- The Washington Times - Thursday, September 21, 2000

America's Democratic and Republican presidential candidates are offering starkly different visions of

how to make Social Security secure for the Baby Boomers, whose earliest retirees will leave the work force later this decade. Although each plan has merit, neither comes to grips the with fact that global economic growth, an essential ingredient in both plans, may falter as Europe's economies follow Japan into lengthy and disruptive aging recessions.

Demography has Japan's economy firmly in its grip. Its population has topped out and will shortly start to decline. Markets, which up till now have been buoyed by expanding legions of consumers, are beset by flaccid demand. Overcapacity, falling asset prices, and deteriorating balance sheets are the byproducts. So, too, is the binge of precautionary saving by an aged work force that rightly fears even worse times ahead. Fully a quarter of Japanese are in their pre-retirement years. And seniority-based pay has concentrated discretionary income inordinately in their hands.

Japan's unique brand of corporatism has accelerated this process. A legacy of the early 20th century, corporatism saddles private firms with social obligations, such as the duty to keep workers on the payroll even in slack times. These policies entail real economic costs, which somehow must be passed along to consumers or taxpayers. Until recently, governments have facilitated these transfers through trade protectionism and outright subsidies. But more recently, an opening of markets has exposed vast inefficiencies in this form of organization.

Beneath the Japanese full-employment miracle is a pattern of chronic underemployment in the service sector. Millions of workers while away their days in jobs with little or nothing to do. Little wonder that only 8 percent of Japan's exports consist of services, compared to 71 percent for America.

Artificial or not, full employment has made Japan's economy resistant to traditional economic remedies. After all, how can deficit spending stimulate growth when there is no one new to bring into the work force? This conundrum highlights a challenge soon to confront all of the rich countries. Sometime in the next decade, the combined population of the entire industrial world will begin to decline. In most countries growth will be driven exclusively by increases in productivity.

This is why Europe's problems in the long run may be even greater than Japan's. The big continental economies face larger population declines. One forecast by the U.S. Census Bureau direly estimates that over the next half-century working-age populations in Italy and Germany will shrink by 47 percent and 43 percent, respectively, compared to 36 percent in Japan. Although both Japan and Europe will experience an explosion of retirees, Europe's social guarantees are more generous. Social insurance taxes in Germany already top 42 percent of payroll. France's and Italy's are close behind.

Yet, Europe's powerful unions resist both benefit cuts and American-style corporate restructuring. Revealingly, France's angry transport workers, ostensibly striking for lower gas taxes recently, also demand earlier retirement. These kinds of expectations make it hard to see how Europe's social institutions will adjust in time to avert serious crisis.

With higher costs and shrinking markets on the horizon, capital is fleeing Europe. In August alone, German companies announced $94 billion in U.S. acquisitions. In contrast, Japan has captured its domestic savings base, enabling the government to build up a $6 trillion debt at interest rates averaging under 2 percent. When the dam finally bursts, Japan will be swept away by debt service costs.

This issue is the topic of a hearing today before the House Ways and Means Subcommittee on Social Security, where members of the CSIS Commission on Global Aging will testify on the implications of aging crises abroad for retirement security in the United States.

Americans should pay attention. If Europe follows Japan down the road to insolvency, the global growth rates on which our federal tax revenues and private pensions increasingly depend are bound to be affected. This is the backdrop against which the competing Social Security reforms of Al Gore and George W. Bush must be measured.

The centerpiece of Mr. Gore's reform is a plan to shift the national debt out of private and into public hands. Under a benign economy, the Old Age Insurance Trust Fund would first accumulate this debt and then sell it back to private investors after 2017 to cover expected shortfalls in payroll taxes. This would require the federal government to run a cumulative deficit of several trillion dollars at a time when Europe and Japan no longer are expected to be net suppliers to the global capital markets. Retirement security might thereby hinge on borrowing huge sums from the developing world.

Mr. Bush favors letting workers invest 2 percent of the payroll tax through individual accounts, backed by a guarantee they will get at least as much as if they had stayed under the existing system. While there is a good prospect retirees would do better under a benign economy, aging recessions in Europe and Japan could easily upset this plan.

Both plans have their strengths. Mr. Gore would make the U.S. less vulnerable to medium-term global turbulence by paying off the privately held debt. Mr. Bush would establish the very structure for private accounts that European governments belatedly are racing to implement. Depending on other events, both could boost national savings. The question is whether baby steps are enough for an aging society.



Paul S. Hewitt directs the Global Aging Initiative for the Center for Strategic and International Studies.

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