Has the crisis of the welfare state been exaggerated?

An inquiry using a risk-management paradigm.

byJuraj Draxler

Assessment paperCourse: States We’re InTerm: Autumn 2004Tutor: Dr Simon Parker

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Abstract

Welfare state is an evergreen topic of academic and public debates. It affects all citizens, as beneficiaries or contributors. The discussion is bound to be ideologically charged, since welfare policies almost inevitably involve some kind of redistribution. In such context, the word “crisis” pops up easily. Welfare mechanisms are sets of static rules, and as economy and society evolve there will always come up a misfit either between what is effective now and what was effective before, or between the public’s view of what was justified yesterday and what is justified today. This paper offers to use the state as a focal point for analysis, by using the paradigm of the welfare state as a risk-management mechanism of the nation-state. The paper develops the paradigm by tracing the origins of the welfare state in the growing need of developing capitalism to provide for its own stability and viability by limiting risks that individuals face, and which would impede cooperation. Without safety nets provided by the state, the capitalist society would fail to develop in the way we know it today.This functionalist concept is meant to be a useful shorthand for the relationship of mutual dependency of the sphere of production and the sphere of governance. It shifts the focus from both the questions of efficiency of individual welfare mechanisms and the questions of social justice. Instead, the attention is squarely on the demand for the welfare state, over time and both at an individual and societal level.In order to answer the question given in the title, what follows is an investigation into the composition and nature of risks that individuals face today, and analysis of the nature of modern, post-industrial, post-Fordist state. The paper concludes that as both the risks and the state, i.e. the whole reference framework, are changing fundamentally, it does not make sense to speak of welfare state crisis. Rather, the paper tries to make it evident that while a demand for state management of risks remains strong, a modified set of social contracts is needed to form a ‘new welfare state’.

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Contents

1 Introduction …3

2 The risk-management paradigm …7

3 Welfare state – a historical perspective

3.1 From warfare to welfare state …9

3.2 Keynesian economics …11

3.3 Fordist and post-Fordist economy …14

4 Welfare state – contemporary challenges

4.1 Modern society and risk management …17

4.2 Example: pension system …19

4.3 What lies ahead …22

5 Conclusion …23

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1 Introduction

When one talks of “welfare state crisis” it is usually in connection with the strains on

public finances that have been besetting Western economies since 1970s.1 Yet the

conflation of welfare state with fiscal redistribution is not a fortunate one. This

accounting approach leads to the simplistic notion that if “the welfare state becomes too

big” it is necessary to roll it back. This is something that neoconservatives have peddled

since 1980s, using the logic of enterprise behaviour: if costs are rising, try to slash them.

However, this is a fallacy of composition. What works at the individual level does not

work for the society as a whole.2

We need to realize two things. First, modern society is a web of dependencies. Today’s

economy does not consist of individuals toiling their plots of land to squeeze out an

assured, if meager, living. It is precisely the lifting of the burden of everyday defence of

1 There are two possible types of problems. One is a straightforward budget deficit, as in the cases of high unemployment, when existing social security provisions lead to high expenditure (on benefits), which is paralleled by diminishing tax income (to which high unemployment and economic slowdown leads). Secondly, the government’s implicit debt may be rising, as in the case of benefit-defined pension systems affected by adverse demographics, where the state is under threat not to be able to honour its obligations towards pensioners. 2 To illustrate this in a slightly simplified way: if, as a manager, I get rid of employees who steal, I improve my company’s efficiency. If, as a society, we make all petty thieves unemployed and do nothing else, we have just raised the stakes for them and probably forced them to turn into robbers. And, slashing costs and releasing criminals onto streets will turn into externalities ultimately unbearable to all. I am using an example of crime on purpose here. An example more pertinent to the topic of the welfare state would point out, for example, that companies are not interested in curing employees who contract tuberculosis, but as a society we probably do not want to leave people with contagious diseases running around. But, for some reason, especially the right-leaning debaters seem to be more willing to accept negative measures as a legitimate way of avoiding external costs. This is not to deny that critics of various welfare systems raise important questions of efficiency of welfare economics, as well as normative questions, regarding the justice of redistribution. However, in public debates, and not only in them, the assumption is too often of two separate spheres: one economic, which produces wealth, and one social, where wealth is consumed. It is precisely this notion that I am going to dispute.

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one’s chances of survival from the individual’s shoulders that makes extensive

cooperation possible. We rely, for example, on a process of endless innovation so that we

can have ever-increasing productivity. However, innovation is tied with risk-taking.

