    [Senate Hearing 108-30]
    [From the U.S. Government Publishing Office]

                                                             S. Hrg. 108-30

            GLOBAL AGING: OPPORTUNITY OR THREAT FOR THE U.S ECONOMY?

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

                                    HEARING

                                   before the

                           SPECIAL COMMITTEE ON AGING
                              UNITED STATES SENATE
                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 WASHINGTON, DC

                                   __________

                               FEBRUARY 27, 2003

                                   __________

                                Serial No. 108-4

             Printed for the use of the Special Committee on Aging

    86-497 PDF

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                           SPECIAL COMMITTEE ON AGING

                          LARRY CRAIG, Idaho, Chairman
    RICHARD SHELBY, Alabama              JOHN B. BREAUX, Louisiana, Ranking
    SUSAN COLLINS, Maine                     Member
    MIKE ENZI, Wyoming                   HARRY REID, Nevada
    GORDON SMITH, Oregon                 HERB KOHL, Wisconsin
    JAMES M. TALENT, Missouri            JAMES M. JEFFORDS, Vermont
    PETER G. FITZGERALD, Illinois        RUSSELL D. FEINGOLD, Wisconsin
    ORRIN G. HATCH, Utah                 RON WYDEN, Oregon
    ELIZABETH DOLE, North Carolina       BLANCHE L. LINCOLN, Arkansas
    TED STEVENS, Pennsylvania            EVAN BAYH, Indiana
    RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
                                         DEBBIE STABENOW, Michigan
                          Lupe Wissel, Staff Director
                 Michelle Easton, Ranking Member Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------
                                                                       Page
    Opening Statement of Senator Larry E. Craig......................     1
    Opening Statement of Senator John Breaux.........................     2
    Statement of Senator Elizabeth Dole..............................     3
    Statement of Senator Ron Wyden...................................     3

                                    Panel I

    Alan Greenspan, Chairman Federal Reserve Bank....................     4

                                    Panel II

    Paul S. Hewitt, Program Director, Global Aging Institute, Center
      for Strategic and International Studies, Washington, DC........    29
    Sylvester Schieber, Ph.D., Vice President, Watson Wyatt
      Worldwide, Washington, DC......................................    36
    Gary L. Geipel, Ph.D., Vice President, Hudson Institute,
      Indianapolis, IN...............................................    75

                                    APPENDIX

    Testimony submitted by Evelyn Morton, AARP, Federal Affairs
      Department.....................................................    93
    Testimony submitted by Richard Jackson and Neil Howe, The Center
      for Strategic and International Studies........................   121

                                     (iii)

           GLOBAL AGING: OPPORTUNITY OR THREAT FOR THE U.S. ECONOMY?

                                  ----------

                          THURSDAY, FEBRUARY 27, 2003

                                           U.S. Senate,
                                    Special Committee on Aging,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10 a.m., in room
    SD-628, Dirksen Senate Office Building, Hon. Larry Craig
    (chairman of the committee) presiding.
        Present: Senators Craig, Talent, Dole, Breaux, Wyden, and
    Carper.

           OPENING STATEMENT OF SENATOR LARRY CRAIG, CHAIRMAN

        The Chairman. Good morning, everyone. The U.S. Senate
    Special Committee on Aging will convene.
        Today's hearing will explore the economics of global aging.
    When I say global aging I am talking about the human population
    of the world growing older. This hearing was called to help us
    better understand the opportunities and the challenges that lie
    before us on issues of concern to all Americans but especially
    the baby boom generation and their children.
        The topic of global aging is directly related to many of
    the important issues this Congress has under consideration. The
    issues include one, strengthening Social Security, improving
    the quality of Medicare, improving long-term care, increasing
    economic opportunities for older workers, promoting economic
    prosperity, and providing for national security. Deliberations
    on these issues tend to focus on trends in the United States.
    Little attention is given to the broader impacts of global
    aging on our nation. So we are here this morning to improve our
    understanding and to build a record so we in Congress can make
    policies based on the best available information.
        In the United States birth rates are roughly at replacement
    levels. Americans are living longer and that is a wonderful
    blessing. We understand all too well the pressures an aging
    society will place on our fiscal health as the baby boomers
    begin to retire. The United States faces the challenges of an
    aging population that if not addressed, could hurt our children
    and grandchildren. We in Congress have the opportunity to
    address these pressures.
        But there is another issue that deserves attention--the
    impact of global aging on the U.S. economy--and today we have
    invited several top experts who will speak to this issue. We
    will hear about the familiar fiscal opportunities and
    challenges ahead. We will also hear about labor and financial
    markets, economic growth, and the geopolitical opportunities
    and challenges before us.
        Our first witness really needs no introduction. Chairman
    Greenspan, I want to thank you for agreeing to appear before us
    today. We welcome you to the Special Committee on Aging.
        We have on our second panel three top thinkers of the
    economics of global aging. Joining us today on the second panel
    will be Paul Hewitt, Director of the Global Aging Initiative at
    the Center for Strategic and International Studies, Sylvester
    Schieber, Director of research at Watson Wyatt Worldwide, and
    Gary Geipel, Chief Operating Officer and Vice President at the
    Hudson Institute.
        So I want to thank all of my witnesses beforehand for being
    here today. We look forward to your testimony and before I turn
    to Chairman Greenspan, let me turn to my colleagues here on the
    committee and the ranking member, Senator Breaux.

                OPENING STATEMENT OF SENATOR JOHN BREAUX

        Senator Breaux. Thank you very much, Mr. Chairman, for
    calling this hearing and for assembling the distinguished panel
    that we are going to hear from.
        Thank you, Mr. Chairman, for taking your time to be with
    us. We thank you for the good work that you do in advising the
    Congress in many of these very difficult areas.
        I have said many times before that the good news/bad news
    story in this country--the good news is that people are living
    a lot longer and the bad news to a certain extent is that
    people are living a lot longer because we are happy they are--
    do not get me wrong in that regard--but because we have more
    people living longer lives, we have more people that
    participate in the entitlement programs, like Social Security
    and Medicare.
        I have to leave, Mr. Chairman, because Secretary Thompson
    is testifying in the Finance Committee right now on the issue
    of Medicare reform and it is very clear if you look at
    demographics in this country we are looking at a potential time
    bomb where 77 million baby boomers will soon become eligible
    for both Social Security benefits and Medicare benefits and we
    are fast approaching the time where we no longer are going to
    be able to sustain the pay-as-you-go system.
        There are some very difficult and very tough political
    decisions that are going to have to be made on both of these
    programs. The sooner we begin the process, the sooner we become
    willing to tell our seniors in this country and their children
    and grandchildren the truth about what we are facing, the
    easier it will be for the Congress to reach a solution to these
    very difficult problems.
        So thank you and thank Chairman Alan Greenspan particularly
    for being with us.
        The Chairman. Senator Breaux, thank you. We appreciate you
    staying as long as you can but we understand the importance of
    that hearing.
        Let me turn to my colleague, new to our committee. Senator
    Dole, do you have any comments?

                  STATEMENT OF SENATOR ELIZABETH DOLE

        Senator Dole. Thank you.
        Chairman Greenspan, it is always a great pleasure to
    welcome you to hearings and I look forward to your comments
    this morning. I, too, have another committee scheduled at the
    same time so I will have to slip out after your comments but I
    am delighted to see you here.
        The Chairman. Without objection. Thank you very much,
    Senator Dole.
        Now let me turn to Senator Wyden of Oregon. Senator,
    welcome.

                     STATEMENT OF SENATOR RON WYDEN

        Senator Wyden. Thank you, Mr. Chairman, and I look forward
    to working closely with you, as we have in the past, and I am
    very pleased to see Mr. Greenspan here, as well.
        I am going to have a number of questions with respect to
    global productivity and inflation after the chairman has done
    speaking but suffice it to say what we are faced with is a
    worldwide demographic tsunami. There are going to be millions
    of baby boomers retiring in 2010 and 2011 in this country and I
    think suffice it to say throughout much of the western
    industrialized world, so it is critically important that we get
    into these issues.
        I am very pleased that the chairman is here today because I
    frankly think government has dawdled on these topics. I think
    we have played a bit at the margins but have failed to really
    articulate the kinds of policies that are going to let us get
    our arms properly around this huge bow wave of retirees that I
    think literally amounts to a demographic tsunami.
        So I look forward to your statement today, Mr. Chairman.
        The Chairman. Well, with the threat of a demographic
    tsunami sweeping down on us, Chairman Greenspan, again welcome
    to the committee. Please proceed.

