[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




 
                          GLOBAL AGING CRISIS

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 21, 2000

                               __________

                             Serial 106-62

                               __________

         Printed for the use of the Committee on Ways and Means


                    U.S. GOVERNMENT PRINTING OFFICE
67-487 CC                 WASHINGTON : 2000



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                    Subcommittee on Social Security

                  E. CLAY SHAW, Jr., Florida, Chairman

SAM JOHNSON, Texas                   ROBERT T. MATSUI, California
MAC COLLINS, Georgia                 SANDER M. LEVIN, Michigan
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               BENJAMIN L. CARDIN, Maryland
KENNY HULSHOF, Missouri
JIM McCRERY, Louisiana


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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of September 12, 2000, announcing the hearing...........     2

                               WITNESSES

American Enterprise Institute, Ben J. Wattenberg.................     5
Center for Strategic and International Studies, Paul S. Hewitt...    14
Moody's Investors Service, Vincent J. Truglia....................    26
Orszag, Peter R., Sebago Associates, Inc.........................     8
Zurich Insurance Group, David Hale...............................    18

                       SUBMISSIONS FOR THE RECORD

Matsui, Hon. Robert T., a Representative in Congress from the 
  State of California............................................    49
Stark, Hon. Fortney Pete, a Representative in Congress from the 
  State of California............................................    50


                          GLOBAL AGING CRISIS

                              ----------                              


                      THURSDAY, SEPTEMBER 21, 2000

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 1100, Longworth House Office Building, Hon. E. Clay Shaw, 
Jr., (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                                CONTACT: (202) 225-9263

FOR IMMEDIATE RELEASE

September 12, 2000

No. SS-22

           Shaw Announces Hearing on the Global Aging Crisis

    Congressman E. Clay Shaw, Jr., (R-FL), Chairman, Subcommittee on 
Social Security of the Committee on Ways and Means, today announced 
that the Subcommittee will hold a hearing on the global aging crisis. 
The hearing will take place on Thursday, September 21 , 2000, in the 
main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 10:00 a.m.
      
    Oral testimony at this hearing will be heard from invited witnesses 
only. However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The aging of the population in the United States is well 
documented. In 1950, people age 65 and older comprised only 8 percent 
of the total population. Today, their share of the population has 
increased to 12 percent, and by 2030, the Social Security 
Administration estimates that one out of every five people will be 
elderly.
      
    Societal aging is not unique to the United States--populations are 
aging much faster in Europe and Japan. Many experts predict that global 
aging will contribute to severe budget pressures, labor shortages, 
declining savings rates, and slower economic growth throughout the 
world's developed countries.
      
    The aging of the population will have a significant impact on 
Social Security and other income security programs for the elderly 
which are financed on a pay-as-you-go basis. The Organization for 
Economic Cooperation and Development estimates that in some countries 
payroll taxes would have to double to sustain the growing costs of 
these old-age programs. Increasing taxes could be problematic, 
especially in many European countries where payroll taxes already 
consume more than 40 percent of payroll. To avoid further tax 
increases, many foreign countries may face pressure to meet their 
budgetary needs through deficit financing, which will have serious 
implications for global capital markets.
      
    In announcing the hearing, Chairman Shaw stated: ``Global aging 
will present some very serious challenges for Social Security programs 
around the world. In this global economy, we must be particularly 
mindful of these challenges and their remedies as we consider options 
for Social Security reform in the United States. The first lesson we 
can learn from other countries is we need to act now to avoid bigger 
problems down the road.''
      

FOCUS OF THE HEARING:

      
    The hearing will examine the effects of global demographic trends 
on retirement systems around the world with particular focus on 
economic, financial, and foreign policy implications of global aging. 
The hearing will discuss Social Security crises abroad and their 
implications for Social Security reform in the United States. In 
addition, the hearing will examine the trends in employer pensions and 
their effect on Social Security.
      

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and Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
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hearing.
      

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    Chairman SHAW. Good morning. We are going to go ahead and 
start. Other members will be trickling in as they generally do.
    Much has been said about the fact that the United States 
population is aging. Women are having fewer children. People 
are living longer, and as a result, our society is graying. By 
the year 2030, one out of every five people will be 65 years of 
age or older.
    The aging of the population will put tremendous pressure on 
the Social Security and Medicare programs. As more seniors 
collect benefits for a longer period of time, the cost of these 
programs will rise considerably. Without action, Social 
Security will not collect enough payroll taxes to pay all the 
benefits that have been promised beginning in the year 2015. At 
that point, we will have to start cashing in the trust funds to 
make up the difference, and by the year 2037, the trust fund 
will be depleted and Social Security will not be able to pay 
full benefits.
    This problem is not unique to the United States. Other 
countries are aging much faster than we are and their pension 
systems are in more immediate danger than ours is. In many 
European countries, payroll taxes already consume more than 40 
percent of workers' paychecks. Yet, the OECD estimates that 
taxes would need to double to solve the problem.
    Because of the global community we live in today, the 
decisions other countries make with respect to their social 
security programs will have a profound impact on the United 
States, and our decisions, likewise, will impact on other 
countries. Overall, the way we choose to handle our old-age 
policies will impact interest rates, equity markets, and 
economic growth around the world.
    Today, we will hear from several experts about the 
implications of global aging and how our policies need to adopt 
to the challenges ahead. I am sure one of the things they will 
tell us is what Americans have been saying for some time-we 
need to act now to address the future of Social Security.
    This hearing is very timely, especially as the Presidential 
nominees are debating how best to save Social Security and 
Medicare and how to encourage other Americans to save for their 
own retirement. Retirement income security, often represented 
as a three-legged stool, consists of Social Security, pensions, 
and personal savings. I would note that this Congress has taken 
steps to strengthen each one of those legs. We appreciate the 
bipartisan support in the House for Social Security and 
Medicare lockbox legislation, as well as our plan to use 90 
percent of the surplus to retire the debt. We also have strong 
bipartisan support for our plan to strengthen the American 
pension system and to expand IRAs and 401(k)s so more workers 
can have stronger retirement security.
    We hope these bipartisan bills do not become entangled into 
partisan arguments on the other side of the Capitol. I hope 
that the Senate will follow the example of the House.
    I want to thank our witnesses for being here today and I 
look forward to hearing their testimonies.
    I must say, departing from my read remarks, that with this 
impending crisis and what is going on in the world today, I 
think it is really shameful that this chamber is not full and 
that there are so few people here listening to this. This is a 
disaster in the making. This Congress has got to act. 
Otherwise, the fallout, what is going to happen to tomorrow's 
seniors is going to really be quite disgraceful. But anyway, 
maybe we will get their attention.
    This morning, we have just one panel and we will begin with 
Ben Wattenberg, and I have to apologize if I am mispronouncing 
names. I am known for that and I did not practice the 
pronunciation. Mr. Wattenberg is a Senior Fellow at the 
American Enterprise Institute. Then we have Peter Orszag, 
Ph.D., who is President of the Sebago Associates in Belmont, 
California; Paul Hewitt, who is the Project Director of the 
Global Aging Initiative, Center for Strategic and International 
Studies; David Hale, Global Chief Economist, Zurich Insurance 
Company in Chicago, Illinois; and Vincent Truglia, Managing 
Director and Co-Head of the Sovereign Risk Unit of Moody's 
Investors Services, New York City.
    Thank you all for being with us. Mr. Wattenberg, we will 
start with you, sir.

    STATEMENT OF BEN J. WATTENBERG, SENIOR FELLOW, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Wattenberg. Mr. Chairman, thank you so much for having 
these hearings on a matter, as you pointed out, of enormous 
consequence. My colleagues will be speaking to some of the very 
specific issues that you mentioned. What I thought I would do 
is try to sketch out my view, at least, of what the facts on 
the ground are and some of the roots of this situation that is 
under discussion.
    It seems to me that at the very root of the constellation 
of problems discussed under the rubric of the global aging 
crisis is another demographic phenomenon which I have called 
the birth dearth. Briefly put, this is where we are as a 
species in the year 2000. Never have birth rates fallen so far, 
so fast, so low, for so long in so many places all around the 
world, already headed, for most people, below the replacement 
level.
    In 1998, there were already 61 countries that had fertility 
rates below the 2.1 children per woman required to merely 
replace a society. That is an ancient demographic axiom. If a 
mommy and a daddy do not have two children to replace them, 
sooner or later, absent immigration, a country is going to lose 
population. The combined population of these 61 countries is 
already 44 percent of the total global population. Another 34 
countries with almost a billion people are poised to go below 
that threshold, bringing it to about 60 percent.
    I think the important thing to note is that this is a 
phenomenon that has never happened before in world history. 
Demographers, were caught with their projections up about this 
situation. The general models following World War II and on 
into the 1950s and 1960s indicated that we had population 
growth and this would then sink. This is the so-called 
demographic transition, and all the very wonderful, neat 
charts, when the line of fertility sank from four children per 
woman or three children per woman would end at that magic 
replacement number of 2.1 and everyone would live happily ever 
after and we would have a sustainable and constant population.
    Unfortunately, these fertility rates are not decided by 
demographers, they are decided by young men and women in the 
privacy of their bedroom and with many other things on their 
mind other than demographic projections, and we have seen a 
stunning decrease in fertility and it is at the root of the so-
called aging crisis because the reason we will not have the 
money to pay for the elderly people retiring is not just 
because there are so many, in our case the maturing of the baby 
boom, but because birth rates have subsequently fallen and 
there are a lot of people getting money and very few people 
paying in.
    It has been said that Social Security is a Ponzi scheme, 
and to some extent, that is correct. But all life is a Ponzi 
scheme. When you are a child, your parents support you. When 
you become an adult, you support your babies and your parents 
through contributions to the Social Security fund. And then 
when you get old, people of middle age support you. That is 
what life is about. It has been going on that way probably 
since the beginning of human history. There is nothing wrong 
with the chain, but if one of the links break, when, for 
example, there suddenly is a harshly depleted cohort of young 
adults, there becomes very little money to pay for these 
pensions.
    Of most immediate interest are the fertility rates that the 
United Nations categorizes as the more developed regions, which 
include Europe, Japan, and the United States. From 1950 to 
1955, this region had a total fertility rate, that is the 
number of children born per woman on average over the course of 
her childbearing years, of 2.7 children per woman. By the late 
1970s, that had fallen from 2.7 to 1.9. That is below the 
replacement rate. And today, it is 1.6, which is about 30 
percent below what is required to merely keep a population 
stable.
    In Europe, in Japan, and Russia, the total fertility rate 
is now 1.4 children per woman. That is about close to 35 to 40 
percent below what is required to replace the population. The 
Italian demographer Antonio Golini looks at these European 
numbers and has a simple one-word description of what is going 
on: ``Unsustainable.'' It is simply unsustainable. The dubious 
honor of the lowest fertility rate in the world now goes to 
Spain, with 1.1 children per woman, followed at 1.2 by Romania, 
the Czech Republic, and Italy.
    This situation we are going into, with the entire Western 
world already below replacement, with the whole level of middle 
developed countries clearly heading below replacement, and the 
rates in the less developed countries also falling from a 
higher base but more rapidly than any prior demographic 
transition are unchartered waters. The world has never seen 
what we are about to see.
    Now, there are plausibly positive effects to this and 
plausibly negative effects to flow from this birth dearth. How 
it works out, no one really knows. But clearly, we would be 
well advised to pay attention to this phenomena, which in my 
judgment has constantly been overshadowed by something called 
the population explosion, which is really yesterday's 
newspaper. It is a very interesting phenomenon but it is not 
what the world of the 21st century is going to be about.
    My colleague, the late Herbert Stein, wisely noted that an 
unsustainable trend will not be sustained. I think he is 
correct. In this case, if you follow the bouncing red ball, you 
would end up not with zero population growth, ZPG, but you 
would end up with ZP. You would end up with no people at all. I 
am not saying that is going to happen, but these are 
exponentially falling rates. In Japan, the demographers are 
already playing games and the newspapers are reporting it. What 
year in the third millennium will the last Japanese baby be 
born?
    So as I say, an unsustainable trend will not be sustained. 
This birth dearth cannot go on indefinitely. It will not go on 
indefinitely. But when it plays out, we will be living in a 
very, very different world from the one we now inhabit. Thank 
you, sir.
    [The prepared statement follows:]

Statement of Ben J. Wattenberg, Senior Fellow, American Enterprise 
Institute

                       TITLE: ``THE PLOT THINS''

    At the root of the constellation of problems discussed 
under the rubric of the ``Global Aging Crisis'' is another 
demographic phenomenon: ``The Birth Dearth.''
    Briefly put, this is where we are as a species in the year 
2000: Never have birth rates fallen so far, so fast, so low, 
for so long, in so many places, all around the world.
    In 1998 there were 61 countries that had fertility rates 
below the ``Replacement Rate'' of 2.1 children per woman, 
required to keep a population from falling over time, absent 
immigration. The combined population of those countries (2.6 
billion) amounted to 44 per cent of the global total. Another 
34 countries, with almost a billion people, are now approaching 
the ``Below Replacement'' threshold, bringing about 60 percent 
of the global population to a demographic realm barely 
considered relevant until the last quarter of a century.
    How does this relate to the aging crisis? One specific way 
concerns pension financing. It is sometimes said that ``pay-as-
you-go'' retirement plans are ``Ponzi schemes.'' Perhaps so. 
But life itself is a Ponzi scheme. Thus, typically, babies are 
taken care of by parents. When those babies become adults they 
provide personal support for their own children, and public 
support for their aged parents, through payroll contributions 
to government. In one form or another that chain has existed 
through all of human history. Problems arise not from the 
nature of the human chain of life, but when one of the links is 
suddenly weakened. If births drop dramatically, then, as the 
low-fertility cohort matures over time, there will be fewer 
working age people to pay the costs for the elderly. This is 
happening now, in ways that no demographer would have imagined 
possible until quite recently.
    But the demographic changes now in motion are so remarkable 
and so counter-intuitive that it would be a serious mistake to 
consider their effects solely in relation to pension planning. 
The potential implications--environmental, economic, cultural, 
geo-political and personal--are monumental, for good or for 
ill, quite possibly for both.
    What is happening can be best seen in ''World Population 
Prospects: The 1998 Revision,'' the excellent reference book 
published by the United Nations, from which data used here is 
drawn.
    Of most immediate interest to the United States are the 
rates concerning the ``More Developed Regions,'' which include 
Europe, Japan and the United States. In the 1950-55 time period 
this region had a Total Fertility Rate (TFR) of 2.7 children 
per women. By 1975-1980 the TFR had fallen to 1.9 children per 
woman, about 10 percent below the replacement level of 2.1 
children. By the year 2000, in apparent free-fall, the TFR for 
the More Developed Regions was 1.6, roughly 25 percent below 
the replacement rate. The proportion of persons over aged 65 in 
these nations was 8 percent in 1950, 14 percent in 2000, and 
projected to be 26 percent by 2050.
    In Europe, Japan and Russia the TFR is now 1.4 children per 
woman, about a third below the replacement rate. Consider some 
specific countries. The dubious honor of the world's lowest 
fertility rate now goes to Spain with 1.15 children per woman, 
barely edging out Romania, the Czech Republic and Italy all 
with rates below 1.20. The Italian demographer Antonio Golini 
looks at these European numbers and describes the situation in 
one word, ``unsustainable.''
    American rates, substantially higher than Europe's, have 
nonetheless been below replacement for 28 consecutive years, 
averaging about 1.9 children per woman over that time. At their 
trough the American TFR reached 1.7 in the mid-1970s. There was 
a up-tick in the late 1980s taking rates almost to the 2.1 
level. Since then the TFR has dropped to about 2.0 and the 
National Center for Health Statistics has taken note of ``the 
generally downward trend observed since early 1991.''
    Notwithstanding a TFR slightly below the replacement level, 
the U.S. will continue to grow, in large measure because of the 
arrival of about one million immigrants each year. Still, 
because there is a mismatch between the large ``Baby Boom'' 
cohorts and the ``Birth Dearth'' cohorts, America faces a 
pension shortfall in the out-years, which is substantial, but 
manageable.
    The situation in Europe and Japan is much more serious. 
Demographer Samuel Preston estimates that even if European 
fertility rates would return to replacement level, there would 
be a 25 percent loss of total population by the year 2060.
    Similar sorts of falling trends, from a higher base, are 
also apparent in the ``Less Developed Countries'' (LDC). The 
LDC fertility rate in 1965-70 was 6.0 children per woman. In 
2000 the figure is 2.9, and in many countries falling more 
quickly than anything seen in prior demographic history. The 
imbalance between the high fertility cohorts and the low 
fertility cohorts in the LDCs will yield problems similar to 
those faced now by the More Developed Countries, only delayed 
by a few decades.
    There is some confusion regarding the present coexistence 
between the ``population explosion'' and the ``birth dearth.'' 
Two powerful trends seem to be at war. They can co-exist, but 
only for a while. The ``momentum effect'' of the high fertility 
rates from earlier decades will likely yield a global 
population growing from 6 billion people to about 8 billion 
people with most of the growth occurring during the first few 
decades of the 21st century. But then the momentum effect of 
the birth dearth swings into play, slamming on the brakes, 
halting that growth, and most probably reversing it.
    It is hard to grasp the full magnitude of the current 
situation. The Birth Dearth, like the population explosion, 
proceeds exponentially. In theory--only in theory--an on-going 
global TFR at Below Replacement levels does not yield ZPG. It 
yields ZP. Already, Japanese demographers are publicly 
speculating about which year in the Third Millennium the last 
Japanese baby will be born. The late Herbert Stein wisely noted 
that an unsustainable trend will not be sustained. Surely, that 
will be the case with the Birth Dearth. But when it plays out, 
we will be living in a very different world.
    Perhaps the most important aspect of the new fertility 
patterns is this: We are in uncharted waters. The world has 
never seen what we are about to see. There are plausibly 
positive effects and plausibly negative effects to flow from 
the ongoing Birth Dearth. How it works out, no one knows. But, 
clearly, we would be well-advised to pay attention now, rather 
than later.
      

                                


    Chairman Shaw. Thank you. Doctor?