Similarly, re-location in search of a job is risk-taking. Capital investment is risk-taking.

Some of the risks are dealt with through legal arrangements that implicitly transfer risks

to larger segments of the society – limited liability partnership is the most notable

example. Some of the risks are insurable. But some, those connected with ‘common

shocks’, are not.3

This leads directly to the second point. State role in managing certain risks is

irreplaceable. Only the state can effectively guarantee a society-wide safety net for

citizens. This safety net, or, rather, a complex of nets, has become known as the “welfare

state”. It is possible to allow a purely private provision of welfare services with the state

taking solely the role of the regulator, but this role is crucial.

These two observations are the basis of the analytical approach of this paper. An

economist might want to measure efficiency of various welfare mechanisms. A political

philosopher’s concern is to come up with theories of justice based on some assumptions

about what human beings are and what is good for them. A political science analysis of

the welfare state, however, should be concerned with describing the context. It should be

historical and institutional, identifying the stable structures that are the welfare state and

describing them in a model that makes it possible to account for past developments and

which allows for some degree of prognostication.

3 In case of pension schemes, for example, inflation is an uninsurable risk. “The probability of pensioner A experiencing a given rate of inflation is not independent of that for pensioner B – the rate of inflation facing one pensioner will (by and large) face them all. There is no possibility of winners compensating losers and so insurance is impossible.” (Barry 1996: 211)

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Therefore, a paradigm is needed that would make it possible to immediately identify the

power relations that determine how the welfare state behaves and changes. In order to

satisfy these criteria, this paper adopts the view of the welfare state as a unique risk

management system of the nation-state. What is meant by this, in short, is the fact that in

a modern society, individuals face a certain set of common risks which only the state can

manage effectively and therefore promote overall economic efficiency and social

stability.

The first section of this paper elaborates on epistemological advantages of this approach.

Then, a brief historical exposition will outline the justification for the paradigm. The

main focus of this analysis is on defining how risks and the state are changing today. The

introduction into the concepts of Fordist and post-Fordist society will create a framework

for this. The paper will then examine how this shift affects both the nature of the state

itself and the composition and nature of risks that individuals face. The overall objective

is to provide a positivistic account that allows for a certain degree of prognostication by

isolating key elements of the welfare state and placing them in a reference framework

that allows for a dynamic analysis.

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2 The risk-management paradigm

Every social institution can be viewed, first, as a channel for actors’ need to form a stable

relationship in order to provide for their own interests, and, secondly, as a building bloc

for the society. Thus it must make sense at the individual as well as aggregate level.4

The concept of ‘risk’ makes it possible to integrate social and economic perspectives, as

well as individual and aggregate level of analysis. A disruption of individual livelihoods

can add up to translate into the disruption of societal structures.

This creates a unifying outlook – there is no distinction between a social justice concept

and economic interests. For our analysis, theories of social justice are seen as

mechanisms of risk management.5

The risk-management perspective grounds the welfare discourse in a material base, while

the focus on ‘state’ provides a historical dimension.

This is important, since it allows to avoid the usual problem with welfare state analyses,

which is that they are heavily dependent on the particular model that the observer relies

on. These models are rather static (Esping-Andersen 2002: 6).6

4 If it does not, then the relationship is not strengthened by its context, and does not become permanent, i.e. does not become an institution – in the sense of Huntington’s “stable, valued and recurring patterns of behaviour” (quoted by Lowndes in Marsh, David and Stoker, Gerry (eds) (2002) Theory and Methods in Political Science. 2nd ed., Basingstone, Palgrave Macmillan: 99).5 To put this into perspective, we could analyze other social institutions in a similar way. Marriage, for example, seeks to, through contractual trappings, codify obligations of parties to the agreement. In effect, it manages the risk of and from defection of one of the partners. The aim is mutual support, procreation and, old-age support from children. And, ironically, we see in the modern society that as another institution takes care of these, namely the welfare state, the marriage loses a lot of its appeal. 6 Thus, residualists view welfare state as a means of providing for those evidently left out of what is perceived as acceptable living standard. New liberals of the likes of Beveridge have emphasized the function of the welfare state as a balance to the workings of the market and as a means of saving market

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It helps to start by thinking what, functionally, actually is the welfare state. Robert E.