      STATEMENT OF ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE BANK

        Mr. Greenspan. Thank you very much, Mr. Chairman. As you
    pointed out, the world's population is growing older as a
    result of both declining fertility and increasing life
    expectancy. These trends manifest themselves in at least two
    important dimensions--a more slowly growing population and
    labor force and an increase in the ratio of the elderly to the
    working age population.
        The so-called elderly dependency ratio has been rising in
    the industrialized world for at least 150 years. The pace of
    increase slowed greatly with the birth of the baby boom
    generation after World War II but elderly dependency will
    almost certainly rise more rapidly as that generation reaches
    retirement age. The changes projected for the United States are
    not so severe as those projected for Europe and Japan but
    nonetheless present daunting challenges.
        Of course, it is difficult to predict the age structure of
    the population in the more distant future. Although we have a
    good idea of the size of the working age population over the
    next 20 years or so--remember, its members are largely already
    born--forecasting the number of children and future immigration
    and population growth is much more conjectural. Even with the
    substantial uncertainty that surrounds these forecasts,
    population aging in a developed world is not likely to be a
    temporary phenomenon associated solely with the retirement of
    the baby boom generation. Rather, under current projections the
    retirement of that generation should be viewed as hastening the
    transition between the current distribution of age and one in
    which the population is notably older.
        As you know, the aging of the population in the United
    States will have significant effects on our fiscal situation.
    In particular, it makes our Social Security and Medicare
    programs unsustainable in the long run, short of a major
    increase in immigration rates, a dramatic acceleration in
    productivity growth well beyond historical experience, a
    significant increase in the age of eligibility for benefits or
    the use of general revenues to fund benefits. Indeed, according
    to the intermediate projection of the Social Security trustees,
    the level of Social Security contributions under current law
    begins falling short of legislated benefits by approximately
    2017.
        While the prospect of a shortfall in Social Security is
    reasonably certain given the changing composition of the
    population, the range of possible outcomes in Medicare is far
    wider. Rapidly advancing medical technologies, essentially
    inelastic demand for medical services for the elderly, and a
    subsidized third-party payment system have created virtually
    unconstrained demand.
        How the financing pressures that accompany increasing
    retirement are resolved will have profound but uncertain
    effects on the structure of both private and public pension
    plans. The total investment income of these funds, in
    conjunction with retirees' other forms of income, must be
    sufficient to finance a satisfactory standard of living.
        The real resources available to fund pension benefits
    depend on the economy's long-term growth rate, which in its
    simplest terms is determined by the growth rate of labor
    employed plus the growth rate of the productivity of that
    labor. Because of the demographic trends associated with aging,
    by 2030 the growth rate of our working age population is
    expected to decline by half.
        One natural response to population aging will almost surely
    be for a more fit elderly population to increase their
    participation in the labor force. Americans not only are living
    longer but they are generally living healthier. Rates of
    disability for the elderly have been declining, reflecting both
    improvements in health and changes in technology that
    accommodate the physical impairments that are associated with
    aging.
        In addition, work is becoming less physically strenuous but
    more demanding intellectually, continuing a century-long trend
    toward a more conceptual and less physical economic output. For
    example, in 1900 only one out of every 10 workers was in a
    professional, technical or managerial occupation. By 1970 that
    proportion had doubled and today those types of jobs account
    for about one third of our total workforce.
        Despite the improving feasibility of work at older ages,
    Americans have been retiring at younger and younger ages. Some
    analysts believe this trend has slowed, although few anticipate
    a rapid turnaround. But rising pressures on retirement incomes
    and a growing scarcity of experienced labor could induce
    greater labor force participation.
        Immigration, if we choose to expand it, could prove an even
    more potent antidote for slowing growth in the working age
    population. As the influx of foreign workers in response to the
    tight labor markets of the 1990's showed, immigration does
    respond to labor shortages.
        An expansion of labor force participation by immigrants and
    the healthy elderly offers some offset to an aging population.
    However, it is heightened growth of output per worker that
    presents the greatest potential to boost the growth of gross
    domestic product. A significant rise in the growth of labor
    productivity will be necessary if the standard of living of
    retirees is to be maintained and that of workers is to continue
    advancing.
        One of the more direct ways to raise growth in output per
    hour is to increase saving and investment, which augment the
    capital stock available to workers. Another is to increase the
    incentives for innovation. Efficiency gains, broadly defined,
    currently account for roughly half the growth in labor
    productivity. Though augmenting saving and investment should
    raise future labor productivity and thereby help provide for an
    aging population, the incremental benefit of additional
    investment may itself be affected by aging. Without a growing
    labor force, the amount of new equipment that can be used
    productively will be more limited and the return to capital
    investment could decline as a consequence.
        What actually happens to the saving rate in the next three
    decades will depend importantly on the behavior of the baby
    boom cohort during their retirement years. Over the post-World
    War II period the elderly in the United States, contrary to
    conventional wisdom, seem to have drawn down their savings only
    modestly. The reasons are not entirely clear. Often people
    bequeath a significant proportion of their savings to their
    children or others rather than spending it during retirement.
    If the baby boom generation continues this pattern, then the
    U.S. household savings rate may not decline significantly, if
    at all.
        Future labor productivity, however, is determined by more
    than just saving, investment, and capital intensity. One of the
    remarkable features of the economy over the past 7 years or so
    has been the acceleration in the pace of the innovative use of
    capital by workers rather than increases in the amount of
    capital per worker.
        Therefore, it is important to address the possibility that
    aging will affect the rate of innovation either through a
    rearrangement of existing capital resources or through
    technological advance. Although discovery of new technologies
    is to some degree a matter of luck, we know that human
    activities do respond to economic incentives. A relative
    shortage of workers should increase the incentives for
    developing labor-saving technologies and may actually spur
    technological development.
        Economic historians have argued that one reason that the
    United States surpassed Great Britain in the early 19th Century
    as the leader in technological innovation was the relative
    scarcity of labor in the United States. Patent records for this
    period show that innovation did respond to economic incentives
    and that the scarcity of labor clearly provided incentives to
    develop new methods of production.
        The aging of the population means that the government will
    inevitably need to make a number of changes to its retirement
    programs. These changes in themselves can have profound
    economic effects. For example, aside from suppressing economic
    growth, large increases in payroll taxes can exacerbate the
    problem of reductions in labor supply, whereas policies to
    promote longer working life can ameliorate it.
        Reductions in benefits through changes to the age for
    receiving full retirement benefits or through reforms to slow
    the growth of Medicare spending or through other means can
    affect retirement, the labor force, and saving behavior. In
    addition, policies that link increases in longevity over time
    to the eligibility age for Social Security and perhaps Medicare
    may need to be considered. Such linkages would help protect the
    financial and hence the economic viability of these programs.
        The aging of the population is bound to bring with it many
    changes to our economy, some foreseeable, many probably not.
    Though the challenges here seem great, the necessary
    adjustments will likely be smaller than those required in most
    other developed countries, but how we adjust will also matter.
    Early initiatives to address the economic effects of baby boom
    retirements could smooth the transition to a new balance
    between workers and retirees. If we delay, the adjustments
    could be abrupt and painful.
        Fortunately, the U.S. economy is uniquely well suited to
    make those adjustments. Our open labor markets can adapt to the
    differing needs and abilities of our older population. Our
    capital markets can allow for the creation and rapid adoption
    of new labor-saving technologies and our open society has been
    receptive to immigrants. All these factors put us in a good
    position to adjust to the inexorabilities of an aging
    population.
        Thank you, Mr. Chairman. I request that my full text be
    included in the record.
        The Chairman. Certainly it will become a part of the
    record, Mr. Chairman, and again we thank you for being here.
        We will move to a round of questions for those senators who
    are here and thank you, Senator Dole, for attending.
        You have obviously offered up some substantial challenges
    to us as it relates to an aging population in this country and
    the rest of the world. Mr. Chairman, historic experience
    suggests that the impending global labor shortage has the
    potential to unleash an era of technological progress. If this
    were to occur, what would happen to relative returns for
    savings and investment?
        Mr. Greenspan. Well, Mr. Chairman, I think it depends to a
    large extent on the type of investment that is made. It is
    fairly apparent if you just think in terms of what would happen
    if you had a decline in the population but the same capital
    infrastructure, it is pretty obvious that there is a surplus of
    capital and the rate of return would fall. But if you can find
    technologies which enhance the capability of individuals to
    produce or, as I like to put it in the extreme form, if human
    beings produced robots which did the same thing they did, then
    clearly there is a very significant rate of return on that. Our
    actual equivalent is in the high-tech area in computers, which
    clearly have enabled us to do types of things which human
    beings do and in many cases do them in a far superior manner.
    Those types of investments will tend to have fairly significant
    rates of return.
        The Chairman. I think I know the answer to this but what
    effect would this have on the value of financial assets, then?
        Mr. Greenspan. The value of financial assets is going to
    depend to a large extent on two things. One, of course, is the
    innovations and the nature of the types of investments that are
    made but also how we address and resolve the issue of the huge
    increase in benefits which in projected to start sometime in
    the beginning of the next decade and under current services
    budgeting would create a very substantial increase in the
    unified budget deficit, higher real interest rates, and
    presumably a weakening in the capital values throughout the
    economy.
        So it really depends on, whether we, in fact, create these
    innovative types of equipment which could be a major solution
    to the shortage of labor but unless we restructure the
    underlying governmental programs, all of the potential benefits
    that could accrue from these innovations could be unwound
    because of fiscal distortions which work their way through the
    financial system and, by moving real long-term interest rates
    higher, must invariably move the capitalized value of other
    assets lower.
        The Chairman. Let me ask this last question. You indicated
    that delaying initiatives in strengthening Social Security and
    improving Medicare, and our colleague just left to go down to a
    Medicare hearing where we are looking at some reform, will make
    program adjustments more painful for baby boomers when they
    eventually retire. Can you describe the potential economic
    effects of delay on the baby boomer generation and their
    children?
        Mr. Greenspan. I am sorry; of delaying changes in the
    programs?
        The Chairman. Yes.
        Mr. Greenspan. Well first, one of the better ways of
    getting a context here is if you ask yourself when you are
    dealing with major programs, government programs which affect
    the economy, ask yourself how would the economy adjust if those
    adjustments had to take place solely in the private sector and
    there were no government programs?
        For example, we can very readily determine that if Social
    Security, Medicare, and Medicaid benefits only rose at the rate
    that the GDP was rising, say in the year 2010 and going
    forward, and you therefore obviously covered a very
    significantly less proportion of, for example, medical
    expenditures than indeed the population would want, then you
    ask yourself well, how would the rest of it, if it needed to be
    done, be financed in the private sector? Clearly what would
    happen is that medical services, which are highly valued in the
    system, would probably elbow out the second and third cars that
    we see in a lot of people's garages. People would probably
    spend less on certain leisure and entertainment issues. In
    other words, what you would get would largely be what we get
    now, on allocation of consumption expenditures over a broad set
    of products. In that environment you would probably not get a
    change in the budget deficit. You probably would not get
    increases in interest rates.
        Therefore what all of this tells you is that it is
    crucially important to find a way to appropriately bring the
    private sector into the issue of financing medical care in a
    much broader way than we have done. If we are going to get an
    appropriate solution between the portion of Medicare that is
    financed and whatever part of it is not publicly financed, make
    certain that it is financed appropriately by whatever
    incentives or whatever we have to do in the private sector.
        In other words, it is going to require something different
    from what I would call the hard-edged problems that you get if
    you have basically mandated programs when we are dealing with a
    very large shift from people in the working age population into
    retirement.
