 Good afternoon. I am going to encourage all of those in the back of the room, if you want to come up and take a chair further towards the front, this is a long room. Don't hesitate to move forward here while I make a few introductory comments. I'm delighted to welcome all of you here today. I'm Rebecca Blank. I'm Dean of the Gerald R. Ford School of Public Policy. The Ford School and the National Poverty Center, which resides in the Ford School, are today together cosponsoring the discussion of one of the most important issues of the day, social security reform. Recently someone asked me if I thought that the Gulf Coast Hurricanes had pushed social security reform off the table, and my reply was absolutely not, though they may have delayed it a little. While the subject may have temporarily receded from center stage, the social security debate is not going away. Social security affects the health and the welfare of large numbers of Americans. The financial challenges to this program, particularly in the face of an aging baby boom, will need to be solved. We're fortunate to have with us today four people who are absolute experts on this topic who can discuss the issues raised in the debate over how we should proceed with reform. I know each of them personally, and I can assure you this is going to be an interesting and a very valuable discussion. I also know there's a little bit of disagreement among this group about what the appropriate next steps on social security reform should be, and I hope that we can have a good discussion about those different viewpoints. Before I get into the introduction of our keynote speaker, let me just tell you a little bit about the panelists who are going to follow. Our panel discussion, I'm assuming, is going to start around 3.25 or so. We're going to have a keynote speech, take a very short break, and then come back together again for the panel. So I want to give you just a little information about today's panelists to whet your appetite to stay for that part of the program. Let me start with Dr. Henry Aaron. Henry, stand up so they know you're here. He is a senior fellow, and the Bruce and Virginia McClurry senior fellow at the Brookings Institute. He's also chair of the board of directors of the National Academy of Social Insurance. He has long been active in writing about and working on the politics of social security reform, not just during this last round of reform, but through a number of rounds of reform in the past. Thank you for coming to Ann Arbor today, Hank, and I know that one of the reasons for your presence here today is your professional affiliation and long friendship with Ned, and we're delighted to have you. Professor Olivia Mitchell is the director, and Olivia, stand up too, is the director of the Bettner Center for Pension and Retirement Research at the Wharton School, University of Pennsylvania, where she is a professor of insurance and risk management and business and public policy. As a member of President Bush's commission for strengthening social security, Olivia's had an opportunity to lend her expertise to those who are leading the privatization debate on the bill. And Professor Bob Willis is here on the corner, is here at the University of Michigan where he's professor of economics. Most importantly for our panel today, Bob directs the Health and Retirement Study, the primary survey available on retirement behavior and well-being within the older population, and also directs the study of asset and health dynamics among the oldest old, known as ahead. Charing our panel is Darren Lobotsky. Darren is a visiting professor in economics from the University of Illinois, and I wanna make sure you know sort of how great the expertise is in that panel so you'll all be here when we start that off after our keynote address. I'm now honored to introduce to you our keynote speaker, Dr. Edward Gramlich. Ned Gramlich is a long-term professor of economics and public policy at the University of Michigan. He chaired the Quadrennial Advisory Council on Social Security in the mid-1990s and took leave from the University of Michigan soon afterwards to serve from 1997 to 2005 as a member of the Federal Reserve Board of Governors. Ned returned to the university just this past month as the Richard A. Musgrave Professor at the Gerald R. Ford School of Public Policy. We were on planning at one point that he was gonna be teaching in the Ford School, but the university needed him for more important things and he's currently serving as the interim provost. We planned this symposium not just as an important vehicle to continue the public discussion that surrounds Social Security reform, but as a way to celebrate Ned's return to the University of Michigan and to the Ford School. I'm very happy to welcome Ned back to the university. As many of you know, Ned was the founding dean of the Ford School and I've deeply valued the foundations that he built through his leadership at the school. I've always considered a real honor to follow Ned Gramlich at the Ford School. It's just great to having back on campus and I very much hope he'll be back at the Ford School next fall as a teacher and a colleague, given he wasn't there this fall. I'm delighted to ask Ned at this point to come to the podium and to deliver his keynote address. One more look at Social Security. Thank you very much, Becky. It's great to be back and I must say Becky has done so much with the school that I left her, that I'm glad I preceded her and didn't have to follow her. She would be a very tough act to follow and I'm glad I didn't have to. Social Security was earlier part of my life. I got heavily into it about 10 years ago. I was chair of the, at the time, called the Advisory Council on Social Security Reform in the Clinton administration. We came out with a report. We were fractured. We had a right wing report, a left wing report and a sensible middle ground report. And that was mine. That was basically my plan. I got all of two out of 13 votes for my plan but I'm still on the stump a little bit though. Today, I'm going to try to broaden the appeal and not talk about a particular plan but just a general approach. Let me start with some good news. We're gonna talk a lot today about what is going to look like a very, very difficult problem. Indeed, is a very, very difficult problem of providing the financing of Social Security Reform in the coming century. But, and one can get very discouraged in going through that. A lot of us have been doing that for years and years but it's, I think, helpful to step back and recognize that the reason that, or one reason that the financial problems for Social Security look so serious is actually some good news. And there are two pieces of good news. One is that both in the United States and around the world, birth rates have dropped pretty sharply and are now in the United States, they're roughly at the level that would equalize they're maintaining a constant population over time and many other countries, they're actually well below that. And the consequence is that when many of us up here today were much younger, you were looking at indefinitely rising world population. Now we're really looking at a stable world population, just a little bit above its present levels. And that's probably a good thing given the world stock of resources. The second point, obviously, is that people are living longer and it doesn't take a whole lot of imagination to think about the alternative to that. And so there is some good news but that leads to an implication which is that as a result of these trends and birth rates and death rates that populations are aging, they are moving to a level with a much higher share of old people in retirement years and implicit in that is high entitlement spending burdens. So how bad is it? And I've taken these charts from the recent report of the Social Security and Medicare trustees. If you can squint and see this, oh, previous one, please. No, the chart, there we are. So the blue line is what Social Security calls the income rate, that's really the tax rate. This is always a percent of payroll. The top red and blue pair are for Social Security. That's OASDI, that's Old Age Survivors and Disability Insurance Program. The blue line is set at slightly above 12.4% of payroll and the red line is the cost of the benefits that are implicit in forecasts that we make for the future of Social Security. And you can see that right now where the horizontal line is there, 2005, the blue line's ahead of the red line, that is the Social Security Trust Fund actually has a slight surplus. But because of the birth and death trends that I mentioned, we're looking at a quick change in that. Pretty soon, Social Security is going to be running large cash deficits. The bottom pair, I want to bring in health insurance a little bit today. And the bottom pair of red and blue lines is the similar kind of calculation for part A of Medicare which covers hospitalization insurance. You can see that the tax rate is less, but actually the trend situation is worse. That is, the Medicare expenditures are rising more rapidly compared to the payroll tax inflow. So now in terms of numbers, the top row is for OASDI and a convenient way to do this, there are lots of ways to measure Social Security but what I'm gonna do is take the infinite horizon that is the forecast from now as far as we can see appropriately discounted. And the number in the left corner of the table is that says that if we had immediate increase in the payroll tax rate, 3.5%, we would balance Social Security now and forever more. On the right side, there's another way to put this and this is the share of discounted GDP over that whole horizon, that's 1.2% of discounted GDP and that's according to the trustees, the situation for Social Security. Medicare part A, the trust fund finance part is the next line down. The payroll tax necessary now to balance the system is much higher than for Social Security 5.8% and the share of GDP is also double that for Social Security 2.5%. But that's only part A of Medicare which involves hospitalization insurance. There is also part B which involves doctors and part D the new drug benefit and these are not payroll tax finance so you can't even compute the payroll tax deficit but what you can do is compute the present discounted value of the gross expenditures, future expenditures for these plans less the 1.3% of GDP that we now spend on these plans and see what that amounts to and it's 4.8%. Now if you sum the two on the GDP side, if you sum the two Medicare programs, you get more than 7% of GDP which is seven times the Social Security liability. So in some sense, the Medicare problem is seven times as bad as Social Security. Social Security as you can see will be bad enough to deal with or hard enough to deal with. The Medicare problem is almost unimaginable from a fiscal point of view. I raise Medicare not because I'm an expert in it, I'm not. I know very little about it but one thing that I am gonna argue is we should worry about the whole scene here and if we talk about Social Security reform we at least ought to do things that are roughly consistent with the types of things we know or suspect we're probably gonna have to do with Medicare. Okay, so the implications of all this, we are talking about huge deficits for entitlement spending. We can talk if you want about marginal changes in this, that and the other thing but in general they're not gonna do the job and we're talking about pretty big changes and we might as well simply recognize that. Between the two of them, Social Security is far the lesser problem. The third point I just mentioned, whatever we do for Social Security it would make sense to have roughly consistent with what we do with Medicare. So what can we do about all this? Well, they're basically five things. We could change taxes, raise payroll taxes or raise other taxes. I'm gonna, by the way, stick to payroll taxes. We've always financed Social Security and Medicare that way. We could start using other taxes but in terms of the burden on society the change is gonna be roughly the same. So I mean you could get into a discussion of different types of taxes but that's not what I'm gonna focus on today. The second thing is we could cut benefit levels. Third thing is we could have people work longer careers before they start receiving benefits. The fourth thing is we could have people save more to supplement Social Security and the fifth thing is we could permit people to invest funds differently and perhaps get a higher rate of return though I emphasize perhaps. I'm gonna say a word about each of these five and just to anticipate where I'm going I'm gonna argue that we'll probably need at least some of each one of those to make this problem work. It's that big. Raising taxes until now has been far away the dominant approach. Social Security's been around for 70 years and the benefit levels have advanced steadily up as have tax rates as have the size of taxable payroll taxable income. The usual approach is that we go ahead, we do some things. Social Security has some financial difficulties and we raise