    STATEMENT OF PETER R. ORSZAG, PH.D., PRESIDENT, SEBAGO 
             ASSOCIATES, INC., BELMONT, CALIFORNIA

    Dr. ORSZAG. Thank you. Mr. Chairman, it is a pleasure to 
appear before the Subcommittee to discuss the issue of global 
aging. As you noted, aging populations are expected to put 
increasing strains on government budgets across the globe, 
although as you also noted, that challenge varies significantly 
from country to country, and, in fact, while the aging 
challenge in the United States is justifiably capturing the 
attention of policy makers, it pales in comparison to the 
challenge faced by many other countries--Italy, Japan, Germany.
    I want to highlight three key points in my testimony this 
morning. My first point is that one of the most important, if 
not the most important, policy response to the global aging 
crisis is higher national saving. Such higher national saving 
increases future gross domestic product if it is absorbed 
through higher domestic investment or future receipts from 
abroad if it is absorbed through higher net lending to 
foreigners or reduced net borrowing from foreigners. Either 
way, the burden imposed on future workers in providing for 
retirement income to future retirees is reduced.
    Now, the difficulty is that many pension reforms appear to 
raise national saving without actually doing so. For example, 
individual accounts would appear to raise national saving since 
they appear to represent a form of saving. But if individuals 
offset the contributions to such accounts through reduced 
saving in other forms, or if government saving is reduced 
because of, for example, the government making contributions 
into the accounts that would otherwise have contributed to debt 
reduction, total national saving may be unaffected.
    The impact of Social Security reform on national saving is 
thus sometimes subtle, and my point is merely that we must keep 
our eye on that ultimate objective and not be led astray by 
initial appearances that may be misleading.
    I would also note that the international experience 
suggests that while a private individual account approach could 
sometimes add to national saving, public trust funds also 
sometimes can add to national saving. There are examples, and I 
would mention Denmark and Norway, of countries that are running 
very large public trust funds that will ultimately be used to 
pay for pension benefits and they are running them very 
efficiently.
    My second point is that much can be done to mend, not end, 
existing public pension systems. In many countries, the fact of 
the matter is, we are not going to see a dramatic reform that 
completely scraps those programs, so that paying attention to 
improving the parts that we can improve would be beneficial.
    For example, one problem in many public systems across the 
globe is that they encourage early retirement. Their incentives 
are set up in such a way that they encourage people to retire 
early, but there is no reason that a public defined benefit 
plan has to impose such a tax on work by the elderly, and, in 
fact, many countries are moving to reducing such taxes or 
disincentives within their public pension systems.
    More broadly, again, public pension systems are clearly 
here to stay in many countries, so it would appear to me to be 
beneficial to focus attention on ways that we can improve them, 
mend not end them, rather than necessarily focusing on 
completely reforming or replacing them.
    My third point has to do with the projections that are 
often used in discussions of global aging, and that is that 
projections over any extended period of time, 75 years, are 
inherently uncertain and the economic and demographic 
projections that we are talking about today are no exception. I 
should hasten to add, that is not an excuse for failing to act 
today, but it is a motivation for making sure that what we do 
reflects that uncertainty. It is not saying that we should not 
act, but rather saying we should act in a specific way.
    One manifestation of the uncertainty in the United States, 
for example, is that the Social Security actuaries prepare 
three sets of estimates about the long-run imbalance in the 
Social Security system. Those in the media tend to focus on the 
intermediate cost estimates, but as you know, there is also a 
low cost estimate and a high cost estimate. The high cost 
estimate shows a substantially higher projected deficit than 
the 1.89 percent of projected payroll that we are familiar 
with. The low cost estimate shows no actuarial deficit at all 
over the next 75 years, illustrating that uncertainty.
    Now, some people have used that uncertainty to say we 
should not do anything at all today. That is surely as unwise a 
response as implementing an irrevocable change today. Instead, 
the best response to the uncertainty is to take steps to 
address the expected problem, but to ensure that we do so in as 
flexible a manner as possible so that we can adjust the policy 
as we learn more about--as this uncertainty resolves itself 
over time.
    And in particular, what I think the uncertainty motivates 
is a policy that I call flexible prefunding, so that we should 
prefund today but we should do it in a way that we can adjust 
the level of prefunding over time. How can such flexible 
prefunding be accomplished in the real world? One example is 
offered by Finland. The overall Finnish pension system is 
partially funded. Parts of it are funded and parts of it are 
unfunded. Finland created a special buffer reserve, which is 
currently 1.1 percent of payroll, when it joined the European 
Monetary Union in 1999. This buffer reserve is explicitly 
designed to vary over time, depending on shocks hitting the 
economy and other things that might affect the relative 
benefits of prefunding versus not prefunding, so it allows them 
to change the degree of prefunding in their system and is an 
example of flexible prefunding.
    To summarize my three points, Mr. Chairman, let me just 
reiterate the importance of focusing on national saving as the 
ultimate objective, perhaps the most important ultimate 
objective of pension reform; mending not ending the public 
pension systems in many countries, since in many countries more 
dramatic reform is simply impossible; and exploring ways in 
which we can adjust flexibly to future developments. We should 
not wait to raise national saving in the face of the coming 
demographic challenge, but neither should we adopt policies 
that irrevocably tie our hands should that challenge turn out 
to be smaller than we currently expect. Thank you.
    [The prepared statement follows:]

Statement of Peter R. Orszag,\1\ Ph.D., President, Sebago Associates, 
Inc., Belmont, California

    Mr. Chairman and Members of the Subcommittee, my name is Peter 
Orszag. In addition to running an economics and public policy 
consulting firm in California, I teach macroeconomics at Berkeley. It 
is a pleasure to appear before the Subcommittee to discuss the issue of 
global aging.
---------------------------------------------------------------------------
    \1\ Dr. Peter R. Orszag is President of Sebago Associates, Inc. 
(http://www.sbgo.com), an economics and public policy consulting firm, 
and a lecturer in macroeconomics at the University of California, 
Berkeley. In his appearance before the Subcommittee, Dr. Orszag does 
not represent any clients, organizations, or individuals beyond 
himself.
---------------------------------------------------------------------------
    Aging populations are expected to put increasing strains on 
government budgets across the globe. Three major factors affect the 
demographic structures of countries: fertility, mortality, and 
migration. Since the beginning of the industrial revolution, mortality 
rates have steadily improved in most countries of the world, especially 
during the twentieth century. At the same time, fertility rates have 
been declining. Consequently, today each working individual supports a 
greater number of old people than before, and the situation is 
projected to grow more severe over the coming decades.
    For example, in 1990, the ratio of the population aged over 60 to 
those aged 20-59 in Europe was about 36 percent. This figure is 
projected to increase to 59 percent by 2040, due to increased life 
expectancy and falling fertility rates. For the world as a whole, the 
World Bank (1994) projects the percentage of the population aged 60 or 
over will increase from 9 percent in 1990 to 16 percent in 2030. As the 
population ages, government budgets will come under increasing strain.
    Although the challenges posed by aging populations represent a 
global phenomenon, the extent of that challenge varies significantly 
from country to country. Indeed, while the projected aging of the 
population in the United States is justifiably capturing the attention 
of policy-makers and the public, it is much less daunting than the 
challenges faced by most other industrialized economies. For example, 
according to both official forecasts and those produced by Mountain 
View Research, the expected increase in, and longer-run level of, the 
old-age dependency ratio is much smaller in the United States than in 
other major industrialized economies, especially Italy, Japan, and 
Germany (Schieber and Hewitt 2000).
    With these facts as background, I want to highlight three key 
points in my testimony this morning:
     First, that the ultimate policy response to the global 
aging crisis must be to increase national saving. The impact of pension 
reform on national saving is often more complicated than it would 
initially appear, as I will discuss below.
     Second, that much can be done to ``mend not end'' existing 
pension systems. Indeed, since dramatic reform is politically unlikely 
in many countries, attention should be paid to ways of improving what 
we have rather than completely replacing it. In particular, much can be 
done--and is being done--to improve work incentives and promote later 
retirement within existing public pension systems.
     Third, that any projections over an extended period of 
time are inherently uncertain, and the demographic and economic 
projections surrounding global aging are no exception. This uncertainty 
is not, I should hasten to add, an excuse for failing to act now. But 
it is an important reminder that we should not implement irrevocable 
changes now, but rather pursue policies that allow us to react with 
flexibility to developments as they occur.

The Importance of National Saving

    Let me talk first about the importance of national saving as the 
ultimate metric with which to judge responses to global aging. In the 
United States, net national saving has risen substantially over the 
past seven years, from 3.4 percent of GDP in 1993 to 6.0 percent in 
1999. The improvement in Federal saving--that is, the contribution of 
the Federal budget to the pool of national saving--more than explains 
the entire improvement. Federal saving has moved from negative 4.1 
percent of GDP in 1993 to positive 1.3 percent of GDP in 1999, a net 
shift of 5.4 percent of GDP. At the same time, personal saving has 
fallen by 3.7 percent of GDP, and other saving (including State and 
local government saving) has risen by just 0.8 percent of GDP. 
Continued increases in national saving, most likely accomplished 
through continued improvements in the contribution of the Federal 
budget to national saving rates, offer the most auspicious response to 
the aging challenge.
    The fundamental benefit of higher national saving is that it eases 
the burden on future workers of providing for future retirees. Higher 
national saving today increases future gross domestic product (if the 
increase in national saving is absorbed through higher domestic 
investment) or future receipts from abroad (if the increase in national 
saving is absorbed through higher net lending to foreigners, or 
equivalently a larger current account balance). Either way, the burden 
imposed on future domestic workers in providing a given level of 
retirement income to today's current workers is reduced.
    Many pension reforms appear to raise national saving without 
actually doing so, and unfortunately semantics are often an obstacle 
here. In particular, ``prefunding,'' which is a term often used in the 
context of pension reform, can mean two different things. In a recent 
paper with Joseph Stiglitz (Orszag and Stiglitz 2000), we therefore 
distinguish between ``narrow'' and ``broad'' prefunding. In its narrow 
sense, prefunding means that the pension system is accumulating assets 
against future projected payments. In a broader sense, however, 
prefunding means increasing national saving.
    The broader definition of prefunding--higher national saving--
should be our ultimate objective. But we can sometimes be led astray, 
because prefunding in the narrow sense need not imply prefunding in the 
broader sense (i.e., higher national saving). For example, consider a 
system of individual accounts that is prefunded in the narrow sense. In 
other words, individuals have retirement accounts with assets in them 
to finance retirement income. Such accounts would appear to raise 
national saving, since they appear to represent a form of saving. But 
if individuals offset any contributions to the individual accounts 
through reduced saving in other forms, then total private saving is 
unaffected by the accounts. In other words, in the absence of the 
individual account system, individuals may have saved an equivalent 
amount in some other form (such as a mutual fund or other account). If 
public saving is also unaffected by the existence of the individual 
accounts, then national saving is not changed by the narrowly prefunded 
set of individual accounts--and so no prefunding in the broad sense 
occurs.
    Similarly, consider a ``partially prefunded'' public pension system 
with a trust fund. The trust fund represents narrow prefunding, since 
it contains assets accumulated to finance future retirement incomes. 
But it is possible that the presence of that trust fund could cause 
offsetting reductions in non-Social Security taxes and/or increases in 
non-Social Security spending. If so, then the trust fund may not raise 
public saving or national saving. I would note that the emerging 
political consensus not to spend the Social Security and Medicare 
surpluses is precisely what ensures that the narrow prefunding in the 
trust funds also corresponds to higher national saving (i.e., broad 
prefunding).
    The impact of pension or Social Security reform on national saving 
is thus sometimes subtle. My point is merely that we must keep our eyes 
on the ultimate objective: higher national saving. Pension and Social 
Security reforms in countries across the globe must therefore be 
carefully evaluated, to ensure that their apparent benefits in terms of 
saving are actually realized.

Improving Existing Pension Systems

    My second point highlights the importance of mending, not ending, 
public pension systems in many countries. Those favoring a movement 
toward individual accounts often highlight flaws in public defined 
benefit programs as a motivation for an individual account reform. For 
example, in many countries, public defined benefit plans incorporate 
substantial taxes on work among the elderly. The provisions of those 
plans are often an important factor in early retirement (Gruber and 
Wise 1999). Some proponents of individual accounts have therefore 
suggested moving to a system of individual accounts as a way of 
avoiding this blandishment for early retirement.
    A public defined benefit plan, however, need not necessarily impose 
an additional tax on elderly work. Indeed, many industrialized 
countries are improving work incentives within their defined benefit 
structures (Kalish and Aman 1997). Here in the United States, the 
delayed retirement credit, which provides increased benefits to those 
who delay claiming benefits past the full benefit age, has been 
increasing, and is scheduled to reach 8 percent for each year of 
delayed claiming by 2005. Increasing the delayed retirement credit has 
a particularly strong effect on encouraging work among the elderly 
(Coile and Gruber 1999). The key point is that the encouragement of 
early retirement is not a necessary element of a public defined benefit 
plan. If incentives for early retirement are a problem, fixing them 
doesn't require abandoning the entire public pension system.
    More broadly, public pension systems are clearly here to stay in 
some form in many countries. Therefore, it would appear beneficial to 
focus attention on ways in which the functioning of those systems could 
be improved by reforming rather than replacing them.

The Effects of Uncertainty

    My third point involves the role of uncertainty. We often tend to 
focus on the central estimate of Social Security benefits and costs. 
But we must recognize the substantial uncertainty surrounding estimates 
of pension costs several decades into the future.
    The substantial shift over the past few years in the projected 
long-term Federal budget balance, along with a somewhat less dramatic 
shift in the projected long-term imbalance within Social Security, 
highlights the uncertainty associated with long-term forecasts.
    That uncertainty is also reflected in the long-term projections 
themselves. The Social Security actuaries here in the United States 
traditionally prepare three estimates: low cost, intermediate cost, and 
high cost. The intermediate estimates are the ones commonly cited in 
the press, and they suggest a non-trivial actuarial imbalance. Yet the 
current low-cost estimate shows a small actuarial surplus projected 
over the next 75 years at the current payroll tax rate (Social Security 
Administration 2000). Many observers have objected to the manner in 
which the Social Security actuaries reflect parameter uncertainty. But 
more sophisticated methodologies also show substantial uncertainty. As 
two leading proponents of these more sophisticated methodologies 
conclude, ``Rational planning for the next century must somehow take 
into account not just our best guesses about the future but also our 
best assessments of the uncertainty surrounding these guesses'' (Lee 
and Tuljapurkar 1998).
    Given this uncertainty, flexibility is crucial: it allows policy to 
reverse itself more quickly should circumstances change. Under an 
inflexible system, policies are more difficult to reverse even if it 
becomes obvious that they had been unnecessary or less beneficial than 
initially thought.
    In particular, and to link this point to my first point, the 
benefit of broad prefunding is that it makes us better off in the long 
run. But it also has a cost: The additional revenue that is necessary 
to produce it, which is sometimes called the ``transition cost'' to a 
broadly prefunded system. What if the future turns out in such a way 
that bearing those costs turns out to have been a mistake, or at least 
much less beneficial than we think it will be today?
    Some analysts have used the uncertainty over long-term pension 
costs to argue that we should wait, and do nothing today. But that is 
surely as unwise a response to the uncertainty as making an irrevocable 
decision today. Instead, the best response to the uncertainty is to 
take steps today to address the expected problem, but to ensure that we 
do so in as flexible a manner as possible, so that we can adjust the 
policy response as information changes. In other words, we should adopt 
a system of ``flexible prefunding'' (Orszag and Orszag 2000).
    How can flexible prefunding be accomplished in the real world? One 
example is given by Finland. Finland has an extensive system of 
mandatory employer-based private pensions, with virtually the entire 
private-sector working population covered. These employer-based 
pensions are divided into a number of different types of schemes 
governed by different legislation. The relevant aspect of the Finnish 
system is that the degree of funding changes as different components of 
the overall pension system are adjusted.
    The overall Finnish pension system is partially funded, with some 
schemes--such as those for the self-employed--unfunded. (In aggregate, 
about three-quarters of all current benefits are financed on a pay-as-
you-go basis.) Interestingly, Finland created a special buffer reserve, 
amounting to 1.1 percentage points of payroll, when it joined the 
European Monetary Union in 1999. The size of the buffer moves over 
time; in 2000, it is estimated that the buffer reserve will be 
increased to 1.4 percentage points. The buffer is explicitly intended 
to provide a flexible source of prefunding: It can be adjusted in 
response to external shocks and thus offset some of the adjustment 
costs that would otherwise be associated with European Monetary Union 
(Herbertsson, Orszag, and Orszag 2000).
    The key point is that changing circumstances may warrant a change 
in the degree of funding within the pension system. This guidance seems 
consistent with sound pension policy-making and even common sense: 
Maintain some flexibility to respond to future events, but don't allow 
uncertainty to impede action today.
    To summarize my three points, Mr. Chairman, let me just reiterate 
the importance of focusing on national saving, mending not ending 
public pension systems in many countries, and exploring ways in which 
we can adjust flexibly to future developments. We should not wait to 
raise national saving in the face of the coming demographic challenge, 
but neither should we adopt policies that irrevocably lock our hands 
should that challenge turn out to be smaller than we currently expect. 
Thank you.

References

    Coile, Courtney and Jonathan Gruber. 1999. ``Social Security and 
Retirement.'' Paper presented at NBER conference on Risk Aspects of 
Investment-Based Social Security Reform. Processed.
    Gruber, Jonathan and David Wise, eds. 1999. ``Social Security and 
Retirement Around the World. Chicago: University of Chicago Press.
    Herbertsson, Tryggvi, J. Michael Orszag, and Peter R. Orszag. 2000. 
Retirement in the Nordic Countries: Prospects and Proposals for Reform. 
Nordic Council of Ministers.
    Kalish, David and Tetsuya Aman. 1997. ``Retirement Income Systems: 
The Reform Process Across OECD Countries.'' Social Policy Division, 
OECD, Geneva.
    Lee, Ronald, and Shripad Tuljapurkar. 1998. ``Stochastic Forecasts 
for Social Security.'' In David A. Wise, ed., T3Frontiers in the 
Economics of Aging. Chicago: University of Chicago Press.
    Orszag, Peter R., and Joseph E. Stiglitz. 2000. ``Rethinking 
Pension Reform: Ten Myths About Social Security Systems.'' R. Holzmann 
and J. Stiglitz, New Ideas about Old Age Security. The World Bank, 
forthcoming.
    Orszag, J. Michael and Peter R. Orszag. 2000. ``The Benefits of 
Flexible Funding: Implications for Pension Reform in an Uncertain 
World.'' Annual Bank Conference on Development Economics. The World 
Bank, forthcoming.
    Schieber, Sylvester and Paul S. Hewitt. 2000. ``Demographic Risk in 
Industrial Societies: Independent Population Forecasts for the G-7 
Countries,'' prepared for the Commission on Global Agin, September 6, 
2000, draft.
    Social Security Administration. 2000. Annual Report of the Board of 
Trustees of the Federal Old-Age and Survivors Insurance and Disability 
Insurance Trust Funds. Washington: Government Printing Office.
    World Bank. 1994. Averting the Old Age Crisis. Oxford: Oxford 
University Press.
      