Goodin speaks of two characteristics that define the welfare state. First, “the welfare state

intervenes (a) in a market economy (b) to meet certain people’s basic needs (c) through

relatively direct means.” Secondly, “the welfare state is a system of compulsory,

collective, and largely nondiscretionary welfare provision.” (1988:11-12)

And what does ‘nation-state’, the second term of our concept, mean? A state, to use the

traditional Weberian way of defining it, is centralized decision-making, territorially

bounded and with a monopoly of the use of violence. But what about the ‘nation’

component? It is usually stressed that a nation-state is a political entity that is culturally

homogeneous enough that it differentiates itself from its surroundings. But the nation-

state can also be defined as such an entity, where the central power takes control of some

of the core institutions shaping citizens’ lives, namely education, healthcare (not only by

direct provision, but also by setting standards, for example for hygiene or food labeling)

and welfare (also in the wide sense of the word, by promoting business activity as well as

regulating labour practices). As we can see, here, the state becomes almost coterminous

with welfare state, and this is not accidental, as we will see in the next section, which

describes welfare provision as raison d’être of modern state.

economy in the long run. Socialists either stress social equality and therefore the redistributive element of social programmes, or community solidarity – in which case they put emphasis on the universality of services (Goodin 1988: 5).

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3 Welfare state – a historical perspective

3.1 From warfare to welfare states

“Who says welfare state says nation state” (Giddens 1994:137). When Bismarck set out

to create the first version of a comprehensive social security net, his aim, he said, was to

“bribe the working classes, or… to win them over, to regard the state as a social

institution existing for their sake and interested in their welfare”7. On a systemic level, the

welfare state is exactly that: a tool that cements the nation-state, thus providing the

crucial centripetal force to balance the workings of the economy. While the early

capitalist era was producing a visibly polarized society, the main clusters of which were

the capital-owning bourgeoisie and the labour-providing proletarians, the nation state was

a stabilizing element, an organizing principle for the whole socio-economic system. This,

arguably, is still the case today, although we tend to realize it much less after having had

progressive taxation, social security system and redistribution for a long time.

And, sure enough, the 19th century was the period of conscious and frantic nation-

building. Compulsory education had already been introduced in some continental

European states during the period of absolutism. Mass armies were now bringing together

workers and peasants from faraway corners of new states, a heterogeneous bunch

7 Cited in Ebeling, R. M. (1994) ‘National Health Insurance and the Welfare State’ Freedom Daily, Jan-Feb 1994. Available at http://www.assumption.edu/users/McClymer/hi119net/BismarckWelfareState.html, accessed on November 21, 2004.

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speaking a motley of dialect, and turning them into citizens with a sense of unity and

certain discipline. Elaborate pageants such as public celebrations of monarchs’ birthdays

or great exhibitions, were helping to create ‘publics’ – the spheres of homogenized

attention focused on topics that concerned the whole ‘nation’. Widening suffrage

expressed the fact that feudal-era concepts of legitimacy based on tradition and ‘divine

rights’ were no longer tenable. Bureaucratic machines were introduced to provide

impartial and stable backbone of nation-states.

Previously, in the era of limited productivity gains, the surest way to gain resources was

to dig up treasures or to win them through war. In the beginning of modernity, states

funded great explorations and hoarded gold in order to build armies to wage incessant

wars – as expressed in the mercantilist theory and the attendant regime. By 19 th century,

however, in the West this “warfare state” was giving way to capitalist, industrializing

nation-states. The state’s “gaze” was turning inward.

The 19th century reforms were, then, mostly designed to complement the market

(education) or provide for the victims of “market failures” (unemployment benefits).

World War I provided more momentum, now that working classes had seen how much

the state had relied on their mobilization, and economies had become more centralized

due to war effort. In Britain, for example, the government now extended its reach to

extensive housing support, to make Britain, in the words Lloyd George “a fit country for

heroes to live in”.8

But there was, as yet, no sense that welfare provision could be directly related with

economic success. This changed with the advent of “Keynesian economics”.

8 Cited in Directgov, http://www.number-10.gov.uk/output/page139.asp, accessed on January 17, 2005.

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3.2 Keynesian economics

In his 1936 treatise The General Theory of Employment, Interest and Money John

Maynard Keynes argued that markets could never achieve full employment on their own.