        So I think there are solutions here and the sooner we begin
    to think of how to phase in, the easier it is going to be
    because there is no doubt that while economists may not be
    terribly good in making long-term economic forecasts,
    demographers are extraordinarily accurate in making forecasts
    of what the population will look like 10 and 15 years ahead.
        The Chairman. Well, thank you. Let me turn to my colleague
    from Oregon, Senator Wyden.
        Senator Wyden. Thank you, Mr. Chairman.
        Chairman Greenspan, I think we would both agree this
    question of global productivity is right at the heart of the
    ball game in terms of a bright retirement future for seniors
    here and around the world.
        Let me ask you about this. Of the western industrialized
    nations, our country and throughout the West, the United States
    has higher wages, better health care and better pensions. When
    you hear the question of improved global productivity, the
    first thing that comes to mind is, why not leave those places
    and go other places where there are lower wages, lower health,
    and lower pensions? When we talk about global productivity,
    what would you advocate in terms of global productivity
    initiatives that would lift a lot of boats around the world so
    as to be responsive to this demographic trend?
        Mr. Greenspan. Well, Senator, I think the issue of
    productivity worldwide goes beyond the global aging issue. I
    think that the so-called development economists have been
    struggling now for quite a good deal of time and have become a
    fairly significant segment of the economics profession and they
    are beginning to identify the necessary if not always
    sufficient conditions that create productivity in various
    different areas.
        I do think, however, that as you are implying, the aging
    does make a difference. I would think, for example, that since
    productivity--let us take the United States--would be greater
    if our population growth and working age population is moving
    up, so, ironically, what that suggests is that increased
    immigration in the United States could very well be a factor in
    improving overall productivity and indeed I think it has
    already been a factor in that regard.
        What  will  tend  to happen if the demographers are right--
    and in this case they can scarcely be wrong for the next 10 or
    15 years--but if they are right then there will be very
    significant pressure for individuals, younger individuals
    residing in so-called emerging economies to move to those
    developed economies which are projected to have fairly
    significant declines in population. It will be the extent of
    the political resistance to that flow which will to a large
    extent, I think, determine, as you may put it, world aggregate
    productivity. The flow of people probably matters more than we
    realize in this context.
        Senator Wyden. Another issue that is very much on the mind
    of seniors of this country, and we talked briefly about it when
    we visited before the hearing, is millions of seniors have much
    of their net worth today in their home. There is significant
    concern among seniors and frankly other people about the
    possibility of a real estate bubble, a housing bubble, and that
    somehow this would cause them great economic damage.
        What is your sense about the prospect of a housing bubble,
    a real estate bubble? You and I talked about it and we were
    concerned some years ago about a technology bubble and I was
    encouraged by your answer with respect to the housing bubble
    and I think it would be helpful for the country to know your
    view on that.
        Mr. Greenspan. Senator, I think the issue of the housing
    bubble arose mainly as an analogy to the stock market bubble.
    The one thing I think we can say with reasonable assurance is
    that the analogy is pretty stretched because, as you know, if
    you sell a home, you have to move out and besides the
    transaction costs on the sale are really quite large and that
    inhibits the degree of turnover.
        But more importantly, there is not a national housing
    market in this country. There are localized markets and indeed
    it is possible in localized markets for bubbles to emerge and
    indeed there are cases. We can name a number of metropolitan
    areas in which home prices have surged and then come down very
    dramatically, obviously Silicon Valley being one of the obvious
    cases, but there are a lot of them.
        But an overall decline would probably require that the
    demand for new housing significantly weakened. But on the
    database that we make our judgments from, it looks as though
    the level of replacement of housing is not very large, meaning
    that the absolute level of home completions plus mobile homes
    is not that much larger than the change in household formation.
    A significant part of household formation reflects immigration,
    which is holding up household formation, and one must presume
    holding up new construction.
        While I am not going to say that there is no possibility of
    house pricing declining--there is; house prices declined 20 or
    25 years ago for a while--but the notion of a bubble bursting
    and the whole price level coming down seems to me as far as a
    nationwide type of phenomenon really quite unlikely.
        Senator Wyden. Thank you; that was an issue important to my
    constituents.
        I want to ask you about inflation and seniors, as well.
    Suffice it to say we all understand that for so many seniors
    their income is fixed and inflation essentially gobbles it up.
    Compounding the problem is, of course, today a lot of the
    investments that seniors turn like CDs, paying relatively low
    rates of return.
        In your view what rate of inflation would allow the economy
    to grow at this point while, at the same time, keeping seniors
    from getting shellacked? In other words, we are trying to
    figure out how to balance these two kinds of considerations and
    given the fact that you are in the monetary business, I would
    be interested in your thoughts on that.
        Mr. Greenspan. Well, Senator, we have always argued that
    the optimum price pattern to facilitate maximum sustainable
    long-term economic growth is effectively stable prices. As I
    and a number of my colleagues at the Federal Reserve Board in
    fact, the Federal Open Market Committee--have been pointing out
    for now quite a while, we are pretty close to price stability.
    The reason we say that is that the price indexes which we tend
    to follow have still, despite the major improvements in them, a
    fairly significant amount of upward price bias and as a
    consequence of that, as sort of a rough cut, we are probably
    not all that far from price stability and that is probably
    where we should be--neither, I might add, in an inflationary
    environment or a deflationary one.
        Senator Wyden. Thank you, Mr. Chairman.
        The Chairman. Thank you, Senator Wyden.
        Now let me turn to my colleague from Missouri, Senator
    Talent. Welcome.
        Senator Talent. Thank you, Mr. Chairman. I want to thank
    you for holding this hearing and thank the chairman of the
    Federal Reserve Board for being here.
        The Chairman. You were not here for opening statements. If
    you have comments----
        Senator Talent. No, although I will probably have a comment
    before my question. Normally one comes to these hearings to ask
    questions and I cannot stay as long as I want but I think I
    probably learned as much by your questions and the questions
    from the senator from Oregon as I may from my own.
        Let me just ask you to elaborate a little bit, Mr.
    Chairman, because the tenor of your testimony--I caught the
    tail end of it but I have managed to read through it--was, I
    think, very encouraging. Let me sum that up and then ask you to
    elaborate a little bit.
        We in this committee have to deal with the coming problems
    that we are going to be confronting with Social Security, and
    Medicare, not to mention issues like long-term care, and
    demographic changes that if the world we are in does not
    significantly change and begin changing pretty soon are going
    to present very, very difficult problems.
        What I appreciated about your testimony was your
    suggestion, that if, we begin changing soon, there are a number
    of different strategies that we could follow which will
    minimize if not eliminate, a lot of the pain that we would be
    confronting, but we have got to do something and begin doing
    something soon.
        How true is it? Is it fair to speculate that if we could
    agree on reasonable strategies to promote growth and
    productivity that we really could have some confidence that we
    might grow and produce our way out of this thing, along with
    other changes that would naturally occur as people react to
    this coming crisis? One of the things you point out, for
    example, is people simply working longer because they want to.
    They are healthier, they work longer, they produce longer,
    which is already happening.
        I mean if we will agree on what we can do to make this
    great economy grow and produce regardless of then how we are
    going to distribute what it produces and the social goals and
    the rest of it, cannot we have some confidence that maybe this
    thing is not going to be as terrible as if you look at it right
    now you think it may be?
        Mr. Greenspan. Well, Senator, there is just no question
    that a necessary condition to get us beyond the big bulge of
    the baby boom retirement is a marked pick-up in the rate of
    growth. It does not seem likely, however, that if we stay with
    the existing obligations that we have committed and project
    them through the period, say 2025, that we can accelerate
    economic growth so that that would be the sole means by which
    to achieve a solution.
        The reason why I suspect not is that largely because of the
    fairly significant changes in productivity that have occurred,
    say, since 1995 and the pace that continues today, we are
    already up sufficiently high where the amount of additional
    increase in the rate of change of productivity is not what it
    was in 1992 where we then had a lot of leverage to go back up.
        So what we will be doing is finding that while we can get
    up to what our historic maximum levels have been, we are the
    cutting edge economy in the world. That is, there is a limit to
    how far a cutting edge economy's productivity can grow and it
    is essentially determined by the state of knowledge and the
    state of intelligence of a particular population.
        I mean one may ask if we were much smarter we could have
    foreshortened the increases in technology or the changes in our
    economic structure that occurred say between 1900 and 2000 and
    done it in 50 years instead of 100. Now the trouble with it is
    we are human beings and we have certain capabilities.
        Therefore I think it is important for us to do everything
    we can do to improve economic growth. If we do not have
    economic growth, I do not think there is a solution here,
    period, in what we are dealing with. But if we can get first
    maximum economic growth and then make certain types of
    adjustments as we phase into the marked increase in the
    commitments that occur after 2010, then I think this is a
    solvable situation. But I think we have to understand that over
    the years we have committed to the American people a level of
    benefits in Social Security and in Medicare which are high
    relative to the capacity of the economy to support and we have
    to make judgments as to whether, in fact, we are capable of
    ratcheting up the growth rate to effectively say we can afford
    it and if not, and I must say to you I expect not, we have to
    review what the nature of those commitments is and make them
    far more capable of being fit into the capacity of this economy
    to service them.
        Senator Talent. As I search for areas where we might
    achieve enough of a political consensus and therefore a
    political will to do something, it just strikes me after all
    the struggle over Social Security reform and the rest of it,
    that maybe it might be better to devote some of this energy
    into coming to some agreement about how we really do maximize
    growth and how we can all reach a way where politically we can
    do that, which all of us agree will at least make it possible
    or easier to deal with the problem.
        Then second, take some confidence from the fact that the
    American people will on their own make adjustments in response
    to what they see coming. I had an economics professor who said
    ``Look, the most important principle in human behavior is this,
    that the crew of the Titanic stopped doing dishes when the ship
    hit the iceberg.'' As people see us approaching the iceberg,
    they will plan on working longer. They will accommodate to it.
    I think lifestyles will begin changing. Those two things, the
    points I am making, I take from your testimony.
        For example, you mention that the post-war population as it
    aged ended up spending a lot less of their savings than people
    thought. My parents certainly did that. If the baby boom
    generation does the same, which I think it will because I think
    the baby boom generation is going to see the greater need of
    their children to have some of their assets than maybe they
    might have figured all of these trends, these reactions will
    work in our favor and maybe make this easier to handle, but we
    do have to begin thinking about this, planning about this, and
    working together now. That is the clear import of your
    testimony--we have to begin doing something now or soon.
        Thank you. I guess that was an opening and closing
    statement combined, Mr. Chairman. I appreciate that.
        The Chairman. Senator, thank you.
        We are joined by Senator Carper. Senator, welcome.
    Questions, comments?
        Senator Carper. Thanks, Mr. Chairman.
        Chairman Greenspan, nice to see you again. It has been
    almost 24 hours. My wife has been on a business trip and comes
    home today and I was sitting here thinking that I have seen
    more of you in the last week than I have seen of her and I am
    looking forward to her return. But you look great; you look
    great.
        Mr. Greenspan. I have seen more of you than my wife and I
    wish she would return, too.
        Senator Carper. We have a common bond here.
        Senator Talent was saying that after the Titanic hit the
    iceberg the crew stopped washing the dishes. As we approach
    this fiscal iceberg that lies ahead, I am not sure that people
    will stop washing the dishes. Maybe they will stop eating out
    and then they will start washing dishes again. We will see what
    happens.
        I have been here a little over 2 years and as fiscal year
    2001 began, we saw budget surpluses are far as the eye could
    see and there was talk of retiring our publicly held debt and
    how that would affect the Social Security Trust Fund. I am just
    going to ask you to kind of walk us back in time to those heady
    days of late 2000 when we were much more optimistic about our
    fiscal future than we are today.
        Just to refresh our memories, what were going to do with
    all those extra monies? How were we going to pay off our public
    debt? How did that figure into the long-term health of Social
    Security and Medicare?
        Mr. Greenspan. Well, Senator, as you recall, the
    Congressional Budget Office, in evaluating what the current
    policy outlook, was estimated that over the 10-year period
