Social Security and Economic Globalization

This chapter takes stock of both OECD developments and some Asian dynamics in social security systems and highlights economic globalization. There are several surprising facts, including that in several OECD countries there is redistribution in favor of the top income quintile. Ageing is a general challenge to almost all OECD countries – and, in the long run, also to China. Globalization is asymmetric and the current form of financial globalization is not sustainable.

Under certain assumptions the neoclassical growth model is an adequate analytical basis for many issues of social security and economic globalization. Before one can consider an open economy growth model it is useful to focus on a closed economy model and present new answers to some old questions: What is the optimum income tax rate in a growth model; a simple answer is derived. A related question then concerns taxation of income in an open economy – with mobile capital. Moreover, the neoclassical growth model can be modified for the case of an open economy and again the questions of taxation, social security and globalization can be raised. The analysis also suggests a new link between the Phillips curve model and medium term government budget constraint. Furthermore the impact of the dependency ratio on the exchange rate, the interest rate and the stock market price index is considered: A modified Branson model gives new insights into the role of a rise of the dependency ratio. Moreover, additional aspects of globalization dynamics are considered, including the role of fatal accidents at work.

Various theoretical approaches to economic globalization and social security are highlighted. There also is a special focus on the role of accidents at work – with contributions by several authors featured. In addition several new approaches are developed and it becomes obvious that the links between economic globalization and social security are more complex than is often considered in the relevant literature. Globalization contributes to economic convergence and growth; social security can contribute to better human capital formation and this in turn could contribute to economic growth.

Key policy conclusions are presented. Existing solutions in the EU context – e.g. the globalization fund – are considered as well as new options developed: an important new proposal concerns the introduction of a variance tax in the banking sector. Such a tax would have as a basis the variance of the rate of return on equity. The idea is to avoid excessive regulation of the banking sector and to encourage management to consider what a long term stable rate of return on equity could be. Effectively such a tax could work as an anti-bubble tax and thereby help to make economic globalization sustainable. There is a broad range of economic policy reforms that should be considered in the US, Europe, Asia and other regions of the world. If the euro crisis cannot be overcome the European model of a social market economy will be a cautionary tale for Asia, rather the US model could become dominant – thus far Japan is the only country in the area that has a broad social security system. With the ageing process of Japan being ahead of that in both the EU and the US the Japanese system will face particular challenges.

Considering the topic of long-term growth and sustainability – in a broader sense – one will have to take into account several aspects: