11 Oct 2006  What Do YOU Think?

How Do We Respond to the “Dependency Ratio” Dilemma?

Without knowing it, we have already heard a great deal about "dependency ratios." We can expect to hear a lot more, both at the level of nations and individual firms. What is the answer to a dilemma that we are going to be confronting more and more frequently?

 

Summing Up

Dependency ratios are useful as general indicators of future economic and social health. But they must be managed downward on both a micro and macro basis, in the opinion of the majority of respondents to this month's column. And it will take time.

There was little argument about what growing dependency ratios at the level of the firm tell us, regardless of where we are in the world. But several deplored what has been done about them. According to Francine McKenna, "There's no pension crisis in the executive suite …. The average worker is funding the looting of shareholder value by the fortunate few." As Cass Apple put it, "It is simply a matter of morality." Bob Fitzpatrick said, "This situation is nothing more than an extension of our 'Teflon' culture." At the national level, Richard Eckel pointed out that, "Socioeconomic policy should recognize that there is an optimal … dependency ratio range beyond which increasingly urgent action is needed to stabilize social costs and attract investment."

Several interesting actions were suggested. Many involved the way in which future obligations are funded. Don Rogers commented that, "Short term, the solution is to … require companies to fully fund and expense their current retirement contributions/obligations. Ouch!" Gerald Schultz agreed, saying, "I believe that in the end it comes down to 'pay as you go.'" Akhil Aggarwal suggested, "Self-funding of the old-age pension starting from a young age …." Vernon McKenzie and Akhil Mehta described successful efforts to do just that in Australia and India, respectively. In Australia, "Every employee, by law, must contribute 9 percent of the employee's salary to a superannuation fund of the employee's choice." For people not wishing to manage their funds, they are automatically placed in a balanced fund of investments. In India, the public sector in 2004 was transformed "from a defined benefit to a defined contribution approach …." John Wilson summed up this view in saying that "The only viable long term solution is for people (and their employers) to invest enough over the length of their working life …. [It] is the only way in which the dependency ratio can be made irrelevant."

Other suggestions ranged from Donald Sylvester's, "our laws should provide encouragement for all to work forever" to Deepak Alse's, "Do not retire employees; treat them as part of an extended family where their services may be required." The timeliness of the issue was emphasized by information from Richard Eckel that the FASB (in the U.S.) has, as of October 23, opened a discussion on Accounting for Social Insurance (PV): http://www.fasab.gov/pdffiles/si_newsrelease.pdf

Of course, dependency ratios are not reduced without other economic and social effects. For example, to the extent that current consumption is replaced by saving for the future as a means of reducing the significance of the ratio, what effect will this have on intermediate-term national economic performance, especially in an economy driven by consumption? Would retention of the elderly in the work force have a net negative effect on the productivity of those of typical working age? Or could these trends impact social costs so favorably that they could render dependency ratios largely meaningless? What do you think?

Original Article

Without knowing it, we have already heard a great deal about "dependency ratios." We can expect to hear a lot more, both at the level of nations and individual firms. The question is, what kinds of responses do they call for?

The dependency ratio is simply the ratio of unemployed to employed people, whether globally, nationally, or organizationally (where retirees are the unemployed). It is linked to such things as birth rates, employment trends, and economic growth rates. But in business, it is also influenced strongly by the cost of retirees, which in turn is determined in large part by the outcomes of negotiations between management and labor.

Harvard economists David Bloom and David Canning attribute at least one-third of a nation's economic success to the dependency ratio, something that can be predicted years in advance based on what we know now about demographic trends. For example, they credit Ireland's economic success in part to a greatly-improved dependency ratio along with other more commonly-cited factors such as a strong emphasis on education. They suggest that China's dependency ratio will peak at about one dependent to 2.6 workers in the next few years. After that, the effects of encouraged reductions in the birth rate will mean that fewer workers will be supporting more retirees in the coming years, placing a burden on the Chinese economy. India, on the other hand, with slower declines in the birth rate, will see its dependency ratio improve as larger numbers of children grow up and enter the work force, where they can support their elders and non-working children.