payroll taxes. We probably have to stop that at some point. I mean we could keep on doing it but there isn't any natural limit to this process especially on the Medicare side and so at some point we probably have to think about changing something or other on the benefit side. It's not to say we can't have any more tax increases. I'm not that much of a supply sider but at some point we probably have to get to a little more balanced approach in dealing with the problem. One thing that I think should be recognized is that the problem in the financial problem in Social Security's often a sign or kind of identified by the drop dead date, when does the trust fund actually run out of assets and that's usually a number, something like 40 years into the future and in a political sense, when do we have to act? Well, in some sense you don't really have to act for another 40 years or so. If we wait and wait till we really confront imminent financial difficulties with either Social Security or Medicare, it seems to me that it kind of pushes you in the direction of making changes on the tax side as opposed to the benefit side because it's very hard to cut benefits in the short run. I think some of my panel members are gonna argue that it's not impossible and indeed it's not impossible and they are doing it in other countries but I think it's difficult and we haven't done much of that in this country and so I think in general, if we wait before we act, you're kind of pushing the balance on adjusting on the tax side. There is one issue that I think is worth considering Social Security now taxes all payrolls at the rate of 12.4% combined employer employee up to about 90,000 of income and one of the things that's happened in the past several years is that a lot more wage income has come in above the taxable maximum rate and below and so we're actually taxing less wage income for Social Security than we have been earlier and some people have argued, well, let's take up and capture the same share of wage income. One thing I would point out is that for Medicare, we tax all payrolls, there is no taxable maximum and I would personally argue that the problems that we're facing are significant enough that we might even think of just getting rid of the maximum altogether. You might wanna do it in phases and just to kind of spread out the burden but I think the taxable maximum is something that in 10 years or so may be gone, who knows? Okay, that's the tax side. We could also cut benefits. As I say, it's difficult to do in the short run because people have worked, you're getting up to age 58 or something, you're making retirement plans and then the government comes along and cuts Social Security benefits. It's difficult if you've already retired, it's difficult if you're near retirement and we've typically shied away from that politically. We might have to rethink that. There might be ways to do it, at least somewhat, we do have a huge problem in front of us. One way to do it, it's very popular on talk shows is by what is known as means testing and what means testing means is you take people with means in their retirement years, Ross Perot, think of, Bill Gates, whatever and they've got a lot of money so we won't give them Social Security and that's a very appealing program for talk shows but it actually isn't that appealing if you think about it because what that implies is that you would be reducing the Social Security benefits of people who, number one, have worked into retirement, number two, have saved a lot and I'm gonna argue that we actually wanna encourage both of those kinds of behaviors and we don't wanna put in a formal program that has a disincentive to do that. So I don't think means testing, means testing has never been very popular with the experts on Social Security, certainly not with me. Now the council that Olivia Mitchell who we'll talk to you later was on, came up with something known as price indexing of benefits, a few months ago I think most people would know immediately what that is, that's kind of dropped out of the lexicon and it's a little complicated but let me just try to make it fairly simple. Social Security does something known as wage indexing of benefits. They bring benefits up with average wage levels. What that means is that you can focus on a concept called replacement rates which is the first year benefit of the average worker compared to the last year wage of that average worker and that replacement rate is right now about 42% and it has actually been that for two decades or so since the wage indexing system was put in. If you went to price indexing of benefits what would happen is that the benefits would not go up so much because prices go up less than wages in general and these replacement rates would gradually trend down. How far would they trend down? Well if you did price indexing forever they would actually trend down to zero. I mean so if you go to price indexing for a very long period of time it's probably not viable. You're just having the retirees fall too far behind workers. The council that recommended this came up with something called progressive indexing where you do price indexing for the top I don't know two thirds or so of the income distribution and you wage index at the bottom. What that means is that all benefits would gravitate toward this bottom rate and I would again say that that's probably not viable in the long run that all people would get in effect the same amount from social security. So I don't think I wouldn't personally be very enthusiastic about either of those for the long run but we might do it for a while. There is a historical when the wage indexing was put in there was a little bit of a political issue at the time. The social security had been over indexed for inflation. There were a lot of people very upset about the change in the indexing procedure. This went to what has been known as the notch baby problem. It was a huge political issue and the rate at which the wage indexing was set may have been a little higher than it had to be and it would certainly be possible to put these indexing schemes in for a while let benefits slip back some. And then but I think at that point we would have to return to something like what we have now but anyways that is something that I wouldn't I would argue a strain you'll see we shouldn't do that either of these indexing scheme for a long time but we might do it for a short time. One thing I do think more favorably about is having people work longer careers. I did this calculation for my grandparents and my grandchildren and basically somebody in my grandparents generation if they were lucky enough to make it to age 65 they could expect to live another 10 years or so and collect benefits. Somebody in my grandchildren's generation separated by four generations they could expect to live about 22, 23 years. And so in some sense younger people get more than twice as much out of the system as older people as an intergenerational equity measure that's probably not fair in some sense. I mean it's very difficult to make these calculations because there are lots of changes among the generations. But I do think that if one social security was first designed if we had known that people would be living so long we probably would have built in some sort of automatic rise in the retirement age and I have a different paper where I try to compute what that ought to be looking at both life expectancies and health status and other things. And my preferred notion would be to raise the retirement age something like 15 months every decade. So those of us up here on the panel we're in close to retirement years already. So our age is 67. Those of you who are 50, your age would be 68. Those of you who are 40, your age would be 69. It would work like that. Not a huge change. It would save quite a bit of money over time and I think it would step us in the direction of better fairness across generations. An argument against this is called the coal miner argument that people work arduous careers and they can't work this long before collecting benefits. Well, we don't have zero coal miners these days but you'd be surprised at how small the incidents of physically arduous careers are. The Labor Department computes these numbers and I show them in the paper and by the time we would get around to doing this we're talking about three or 4% of the workforce. I mean it really isn't that big of an issue. I'm running out of time so I'm gonna move ahead here. Next issue is could we have people save more? Americans don't save that much. The overall personal saving rate seems to be stuck at zero. Some of my old former colleagues at the board think once we get out of the housing refinance binge, saving rates will move up again. I am unpersuaded about that. For roughly half the population, Social Security comprises close to 90% of retiree living support. When we did the Council 10 years ago, I tried to address this by suggesting mandatory add-on small saving accounts, 2% of payroll. The idea was that if you out there were already saving, that's great, my congratulations and you could reduce your other saving by the 2% of payroll. If you're already doing the right thing then it shouldn't affect you. But two thirds of you probably are not saving enough or maybe saving zero and you'd have to save more. So I thought it was nicely designed to deal with that. It wasn't a political favorite, it never will be. And so we may, I mean I could still talk about it but it's kind of a waste of time so I won't. The President has proposed a different kind of individual account, what is known as a carve-out account where you carve it out of the regular payroll tax that people pay. And I think that that is likely to reduce national saving and my reasoning for that is that right now all of you are thinking about retirement saving to the extent you are thinking about retirement saving. Social security is there, you probably don't take it into account much and you save what you save. If you replaced your payroll tax with an individual account, started getting statements, you'd probably see these statements and wow I'm really building up money in my accounts and my guess is you'd be reducing your other saving. And so I think a carve-out account is liable to go the wrong way in that sense. A lot of people have talked about tax subsidies for saving and nothing theoretically wrong with that but what I think has been the dominant experience is that people have had these tax incentives, they have not increased their saving, they have converted their existing wealth to tax preferred form, the government loses money and they don't save anymore and national saving goes down. And so I'm not so high on that one either. The only thing that I think might work in this area is that for people working in corporations with defined contribution plans called 401k plans, right now you have the opt in option. You go to work, you wanna be part of our defined contribution plan, yes or no, if you say yes you're in. So what about if we reversed it and made it opt out that you're automatically enrolled at a certain percent of your salary and your money is invested saying bonds and you can take steps to opt out. They've actually done experiments with this and that has raised a saving rate. So that might be something we can get away with. We probably won't get away with that on accounts. The next one and this is a hugely complicated issue. I don't have much time so I'll try to go through it pretty quickly is permit people to invest their funds differently and get a higher rate of return. Basically it's impossible and let me quickly go through the argument. First off is the first bullet point suggests the pure pays you go pension plan has a rate of return equal to the equilibrium growth of real earnings which is roughly 3% or so. This has been as the proposition of Paul Samuelson something like 50 years ago. We do have legacy costs with social security that is we paid out full benefits before people had worked full careers and so that actually sits there as a little bit of a tax on everybody who's come later. There's also redistribution in social security so high income people get somewhat lower returns than this average and so that reduces the return for social security by something below the 3%. These carve out individual accounts I mentioned. The basic macroeconomic proposition is if you haven't changed the stock of capital you can't change the overall return on that capital and if you haven't raised national saving you can't change the overall stock of capital and so if you haven't raised national saving you're probably not going to raise the overall return and carve out individual accounts as I just argued I don't think would raise national saving. Add-on individual accounts could but probably not hugely there are economic reasons why the marginal return may be slightly greater than the average. It's been suggested we let people invest in stocks instead of bonds right now implicitly. I mean you know change the investment portfolio. If you believe in the usual postulate of capital markets looking ahead the risk adjusted rate of