He provided a coherent theoretic justification for the state to step in to smooth the troughs

in the business cycles. This should be achieved through “built-in” stabilizers that would

inject money into the economy at the time of falling demand. Keynes did not talk

extensively of social security system, but it soon became clear that unemployment

benefits fit in well with this scheme. So, the welfare state became part of, rather than a

supplement, to state macroeconomic management. Post-war welfare states started

offering “a form of retirement insurance traditionally available only to civil servants and

a minority of private sector workers through their employers” (Myles 2002:159). And it

provided for a heightened sense of cohesion “a social arrangement with apparently few

costs and many benefits which included maintaining social stability and fostering a sense

of national community and solidarity” (Mishra 1984: 5).

This is why actors of different ideological persuasions joined eagerly in promoting it. For

many on the Left, socialism became welfarism, fiscal redistribution taking place of

common means of ownership. New Liberals, like Beveridge, had wanted the welfare state

to supplement the market, and it worked. Conservative parties were happy to see the

strengthening of the state, which the system entailed, and they, just like the liberals,

appreciated the social peace.

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The necessity of welfare state provisions was briefly discussed from time to time, most

notably in 1950s, when there was a sense that growing affluence would make state

welfare provision superfluous (Mishra 1984: 2). But the legitimacy of welfare state was

not seriously challenged during the first three post-war decades, which saw economic

growth unparalleled in history, accompanied by universal welfare gains.

Then, several phenomena brought up a sense of crisis. First came the stagflation of

1970s, which put the efficacy of Keynesian demand management economics in doubt.

Traditional measures seemed to be speeding up inflation without helping employment.

And with unemployment high, social expenditures increased. Second, towards the end of

the 20th century, publics across the developed world had become increasingly aware of

the demographic pressure on the welfare state.9 Thirdly, there are growing fears that

globalization puts pressure on the tax bases of developed economies, with the threat that

states will be forced to engage in competitive lowering of tax rates, the ‘race to the

bottom’, in order to prevent capital flight in the world of highly permeable boundaries.

The recent spate of tentative tax cuts in Western Europe has been paralleled by radical

moves away from progressive taxation in Eastern Europe – by January 2005, Estonia,

Latvia, Lithuania, Romania, Russia, Serbia and Slovakia have flat-rate income tax.

This reflects the fact that, fourthly, as a response to the problems of the prevalent

economic measures, but also as result of new technology and management techniques,

neoliberal thinking has made inroads into the traditional consensus of mixed economies

9 Better living conditions and improved healthcare means that people live longer during their retirement. At the same time, natality has been falling practically uniformly in the developed world for the past two-three decades, which means the ratio of productive population to pensioners becomes less and less favourable as years go by. And it should not be overlooked that “demography is producing a qualitative as well as quantitative change among the elderly,” as ‘the oldest elderly’ segment grows (over 80), with attendant issues of expensive care that the traditional informal carers (usually members of family) are unable to provide. See Myles 2002: 131.

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and the welfare state.10 While the monetarist alternative to Keynesianism proved

unpalatable to most governments (especially after the high cost flirtation with it of the

U.S. Federal Reserve Board under Paul Voelcker in 1979-82), the ‘Washington

consensus’ of 1990s came to be a powerful policy-forming regime. The French socialist

government of Lionel Jospin in 1990s privatized more fervently than its conservative

predecessor, and World Bank (WB) blueprints for economic reforms are widely

followed, not least in the case of pension reforms, where a 1996 WB document was used

as a crib especially in the post-Communist economies. Keynesianism in its core sense, of

state manipulation of aggregate demand through money supply, however, is still

practiced.11

And, fifth aspect, the structure of economies and of production was changing. In 1970s,

Daniel Bell laid down his prognosis for a ‘post-industrial’ society, based on knowledge

and information technology, increased role of skilled and flexible labour, and the rise of

the importance of services.12 Other similar concepts, following the notion that changes in

the production mode deeply affect the social sphere, were proposed. Authors such as

Jessop (1994: 14), have used the label Fordism, with its assembly line connotations, to

10 It is often overlooked that the shift from public goods, public companies emphasis to deregulation was to a large extent a consequence of technological changes. One example: digital technology made possible a large number of TV channels. Satellite technology made it escape, partly, national regulation. 11 All central banks of developed countries use interbank interest rates as their medium for stimulating or dampening economic activity. This is important to point out, since it illustrates one fact that will come up again and again in this paper – the state as a regulator cannot be replaced. The role can be ‘contracted out’ from the nation-state level, as in the case of the Eurozone, however, the mechanism remains the same. The members of the Board are appointed following negotiations between the member states, and the Board’s independence just reflects the general tendency to have the monetary decision-making bodies shielded from immediate public opinion vagaries.12 We may add two additional strains. The changing role of family and changed nature of gender relations make especially the systems relying on the support for the traditional family, mostly through its breadwinner, obsolete . Esping-Anderson argues that the “continental European Welfare state model” is most in need of addressing this challenge. (2002: 2) Also, the nation state is withering away as a concept that provided the focus of welfare-state construction. Much of the history of the welfare state is concomitant with “nation-building”. (Esping-Andersen 2002: 1)

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describe the way the economy and, by extension, the society, was organized in the

developed world, throughout most of the 20th century.