The concept is even more striking when applied to organizations. GM's dilemma stems in large part from the fact that its dependency ratio has deteriorated as workers take earlier retirement, live longer, and enjoy health and other benefits that become more costly. Those that GM employs find it increasingly difficult to bear the burden. And consumers are becoming less willing to pay for it in the price of GM's products. When dependency ratios become too burdensome, as in the case of Bethlehem Steel in 2001, where each worker was supporting 7.5 retirees, management is increasingly tempted to do what Bethlehem's management did: declare bankruptcy and walk away from as much of its obligation as possible.

Potential management responses can get pretty complicated. In this instance, growth trumps greater productivity, because the latter alone raises the dependency ratio. In a recent article in The New Yorker, Malcolm Gladwell suggests a more complex approach that would involve pooling employee populations among consortiums of companies, presumably some growing rapidly (with low dependency ratios now but higher ones later) and some growing more slowly. Bethlehem Steel had another answer. It merely handed $7 billion in unfunded obligations over to the U.S. Government's Pension Benefit Guaranty Corporation. Then Wilbur Ross, who bought the remaining assets, started over with a completely new employee savings plan and a dependency ratio of 0 (unemployed) to 1. Of course, the more generous the long-term solution for workers in retirement, the less competitive a company can be on costs today. So what is the answer to a dilemma that we are going to be confronting more and more frequently? What do you think?

To read more:

For an interesting discussion on this issue, see Malcolm Gladwell, "The Risk Pool," The New Yorker, August 28, 2006, pp. 30-35.

Comments

    • Cass Apple
    • Vice Chairman, DRC

    The Organizational Dependency Ratio would be irrelevant if management (and labor) had the ethics to fully fund retirement obligations when they agreed to the arrangements, keeping the obligations fully funded as they go. Instead, both managers and labor leaders sought (and some still seek) agreements that hide the costs of promised benefits.

    This is not a sophisticated problem. It is simply a matter of morality.

     
     
     
    • Bob Fitzpatrick

    This situation is nothing more than an extension of our "Teflon" culture:

    1. CEOs, leaders, celebrities, sports stars, etc ... not accepting responsibility for their actions (or inactions).
    2. Proliferation of disposable consumer products and disposable employees.
    3. "Doing the right thing" is not always rewarded socially and/or financially.

    It is a systemic issue with no clear near-term solution in sight other than going down the path of least resistance by declaring bankruptcy and starting over.

     
     
     
    • Bob Higgins
    • Consultant, BPP

    As we all know, actuarial "science" can easily be manipulated by adjusting certain assumptions.

    The "science" recognizes probability factors such as death and disablility but doesn't properly recognize the inevitability of change to the sponsoring organization's Dependency Ratio.

    This might increase funding requirements but should still be manageable.

     
     
     
    • Francine McKenna

    I've commented before on this subject in this forum when we discussed pension reform in Mexico. At that time I noted, "...even in the U.S. many are losing the type of pension benefits that their parents and grandparents enjoyed after many years of work. Most employers in the U.S., other than the federal government, have dropped defined benefit plans for 401k and other self-savings plans. Many who work will never have anything other than social security unless they save on their own. And many who thought they would get a healthy pension will be cheated, as failing companies shirk their obligations and pawn them off to the Pension Benefit Guaranty Corporation (PBGC). One only has to look at the headlines to see the crisis in funding these obligations looming on the horizon.

    "Mexico as well as the U.S. needs to find ways to raise employment, especially in above minimum wage-paying jobs, to more of the workforce. In Mexico, this may someday discourage Mexican workers from thinking the grass is greener on the other side of the border and allow them to save more for tomorrow, rather than living from day to day. In the U.S., this may mean the reduction in the numbers of the working poor and an increase in their confidence and self-respect, as well as their personal savings. Let's address first things first, as so many here and in Mexico have suffered during the last four years under the first president since Herbert Hoover to oversee a net loss in jobs during his administration."

    Employers no longer feel an obligation to their employees and employees and, for the most part, no longer fund their fellow employees under a self-funded pension scheme. Companies like GM are dinosaurs. Although their failures and mistakes go beyond being "too generous" with their workers, it's the workers that are taking the blame but it's also the workers who are bearing the pain of the bad management and poor planning.