returns on stocks and bonds ought to be the same. If it weren't the same we would reallocate portfolios. So I don't think there is much here. This is a complicated issue. One that is debated I think it's largely the debate is largely misplaced. The one thing I would say about this is there is risk if we start letting people invest there is risk and one of the things that we are observing now is the demise of the corporate defined benefit system. We have permitted corporations to improperly fund their defined benefit systems. A lot of them are closing down and in the end the only defined benefit system we may have the only viable defined benefit system we may have in this country is social security. Defined contribution system where you invest your own money are great but they do entail individuals taking all the investment risk. Defined benefit the sponsor of the plan takes the investment risk and so given that the corporate defined benefit system is disappearing I think we should ask ourselves do we wanna have individuals take a huge amount of additional or even a little additional investment risk on their social security. I would say no I think it's a good balance to have a government defined benefit system to backstop people. So let me quickly summarize the even though I started you off with good news people living longer et cetera we've got a very significant financial problem here in terms of percent of payroll just for part A of Medicare and social security it adds to a little more than 10% of payroll is that right? Did I do the numbers right? No 9.3% of payroll and that's ignoring parts D and B and D of Medicare which are as you remember the first slide even bigger as a share of TDP. So we got a significant problem if we throw a lot of good stuff at it let's eliminate the taxable maximum let's change the retirement age and the way I said let's do progressive indexing for a while let's make some other changes. Any of those could probably get me assassinated if I were actually running for office but together they add to 4% of payroll less than half the way there and we're not even talking about the big problem. So while it's great that we're living longer we have in so doing put a significant financial burden on ourselves marginal changes won't do it. We've got very we've got to think about very big changes you may not like mine that's fine but we got to do something and the earlier we do it the better. Thank you very much. I mean we all want to hear what the panel has to say but if you want to get at me right away Becky's given a brief time to do that. Yeah, it's hard to hear. Yeah. You know percent of payroll but back in the dark ages that used to be calculated at 1% of payroll. Do you have any data on what that has cost us and would you include eliminating that in your proposed remedy of increasing the retirement age? I think the implication of that on the overall finances of the system was pretty close to zero actually. Yeah. Pardon? There is something called the delayed retirement credit and that you know you get an actual reduction in benefits of your entire early you get increase in actual increase in benefits of your entire late and the so-called social security earnings test I you know it would affect some people but it's just not significant as an overall factor. Yeah. Let me toss out of the table a couple of other alternatives or additional things. Hi Peter. Hi, good to see you. Welcome back. One would be the current plan to abolish the inheritance tax. If we instead took a liberalized inheritance tax generous exemptions and instead allocated that entire earmarked it legally for social security we could make a significant impact. I don't have the figures in front of me but it would solve a good 30% of the deficit or something over 75 years. Another one may be less important but I think fair is to require new hires at the state and local level all to participate in the system. In many cases there's a lot of free loading at the end because they retire and do second jobs and still get social security. And one you haven't talked about I think we have privately in the past is instead of letting individuals choose alternative investments have the system as a whole engage in alternative investments and personally I would say stocks and bonds, state and local government corporation, private hospital bonds, overseas stocks and bonds. I personally would say put all additions to the portfolio and those things not only to increase the rate of return but to avoid the tremendous disgorgement costs the impact that's gonna occur on the federal budget when all of a sudden instead of receiving a tremendous subsidy from social security it has to pay out hundreds of billions of dollars a year into the trust funds. You're dead right on state and local workers they ought to be part of the system I think every good government approach to social security has suggested that just for the reason you say. I don't think you get much from what is known as central fund equity investment or investment in hospital bonds the proposition of capital markets is that risk adjusted rates of return on all these assets ought to be the same. Now at an earlier session this year Professor or Dr. Aaron of the Brookings Institution that who you're about to hear from said well that's true for individual investments but if you have the central fund hold the equities they don't have to sell the equities at a particular time and maybe the rate of return would be higher. I actually it was an intriguing idea and I actually had our financial guys at the Fed work on that and they sent me a memo and basically that's trivial too. I mean you just can't get much I mean maybe their memo was wrong it got it got into some pretty dicey calculations but but you can't get much from in my view from central fund equity investment either. Tell me again what your first thing was. The inheritance tax I agree with you I would like to see the inheritance tax stay. I think it's removing it would be a mistake but I actually don't agree with saying well we got this nice tax idea let's go around and use that for social security and the reason I don't agree is that I think it sweeps the problem under the rug. We have a problem here we've got to confront it and just to say well we can use this other tax strikes me as irresponsible budgeting. We got a lot of things we got to do with our tax system and I think my view of this is we're living longer our birth rates have stabilized at an acceptable level. We ought to be able to figure out how to finance entitlement spending internally and not pick up a lot of other taxes to pay for it. However meritorious those other taxes are. Quick questions one is what happens to the OASDI deficit after the baby boomers die off? Keeps going up. It continues to go up. Yeah I mean we had that chart. You want to put the first chart up there it just keeps going up. It doesn't go up the same slope but it keeps going up. So okay so because we're still living longer. Okay the nice thing about central investment of the funds however. It's just going up. Is that it keeps the federal government from spending it. What the. The social security surplus because I mean the bigger problem right now is the fact that we're spending the surplus as opposed to. Yeah we right now there is a cash surplus for social security and the arguably right now what that's doing is reducing the deficit below what it would otherwise be and there's a raging empirical debate about does that lead for less responsible fiscal policy. Maybe it does but remember that pretty soon that social security surplus is going to be a deficit and whatever it does now presumably it oughta go the other way whenever the lines cross. So I think you could argue for taking social security out of the budget making the Congress balance the general budget. I've often made that argument in the past. That would might help an overall fiscal policy. It ain't gonna help much on the problem we're talking about today. My question is one of timing and urgency on the counterfactual of not moving for one reason or another the politics of that sort of thing. How long can one can we expect that sort of be somewhat comparable to this period of time versus the markets really starting to react to that enforcing some sorts of drastic adjustments? It's hard to know about markets. I mean I'm just coming back from the Fed and we're supposed to be quite expert in all that but the markets in their wisdom have known about large and outsized forecast deficits for a long time now and you'd think you'd see something in long-term interest rates, we don't. This is what Mr. Greenspan labeled the conundrum and he actually got a lot of financial traders to consult their dictionary I think for the first time ever and calling it that. We all now know what a conundrum is and long-term bond rates are a conundrum. Part of the reason for the so-called conundrum is that what's going on here, which I'll call undersaving, is probably exactly the reverse of what's going on in much of the rest of the world and global markets are, I mean markets are global now and so it could be that the very high saving of many other countries is keeping our interest rates from going up and it's, I guess it's hard for me to, whatever is going on, it's hard for me to see why anything, what new is added to all that. You know, we give this speech today and oh yeah these deficits are bad but people should have known that and already we have a conundrum so I wouldn't, in terms of kind of economic predictions from all this, I think that you'd be, well I wouldn't bet a lot of money that you're gonna see a rise in long-term interest rates and according to the economic textbooks you should but I wouldn't bet a lot of money on it. One more and we'll move to the panel. You don't even have to have that. Going, going, going, thank you very much. I'm gonna give us all a five minute stretch break while we set the panel up and we'll start five after three according to my watch. Here I'm ready to start up again. If there's anyone who's joined us, I welcome you all to our forum on Social Security Reform co-sponsored by the Gerald R. Ford School of Public Policy and the National Poverty Center which is located at the Ford School. Dr. Edward Gramlich has just given us a keynote speech and we're about to launch into a panel discussion with just a wonderful group of experts and I want to introduce Erin Lobotsky who is a visiting professor from the University of Illinois who has worked on a variety of related issues and is going to moderate the panel. Erin, thank you Dean Blank. I am Darren Lobotsky and I'm visiting the Ford School this year and I'm delighted to be part of this panel discussion. I'd like to start by thanking Dean Blank and the Ford School and the National Poverty Center for hosting this forum. I'd like to get started by reintroducing the panel members for those of you who may have just arrived. Bob Willis will start off. He is a professor at the University of Michigan Department of Economics, the Survey Research Center and the Population Studies Center. As Dean Blank mentioned earlier, he directs two of the largest and most important studies that we have on the health and labor market outcomes and financial conditions of the elderly and near-elderly in the United States namely the Health and Retirement Study and the Head Study. Dr. Willis has written widely on fertility, intergenerational transfers and the well-being of the elderly. Welcome Dr. Willis. I'm just going to introduce everybody first. I'm going to introduce everybody first. You'll be more welcome in a minute. Dr. Olivia Mitchell is the International Foundation of Employee Benefit Plans, Professor of Insurance and Risk Management and Business and Public Policy at the Wharton School at the University of Pennsylvania. She's also the Executive Director of the Pension Research Council and Director of the Botner Center for Pensions and Retirement Research. She was recently a member of President Bush's Commission for Strengthening Social Security. She's the co-author with Robert Clark of the forthcoming book, Reinventing the Retirement Paradigm. Welcome Dr. Mitchell. Finally, Henry Aaron is the Bruce and Virginia McLaury Chair and Senior Fellow at the Brookings Institution in Washington DC. He chaired the 1979 Advisory Council on Social Security and is a member of the Institute of Medicine, Chairman of the Board of Directors of the National Academy of Social Insurance and former Vice President of the American Economics Association. He is co-author with Robert Reichauer of the book Countdown to Reform, The Great Social Security Debate as well as the forthcoming book, Strengthening Medicare for the 21st Century. Welcome Dr. Aaron. I'm honored to be part of the program with these distinguished scholars. Each one is gonna talk to you for about 15 or 20 minutes and then we'll go through to the panel again for about three or four minutes and have them comment on each other's presentations. And then at the end, we'll open up the floor to questions. So Dr. Willis, please begin. Okay, thanks. I've actually been given a task to talk about