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Explores Cutting Senior Benefits
Greenspan Again Pushing for Higher Retirement Age
Aug. 27, 2004 Federal Reserve Chief Alan
Greenspan was back on the speaking circuit today pushing for Americans
to increase the retirement age to meet the pressure that will be applied
to the federal budget as it struggles to meet the demands from the boom
in the senior citizen population.
He also again explored cutting
benefits for senior citizens. "Curbing benefits once bestowed has proved
difficult in the past," he noted, so the government must be careful
about enacting any new benefits. Congress last year, at President Bush's
urging, passed a new prescription drug benefit expected to cost more
than $540 billion in the next 10 years.
The elderly population is projected to double by
2035, for which the U.S. is not prepared to handle. The percentage of
the population that is over 65 is to rise from about 12 percent today to
about 20 percent in this period.
He says changes in benefit programs must be made.
Most observers expect Social Security, under
existing law, to be in chronic deficit over the long haul; however, the
program is largely defined benefit, and so the scale of the necessary
adjustments is limited, he said.
The shortfalls in the Medicare program, however,
will almost surely be much larger and much more difficult to eliminate.
Medicare faces financial pressure not only from the changing composition
of the population but also from continually increased per recipient
demand for medical services. The combination of rapidly advancing
medical technologies and our current system of subsidized third-party
payments suggests continued rapid growth in demand, though future
Medicare costs are admittedly very difficult to forecast.
He spoke in Jackson Hole, Wyoming, to a symposium
sponsored by the Fed Bank of Kansas.
Greenspan said funding Social Security and Medicare
through increased payroll taxes will not work, because these higher
taxes will decrease the incentive to work and reduce the pool of those
who pay the necessary taxes.
He spoke in favor of government policies to extend
the working years and boosting the age of retirement.
Despite the improving feasibility of work at older
ages, Americans have been retiring at younger ages, he noted. But
rising pressures on retirement incomes and a growing scarcity of
experienced labor could eventually reverse that trend.
He sees increased worker output as offering the
greatest potential for boosting U.S. gross domestic product to a level
that would enable future retirees to maintain their expected standard of
living without unduly burdening future workers.
"If we have promised more than our economy has the
ability to deliver to retirees ... we must recalibrate our public
programs so that pending retirees have time to adjust through other
channels," he said
The complete text of the speech follows:
Remarks by
Chairman Alan Greenspan
At a symposium sponsored by the
Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming
August 27, 2004
Opening Remarks
I am pleased to be here this morning to discuss the
economic implications of population aging and to provide a general
overview of some of the issues that will be covered in much greater
detail over the next two days.
The so-called elderly dependency ratio--the ratio
of older adults to younger adults--has been rising in the industrialized
world for at least 150 years. The pace of increase slowed greatly with
the birth of the baby-boom generation after World War II. But elderly
dependency will almost certainly rise more rapidly as that generation
reaches retirement age.
The changes projected for the United States are not
as dramatic as those projected for other areas--particularly Europe and
Japan--but they nonetheless present substantial challenges. The growth
rate of the working-age population in the United States is anticipated
to slow from about 1 percent per year today to about 1/4 percent per
year by 2035. At the same time, the percentage of the population that is
over 65 is poised to rise markedly--from about 12 percent today to
perhaps 20 percent by 2035.
These anticipated changes in the age structure of
the population and workforces of developed countries are largely a
consequence of the decline in fertility that occurred after the birth of
the baby-boom generation. The fertility rate in the United States, after
peaking in 1957 at about 3-1/2 births over a woman's lifetime, fell to
less than 2 by the early 1970s and then rose to about 2.1 by 1990.1
Since then, the fertility rate has remained close to 2.1, the so-called
replacement rate--that is, the level of the fertility rate required to
hold the population constant in the absence of immigration or changes in
longevity.
Fertility rates in Europe, on the whole, and in
Japan have fallen far short of the replacement rate. The decrease in the
number of children per family since the end of the baby boom, coupled
with increases in life expectancy, has inevitably led to a projected
increase in the ratio of elderly to working-age population throughout
the developed world.