                                

    Chairman Shaw. Thank you. Mr. Hewitt?

  STATEMENT OF PAUL S. HEWITT, PROJECT DIRECTOR, GLOBAL AGING 
   INITIATIVE, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES

    Mr. Hewitt. Mr. Chairman, I am Paul Hewitt and I am Project 
Director of the Global Aging Initiative, which is a three-year 
project to look at the international implications of the 
simultaneous aging of the major industrial nations. It is 
conducted under the aegis of a Commission on Global Aging, on 
which you sit, sir, as well as Mr. Matsui, the ranking member 
of this subcommittee. The Commission is headed by former Vice 
President Walter Mondale, former Prime Minister of Japan 
Ryutaro Hashimoto, and former President of the Deutsche 
Bundesbank Karl Otto Pohl. It includes many leading economists, 
financial analysts, demographers, scientists, medical experts, 
retirement experts, and legislators, including cabinet 
officials from three continents. I am pleased to recognize that 
three of my colleagues on this panel are members of the 
Commission on Global Aging.
    When we began to analyze the consequences of the 
simultaneous aging of the rich countries, two aspects of this 
trend quickly captured our attention. First is that aging in 
Japan and Europe is qualitatively different than in the United 
States. In Japan and Europe, you have depopulation. This is the 
prospect that in the very near term, their populations will be 
shrinking, and that going forward, as we look into the mid-
century, we see that after 2010, their working populations, in 
particular, will be declining by as much as one percent a year. 
This will have a contractionary effect on economic activity.
    The second significant aspect of this crisis is that the 
sum is likely to be larger than the parts. That is, there is no 
safety in numbers, as we baby boomers long ago learned. Indeed, 
there is the potential for our domestic aging crises to product 
significant global spillovers. Because of this possibility, it 
is in our interest to begin a frank dialogue with our major 
trading partners to ensure that they do not export crisis.
    All of the industrial nations are entering an era of 
chronic labor shortages. This will begin, probably, by 2010 in 
most countries, perhaps here sooner, and our growth potential 
will decline over time, as our productive population shrinks. A 
nation's GDP is simply the multiple of its average income times 
number of workers. And so, when we have shrinking working 
populations, over time, we have the potential for shrinking 
GDPs.
    The U.S. Census Bureau estimates that Italy's working-age 
population, 20 to 64, will decline by 47 percent over the next 
half-century, Germany's by 43 percent, Japan's by 36 percent. 
Much of this decline is already locked in. So whatever the 
actual numbers turn out to be, it is virtually certain that we 
will have lower growth potential going forward.
    Countries with shrinking populations could also experience 
contracting demand and declining unit sales for as far as the 
eye can see. I recently explained to the chairman of Fiat that 
Italy faced a dramatic decline in its labor force, and he said, 
``Why should I lose sleep over that? We have high rates of 
unemployment for Italy's youth and that's what I lose sleep 
over.'' I said, ``How are you going to cope with the prospect 
of declining car sales for at least the next half-century,'' 
and he said ``I will now have to lose sleep over your 
problem.'' In point of fact, Fiat will probably cope by moving 
its business outside of Italy increasingly.
    Capital flight will be the by-product, and to a certain 
extent, I think this is evident in the decline of the Euro, 
which is caused by capital flight to America. Perhaps we should 
add another line to the Statue of Liberty: ``send us your 
money, too.''
    We will see the collapse of asset values. Certainly, there 
will be industrial overcapacity in the construction sector and 
so forth. For example, over the next 20 years, the number of 
Italians in their household buying years, 25 to 40, will 
decline by almost 30 percent. So this will certainly affect 
real estate and other tangible asset values.
    Military weakness will probably also be a side effect, 
because rising old-age income and health support costs will 
crowd out defense programs. There will be a huge increase in 
the number of senior citizens in the developed world and a 
relatively smaller increase in the number of people who will 
pay for their benefits under pay-as-you-go programs.
    I think as you get out a little bit further into this 
decade, you will start to see the potential for large fiscal 
crises, perhaps even default risks. By the 2020s, there could 
be a global capital crunch. According to OECD, the combined 
effect of all of these older populations retiring at the same 
time and spending down their assets could reduce national 
savings in the OECD countries by as much as eight percent of 
GDP by 2030.
    Declining savings rates in the industrial world may shift 
the role of international lender to the developing world. That 
means, for example, when America shifts its national debt from 
the Old Age Insurance Trust Fund into the hands of private 
investors in the 2020s to cover expected payroll tax 
shortfalls, we may be borrowing heavily from the developing 
world.
    So there are a whole series of foreign and domestic policy 
issues raised by the simultaneous aging of the industrial 
countries. To the extent that other countries export their 
crises to us, they will also undermine the potential growth of 
our 401(k) and personal retirement accounts. I personally 
believe that Japan is already experiencing the symptoms of an 
aging recession. If their working population, and total 
population were still growing at the same rate as in the 1970s, 
we probably would not be as concerned about Japan's growth 
rate. Clearly, with the number of workers and the number of 
consumers declining, all economic growth will have to come from 
technology, and also from more efficient forms of economic 
organization, which lead to increased labor and capital 
efficiency.
    Because of these population dynamics, it is my view that in 
the aging counties, retirement security increasingly will hinge 
on owning assets abroad, and that countries that have not 
spread around the ownership of financial assets are going to 
find themselves increasingly unable to tap into the earnings of 
a dwindling, overtaxed labor force or a few big corporations 
which now are able to move their capital and even their 
headquarters to more hospitable climes. Thank you.
    [The prepared statement follows:]

Statement of Paul S. Hewitt, Project Director, Global Aging Initiative, 
Center for Strategic and International Studies

    Chairman Shaw and Congressman Matsui, thank you for your 
leadership in highlighting the important issues raised by 
global aging.
    The Global Aging Initiative is a project by the Center for 
Strategic and International Studies to examine the 
international implications of the simultaneous aging of the 
major industrial nations. Our work is being conducted under the 
aegis of a 75-member blue-ribbon Commission on Global Aging, 
headed by former Vice President Walter Mondale, former Japanese 
Prime Minister Ryutaro Hashimoto, and former Deutsche 
Bundesbank President Karl Otto Pohl. Among its members are 
cabinet ministers, senior legislators, appointed officials, 
leading business people, economists, demographers, scientists, 
and experts in retirement, medicine, finance, and national 
security from three continents. In addition to the Chairman and 
ranking minority member of this Subcommittee, I am pleased to 
recognize three other participants in today's panel as 
colleagues on the Commission.
    When CSIS first conceived the Global Aging Initiative in 
1998, we were aware that other industrial countries either were 
actively debating, or had already undertaken pension reforms of 
the kind being discussed in America. Our initial approach was 
to look at how foreign governments were coping with the 
challenges of aging populations.
    But as we explored things further, we found that there were 
aspects of global aging which made it more than just a matter 
of comparative policy. The first is that population aging in 
Japan and Europe is qualitatively different than our own. While 
America will see a greater percentage rise in the number of 
elderly than Europe and Japan will, our working population will 
continue to grow for the foreseeable future. By contrast, our 
major allies can expect a dramatic decline in their youth and 
working age populations. Under the Census Bureau's long range 
estimate, their combined populations could fall by nearly one-
third over the next half century. This has a host of economic 
implications for the nations involved. Declining numbers of 
workers and consumers inevitably will exert a contractionary 
effect on their growth rates, asset values, savings rates, and 
currencies. If this happens, tax revenues are sure to 
disappoint, in turn, making it harder to fund retirement 
benefits without big tax increases or big budget deficits. 
Convulsive change in these circumstances may be hard to avoid.
    This possibility suggests a second dimension to the global 
aging crisis, which is that the whole may be larger than the 
sum of its parts. That is, as we baby boomers know all too 
well, when it comes to aging, there is no such thing as safety 
in numbers. The fact that all of the rich countries will 
simultaneously experience a dramatic upward shift in their 
population age structures creates the potential for global 
economic and political spillovers. These factors could limit 
our own options for Social Security reform and impose 
additional burdens that are not immediately obvious when 
looking only at our national picture. Retirement security for 
Americans is probably going to require cooperation abroad. No 
matter what we do to shore up Social Security, our efforts 
could be undone by crises in other countries.
    The thrust of my testimony today is that these pressures 
are already evident in the global economy, and they are likely 
to become far more powerful over the coming decades. Consider 
that over the last 25 years, the number of elderly in the major 
industrial countries rose by 45 million, while working age 
populations grew by 120 million. In the next 25 years, 
according to official projections of the various affected 
countries (most of which are probably optimistic), elder 
populations will rise by 120 million, while working age 
populations will rise by just 5 million.
    What follows, Mr. Chairman, are only my own views, and not 
those of CSIS or the Commission on Global Aging. Nevertheless, 
they are well-supported by the facts. There are other plausible 
interpretations of some events and trends. But I think the 
general direction is clear.
     The world may be on the threshold of a new period 
of turbulence. In recent decades, it would seem, we have 
banished the business cycle. But booms and busts have been the 
historical rule, rather than the exception. Under current 
patterns of work and retirement, the developed world as a whole 
could experience long periods of economic stagnation and 
decline. How serious these problems become will depend on 
institutional flexibility in the various countries. For Japan, 
Italy, and Germany, however, time is running short. I am 
pessimistic that they can adjust their systems of economic 
regulation and social provision fast enough to prevent their 
welfare States from plunging into crisis. Japan's extraordinary 
debt, now officially equal to 12 percent of world GDP, but 
unofficially perhaps half again higher, is the most worrisome 
in the short term. It is a time bomb waiting to explode.
    But as bad as Japan's situation looks today, in some ways, 
Europe's is worse. By the end of this decade, the populations 
of Italy and Germany will be declining faster, and their union 
movements, which consist in large part of retirees, are more 
adamant against change. Last March, Japan quietly cut pension 
benefits by 20 percent for the typical 40 year old. In 
contrast, France's taxi drivers, who recently shut down the 
economy in protest over gas prices, were demanding even earlier 
retirement--this, in a country where the average age of 
retirement is 59.
     Within two decades, much of the industrial world 
could find itself in the grip of aging recessions. Aging 
recessions are marked by declining asset values, falling levels 
of consumption, spikes in precautionary saving by aged workers, 
falling growth rates and hence tax revenues, chronic budget 
deficits, declining returns to investment, capital outflows, 
and currency crises. If this sounds familiar, it should. Japan, 
in my opinion, already is in an aging recession. Its population 
has leveled off and soon will decline. Consumer spending has 
fallen for 29 straight months. Property values have collapsed. 
The retail and construction sectors are on deficit-financed 
life support. Due to the unique characteristics of the Japan's 
social compact, the economy remains more or less at full 
employment. Yet, under these conditions, fiscal stimulus is 
ineffective, since you cannot stimulate an economy when there 
are few new workers to bring into the labor force. Monetary 
policy is also proving counter-productive, to the extent that 
lowering of rates of return merely prompts aging workers to 
save more. After 2010, these conditions are likely to prevail 
throughout much of Europe, as well.
    Indeed, in its flagging currency, the euro, Europe, too, is 
beginning to exhibit symptoms of decline. Capital is fleeing 
the Continent at an unprecedented rate. Despite today's 
unfavorable exchange rates and the supposed overvaluation of 
U.S. equities, German companies announced $94 billion in U.S. 
acquisitions in August alone. One reason for this is that 
European firms face the prospect of declining unit sales for as 
far as the eye can see. A real estate shakeout is also on the 
horizon. Italy, Germany and several smaller countries will 
experience dramatic declines in their household forming age 
groups--Italy could have 30 percent fewer persons aged 25-40 by 
2020. These kinds of pressures are sure to weaken household and 
financial institution balance sheets, spawning weakness 
elsewhere.
     By the 2020s, a global capital crunch could damage 
relations with the developing world. Rising elderly dependency 
is expected to undermine savings rates across a band of 
countries that today account for almost two-thirds of global 
economic output. Surging retiree populations in the industrial 
world mean that large numbers of affluent households will be 
spending down their life savings in unison. One estimate by the 
OECD shows that retirement alone could depress private savings 
rates by 8 percent of the combined GDP of the 22 OECD countries 
by the late-2020s. When governments run budget deficits under 
these conditions--for example, to pay benefits during some 
future slump--they will be borrowing from the third world, in 
the process, raising the cost of capital everywhere. It is 
possible that countries like China, India, and Indonesia will 
resist the mantle of international lender, much as America did 
in the 1920s. And if they opt for protectionism, as we did 
during the recession of 1930, a similar result could ensue.
     We are sure to become militarily weaker, even as 
our defense needs shift from protecting borders to protecting 
our growth rates. We must grow steadily in order to finance our 
social guarantees. But these conditions require world peace. 
And yet, the defense programs of America and its allies will 
face enormous fiscal competition from old age benefits. Our 
combined unfunded pension liabilities are roughly equal to 
world GDP. And our unfunded health care liabilities may be of a 
similar magnitude. As these obligations come due over the next 
30 years, our defense spending is likely to suffer. Our allies 
no longer posses first-rate militaries. Our own military faces 
its own aging problem. The equipment we purchased during the 
Cold War is wearing down. Under the current budget baseline, 
our armed forces will shrink to half their current size by 
2010. Combined with the deteriorating capabilities of our 
allies, this may leave us unable to deter or resolve foreign 
crises that threaten global growth rates, and hence our ability 
to finance Social Security.
    Global aging has the potential to be a first rank crisis, 
one that wipes out the modern welfare state, as we know it. If 
Europe follows Japan down the road to fiscal insolvency, the 
tax revenues and market returns on which America's retirees 
depend are sure to suffer. What would happen to our IRAs and 
401(k)s if Japan were to default on its debt, or Europe were to 
debase the euro? These possibilities are real; and it is this 
fear which motivates Europe's left-of-center governments to 
advocate reforms that here are branded as ideologically far to 
the right. Whether it is the ex-Communist Massimo D'Alema in 
Italy or Gerhard Schröeder and his Red-Green coalition in 
Germany, progressive governments are putting aside ideology to 
cut back on benefit guarantees and institute systems of private 
retirement provision.
    There is much for America to learn from these crises. For 
example, our current plan for Social Security is to flood the 
bond markets after 2020 with trillions of dollars of our 
national debt. The idea is that over the next 15 years we would 
shift virtually all of the privately held national debt into 
the Old Age Insurance Trust Fund, a public agency. But then, 
beginning in 2017, the Trust Fund would sell this debt back to 
private investors at a time when Europe and Japan are no longer 
expected to be supplying the global capital markets. The baby 
boomers' retirement security might thereby hinge on heavy 
borrowing from the third world. This, it seems to me, is bad 
foreign policy, bad economic policy, and bad retirement policy.
    In conclusion, Mr. Chairman, there is a new source of 
retirement insecurity that we must insure against. It is the 
growing fragility of the welfare state itself. In Europe, 
individuals are learning that the best way to guarantee 
retirement security is to own assets abroad--not only in 
America, but the fast-growing emerging markets. If we invest 
our pensions in countries, like India, with large labor 
surpluses and low productivity, our capital and technology can 
generate large returns that can be shared back with retirees in 
the industrial countries. In this way, the young will still 
support the old, but across national borders and not simply 
within them.
      

                                


    Chairman Shaw. Thank you. Dr. Hale?