    there would be approximately, as I recall, $5.7 trillion worth
    of accumulated surpluses. The basic reason for that was not
    that they were blind-sided on the impact of stock prices on the
    revenues that had occurred earlier but very small technical
    changes were made in the relationship between incomes, capital
    gains, and taxes on stock options. All that was well known.
    What was not in the CBO's forecast was a 50 percent decline in
    stock prices and what that did to those revenues.
        But when they looked as though they would be out there,
    there was a very strong presumption that if we retired the
    debt, that as we moved into the early years of the next decade,
    while we would invariably be running fairly large unified
    budget deficits, the level of the debt to GDP would be starting
    at a quite low level and that we could probably sustain running
    significant deficits for a protracted period of time because
    the debt started off very low, if I may put it that way.
        Now regrettably, that choice has been lost and we are back
    to the same problems that we perceived back in the mid-1990's.
    We had conversations back in the early 1990's which replicate
    very much what we have been talking about today. There was that
    period, though, where there was the possibility or perceived
    possibility that we would have adequate revenues to essentially
    book the forward unified budget deficits and then sort of
    capture them by lowering the debt and essentially find that the
    amount of adjustments that would be required would be much less
    than we are now obviously going to have to face.
        Senator Carper. A number of people including, I believe,
    the president, have suggested that we ought to lower Social
    Security taxes for some of our workers and allow them to divert
    a portion of their Social Security, their payroll taxes, into
    other investments. We still have an obligation to, my mom, for
    example, that she and her generation would continue to receive
    the benefits that have been promised to them under Social
    Security but we would allow a younger generation, maybe my
    children, to divert a portion of their payroll taxes into other
    kinds of investments but still pay something into Social
    Security.
        That was an idea that intrigued a number of people, maybe
    still does, but it was, I think, more intriguing 3 years ago
    than it is today.
        One of the things I wrestle with as we face that proposal
    is how are we going to pay the obligations to my mother's
    generation and maybe to the boomer generation that I am a part
    of if we divert the monies that otherwise would be needed to
    pay those benefits? It was not as difficult a mountain to climb
    3 years ago as I believe it is today. I would just invite your
    comments on that observation.
        Mr. Greenspan. There are several issues involved here. I
    have always been attracted toward moving significant amounts of
    retirement resources into the private sector. In fact, I had a
    long presentation about 5 years ago before this big revenue
    surge and then loss occurred before a special task force of the
    Senate Budget Committee in which I raised the issue of various
    different ways to essentially move funds from the public to the
    private sector and have minimal guarantees and mechanisms which
    I thought would be useful for coming to grips with the Social
    Security problem.
        I suspect, although I grant you it certainly does not sound
    this way when one hears the rhetoric, that the Social Security
    problem in quotes is a relatively small one that has to be
    adjusted. I think the really serious fiscal problem is Medicare
    and the reason for that is that, as I pointed out in my
    prepared remarks, we have had a remarkable increase in
    technology, and the advent of being able to get very much
    greater insight into the structure of how we function as human
    beings has opened up huge potential avenues for pharmacology
    and for other types of technologies which I think over the
    decades in the future are going to be in increasingly greater
    demand.
        So we have got this very difficult problem, as Senator
    Breaux said, which is a difficult problem and a wonderful
    solution of this remarkable technology which we are dealing
    with but which has increased the cost of medical care
    generally.
        I personally do not think it has increased the price of
    medical care. I think our price indexes are just plain
    overdoing it. I do not think all of this increase in cost is
    real. I mean it is a major improvement in medical services and
    the demand for that because it is so good is creating the
    possibility of a much larger demand than I think people have
    previously anticipated. Certainly when the original debate on
    Medicare was occurring there was not even the remotest notion
    of what potentially lay out there in improved technologies.
        This is something that I think we have to become aware of
    and try to find a way in which with our limited economic
    resources we can capture this technology in the most effective
    way for the American people. That is going to be a more
    difficult problem, I suspect, than Social Security.
        Social Security, as difficult as it is, is basically a
    defined benefit program with actuarial calculations and
    judgments and estimates and we are pretty good at that. The
    real problem is going to be how we take this wonderful bonanza
    of technology and find the best way to employ it.
        The Chairman. For the sake of our time and the chairman's,
    I would limit all three of us to one last question each.
    Senator Carper? We will just work our way back.
        Senator Carper. OK, good.
        I have heard you talk before about the way we determine how
    benefits should be raised, how benefits should be raised and
    the market basket that we use to determine what the increase
    should be and benefits each year and I have heard you say that
    there are other options that we should consider that are truly
    reflective of the price increases that people who are
    retirement age face. Would you just take a minute and talk
    about that again, please?
        Mr. Greenspan. Senator, if you go back to the original
    Social Security legislation you are going to find that the
    escalation of benefits essentially, according to the will of
    the Congress, was to increase benefits according to the cost of
    living and at the time, the only measure that we had of the
    cost of living was the Consumer Price Index, which is
    effectively what we use. But it has always been an issue of
    whether that really, truly measured the cost of living and one
    of the reasons basically is that it has a fixed weight system
    which biases it upward.
        Since the original views of indexing both Social Security
    and the tax structure, we have improved our ability to measure
    the cost of living and indeed the very latest version is the
    Bureau of Labor Statistics so-called chain-weighted price
    index, which is a far superior measure of the cost of living. I
    suspect that judgment would be agreed to by virtually every
    economist I know.
        Therefore, the issue arises whether we really want to index
    benefits more than the cost of living or is it the will of the
    Congress to stay with the cost of living? If it is the latter,
    it makes a big difference. You will find, for example, if we
    had used the chain-weighted CPI, we would have probably had a
    budget deficit about $40 billion less in fiscal 2002, a little
    more than half because of the tax bracket shifts and a little
    less than half on the issue of benefits.
        So if you want to come at the budget in a manner in which
    technical changes are appropriate, I think you will find that
    cumulatively over the years it makes a very significant
    difference and if we do it now it would make a rather large
    difference by the year 2010.
        Senator Carper. Thanks very much.
        The Chairman. Senator Wyden?
        Senator Wyden. Thank you.
        Mr. Chairman, I want to go a little bit further on this
    question of health care productivity. We sort of touched
    indirectly on it, but one of your many contributions, was early
    on you pointed out that information technology a few years back
    was going to give us a chance for this incredible opportunity
    for productivity growth. I am curious about your thoughts as it
    would apply to health care in particular.
        For example, electronic medical records could be an
    extraordinary opportunity for increasing health care
    productivity. We know if someone sees three doctors today that
    there is a very high likelihood that doctor three will not know
    a whole lot about what doctor one and doctor two have done, so
    you have to basically start all over.
        I see nurses when I go to health care programs spending
    astronomical amounts of time charting, for example. If they had
    a palm-like device, for example, they could probably handle a
    lot of that.
        I am curious if you have given any thought to steps that
    would increase health care productivity, basically taking what
    you said about IT, information technology as related to the
    economy as a whole, and brought it to the health care field,
    particularly as it applies to government. I mean if you look at
    these government health care programs, I think it is fair to
    say we are technological Luddites. We are not making the
    investments in these technologies that it seems to me could do
    in health in terms of increasing productivity what you have
    correctly advocated in other areas and I am curious about your
    thoughts with respect to increasing health care productivity.
        Mr. Greenspan. Senator, I think you are hitting on one of
    the areas where we are still back in pre-World War I days. I am
    still looking at prescriptions written by doctors. I cannot
    understand them now any more than I could when I was young.
    There is a remarkable amount of actual paper that goes on
    prescriptions and then building into the health care records of
    individuals and I think you are quite right, that we now have
    the technologies to integrate a very significant amount of
    medical records of individuals into central systems.
        You do have a privacy issue here, which has been one of the
    major problems preventing that, and I am not sure how you get
    around it. But technology is there to very significantly reduce
    administrative expense.
        Remember a very large part of improved technology in
    medical care does not come from biomedicine or pharmacological
    insights. It comes from information technology systems. I mean
    MRI is a system which has got very little to do with
    biochemistry. It is an electronic insight of remarkable
    importance. I think that the synergies of various technologies
    are clearly where a great deal of overall innovation is going
    to occur and especially in the medical area.
        Senator Wyden. I want to observe the chairman's rule about
    just one question. I would hope, because I thought what you
    said about IT made a huge difference early on as it related to
    the economy generally, that you and your excellent staff people
    would look some more at health care productivity because I
    think even as it relates to privacy, if we were to do nothing
    else in this country other than to say on a voluntary basis, on
    a voluntary basis if someone wanted to direct their health care
    providers to have electronic medical records, this could very
    significantly boost our productivity and go right to the point
    that you have talked about for years in terms of output per
    hour.
        I may follow up with you some more on this because I think
    it is a chance to really extrapolate from what you said about
    productivity generally in the health care field where, of
    course, costs are rising.
        So thank you, Mr. Chairman.
        Senator Carper. Mr. Chairman, could I just make an
    observation? Senator Wyden has put his finger on a very
    important point. I have just written a piece for a DLC
    publication, Blueprint, on this very issue.
        I recently met with some folks visit from the Patient
    Safety Institute and the Delaware medical society who put
    something together called the Delaware Health Information
    Network. I believe they are onto something. I talked to a guy
    the other day who told me he was taking 15 different medicines,
    he has seven doctors, and my guess is that those doctors are
    not talking with each other and are not aware of the kind of
    interaction that those meds are having. There are ways not just
    to save money here but really to improve patient care.
        I think the issue about privacy can be addressed.
        The Chairman. Well, I thank you for that. If you will
    recall some weeks ago we had a hearing that touched--we had a
    couple of witnesses that touched on that as it relates to the
    kind of voluntary effort of counseling that is going on now
    with our seniors, but the technology side of it for all is
    very, very significant.
        Mr. Chairman, one last question for me. You talked about
    large increases in payroll tax would suppress economic growth
    and reduce the incentive to work in what will likely be an era
    of labor shortages. This seems to make a strong economic
    argument against raising payroll taxes in an effort to
    strengthen Social Security or Medicare in any significant way.
    Can you elaborate on how increases in payroll taxes would
    suppress overall economic growth?
        Mr. Greenspan. Well, all taxes, by their very nature,
    suppress growth. The question is that they are there hopefully
    not just to suppress growth but to raise revenue for purposes
    that the government thinks are important.
        I think with respect to Social Security and Medicare as a
    first approximation, I would certainly say not to solve the
    problem by moving up taxes. You may end up at the end of the
    day with a whole series of adjustments that you have made and
    there is a small part that still has to be done and you may
    decide that it is the least worst final alternative, but one
    has to keep in mind that raising taxes is not merely a revenue-
    raising phenomenon; it has negative impacts on the tax base
    from which you are making those revenue increases.
        The Chairman. Well, Mr. Chairman, again we thank you very
    much for coming this morning and expressing your views on this
    very important issue. You have offered us great insight. I
    think the record we build here--as you know, we are not an
    authorizing committee but we value our ability to be the town
    crier on occasion, as many of the authorizing committees move
    in certain areas that we are involved in, to build records that
    we can then make available to our colleagues here in the Senate
    as decisions are made.
        So again thank you very much. We appreciate it.
        Mr. Greenspan. Thank you, Mr. Chairman.
        [The prepared statement of Mr. Greenspan follows:]
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        The Chairman. Now let me invite our second panel forward.
    Again let me repeat that joining us today on our second panel
    will be Paul Hewitt, director of the Global Aging Initiative at
    the Center for Strategic and International Studies, Sylvester
    Schieber, director of research at Watson Wyatt Worldwide, and
    Gary Geipel, chief operating officer and vice president of the
    Hudson Institute.
        Paul, we will start with you if you will pull the
    microphone as close as possible to your comfort so we all can
    hear. Please proceed.