The insights connected with this concept fit well with the notion of welfare states as

nation-states’ risk management mechanisms, and it is worthwile to elaborate on them.

3.3 Fordist and post-Fordist economy

In general terms, Fordism is “based upon the dominance of mass production and mass

consumption (especially of consumer goods) and massified, semi-skilled labour.” It is

characterized by an “increased role for both large scale capital and organized labour”,

which is reflected in the importance of collective bargaining. Geopolitically, it was

formed under the leading role of the US in international economy, and framed by a free

trade consensus and stable exchange rates (Hoggett 1994: 96-7, emphasis added).

Politically, the Fordist state had been characterized by a left-right cleavage (attenuated by

the consensus on the need to build and sustain a welfare state).

The post-Fordist state reflects, first and foremost, a new “regime of accumulation.” It is

based on a number of flexibilities as opposed to the rigidities of Fordism. Flexible13, de-

massified labour force produces in the deregulated environment of international markets

with floating interest rates. “Fordist mass production of standardized goods, typified by

the assembly line and the minute division of semi-skilled labour, is increasingly displaced

by batch production of diversified products, a growth in small-scale service industries…”

13 Both in terms of flexible, widely applicable skills and ability to be frequently re-employed.

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(1994: 99). This new economy is possible due to key technical innovations (semi-

conductors, internet, etc.).14

The effect on the social sphere is likely to be profound. “The standard production worker

and the low-skilled could by and large count on a decently paid and secure job in the

welfare capitalist era. This is unlikely to be the case in the twenty first century.” The

reason is that “the unfolding service economy is potentially dualistic. The overwhelming

thrust is in favour of skilled and professional jobs but a sizeable market of low-end,

routine services may also emerge.”15 What we are facing is a “lifelong-entrapment” in

low-skilled and low-paid work of certain segments of population in precarious living

conditions, where they would face low-skilled uncertain and low-paid work or

unemployment.16

As national governments find themselves less and less able to exercise demand

management in open economies, they become increasingly active on the supply side and

on the side of forming framework for globalisation. The partially “hollowed out” nation-

states (Jessop 1994: 24) seek to increase competitiveness of domestic economies by

creating conditions for industrial innovation and for a better-educated labour force.

“Fordism was typically associated with a primary concern with demand management and

with the generalization of mass-consumption norms. This reflected the belief that Fordist

14 With the role of information, already heavily stressed by Bell, becoming increasingly prominent, various authors sought to illuminate it by talking of ‘information society’, knowledge economy’ or ‘knowledge society ‘. The later term is employed by Manuel Castells (1998), who also uses the term ‘network society’ to stress the nature of the new societal order.15 Esping-Andersen 2002, p. 2-3, emphasis added. He adds: “The hard trade-off is that, in the absence of a low wage marhet, the alternative is likely to be mass unemployment.”16 Manuel Castells describes today’s world as increasingly the one where poverty is likely to be much less geographically bound than before. He also seconds the view that today’s system reflects “a tendency to increased social inequality” (1998: 344). As for cleavages, Esping-Andersen notes that in the knowledge economy, “class may be less visible, but its importance is arguably far more decisive. In knowledge-intensive economies, life hances will depen on one’s learning abilities and one’s accumulation of human capital. As is well-established, the impact of social inheritance is as strong today as in the past – in particular with regard to cognitive development and educational attainment.” (2002: 3).