STATEMENT OF DAVID HALE, PH.D., GLOBAL CHIEF ECONOMIST, ZURICH 
               INSURANCE GROUP, CHICAGO, ILLINOIS

    Dr. Hale. Yes. Thank you very much for the opportunity to 
speak to the subcommittee. My firm is responsible for the 
management of over $200 billion of retirement savings in this 
country and elsewhere in the world, so needless to say, we pay 
very close attention to these demographic trends which will be 
a profound influence on both the U.S. and the global economy 
here in the 21st century.
    In any case, I wanted to examine a variety of different 
aspects of this issue here in the next few minutes. First just 
to summarize, as my colleagues have pointed out, we do confront 
an unprecedented aging challenge in the next few decades. Two-
thirds of all the people who have lived to the age of 65 in the 
whole history of mankind are alive today. As a result, 
demographic factors that have already happened--declining birth 
rates--there will be a profound change in the next 20 or 30 
years in the ratio of working to dependent people.
    And finally, there will be a major change, as well, in the 
composition of the world's population. Because birth rates are 
still much higher in developing countries than in Europe or 
North America or Japan, the industrial countries' share of 
world population will fall from 20 percent recently to just 12 
percent in a few decades' time, and this trend might continue 
indefinitely. We just do not know yet what is going to happen 
to birth rates in the developing countries as they become more 
affluent and as their economies evolve further.
    In the United States, this challenge has, again, several 
different components. First, we know from numerous actuarial 
studies that our Social Security fund will exhaust its 
resources at some point in the third decade of the millennium, 
of the century.
    Secondly, only about half the American population currently 
has any kind of private retirement savings. So a significant 
number of people will confront the possibility of a big decline 
in living standards when they approach retirement as a result 
of their failure to save adequately. Indeed, the U.S. is now 
unique among all the industrial countries in having a negative 
household savings rate. For most of our history, we had a 
savings rate somewhere between four and eight percent. As a 
consequence of recent wealth creation from the stock market, 
our savings rate has collapsed.
    And finally, there has been a profound change in the last 
ten years in the character of U.S. retirement savings. Ten and 
15 years ago, most Americans had something called a defined 
benefit pension plan. That pension plan was basically a 
corporate liability in which an employer guaranteed to a worker 
or to an employee a certain level of retirement income when he 
left the firm. Today, a growing share of our retirement income 
is now going to come from defined contribution plans, where 
workers rather than companies assume responsibility for 
managing these assets. It is not a corporate liability. In 
fact, it is a household or personal asset and, therefore, the 
returns will fluctuate with what happens in the stock market 
and the bond market.
    Now, in recent years, the stock market has done so well, 
defined contribution plans have enjoyed significant gains. 
Indeed, the value of all private pension assets in this country 
has increased from $3 trillion ten years ago to $12 and $13 
trillion recently, a very, very significant wealth gain and one 
which, in part, explains why the personal savings rate of the 
United States has collapsed.
    Ironically, it was commonly argued on Wall Street ten years 
ago that during the 1990s, the savings rate would rise sharply 
because of the aging of the baby boom generation and the need 
for this generation to set aside more retirement savings to get 
ready for its aging and for retirement in the second and third 
decade of this century. But because of these tremendous wealth 
gains, the savings rate has collapsed. The driving force for 
U.S. savings in recent years has not been demography, it has 
been productivity. The spectacular growth of productivity has 
created the stock market boom, has changed the character of 
monetary policy, has changed the performance of the economy in 
ways which have created wealth without savings.
    But obviously, as we go forward, the aging of the 
population could at some point constrain this process. One can 
construct scenarios where in ten or 15 years' time, the so-
called baby boom generation will be selling its equity 
portfolio, will be taking assets out of these large defined 
contribution pension plans, and, in fact, be creating selling 
pressure on the equity market, and the question then becomes, 
what would be the consequence of such a market adjustment 
process if it were to happen in 2010, 2015, or the years that 
follow.
    The answer is, it might reverse some of the very benign 
consequences we have seen from rising equity prices here in the 
late 1990s. If we, in fact, had a weakening equity market, it 
might set the stage for the savings rate to have to increase. 
But as the savings rate did increase, that, in turn, could 
depress consumption and slow the economy's growth rate. That, 
in turn, could have a soft reinforcing effect on the stock 
market by also depressing corporate profitability.
    The fact is, we are very much in uncharted territory. We 
cannot quantify precisely how these demographic changes will 
alter the performance of the markets and the economy, but there 
is no doubt that at some point in ten or 15 years, the reversal 
of this process of wealth accumulation through defined 
contribution plans as a result of the phenomena we had here in 
the 1990s could set the stage for some major economic 
adjustments, indeed, some major economic shocks.
    This, in turn, leads to the question, what should be the 
policy of response? Since the Congress cannot control the 
performance of the economy, there is no way the Congress can 
directly control these outcomes. But it could attempt to try to 
create a better environment through a variety of policies which 
would influence the markets indirectly.
    I think there is room for a policy agenda on three fronts. 
First, we could permit the Social Security fund to invest in 
the equity market. The Social Security Trust Fund will peak in 
15 years' time with about $3 trillion of assets. That sounds 
like a lot of money, but it is no longer a huge number when you 
compare it to the current value of private pension fund assets 
or what they might be in the year 2015. I can, for example, 
easily construct scenarios in which private pension assets in 
15 years' time could be $30 or $40 trillion. So even a trillion 
dollars for the Social Security Fund would not by itself be a 
powerful influence in the stock market, but still, it could be 
a useful one. It could be a positive and on the margin make a 
contribution.
    Secondly, the U.S. could take additional steps to try and 
broaden involvement in the equity market on the part of the 
population by bringing in some kind of organized retirement 
savings program, the half of the part of the population that 
currently has nothing. In the recent Presidential campaign, we 
have had candidates such as Vice President Gore offer the 
possibility of tax subsidies or matching tax allowances for 
retirement savings by low-income people. It is not clear his 
program has enough subsidies or incentives to, in fact, be 
feasible, but the issue he is addressing is an important one. 
We do need to do more to bring into the retirement savings 
programs of this country the half of the population which 
currently has no savings at all, and if we have these flows of 
money in the markets, they also could be a useful reinforcement 
if and when the people who currently have private pension plans 
are, in fact, liquidating those plans.
    And finally, I think this situation also will compel us to 
accept and to encourage further globalization of our equity 
market. In recent years, there has already been a very 
significant expansion of foreign involvement in all of 
America's asset markets. Indeed, today, foreigners own about 40 
percent of our Treasury debt market, 20 percent of our 
corporate bond market, and about eight percent of the equity 
market, in addition to having about $1.2 trillion of direct 
investment in this country.
    The bottom line is, if we go out over the next ten or 20 
years, there will be rapidly growing savings in many of the 
developing countries which currently have populations that are 
on average ten or 15 years younger than this country. And all 
over the world today, there is now a tremendous movement to 
establish retirement savings programs. I was in 22 countries 
last year studying the issue of pension fund and stock market 
development and I was very impressed by the scope and the 
breadth of this effort.
    Thirty years ago, only two developing countries, Singapore 
and Malaysia, had significant retirement savings programs. 
Chile then introduced a very radical savings revolution in the 
1980s with privately managed pension plans for the first time 
in the country's history, and in the last five or ten years, we 
have seen this program imitated in countries as diverse as 
Argentina, Bolivia, Peru, Mexico, and in the last few years in 
Eastern European countries such as Hungary and in Poland.
    The World Bank now is working on a program to introduce 
private retirement savings to China. If you talk to Chinese 
government officials, they will tell you they are now 
pioneering the development of a stock market, pursuing major 
changes in their economic structure, because they recognize 
they have to allocate resources more efficiently, have to 
improve returns on assets if they are going to confront China's 
own future crisis with retirement. In the year 2030, China will 
have 400 million people over the age of 60, an unprecedented 
number for that society, and they will confront the same 
challenge we will be confronting in providing retirement income 
for these people.
    In any case, if we do have a large new pool of global 
savings with the billions of people who currently live in 
developing countries, this could be a useful offset, a useful 
substitute for what might at some point in 20 or 30 years be 
liquidation of pension funds and equity portfolios by aging 
baby boomers and the aging citizens of the old industrial 
countries. It is hard to imagine that scenario right now 
because it is so contrary to our recent history and recent 
experience.
    The bottom line is, by the year 2025 or the year 2030, we 
may have no alternative. We will have to have a much greater 
globalization of our equity market, of our capital market here 
in America if we are going to cope with this challenge of an 
aging population and the liquidation of the assets now being 
accumulated in their retirement savings programs. Thank you 
very much.
    [The prepared statement follows:]

Statement of David Hale, Ph.D., Global Chief Economist, Zurich 
Insurance Group, Chicago, Illinois

Will the Aging of the Baby Boomers Create a Bear Market After the year 
                                 2010?

    There is little doubt that the aging of the world's 
population will be one of the great challenges confronting all 
nations during the 21st century. In the old industrial nations, 
the ratio of working population to retired people will fall 
sharply. In the developing countries, rising living standards 
and improved health care will create a large retired population 
for the first time ever in the history of those societies. In 
the case of mankind as a whole, two thirds of all the people 
who have ever lived to the age of 65 are alive today.
    While the aging process is a universal human challenge, the 
response of each country will reflect its own unique 
circumstances. In continental Europe, it may be possible for 
some countries to compensate for the decline of the population 
by increasing the current low level of labor force 
participation among young people and women. In the U.S., 
immigration is rapidly emerging as a popular solution to the 
problem of labor shortages in the nation's full employment 
economy. Continued high levels of immigration could also help 
to offset slower growth of the native population. Japan does 
not have a history of accepting immigration, but its level of 
labor force participation is so high that the only way it will 
be able to maintain its current labor force without immigration 
will be to raise the retirement age to 90 years. This problem 
suggests that Japan will have to significantly change its 
immigration policies or experience a major economic contraction 
in a few decades time. The developing countries still have 
young populations but they will start to catch up with the 
aging process in the industrial countries in another thirty 
years They are now preparing for this challenge by introducing 
retirement savings programs which could also play a major role 
in promoting the development of their capital markets, the 
privatization of State enterprises and other forms of financial 
liberalization necessary to allocate capital efficiently. In 
fact, Chinese officials now often refer to their future 
retirement funding challenge as one of the reasons why they 
have to enhance the return on capital in their economy. As 
China will have 400 million people over the age of 65 in 2030, 
it will be impossible for the country to provide retirement 
income to them if the economy continues to be dominated by 
unprofitable State enterprises.
    The United States is better prepared than most other 
industrial countries to cope with the challenge of aging 
because it has a long history of institutionalized retirement 
savings in both the public and private sector while there is a 
great social tolerance for immigration as a result of the 
country's history. But while America enjoys many advantages, it 
is not totally prepared for the challenges which lie ahead. 
First, the Federal Government's social security system could 
exhaust its reserves in the third decade of the 21"">st century 
unless there are major changes in expenditure or taxation 
during the interim. Secondly, only about half of the working 
population has a private retirement savings program at its 
place of employment. The rest of the population will probably 
have only a modest level of retirement savings to supplement 
its income from the Federal social security program. Thirdly, 
during the past decade there has been a major change in the 
composition of private retirement savings programs from defined 
benefit plans to defined contributions. Under defined benefit 
plans, corporations have a formal liability to their employees 
to provide a certain level of retirement income. Under defined 
contribution plans, the workers take over responsibility for 
allocating their retirement savings to various investment 
products and thus are potentially vulnerable to any major 
correction in the stock market or bond market. The benign 
performance of the equity market during recent years has 
encouraged everyone to believe that the value of their 
retirement savings can only expand if they invest in mutual 
funds but it is unclear how long the equity market will be able 
to deliver returns as outstanding as those which have occurred 
during the 1990's. Indeed, one of the unresolved questions 
looming over the U.S. financial markets is what will happen in 
twenty or thirty years when the current baby boom generation is 
liquidating its equity portfolio in order to pay for 
retirement. Will the savings of the next generation be large 
enough to absorb their equity sales? Will there be a stock 
market correction which both depresses the income of the baby 
boomers and the demand for equities by the generation following 
them? Will the growth of retirement savings in the developing 
countries create an alternative source of demand for U.S. 
equities if Americans become sellers?
    At the present time, only a few things are certain. First, 
the population will age. Secondly, government expenditure on 
retirement will expand dramatically in all the industrial 
countries and ultimately in the developing counties as well. 
Thirdly, there is likely to be a substantial increase in 
retirement savings during the next one or two decades as a 
result of efforts to get ready for the demographic challenge 
posed by aging. The great uncertainties center on how the 
financial markets will adjust to the tremendous changes now 
occurring in human demography. There has been a great deal 
written on this topic by academic and brokerage house pundits 
but the actual outcomes have often defied conventional wisdom 
and market intuition.

Savings and the Aging Process

    At the start of the 1990's, it was commonly argued that 
there would be a large increase in the U.S. savings rate 
because of the aging of the baby boom generation and their need 
to prepare for retirement.
    It was easy to understand why there was so much optimism 
about savings. According to Federal Reserve data, the age group 
45-64 has the highest savings rate while the young and the very 
old tend to be dis-savers. During the 1990's, the share of the 
population of people aged 45-64 years rose from 18 percent to 
24 percent and is likely to expand further to 25 percent by 
2010. The population aged 20-34 years, by contrast, has fallen 
from 26 percent in 1980 to about 20 percent recently. The 
population over the age of 64 is constantly expanding but it is 
still only about 12 percent of the population compared to 10.5 
percent in 1980 and a projected 20 percent in 2030.
    Despite the large increase in the population of people aged 
35-64 years during the 1990's, the savings rate fell rather 
than increased. In fact, the most recent government data shows 
that the household savings rate was negative during August 
compared to numbers in the 4-6 percent range during the first 
half of the 1990's.
    There has been a steady expansion of retirement saving 
through defined contribution and benefit plans during the 
1990's. According to government data, the number of retirement 
programs has expanded from 311, 094 in 1975 to 700,000 in 1997. 
The number of participants has also grown from 44.5 million in 
1975 to 86 million in 1997. The number of defined plans has 
shrunk from 170,000 in 1985 to 53,000 in 1997 but the number of 
defined contribution plans has swelled from 207,748 to 647,000. 
As a result, there are now 46 million people in defined 
contribution plans compared to 40 million in defined benefit 
whereas in 1975 there were only 11.5 million in defined 
contribution compared to 33 million in defined benefit plans.
    The expansion of defined contribution plans is apparent in 
the growth of the mutual fund industry. It now has over $7 
trillion of assets compared to $5.8 trillion in the banking 
system. At the end of 1999, formal retirement savings programs 
represented $2.426 trillion of mutual fund assets, with about 
half in IRA savings and the other half in employer sponsored 
defined contribution pension plans. As a result, mutual funds 
now represent about 19 percent of the country total retirement 
assets of $12.7 trillion compared to only 5 percent in 1990, 
when retirement assets were $4.1 trillion.
    The growth of mutual fund assets has resulted from both 
rising equity prices and new cash contributions. According to 
data from the Investment Company Institute, cash contributions 
last year were $133 billion compared to $130 billion in 1998, 
$100 billion in 1996, $74 billion in 1992, and only $30 billion 
in 1990.
    How could retirement savings be expanding when the savings 
rate is negative? The answer is asset inflation. The tremendous 
gains in financial asset values during the 1990's have tripled 
the value of retirement assets despite the fact that nominal 
GDP has increased by only about 56 percent. In effect, buoyant 
equity markets have increased the ratio of pension assets to 
nominal GDP from .73 in 1990 to 1.38 in 1999. There has been a 
dramatic expansion of the wealth of the American people despite 
the fact that they have lowered their savings rate. Indeed, it 
appears that the savings rate has declined because wealth 
creation in the equity market has encouraged faster growth of 
domestic consumption.
    If some economic shock were to cause the stock market to 
fall sharply, this process would probably go into reverse. The 
value of household equity portfolios, including pension assets, 
would decline, but the savings rate would rise. If the stock 
market correction were steep and prolonged, it is even 
conceivable that the country would experience a recession 
because of the required adjustment in consumption to restore 
the household savings rate to its traditional level of 4-6 
percent of personal income.
    It is clear from the history of the 1990's that there is no 
straight forward correlation between personal savings and the 
demographic structure of the population. The savings rate fell 
sharply despite the aging of the baby boom generation because 
the benign performance of the economy permitted the household 
sector to create wealth through rising equity prices rather 
than deferring consumption. There is great dissention among 
stock market pundits about whether the equity market has 
overshot on the upside, but the bottom line is that the 
expansion of the country's stock market capitalization from $4 
trillion in 1990 to $16 trillion recently has had a 
transforming effect on the economy generally. The investment 
share of GDP has increased to record levels. There has been a 
boom in company start-ups. Venture Capital funding has expanded 
from $5 billion per annum in the mid-1990's to $50-60 billion 
per annum recently. The U.S. has been able to easily fund a 
current account deficit equal to 5 percent of GDP because of 
tremendous foreign demand for U.S. corporate paper (equities 
and bonds) as well as foreign takeover bids for American firms.
    The combination of a declining private savings rate and 
growing foreign demand for U.S. financial assets against the 
backdrop of a full employment economy with an unprecedented 
current account deficit has created fears that the economy is 
now overly dependant upon the stock market as a growth engine, 
but the fact is this equilibrium appears to be sustainable so 
long as the U.S. offers the world a high return on capital 
compared to other place.
    What will happen when the baby boomers retire and start to 
sell equities from their now burgeoning portfolios? There is no 
simple way to answer this question. If every other factor is 
constant, increased equity sales could depress the market. But 
it is unlikely that the situation will be so clear-cut. If the 
U.S. is still enjoying a good economic performance compared to 
other countries, there could be significant foreign demand for 
U.S. equities from countries with discretionary wealth or 
expanding retirement savings. The aging of the population in 
continental Europe and Japan could erode their savings during 
the next two decades, but younger countries such as China, 
Mexico and Brazil could be expanding their savings quite 
rapidly at the same time. In contrast to the old industrial 
countries, their pension funds are now significantly 
underweighted in U.S. financial assets. As a recent First 
Boston report note, the marginal buyer of U.S. equities during 
recent years has been foreigners and corporations, not 
households.
    ``Over the next 5 years a critical mass of the working 
population will retire. The growth rate of the population over 
65 and the fraction of the population over 65 will turn higher 
and keep rising until about 2020.
    That matters for markets because the oldest cohorts of the 
baby bulgers could quickly become the marginal reallcoators 
among asset classes, because an increasingly large share of the 
nation's stock market wealth is being held by older 
generations, and because the distinctive behavioral pattern 
among retirees is that they become more risk averse. Indeed, 
the prospect of an increasing share of the population having a 
shorter investment horizon (and hence?) becoming more risk 
averse opens up a can of worms for asset markets.
    What will happen if retirees re-weight their portfolios, 
reducing their stock holdings and increasing their bond 
holdings? What will happen to the stock market if the retirees 
sell stock to a smaller generation of younger investors? Will 
retirees demand increased dividend payments to finance 
recurrent expenditure? Will they want a higher equity risk 
premium?
    These are some of the key demographic issues we face, 
beginning just about now. They carry the weight of history on 
their shoulders, bearing in mind the watershed events of 1965 
and 1980.
    Reaching a clear conclusion in terms of the stock market is 
complicated by the fact that, for most of the 20 years, the 
marginal buyers of equities have been corporations and 
foreigners rather than households. Foreign demand , in 
particular, appears to have been playing a critical role over 
the second half of 1990s. In 1999, foreign investment funds 
bought US stocks outright to bolster their portfolios to the 
tune of net $92bn. On top of that foreign business has also 
massively increased its purchases of US companies in the line 
with the enormous increase in cross border M&A activity. The 
latter ballooned to around net $153bn in 1999, following around 
net $78bn in cross border deals in 1998. The pick-up in cross 
border M&A is a key reason why net new issuance of US stocks 
has turned so decisively negative over recent years.
    Against that background, our judgement is that an eventual 
shift in asset allocation by foreign investors rather than by 
baby bulgers poses the greater risk for asset markets But a 
current account adjustment that comes just when a wave of 
households is trying to retire from active labor market 
participation would certainly be an unpleasant contingency to 
behold. The risk in this regard is probably worth the 
beginnings of some more cautious valuation of US securities 
markets all by itself, compounded by the intensifying scarcity 
of default-risk free Treasury securities to buffer domestic 
investors against adverse credit outcomes in a current account 
adjustment.''
    As a result of America's record of unbroken current account 
deficits since the early 1980's, foreigners are already major 
players in the U.S. financial markets. At present, they own 
about 38 percent of the U.S. Treasury market, 20 percent of the 
corporate bond market and 8 percent of the equity market. They 
also have direct investments in the U.S. worth about $1.2 
trillion. If the U.S. does not reduce or eliminate its current 
account deficit, these ratios could easily double during the 
next decade even without any selling of equities by the baby 
boomers. At present, the country's deficit on international 
investments is about 18 percent of GDP compared to a surplus of 
8 percent in 1981 and a previous debt/ GDP peak of 24 percent 
in 1894. If the current account deficit remains at 4-5 percent 
of GDP, this ratio will double in five years time and then rise 
to 60 percent of GDP by about 2010.
    The most high risk scenario would be if the baby boomers 
had to sell equities against a backdrop of a poorly performing 
economy which was already depressing equity values. In such a 
scenario, the economy could enter a period of prolonged 
stagnation as declining stock values boosted the savings rate 
and depressed consumption. The decline in the equity market 
would then generate a reversal of the many positive factors 
which have been apparent in the recent bull market. Not only 
would consumption sag. There would be less venture capital for 
entrepreneurs. Company investment would suffer from rising 
equity costs. Interest rates might also rise if a declining 
equity market frightened foreign investors and made it more 
difficult to finance the current account deficit.
    What actions can policy makers take to lessen these risks? 
As Congress cannot dictate the performance of the economy, it 
can address the risks posed by demography only indirectly. But 
it is not difficult to imagine an agenda which could lessen the 
risk of a hard landing for the equity market when the baby 
boomers retire.
    First, only about half of the population currently has a 
private pension plan. Congress could provide more tax 
incentives in order to encourage all Americans to increase 
their retirement savings. Vice President Gore has proposed a 
program of matching retirement contributions for low income 
Americans. What remains unclear is whether low income people 
would have enough discretionary savings to take advantage of 
this proposal. But if a program could be devised to create 
private retirement savings for the half of the population 
without it, there would be a larger flow of money moving into 
the equity market during the next decade than is likely to 
occur without such intervention.
    Secondly, Congress could permit the social security fund to 
invest in equities. The social security fund at its peak in 
2015 will not be large in relation to private pension plans. It 
is expected to peak at about $3 trillion compared to private 
pension assets of $12 trillion today and a probable $30-40 
trillion in fifteen years time. But if it invested in the 
equity market, it could help to offset reduced equity purchases 
by the private sector. Privatization of social security could 
also encourage such diversification but it is not a 
prerequisite.
    Thirdly, the U.S. should encourage the growth of private 
retirement savings in other countries through agencies such as 
the World Bank, the International Monetary fund, and even the 
United Nations. If the developing countries had a large and 
rapidly growing pool of pension assets for populations which 
will be far younger than the OECD's in 2010-2020, there would 
be a potential flow of savings to compensate for equity sales 
by the elderly populations of the old industrial countries.
    As a result of the aging process in the old industrial 
countries, their share of the world's population will decline 
from 20 percent today to 12 percent by 2050. In the year 2050, 
the U.S. will also be the only industrial country on the list 
of the world's ten largest countries as defined by population.
    The coming upheavals in the structure of the world's 
population will have profound implications for the development 
of financial markets and global capital flows. At present, the 
developing countries account for only about 7 percent of world 
stock market capitalization despite the fact they represent 45 
percent of world output, 70 percent of the world's land area, 
85 percent of the world's population and almost 100 percent of 
the projected growth in the world labor force during the next 
fifty years. Since the developing countries have much younger 
populations, they are likely to enjoy the benefit of rising 
savings rates during a period when the aging populations of the 
old industrial countries could be experiencing a decline in 
their savings rates.
    It also is important to note that many developing countries 
are now establishing pension fund systems in order to prepare 
for the aging process. Singapore and Malaysia were the first 
developing countries to establish broad based central provident 
funds almost thirty years ago. Chile followed during the 1980's 
with a system of universal retirement savings managed by 
private companies. The success of Chile in boosting its savings 
rate and creating a viable retirement system has encouraged 
widespread imitation in other Latin American countries and 
eastern European countries such as Poland and Hungary. African 
countries with historical links to Britain, such as South 
Africa and Zimbabwe also have highly developed pension systems.
    As a result of these developments, Latin America now has 
almost $150 billion of privately managed pension fund assets 
and Goldman Sachs is forecasting that the total will grow to 
$300 billion by 2005. Brazil has the largest pension fund 
assets with $71 billion despite the fact that only 3 percent of 
the population is involved in the plans. Chile is next with $34 
billion of assets and near universal coverage of the working 
population. Argentina has $17 billion of assets with extensive 
coverage of the working population. Mexico follows with $11 
billion and universal coverage of people employed in the formal 
economy. At the present time, Latin American pension funds have 
invested 24.4 percent of their assets in domestic equities, 72 
percent in domestic fixed income securities, and 3.6 percent in 
foreign assets.
    The U.S. should try to encourage developing countries to 
open up their pension funs to much higher levels of foreign 
investment than currently exist. Since emerging market 
countries could have trillions of dollars in pension assets by 
the middle decades of the 21"">st century, such a development 
could provide a potential shock absorber for OECD equity 
markets which could be suffering from equity sales by aging 
baby boomers. In recent weeks, the new Mexican president elect, 
Mr. Vincent Fox, has proposed much greater integration of the 
U.S. and Mexican economies. The U.S. could take advantage of 
his proposal to pioneer further liberalization of Mexico's 
pension fund investment policies.
    The pension fund assets of the developing countries are so 
modest today compared to the industrial countries that little 
attention is paid to their investment policies and potential 
role in global financial markets. But the fact is pension fund 
growth will play an important role driving the development of 
domestic capital markets in the developing countries during the 
next decade, and when their assets start to approach 50 percent 
of GDP, they could become players in global financial markets 
as well. In the year 2050, they could become as important a 
factor in global financial markets as OPEC twenty-five years 
ago, Japanese life insurance companies in the late 1980's, and 
hedge funds more recently. As a result of the aging process now 
apparent in the U.S. and other industrial countries, it is in 
the self-interest of everyone to encourage developing country 
pension funds to become global players by the second decade of 
the 21st century.