    There's no pension crisis in the executive suite. Let's talk instead about the "dependency ratio" between the average corporate executive and his workers. In 2005, per the AFL-CIO, it stood at 411 to one. The average worker is funding the looting of shareholder value by the fortunate few.

     
     
     
    • Don Rogers
    • Carlin Rogers Consulting, LLC

    The "dependency ratio" problem is serious because it creates competitive advantages and disadvantages for specific firms. But it is not a problem that can be solved by the firm. Too many Bethlehem Steels will destroy the pension guarantee system.

    Long term, the solution to this "problem" is to move away from traditional employer owned (or guaranteed) pension, retirement, and even health care funds to straight investment systems. The employer and employee pay into the fund, the employee owns the account, and the employer has no additional liability.

    Short term, the solution is to eliminate tax advantages for either underfunded or overfunded pension liabilities and require companies to fully fund and expense their current retirement contributions/obligations. Ouch! This will be painful for those companies with high dependency ratios and for companies with large deferred compensation plans of any type.

     
     
     
    • Rod Johnson
    • CEO, 2nd Perspective

    I have a relatively simple solution. Unfortunately, it will not address those already nearing or in retirement. Make CEO and executive retirement and compensation incentive systems the same as the working group. Miraculously, it will all be worked out. The real crime is that we reward executives far beyond what they are worth and for things they can only do "accounting tricks" to accomplish, like increasing quarterly performance. If we rewarded them for longer term company performance and items they truly can impact, the accounting tricks we all seem to be chasing would go away.

     
     
     
    • W. Peter Bailey
    • Manager

    I think that we have to refine the issue components so the discussion makes sense. If we are addressing a segment of the population where the model failed, we get a different answer. And if we address the adequacy of the model the discussion would lead to a different direction. An example of a thought on the dependency ratio on the GM situation: if the retirees purchase products and services from GM, why doesn't that go toward replenishing the fund? I think there are more direct and indirect feedback loops to the model when applied in the 21st century economic model for mature economic nations like the U.S.

     
     
     
    • Phil Clark
    • President, Clark & Associates

    Many years ago we crossed a boundary and being happy became equated with money. Money also became the measure of success instead of how well our society was working. In that process we left behind our vision for a nation and replaced it with a vision of self. Don't get me wrong, self worth and motivation are drivers of success and should be encouraged. But how much self worth or motivation do the unemployed have when they see pensions wiped out and companies not live up to their promises? Remember that business adage, "That which gets measured gets done." When our sole measure of success became money we lost our way. Now we have leadership training touting servant leadership and leading with the heart and an emphasis on people. That's as it should be ... but ... as long as bankers and Wall Street reward or punish companies by focusing on dollars alone ... it will remain all for naught.

    Look at the reward mechanism. Treat people well, have happy workers, but if companies don't make the "forecasted" profit increase anticipated by Wall Street this quarter, companies get smacked by investors, and stock and worth goes down. These companies didn't lose money or even not make a profit over last quarter ... they just didn't make what "others thought they should". Profit and success are good, but greed is an ugly mistress.

     
     
     
    • Richard A. "Tony" Eckel
    • President, Systems Synergy, Inc.

    Dependency Ratios are not comparable between societies and business as Bethlehem Steel aptly demonstrated. Retirement obligations were summarily dismissed at zero cost to the company. This shifted the burden of the obligations to other ratepayers, companies prudently managing their income, and taxpayers. From the standpoint of businesses, this ratio will have little real value until business is forced to deduct the current cost of long term dependency obligations before bonuses and distributions. At that point, investors might start to use the ratio as a measure of strategic financial health.

    Societies and municipalities are not so unaffected. When these obligations are deferred, the effect is a cost growth over the entire community. While the federal government can use inflation to reduce obligation costs, state and local government must raise taxes or default. Few states are willing to default on obligations to their constituents. But obligations to their lenders? Not so much.

    For Ireland, what would the situation be if jobs, that drove their ratio improvement, had been offshored? Consider that the USA has a national ratio of about unity (156M/144M), but the loss of high paying jobs to foreign sources would suggest this metric is inadequate to the task of useful cost comparative information, since the real income is declining. Socioeconomic policy should recognize that there is an optimal [sophisticated] dependency ratio range beyond which increasingly urgent action is needed to stabilize social costs and attract investment. Statistical research may even reveal the effect of dependency costs to investment risk, but not with such a coarse definition.