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mass production was supply-driven and could only be profitable when high levels of

demand were maintained” (Jessop 1994: 26, emphasis added). But “the post-Fordist

stress on flexible production has encouraged states to focus on the supply-side problem of

international competitiveness and to attempt to subordinate welfare policy to the demands

of flexibility.” On the other hand, states are emerging as managers of the process of

globalisation, by setting “legal norms for cross-national cooperation… reforming

international currency and credit systems… developing a new international intellectual

property regime…” and so on. The nanny state becomes a manager state.17

As the state’s approaches change, we need new methods for making policy diagnoses,

which would enable us to have a more informed view of the future (Gøsta Esping

Andersen 2002: 6-9). With more decentralized decision making, we need to allow for

systems that look at individuals rather than masses. Thus we might need to replace short-

term, ‘snapshot’ diagnoses with a ‘lifecourse framework’, for instance. Secondly, we

need to rethink principles of social justice. This becomes relevant especially concerning

some moral orientation as to how the burden of pensions should be changed between

generations. Thirdly, we should view welfare as social investment, rather than as

expenditure.18

17 Jessop describes one specific model of supply-side state as “Schumpeterian Workfare State” (1994: 24).18 “Let us begin with today’s retirees who on average, enjoy solid welfare and income security. Is this due to exaggerated public largesse? In part, perhaps, but the real reason is that those who retire now were the main beneficiaries of the post war full employment boom, allowing them to accumulate strong resources.” (Esping-Andersen 2002: 2-3).

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4 Welfare state – contemporary challenges

4.1 Modern society and risk management

The leitmotif of this paper is risk. State management of risks is often understated in

ideological debates raging around the topic of state intervention, which either centre on

efficiency or on questions of apriori justice. That’s why it is important to emphasize this

again: if we accept the view of human beings as actors averse to situations which border

on self-destruction, we have to accept that they will not take risks if that means a high

probability of ending in such situations.19 Of course, individuals also rely on personal

networks of support – family, friends. But modern society is precisely based on diluting

the power of closed, tightly-knit networks of support and relying on the “strength of the

weak ties” (Granovetter 1983). Efficiency of modern economies is based on a fluid

society. This is why the ‘maximin’ rule and the resulting ‘liberty principle’ of Rawlsian

social justice is such a powerful concept (Rawls 1971).

Risk management at societal level is just another public good and is similar to provision

of other public goods. Every modern country is ultimately dependent on public goods –

and this is true even for economies where state intervention is less visible than elsewhere.

19 I could invest a million pounds in a project with high probability of good return, but if there is a 10 percent chance of such a failure that it would plunge me in abject poverty, would I take the risk?) Businessmen, in fact, are protected by limited liability provision, a legal arrangement that the British paper The Economist once listed among the most important inventions of the modern age. Limited liability is something we take for granted today, but when it was finding its way into the legal system in 19the century Britain, it was a completely counter-intuitive proposition with lots of opposition.

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Hong Kong is a highly productive market economy. It has often been portrayed as an

example of what happens if the market is given a completely free hand. In fact, Hong

Kong’s economic success has been underpinned by very sparing, but effective state-level

intervention. The state provided vital information services – small firms, the backbone of

HK economy, would not be able to gain detailed information on the demand for

consumer goods in the US. This “safety net” was crucial for Honk Kong’s “low-risk

entrepreneurialism”. The success rate of businesses was the same as elsewhere – to every

successful business venture there were seven failures. But the small entrepreneurs could

rely on “the safety net of public housing and subsidized public amenities (Castells 1998:

263). In South Korea, another Asian tiger, the government was a much more explicit

helper, protecting gigantic domestic conglomerates, on which their economy was based,

from outside competition, creating favourable investment conditions. In Hong Kong, the

government intervened in a much more discreet way – if one fails in a business venture,

the healthcare provision is still there, and so is education for children.

This illustrates the problem in the debate. Due to high centralization of post-war

economies, state’s role in the economy has come to be equaled with nationalization. The

role of the state as a regulator was obscured by the state as a manager. The latter is

debatable but the former is irreplaceable. The next section will illustrate this through a

brief analysis of probably the most pressing problem of welfare states today: adverse

demographics and the problem of pensions systems.

4.2 Example: pension systems

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Problems facing pension systems across wealthy nations of today probably best illustrate

the effect of changing socio-economic conditions in the past two decades on a standing

welfare arrangement and the attendant social justice dilemmas.

The following is only a brief sketch, which describes the issue in a very generalized way.

Conditions from country to country differ. Some countries, such as Germany, have large

pay-as-you-go (PAYG) benefit-defined pension schemes20. The public policy dilemma

there is more visible that in countries with high proportion of funded schemes, such as

Britain or the Netherlands, or with contribution-defined PAYG schemes, such as France

(Myles 2002:157).