                                    The World's Ten Most Populated Countries
                                              [Millions of People]
----------------------------------------------------------------------------------------------------------------
                          1998                                       2020                        2050
----------------------------------------------------------------------------------------------------------------

China...........................................    1237              China     1397              India     1707
India...........................................     984              India     1341              China     1322
United States...................................     270      United States      323      United States      394
Indonesia.......................................     231          Indonesia      276            Nigeria      338
Brazil..........................................     170             Brazil      204          Indonesia      331
Russia..........................................     147           Pakistan      199           Pakistan      260
Pakistan........................................     135            Nigeria      184             Brazil      228
Japan...........................................     126         Bangladesh      171         Bangladesh      211
Bangladesh......................................     125             Russia      141              Congo      184
Nigeria.........................................     111             Mexico      134             Mexico      168
----------------------------------------------------------------------------------------------------------------


Conclusion

    In the modern period, there have been numerous articles 
written about how demographic changes would affect the price of 
home prices and real estate, not just equity markets. So far 
demography has appeared to be far weaker influence on asset 
prices than other factors, such as interest rate levels or 
productivity growth. The inability of economists to use 
demography as a forecasting tool suggest that we should not 
attempt to draw extreme conclusions about the impact of aging 
on equity markets in twenty or thirty years time. But since we 
can imagine scenarios in which an aging population might 
liquidate its equity portfolio, depress equity prices and 
generate other negative spillover effects on the economy, it is 
not too soon to think creatively about how we could lessen this 
risk. In the year 2000, the answers are obvious. We need to 
expand the potential number of equity owners at home by 
permitting the social security system to invest in equities 
while encouraging a larger global market for U.S. equities by 
promoting retirement savings for all of the world's people. 
When the cold war ended in 1989, there were probably 100 
million people on the planet earth who owned a share of stock 
or had a pension plan. Today, the number is probably at least 
300 million as a result of recent pension fund expansion in 
Latin America and Eastern Europe. The goal of policy makers 
should be to expand this number to 2-3 billion people by the 
year 2020. In such a scenario, it is difficult to imagine how 
the aging of 50 million Americans could produce a stock market 
slump unless the U.S. itself pursued a policy of financial 
protectionism.
      

                                


    Mr. McCrery. [presiding.] Thank you, Dr. Hale. Mr. Truglia?

STATEMENT OF VINCENT J. TRUGLIA, MANAGING DIRECTOR AND CO-HEAD, 
 SOVEREIGN RISK UNIT, MOODY'S INVESTORS SERVICE, NEW YORK, NEW 
                              YORK

    Mr. Truglia. Thank you very much for the opportunity to 
speak before the subcommittee. At Moody's, we spend a great 
deal of time studying the issue of pension burdens for 
countries around the world. It is clear to us that rapidly 
aging populations in the industrial world, as well as in 
certain emerging market countries, will pose some complicated 
economic and financial problems going forward.
    First, when examining the various industrialized countries, 
what we have concluded at Moody's is that almost every country 
will ``default'' on its pensions. What do I mean? When we talk 
about default on a financial obligation, basically what we are 
saying is that the obligor does not meet the original terms of 
the contract. In some way, the contract is broken. When we look 
at present pension promises, it is clear that the promises 
various governments are making to their people will not be met 
according to the present terms of the implied contract.
    At the same time, we believe that the public does not view 
a breach of promise by a government on a pension as seriously 
as it would react to a breach of promise on a financial 
instrument. This is just a societal convention. The reason for 
the differences in treatment between the two contracts is 
probably best explored by anthropologists, not economists. 
Nonetheless, it is clear to us that in most industrialized 
countries, presently promised pensions cannot possibly be met.
    Why can the promises not be met? The reason is quite 
straightforward. Meeting all present pension promises implies a 
drain on the economies of the developed world, and in 
particular on the respective public sectors, that would make 
the burden intolerable.
    The best way to measure this burden is to estimate the net 
present value of presently constituted pension schemes. If we 
use the worst case scenarios as prepared by the OECD several 
years ago, we find that the implied debt burdens created by 
these public sector pension schemes, when added to existing 
debt levels, for a number of countries reaches very, very high 
levels. The U.S., 115 percent of GDP; U.K., 144; France, 193 
percent; Italy, 241; Germany, 247; Japan, 339 percent of GDP.
    As these numbers indicate, the implied debt burdens are, 
for the most part, unsustainable. Our conclusion is that the 
pensions will be cut drastically in most of these countries. 
The U.S. does not look quite as bad, basically because we have 
somewhat better demographics and we also provide less-generous 
pension schemes. In general, however, it is only a question of 
when and by how much most of these pension programs will be 
cut.
    To prepare for the upcoming demographic transition, most 
countries have been trying to improve their fundamental fiscal 
position to at least accommodate some of the cost of the 
increases in future pension claims. Therefore, it is not 
surprising to see that most developed countries have tried to 
rein in their public sector debt with varying degrees of 
success.
    Despite the numbers noted above, which capture net present 
values, there are different trajectories for the implied debt 
build-up among the various countries, depending upon the 
individual country's demographics. For instance, almost all 
developed countries have very low birth rates. What usually 
distinguishes one country from another demographically is the 
rate of immigration. Those countries with significant 
immigration have a longer time horizon over which to deal with 
the debt burden. Countries with traditionally low levels of 
immigration, for instance, Italy and Japan, will simply age 
more rapidly than most of the other major developed countries.
    In the case of Italy, the public sector has begun to slowly 
reduce the country's relative debt burden. In fact, despite a 
history of public sector profligacy, some analysts estimate 
that even the Italian government will soon move to fiscal 
surplus. A better fiscal balance combined with recent increases 
in immigration to Italy means that the pension problem is still 
serious, but slightly less critical than in the other developed 
country with a very rapidly aging population, Japan.
    Japan could not be having this demographic transition at a 
worse time. As you may know, the Japanese economy has been 
underperforming for the last ten years. To deal with weak 
economic activity, the government has been using fiscal 
stimulus to try to jump-start the economy. Every time the 
government injects funds, economic activity improves. However, 
as soon as it reduces the stimulus, the economy once again 
shows signs of weakness, thereby requiring further stimulus.
    This has now been going on for so long that the government 
has now built up an enormous public sector debt. The 
government's debt to GDP ratio is about 130 percent, a number 
we have not seen in an industrialized country since before 
World War II. According to both the IMF and the OECD, that 
number will easily reach 150 percent of GDP in Japan over the 
next few years. Others estimate that the debt burden could go 
even higher.
    Now that the debt burden is so high, the country is also 
facing a situation where its pension system will start going 
into sizeable deficit by mid-decade. By the end of the decade, 
according to the government's own estimates, the cumulative 
shortfall will be enormous. This means that if the country is 
to stabilize its debt, even sharper cuts will be needed in 
other non-pension-related areas.
    It would seem obvious that the pension system needs urgent 
reform in Japan. In fact, the government recently made some 
reforms in the system, but these reforms only affect benefits 
far out into the future. There are important reasons why the 
government is reluctant to reform the pension system quickly 
that are centered more on economics than politics.
    Since consumption is quite weak at present in Japan, if 
benefits are cut immediately, then consumption by seniors will 
decline. If contributions are raised, since contributions are 
similar in effect to a tax increase, the government fears that 
higher Social Security taxes might force the economy into 
another downturn. This is the basic pension conundrum. Beyond 
this, however, the general pension problem combined with the 
country's demographics and structure of the labor market are 
further complicating the economic problem.
    The pension problem is well known and widely discussed in 
Japan. The average person knows that contributions will 
eventually rise and benefits will be cut. What is the reaction 
of a rational person in this type of situation? Save more 
money. Since interest rates have been kept artificially low, 
that means the return on pension savings as well as on 
retirement savings of the working population is also quite low. 
In addition, many Japanese have lost a great deal of money in 
the stock market since the 1980s. A low rate of return implies 
that to maintain spending levels in the future, one needs even 
more savings, not something that is helpful for the economy.
    Worse still is the fact that the Japanese economy needs 
additional economic restructuring. Restructuring is another 
term for layoffs. The problem is that if a worker who is in his 
40s or 50s loses his job, it is extremely unlikely that he or 
she would find a comparable job. That means that they know that 
if there is a great threat to their job over time, then they 
should save as much as possible now.
    All these factors are adding to the overall economic 
malaise. All in all, Japan faces some of the most complicated 
fiscal and financial and pension problems of any country in the 
world. Japan probably represents the best example of why it is 
necessary for governments to maintain reasonable fiscal 
policies and also to maintain pension systems that are as 
actuarially sound as possible. If the problem in Japan is not 
solved before the end of this decade, we might find that the 
Japanese economy will look quite different than it has in the 
past. Thank you for your attention.
    [The prepared statement follows:]

Statement of Vincent J. Truglia, Managing Director and Co-Head, 
Sovereign Risk Unit, Moody's Investors Service, New York, New York

    At Moody's we spend a great deal of time studying the issue 
of pension burdens for countries around the world. It is clear 
to us that rapidly aging populations in the industrialized 
world, as well as in certain emerging market countries, will 
pose some complicated economic and financial problems going 
forward. First, when examining the various industrialized 
countries, what we have concluded at Moody's is that almost 
every country will ``default'' on its pensions. What do I mean? 
When we talk about default on a financial obligation, basically 
what we are saying is that the obligor does not meet the 
original terms of the contract. In some way the contract is 
broken. When we look at present pension promises, it is clear 
that the promises various governments are making to their 
people will not be met according to the present terms of the 
implied contract. At the same time, we believe that the public 
does not view a breach of promise by a government on a pension 
as seriously as it would react to a breach of promise on a 
financial instrument. That is just a societal convention. The 
reason for the differences in treatment between the two 
contracts is probably best explored by anthropologists, not 
economists. Nonetheless, it is clear to us that in most 
industrialized countries presently promised pensions can not 
possibly be met.
    Why can't the promises be met? The reason is quite 
straightforward. Meeting all present pension promises implies a 
drain on the economies of the developed world, and in 
particular on the respective public sectors that would make the 
burden intolerable.
    The best way to measure this burden is to estimate the net 
present value of presently constituted pension schemes. If we 
use worst case scenarios as prepared by the OECD several years 
ago, we find that the implied debt burdens created by these 
public sector pension schemes for a number of countries reach 
very high levels.


                    Implied Debt Burdens/GDP by 2030



US.........................................................         115%
UK.........................................................         144%
France.....................................................         193%
Italy......................................................         241%
Germany....................................................         247%
Japan......................................................         339%



    As these numbers indicate, the implied debt burdens are for 
the most part unsustainable. Our conclusion is that the 
pensions will be cut drastically in most of these countries--
the US doesn't look quite as bad; basically we have somewhat 
better demographics and we also provide less generous pension 
promises. In general, however, it is only a question of when 
and by how much most of these pension programs will be cut.
    To prepare for the upcoming demographic transition, most 
countries have been trying to improve their fundamental fiscal 
position to at least accommodate some of the cost of increases 
in future pension claims. Therefore, it is not surprising to 
see that most developed countries have tried to rein in their 
public sector debt, with varying degrees of success. Despite 
the numbers noted above, which capture net present values, 
there are different trajectories for the implied debt build-up 
among the various countries depending upon the individual 
country's demographics. For instance, almost all developed 
countries have very low birth rates. What usually distinguishes 
one country from another demographically is the rate of 
immigration. Those countries with significant immigration have 
a longer time horizon over which to deal with the debt burden. 
Countries with traditionally low levels of immigration, for 
instance Italy and Japan, will simply age more rapidly than 
most of the other major developed countries.
    In the case of Italy, the public sector has begun to slowly 
reduce the country's relative debt burden. In fact, despite a 
history of public sector profligacy, some analysts estimate 
that even the Italian government will soon move to fiscal 
surplus. A better fiscal balance combined with recent increases 
in immigration to Italy mean that the pension problem is still 
serious but slightly less critical than in the other developed 
country with a very rapidly aging population--Japan.
    Japan could not be having this demographic transition at a 
worse time. As you may know, the Japanese economy has been 
under-performing for the last ten years. To deal with weak 
economic activity, the government has been using fiscal 
stimulus to try to jump-start the economy. Every time the 
government injects funds, economic activity improves. However, 
as soon as it reduces the stimulus, the economy once again 
shows signs of weakness, thereby requiring further stimulus. 
This has now been going on for so long that the government has 
now built up an enormous public sector debt. The government's 
debt/GDP ratio is around 130 percent, a number we haven't seen 
in an industrialized country since before World War II. 
According to both the IMF and OECD that number will easily 
reach 150 percent of GDP in Japan over the next few years. 
Others estimate the debt burden could go even higher.
    Now that the debt burden is so high, the country is also 
facing a situation where its pension system will start going 
into sizable deficit by mid-decade. By the end of the decade, 
according to the government's own estimates, the cumulative 
shortfall will be enormous. This means that if the country is 
to stabilize its debt, even sharper cuts will be needed in 
other non-pension-related areas. It would seem obvious that the 
pension system needs urgent reform in Japan. In fact the 
government recently made some reforms in the system, but these 
reforms only effect benefits far out into the future. There are 
important reasons why the government is reluctant to reform the 
system quickly that are centered more on economics than 
politics.
    Since consumption is quite weak at present in Japan, if 
benefits are cut immediately, then consumption by seniors will 
decline. If contributions are raised, since contributions are 
similar in effect to a tax increase, the government fears that 
higher social security taxes might force the economy into 
another downturn. This is the basic pension conundrum. Beyond 
this, however, the general pension problem combined with the 
country's demographics and the structure of the labor market 
are further complicating the economic problem.
    The pension problem is well known and widely discussed in 
Japan. The average person knows that contributions will 
eventually rise and benefits will be cut. What is the reaction 
of a rational person in this type of situation?--Save more 
money. Since interest rates have been kept artificially low, 
that means that returns on pensioner savings as well as on 
retirement savings of the working population is also quite low. 
In addition, many Japanese have lost a great deal of money in 
the stock market since the 1980s. A low rate of return implies 
that to maintain spending levels in the future one needs even 
more savings--not something that is helpful for the economy. 
Worse still is the fact that the Japanese economy needs 
additional economic restructuring. Restructuring is another 
term for layoffs. The problem is that if a worker who is in his 
40s or 50s loses his job, it is extremely unlikely that he or 
she would find a comparable job. That means that they know that 
if there is a threat to their job over time, then they should 
save as much as possible now. All these factors are adding to 
the overall economic malaise. All in all, Japan faces some of 
the most complicated fiscal and pension problems of any country 
in the world. Japan probably represents the best example of why 
it is necessary for governments to maintain reasonable fiscal 
policies and also to maintain pension systems that are as 
actuarially sound as possible. If the problem in Japan is not 
solved before the end of this decade, we might find that 
Japanese economy will look quite different than it has in the 
past.
    Thank you for your attention.
      

