[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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