The social contract in the 21st century
Economic outcomes and the relationship between individuals and institutions have shifted for workers, consumers, and savers in advanced economies.
Life has changed substantially for individuals in advanced economies in the first two decades of the 21st century as a result of trends including disruptions in technology, globalization, the economic crisis of 2008 and its recovery, and shifting market and institutional dynamics.
In many ways, changes for individuals have been for the better, including new opportunities and overall economic growth—and the prospect of more to come as the century progresses, through developments in science, technology and innovation, and productivity growth.
Yet, the relatively positive perspective on the state of the economy, based on GDP and job growth indicators, needs to be complemented with a fuller assessment of the economic outcomes for individuals as workers, consumers, and savers.
In a report, The social contract in the 21st century: Outcomes so far for workers, consumers, and savers in advanced economies (PDF–2.7MB), the McKinsey Global Institute takes an in-depth look at these changes in 22 advanced economies in Asia, Europe, and North America, covering 57 percent of global GDP.
Among the findings: while opportunities for work have expanded and employment rates have risen to record levels in many countries, work polarization and income stagnation are real and widespread
Young people have fared less well than the elderly. The young (15 to 30), who make up around 180 million individuals across our sample countries, have difficulty obtaining well-paid, high-quality jobs and also have a harder time climbing on the housing ladder, with much lower wealth than their peers two decades ago (Exhibit 6).
Compounding the problem is the rising cost of housing; the cost of a minimally acceptable house is 23 percent of incomes for young people versus 14 percent for adults and over 65. By contrast, old-age relative poverty is falling almost everywhere.
Women have seen improvements but still lag men. Over two-thirds of job growth from 2000 to 2018 is attributable to women, and the number of working women rose from 175 to 206 million.
Yet, they are still behind; the share of working women increased from 44 to 46 percent but has yet to attain parity. The gender pay gap narrowed from 80 to 85 cents for every dollar a man earns. It ranges from a low of 96 cents in Belgium to a high of 65 cents in South Korea.
As savers, women have a median level of net wealth that is just 62 percent of men’s in eight European countries, although the gap narrowed in the last two decades
Rising expense of and growing demand for healthcare and education. Rising healthcare and education costs significantly affect more than 125 million individuals who spend more than ten percent of their outlays on healthcare and education, as well as the almost 245 million people who are primarily supported by public budgets.
How can technology and the competitive dynamics that benefited discretionary goods and services be harnessed to make healthcare and education more affordable?
The multiple pressures on low-income individuals. Low-income groups, who make up roughly 335 million in the 22 countries, face difficulties across all three arenas of work, consumption, and saving, and their position has grown more precarious than it was in 2000. How can social safety nets and other supports be revamped for the current era and set of challenges? What market-based mechanisms can be established to assist them?
As people live longer, the number of expected years spent in retirement across our 22 sample countries has increased from 16 in 1980 to 20 in 2018.
These gains and expansions in productive working life are a hallmark of progress in the 21st century, yet they also pose a considerable challenge for both institutional and individual savers. Institutional pensions, whether public sector or employer provided, will need to deal with higher pension pay-outs and lower receipts, even after accounting for longer working age.
Individual savers will need to save more for themselves for their longer lives and compensate for the shortfall in institutional saving.
In response, about half of OECD countries have raised the statutory retirement age and some, including Denmark, Finland, Italy, and the Netherlands and Sweden, now explicitly link the retirement age to life expectancy.
By 2060 the normal retirement age will approach 66, which represents an increase of 1.5 years for men and 2.1 years for women. Life expectancy has been increasing at a faster rate.
Governments and private sector institutions concerned about fiscal sustainability have taken action over the past two decades to shift a larger responsibility to individuals for their own retirement savings.
The net pension replacement rate that an average worker can expect to receive from her or his mandatory pension has decreased by 11 percentage points for the average person in our 22-country sample .
Net replacement rates, which measure how effectively a pension system provides a retirement income to replace average earnings, now range from 92 percent in Italy to just 28 percent in the United Kingdom.
Many pension schemes have changed from defined-benefit plans, for which institutions guarantee a minimum return and thus bear the market risk, to defined-contribution ones, for which individuals bear the market risk.
To compensate for the extended period in retirement and decreasing institutional savings in most countries, household private savings would need to increase.
However, with widespread stagnation in wage and income growth in many economies and aggregate declines in some, the household saving rate has fallen in one-half of our sample countries by almost 6 percentage points since 2000.