                                


    Mr. McCrery. Thank you, Mr. Truglia. I am not an economist. 
I am a lawyer, and so much of what you have said is not 
settling real well. For example, Dr. Hale, explain to me how we 
can have wealth without savings. That was what you said. You 
said we have wealth without savings, so explain that to me, how 
we create wealth without savings.
    Dr. Hale. The household savings rate is basically a 
residual of what is left after we subtract consumption from 
income, and in recent quarters, consumption has exceeded income 
and, hence, the savings rate has turned negative. But the value 
of the portfolios of existing assets have increased 
dramatically because of the very good performance of the stock 
market.
    One number we can quantify easily is pension fund assets. 
We record that very carefully every day, every month, every 
year, and the assets now are worth about $13 trillion. In 1990, 
they were worth about $3 trillion. Mutual fund assets now are 
$7.5 trillion. A decade ago, they were a third of that, and 20 
years ago, they were a few hundred billion dollars. The total 
capitalization of the United States stock market is today about 
$16 trillion. In 1990, it was $3 to $4 trillion.
    So all of this is a proxy for wealth creation. We have also 
had gains in house prices and other things, but there is no 
doubt the central driving force for wealth creation in recent 
years has been this very dramatic appreciation in share prices 
and the value of stock market capitalization.
    Mr. McCrery. So I guess what you are saying is that the 
value of a family's equities does not count as savings.
    Dr. Hale. Under the conventional definitions that we use in 
our national income accounts, that is correct. Moreover, we 
have the problem that in computing our national income, we 
subtract from income tax payments made on capital gains, 
despite the fact we do not include in our estimates of income 
the value of these capital gains. So we have some accounting 
anomalies.
    The bottom line is the savings rate, therefore, is in my 
opinion not as meaningful a number as it might have been ten or 
20 years ago. Our savings rate is low compared to the rest of 
the world, but there is no doubt that our wealth creation has 
been quite spectacular.
    The problem, I think, in policy terms is very simple. Half 
the population does not own any stocks, does not have a private 
retirement plan or a pension plan, and is not saving either, 
and that is where I think there is a policy challenge. We have 
got to get these people somehow into the wealth creation 
process or they are going to confront a big decline in living 
standards when they reach the age of retirement.
    Mr. McCrery. So is the traditional definition of savings 
losing importance? Is it something that we should perhaps 
revise rather than continually throwing out this almost 
hackneyed phrase now, oh, the savings rate is too low and the 
United States' savings rate is so low compared with Japan and 
other countries. So what? If we are creating wealth, which to a 
normal non-economist--
    Dr. Hale. Right.
    Mr. McCrery.--sounds like savings, feels like savings, 
perhaps we should revise this definition.
    Dr. Hale. There is no doubt that the savings rate has been 
a much abused concept, and over the years, various factions or 
various groups have found it convenient to point to the savings 
rate as a rationalization for some policy agenda, be it to 
promote new kinds of retirement savings with tax allowances or 
simply be critical of our economic performance. Fifteen years 
ago, our great concern was the budget deficit. That has gone 
away. Now we are confronting a $4 trillion budget surplus. The 
other side of that now is this very low private savings rate.
    But if I had to pick the one area of vulnerability from all 
this, it is that America is now running a very large current 
account deficit. It will be in the year ahead possibly five 
percent of GDP. That is, in my opinion, not a problem by 
itself, because the counterpart to this has been a tremendous 
demand on the part of the global economy for American assets--
stocks, bonds, FDI year. But it is a potential vulnerability in 
the sense that if we ever had an interruption of those capital 
flows, a suspension of those capital flows, it would set the 
stage for a much weaker dollar, for higher interest rates, and 
possibly a stock market correction.
    So we must be sensitive to how big this imbalance grows. If 
you talk to senior officials like Alan Greenspan, for example, 
of the Federal Reserve Board, they will tell you that on a 
three-to five-year view, there has to be a point when these 
capital flows could slow down because we might have greater 
growth elsewhere in the world or some other interruption. And 
when that happens, we could have an unpleasant, potentially 
nasty adjustment in our financial markets. But it is not 
guaranteed to happen. It is simply one of these things that 
could happen because of a convergence of circumstances. We are 
rolling the dice, and so far, the dice are going our way, but 
there may be a moment when the outcomes change.
    Mr. McCrery. I got here a little late so I did not hear the 
first couple of presentations, and you may have covered this, 
and I think maybe Dr. Hale may have alluded to this, but what 
happens to our stock market when baby boomers start to redeem 
their stocks, so to speak, to finance their lifestyle in 
retirement? Have you all looked at that?
    Dr. Hale. I will tell you that from the perspective of Wall 
Street people, this is the great unknown question, and only now 
are academics and even Wall Street pundits beginning to write 
about it. There are two or three academics in this country with 
the National Bureau of Economic Research, at Stanford and 
elsewhere who are starting to write about it. But the area is 
very unexplored.
    All we can do right now is speculate, and as my testimony 
indicates, you can clearly construct potentially negative high-
risk scenarios, but they are not going to happen automatically. 
They will depend on lots of other circumstances. How much 
retirement savings is there elsewhere in the world as we run 
down ours? Where will that money go? What will be the 
performance of our productivity in five or ten years? If we 
could keep sustaining high levels of productivity and profit 
growth, the rest of the world may have so much demand for 
American assets it will not matter if the baby boomers are 
selling it. There are just so many different factors.
    We learned, I think, in the 1990s that you cannot predict 
the economy solely on the basis of demography. If you go back 
ten years ago, Wall Street was awash with newsletters saying, 
the savings rate in the 1990s will go to ten percent because of 
the aging of the population. Not a single pundit anywhere 
predicted it would go to zero. Why? Because they could not 
imagine in 1990 the tremendous gains we have had in recent 
years in productivity, in corporate profitability, and economic 
growth, which have given us this spectacular stock market boom.
    By definition, the stock market is a place where many 
different factors converge, but there is no doubt if we go out 
15 years this issue of baby boomers selling equities is a 
potential risk. There is the danger that it could be 
destabilizing and all we can do is try and develop shock 
absorbers to cope with it.
    Mr. McCrery. I want to ask one more question and then I 
will turn it over to my colleagues. You, I think, Mr. Truglia, 
mentioned that foreigners held 40 percent of the United 
States--or was it Dr. Hale--debt, publicly held debt. So as we 
reduce our publicly held debt, and some are promoting that we 
extinguish our publicly held debt by 2012 or 2013, what effect 
will that have on our stock market? Will foreigners shift their 
money from government securities to equities in the United 
States?
    Dr. Hale. This is, again, one of the great unknowns. I had 
a conversation just last week at Jackson Hole, Wyoming, with 
Alan Greenspan about this topic and I said to him, ``Are you 
not concerned that the disappearance of the U.S. Federal debt 
market will undermine the dollar's status as the global reserve 
currency,'' because right now, foreign central banks own over 
$1 trillion of U.S. Government securities as part of our global 
currency role. And his answer was, ``They can buy corporate 
debt.'' Maybe they will buy Fannie Mae debt or Ginnie Mae debt. 
Right now, the government is talking about constraining the 
growth of Ginnie Mae and Fannie Mae. Perhaps we will have to 
expand it to replace the Treasury debt market.
    There are examples in history of central banks owning 
private securities--railway bonds, corporate bonds--and this 
is, again, a question we will be addressing over the next ten 
years. But there is no doubt that we could have some 
substitution. I think that central banks could, if they wanted 
to, own very high grade corporate bonds and very high grade 
agency bonds. I doubt that foreign central banks would want to 
own U.S. equities. It would have been a great investment, but 
it is contrary to the mandate of central banks normally to 
speculate in equities. The outlier would, of course, be two 
years ago, Hong Kong, which had its central bank buy $20 
billion of equities to fight off the New York hedge funds, but 
that is a very unusual policy. Most of the time, central banks 
want to be short maturity instruments, two or three years, just 
to have liquidity.
    Mr. McCrery. Thank you.
    Mr. Hayworth?
    Mr. Hayworth. Thank you, Mr. Chairman. To the distinguished 
panel, thank you and good morning. Apologies are in order. One 
of the challenges of serving in Congress, and I am certainly 
not an advocate of cloning, but quite often we need to be in 
three places at once and that is a physical impossibility as we 
address this fiscal impossibility that may be confronting us 
now.
    Dr. Hale, you just mentioned examples in history. As I was 
sitting here listening to some of the testimony, I am reminded 
of, I believe it was Mark Twain's observation that history does 
not repeat itself, but it rhymes. And yet to peruse Mr. 
Wattenberg's testimony about the birth dearth and the Japanese 
demographers extrapolating that there will be an identifiable 
final Japanese birth, it seems we are heading into great times 
of uncertainty, which by its very definition can lead to 
challenges economically, and I will use that terminology rather 
than other descriptions that might be less than encouraging to 
the markets and observers as a whole.
    Let us return to the question of other economies, other 
situations. Japan, in a situation--I believe, Mr. Truglia, you 
mentioned in terms of the drain on their gross domestic 
product, 339 percent could be their implied debt burden to 
carry out the pension funding. They are in a horrible 
situation. Dr. Hale, you mentioned it, as well.
    I guess I will address the question to both of you. Mr. 
Truglia, you might want to start. What lessons do we take from 
the Japanese situation as we are making the transition in 
American policy over this next decade? What should we keep 
uppermost in our minds?
    Mr. Truglia. In terms of Japan, one of the reasons I use 
those numbers, they are worst case scenarios that were done by 
the OECD and it is important to keep in mind that when you are 
talking about looking at some projections, they are so patently 
ridiculous that they cannot possibly ever occur in reality. We 
have actually looked into the history of how high a debt burden 
could possibly be sustained.
    What is the ultimate level we have actually seen in 
history? You have to go to the pre-World War II period to find 
it and we found that Britain for decades lived with a debt to 
GDP of about 170 percent of GDP. France hit 185 percent after 
World War I. Germany, it is hard to measure GDP after World War 
I, but if you compare it with national product--again, these 
were all academic estimates--it probably was also at about 180 
to 190 percent of GDP.
    The key question, once you start to get to those debt to 
GDP burdens is that the society has to make a choice as to who 
is going to bear the burden. Japan is headed in that direction 
because of pensions, but for a whole lot of other reasons, too, 
and the question then is, if they do reach that 170, 180 
percent debt to GDP, they are going to have to choose who 
suffers.
    And in the case of the U.K., in the 1920s and 1930s, what 
they did was they decided to give creditors a preferred status. 
So if you held gilts throughout the 1920s and 1930s, you did 
very, very well. The government also had to run government 
budget surpluses to keep everything stable. But what that did 
was that destroyed the economy slowly, eating away at its 
fundamental structure, and that is one of the reasons Keynes 
wrote his book in the 1930s was to try and counteract this 
bizarre fiscal policy of deflation deindustrializing the 
country and paying very high real interest rates at the same 
time.
    The French after World War I thought that they could 
possibly have the Germans pay all their war debt through 
reparations. Well, by the mid-1920s, they knew this was not 
going to occur and they were very lucky that they happened to 
have a conservative government elected in 1926 which decided it 
was going to make the workers bear the burden. And so French 
industry, after the working wages were driven down in real 
terms, French industry flourished.
    Germany, however, could not decide who was going to bear 
the burden, could not decide, and basically what you have under 
that kind of a situation is the economy went into 
hyperinflation.
    The Italians had a somewhat similar problem. Their debt was 
not as high, the maturity was very bad, and they just decided 
to default on the debt, and the biggest problem for Italy since 
then has been that the actual default and rescheduling was so 
successful that it has always been a viable option in Italian 
academic circles. Oh, if we cannot pay our debt, we will just 
reschedule it.
    So the problem you have in Japan is we are approaching 
those very, very high debt levels. What choices will that 
society have to make? And the problem is, it is such a 
consensual society, it is difficult to see who they would 
decide upon as bearing the burden of the debt, because it is 
not a transfer ever intergenerationally, as most academics 
refer to it. It is a political choice made in that generation 
as to who is going to bear the burden.
    So Japan's problem is so enormous and because they cannot 
make a choice as to who is going to suffer--even now they 
cannot make a choice as to who is going to bear the burden of 
restructuring--that the longer they wait, the worse the problem 
is going to be, and the closer they get to that 170, 180 
percent debt to GDP ratio means that that problem is going to 
confront them sooner rather than later and hope to the world 
that the JGB market can handle it.
    Mr. McCrery. Thank you very much.
    Mr. Collins?
    Mr. Collins. Thank you, Mr. Chairman.
    Dr. Hale, I want to go back to Mr. McCrery's comment about 
wealth does not necessarily have to include savings. It kind of 
reinforces an old saying that I have always had. I have been 
accused by challengers and others about being a millionaire. 
Well, I have always figured there were two ways to be a 
millionaire. You could have one or you could owe a million. You 
had to have some assets to owe a million. You might not have 
had a dime in the bank.
    Fifty percent of our population has no savings and no 
stock. I think a lot of that comes from government itself, 
through the fact that we have five marginal tax rates for the 
purpose of bringing funds in to cover entitlement programs that 
have been established by the Congress over the years, many that 
are facing deficit funding in years to come. It has also been 
the high marginal rates come from the standpoint that we bring 
a lot of funds into this town and transfer them back out to 
others. One particular program is the Earned Income Tax Credit.
    Also, I think it reinforces, too, Alan Greenspan's comment 
here last year before the committee when he addressed the 
Social Security issue. He said, if you are ever going to solve 
the Social Security problem, you have to end the pay-as-you-go 
system. There are people today who are talking about programs 
and proposals that would do exactly that. However, it would not 
affect the current beneficiaries of Social Security and 
probably would not even affect my generation, which I am part 
of the World War II baby boom generation. But it would change 
and set up in place a retirement system for the generations 
behind us, which would end the pay-as-you-go system in about 30 
to 40 years.
    Mr. Greenspan also advised us last year that we ought to 
look at capital gains rates so that we can encourage people to 
invest and divest of assets. You do not usually sell something 
unless you have a gain to it, so you would have a tax 
liability. He cautioned us to look at the marginal rates. In 
1993, prior to the Clinton-Gore, the one that Mr. Gore cast the 
deciding vote over when he was in the Senate, we only had four 
rates. Now we have five marginal rates.
    We also hear a lot from Treasury and we have heard a lot 
from witnesses over the last five or six years about the 
alternative minimum tax and how it is going to be affecting 
more middle-income folks. All of those things need to be looked 
at.
    I have always had a suspicion when it came to the Medicare 
program that was created in 1965, it was something similar to 
what you talked about in some other countries with the pension 
programs. We had a lot of heavy hitters in this country, large 
corporations who had established benefit programs that included 
long-term health care for their retirees.
    Mr. McCrery. Mr. Collins, we have about two minutes left to 
vote.
    Mr. Collins. Okay. But I believe one of the reasons that 
Medicare program was passed was to change that health care 
promise from being primary care to being supplemental to 
Medicare. It saved tons of money for a lot of people and put it 
on the backs of taxpayers.
    And also, you mentioned the market sell-off by the baby 
boomers. Somebody has to buy when somebody sells. Thank you.
    Mr. McCrery. Would the panel indulge us for just a couple 
minutes to run across the street and vote and come back. Can 
you stay for a few more minutes? Thank you. We will be right 
back.
    [Recess.]
    Chairman Shaw. [presiding.] I would say to the panel that 
usually when we have a vote called and we go that close to the 
end of a hearing, we terminate the hearing. Despite the low 
attendance that we have at this hearing, I can tell you that 
you have certainly gotten the attention of those of us who are 
here. In fact, I was just talking to Kim, our staff person, Kim 
Hildred. We need more of these types of hearings. This is some 
scary stuff.
    When I left here, when I broke and left the hearing for a 
few minutes and went over to the front of the Capitol, there 
was a news conference and one of the subjects was the 
retirement of the national debt. This, and I think Mr. Truglia, 
you spoke about this, and I heard you speaking about this when 
I returned and talking about Japan and this type of thing. This 
is just a disaster, a global disaster waiting to happen.
    One of you has spoken on the impact of the fact that birth 
rates are going up in some of the developing countries. The 
huge question is whether they can sustain that population 
growth. How would you speculate, and I know there is no real 
model that I am aware of that you can judge from, but how would 
you predict what that is going to do to a shift in global 
powers, a shift of centers of population, centers of wealth? I 
am looking for a volunteer. I am not going to call on any one 
of you. Yes, sir, Mr. Wattenberg? By the way, I used your 
statistics out there. I hope they are right.
    Mr. Wattenberg. Excuse me?
    Chairman Shaw. I said, I used your statistics at that news 
conference a few minutes ago. I hope they are right.
    Mr. Wattenberg. I hope I am right, too. The birth rates and 
the fertility rates in the less developed countries are also 
coming down remarkably rapidly. People keep saying, well, the 
third world is growing and growing and growing, but they are 
growing because of what demographers call the momentum effect. 
The mothers today were born in periods of high fertility so you 
have lots and lots of mothers. But the actual fertility rates, 
the birth rates in the less developed countries are falling not 
only rapidly, but more rapidly, as a rate, than had happened in 
Europe and in the United States. Just about 35 years ago, the 
total fertility rate in the less developed countries was a 
little bit over six children per woman and now it is a little 
below three. So this changes the whole dynamic.
    First of all, these less developed countries are going to 
have the same problems that we are having just a generation or 
two later because there is going to be this imbalance between 
elderly people and working age people. So the way I see it, 
this is going to be a global rolling problem. It is just a 
wholly new situation: people are not , or will not be 
reproducing themselves in the numbers needed to keep population 
from falling.
    Chairman Shaw. Do you have the information broken down per 
continent? What would be the breakdown per continent?
    Mr. Wattenberg. Oh, per continent?
    Chairman Shaw. Africa, South America--
    Mr. Wattenberg. Well, you will have a shift, obviously, 
from--I mean, there is a scenario that has Europe becoming sort 
of a continent of a little pretty picture postcard kind of 
place with ever-diminishing population. The demographer Samuel 
Preston has estimated that even if European fertility rates 
went up to 2.1 children tomorrow, or nine months from now, 
which is not going to happen seeing as they have been falling 
and falling and falling, you would still have a 25 percent 
decrease in total European population by the middle of the 
century.
    So the balance, the geopolitical balance is moving from 
Europe surely toward Asia even though China is already below 
replacement, North and South Korea are below replacement, 
Taiwan is below replacement, and Thailand is below replacement. 
All the countries are coming down, but as a differential rate 
from different gases.
    The answer to your question is that power will be moving 
from the Western world to the non-Western world, or population 
as a proportion of total population will be moving from the 
Western industrial world to what we now know or think of as the 
non-Western, non-industrial world.
    I wanted to make just one other comment, which is on all 
the gloomy scenarios, which I partly share. Because of the 
nature of this split demography, where the fertility rates in 
the third world are coming down but from a much higher base, we 
are still going to have in the course of the next 50 years an 
additional two billion more people. We are going to grow from 
about six billion people to eight billion as a global totality. 
And moreover, a lot of the people who are now living in less 
developed countries are moving to the cities, getting better 
educated, spending more money, moving into the middle class. So 
I think the amount of turbulence coming at us is major, but the 
amount of demand is not necessarily going to come down for 
quite a while.
    Chairman Shaw. Could you continue that scenario through the 
other continents?
    Mr. Wattenberg. Until recently, it was said that Africa was 
the last holdout, that the fertility rates had not come down, 
but in the last 15 or 20 years or so, and this is even 
preceding the catastrophe of AIDS, we began to see fertility 
rates falling substantially in many of the African nations. So 
that was sort of the last holdout. Fertility rates had fallen 
everywhere except Africa, and now they are falling very 
rapidly. I mean, the basket case scenario was always Kenya. 
They had a fertility rate of eight children per woman. It is 
now down to four-point-something. So these rates are falling 
very, very rapidly.
    The other notion was that the Muslim countries would not 
fall because of religious restrictions and you are seeing 
reductions in fertility rates, some of them quite dramatic. I 
mean, the Egyptian rate is down. The Tunisian rate is down 
close to replacement level already. There is a falling birth 
rate in both Iran and Iraq. We have some data in from certain 
cities in Iraq. In Shiraz, it is below replacement rate 
already.
    So it is as if somebody put something in the global 
drinking water supply. It is happening everywhere. The Latin 
American countries are coming down substantially. The Mexican 
birth rate 35 years ago was 6.5. It is now down to about 2.5 
children per woman. So this whole idea that America is going to 
be flooded with Mexican immigrants is going to be very 
interesting because that is not going to leave any people in 
Mexico.
    The Asian countries are sort of split. The developed 
countries have already come down below replacement, and that 
includes China for some very unfortunate coercive reasons, but 
it is still below the replacement rate. The Indian rate has 
come down very sharply, from, again, about six children to 
about three children. Bangladesh, which was the other great 
basket case nation, fell from six children per woman to three 
children per woman in one decade, which is just absolutely 
unheard of.
    And then you have the phenomenon of Eastern Europe and the 
former Soviet republics and no one knows whether that is just 
the normal, just in a similar pattern with all the other 
countries or because of the economic and social chaos that has 
been going on, particularly in the former republics of the 
Soviet Union.
    The other thing is that people have argued that when income 
goes up, fertility goes down because people live in cities and 
live in apartments and whatever, and simultaneously, they have 
argued that when income goes down, because there is not a lot 
of money to support children, then fertility goes down. So you 
have a situation that when income goes up, fertility goes down, 
and when income goes down, fertility goes down, which leads one 
to the conclusion that fertility is going down, having 
exhausted the other possibilities.
    Chairman Shaw. What is the presence of birth control, the 
technology? How much of that is having to do with this all from 
a global perspective?
    Mr. Wattenberg. Well, it is a--
    Chairman Shaw. Now in Africa, I would assume that probably 
they do not use much birth control, that there is something 
else going on.
    Mr. Wattenberg. They are using more and more, and this is 
the contraceptive revolution has spread throughout the world 
and the population groups maintain that it is because of the 
U.N. programs that so much of this fertility decline has 
happened. I am a little skeptical myself; I support those 
things, but the rates have come down in countries that have not 
had specific national programs.
    So the basic cause of this birth dearth is broader than 
just contraception. It is modernism. It is a combination of 
contraception, legal abortion, education of women, moving from 
farm to city, high technology, advent of television, modern 
communications. You can just go on and on, and as I say, the 
demographers all along understood this demographic transition 
from high fertility to low fertility, but they always assumed 
that it would sort of level off at this nice pleasant rate of 
2.1 and it just went through it like a hot knife through butter 
and you have these 60 countries already that are way below 
replacement level fertility with no particular sign that it is 
going to come back up.
    Now, obviously, sooner or later, it has got to come back up 
because, as I said, otherwise there are not going to be any 
people around, but it is going to be a very different world.
    Chairman Shaw. You also mentioned religion as it applies to 
the Arab countries. Your lowest replacement is Spain, which is 
a Catholic country.
    Mr. Wattenberg. The Catholic countries of Southern Europe 
are very low. Greece is very low. It seems to now be beyond 
religion. You have Catholics in the United States having the 
same birth rate as Protestants. There is not any difference.
    Chairman Shaw. Someone else wanted to chime in here, and I 
would welcome the three members sitting here, that we sort of 
have a free flow here and anyone can come in at any time. Yes?
    Mr. Hewitt. Just to add to some of these remarks, on the 
geopolitical consequences, I think they will be significant. If 
you look at China, for example, by mid-decade, they could have 
400 million over 65, and if they rigorously enforce their one-
child policy, the elderly will be 40 percent of their 
population. In fact, half of the Chinese population at that 
point would be over 60 and at that point China will also be at 
risk for aging recessions.
    Chairman Shaw. When was that?
    Mr. Hewitt. Pardon me?
    Chairman Shaw. What date was that you gave us?
    Mr. Hewitt. Mid-century, 2050. Then, there is the 
population explosion in other regions. I agree with Ben, birth 
rates are coming down everywhere, but they are coming down more 
slowly in some countries than in others. Take the Middle East. 
In Saudi Arabia, the average age is 16, and it is close to that 
in Iraq and Iran, and other Gulf States. That means that their 
populations will more or less double in the next 20 years. In 
many cases, for example, Saudi Arabia, you have a situation 
where they are already importing food and desalinizing water. 
