, solutions demand that developed economies increase the size of their labour force by increasing retirement ages, and increase payments made to the state by raising taxes.

Incumbent politicians are at the mercy of the next election to remain in office, so striking the balance between what is in the long-term interest of a nation and what is palatable to voters becomes fraught with compromise. There can be enormous conflicts of interest, between the future and the present.

Plenty of pitfalls

Even the slightest attempts at reform are facing considerable resistance, evidenced by protests and rioting in Greece earlier this summer, and now strikes in France in response to increasing the retirement age from 60 to 62.

Having faced immense resistance toward benefit reductions, French President Nicolas Sarkozy is already entertaining concessions. In light of these changes, Reid remarked "… it does seem that an increase in the retirement age of a year or two spread over a few decades will not be enough to ease the problems highlighted".

This battle is likely to continue with strong resistance as both austerity measures and reforms occur at a time when many economies are experiencing high unemployment, sluggish growth, and the first wave of countless ‘baby boomers' entering retirement.

Across the considerably younger Gulf Cooperation Council (GCC) landscape similar social benefit schemes exist for Gulf citizens. There is no doubt these schemes have distributed wealth, contributed to higher living standards and levels of health. However, GCC states need the foresight to evaluate the sustainability of these practices over subsequent generations. The GCC's hydrocarbon bounty is footing the bill today, but that will not always be the case. Generous social welfare benefits are easy to dispense but extremely difficult to withdraw, and as our populations grow and ultimately age, the GCC too may face the challenges of Europe.

As the GCC is in the early stages of enjoying the social benefit windfall, it pays to learn from western countries' past and use its present to devise innovative and sustainable schemes for its future. It is far easier to ‘kick the can' of reform down the road than to tackle it head-on. Corrective measures are cheaper and easier to enact today, than tomorrow.

Ali S. Al Salim is a Kuwaiti businessman based between Kuwait and London.