kind of the demographic background to issues having to do with self security. And so I'm actually not going to be in any particular way taking a position on particular policies. I think that Olivia and Henry are going to be doing that. So I really want to kind of set the stage and maybe we could have the first thing. As it was mentioned, I'm heading the Health and Retirement Study which is a study of the entire US population, a representative study of the US population over the age of 50. And it's a very holistic study. And what I've given in this slide in the next is a set of issues that confront people who want to study aging in America and particularly aging in an aging society where individuals are aging, but the society as a whole has a change in the age distribution. And I'm gonna do that. So there's a changing demographic landscape that I'm gonna be talking about. There's a baby boom and the boomers are approaching retirement. There's a growth in longevity, as Ned mentioned. There's also been a divorce revolution in changes in family structure which really didn't come up in the earlier discussion. It's not gonna come up that much in my discussion but I think is a terribly important issue that we need to deal with. The position of women, the position of the relationships between generations are getting much more complicated than they've been in the past. And we're starting to see that in the early boomers who are now approaching retirement. There's a changing landscape of work in retirement. As has been mentioned, there's been a replacement of defined benefit pension plans by defined contribution plans to a large extent. There's been an increase in things like vehicles like 401ks. There's been a decrease in employer health insurance. There's been, and in general, there's been an increased scope for decision making by individuals concerning their retirement. There are more things that are determined by choices and decisions and fewer things that are being determined by formulas and laws. And this increase in complexity of decision making is I think an important thing that we need to be aware of in thinking about policies. Will people make wise decisions? There's also been changing epidemiological and healthcare trends. As Ned emphasized, there's a very rapidly rising expenditures on healthcare. And what makes this difficult is there's also been very rapidly rising improvements in the technology of health. A century ago doctors probably did more harm than good and maybe now they may be doing more good than harm. And so there are rapid changes there and so issues about how much we should spend on that is an issue that's not just a matter of fiscal policy, but it's a matter of what would be the appropriate allocation of resources to those issues. There are trends in obesity that are running against the general trend of better health and there is a growing risk of ending life with dementia. And the reason for that is that as we live longer and competing causes of death, like heart disease or cancer are dealt with, the risks of dementia, Alzheimer's disease and other forms of dementia really aren't foreseen to change. And that means that more people will be ending their life in that stage. And that has major cost implications, some of which are on the national budget, public budget, but many of which are in family budgets and not just money budgets, but also time budgets and emotional budgets. And we need to think about those too. Finally, there are issues of changing policies, debates on social security that we're talking about now, issues about Medicaid, which is a topic that hadn't really come up, there are issues about the Medicare prescription drug program tax reform. We've argued that the data that we're collecting is relevant to all of those things and I'm only gonna just touch the bare surface of remarks today on some of these things. Let me turn to the first thing I wanna talk about is the US situation, the demographic situation and let's have the first slide. This shows the baby boom and baby bust from the point of view of cohort fertility. The cohort fertility is a measure of the number of children that women actually bear. And so the horizontal axis is women who were born in 1910, for example, had under 2.4 children on average. A large part of the reason for that is a large number of those women were childless, which is this other red line here and you can see the scale for the childlessness is on the right and the scale for number of children per woman is on the left. And what you can see is that there was a baby boom that women after 1910 progressively had more children until the women who were born around the late 1930s and then there was a decline in fertility since then and you can see now that one of the recent trends is that the rate of childlessness is actually increasing once again and when you're thinking about intergenerational issues, being childless means that you do not have a next generation there and that raises a set of issues that need to be thought about. Let me go to the next slide. The implications of the baby boom and the baby bust are shown here and these are really, I think it's a very interesting chart that I found somebody created on, swiped it off the web, I've forgotten where I got it from, but it's a nice chart. And what it shows is the number of births in each year from 1910 to 2005. And what you can see is that the number of births was very small and it rose really dramatically between 1935 where it reached the bottom up to the top of the baby boom in 1965 which and then there was subsequent fallen fertility and there was a baby bust sitting there but then what you see over on the right hand side is not so well known as the sort of echo. Each woman was having fewer children but there were so many women who were produced by the boomers that they're starting to produce children and indeed a lot of the things that will distinguish the United States from other societies in terms of its age structure is really because of this echo boom or at least in good part. Let's go to the next slide. So this just gives you a sort of way in which the boomers traveled through the U.S. age distribution. If you look up in the upper left hand corner we've got these age pyramids. As you'll see the term pyramid is gonna be something that's gonna go out of fashion. It's gonna turn out to be the age top or whatever something is that stands on a pointed end. But we still have a pyramid there in 1975 and the boomers initially congested the schools when they were 10 to 25 and then in pictures not showing they entered the labor market in very large numbers and then by 2010 they became age 45 to 64 and we're sort of sitting just before 2010, five years before that and the boomers are really approaching retirement and that's what's causing lots of discussion because if you remember the last chart the people who were down at the bottom of the numbers of births were people who were like 65 to 70 now. People were in 1930 to 40. The people who are at the top of the chart very numerous are these boomers and that's what's gonna change the age distribution and here in 2030 and 2050 you can see how they work their way through the age distribution somebody saying like a rat through an anaconda. So now let's move to the next chart. I wanna put the US into a global context. I think Ned alluded to this but I wanna make it a little more explicit than he did. There's been rapid population aging throughout the world and it's been a consequence really of fertility decline and increasing longevity and I'm gonna talk about both of those and the US is experiencing less rapid aging than most other societies. So we're in a less in some sense rapidly changing and desperate situation in some other countries. We have the next chart. So here's a set of the countries that in the proportion of the population over 65 where the top 20 is given and then the United States is down at the bottom it's not even close to the top 20 and you can see the champions of the aging societies are places like Italy is number one. Japan is way up there. You probably knew about both of them. Greece is kind of a little bit of a surprise up there. Germany, Spain, Sweden and so on. So many countries have a much higher proportion of aged population than we do 20% compared to say 12%. Next slide. Well the major reason for this is this worldwide fertility decline and I've just put up I'm not gonna spend very much time on this chart but it's just to show you a sampling of different countries that have had fertility declines. The United Kingdom and France and Finland and Denmark you can see up there many people think of the Scandinavians as low fertility countries but they're not anymore. If you look down in the lower left can corner Spain and Italy and Greece you can see they went from being very high fertility countries to being extremely low fertility countries and Italy now has on average one child per woman. Well if you think about that that's half of a replacement which would mean that in steady and long run equilibrium the Italian population size would fall by half every generation. So if there are 50 million or 70 million I suppose now it would go to 35 million and 25 years and half of that in 50 years and so forth. I once told an Italian that I wanted to meet him because I wanted to be there while there were still Italians on the face of the planet they're going extinct and he said yes we're like pandas we're an endangered species. You can see Eastern Europe I'm gonna come back to the US, Australia and then China and Taiwan. During this last decade the US is the only industrialized country that with fertility above replacement it might have dropped below replacement I think in 2003. And the other place I want you to look because this is really important for the rest of the century is are these countries in the Asia. Here you have China, Taiwan and Hong Kong. Look at China they went from seven births per woman in 1965 down to well below two births per woman. This is an extraordinarily rapid change in fertility unprecedented in human history and will cause unprecedented rapidity in the change of age distributions let's go on. This is some age pyramids just to give you a comparison between the United States and Italy and you can see in the US case that we already went through that the US age distribution changes but it remains even in 2050 it remains a kind of pyramid not a sharp pyramid but sort of pyramidal and it also the size of the population remains the same. If you look over in Italy you see this very rapid progression of population that's aging and you can see an actual inversion of the age pyramid over here so that a very small number of young people a very large number of old people this is gonna be an old society you also see the whole area of these charts declining from top to bottom which is my asymptotically disappearing Italian population. Next chart here is a case I just came back from Korea a couple weeks ago and became really quite fascinated by them. They claim now to be the most rapidly aging country in the world. Korea had its fertility fall from there you can see around four I guess about I can't read the scale quite but probably about 4.6 or so children per woman in 1970 to 1.16 children in 2005 they claim that's the lowest fertility on earth although Hong Kong and parts of Italy are probably close competitors that because of that change their population, no please go back because of that change their population is gonna be aging extremely rapidly and they have no pension plans no employer pension plans they have no social security system they have a fairly rudimentary healthcare system so you might think that they could start things from scratch that they don't have all of these legacy costs that Ned remembered but that's actually not true the Asian societies are famous for having the young people tend to help the old people in old age their old age support well now the young people are not having any children of their own they know they have to save for their old age what do they do about the old people well that's a legacy cost it's not on the public books but it's in the social books and they really need to consider that let's go on I wanna go to mortality and mortality decline very quickly and let me get one here's the U.S. growth in age in length of life for women it went from from 60 to 75 and for men or for men it went from 60 to 75 for women another 10 years or five years on each side let's go to the next one this is a really quite remarkable graph this is from a paper in Science Magazine by James Fulpell and Jim Open and it shows that there's been a gain in the world length of life 40 years over 160 years and if you measure the possible length of life by what's the expectation of life in the country that has currently the highest level of longevity it's been a straight line if that straight line were to continue that straight line has been one fourth of a year of extra length of life every year if that were to continue the next 50 years that would raise female life expectancy from 80 to 95 it's this very unexpected relationship you can