Governments in these countries are not democratic, and they 
tend to blame outside influences for their problems.
    Juxtapose this with the fact that our ability to deter or 
resolve crises in the Middle East is going to decline 
dramatically because America has an aging problem in its own 
military. All of the equipment we bought during the Cold War is 
wearing out. And by 2010, if we continue on the current budget 
baseline, our armed forces will be half their current size. We 
know from Kosovo that Europe no longer has a first-rate 
defense.
    And so just as we become more dependent on economic growth 
than we have ever been, because otherwise we cannot pay the 
pension costs, we are going to become more vulnerable, not 
simply because we cannot deter conflicts, but because the 
nature of our defense obligation has changed. We are no longer 
defending borders. We are going to have to defend our growth 
rates if we want to have Social Security.
    Mr. McCrery. Mr. Chairman?
    Chairman Shaw. Yes, go ahead.
    Mr. McCrery. Dr. Orszag, in looking at your bio here, you 
have a Ph.D. in economics and you teach macroeconomics. I 
understand that the impact you all are talking about primarily 
today is on our pension systems and so forth and the difficulty 
we are going to have in paying those debts with the lower 
population growth, but can you tell me any salutary effects of 
what is happening with respect to the birth rate? Are there 
any?
    Dr. Orszag. There are some potential positive effects from 
slower population growth. In particular, this might seem a 
little theoretical, but--
    Mr. McCrery. All of this seems pretty theoretical.
    [Laughter.]
    Dr. Orszag. Okay, but that is a caveat. Slower population 
growth will affect, under most models, will affect the amount 
of capital that we have per worker. So intuitively, the slower 
the population growth, everything else equal, the more capital 
that we have per worker, which could raise income per worker, 
or output per worker. That is a potential benefit.
    Now, there may be a mismatch between that positive effect 
and paying for the pensions that has to occur. Just because 
income per capita goes up does not mean that the pension system 
is made whole. Nonetheless, there are some potential benefits.
    If I could just add one other quick comment on China, 
because I think it is obviously such an important country, 
there is not only the issue of the population aging, but also, 
they face particular challenges in pension reform. I was in 
Beijing a month ago and we met with the premier to talk about 
social security reform. A lot of the existing pensions are on 
the books of the State-owned enterprises. The pensions had been 
provided by the old State-run system. Now, obviously, as they 
are moving to a market economy, you do not want to have the 
pensions stuck there on the State-run enterprises.
    So they face a particularly large challenge in trying to 
deal not only with the population aging that is faced by lots 
of other countries but in shifting pensions basically from one 
sector to another. So I think that that transformation is 
worthy of our attention because it has geopolitical 
ramifications--basically, the pension system in China is an 
important thing. China is an important country and it will have 
geopolitical ramifications.
    Chairman Shaw. I wish you would go down to Pennsylvania 
Avenue and talk to our premier.
    [Laughter.]
    Mr. McCrery. Mr. Wattenberg wants to make a comment. Before 
you do, though, let me just slip in here that that is an 
interesting thought about China having the problem with 
pensions from a government pension standpoint as opposed to the 
United States, which our pension problem is going to be 
primarily corporate and private. I mean, we have a public 
obligation, but the private sector in our country provides most 
of the pension benefits, do they not? So is it not going to be 
easier for us, assuming that the private sector is better at 
increasing productivity than the public sector, is it not going 
to be easier to meet that obligation, given the fact that we 
are going to have more capital per worker?
    Dr. Orszag. If I could offer a couple comments--
    Mr. McCrery. Sure.
    Dr. Orszag. First, the Social Security system in the United 
States is fully portable with few exceptions, such as for State 
and local workers. But basically, you can move jobs and your 
Social Security benefits follow you. There is not a portability 
issue. In fact, it is, in a sense, more portable than many 
private pension plans are.
    Mr. McCrery. We are trying to fix that.
    Dr. Orszag. Yes, and actually, one of the benefits of the 
legislation that the Ways and Means Committee and the Senate 
Finance Committee have been working on is to improve the 
portability of pensions across different types of pensions.
    The second point is, if you look at current retirees, 
Social Security is, for the majority of them, the most 
important source of retirement income, not private pensions. 
Now, that may change in the future--
    Mr. McCrery. It is changing, is it not?
    Dr. Orszag. It is changing and doing projections out into 
the future is more difficult, but in terms of current retirees, 
Social Security is by far the most important source of income 
for the majority of them.
    And just a third point that I wanted to get in because it 
was discussed earlier, as we noted several times in terms of 
private pensions, only about half of the workforce is covered 
by private pensions. One thing I just wanted to note is that is 
very income dependent. The coverage rate for lower-income 
workers is much lower than for higher-income workers, 
dramatically lower.
    One of the very interesting things is that if you offer 
lower-income workers the opportunity to participate in a 401(k) 
plan with a corporate match, they participate at surprisingly 
high rates. Even at $10,000 or $15,000 in income, half of the 
people who are offered a 401(k) will choose to contribute. Now, 
the problem is only 20 percent of them are offered in the first 
place, so only ten percent of them, half of the 20, have a 
401(k). But the key thing is, if they are offered the 
opportunity to have their contributions matched, they 
contribute at what I consider to be surprisingly high rates and 
that at least raises the question of this sort of government 
matching program that Dr. Hale mentioned.
    Whether that in some way--and the Senate Finance Committee 
has something similar, although it is not refundable, so it is 
not exactly the same, but something similar is in the Senate 
Finance Committee pension bill. Whether something like that is 
the most auspicious way of promoting retirement security for 
that 50 percent of the workforce that does not have a private 
pension, I think the answer might be that it is.
    Dr. Hale. The Investment Company Institute has done surveys 
of employers and they find that in corporations that offer 
401(k) defined contribution plans, 75 percent of the employees 
take them up but 25 percent decline because they do not want to 
make any income sacrifice. An interesting question is, should 
we make this compulsory? In Australia, the Federal Government 
10 years ago brought in a compulsory superannuation program for 
all income with a threshold of $8,000, and by law, nine percent 
of all income must be set aside for a compulsory retirement 
savings program, and this affects the entire population. It is 
not elective. It is not optional. It is mandatory. The only 
allowance is really low incomes, a few thousand dollars, are 
not included because the administration costs are too high.
    Just one further interesting fact on China. China does not 
yet have a private pension fund system, but the Chinese people 
are moving rapidly to get ready for retirement through 
development of their stock market. China reintroduced the stock 
market in 1991. It had been shut down by the communists in 
1950. Today, after nine years, China has 80 million retail 
shareholders, more than the United States, and now they are 
going to go the next step--
    Mr. McCrery. How many million did you say?
    Dr. Hale. Eighty million, eight-zero. They have taken to 
the stock market very, very quickly. The market capitalization 
of China is now approaching $500 billion, which is half of GDP, 
and there is also a further couple hundred billion of Chinese 
companies listed in Hong Kong or offshore investors. In fact, a 
few of these companies now are listed in New York because the 
market here is bigger than it is in China.
    But the point is, China is now going through a gigantic 
experiment in resource allocation, including joining the World 
Trade Organization, to get ready for retirement. They realize 
they have got to have the loss-making State companies become 
successful, profitable capitalist companies. Otherwise, they 
cannot cope with 400 or 500 million retired people. This is a 
central driving force.
    Mr. Wattenberg. I just wanted to add one point to your 
question, sir, about is there a good news side to this. From 
the environmental point of view, the idea that we are growing 
less rapidly than before and will stabilize and then probably 
decline, I think most environmentalists would think that is 
probably a pretty good idea.
    The issue of global warming is one that I find fascinating 
In the early 1990s, the U.N. middle series projection was 
talking about 11.5 billion people before the world stabilized, 
and in the last ten or so years that has gone down by about 30 
percent, from 11.5 billion to about 8.5 billion. Some 
demographers think it is probably never going to hit eight 
billion. Insofar as global warming is caused by human beings, 
which is a dubious proposition or one that has got to be 
considered, the amount of humans causing the this problem will 
be diminished by 30 percent. But I have yet to see any global 
warming population study adjust their figures for population. 
They are still using that 11.5 billion figure because it is 
nice. If you have to cut it all by 30 percent, there would be a 
different situation.
    And finally, there is another set of policies that have to 
be considered, those called ``pronatal.'' How can you over a 
period of time in a noncoercive way, obviously, make it easier 
for young people who want to have children to have children, 
because just looking at it very dispassionately, it is those 
missing children that are causing the shortfalls in pensions in 
the out years.
    We as a society have made it harder for young people who 
want to have children to have children. We have piled college 
loans on them. We have reduced the real value of the tax 
deductibility for children. The heartening sign, I think, is 
the advent of the tax credit. Five hundred dollars is not a 
whole lot of money per child per year, but it is something. Now 
there is talk, I guess, it is going to go up to $1,000.
    The experience in the European countries has been that 
pronatalism does not work. On the other hand, nobody knows that 
because you do not know what would have happened if they did 
not have the pronatal policies. I mean, there is a lot of 
theory spinning going on. From my point of view, it would seem 
to me that $500 is not going to work, $1,000 is not going to 
work, but there is a finite number where it is going to work, I 
mean, $5,000, $50,000. At a half-a-million dollars, I guarantee 
you it will work.
    So there is some tweaking that, at least in this country, 
that we ought to be looking at the various pieces of social 
legislation that come down the pike and say, is this making it 
easier for people who want to have children to be able to have 
children. Nothing coercive, nothing of any sort like that, but 
when you go out and talk to young people, as I do when I talk 
at colleges on this topic and I had these discussions in Europe 
on some television programs that I have done, many young people 
say, you know, I would really like to have a second child but 
we cannot afford it. Now, the fact is that human beings have 
never been wealthier before in the history of the planet. They 
want cars and a house and all those things. But that is 
something that ought to be considered by the Congress.
    Dr. Hale. There is one industrial country which has run 
contrary to the trends that Ben and I and others outlined a few 
minutes ago. It has succeeded. It appears to have stabilized 
its birth rate at replacement level after a decline 15 or 20 
years ago, and that country is Sweden. Their birth rate is 
still remarkably high by the standards of Western Europe. The 
Japanese government sent a special delegation there a couple of 
years ago to investigate why, to see if this should be 
something that the Japanese public policy should imitate, and 
the bottom line is the Japanese did not like what they saw in 
Swedish society about the role of women, the role of child 
care, the role of public spending as a kind of subsidy for 
various social safety nets. But it is an example we should look 
at.
    I would not endorse all the things I have seen there 
because they have other consequences for taxation and 
incentives, but we do have one interesting case study to look 
at. Other countries around the world are now trying to also 
have pronatalist policies. You have big new tax allowances in 
Quebec, because in Quebec the decline in population is a threat 
to the language, not just to the economy. Singapore now has a 
policy of government-sponsored courtships. They have love boats 
for young civil servants to go out and get engaged because 
their birth rate has also fallen. And other countries are also 
looking for examples to imitate. But Sweden is a very 
interesting case study. It might be worth having an expert or 
two come and speak on the topic here.
    Mr. Wattenberg. Except I have the U.N. book here. Dr. Hale 
is absolutely right. They did have an uptick, but it has now 
gone down to about 1.6, is that not right, Paul? Yes. So it is 
tricky stuff. But you were right for a while.
    Mr. Truglia. On the point of the U.S. position, I think 
when we are looking at the burden of public sector pensions, 
the U.S. comes out looking relatively good because we are not 
historically as generous as continental Europe and Japan have 
been with their systems. So, therefore, the discussion of our 
pension problem becomes broader and, in fact, more complicated 
to deal with. From a rating perspective, it is easier, because 
we are looking at rating of government bonds. So our job is 
made easier by the low promises made by the government. But in 
dealing with the problem, it is easier in a certain sense in 
the continent of Europe and Japan because the decision is very 
centralized and when they actually come to grips with it, they 
will probably have a more profound effect quicker.
    So, for instance, in the case of Italy, which has terrible 
demographs and a pay-as-you-go system in place for most workers 
now, made a reform in the mid-1990s going to a defined 
contribution scheme for new workers, so once they get over this 
very long hump, they will actually be in very good shape way 
down the road. But how do you get from here to there is the 
question.
    Chairman Shaw. I think what I am hearing from every one of 
you is a pay-as-you-go pension system no longer is sustainable 
in the Western world.
    Mr. Truglia. Certainly not at benefits promised.
    Chairman Shaw. J.D.?
    Mr. Hayworth. Thank you, Mr. Chairman. So many different 
permutations and consequences to what we are looking at here 
today. It almost reminds me of a day in the first grade when 
they say, the person, place, or thing is a noun, so name a 
noun, and so you would go home and name about everything.
    One element in terms of strategic implications for the 
United States, I am intrigued by what has been mentioned about 
Beijing and the policy consequences there in terms of trying to 
make plans to fund some pension program. Of course, our friends 
there, though much has been made of market reforms, there is 
still not strict adherence to the ballot box, is there. There 
may be popular sentiments, but we saw what transpired at 
Tiananmen Square.
    In terms of securing wealth, the People's Republic of 
China, does this provide impetus to those within their 
military-industrial complex who want to have a reunification 
with Taiwan and the economy there? Is this something that is 
very much on the minds of the Chinese leaders in the short 
term? Is there added impetus, then, to expect some Chinese 
military action to take Taiwan, Mr. Hewitt?
    Mr. Hewitt. I get the impression that they are not thinking 
about demographics as a military policy issue right now. If 
this is a danger on Taiwan, it would seem to be in the window 
between now and 2020. Between 2020 and 2030, the elderly 
portion of China's population will double from 8 to 16 percent, 
a transition which took 60 years in the United States, or will 
by 2010 or so.
    I can tell you, one of the things we are looking at is what 
would happen to China's elderly if they did take some 
aggressive action and the United States and Europe were to shut 
them out of the global economy for any period of time. I think 
it would be an absolute disaster.
    If you look at the younger people in China, they have a 
very different character than the older generations. There are 
entire generations now that have been shaped by 30 years of the 
so-called one-child policy. In many cases, these youth have no 
aunts, uncles, brothers, sisters, or cousins. They are only 
children, and the term for them there is ``little emperors.'' 
Little emperors are not good spear carriers for socialism or 
communism.
    So these issues all have to be taken into account, and I 
think that there is a compelling case to be made to the Chinese 
that if they focus on the goal of prosperity, they really have 
a much better chance of making it into mid-century without a 
horrible retirement crisis.
    Mr. Truglia. Might I add on China, one of the key problems 
that they face is a fundamental fiscal problem and that is more 
medium term and the Chinese are quite aware of this. The size 
of the central government is actually relatively small compared 
to the rest of GDP, and so now that they are talking about 
trying to take on the social safety net that used to be in the 
State-owned enterprises, they are stuck in this conundrum of 
how do you increase the take of the central government to try 
and fund all of these various activities without having the 
kind of negative effects that you would expect by a government 
basically increasing or suddenly creating social security 
contributions which look like a tax increase.
    So they are caught in this bind, and what you see if you 
actually take a look at the Chinese fiscal position, thank 
goodness for them that they have capital controls and a 
relatively closed economy because the domestic fiscal situation 
is quite dreadful. The only reason it has not had a big effect 
on the external side is that they have walled off the potential 
effects of a spillover of profligacy at home on the domestic 
side. They even count as revenues borrowings that they 
undertake. Bonds are included in their revenue figures and 
their overall revenue is still very, very small relative to 
GDP.
    So they really cannot afford to build up a large pension 
burden without a massive reform of the fiscal situation. The 
threat to the military over time is somewhat analogous to 
Russia, that you will then be crowding out their own military 
needs to try and meet these social needs and how are they going 
to ever balance these two? We do not know, and in a non-
democratic society, it is going to be even more difficult to 
predict--a massive problem for them purely coming out of the 
fiscal side.
    Dr. Orszag. If I could just add a few thoughts, first of 
all, I agree with the characterization of this as being a very 
difficult problem in China. I am not sure I agree that policy 
makers are not very attuned to it. I was struck by--this was an 
academic conference in Beijing. We probably had six or seven 
cabinet ministers who came to the conference, which is--it 
would not happen in the United States. So I think that they are 
aware of the problem. It is just difficult to deal with.
    They had a set of reforms that were put into place a few 
years ago and one of the critical problems is actually 
enforcing what is supposed to be happening out in the local 
areas. The central government just has difficulty making sure 
that if funds are supposed to be put into accounts, that they 
are actually put into accounts, which is obviously a different 
problem than one that we face here. We do not normally have to 
worry about things like that.
    Mr. McCrery. While it may be true that six cabinet 
ministers would not show up in the United States, it is also 
true that cabinet ministers in the United States do not make 
policy. The legislative branch does, and that is why we are 
here today.
    I seem to be hearing implicit in your testimony and in your 
remarks that maybe we should consider converting Social 
Security from a defined benefit program to a defined 
contribution program. Is that something that we should 
consider?
    Mr. Hewitt. If I can speak on this, there is no system that 
is going to be risk-free if the rest of the world does not get 
its act together. Retirement security here, whether it is 
401(k)s or dependency on a government program, will be at risk 
if other countries export their crises to us. So very much now, 
more than ever before, Social Security at home requires a 
strong diplomatic and foreign policy that is focused on these 
questions.
    Chairman Shaw. How would that be transferred to us?
    Mr. Hewitt. Well, if the disaster in the making that Mr. 
Truglia outlined takes place under the worst-case scenario, and 
there is upheaval in Japan, default or some form of default, 
hyperinflation and so forth, this, of course, will have a huge 
effect on our own stock markets.
    Chairman Shaw. You are talking about--
    Dr. Hale. a global depression.
    Dr. Orszag. If I could also just respond, I think one thing 
that maybe we could all agree on is that increased funding of a 
pension system would be beneficial, that increasing the saving 
that the pension system is doing, including here in the United 
States, would be a good thing. How that is done is a different 
question. I think I may come down on a different side of 
whether that should be done through getting rid of the defined 
benefit system and turning it into a defined contribution 
system or doing it within the defined benefit system. But 
increasing that funding is critical regardless of where you 
come out on the defined benefit versus defined contribution 
debate.
    Mr. Truglia. Might I add on the defined benefit versus 
contribution, that technically solves the government fiscal 
problem that you have, but it does not necessarily deal totally 
with the fundamental pension problem. It is not clear. And then 
you have the problem that you had in Chile in the case of the 
build-up of their system, that you wind up having society 
decide that there is a minimum level that everyone has to have 
to provide a minimum level of social insurance, and what we 
have seen, though, in recent years is that more and more people 
are going to take advantage of that, so they are trying to 
avoid the defined contribution because they know, if they can 
possibly stay out, they know they can at least get the minimum 
contribution and try and stay out of the system.
    But more importantly, if you take a look at--when you talk 
about medium and long-term projections, having been in country 
risk analysis now for too many years, I am afraid, I have seen 
the long-term economic projections certainly not live up to 
your initial hopes. And if you were in 1985 and you were 
projecting what Japan would look like fiscally and economically 
in the year 2000, I think you would come up with an 
extraordinarily different picture than the reality. And if you 
had decided at that time that Japanese stocks were, in fact, 
probably the thing to have in your retirement accounts, ex post 
in view of retiring now, you probably would not be a very happy 
retiree.
    So I am just saying that whatever it is, you probably want 
a combination of all sorts of things, not all your eggs in one 
basket, try different approaches, at least keep sound fiscal 
policy so you can deal with an emergency, and just in case 
something else happens, do not propose anything that is too 
risky for the society as a whole.
    Chairman Shaw. You know, it is interesting. A light bulb 
just went off in my head in listening to the comments on 
increased funding. That is precisely what the Archer-Shaw bill 
does. It increases funding for Social Security. Now, that is 
something that everybody should support.
    Mr. McCrery. Well, it increases funding based on the 
assumptions made by the Archer-Shaw plan, and that is what Mr. 
Truglia was getting at and I agree with him and I am sure you 
do, too.
    Chairman Shaw. Absolutely.
    Mr. McCrery. None of us who supported the Archer-Shaw plan 
said that it would definitely, definitely, definitely work, but 
based on everything we know and based on the history of our own 
stock market over 100 years, we think it will. But surely, as 
Mr. Truglia points out, there is no guarantee, but we do have 
to take some risk in public policy occasionally, so I think the 
Archer-Shaw plan was a very good kind of middle-of-the-road 
solution to the Social Security problems that we were facing. 
It does guarantee a minimum benefit and yet it does offer the 
prospect of getting a higher rate of return for our investment 
for those payroll taxes, which puts more money, as Dr. Orszag 
suggested, into the system. So it is a very well-crafted plan 
that deserves some thought.
    Most Republicans, frankly, do not like the Archer-Shaw plan 
because it is not risky enough. It is not dependent enough on 
the private sector and individual accounts and risk. But it is 
worth thinking about in this society as we try to get through 
this problem.
    Dr. Orszag, you are itching to say something.
    Dr. Orszag. I just wanted to note that, as the chairman 
obviously knows, the Archer-Shaw plan also involves substantial 
general revenue transfers.
    Mr. McCrery. Absolutely.
    Dr. Orszag. And that is the key to the funding. So those 
general revenue transfers could be put into the accounts that 
would be created under Archer-Shaw or could be put into some 
sort of alternative mechanism, too. But the key to the 
increased funding is the general revenue transfers.
    Mr. McCrery. Absolutely. There is no way to get there 
without a substantial commitment of general revenues. There has 
got to be a transition from where we are now to where we want 
to go, and the only way you can finance that is with public 
revenues or general revenues. We understand that. But you are 
never going to get there if you do not commit some percentage 
of general revenues to the problem. So you are exactly right, 
but so what?
    Chairman Shaw. I think one of the things here that I think 
should be recognized, and I would like to direct this to Mr. 
Hewitt, the Gore Social Security plan increases national debt 
to the Social Security Administration. Could you comment on 
that?
    Mr. Hewitt. I think the idea, if I understand the plan, is 
not to eliminate the national debt, as some say, but rather to 
shift its ownership from private hands into a public agency, 
the Old Age Insurance Trust Fund. But the second half of that 
plan is to reverse those flows at some point. Essentially, the 
government would borrow the debt back after 2020 when payroll 
taxes no longer suffice to pay the benefits.
    And what I think the message of this panel here today is, 
that the world in 2020, despite its many uncertainties, is 
going to be in part driven by these demographic factors. It 
could be that if Japan and Europe continue to age and 
retirement patterns continue, that countries which have been 
supplying the global markets, who we have borrowed from in the 
past when we have issued a lot of national debt into private 
hands, will no longer be supplying those markets and we need to 
even ask ourselves whether even China would be able to absorb 
that debt given its demographic problems.
    The International Monetary Fund and other organizations 
that have looked at this possibility, and have expressed 
concern that that kind of an approach, issuing a lot of debt, 
even if it is simply a trust fund selling back its debt to the 
private hands, would have an effect on the cost of capital 
globally. Whether that will be the case, we do not know, but 
the conditions are certainly there where it might.
    Chairman Shaw. Thank you. Thank you all very much. This has 
been a fascinating, fascinating hearing. We have our work cut 
out for us. We have a lot to do to ring those alarm bells 
across this country.
    And again, as I commented at the beginning of the hearing 
and now I will really underscore, it is really too bad that 
there is not more press here, that there is not more interest 
in this hearing. We had a number of inquiries before the 
hearing and we thought that it would bring attention to this 
problem. Much of our job is not only to pass laws but also to 
direct public attention in the direction that it has to be so 
that there will be the climate to legislate in the areas that 
really need our attention. This is a disaster in the making and 
America seems to be sleeping through it. Our job is to wake 
them up.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 12:10 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of Hon. Robert T. Matsui, a Representative in Congress from 
the State of California