    This Dependency Ratio may be a short term fad, but it lacks the sophistication and precision to use for real analysis or decisions. However, that status hasn't stopped the media from prominently reporting the Dow Industrial Average for more than 100 years.

     
     
     
    • Ulysses U. Pardey
    • Managing Director, Am-Tech, S.A., Panama, Rep. of Panama

    Dependency ratios: What kinds of responses do they call for?

    Part of the solution at a company level it to keep being productive.

    I have observed that experience is knowledge and knowledge is a key success factor. Experience is earned with age. So keep experience in the company; don't let it go. Transfer it to other employees; allow employees to benefit from more experienced ones. Develop within the company the foundations for a learn-from-each-other ambiance based on a win-win and positive mind-set.

    I know that in the real world of business and management practices, as well as in society, this is far from the case. So there is an immense opportunity for the academic and practitioner communities of business and management, and why not for the government to some extent, to contribute to a workable solution of this matter. We will all benefit from this collaboration.

     
     
     
    • C. J. Cullinane

    The dependency ratio is only going to get worse unless positive steps are taken to balance the ratio. Either the government has to intercede with healthcare or retirees will have to work longer, either part time or full time. I cannot see how a company can support the expense of retiree healthcare.

    The United States and other countries will find that their companies just cannot compete due to excessive costs, and if the government intercedes, taxes go up. It is a very tough problem.

    Immigration, a longer working life, or nationalized healthcare could help, but each of these has a downside. Productivity increases help most problems in manufacturing but the increases would have to be enormous.

    To be competitive in the global marketplace, industry will have to focus on productivity and tougher, leaner pensions/retirements for all employees.

     
     
     
    • John Inman
    • OD and Training Manager

    The changing demographics are not new news. Our willingness to reward ignoring them, however, is a concern. Are we to assume that we are so incapable that we cannot bring the right people to the table, collaborate, and create a solution? Several participants in this conversation have identified greed as a driving force in this problem. I agree. If we put the collective health of our communities both domestically and internationally ahead of individual wealth accumulation, I suspect that a solution would be readily available. Do we have the will to address the uneven playing field for the vast majority of the citizens? I have not seen a move in this direction, but several writers here have great ideas that should be explored. Maybe they should be invited to the table!

    This is a complex issue and will take some extraordinary efforts to address fairly. I just finished the new book "The Politics of Jesus: Rediscovering the True Revolutionary Nature of Jesus' Teachings and How They Have Been Corrupted." I highly recommend this not as a religious book--it is not--but as a book that specifically addresses this very issue: our willingness to take care of all our community members, not just the privileged. Regardless of political or religious leaning, this is a must-read. Do we have the will to do what is right? I hope so. I believe that the disparities will tear apart our civilization.

     
     
     
    • Richard Smith
    • EdD OL student, Pepperdine University

    Dependency ratio assumptions change if the business environment includes progressive employee recycling as well as succession planning programs. Current trends indicate that a growing pool of highly knowledgable, healthy retirees is available to both business and local communities. Continuing knowledge contributions from retirees to prior employers make sound business sense for both parties. Retirees are in the unique position of being truth tellers, red/blue team members, and mentors to the active workforce and management. Executives, HR, and the CIO can enable the recovery online (if not on-site for lunch) of this valuable, departing knowledge and experience base; trusted employees don't stop being trustworthy when they retire.

     
     
     
    • Gaurav Goel
    • Project Manager, Infosys Technologies

    There is no doubt that dependency ratios are critical factors in determining the competence and profitability of any organization, society, or country. Uncontrolled growth, without considering long-term consequences, may lead to an undesirable situation. Now it is time to accept the significance of this aspect and act before it becomes uncontrollable.

    The first step should be to quantify the impact in a long-term perspective. One way to do so is to include a new item in the balance sheet of companies. Organizations should recognize their liability towards their aging employees and track it in their annual reports. This will help shareholders understand the long-term profitability of organizations. And management will know if they are expanding operations too fast.

