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Global Risks: Japan, Germany, France

As employers raise their contributions to social security in Belgium, France, Sweden, and Spain, it becomes increasingly expensive to invest in these countries. By contrast, the low employer social security contribution in Ireland (which still has a sizable younger population) helps to further increase its attractiveness to foreign investors. Similarly, although the United States has wage and salary rates comparable to the Netherlands and Germany, it has much lower costs associated with statutory plans and employee benefits. Yet Canada is likely to get most future automobile plants in North America because direct healthcare costs to companies are so much lower than in the United States. With the highest “fully loaded" labor costs among advanced countries, Germany could be the biggest loser, as firms leave for countries that offer a better trade-off between labor costs and labor productivity.

Japan offers a sobering example of how difficult the reform process is likely to be. Already faced with the largest public debt burden among the advanced economies, Japan's national parliament simply mandated higher contributions from companies and employees in order to cover looming shortfalls in the public pension system, essentially ignoring an economic malaise lasting more than a decade. The new requirement adds a heavy burden to Japan's ailing businesses that Keidanren, the nation's largest business group, estimates will reduce consumer spending and cut corporate profits in half by 2007.

Commentators suggest that the additional costs will make Japan even less attractive to foreign investors, particularly in labor-intensive industries such as manufacturing, retail, and logistics. Forecasts in such "young" countries as Australia suggest that the pension burden will be manageable with only modest changes in taxation and spending levels. But the picture grows more difficult with each year in which additional revenue is not raised. One study in the United States suggested that delayed response could leave the country with an overwhelming $51 trillion (U.S.) deficit in its Social Security program, necessitating a 78 percent increase in corporate and personal income Demographics 55 tax rates.37 To date, New Zealand is one of the few countries to raise taxes now with a concrete plan for generating surpluses and smoothing out the burden.

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