    I would like to begin by thanking Chairman Shaw for holding 
this hearing. All too often, Congress approaches a problem with 
too narrow a focus and fails to examine the larger 
ramifications of the issue. Hopefully, with more hearings like 
this one, we will be able to maintain a broader perspective on 
the issue of global aging throughout the 107"">th Congress.
    I would also like to thank Paul Hewitt and the other 
representatives of the Center for Strategic and International 
Studies'Global Aging Initiative (GAI). All of you are here 
today because of the work you have done to promote a greater 
awareness of the demographic trends facing industrialized 
nations. The GAI's research will play a vital role in 
formulating public policies to respond to population aging both 
here in the United States and abroad.
    Due to improvements in life expectancy and the aging of the 
Baby Boom generation, the number of people in the United States 
over age 65 is expected to roughly double between now and 2030 
(from approximately 35.5 million in 2000 to 69.1 million in 
2030).
    Moreover, because of lower fertility rates, people over the 
age of 65 will comprise an increasingly larger share of the 
total population in the not-too-distant future. The U.S. Census 
Bureau projects that the percentage of the population age 65 
and older will climb from 12.7 in 2000 to 20.0 percent in 2030. 
Consequently, as one of our witnesses points out in his written 
testimony, ``today each working individual supports a greater 
number of old people than before, and the situation is 
projected to grow more severe over the coming decades.''
    This situation is certainly not unique to the United 
States. In fact, these demographic trends, while daunting here 
at home, pose even greater challenges for other nations. As Dr. 
Hewitt notes in one of the GAI's publications, Western Europe's 
median age will rise by 14.8 years over the course of the next 
50 years. Japan's median age will rise by 8.9 years, and 
America's median age will rise by 2.7 years.
    For some time, this Subcommittee has been examining how 
these long-term demographic trends will place increasing 
strains on public programs for the elderly, such as Social 
Security. We may be required to find new resources to meet our 
obligations to our nation's retirees. While we have not yet 
reached a consensus about a particular response or set of 
responses to these trends, I think we all agree that we cannot 
afford to procrastinate in working towards a solution. The 
United States may be better positioned than many other 
countries to meet the challenges of an aging population, but 
that does not mean that we can be complacent. By acting in a 
timely fashion, any changes that are made to Social Security or 
any other program for the elderly may be phased in gradually, 
thus giving individuals more time to respond to these changes.
    Although the United States and other industrialized 
countries face the same type of problem in terms of global 
aging, I think we can also agree that we should not necessarily 
pursue the same solution. Reforms adopted in other countries 
provide tremendous insight in addressing the challenges created 
by global aging, but there is no universal cure-all. For 
instance, while some countries, such as the United Kingdom, 
have decided to privatize their Social Security programs, such 
restructuring is neither necessary nor desirable in the United 
States.
    While there is no universal cure-all for global aging, one 
of the most effective ways to prepare for an aging population 
is to promote economic growth so that the economy will be 
better able to handle future demands. Of course, one of the 
best ways to promote economic growth is to increase national 
saving by consistently reducing the national debt. I trust that 
today's witnesses will discuss the role that economic growth 
can play in easing the strains created by aging populations.
      

                                


Statement of Hon. Fortney Pete Stark, a Representative in Congress from 
the State of California

FIRST THING AMERICA MUST DO TO DEAL WITH ITS AGING CRISIS, IS NOT GIVE 
            AWAY THE TAX BASE NECESSARY TO FINANCE MEDICARE

    Mr. Chairman, Members of the Committee:
    It is important to hold a hearing on the ``Global Aging 
Crisis,'' so as to better understand the situation facing the 
global economy in the coming decades.
    But it is also a strange hearing to be holding when the 
Ways and Means Committee reported out, and the House has 
passed, a bill which eliminates a progressive tax worth $13.7 
trillion over the next 75 years, that would have been used to 
finance the Medicare system. One shouldn't hold hearings about 
a crisis in the same calendar quarter in which we helped deepen 
the crisis.
    As the percent of the world's retiree population increases, 
financing the health care needs of these retirees will be an 
even more complex and difficult task than ensuring their 
retirement security.
    There are a lot of things that can be done to ensure the 
future of Medicare: we can cut what we pay providers, we can 
ask retirees to pay a larger share of the cost of the program, 
or we can find some new sources of revenue. The only honest 
answer is that we will have to do all three. There is no magic 
bullet. Governor George W. Bush's flirtation with Premium 
Support is not some new magic answer: premium support saves 
only by forcing seniors into HMOs that save money by denying 
care and paying providers less.
    Since the day will come when we will need additional 
revenue to pay for Medicare, it is the height of 
irresponsibility to give away the portion of the Social 
Security tax on upper income individuals that is dedicated to 
financing the Medicare hospital trust fund.
    If you want to address the global aging crisis, the first 
thing you do is don't make the situation worse just for the 
sake of immediate election year rhetoric.
    There are other long-term steps that we can take to make 
Medicare a better and more affordable program for our aging 
society: I urge Members to look at the hospice and end-of-life 
improvement provisions in HR 2691 and at the long-term 
coordination of the care of the chronically ill in HR 4981.
    While there may be a global crisis, it is worth remembering 
that we can solve this problem. As the GAO recently reported, 
between 2000 and 2020, all Federal mandatory spending on the 
elderly and retirees will climb from 6 percent of GDP today to 
8.4 percent. A lot of money? Yes. Manageable? Yes.
    It is interesting to note that two societies whose 
population is as old today as ours will be in 2020--Germany and 
Japan \2\--have in the last several years enacted (during a 
period when their economies were relatively weak) national 
social insurance plans to provide long-term care for all of 
their citizens. In Germany, they voted a 1.7 percent  payroll  
tax,  split  between employers  and  employees.\3\  The 
Japanese
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    \2\ Today the percent 65 and older is 12.5, 17.1, and 16.4 
respectively in the USA, Japan, and Germany. In 2020, it will be 16.6, 
26.2, and 21.6 respectively. Health Affairs, May/June 2000, p. 192.
    \3\ Americans' unwillingness to pay taxes for social programs 
contrasts with the German view: ``it is thought to be a relatively 
modest premium when compared with the average of 39.6 percent of income 
that is already paid for health, pension, and unemployment benefits.'' 
Ibid., p. 10.
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voted a 0.9 percent salary tax on everyone over age 40 to start 
a new $43 billion a year long-term care program.\4\
---------------------------------------------------------------------------
    \4\ Again, what a contrast. Japan's tax rates are lower than 
America's, yet they are willing to start a major new social program to 
help their aging society. The USA, on the other hands, remains mired in 
a debate on whether to provide $8 billion a year for a drug benefit in 
Medicare-a benefit that the Japanese have long had.
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    I would hope, Mr. Chairman, that in the future, the Ways 
and Means Committee could look in detail how these other 
advanced societies have dealt with the aging crisis through a 
social insurance program and social contract.

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