    Following basic rules for limiting the size of the organization, like outsourcing of non-core operations and hiring contractors for unsustainable operations, can help in managing staff requirements.

    Finally, the retired employees should not depend entirely on their employers. Government should improve the social security system and individuals need to plan their own retirement. Individual savings and improved family ties can help in reducing the impact of increasing dependency ratios.

     
     
     
    • Akhil Aggarwal
    • Programmer & Business Analyst, IBM Corp.
    1. Self-funding of the old-age pension starting from a young age, i.e., small deductions from the employee's monthly salary (right from the start) towards contribution to the superannuation. If made every employer's legal obligation, this can most certainly alleviate the long-term financial obligations on the employer with regard to employee retirement and the chances of the employed class not saving enough money. It can also give a boost to investment and the circulation of money within the economy.

    2. A more flexible retirement age with a view to increasing the age for as many employees as possible.

     
     
     
    • Jay Somasundaram
    • Analyst

    Our mental models have created the independent stages of study, work, and retirement as that which best meets the needs of business. People do much better when all three are integrated. Otherwise students are cut off from the real world, workers don't learn, retirees vegetate... .

    We also separate house/family/voluntary work as less valuable. There is plenty of valuable work begging to be done.

    The answers are all there. All we need to do is change the way we think.

     
     
     
    • Anonymous

    The dependency ratio uses coarse statistics to compare the costs of long-term liabilities to current productive assets. A number of posts rightly noted that companies are "rewarded" on the stock exchange for short-term results. However, if you investigate success over time, it is really those companies that have a long-term view that continue to succeed and provide sustained value to investors and shareholders.

    Some respondents talked about the need for companies in the U.S. and other developed countries to be competitive with India and China.

    The "costs" of worker dependency for things like healthcare and pensions are a result of the developed nature of the country they are in. If they seek to have the low costs of workers in underdeveloped countries, then perhaps they should also be happy to accept the lower sociopolitical conditions of those same countries, such as a lack of strong company and IP laws, volatile political situations, and potential political interference, plus the bribery and corruption that is part of those economies?

    If we want the protections offered by listing on stock exchanges where capital is happy to invest, in countries where certain standards of politics, law, and labour are expected, then we better expect that they will be at a cost, and we should start competing on quality, not just on price.

    As a manufacturer in a high-cost country, we have found that we have different classes of customers: those who are willing and eager to buy local products even at a higher cost and those for whom price is the defining factor. Since we began offering customers a choice of country of origin, business has boomed and everyone remains happy: We no longer try to cut prices but make a fair profit based on the cost of manufacture.

     
     
     
    • Aniruddha M. Godbole
    • Executive Assistant, A Treasury Management Consultancy Firm

    There is an interplay between the real and the financial economies. When someone wants money to consume even during retirement, it's possible because of this interplay. The real economy is run by working people; otherwise, retired people won't get the return on their wealth.

    The number of working people is important. Thus, the dependency ratio is crucial. However, the productivity of the working people is crucial, and higher productivity due to technological and other improvements may overcome the problems of a lower dependency ratio.

     
     
     
    • Gerald Schultz
    • Retired CEO, Consultant CEO Coach

    It is clear that the dependency ratio is a complex subject with many solutions. I believe that in the end it comes down to "pay as you go." Whether it's the government, a business, or a family, pretending that you can make commitments for future payments when money won't be there is self-destructive. This is encouraged when the organization involved does not have to answer for their self-destructive behavior. Recent changes in reporting requirements for the government (healthcare liabilities) and business are proof that a problem exists. Successful businesses will not provide unfundable pensions to employees, excessive payments to executives, or virtual P&L statements to shareholders.

     
     
     
    • Meenalochani
    • Organizational Consultant

    We need a paradigm shift in the way we approach compensation and retirals which can skew a company's profitability if not addressed with care and caution.

    The very reason that we are focusing on the "Dependency Ratio" is indicative of the fact that organizations, big and small, are coming under pressure for profitability due to a wide variety of reasons but more specifically with respect to rising employee costs. These costs don't seem to end with organizations having to deal with the current contributors but also tilt to ex-contributors of any organization.