With rising productivity and population growth in the post-war era, PAYG schemes were

a natural choice for most governments. Since the system involved redistribution rather

than control of large pools of investment money, there was less potential for

mismanagement, and less public objection to state’s role. In fact, the arrangement

“sidestepped public distrust of capitalized pension schemes in countries where depression

and war had devastated pension funds in the first half of the century” (Myles 2002: 149).

PAYG schemes locked in at a state level the intergenerational contract that had before

existed only at a family level – the productive generation will provide for the elderly in

need.

The problem of adverse demographic ratio, economic stagnation and unemployment

posed a challenge to this system (Myles 2002: 150). At the same time, by 1980s, affluent

20 Pay-as-you-go schemes rely on the productive segment of the population to provide pension funds via taxes. This is different from funded schemes, where a person accumulates pension support in a personal account over his working life. Either scheme can be benefit or contribution defined. In the first case, benefits are settled beforehand, either through contract (private scheme) or law (state PAYG scheme). In the latter case, it is benefits that are defined when one enters the scheme.

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middle classes had become increasingly unhappy with state provision of services. Middle

classes had by now more disposable income, and, with the exit from bureaucratic jobs

(civil servants were a large component of middle classes) and makeover into flexible

workforce of service economy had the mindset that favoured more solutions that entailed

more choice.21

This largely follows from our description of a change from a Fordist to a post-Fordist

society. Society changes view of some institutions, but the basic risk remains the same:

that the productive population will not save enough for the old age. For, “the economic

function of pensions is to redistribute consumption over time”, (Barry 1998: 205) nothing

more. The shocks to the society would be large and therefore governments either directly

manage such redistribution through PAYG schemes or regulate it by setting up legal

frameworks for private pensions schemes.

Here we enter a key area. Even with private schemes in place, state’s role does not

become less crucial. Private schemes are funded schemes. It is often implied that the

switch to public schemes will solve the problem of adverse demographics. In fact, this is

not true, at the aggregate level, the problem of getting funds from the working population

to pensioners remains the same, whether it is through reaping benefits of market

investment or through a PAYG schemes (Barry 1998: 214). And funded schemes are

vulnerable to a common, and therefore uninsurable, shock – inflation. “Funded schemes

can cope with inflation if their assets are indexed by the state for example where the state

sells indexed gilts or where it underwrites directly the indexation component once funded

pensions are in Payment. However, the part of the return that compensates for inflation is

21 The issues surrounding structural support or opposition to the welfare state in the post-scarcity society are discussed in detail in Giddens (1994, especially: 139-144).

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paid out of current tax revenues – that is, on a PAYG basis” (Barry 1998: 210). In sum:

“A larger private sector does not imply that markets are in charge, only that the strategies

differ” (Myles 2002:171).

Either way, the fragile contract of post-war welfare state implying that a productive

generation can provide for the retired under the same conditions as they themselves will

be provided for, looks untenable.

New ‘intergenerational contract’ is needed. Musgrave (1986) suggests a fixed-

replacement model, where additional costs resulting from demographic change would be

spread equally between generations. Myles (2002: 142-3) considers this model of

intergenerational justice both politically viable, and persuasive, especially when

switching from a static, point-in-time analysis to a life course framework.

And this is exactly what theorizing on social justice will have to do. With Rawlsian

principles reflecting the nature of risk-averse individuals, the task is now to modify,

along those principles, the framework for distributing costs of adjustment to a new

demographic reality.

In other words, the material reality changes the composition of risks. Today’s productive

workforce faces the prospect, with unadjusted pension schemes, of paying far more for

other than it will be getting out of the system. The mechanisms therefore need to be

adjusted to be more in line with prevalent principles of social justice, which reflect the

risk-averse nature of most individuals.

The most difficult part will be to carry this model over into the public consciousness and

make it, gradually, a policy regime. But it surely can be done, just as Keynesian

principles have become adopted in the sphere of macroeconomics.

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4.3 What lies ahead

In the future, the risk to society’s stability will most likely become less defined by

massive industrial action or mass movements with a an agenda to topple a clearly defined

structure.22 This is due to the shift away from Fordist economics. Some collective goods

connected with risk management, on the other hand, do not seem any less relevant: safe

environment (in the wide sense of being safe from crime to being safe from pollution

damage), educated and healthy workforce, lifecourse stability (achieved through state’s

assistance with spreading consumption to provide for a post-productive life), and so on.

However, as “centers of collective agency” become “paralyzed by post-modernist social

and political trends” (Offe 1996: viii) the way of dealing with risks will probably become

more stratified and more network-like, as opposed to centralized solutions of the Fordist

age.