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

        Mr. Hewitt. Thank you, Senator. Mr. Chairman, thank you for
    your leadership in scheduling this hearing on the opportunities
    and threats of global aging. I would be remiss if I did not
    also acknowledge the contributions of Senator Breaux to the
    CSIS Commission on Global Aging, which has been examining this
    question for 3 years now.
        The commission's central finding was that the challenge
    posed by global aging is pervasive, it will affect everything
    from individual life plans to international security
    agreements. Global aging will generate important economic
    opportunities but it will also create unprecedented dangers.
    Which of these forces triumphs will depend on the course of
    policy reform over the next few years, not just in the United
    States but in countries the world over.
        It will surprise some to learn that America is probably
    going to age less over the next half century than any other
    country in the world. The Census Bureau projects that our
    median age will rise by just 3.6 years, barely half the rate of
    the previous 50 years. The median age of the world is on track
    to rise by 9.7 years over this period, while the typical
    Mexican at mid-century is expected to be 16 years older than
    her counterpart of today. As shown in the first table in my
    testimony America's age structure will be converging with that
    of the developing world and diverging from those of our allies.
        Population aging is creating important opportunities in the
    developing world. In a phenomenon known as the demographic
    bonus, falling fertility directly increases per capital incomes
    even as it frees women to participate in labor markets and
    enables families to spend more on health and education. The
    result can be a virtuous circle of economic growth and
    political stability.
        Falling fertility has made such a difference in China. Last
    year China produced 5 percent of global output but accounted
    for one-third of global growth.
        Yet in order to capitalize on this bonus, societies must
    also provide employment. Without jobs, growing labor pools
    translate into ballooning legions of unemployed who, in turn,
    are the source of social unrest. It was the recognition that
    unemployment had caused so much upheaval in the first half of
    the 20th Century that led every industrial country to establish
    generous welfare states in the aftermath of World War II. Yet
    safety nets are expensive and this means they are likely to
    remain modest in the low and middle income countries for the
    foreseeable future. This means that social peace in these
    regions will depend perilously on the state of the global
    economy.
        For example, China estimates that its economy will need to
    grow at 8 percent a year just to prevent unemployment from
    rising.
        A particular concern then is the fact that aging is
    increasing the potential for crisis throughout the developed
    world. As shown in Table 2 on the right, CSIS estimates that by
    2040 today's old-age benefits will consume an additional 12
    percent of GDP a year in a typical developed country. Were
    these imbalances permitted to accumulate, by the mid-2020's
    budget deficits in the rich countries would consume all of
    their savings, making them dependent on capital flows from the
    Third World to fund domestic investment. Long before this
    happens, of course, capital shortages and default risks would
    spill over into the global markets and disrupt growth
    everywhere.
        Mr. Chairman, a complete discussion of these budget
    estimates can be found in the 2003 Aging Vulnerability Index,
    which is published by Watson Wyatt and CSIS. I would like to
    request at this time that a copy of this report be inserted in
    the record as an appendix to my written testimony.
        The Chairman. We will do that. We will file that and
    appendicize it to your testimony. Thank you.
        Mr. Hewitt. Thank you. In fact, we are concerned that the
    potential for fiscal crisis may be much greater than these
    numbers suggest, as was hinted by Chairman Greenspan just a
    moment ago. Labor shortages are projected to cut GDP growth by
    an average of .7 percent a year in Japan and .4 percent in the
    EU-15 over the next 25 years. This means that even at full
    employment, economic growth in these regions will fall under 1
    percent after 2015. Growth is essential.
        More immediate and worrying, however, are the effects of
    depopulation on product markets. In Germany and Japan shrinking
    numbers of older and thriftier consumers already are creating
    overcapacity in many industries, from construction to retail,
    that used to be engines of economic growth. The loss of pricing
    power in these sectors not only has been deflationary but
    fiscally destabilizing as collapsing corporate profits and
    rising bank losses have deprived governments of needed
    corporate income tax revenues.
        If demography is the culprit in this malaise, as I believe
    is the case, then there is a high potential for fiscal
    instability in the near term. It remains that properly managed,
    the industrial world's aging could prove a boon for the
    developing world. Slowing growth in the rich countries will
    translate into fewer profitable investment opportunities in our
    domestic economies. In response, managers of capital
    increasingly will look abroad to developing countries with
    large labor forces and low productivity where infusions of
    capital and technology and know-how can generate out-sized
    returns. In this win/win scenario, rich country retirees would
    maintain high rates of return on their nest eggs while helping
    to accelerate economic development in the poorer regions.
        Realizing this potential will require an historic expansion
    of global trade and investment alongside fundamental structural
    reforms in both the developed and developing regions. The rich
    countries will need to place much more of the retirement burden
    on saving--for example, by expanding private pensions--to
    ensure that they remain capital exporters. Meanwhile, the
    developing countries must create physical, educational,
    financial and legal infrastructure so that they become safer,
    more productive places to invest.
        Last but not least, we will have to find some way to avoid
    instability in the Middle East and sub-Saharan Africa where an
    ongoing explosion of youth foreordains higher unemployment and
    falling living standards for at least the next two decades and
    possibly beyond.
        In conclusion, Mr. Chairman, America and the other
    developed countries must avoid the temptation of spiraling
    deficits that divert our saving into unproductive government
    debt. It is essential that we tackle entitlement reform not
    just for ourselves but for the economic and political stability
    of the world. Thank you.
        [The prepared statement of Mr. Hewitt follows:]
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        The Chairman. Paul, thank you very much.
        Mr. Schieber.