    With the Talent War in place, a Compensation War seems to be on the rise. Unless senior managements focus on a conscious and innovative approach towards moderated rewards programs, the focus on dependency ratios will be palpable. Until organizations take a bold new step in innovating rewards practices and trying to bring them to an equilibrium, dependency ratios will dominate.

    Groups of organizations should consciously start the process of revisiting certain compensation practices and stop being threatened by talent attrition which influences the compensation design for current employees. This in turn influences retirals over a period of time with forceful certainty.

    A few bold steps, a few new methods in compensation, in conjunction with certain economic policies and statutory rules can pave the way for a better approach towards rising compensation/retirals of current and former employees. This can then turn the table towards focused and phased reforms and shift the dependency ratio paradigm.

     
     
     
    • Malvin Bernal

    The dependency ration dilemma is something we have to face but keep trying to avoid. It's similar with the way we handle our budget: We want to give people incentives at the cost of other people's productivity. Our welfare system is quite the same thing. What is needed is a shift from dependency to interdependency.

    If we are going to subsidize the retirement of, let's say, the baby boomers, there should be corresponding activity that would result in productivity. More so if corporations are feeling threatened because of the amount needed to finance retirement. What they should look at is not whether the funds are there, but whether CEOs are getting more than what they produce on a macro level.

    Just think about it: No one worries whenever a CEO retires.

     
     
     
    • Jasper Ojongtambia
    • President, AEC Computer Division

    We respond to "Dependency Ratio" by the choices we make. The choices we make as individuals, firms or nations determine our outcome in life.

    Since we know the factors that can increase or lower the dependency ratio,we are responsible for having a comprehensive plan concerning health, national birth rate, education, national security, and government policies that encourages business developments including investments.

    The situation at GM did not happen overnight. Inadequate long-range managerial planning, poor communication / relationship with labor, lack of vision for customer needs, and slowness in adapting to new technology (including the Internet) is what got GM where they are now. With a keen eye on competition, I am confident they can fix it.

    If addressed with regular updates, these factors will increase productivity, efficiency, market share, and profit. The problem of retirees will no longer exist.

    Conclusion: Our response to the dependency ratio should be the responsibility of the firm or nation. Comprehensive long-range planning in all the factors that can increase or lower this ratio is all that is needed. It is left to those in charge to map their route.

     
     
     
    • Deepak Alse
    • Project Leader & Product Engineering Coordinator, Wipro Technologies

    A fundamental flaw in the calculation of dependency ratios is that they consider age and not productivity as the criteria. Human survival is based on a simple ecosystem where the producers need to match consumption. In Asian societies, senior citizens remain productive until very late stages of life. They become caretakers for grandchildren, advisors on various issues, and are even the backbone support for commercially productive children. This enables the adult children to remain very productive at their roles in the organisation.

    I can vouch for the fact that more than 50 percent of working couples in India depend on their retiree family members for a lot of aspects!

    The notion that retirees should become unproductive is largely fostered in developed nations because of the large sums of assured retirement payments and health benefits. A long life need not be a medical-insurance dependent life! But that is how it is because of the current unsustainable lifestyles of many citizens. Retirement benefits should remain benefits and not become assurances. The retirees cannot and should not be assured of benefits that current economics can't support. Assured retirement benefits create complacency and disincentives for financial education.

    The Plan of Action for Corporates: 1. Provide Health Awareness training for employees and encourage healthy lifestyles. 2. Do not retire employees; treat them as part of an extended family where their services may be required. 3. Respect employees' financial judgement. Educate them on financial tools and options. Make proportionate contributions to their investments.

    The Plan of Action for Governments: 1. Invest in continual education for citizens. An educated citizenry is a productive citizenry. 2. Create social security as a protection mechanism only and not as an investment option. Excessive social security creates complacency that can harm a nation in the globalised world. 3. Encourage citizens and create mechanisms that provide large payoffs to those who develop more complex skills.

    Dependency ratios need to converted to interdependency actions. A vibrant society and organisation learns from its past and invests in the future!