see the U.S. used to be a champion but it's sort of fallen off you can see Japan is the current champion and who knows who's gonna be the future champion this aging is much more rapid than is projected by the actuaries office so that's another fundamental thing about these demographic things the charts that you've seen about the future make you believe that the future's certain that's just ain't true there's a lot of uncertainty about mortality there's a lot of uncertainty about fertility and there's even more uncertainty about income and productivity growth let's go on to the next slide most of these years of life that are gained will be at old ages, ages after 65 I'm gonna speed up here and this is sort of a chart that shows this increasing probability of dementia at later ages and this is from the health and retirement study that prior chart was as well that shows sort of what's the implication for informal caregivers who are largely family members is that a person who's severely demented becomes really a full time, a 40 hour a week job that's not on our national income accounts and it's not in our fiscal accounts but it may be trend but if you now think about the increasing number of people who are childless or the people who have divorces and so forth those numbers could end up in our books so what's the problem? Well I wanna just underline really what Ned talked about that in general trends in fertility and mortality are potentially well for enhancing it the macroeconomic level they would permit higher capital labor ratios in long run equilibrium growth they're higher levels of human capital per worker they're higher levels of per capita income at the family level parents are freely choosing fewer children China aside where there's been the one child policy that's covered part of China there's investing more in each child's education and health in Korea for example current levels of education in Korea are at or above US levels whereas 30 years ago they were at the grade school level so there's just been enormous investment by generations in their children the higher lifetime incomes of successive generations again in some of the Asian countries that could be by an order of magnitude higher there's a longer length of life so what's the problem? Well the changing age structure is a challenge because aged individuals face decreasing health and productivity there's great individual uncertainty at the individual level in their diminished capacity to respond to older ages the intergenerational transfers and how can we deal with those? Well there are kind of two types of social institutions one is one set of institutions deals with intergenerational transfers the family and the state and as I mentioned the legacy costs can create difficulty in making transitions from say the state to the market but also from the family to the market market alternatives includes private savings private insurance and annuities life cycle labor supply go ahead this is kind of the age sensitivity of these things this is a plot due to Ron Lee of essentially government benefits received by age and you can see that the benefits at the end of life dwarf the benefits at the beginning of life and here's a chart of the age distribution of taxes and they're more centered in life and here you can see what I think is a terribly important thing to bear in mind this is an overall scheme that Ron Lee has developed which does the magnitude and direction of intergenerational transfers for both within families privately and publicly and you can see that the private sector the transfers are always from the older almost always from the older generation to the younger generation that's child rearing that's education of children that's bequests and transfer gifts and transfers the public sector has basically taken over from the family what was done in say Korea and the past or other countries where the old age part was where the family business is now a public business with the small exception of support for education and that's where the age distribution issues come in those transfers from young to old are easy when they're a lot of young and not many old and hard otherwise work in retirement, there's been I think a reversal I'm not gonna run out of time so let me just go through the pictures here so this is what is the original HRS cohort that's been followed from the time there 51 to 61 in 1992 until I think this picture was drawn based on 2002 data and it's sort of a picture that shows the blue line and the red line indicate the proportion retired and the green dotted line shows what's technically known as the hazard of retirement or the likelihood that people leave you can see a spike at 62 about half of people are retired by age 62 Ned mentioned what about working longer why don't we go ahead well in 2004 the HRS introduced the baby boomers or approaching these are people who were born 1948 to 53 so they participated in the baby boom they're gonna be in their 60s around 2010 when we saw that big bulge before they were asked how likely it is that they were to work full time after age 65 and you could see a really substantial increase between both men and women in that fraction so it does look like the long-term decline in labor force participation may be reversing itself and so we have a set of problems we need to deal with the family structure we need to deal with the wage structure growing more unequal there's a lot of inequality that's masked by the averages that I've been showing there's an open question where the healthy years of life will grow a pace with years of life and let me conclude with this we hope that we do better than she did our next speaker is Dr. Olivia Mitchell since I'm short I was gonna try to use this microphone I find I tend to disappear behind these podium so thank you very much to Dean Blank and all her colleagues at the Ford School it's a great pleasure to be back here in Ann Arbor and especially in honor of Ned Gramlich I've worked with him numerous times over the years and he has many many talents many of whom which you saw this afternoon I find him to be a great intellect a wonderful diplomat and a super leader and so it's a privilege to be here to participate in this session I have to applaud Michigan for bringing him back home I'm not sure whether I should offer him congratulations or condolences on becoming acting provost on the other hand speaking as an economist of course economics is called the dismal science and he may have more fun in his administrative capacity than being an economist after we go through more of this discussion today it will become even more obvious at any rate let me just reiterate some of the themes maybe cast them in somewhat different terms next slide please as many people are fond of saying in the US retirement security really relies on what we call the three-legged stool we don't rely completely on government we rely on multiple different pillars of support in retirement so we have the private component Bob has just told us about people working longer private saving and so on we have employment-based pensions which are not in great shape at the moment perhaps we can come back to that later but our focus today is social security one thing I would note is when I talk in Europe they say to me oh no you have the wrong image it's not a three-legged stool it's like a cappuccino in Europe they have the model that the liquid part the coffee and the milk together that's government the foam on top of the cappuccino that's the pension and the sprinkled cinnamon or chocolate or whatever you have on the cappuccino that's private saving so the relative roles of these obviously vary a lot across country across culture, across civilization so just to re-emphasize the importance of some of the work being done here at the University of Michigan we have a survey that's known as the health and retirement study if there's students in the audience that are interested in research projects this is a gold mine it's a wonderful, wonderful survey this happens to represent by-wealth-ventile that is the poorest folks on the left the richest folks on the right the proportion of their wealth as surveyed on the verge of retirement so what we see is the poorest folks they're in trouble they basically only have social security to retire on and then they're in debt that's why things look bad for them at the right-hand side you see people who have substantial personal wealth maybe some of them are business owners they're not really the case that we're worried about but what you see is the relative importance of social security is very strong for the bottom let's say third of the wealth distribution even right in the middle the median-ventile two-fifths of their wealth looking into retirement and social security about one-fifth is their home equity one-fifth is private saving and one-fifth is their pension so we have a little bit of a balance better in this country than in many countries but obviously social security is still a very important component you've seen this graph before let me just bring it home to you again with the fact that social security faces looming shortfalls what we see first off is the near-term problem and I take a little bit of an issue with Ned's point that well we don't really have to worry for 40 years first of all 40 years comes a lot quicker than you think the second point is that we do have to worry much sooner than that we should start worrying now because within about 13 years give or take a little bit the surplus of social security will be gone that is there will no longer be enough payroll tax taken in to pay promised benefits now you can say well that's no problem because we have this file cabinet in West Virginia with approximately 1.7 trillion dollars of IOUs which represent the trust fund and that's true this file cabinet exists I have pictures of it in my office I will share them with you if you wish but the fact is there's no money behind those promises the federal government has said it will come up with the money but there's no dedicated source of revenue to pay those benefits within approximately 13 years so I believe the problem is a near term problem the commission that I served on said really we shouldn't be thinking about 40 years the crunch will start to come now and in 2042 that's when the social security trust fund drawers are empty and I suspect many of the people in this room will still be here at that time point the only options at that point if there's no reform are either to reduce benefits and just click one more time or raise taxes the other point I would make to you is that this long term unfunded liability is of substantial magnitude Ned showed you some numbers just to put it in concrete terms if you compute in today's dollars what the present value of the unfunded liability is it's about 11 trillion dollars anybody know the size of the US GDP? about 11 trillion dollars so if you took the whole value of what we produce that would be enough with nothing much left over to finance unfunded liability that gives you a relative sense to put it differently not that we would do this but if you were to ask every worker to cough up enough money to finance the system set it straight and go forward the amount of money every worker would have to contribute would be on the order of $78,000 per person that just solves the old problems and then we have to save for our own retirement going forward how many people have $78,000 sitting around needing needing to be given to the government to finance social security it's a big and daunting task what do we do about the present value of this shortfall? I believe it's massive political risk a lot of people say oh the social security system represents safety individual investments represent risk wrong and there's an old Chinese proverb that says the couple that goes to bed early to save on candles wakes up with twins what's the point? there's risk in everything there is nothing like safety what are your choices? if you do nothing the benefits will be reduced by about a third when the money runs out personally I don't want to be 82 years old or 84 years old and be told oh by the way your benefits are going to be cut by a third we have to fix it now you could raise taxes that would require a hike in payroll taxes by 50 to 80% depending on when you do it and another sort of comment I would make about one of Ned's proposals is even if you uncapped the social security wage base and subjected all of social secure all of earnings to social security taxes that would only push forward the date of insolvency by six years it sounds big it is small compared to the size of the problem this means social security is very risky and every year we wait it gets worse so how do we get into this math? part of it is simple math as both Bob and Ned have pointed out we used to have a lot of workers and a few retirees now we have a few workers and a lot of retirees there are other reasons and I think we should mention them it's just not the baby boomer's fault I think we have to understand that it's the fact that people have retired earlier so we're supporting them longer people are