The populations in most developing countries
likewise are expected to have a rising median age but to remain
significantly younger and doubtless will grow faster than the
populations of the developed countries over the foreseeable future.
Eventually, declines in fertility rates and increases in longevity may
lead to similar issues with aging populations in what is currently the
developing world but likely only well after the demographic transition
in the United States and other developed nations.
* * *
The aging of the population in the United States
will significantly affect our fiscal situation. Most observers expect
Social Security, under existing law, to be in chronic deficit over the
long haul; however, the program is largely defined benefit, and so the
scale of the necessary adjustments is limited. The shortfalls in the
Medicare program, however, will almost surely be much larger and much
more difficult to eliminate. Medicare faces financial pressure not only
from the changing composition of the population but also from
continually increased per recipient demand for medical services. The
combination of rapidly advancing medical technologies and our current
system of subsidized third-party payments suggests continued rapid
growth in demand, though future Medicare costs are admittedly very
difficult to forecast.
Although the sustainability of fiscal initiatives
is generally evaluated for convenience in financial terms,
sustainability rests, at root, on the level of real resources available
to an economy. The resources available to fund the sum of future
retirement benefits and the real incomes of the employed will depend, of
course, on the growth rate of labor employed plus the growth rate of the
productivity of that labor.
The growth rate of the U.S. working-age population
is expected to decline substantially over the next two decades and to
remain low thereafter. But the fraction of that population that is
employed will almost surely be affected by changes in the economic
returns to working and, especially for older workers, improvements in
health.
Americans are not only living longer but also
generally living healthier. Rates of disability for those over 65 years
of age have been declining even as the average age of the above-65
population is increasing. This decline in disability rates reflects both
improvements in health and changes in technology that accommodate the
physical impairments associated with aging. In addition, work is
becoming less physically strenuous but more demanding intellectually,
continuing a century-long trend toward a more-conceptual and
less-physical economic output. For example, in 1900, agricultural and
manual laborers composed about three-quarters of the workforce. By 1950,
those types of workers accounted for one-half of the workforce, and
though still critical to a significant part of our economic value-added,
today compose only about one-quarter of our workforce.
To date, however, despite the improving feasibility
of work at older ages, Americans have been retiring at younger ages. But
rising pressures on retirement incomes and a growing scarcity of
experienced labor could eventually reverse that trend.
Of course, immigration, if we choose to expand it,
could also lessen the decline of labor force growth in the United
States. As the influx of foreign workers that occurred in response to
the tight labor markets of the 1990s demonstrated, U.S. immigration does
respond to evolving economic conditions. But to fully offset the effects
of the decline in fertility, immigration would have to be much larger
than almost all current projections assume.
* * *
It is thus heightened growth of output per worker
that offers the greatest potential for boosting U.S. gross domestic
product to a level that would enable future retirees to maintain their
expected standard of living without unduly burdening future workers.
Productivity gains in the United States have been exceptional in recent
years. But, for a country already on the cutting edge of technology to
maintain this pace for a protracted period into the future would be
without modern precedent. One policy that could enhance the odds of
sustaining high levels of productivity growth is to engage in a long
overdue upgrading of primary and secondary school education in the
United States.
We obviously cannot attribute recent productivity
trends to a high level of national saving. Rather, the effectiveness
with which we have invested both domestic saving and funds attracted
from abroad is the apparent source of our decade-long rise in
productivity growth. As I have noted previously, the bipartisan policies
of recent decades directed at deregulation and increasing globalization
and the innovation that those policies have spurred have markedly
improved our ability to channel saving to its most productive uses, and
as a byproduct increased the flexibility and the resiliency of the U.S.
economy.
It is, of course, difficult to separate rates of
return based on the innovations embedded in new equipment from the
enhanced returns made available by productive ideas of how to rearrange
existing facilities. From an accounting perspective, efficiency gains,
broadly defined as multifactor productivity, have accounted for roughly
half the growth in labor productivity in recent years. Capital deepening
accounts for most of the remainder.
All else being equal, domestic investment would
raise future labor productivity and thereby help provide for our aging
population. But the incremental benefit of additional investment may
itself be affected by aging. With slowed labor force growth, the amount
of new equipment that can be used productively could be more limited,
and the return to capital investment could decline as a consequence. Yet
it is possible that the return to certain types of capital--particularly
those embodying new labor-saving technologies--could increase.