Moreover, surveys show that more than half of individuals did not save for old-age last year, and a quarter did not save any money at all.
The cost of many discretionary goods and services has fallen sharply, but basic necessities such as housing, healthcare, and education are absorbing an ever-larger proportion of incomes.
Coupled with wage stagnation effects, this is eroding the welfare of the bottom three quintiles of the population by income level (roughly 500 million people in 22 countries).
Public pensions are being scaled back—and roughly the same three quintiles of the population do not or cannot save enough to make up the difference.
These shifts point to an evolution in the “social contract”: the arrangements and expectations, often implicit, that govern the exchanges between individuals and institutions. Broadly, individuals have had to assume greater responsibility for their economic outcomes.
While many have benefited from this evolution, for a significant number of individuals the changes are spurring uncertainty, pessimism, and a general loss of trust in institutions.
Policy makers, business leaders, and individuals will need to focus on two fronts. The first is sustaining and expanding the gains achieved through continued economic and productivity growth; business dynamism; investment in economies, technology and innovation; and continued focus on job growth and opportunity creation.
The second is tackling the challenges individuals face, especially those most affected. Leaders are beginning to respond to these opportunities and challenges to varying degrees.
However, more is needed given the scale of the opportunities and challenges, if the outcomes for the next 20 or more years of the 21st century are to be better than the first 20 and increase broad prosperity.
The persistent gender and race gaps. Although more than 205 million working women have made strides in the labor market, they continue to lag behind men in terms of employment, wages, savings, and overall wealth. Similarly, the racial wealth gap in some countries, such as minorities who constitute 90 million people in the United States, is both persistent and growing.
How can opportunities presented by the future of work be harnessed to narrow the gap?
Some institutions—public, private, and social—and individuals are starting to adapt and take action. In the private sector, one sign of a broader reappraisal was given by the Business Roundtable, a group of CEOs of major US companies.
In August 2019, it announced that its members are redefining the purpose of a corporation, to care and deliver value for employees, customers, suppliers and communities, as they do with shareholders.
The social sector and other forms of institutions, including philanthropic foundations and faith-based charities, are also playing a larger role in addressing some of the key challenges.
Families are helping their younger members with education and housing. In the United Kingdom, parents supporting their children are ranked the 10th largest mortgage lender.
Finally, individuals themselves are changing their behavior in light of these changes to the social contract. Many workers are opting for independent work as their primary source of income or to supplement their existing income.
Automation requires new and different workforce skills, and individuals today have many more possibilities to prepare themselves and improve their skills, or learn new ones, than they used to.
For example, courses on online platforms are increasingly accessible; others are engaging in lifelong learning to stay ahead.
Most of these efforts seem early, localized, and relatively small in scale and scope, compared to the extent of the challenges.
Moreover, many have yet to fully take into account the effect of factors, including climate change, likely to impact work and other economic aspects of the social contract.
Therefore, concerted action is needed on two fronts: first to make sure that the gains of the 21st century so far are sustained and scaled, and the potential for even more opportunities and economic prosperity is fully realized.
Second, to make sure that the outcomes for individuals in the next 20 or more years of the 21st century are better and more inclusive than in the first 20 and increase broad prosperity.
Real median net wealth has not recovered in 13 countries since the financial crisis; it declined from $104,371 to $80,659 on average in our 22 sample countries between 2007 and 2018 and has only just started to rise again. Inflation-adjusted growth in mean net wealth has also been sluggish since the crisis: annual growth has been close to zero for most of the post-crisis period.
The proportion of individuals with zero or negative net worth has risen significantly in recent decades.
In the United States, for example, the share of households with zero or negative net worth rose to 23 percent in 2017 from 16 percent in 2001.
Along with disruptive global trends and slow GDP growth, a shifting social contract is affecting these outcomes, through the changing roles of public and private sector institutions, and interventions that shape individual or institutional responsibility for economic outcomes.
Our research suggests that in 19 out of 22 countries, institutions are intervening less in the marketplace, while governments in 18 out of 22 countries have somewhat stepped up their spending
Some of the biggest changes in the extent of market intervention are a decline in employment protection for workers on temporary contracts, a substantial reduction in product-market regulations, and a sharp fall in the net replacement rate for mandatory pensions. In terms of public sector spending, the biggest change came from pensions, for which public spending across the 22 countries rose by 1.9 percentage points on average.
This in turn was almost entirely a function of demographic change, as people live longer. Healthcare spending also rose by 1.1 percentage points, and about 30 percent is explained by aging.