living longer and I think the risk is of course they're gonna live a lot longer higher benefits per retiree benefits have been increased dramatically over 30 times since the beginning of social security I'm not saying it's wrong I'm not saying it's right everybody made a valid political argument but the benefits have grown tremendously and then as was pointed out benefits grow with wages right now rather than with prices wages have been growing about 1% per year faster than prices doesn't sound like much it adds up to a lot over the long haul tax revenue is not gonna keep up we've heard about lower labor force growth lower fertility productivity growth people keep saying well we could just have higher productivity growth that would make that wage based rise tax revenue would come flowing in we would save the day but the problem is if we knew how to increase productivity growth that would be the silver bullet it's just very hard to do another proposal is to make more of pay sorry yeah another reason that the revenue isn't growing very quickly is people have figured out clever ways to shield their earnings their compensation from social security taxes every time my employer pays me a dollar in a health care health insurance premium that's shielded from social security and people have lots of ways of doing that and that's been another part of the problem what are some of the options for social security well there's the political answer I fear which is just muddle along and hope it goes away it'll be settled on somebody else's watch and when the time comes we'll either have to raise cut benefits a lot sorry sorry to disappoint you or raise taxes a lot or probably both and I have to say there's precedent for that in when in 1983 when the Greenspan Commission last was confronted with social security shortfalls they were about three months from running out of benefits money to pay benefits checks so this was a real tight problem this was a crisis situation and they did in face taxes and cut benefits both maybe we'll be there again another possibility is turned the whole thing into a welfare program as Ned pointed out one option is simply to say if you have income if you have assets sorry you don't get any benefits now he suggested this would be unpopular I would take a little bit of a different view it may be necessary from an affordability point of view and it already is happening in the Medicare prescription drug plant there is already means tested being implemented within that system it wouldn't take much to bring it over to social security now I understand there's somebody in the room that used to work with Wilbur Cohen is this person still here I remember Wilbur Cohen used to say a program for the poor is a poor program and this was one thing that he viewed as very deleterious about a means tested system it would lose political support quite possibly and there's also behavioral responses if you tell people hey we're going to take care of you at some level no matter how much money you have people might not save they might blow it all they might take big risks that might be problematic you could also move to funding and we mentioned already the possibility the government could invest the trust fund in the capital market or instead of having the government control the money you could have personal retirement accounts about which I'll say more momentarily what about the government investing the trust fund I guess I'm making two arguments one it's just not nearly enough and number two I don't really believe it's feasible the social security system has been running a surplus since 83 this is this this IOU stuff that's been going into the file cabinets in West Virginia it's all in the order of about one point seven trillion dollars that money has already been spent you could take the annual continual surpluses going forward but as was already the point was already made the money's been spent anyway by the federal government and other regards so then you would simply bring home the need to try to raise revenues some other way and I believe political interference would be a huge concern Japan for many many years has had the government investing its surpluses they have roads going to nowhere they have airports sinking into the sea this is all done with publicly chosen investment projects it's a very big problem ultimately could the trust fund really be lockboxed I don't believe it can one of my colleagues Kent Smethers has estimated that every dollar put into this trust fund has led to two dollars and seventy six cents more in government debt so I don't believe it's a viable way to go just a couple words on the commission to strengthen social security this is the group I served on a couple back in two thousand one first point to make is that it was a bipartisan that is half democrats half republicans commission chaired by Daniel Patrick Moynihan and Richard Parsons we had a challenge our charge was to bring social security back into solvency that seems like a no-brainer but that was our goal while in here with the catches maintaining social security benefits for anybody retired or near retirement which we took as age fifty five plus so can't change the benefits for folks getting benefits all right fine don't raise the payroll tax says the president and offer voluntary personal accounts individually managed so this is a pretty tight set of restrictions how did we proceed if ever some evening you find yourself unable to sleep our report is on the website uh... c triple s dot gov let me just give you the cliffs notes version so we had three major parts of our preferred proposal or the one that's gotten the most public press first of all move from wage indexing to price indexing and what i didn't perceive before i got started with how powerful this change in many different directions what you would do is you would not cut benefits compared to today at all everybody in the future would have the same purchasing power as they would under today's benefit rules for people retiring today but the rate of growth of benefits would be lower and that's basically the single change that brings the system back into solvency no one would have their benefits cut not withstanding a lot of political hype to the contrary second go to price indexing actually is beneficial in the sense that there's some money left over you do better than achieve solvency so one thing you could do is quit prices price indexing after a while and do what Ned proposes go back to wage indexing another thing you could do is target the poor and on the commission we felt very strongly that we have to fix of deficiency in this security system that today there's no minimum benefit you can work your whole life and be below the poverty line we said we should fix that we should use some of the money that we would achieve under the price indexing not only to bring the low wage earner to poverty line but to a hundred and twenty percent and we would also give more to surviving spouses and then last but surely not least the personal retirement account story will propose was a carve out where you could take four percentage points out of your payroll tax if you want it you would not have to do it you could remain in the traditional social security if you wished if you opt to carve out some of those contributions and invest them you can't get the whole benefit you would have been promised under the old system and they would have to be an offset the way we structure the offset was if you thought you could earn two percent real in your private account then you would be neutral vis-a-vis staying in or going out if you thought you could do better than two percent real you'd make money into the personal account what impact did this have well the most important impact was that it restored the system to solvency the cost line benefit line would cross and you would not only have that happen but you'd have enough money as I said to try to enhance benefits at the bottom what was the public reaction next slide so this is a if you could read in the back row social security tsunami warning center there's been a nine point no demographic quake away title waiver retirees is headed this way and then the bush character says at the emergency plan and the donkey says risk what and risk frightening the public so there was a huge amount of denial and a huge huge amount of controversy resulting from that key points just to summarize them our proposal and then the president basically took up our proposal modified it slightly moved ahead no privatization we did not propose shutting down social security no benefit cuts there would be a stronger safety net by the way a point mentioned by bob willis the personal retirement would be bequeathable in the event of death and divisible in the event of divorce right now for all of you young folks that maybe haven't been married or thinking about it you've got to stay married ten years you get no benefit it after getting divorced from your spouse's social security this would offer a benefit in a much more transitory society diversification it would let people choose have some choice over investments and we thought greater transparency so in my time remaining how many minutes okay my time remaining next slide let me just uh... raise this other gorilla the king around the corner the numbers may vary between our different presentations but the point is the same the social security problem is about one-seventh of the overall issue it's medicare that really has this bankrupt so medicare parts a b and d are going to cost us on the order sixty-some trillion this is a huge funded liability we've got to fix social security now or there won't be any money by the time we deal with medicare so who's going to bear the cost of the medicare reform this is the pharmacist saying here's your prescription ma'am your grandson can pay for it at the front desk that's exactly what we're doing by raising benefit promises today with no means to finance them being made explicit so conclusion our current system is i think horribly risky for any of you already retired my senses the politics are going to protect you on social security do not go to sleep resting easy about medicare because heaven only knows how that benefits going to be paid we've got to get going reforming social security soon and the most important thing is to get the math rate to have people understand what the consequences are not doing it right i believe that funding and offering personal accounts is a viable piece of a bigger reform now having said that and having spent the last four years talking to people in fact i even travel with the president to uh... talk about personal accounts where do i think things stand now well let me just refresh your memory remember the lady i don't remember exactly her name but she was out in california she went to eat at a fast food restaurant and claim to have discovered a human finger in her chili remember that it was a whole liability issue in a fraud in hopes though it really was a finger okay so let's look at the last slide this is the prospects for personal accounts there's a bowl of social security reform chili and then a little finger in it and it's called labeled personal accounts and the elephant says maybe they'd like it better without the finger so on that i'll leave you and turn it over to the next speaker thank you our third speaker is henry erin i'm going to play some uh... rather unusual demands on you uh... i'm gonna ask you just to listen i have no powerpoint slides at all i also have to tell you that i think there are very deep truths embedded in alphabetical ordering uh... and i think that uh... today uh... becky has decided to teach me how it is to be bob willis all your life uh... if uh... if this uh... afternoon was a banquet uh... the order of the courses would be rather odd we would have started with the main course uh... we would have moved on to uh... what i will characterize as three side dishes uh... i i like to regard myself as the dessert uh... to this uh... repast uh... i'm gonna try and do four things uh... in my comments first i'm going to present the fiscal problems that net and uh... the others have focused on but in a slightly different way uh... from the way they have done uh... the second thing i'm going to do is uh... re-emphasize the point that's been made that health care costs are really the big enchilada here and i emphasize health care costs medicare i'll come back to that third uh... i'm going to support the view that social security well i is not as large a problem as uh... medicare is but i'm going to go further and argue that it really isn't a very big problem at all and that in practice it shouldn't cause us to break a sweat uh... because there are viable compromises uh... that could be reached within the political center and finally i'm going to do something that net is much too nice to do and olivia would be disinclined to do uh... i am going to uh... suggest some of the political reasons uh... why action on social security seems as remote uh... as it does i think to all of us uh... as it is uh... i'm going to suggest that what is what we're really seeing here are