And the nature of risk is changing. In the past, human activity could mostly be usefully

described as ‘games against nature’ – efforts to extract natural resources to use in

satisfying human needs. Today, most risks people face are ‘manufactured risks’ – they

involve strategic games, decision-making by other people. ‘Manufactured uncertainty’

cannot be dealt with through traditional actuarial methods (Giddens 1994: 4, 151-7). In

fact, as risks become tied to each other, the overall risk of ‘system failure’ becomes

greater. And the only way to deal with system failure is through a central agency. In other

22 Movements in today’s society become more issue-oriented, less geographically centralized, and less general, less radically transformational. The reasons for this are discussed by Castells (1998: 351-3).

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words, even as capitalist economies become more decentralized, the fact that actors are

operating in an increasingly interconnected world means that economic entities create

risks that are tied together and eventually affect all.23

The state in the post-Fordist era might very well be becoming a hollowed out

Schumpeterian welfare state but that does not make it a less relevant actor in any way.

5. Conclusion

The main points of our analysis are these:

1) The welfare state is the state of today. As society becomes attuned to the

concept of economic growth, underpinned mostly by rising productivity, there is

an overarching demand for stability of a thick web of social and economic

relations. This can only be provided centrally, either by reducing the impact of

uninsurable common shocks (e.g. inflation or an extensive natural disaster) or by

providing every individual with a certain assurance of welfare minimum, which

would enable him to take risks in the marketplace.

2) The welfare state is changing, but reducing this change to a fiscal crisis is

misleading. The question does not stand simply whether to redistribute more or

less. The relationship between the state and its citizens (as political or economic

actors) is one of mutual dependency. The welfare state does of course change, but 23 As financial systems become more and more integrated and elaborate, through the use of derivatives, the global financial architecture becomes one dynamic system, where failures are difficult to contain on a company level. The Asian crisis of 1998 was a typical example of this, when a chain of events in Asia – starting with the collapse of the property market in Thailand – affected the whole world.

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the change is necessarily one of longue durée. In other words, it is an institution

that is a component part of today’s society rather than something external to it,

just like marriage, organized religion, or market economy.

3) What changes is the risk composition as well as the state itself . Both of these

are rooted in the changing mode of production. As for risks, not only do

individuals face different composition of them, but the nature of risks is changing.

We live in an interconnected, ‘reflexive’ society (Giddens 1994: 80).

Economically, this means that as the bulk of production becomes less an effort to

extract resources from nature and more a game of complex cooperation with other

individuals and entities, risks that each of these faces are no longer independent.

This has far-reaching implications both for theories of justice as well as for

economic management. On the state side, central governance becomes ‘hollowed

out’ in the face of globalization, concentrated less on direct involvement in the

economy and more on crucial regulatory activities.

4) Post-Fordist society promotes various inequalities. Life-long entrapment in

substandard living conditions now threatens not disadvantaged communities,

since work becomes much less mass-scale, but individuals left out of the fluid

workflow by lack of vital skills. Demand for highly skilled and flexible workforce

means that individuals who are not given proper education early in life may find it

difficult to escape a poverty trap despite periodic material assistance – in the

world where even lower-rang jobs are non-manual and relatively high skilled, it is

difficult to hop on the train. Also, as the society moves away from large-scale

production and collective bargaining, welfare provision becomes less

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redistributive. This, however, will probably continue to be offset by democratic

government, since:

5) State power remains the decisive determinant of welfare provision. Even

optically decentralized, quasi-market solutions, such as funded pension systems,

are in reality highly dependent on state regulatory role. Any crisis arising from a

common shock would create the demand for the state as a guarantor to step in.

The state, qua public, is also the only level where new social contracts can be

made and enforced, such as a new intergenerational contract to decide how the

burden of demographic change will be shared.

The welfare state in not in the crisis in the sense that some moral obligations cannot be

carried out due to material constraints. Rather, the whole set of referents is changing.

What remains unchanged is the demand for risk-management at the state level. This

spells continuation of ‘welfare state’ albeit in modified forms. Modifications will take

place, mostly, in adjusted sharing of costs of this risk provision, reflecting modified

partial social contracts. In other words, welfare mechanisms will be adjusted to remain in

line with the principles of social justice, which remain the same, reflecting the same

demand for state risk-management.

If there is a sense of crisis, it mainly comes due to the fact that approaches of too many

actors in the discussion have become ossified. Other than that, the welfare state lives on.

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