    STATEMENT OF SYLVESTER SCHIEBER, PH.D., VICE PRESIDENT, WATSON
                    WYATT WORLDWIDE, WASHINGTON, DC

        Dr. Schieber. Mr. Chairman, thank you for the invitation to
    testify here this morning. I am going to focus on capital
    market issues that I believe are likely to arise in response to
    the global aging phenomenon that we have been talking about
    here this morning.
        Capital markets, like others, have both a supply and a
    demand side and we have to look at both to understand the
    implications of aging. According to the prevalent economic
    thinking today, we are in a period when savings rates are
    relatively high in the developed world. The role of savings is
    to supply capital to our economies to spur economic growth. In
    the future, however, as our populations age significantly,
    current models of behavior suggest that savings levels are
    likely to fall.
        It is not just the supply of savings that is important; it
    is also what we do with those savings. If a large portion of
    personal savings are soaked up by government deficits as
    developed societies try to maintain their current support
    levels for the elderly, then those savings will not be
    available for investment to spur economic growth. When we look
    at our own social insurance systems and others in the developed
    world, there is real concern in this regard.
        It is also possible that private savings will be squandered
    as some countries try to prop up sagging demand associated with
    advanced aging. What has happened in Japan in the last decade.
    It is a good example of what we should strive not to emulate.
        Because of the relatively high savings rates that now exist
    in the developed world, an interesting phenomenon is unfolding.
    The ultimate surge in retirements that we are going to
    experience is still sometime off but we are in a situation now
    where labor forces in some of these countries may already be
    shrinking.
        As Chairman Greenspan noted earlier, with savings rates
    increasing at the point where workforces are stabilizing or
    possibly declining, you may end up with excess capital. At
    least for a while, there is going to be a tendency to
    substitute capital for labor. In fact, when we look at Germany,
    France, and Italy, labor shares of business sector output have
    already been falling over the last 10 or 15 years, reflecting
    more intensive capital usage. But economic theory tells us that
    as capital intensity increases, rates of return will fall.
        In my prepared remarks I present some analysis that we have
    done looking at rates of return across the corporate sector
    across the developed world, and what we have found is that the
    rates of return, the ability of corporations to create surplus
    value in the older countries is significantly less than in the
    younger countries, countries with lower aged dependency ratios.
    In fact, we found that a country that has a 0.10 higher
    dependency ratio will have companies on average that have an 18
    percent lower surplus value in their corporations--a very
    significance difference just on the basis of the aged
    dependency ratio within those countries. The results of that
    analysis are in Table 4 in my prepared remarks.
        Table 5 in my presentation, the first Table 5--I apologize;
    there were two Table 5s--the first Table 5 shows the aged
    dependency ratios in a number of the major developed countries
    across the world. At the end of the 20th Century the United
    States had one of the lowest aged dependency ratios among these
    countries and we have undoubtedly benefited from the ability to
    generate higher returns because of it. Over much of the last 15
    to 20 years the United States has been a significant importer
    of capital, in large part because our domestic savings rates
    are relatively low but also because our returns on investment
    have been relatively high.
        As we look to the future, the aged dependency ratio in the
    United States and elsewhere around the world is projected to
    increase and to increase significantly. For some period of time
    the United States might be the beneficiary of this evolving
    picture as we continue to attract capital because we are in a
    so much better position than the rest of the developed world.
    But as our own population ages it will become increasingly
    efficient to seek alternative places to invest our own capital.
        With an abundant supply of labor and a lower stock of
    capital, developing nations had the potential of generating
    higher rates of return to capital investment than countries
    with high capital/labor ratios. This is not simply a one-sided
    proposition, for the developed nations. The shifting of capital
    has a tremendous potential to dramatically increase the
    productivity rates and the standards of living in the
    underdeveloped economies of the world over the coming decades.
        Getting the economic and legal infrastructures in place in
    the developing countries of the world to solve the global aging
    dilemma is a great challenge. When we look at Table 7 in my
    prepared remarks we see that much of the supply of surplus
    labor that is going to be available in the world over the next
    30 years will come from countries that have cultures that are
    very different than ours.
        Beyond cultural differences there are other potential
    barriers to significant investment in these nations. Capital
    owners must be able to invest in opportunities within a
    framework of regulatory and civil law that is enforced on an
    evenhanded basis. Business dealings must be aboveboard and open
    to review. There have to be statute- and case-based legal
    systems that allow disputants in business deals to resolve
    differences when they arise.
        Concerns about the financial markets and the political and
    legal infrastructures lead many investors in the developed
    world today to have a home bias in terms of their investing. To
    continue this pattern in the face of aging populations will be
    extremely inefficient. It will be inefficient for those
    countries themselves.
        As we put all of the elements of this picture together, the
    United States is in a better position to weather the aging of
    its population than virtually any of the other countries of the
    developed world. We should remain a relatively attractive
    market for investment much further into the global aging
    phenomenon than most of the other developed countries and
    should continue to see foreign flows of capital into our
    economy. At some juncture, however, the slowdown in our own
    labor force growth will inevitably mean we will suffer the
    consequences of capital deepening that are already hitting
    other developed nations. Before that occurs we should pursue
    policies that allow us to take our own surplus capital to other
    parts of the world where there will be sufficient labor to use
    it effectively.
        As we think about the challenges the aging developed world
    faces, we ought to quit concentrating so much of our energies
    on the immediate reform of social insurance programs in the
    developing world and help get in place operating frameworks
    where capital can flow freely to stimulate real economic
    growth. As the developed countries realize rewards of capital
    infusions that allow their own national incomes to rise, there
    will be plenty of time to reform their own national retirement
    systems. Thank you very much.
        [The prepared statement of Dr. Schieber follows:]
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        The Chairman. Thank you.
        Now let me turn to you, Gary. Please proceed.