the after effects uh... brass knuckle politics associated with the medicare modernization act enacted in two thousand and three uh... an event that in my view for this administration irrevocably destroyed prospects of cooperation between democrats and republicans after yesterday's news i'm tempted to call this the delayed effect uh... so let me start with the fiscal challenge uh... chicken little rhetoric uh... from the administration and others not withstanding the actual challenge from social security's deficit is really rather modest between now and uh... twenty forty uh... that's a date after the last baby boomer has retired the cost of social security uh... measured as a share of gross domestic product uh... is projected to rise by two point one percentage points that's a thirty five year period uh... there is no projected increase in the cost of social security as a share of gdp thereafter and those of you who are arithmetically on your toes will wonder how what i just said could be true and the charts that were previously shown could be true to keep your attention alive i will answer during question period uh... that means that the increase in the cost of social security between now and twenty forty is about six tenths of one percent of gdp per decade for reference the cost of social security actually rose two point one percent of gdp in just fourteen years between nineteen sixty nine and nineteen eighty three the expenditures on national defense rose by one point six percent of gdp in just seven years from nineteen seventy nine to nineteen eighty six these two comparisons that tell me at least that the projected total increase in social security costs is not particularly large by historical standards and that it comes on relatively slowly uh... now i want you to note that i have cited social security spending as a share of gdp and not as uh... the previous speakers have done the projected trust fund deficit in the united states we happen to pay for social security with an earmarked tax and we channel it through a trust fund not all countries do so we could finance it in other ways here now my own view is that earmarking and using the trust fund is good policy i think it contributes to fiscal discipline with respect to a program that congress might be tempted to expand irresponsibly the fact is that politicians gain immediately from promising to raise pensions but the costs don't come in for years even decades and that combination uh... is a sore temptation to demagoguery and irresponsible legislation earmarking and long-term accounting reduce that risk they have contributed to the fact that the u.s. social security system is among the most parsimonious pension systems in the developed industrial world linking benefits to the same base on which taxes are levied also gives beneficiaries the sense that they've paid for their pensions and are not the objects of charity that sense persists although in fact uh... benefit the connection between benefits and taxes is really pretty loose still i think it's a good thing and the reason i think it's a good thing is that people regard social security as a pension not as welfare they can go in and they cash their checks with pride and not with shame but my objective now is not primarily to uh... praise earmarked financing rather it's that i want to emphasize that the fiscal burden is best measured by how much the program will cost not by whether earmarked revenues exceed or fall short of projected outlays the fiscal burden would be the same however the benefits were financed now if one focuses on cost and not on deficits then social security is just one among the full menu of government obligations including national defense interest on the debt health care spending and everything else that government does net uh... and everybody else have focused on one of those other obligations medicare like social security medicare mostly serves the elderly and the disabled and for that reason medicare is subject to the same demographic and economic forces the drive social security outlays but per capita social security benefits jit roughly speaking rise at the same rate as wages under current law per capita medicare outlays in contrast rise approximately with navrat national average health care spending and those numbers have outpaced per capita earnings growth by about two and a half percentage points a year for the last four decades the principal driver behind these uh... rising health care spending uh... totals uh... is advancing medical technology it's not primarily aging and projections into the future do not suggest that aging is a major part of projected increases uh... in total health care spending uh... most of the increase in health care spending that comes from technology goes for stuff that's really worth what it costs that's highly beneficial uh... as an aside bob topel and kevin murphy at the university of chicago estimate that the increase in longevity between nineteen seventy and about two thousand much of which but not all of which is due to our health care uh... improved health care is worth about as much in terms of increased utility as all economic growth measured economic growth combined but as health care spending has been rising a growing absolute amount although perhaps a declining proportion goes for health care that yields few benefits or none at all now looking ahead to the future there really isn't any sign that the gap between growth of per capita health care spending and per capita earnings is going to narrow and that means that medicare outlays as a share of gdp you're going to go up uh... by a number that is the product of the increase in the proportion of the population that claims benefits multiplied by the excess of the growth of per capita health care spending over the growth of wages now the math that comes out of that is striking if a historical two-and-a-half percentage point gap persists medicare and medicaid taken together are going to rise from four point two percent of gdp to about sixteen point one percent of gdp by twenty forty that nearly twelve percentage point increase is almost six times the roughly two percentage point increase in the share of gdp projected to go to social security it's more than one-and-a-half times as large as total current personal income tax collections which account for seven point six percent of gdp it's nearly twice total current payroll tax collections which absorb six point three percent of gdp what that means is that if medicare and medicaid were not changed and historical growth trends continued it would be necessary to nearly double both income and payroll taxes as a share of gdp by twenty forty to pay for their added costs in my view that is a big deal a really big deal and they understate matters because they exclude state spending on medicaid which covers about forty percent of the cost of the medicaid program and they also exclude the increasing share of worker compensation that will go for private health care for the non-disabled working age population if current trends continue growth of gdp and of health care half of all economic growth will go to increased health care spending by twenty twenty one and all of economic growth would go to it by the year twenty fifty one so while i share the view that dealing with the added costs of uh... of social security is serious i do not think it is a major problem but i am extremely troubled by the challenge from health care spending i want to stress that the problem is not just a medicare problem it is or and not prime not even just a medicare and medicaid problem it is most assuredly not an entitlement problem the challenge comes from the fact that per capita health care spending is likely in total is likely to rise a lot faster than income uh... and that a large part of our income is will have to be devoted to it unless major changes are made in the structure of health care financing in general unless we limit the overall growth of total health care spending and that means not just medicare not just medicaid but all of it some very bad things i believe are going to happen first we may find ourselves forced to undermine some very fundamental promises to the poor the elderly and the disabled some very vulnerable people may find themselves treated as second-class consumers of health care and second we will continue to spend a lot of money uh... on health care that it really isn't worth what it costs now i'm going to go back to social security for my last few comments when president bush took office in two thousand and one uh... he had a wonderful chance in my view to implement his vision of social security change it was not my vision but uh... let's face it he was elected president not me uh... he had a wonderful chance because he inherited projections of very large budget surpluses the surpluses were there because the nation was fiscally conservative during the nineteen nineties because the nation was very prosperous and very lucky during that same decade and because president clinton had resisted cutting taxes setting as his motto save social security first i'm sure many of you remember that president bush could have used those surpluses to pay for the so-called transition costs associated with implementing the individual accounts he had advocated during his campaign he didn't president bush's program was cut taxes first and second and third he got his way then came recession and nine eleven projections of surpluses gave way to projections of endless deficits the opportunity to create individual accounts while at the same time restoring fiscal balance to social security was lost creating private accounts with funds diverted from social security as president bush proposed would have deepened budget deficits and increased social securities projected long-term deficit even with cuts in traditional benefits that olivia described and that the president eventually endorsed both the projected social security deficit and the overall budget deficit would have been increased for decades in brief the bush program consisted of a direct cut in social security benefits authorization to workers to divert payroll taxes from social security if they accepted still further cuts in traditional benefits which might or might not office be offset by benefits that they could eventually receive from the individual accounts believe it or not this plan failed to kindle much enthusiasm even among republicans democrats took one look and broke out the champagne they didn't even trouble to put forward a plan of their own the political motivation was to let the public's undistracted attention rest on the president's plan now democrats did take a bit of flak from good government walks like many of us here who soberly advised them that it was the duty of the loyal opposition to come up with better ideas in order to prove that they should be returned to power somehow democratic office holders decided that they cared more about winning than proving to good government types that they deserved power so they stood back and they let a bad plan founder which it has done spectacularly they stood back for another reason democrats recall the results of trying to be the responsible opposition in two thousand and three over the medicare modernization act at that time senate democrats worked with their republican colleagues to pass a bill that both sides could accept it differed in essential ways from the one that had previously passed the house of representatives and that senate democrats could not abide uh... the senate democrats anticipated that as is customary differences would be ironed out in the conference committee they assumed that as his customary they and the republicans would split the difference the features that were most objectionable to both sides would be jettisoned that didn't happen house and senate republicans froze democrats out of the conference completely republicans met behind closed doors and wrote the final bill without any of the usual compromises the medicare actuary was strong armed into suppressing estimates that showed that the bill would cost far more than the budget resolution authorized which was very important because items in the budget resolution could pass with the simple majority but extra outlays would have been subject to a filibuster and would have required a sixty percent uh... majority to pass to cap it all the house leadership flouted procedures by extending the usual fifteen-minute voting period to three hours giving time to break a few arms and convert what seemed to be a sure loss into a narrow victory the democrats drew the obvious conclusion from this episode that they could not trust republicans to play fair they decided that if the republicans had the votes they could pass their damn social security bill but that they were going to have to do it without republican support uh... democratic support or democratic cover as it happened the republicans didn't have the votes because some of them defected and others were afraid to act without cover of democratic participation now i want to join all of the others in expressing acute regret that this is the way things turned out