- The Washington Times - Monday, August 30, 2004

In a major speech delivered last week, Federal Reserve Chairman Alan Greenspan issued yet another warning about the likely inability of the United States to fulfill its retirement and health-care promises to its aging population.

Taking account of the impacts on both the retirees who will receive the benefits and the younger generations that will pay the bills for the largely pay-as-you-go Social Security and Medicare entitlement programs, Mr. Greenspan was as emphatic in his blunt assessment as he was in his recommended action. “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,” Mr. Greenspan declared, then “we must recalibrate our public programs so that pending retirees have time to adjust through other channels.”

With the first wave of the 76 million baby boomers born between 1946 and 1964 becoming eligible for Social Security benefits before the end of the next four-year presidential term, Mr. Greenspan concluded his latest warning with a simple observation: “If we delay [addressing this problem], the adjustments could be abrupt and painful.”

Absent any action, current demographic trends would prove overwhelming. Over the next 30 years, for example, the growth rate of the U.S. working-age population will likely slow from about 1 percent a year to one-quarter of 1 percent. During the same period, the percentage of the U.S. population older than 65 would soar from 12 percent to perhaps 20 percent.

The Fed chairman downplayed the likelihood that increased immigration could solve the problem. And while Mr. Greenspan again pleaded for a “long overdue upgrading of primary and secondary school education,” he also downplayed the possibility that soaring productivity would provide the solution. Besides, achieving the level of capital investment required to maintain significant increases in productivity would surely be hampered by America’s inadequate domestic saving. Today, that gap is being bridged by borrowing saving from abroad at a rate of 5 percent of total U.S. output, a trend that almost certainly is not sustainable, even if it were acceptable. Thus, even to finance a declining level of capital investment, it will be necessary to increase America’s dismal personal saving rate, which averaged 9 percent of disposable income (1960-89) before plunging first to 5 percent during the 1990s and then to less than 2 percent (2000-2003). The explosion of government dissaving in the form of the federal budget deficit has also negatively affected the level of national saving, requiring fiscal policy-makers to be “especially vigilant” when considering the creation of new benefits, Mr. Greenspan convincingly argued.

Considering the deleterious work-incentive impact of tax increases, Mr. Greenspan effectively endorsed reducing benefit commitments by delaying the age at which retirees become eligible for Social Security and Medicare. The fact that “Americans are not only living longer but also generally living healthier” makes this option attractive for both the short term and the long term, although the political challenges clearly are immense. While he did not mention it, partially privatizing Social Security so that younger workers may earn higher returns must also be part of any adequate long-term solution, as should real reform of Medicare.


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