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Macdonald-Laurier Institute

It’s time to rethink the social contract for our rapidly changing world: Linda Nazareth in the Globe

February 18, 2020
in Columns, Domestic Policy Program, Economic policy, In the Media, Latest News, Linda Nazareth
Reading Time: 4 mins read
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The onus will continue to be on individuals to take on more individual responsibility in a world that is transforming more quickly than the rules can be changed, writes Linda Nazareth.

By Linda Nazareth, February 18, 2020

Unemployment rates are low, the stock market is humming and the economy is great, right? That is the narrative we hear from politicians and some economy watchers, but it seems not to synch with the realities for many households. From baby boomers facing underfunded retirements to millennials unable to find more than fragmented employment, it seems that many are unhappy with the economic realities they face. Is this just glass-half-full thinking, or do they have real concerns? New research from the McKinsey Global Institute (MGI) suggests that it is the latter and that, in fact, it is time to rethink the social contract between individuals and institutions.

If you never studied philosophy or political economics (or if you studied them and have forgotten most of what you learned) then you may not be familiar with the idea of the “social contract.” As pontificated by great minds such as Jean-Jacques Rousseau and John Stuart Mill, the term basically refers to the hazy set of rules that govern the relationship between individuals and institutions. Individuals give up some rights to live in society, goes the theory, but in return government and maybe business have to bear some responsibility for their well-being.

Pre-21st century, the rules were along the lines of everyone getting a full-time job if they wanted one, governments and business providing decent pensions, and a certain standard of living being attainable for most. Over the past few decades, however, a lot of things have changed what was the accepted reality. From the deep recession of 2008 through to the burgeoning fourth industrial revolution, economic forces have created a playing field that looks very different than it did a couple of decades ago.

The MGI report puts some numbers to the way things have changed throughout the industrialized world, for good or bad. For example, we have seen developments such as deregulation of many industries as well as the rise of low-cost manufacturing centres such as China and Vietnam. As a result, the cost of many goods, including clothing, recreation and furnishings, have dropped. At the same time, the cost of what the MGI calls “basics,” a category including housing, health care and education, has risen to more than compensate. Meanwhile, inflation-adjusted wages have fallen in many countries including Canada. Although not every household has lost from these changes, many, particularly those at lower income levels, are indeed worse off than they were.

It is also a woeful reality that lifetimes are getting longer but that, in financial terms, households are saving ever less to cover their retirement years. According to the MGI data, the number of expected years in retirement for those in their 22-country sample has risen from 16 in 1980 to 20 in 2018. At the same time, both work and government pension plans have generally gotten tighter.

This might be fine if individuals had stepped up their savings to compensate, but that seems to be far from the reality. Over all, in 2017, more than half of individuals in advanced economies did not save for retirement, a quarter did not save at all and 20 per cent do not have enough wealth to cover six months of basic living. The Canadian figures – 41 per cent did not save for retirement; 20 per cent did not save at all; and 12 per cent do not have a six-month savings buffer – are better than the average, but hardly much to brag about.

So, in light of these changes, how should the social contract be rethought? Well, as McKinsey and others have pointed out, a first step comes from acknowledging the economic shifts. That is, the labour market is changing in a way that some are being left behind, income polarization is only growing and it appears that every generation feels they are being denied access to the economic party.

That is certainly the reality in Canada, where an MGI-calculated index shows that market intervention by institutions to provide such things as pensions has fallen by about 14 percentage points since 2000 in Canada, as compared to 13 percentage points for all countries, while government spending has barely budged to compensate. As a result, Canada is in a category that the MGI calls “low intervention, low spending”; this also includes the United States, Australia, New Zealand and Japan. In contrast, there is a “high intervention, high spending” group that includes France, Austria, Norway, Finland and Denmark.

Acknowledging the speed with which the world is changing, the next step may be to put in more worker protections (always tricky since regulation is not necessarily the answer to everything) or perhaps getting business and social organizations more involved in the needs of households.

Better still, of course, would be to jog the economy in a way that creates growth and productivity, which would presumably ultimately be shared through the population. That, however, is not likely to be much of a short-term fix. Instead, difficult as it might be, that means the onus will continue to be on individuals to take on more individual responsibility in a world that is transforming more quickly than the rules can be changed.

Linda Nazareth is Principal of Relentless Economics and senior fellow for economics and population change at the Macdonald-Laurier Institute

Tags: economic policyeconomyLinda Nazareth
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