Although domestic investment has accounted for only
half our recent productivity gains, its contribution has historically
been much larger. Should the pace of efficiency gains slow, it would
fall to the level of investment to again become the major contributor to
productivity gains. Investment, however, cannot occur without saving.
But maintaining even a lower rate of capital investment growth will
likely require an increased rate of domestic saving because it is
difficult to imagine that we can continue indefinitely to borrow saving
from abroad at a rate equivalent to 5 percent of U.S. gross domestic
product.
A key component of domestic saving in the United
States in future decades will be the path of the personal saving rate.
That rate will depend on a number of factors, especially the behavior of
the members of the baby-boom cohort during their retirement years. Over
the post-World War II period, the elderly in the United States, contrary
to conventional wisdom, seem to have drawn down their accumulated wealth
only modestly. Apparently retirees spend at a lesser rate and save more
than is implicit in the notion that savings are built up during the
working years to meet retirement needs. Perhaps, people mis-estimate
longevity or desire a large cushion of precautionary savings. Moreover,
often people bequeath a significant proportion of their savings to their
children or others rather than spend it during retirement. If the
baby-boom generation continues this pattern, achieving a higher private
domestic saving rate is not out of reach. Even so, critical to national
saving will be the level of government, specifically federal government,
saving.
A doubling of the over-65 population by 2035 will
substantially augment unified budget deficits and, accordingly, reduce
federal saving unless actions are taken. But how these deficit
trends are addressed can have profound economic effects. For example,
aside from suppressing economic growth and the tax base, financing
expected future shortfalls in entitlement trust funds solely through
increased payroll taxes would likely exacerbate the problem of
reductions in labor supply by diminishing the returns to work. By
contrast, policies promoting longer working life could ameliorate some
of the potential demographic stresses.
Changes to the age for receiving full retirement
benefits or initiatives to slow the growth of Medicare spending could
affect retirement decisions, the size of the labor force, and saving
behavior. In choosing among the various tax and spending options,
policymakers will need to pay careful attention to the likely economic
effects.
* * *
The relative aging of the population is bound to
bring with it many changes to the economy of the United States--some
foreseeable, many probably not. Inevitably it will again require making
difficult policy choices to balance competing claims. The decade-long
acceleration in productivity and economic growth has seemingly muted the
necessity of making such choices. But, as I noted earlier, history
discourages the notion that the pace of growth will continue to
increase. Though the challenges of prospective increasingly stark
choices for the United States seem great, the necessary adjustments will
likely be smaller than those required in most other developed countries.
But how and when we adjust will also matter.
Early initiatives to address the economic effects
of baby-boom retirements could smooth the transition to a new balance
between workers and retirees. As a nation, we owe it to our retirees to
promise only the benefits that can be delivered. If we have promised
more than our economy has the ability to deliver to retirees without
unduly diminishing real income gains of workers, as I fear we may have,
we must recalibrate our public programs so that pending retirees have
time to adjust through other channels. If we delay, the adjustments
could be abrupt and painful. Because curbing benefits once bestowed has
proved so difficult in the past, fiscal policymakers must be especially
vigilant to create new benefits only when their sustainability under the
most adverse projections is virtually ensured.
Responding to the pending dramatic rise in
dependency ratios will be exceptionally challenging for the policymakers
in developed countries. While I do not underestimate the difficulties
that we face in the United States, I believe that, given the political
will, we are better positioned than most others to make the necessary
adjustments.
Aside from the comparatively lesser depth of
required adjustment, our open labor markets should respond more easily
to the changing needs and abilities of our population; our capital
markets should allow for the creation and rapid adoption of new
labor-saving technologies, and our open society should be receptive to
immigrants. These supports should help us adjust to the inexorabilities
of an aging population. Nonetheless, tough policy choices lie ahead.
Footnotes
1. The fertility rate used here is the total
fertility rate. It is measured as the average number of children who
would be born to a woman over her lifetime if she experienced the birth
rates by age observed in any given year. |