      STATEMENT OF GARY L. GEIPEL, PH.D., VICE PRESIDENT, HUDSON
                      INSTITUTE, INDIANAPOLIS, IN

        Dr. Geipel. Thank you very much, Senator Craig. It is a
    great privilege for me to represent Hudson Institute before
    this committee with its crucial agenda. It is also a privilege
    for me to join these particular colleagues on this panel.
    Hudson Institute prides itself on a reputation for
    understanding workforce development, but with regard to the
    implications of global aging, there is very little we could do
    to improve on the work that CSIS and Watson Wyatt have done,
    particularly represented by these gentlemen. They have almost
    single-handedly carried the burden of describing the magnitude
    of the challenges and some of the potential solutions, so I am
    privileged to join them.
        I was asked specifically to address some of the
    implications of global aging for workforce issues and to begin
    I would offer the headline that the challenges posed by global
    aging for the U.S. workforce are serious but perhaps not as bad
    as some of the implications posed by entitlements and capital
    flows, which we have already heard about today. They are also
    relatively much less serious in this country than they are in
    other parts of the developed world, and I would argue they are
    perhaps a bit more subject to influence by public policy in a
    way that is less politically contentious and sensitive.
        I would like to, given the time involved here and the fact
    that we are at a fairly stage in understanding these
    challenges, I thought my contribution might be best focussed on
    offering a big picture sense of the equation that is involved
    in understanding the impact of global aging on the workforce. I
    offer what amounts to a four-part equation, starting with, of
    course, the challenges in general of global aging for the
    workforce, which I will try to unpack in more detail. Second,
    factors specific to countries or indeed regions within
    countries that either exacerbate or mitigate the more general
    challenges. Third, the policy levers that are available, both
    public and private, to help ease some of the challenges for the
    workforce. Finally, a set of wild cards that could dramatically
    bring about either the worsening or the bettering of the
    situation. I would argue that only by looking at that full
    equation can one truly understand the outcomes likely to occur
    for the workforce as a result of global aging.
        So just briefly, what are the general challenges? Well, if
    you assume that the available workforce for the next 25 to 50
    years consists only of the current population in any given
    country and the children they are likely to have, then clearly
    you have a problem on your hands in most of the developed
    world, at both ends of the talent spectrum. You have a double
    whammy on the high-skilled end, where you have the retirement
    or death of your most experienced and knowledgeable individuals
    at the same time as you have smaller numbers of younger college
    graduates coming into the workforce due to low birth rates. You
    also have a double whammy on the low-skilled end of the
    spectrum. Because of wage premiums that are out there for
    skilled work, more and more people are pulled in that
    direction, at the same time as demand for low-skilled work is
    increasing due to the demands imposed by an aging population
    for things such as long-term care, entertainment, travel, and
    leisure activities.
        So especially on the high-skilled end of this, you have an
    increasing global battle for talent that will intensify both
    within and between countries. You have a relocation of labor-
    intensive operations in both manufacturing and services to
    countries where the labor shortage is less severe. You have
    continued upward pressure on wages and benefits in the high-
    skilled labor force. You have relentless efforts, as Chairman
    Greenspan already alluded to, to squeeze more output from fewer
    workers through the application of technology. So that is the
    basic picture.
        Part two of the equation, is that not all countries will
    join this battle, if you will, on a level playing field.
    Relatively speaking, the good news for us is that the United
    States starts much stronger than many other countries in the
    developed world.
        First of all, the basic aging problem is less severe, as
    Paul Hewitt has already indicated. Americans especially our
    recent immigrants, have more children. We are still very much
    the preferred immigrant destination at both the high-skill and
    low-skill ends of the talent spectrum. Our magnetism is very
    strong, including our magnetism with regard to skilled workers
    from other developed countries. I would think that France and
    Germany would be concerned that they typically end up in the
    Top Five list of countries that are supplying workers to the
    United States under H1B visas, even though they have their own
    skill shortages.
        Our higher education systems in this country are amazingly
    magnetic with regard to young people, which is a huge benefit
    to us. Just ask yourself how many Indian, or Chinese, or Polish
    young people dream of studying at a university in Japan--
    arguably very few--but millions of them dream of studying at a
    university in this country.
        We also, I would argue, start in the United States with a
    culture that is more positive about the prospect of remaining
    in the workforce past the age of 65. A phenomenon that I think
    most of us have encountered--the 75-year-old or 80-year-old
    greeter at Wal Mart or Target is not something that I have ever
    seen in France or Germany or in many other parts of the
    developed world. It speaks well for the desire of many
    Americans to remain engaged in the workforce even when economic
    necessity does not require it.
        Finally, the volunteer sector in the United States is much
    more developed, by an order of magnitude, than in the rest of
    the developed world. Again this is all to the good because it
    suggests that many of our older adults, even if they are not in
    paid work, will still be engaged in some type of quasi-
    employment situation, to the good of society.
        This leads us to what the question of policy levers can do
    to further improve the situation the United States enters into?
    I would suggest that you can group most of the policy responses
    into five areas.
        First of all, benefits and entitlements. We have heard a
    lot about that already today. I would simply say that the
    challenge here, in general terms, is to blur the line between
    work and retirement. It turns the last 50 years on its head. We
    have spent a lot of time in public and private policy coming up
    with all manner of benefits, programs, and rules that pivot
    around the magic age of 65 or some other such magic number. I
    think what we need to do now is to come up with all manner of
    benefits, programs and rules that cause people to ignore the
    age of 65 and move in the direction of much more flexibility,
    keeping all-or-nothing choices to a minimum.
        Education's, similarly important in this area. Life-long
    learning is a cliche that we need to start turning into
    something more than a cliche. We do not need to come up with
    new curricula or course work that is directed at ``old
    people.'' What we need to understand is the importance of
    incremental opportunities throughout one's working life to
    continue to upgrade skills. We have to frankly recognize that
    dealing with the ongoing K-12 problem is very much a part of
    responding to the challenge of global aging. You do not want to
    let anybody slip through the cracks and I would argue that ``No
    Child Left Behind'' could be understood as No Worker Left
    Behind.
        Some of the work that this committee has already done to
    look at disease management, to look at the outcomes-based
    revolution, is very important, to re-orient ourselves away from
    treating the ``inevitable manifestations of aging,'' to move
    away from that and more toward looking at strategies of disease
    management that will avoid those ``inevitable'' outcomes.
        Finally, of course, immigration policy. A sophisticated
    immigration policy that links workforce needs to recruitment is
    very important.
        In conclusion, allow me to put forward some wild cards that
    could vastly change this equation. First of all, there is the
    wild card in which the problem of global aging evaporates as a
    result of what some have called hyperaging. If we truly get
    exponential breakthroughs in medical care, such that 65 becomes
    middle age with life spans extending beyond 100, that would
    change the global aging calculus dramatically. Second, at the
    other end of the spectrum, the problem worsens significantly.
    Some type of disease-induced population decline as a result
    either of deliberate action or otherwise, could significantly
    worsen the aging problem by reducing the population that might
    be available for work in the developed world.
        Third, we could rewrite the output equation. There is some
    hope that the marriage of artificial intelligence and robotics,
    for example, will cause labor saving on an exponential scale.
        Finally, I think it is worth referencing that the War on
    Terrorism potentially does have an implication here. If a
    backlash to further potential terrorist strikes on the order of
    9/11 were to occur, that arguably would create a potential
    fortress mindset in this country, at the same time reducing
    some of the freedoms that are precisely the appeal that we have
    in this battle for talent globally. Thank you.
        [The prepared statement of Dr. Geipel follows:]
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        The Chairman. Gary, thank you. Gentlemen, thank you very
    much for your testimony, both your spoken word and, of course,
    your full statements will become a part of the record.
        Paul, I am most struck by the global aging linkage to so
    many policy issues and, of course, that is what we are about
    here. The word you used to describe these linkages was
    pervasive. How informed are officials in other countries
    regarding these linkages?
        Mr. Hewitt. They are not well informed at all. We have
    managed to put together a fairly impressive group in the Global
    Aging Commission that has, I think, helped us spread the word.
    But for the most part, people are surprised. Prime Minister
    Gujral of India, former prime minister, confessed after we
    first had him to one of our meetings that, for the first time,
    he realized that India's population was not just a burden to
    the world. I recall sitting down with the chairman of the
    foreign affairs committee in the Bundestag, the German
    parliament, and after a fair amount of talking, he just started
    shaking his head, and he said, ``You know, if we'd begun 10
    years earlier, we would have had a chance.''
        So politicians, I think, have not really focussed on these
    questions. They need to; it is essential that they do. One of
    the reasons why they do not, though, is that the problem, the
    challenge of global aging is entirely unprecedented. Imagine a
    society that is beset by chronic labor shortages, that has to
    get used to the idea that job creation is not the best measure
    of economic success. In fact, it is intelligent job shrinking
    that we will need to be doing.
        Of course, there is another new phenomenon: shrinking
    numbers of consumers. This is posing incredible sectoral
    problems throughout the global economy and in particular,
    national economies like Japan's where you have vast
    overcapacity. One out of five workers in Germany is in
    construction. They think this is an essential sector. Yet, the
    demand for construction is declining because the German
    population is shrinking. There are more deaths than births.
        So all of these things, I think, are interconnected and it
    is essential that we do the education. We really do not have
    much time so your efforts here are very much appreciated.
        The Chairman. North America appears to be in a better
    position. I think all of you speak with a certain degree of
    optimism about our opposition relative to the rest of the
    world, obviously with caution and making certain assumptions,
    but Paul, North America appears to be in a better position
    regarding aging pressures than other nations or regions of the
    world. Can you describe a likely scenario for the economic and
    geopolitical relationships between the United States and its
    neighbors, Mexico and Canada, in 10 or 20 years?
        Mr. Hewitt. I think to do so with any degree of confidence
    would be impossible because so much depends on what happens
    outside of North America. Gary Geigel was mentioning that if
    there were another big terrorist shock that slowed down global
    trade it could certainly gum up the borders, as it did directly
    after 9/11.
        The Chairman. In other words, walls built.
        Mr. Hewitt. Yes. Then, of course, what are the often
    contingencies? Well, Japan does not look like they are going to
    last the decade without a default and an IMF work-out. What
    would that do to China's economy and to the U.S. economy and to
    Southeast Asia, for which Japan is a major export market?
        Then there is the larger questions of capital productivity.
    For example, how do we get capital to be more productive, and
    not just labor, so that we get higher returns on our money?
        Now in this context some of the relationships between
    Canada and the United States and Mexico, the NAFTA countries,
    evolve in different directions. If you look to the end of this
    20-year period, in Mexico you are going to see a great
    diminution of immigration. Our immigrants are going to come
    from different places, wherever that may be, because not just
    Mexico but virtually all of Latin America is going to be aging
    at a very, very rapid rate. Increasingly, we expect they will
    be capitalizing on their demographic bonuses and they will not
    be sending so many people abroad; there will be plenty of
    opportunities in their home countries.
        Growth is going to slow in Canada. The birth rate there is
    1.6. That is almost a quarter below replacement. So even if
    Canada has very robust immigration, its population will stop
    growing and this will dramatically slow the growth of markets
    and certainly the growth of productive potential. So Canada is
    kind of a piece of Europe on our northern border.
        Of course, we can expect that Europe will become a big drag
    on global growth, as Japan has become. In fact, all of this has
    contagion potentials, too.
        Managing these issues, of course, really are going to
    require very sensitive management, sensible management, in U.S.
    diplomacy.
        The Chairman. Doctor, you were wishing to get into that
    question, I see, and certainly all of you can join in or make
    additional comments if you choose. Please.
        Dr. Schieber. To the extent that the developed world is
    facing the prospects over the next two or three decades of
    labor shortages, Mexico will be a tremendous asset for us.
    Today the Mexican working age population is virtually the same
    size as the German working age population. By 2030 the Mexican
    working age population is going to be twice the size of the