     
     
     
    • Donald Sylvester
    • Controller, Zohouri Developments, LLC

    One of the main erroneous assumptions in this entire discussion lies in an assumption that it is good for anyone to retire. Regardless of the age of a mature worker, our laws should provide encouragement for all to work forever.

    Obviously this is tantamount to heresy in America, but it has remarkable benefits for those who understand that retirement is equivalent to dependency in all aspects of life. Someone who is retired no longer focuses on other motivations, and becomes more self-absorbed, self-conscious, and isolated.

    Just a thought from a farmer's son who was taught that to stop working is to start dying. Bless my father, he is correct.

     
     
     
    • Howard Dokua-Smith
    • Patients Health Systems

    In considering the dependency ratio at country level, if it is accepted that retirement benefits including healthcare should be the same for all people (both rank and file and executives, with the CEO included), then a scheme such as the one below might work.

    Employer contribution + Employee contribution = dependency ratio of 1:1 is deposited in an interest-earning government trust (not Social Security). The corporate tax is reduced by equal amount of earned interest since the government will earn a higher future return from the trust.

    The starting point for the current retirees will be Social Security, where all retirees who paid into SSN will be considered as former employees of the Federal government.

    Thus the new scheme will look like the following:

    Federal Government (FG) + Retiree (RT) = input to National Pension Fund (NPF)

    Current Employer (CE) + Employee Contribution (EC) = input to NPF

    All retirees, regardless of their personal wealth, will be issued "The Retiree's Package" (an ID and other items including Retiree's uniform) if they decide to draw from the NPF.

     
     
     
    • R. O. Rodriguez
    • C3TS Consulting

    Let's stop our dependence on DR's. DR's are mostly fodder for the media. Simply put, DR's are indicators and represent nothing more than a snapshot of conditions at a particular point in time. Organizational DR's are important to the extent that in the proper hands they could predict future revenue outcomes and the degree of future sustainability. Nationally, their importance is limited to certain industries, namely the finance industry, and only in terms of predicting things such as loan delinquencies. Globally, they are pretty meaningless, even in terms of economic comparisons from one region or country to another, and their use is no different than trying to compare currency values or average seasonal temperatures.

     
     
     
    • Richard A. Eckel
    • President, Systems Synergy, Inc.

    Much as I deplore multiple postings, believing that if one cannot say it well the first time, they must be wrong, I want to point out that the FASB has just (on Oct 23) opened a discussion on Accounting for Social Insurance (PV):

    http://www.fasab.gov/pdffiles/si_newsrelease.pdf

    The coincidence is a stroke of genius, or an inside job. In the absence of exculpatory evidence, one accepts acumen. Well timed, Professor Heskett!

     
     
     
    • Ramesh Dorairaj
    • General Manager, MindTree Consulting

    I think the real malaise is overarching credit. Living beyond one's means through excessive consumption is more to blame, though we should not take the blame entirely away from corporations that live quarter to quarter. But we do have to wonder how these companies behave in this manner: is it not to meet the very same public demand for more and more returns?

    Whenever I have been fortunate to visit the U.S., I never cease to be amazed at individual profilgacy. Three cars, (all gas guzzlers), multiple credit cards, frequent upgrades of consumer durables, increasing leisure travel to expensive places ... all of these at the expense of prudent investment and savings, and without adequate medical and life insurance coverage.

    I only hope that this is a passing phenomenon and the younger generation will save and invest more. Expecting corporations to save on one's behalf is foolish and irresponsible.

     
     
     
    • Vernon McKenzie

    For such an economicially powerful country, the U.S. seems to be behind in many areas. Perhaps the Australian solution (which I am sure is also present in many other countries) is too "socially left" to ever be adopted in the U.S. However, as a generally conservative voter, I have to acknowledge the contribution of one of Australia's previous left-leaning Federal governments, which introduced compulsory "Superannuation" (i.e. 401K, but not run by the employer).

    Every employer, by law, must contribute 9 percent of the employee's salary to a superannuation fund of the employee's choice. The funds are governed by effective rules of independence, scrutiny, and risk management. They are commercial investment funds where the employee has significant choices in the mix of their invested funds, e.g. domestic stocks, international stocks, cash, bonds, property, etc. Employees (or employers) can make additional contributions to their "Super," which comes with significant tax advantages, noting that these contributions are invested until retirement.

