March 2, 2003

Inverting the welfare pyramid

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The other week, we raised the issue here of transferring wealth to the young via a fund starting at birth. The response to this idea has been huge and so it is worth exploring further, particularly in light of our demographic trends which mean an aging population will have to figure out a way of looking after itself.

The crux of the idea is to invert the welfare pyramid. In tandem with a pension fund, we could have a wealth fund for every child born in the country. The reasons for having such a wealth fund are the same as those behind stock option plans for workers in a private company. The idea is that workers are incentivised by stock options and so there’s a greater productive effort, ensuring that the company does better than its peers. Stock options also allow all the workers, not just the management, to “buy into” and profit from, the success of the company. Ryanair is a great example of this. Setting up a fund is a way of giving everyone a reasonable stake in society with the objective of changing peoples’ behaviour towards the State and each other.

A plan to provide a wealth fund for every child in the country would allow all of us to buy into the society early. Instead of rewarding people for good citizenship at 65 on retirement we could dangle the wealth carrot in front of kids when they are in their late teens and early 20s or 30s. Wealth -not income – is the key to financial success. A lack of income means you don’t get by, a lack of assets means you don’t get ahead.

How would the scheme work? The State could ensure that everyone has a minimum of assets when they reach 30, by using some of the money set aside for the national pension fund to start an investment fund for every child born in the country – all 58,000 of them. For example, a fund starting with 10,000 euro for every child would cost euro 580million, just over half what we are setting aside for pensions. A well- invested fund could generate substantial assets for everyone in the society maturing when these kids are thirty. If compounded at 7% per annum, we could be talking of assets in the region of euro 76,000 for our thirty-year olds by 2033. (This would shrink the huge wealth gap that has emerged over the past decade. This wealth gap is largely as a result of the ownership of and price of land that has given a one-off gain to owners of houses during the housing market boom. This could be regarded as equivalent to a huge one-off tax cut to those people who own their houses, paid for by a huge one-off tax hike for those who have bought houses in the past five or six years.)

The fund gives everyone a real stake in this society. Funds could be restricted to paying for other wealth- enhancing pursuits such as financing education, making other investments, business start-ups and ultimately home building.

Many have argued that the international equity market might not generate 7% over the period, given recent experience. But who said anything about the equity markets? Such a fund could be used to part-finance, together with private money, the building of toll-roads for example. By giving every child a shareholding in a national toll-road company, a yield of 7% on invested capital could be easily achieved. This would be a PPP –public private partnership- with real public involvement. The exit strategy for fund holders at 30 would be the secondary market in these tradable shares that would obviously emerge.

Why introduce this now? The most important reason is self-help. Over the years, big, top-down leftwing ideas do not seem to have reduced inequality or stopped the emergence of an underachieving underclass that is not emigrating from Ireland anymore. There are two ways of dealing with this problem. The first is the way we are dealing with it now which involves an opt-out from the rest of us. We seal people off in their run-down ghettos, allow them to exist on welfare and the deal is the following – you stay away from us and we will pay tax to keep you in subsistence. This is a sort of tolerable privation in which a certain section of the population becomes entirely dependent on the State and dropout parents raise dropout children. This can’t be the answer.      

Our system needs to be revamped to put the focus where it belongs: on the children, not the parents. All economic studies of the present status quo show that social welfare changes people’s behaviour and, in the US at least, there is compelling evidence that welfare given to parents without any conditions can have a detrimental effect on children.

Can we make welfare conditional? Of course we can. Families that look after their kids should get additional payments. For example, there might be more benefit for mothers who take their kids for regular medical check-ups. If a child attends school regularly, that family should get more benefits than those families where the kids are constantly mitching. If the parents take part in school initiatives and even children’s marks could be taken into account when it comes to welfare payments.

The reason for this conditional welfare is that people change their behaviour. All studies show that education is key to success. Equally, the main reason that poor kids don’t get to college is because there is no culture of education at home, not because of a lack of funds. If Dad is at home on Wednesday night helping little Paddy with his homework instead of down the pub drinking and watching Man U, there’s a much better chance that little Paddy will go to college. Although is sounds harsh, the state could also stop benefit to parents who remain junkies after health board rehabilitation efforts to get them off the gear.

The point is that our present system of all handouts and no wealth- based funds is causing the system to reinforce itself where poor kids underachieve, leave school early, feel entirely cut off from the rest. In short, they feel they have no stake in society and open-ended welfare – the insulated middle classes’ part of the deal – reinforces this.

The combination of the carrot of a wealth fund, like a pension fund, made available to all children when they reach 30, plus the stick of conditional social welfare payments, could greatly change everyone’s behaviour for the better, leading to less crime, more social advancement and much more equal opportunity.

Why is it important to air these ideas now? Because of our birth rate. The average Irish family has fallen from 5.5 in 1980 to 2.5 in 1999 – which includes parents. We are now typical of all Europeans. By 2030, the Irish baby boomers who are sustaining growth these days will be close to retirement. They will need younger people to work and look after them. Irish children will be scarce and therefore, from a rather inhumane but crucial macroeconomic perspective, more precious.  When Irish children are scarce we can less afford any of them to underachieve if we all want to retain a rising living standard. The other option is to get poorer as we get older or open the doors to limitless immigration. As far as I can gauge, the population hasn’t seriously considered either of these options. So we have some choices: getting more out of our scarce Irish children, importing more immigrant kids or collectively accepting a lower standard of living in retirement.