    German working age population. There is a phenomenal shift
    going on.
        As Paul mentioned, Canada is reaching almost the point of
    stability in terms of their labor market. My guess is that
    Canada will continue to be a strategic partner because of our
    cultural linkages, the proximity, the length of the border----
        The Chairman. Resources.
        Dr. Schieber. Resources, a whole variety of things,
    although we do discourage them bringing lumber down here.
        The Chairman. Well, at the moment. Put a few of my people
    out of work. We're trying to balance it out.
        Dr. Schieber. I know. I go there frequently and they remind
    me about this every time I am there.
        Canada, I think, will continue to be an important partner
    but to the extent we have labor shortages, we have a nation
    right here on our border where there are tremendous cultural
    linkages and I think there is a fantastic opportunity here, if
    we can get this relationship worked out, to really take a step
    ahead relative to the other nations, developed nations in this
    world.
        If you think about the countries encircling Europe and the
    European Union--Northern Africa, the Middle East, on over into
    Asia--and the nature of those exploding populations the
    cultural differences and the reluctance on the part of the
    Europeans to allow them into their societies, the potential
    relationship we have with Mexico ought to be one that we look
    at very carefully and try to develop in an extremely healthy
    way.
        The Chairman. I think that is a phenomenally astute
    observation. One of the questions I get asked quite often when
    I am out in my State or traveling the country, is what is wrong
    with the French as it relates to the specific issue at hand at
    the moment that the world is debating, and I said ``You have to
    look at--what is wrong with the French are the French, I mean
    in regard to their whole history and culture and how they
    interact.'' But within that population base is a phenomenal in-
    migration of Muslims over a short period of time that can
    create great political unrest if they move in certain
    directions and are trying to factor that into their
    decisionmaking. It is the lack of the ability to assimilate
    them into their culture. They have literally put them into, if
    you will, not a ghetto but a separate suburb.
        Dr. Schieber. It is a ghetto.
        The Chairman. Yes, all right. I did not want to use that
    word but you are right.
        Dr. Schieber. If it quacks, it is a duck.
        The Chairman. Yes. Well, Doctor, your testimony highlights
    the mutual benefits of U.S. and European business investment
    flowing into developed countries. From the outside looking in,
    it seems as if cultural values undermine the rule of law in
    many of these countries. What ideas do you have for improving
    the free flow of business investment into the developing world?
        Dr. Schieber. Well, we have institutions that we sponsor
    here that reach out into nations all over the world and try to
    help them structure their economies in ways that will enhance
    the welfare of their people. These are organizations like the
    World Bank, the International Monetary Fund, and other groups
    like them. I believe that they have spent a lot of their
    energies in recent years focussing on things that should not
    have been a first priority.
        One of the reasons that behavior is different in some of
    these less developed countries is that graft was the way that
    people get things done. These traditions do not mean that the
    governments cannot be reorganized and business processes cannot
    be carried on in a different fashion. I believe we ought to
    devote more of our energies to helping these countries
    establish legal frameworks, to establish regulatory frameworks,
    help them get their capital markets created so there is an
    infrastructure that will take our capital and allocate it
    across the market efficiently.
        I think in some regards we have made tremendous progress in
    places like China over the last decade. There is still a great
    way to go. There is a natural tendency when capital goes into
    China to try to link that capital up with state-owned
    enterprises, and then it does not become an investment; it
    simply becomes a way to hide the true cost of the rotting
    industries that are a remnant of the old communistic system.
        We really need to work directly, government to government
    and through these other entities, to try and put in place true
    market structures that will allow us to take capital and invest
    it there and have it be used efficiently. If that happens, we
    have tremendous opportunities to raise the productivity and the
    standard of living of workers there. Then we can repatriate the
    returns on that capital to help finance the consumption of a
    larger aging population without having to do it purely on the
    backs of our own workers. We really do need to think about
    this.
        Mr. Hewitt. If I could just add one short point: it is that
    a lot of this investment that is happening in China is coming
    from companies in the form of foreign direct investments.
    Watson Wyatt is over there. Citigroup is there. General
    Electric is becoming a major employer. Volkswagen regards China
    as its second-largest market in the world, larger than the
    United States.
        So some of this process is going to be accomplished through
    multi-nationals. That leaves a substantial role for the
    multilateral institutions to focus on institutional reform.
        The Chairman. Doctor, one last question to you. I guess the
    thing that intrigues me now, during my college years and
    younger years one of the things to talk about was the dynamics
    of the great Japanese economy and all that was going on over
    there and we were trying to search out why we could not have
    some of our institutions interrelate more like theirs did and
    all of that. Yet now, of course, we have seen almost a decade
    of stagnation or flat economy in Japan.
        You talked a bit about Japan's economic situation. Are
    there policy changes that Japan can make to improve their
    economy now? How do they work their way out of where they are?
        Dr. Schieber. Frankly, the bottom line is I am not sure
    they can work their way out of where they are right now.
        The Chairman. Somebody referenced a default. Maybe it was
    you, Doctor.
        Dr. Schieber. No.
        The Chairman. Oh, it was you, Paul. That is why I thought
    that question fit most appropriately now.
        Dr. Schieber. First of all, they do have tremendous
    structural problems, the way their corporate sector works, the
    interrelationship of the corporate sector with the banking
    sector, and so forth. Beyond that, they are an extremely old
    society, even relative to most of the rest of the developed
    world. They are way ahead of us. Their fertility rates are very
    low, around 1.25, 1.3, and my guess is they are going to fall.
    They have virtually no immigration. It is just a closed
    society.
        They have very high rates of saving, personal saving. There
    is a table in my presentation that shows almost an astronomical
    one, but they have totally squandered that over the last decade
    and I think this is the lesson we really need to focus on
    because in so many other ways we are very different.
        We do have dynamic regulatory structures that allow our
    industries to change and for there to be a true creative/
    destructive process. We have the highest immigration rates in
    the developed world. We have high fertility. Many of their
    problems we do not have.
        But what they have done over the last decade is to have
    taken a very high rate of personal savings, and for all
    practical purposes they have squandered it. They have
    squandered it largely through fantastic government deficits
    that they have run. They have gone from one of the lowest
    government debts in the developed world to the highest. It is
    around 1.5 times GDP now?
        Mr. Hewitt. It will be 160 percent this year.
        Dr. Schieber. A fantastic, fantastic debt that they have
    run up. They built the big airport out in Osaka that is now
    sinking into the sea and these massive infrastructure projects
    that are not going to provide any rate of return to the
    Japanese society over the long term.
        The thing we have to be very careful about is spending our
    resources through government regulation or government
    investment that are not going to net us a return. We have to be
    very careful about protecting dying industries. For example, we
    need to think very seriously about what we are doing with the
    steel industry.
        We also need to be very careful about sucking out the
    savings that does go on in the personal sector of our economy.
    We should not use personal savings for deficit financing at the
    government level to support consumption for a relatively young,
    healthy elderly population. If we squander our savings they
    will not add to the value of our overall welfare.
        So I think that the waste of the resources they have is
    something we should pay very close attention to. I do not think
    they can work their way out of most of the other things.
        The Chairman. Well, you have answered--the follow up was
    going to be lessons learned from them that we ought to apply.
        Dr. Geipel, in your testimony you touch on the strength of
    the voluntary sector. The folks who engage in these activities
    contribute greatly to the vibrancy of our society. This is, I
    think, clearly an opportunity. Do you have any policy
    recommendations at the Federal level to better enable the
    voluntary sector?
        Dr. Geipel. You are right to highlight that as an
    opportunity and something that really sets the United States
    apart. At the risk of straying into Euro-bashing, I have spent
    a lot of time on the continent and I am struck by the
    retirement patterns that seem to take people in one of two
    directions, either toward a very inward focus tending to the
    garden or to whatever few of grandchildren might exist, or to
    the other extreme, a kind of manic tourism, notching off the
    number of countries one could conceivably visit before one's
    strength dissipates.
        It seems to me that what is missing in that--I do not want
    to disparage either one of those pursuits----but what is
    missing is the opportunity for something in between, which is
    something larger than one's own home and garden but focused on
    the community, giving back with the opportunities that we have
    through our churches, through community organizations,
    volunteer groups, which I do believe can significantly offset
    labor shortages that might arise in the future with regard to
    care of individuals in nursing homes, dealing with indigent
    populations, and so forth.
        So it is clearly an opportunity for us. What can Federal
    policy do? There I would say essentially it is looking to stay
    out of the way. It is one of those things that seems to be
    working reasonably well in the United States, and what Federal
    policy can do is simply look for additional opportunities to
    encourage private philanthropy, which very much undergirds the
    voluntary sector, doing things which I think the Federal
    Government is already doing.
        I think the approach of the so-called Faith-Based
    Initiative right now is appropriate, because what it does is
    simply look at what the Federal Government can do to remove
    barriers, to level the playing field between faith-based
    organizations, voluntary groups, and government agencies,
    paying attention along the way to the separation of church and
    state, but what can government do to simply level that playing
    field to engage those organizations more?
        The efforts that are being made to create Federal programs
    for volunteering I realize are sometimes controversial, to the
    extent that public dollars are used, to create, in effect, paid
    volunteers. My attitude is that it reflects an important
    experiment, the Senior Corps now and so forth, that reflect an
    important experiment. There may be certain individuals in
    retirement who respond more to those types of incentivized
    programs for volunteering, so I see no harm in the Federal
    Government trying to experiment with the impact of those.
        But in essence, I think the bottom line is the best thing
    the government can do is simply not to do anything that would
    constrain the health or growth of that sector.
        The Chairman. If you will, I am not coining a phrase; I am
    reusing one that has gained attention over the last few months,
    Old Europe versus New Europe. I have watched and understood
    that countries emerging out from behind the Iron Curtain and
    reentering a market economy and a more democratic or
    representative process recognized in some instances that they
    could not get it all done through government, that they had to
    work to stimulate a voluntary sector back into their economy.
        Is there a difference today between a Poland or a
    Czechoslovakia and let us say a France or Belgium as it relates
    to volunteerism and a greater support, or is this just a
    European phenomenon of the little garden in the back yard and I
    think you said checking off the countries?
        Dr. Geipel. No, I think there are some differences. It is
    interesting to me to refer back to Chairman Greenspan's comment
    that in earlier times, the shortage of labor in the United
    States spurred us to look elsewhere, toward technological
    innovation. I would argue that the absence of the alternative
    of big government in some of the emerging post-Communist
    nations has caused more attention to be paid to private
    alternatives, philanthropic alternatives. The community
    foundation movement, for example, which has been thriving in
    the United States, is further along in some parts of Central
    and Eastern Europe than it is in the West. That is an
    indication.
        I also think that we should not overlook the role of the
    church, of various churches of all faiths. Poland is an obvious
    example, a more religious society, religious in the sense of
    active participation and practice, not identification in the
    secular sense but active involvement, Poland clearly and other
    parts of Eastern Europe, as well, that is more of a role. I
    think that again leads people to find opportunities through the
    church that perhaps they are not finding in places such as
    Germany and France.
        The Chairman. Gentlemen, I wish I had more time. I have
    more questions but I am out of time and I suspect probably you
    are, too.
        So we thank you very much for coming, being with us today
    and helping us build this record. We will continue to work on
    this issue. We think it is extremely valuable that collectively
    I and my colleagues know more about and look at what we do here
    policy-wise through some of these glasses of understanding. I
    think it will be helpful in the long term. Obviously in the
    next decade we have some very critical policy choices to make
    here that have long-term impact and I think you reflected on
    those today.
        So thank you very much and the committee will stand
    adjourned.
        [Whereupon, at 11:51 a.m., the committee was adjourned.]
                                A P P E N D I X

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