    This all means there is no such thing as unfunded pension liabilities (except for some legacy government employees), and an employee is not exposed to the double risk of a poor performing company which may ruin their employment prospects as well as their retirement prospects. Financially unsophisticated employees do not need to actively manage their Super, and for such people the investments automatically allocate to "balanced": a mix of blue chip stocks, cash, and some property.

    Now this does not solve the dependency ratio problem, but it provides some means of helping to manage it. The growing pool of savings and investment also helped Australia to sail through some recent economic turmoil (e.g. Asian currency crisis, SARS, September 11) quite well compared to what was expected. If the dependency ratio declines in Australia (as is likely), then the government can actively alter the minimum Super contribution before everyone runs around lamenting what should have been done.

    Now, just imagine the economic power behind every U.S. employee investing 9 or 10 percent of their income until retirement?

     
     
     
    • Akhil Mehta

    Most of the comments posted here take private organizations as test cases. In fact, examples of reforms in the pension sectors can even be derived from the public sector.

    A case in point is the pension reforms in the Indian public sector (government sector), implemented since 2004, for all new joinees. These reforms comprise the following:

    a) Moving from a defined benefit to a defined contribution approach, funded entirely by the employee.

    b) Providing flexibility to employees on opting the fund based on investment style.

    That approach can be the key in mitigating unfunded pension woes in the long run.

     
     
     
    • Emanuel Dass
    • Business Adviser, abmc Mortgages

    Seems to me that another qualitative dimension to the "globalisation" of growth has been truly discovered in this debate.

    It certainly will help both governments (in their future policy responses) and businesses (in challenging the notion of "work"/value creation) if they take a more leading role in the crafting of cutting-edge, grass-roots community organisations to deliver a broader menu of value creation as a basis for sustainable growth with more qualitative elements to it.

     
     
     
    • Birgi Martin
    • Consultant

    It is not completely right to expect everything from the government. The dependency ratio dilemma creates competitive advantages for some firms. First of all, all firms should pursue ethical policies that represent the interests of all employees and stakeholders.

     
     
     
    • John Wilson
    • Group Commander, Northern Ireland Fire & Rescue Service

    The only viable long term solution is for people (and their employers) to invest enough over the length of their working life to allow their final pension fund to be capable of providing their retirement income without dependancy on subsequent company performance or numbers in the workforce. I think it really is that simple.

    This "long haul" approach requires a considerable financial sacrifice now but is the only way in which the dependancy ratio can be made irrelevant by creating a stand-alone personal fund fully adequate for retirement.

    Even with median performance on investments, a pension fund should show enough growth over a forty-year timeline to ensure a reasonably comfortable retirement: Yes, it does require some protections in terms of the management of investments, employer contributions--and ideally a supportive tax regime--and maybe an element of compulsion too, but it is achievable.

    This degree of personal financial sacrifice would inevitably impact on consumer spending, but we need to be honest with ourselves and acknowledge that we can't actually have it both ways--the best today and the best tomorrow.

     
     
     
    • Gokul Ranganathan
    • Business Architect, Nandaki Systems

    A holistic and total approach towards talent lifecycle management should help companies achieve a healthy dependency ratio. A well sketched talent management strategy should take into consideration the business strategy and henceforth the programs and projects that arise. An efficient talent mapping would naturally identify talents that are needed to service the core process and talents that can be contracted to support them. A growth road map for each talent that satisfies both individual and organizational goals shall address the concerns of immature retirement and overuse of post-retirement benefits.

    With thorough acknowledgement of the fact that this forum addresses the dependency ratio as an economics play at the national and organizational level, it is interesting to observe a behavioral pattern where there are a group of people who feel employed and another who feel unemployed within the organization. Can the term "dependency ratio" be extended to the science of organizational behavior that defines the ratio of staff underutilized to staff used at full capacity?

    It would also be interesting to explore the dependency ratio in the context of businesses in emerging markets. Companies offering world class services with the best talent do not necessarily offer luxurious retirement packages. If offered at all, such packages are greatly dependent on the inflation rate of the economy and the health of the organization.