uh... it is regrettable because early action to put social security on sound long-term financial footing is very desirable through excessive tax cuts an ill-conceived and dishonestly justified and botched war back alley politics on medicare and breathtaking ineptness in responding to hurricane katrina the bush administration in my view has effectively terminated its own capacity to engineer major change in domestic affairs i'm afraid that we're going to have to wait for the next president at least before action is taken uh... to deal with social security i think that is a very very bad shame as the sooner we move to uh... deal with this problem the better precisely for the reasons that uh... others have emphasized that i would like to reinforce we need to get that problem out of the way because then we have a really big problem to face and that is the reform of health care financing a part of which is medicare but not all of which and that is going to be a major challenge not just to our political system but to our analytical skills as well before we move to the question and answer session i'd like to uh... give the panelists maybe uh... few minutes to if they'd like to respond to comments that other panelists have made uh... would you like to start actually i i think i'd be happy to hear your discussion so i'm i'd be happy to do it well great uh... so we have a uh... microphone in the middle of the room uh... if you have a question please go up to the microphone uh... it'd be great if you could introduce yourself and ask a succinct question i think we've left them dumbfounded speechless please uh... vice-president cheney came to battle creek a few months ago as part of the roadshow on the bush plan and uh... he said two interesting things uh... to the audience do you people of fifty five and older don't worry about a thing social security will be there the taxes are there to pay your benefits and then he said to the younger people we have a great deal for you we're going to let you take the tax some of the taxes that you're now paying to pay the benefits of older people and use them yourself in your private account and uh... it struck me as i think it would have struck uh... henry erin at least and others as well the biggest problem with that is you can't spend the same dollar twice the center for budget and policy priorities estimates that the bush plan as sketched out would invent entail deficits over the next twenty five years which would total four point six trillion dollars which uh... strikes me as being real money and uh... i just wonder how we can contemplate going into that kind of a situation or uh... at least we did contemplate it earlier in the year here uh... would agree that uh... continuing to pile up large amounts of public debt uh... is adverse to the long run interest of the nation we uh... have emphasized different parts of the budget uh... in our in our talks uh... but i think uh... sort of all almost all economists will not sign on to the deficits don't matter manifesto maybe i'm misspeaking for others i think not uh... and for the simple reason the deficit subtract from national saving and thereby deprive those who come after us of uh... of capital that could be used to enhance productivity now we may disagree about whether a particular policy on net will have the effect of reducing national saving uh... i think uh... there's certainly disagreement uh... as to the net effect of private accounts i think in the table but uh... as to the unwisdom of uh... large long-term deficits is there a dissent the following observation uh... as everyone's pointed out the current system is one which has already a legacy cost that is the current system is promised benefits and it doesn't have the tax revenue to pay them under the rules that's a fact the current system has what we call an implicit debt of eleven trillion dollars that's a fact i mean it whether it's eleven point one or you know the issue is it's a huge unfunded liability it is not counted as part of our explicit government that but that doesn't make it any less important so when you claim that or when critics claim that you can't spend the same dollar twice you can't pay the retirees and pay yourself that's absolutely right but that doesn't solve the problem that we have a huge gap and the fact is that anybody who wants to reform the system in any direction is going to have to figure out how to chip away at that unfunded liability and figure out how to make the system better going forward this boils down to the question of what is the correct counterfactual let's take as an assumption that we have an eleven trillion dollar unfunded liability out there the commission's plan which the president took and modified slightly moved you from an eleven trillion unfunded liability to a solvent system it got rid of that implicit debt yes it costs money it costs about half a percent of GDP when the financing is needed to get you to that eventual result in present value it costs you less than one trillion dollars in GDP and then you erase the unfunded liability so i think it's an unfair claim to say oh there's huge transition costs associated with the reform we've already got the cost and the fact is we have to recognize them in moving toward a solution uh... a lot of uh... discussion of social security uh... how big it is Olivia keeps talking about the uh... open group liability of eleven trillion hank keeps talking about the share of GDP one percent these are the same numbers well it's i mean the uh... in in the trustees report it's uh... it's a one of the the social security liability is one percent of GDP over the indefinite future the same numbers uh... is is that big or not big you know it's uh... it is uh... hank said it's manageable we could do this uh... my retirement aid suggestion alone would would do that and uh... so then the question is uh... we see this small problem near this huge problem and uh... should we think about these other things like changing the tax system or uh... you know some of the other things that i mentioned and others mentioned uh... i would say yes i would say that we we gotta worry about small problem and uh... and and at least uh... uh... anticipate the big problem coming along uh... and uh... but uh... you know you know that's uh... partly uh... an issue in the eye of the beholder the one thing i would say i i was not a fan of the uh... the bush carve-out approach actually i'd like option three of of olivia's uh... commission report a little better than than that that wasn't wasn't far from the plan that i recommended uh... when i had my bite at the apple but i think the uh... a lot of us feel that uh... in this different way to uh... it's maybe a perhaps more measured way to say what uh... person on my left said uh... that uh... the individual accounts weren't chipping chipping away uh... in the way that olivia was mentioning they uh... they were basically system neutral and uh... a lot of us uh... did want to chip away uh... whether on the tax side retirement age benefit cuts whatever individual accounts didn't do that and i think uh... in a sense that was the lost opportunity of this year did you want to respond yeah i just wanted to make uh... one other point just uh... in terms of thinking about you know it's sort of the real uh... it's sort of fundamental level if we engage in pay as you go financing we get sort of as has been explained the uh... return that's essentially the rate of growth rate of population growth plus the rate of productivity growth if we uh... invest in extra capital we get the marginal return from capital and uh... uh... in in uh... our society most the rate of return on capital is marginal return on capital and i'd by that i really mean physical capital and human capital education and training as well as as well as you get that return now you can only get that extra capital of the if you're going to if you're going to invest more simply swapping bonds around whether it's deficits in the general account or it's or it's in so security is immaterial so i think that that needs to be that needs to be made clear second point that i'd like to make is that the return the the growth rate return which is looking very dismal in countries like germany or italy and uh... somewhat better in countries like the united states if we look at it from a worldwide point of view is is uh... is not so bad these countries like china or korea that i showed in others are having very rapid declines in in in uh... population growth but uh... before they get to a very large eight old population they have a very large young population which is also increasingly well educated going through producing and and and if they did nothing those people would have to save a great deal is would really then be involved is that we as you know we we in uh... old europe and uh... maybe all the old americas could join would would benefit from the from the savings and and the productivity of the capital financed that way from from these other people now it would be good it would result in a shift in the ownership of the capital stock and and uh... that would go to the to the uh... those people who engaged in saving and i'm not sure and i suspect that politically that would be a uh... ultimately be a volatile volatile issue but i think we do need to think worldwide as well as as well as just in the u.s i have a question i think uh... tries to go across the three of you and uh... curious the three social security uh... the big panelist the uh... it strikes me a little bit of that and i may be wrong so somebody can correct me that the difference between the green span commission and your commission reflect something henry said about the decline of policy analysis because your commission answered given a very tight mandate you you're supposed to do this but you can't raise taxes and i was drawn to neds last slide that said here a number of things we could do to cut it in half and so it's and and henry talked about modest tax increases and so i sort of have a feeling if we put the three of you together since you all agree on the numbers as analyst working without political constraint there probably is not that much difference between what you would come up with what it would be might be eight or ten little things done at various times that would involve some cut in benefit level some rise in taxes some change in the retirement age etc among the things you said so the question really is is this this goes back to henry is there more agreement here among analysts than one can get in the political arena i mean i'll answer i think uh... the three of us of the four of us uh... if if you uh... put us in a room we could uh... figure out social security and uh... maybe ten minutes i mean i think we could we could easily come up with something uh... they're too proud of that one is uh... we don't have to get elected and uh... others do and uh... that that part is harder uh... they're uh... the uh... the menu that we would come up with would be uh... largely paying maybe all paying and uh... that uh... so i i think in some sense the problem is more political than it is the fact that the analyst can't figure this out the analyst i think can't figure it out can't agree the second thing is that you could uh... put put us and we could we could take the uh... we could we could give you uh... an exam and take the uh... highest ten percent of the audience in a room we could not do the same thing for the health programs uh... partly medicare and partly all of health i mean henry is right about that medicare is just the uh... tip the iceberg health problem we could not do it for that let me just uh... respond quickly it's true that our commission had a rather tight mandate and i think i probably became more aware of the constraints the more we were trying to work with the numbers and actually doing the social security actual calculations and so forth but i guess i bought into it for a couple reasons notwithstanding the fact that i'm a democrat first of all i believe that medicare is and will be a far more painful problem to solve so i wanted to try to come up with the fix within the current social security payroll tax regime that's point number one and so i wanted to see how far we could go as i believe net accurately said the personal accounts were watched they don't make it better they don't make it worse it's the price indexing that that brings you back to solvency number two i don't believe in this is a question now for philosophical public policy position i don't believe that the government ever has saved the trust fund i believe the evidence is fairly compelling that if you give the money the government surplus to the treasury they spend it in fact they more than spend it and so that's why i was led to the down the path of favoring personal accounts and so at the end of the day you really are faced with that question you could raise a retirement age you could raise the payroll tax you could uncapped social security but all that's going to do is increase the surplus which will then give to treasury which treasury will spend and we're going to be right back in the same sauce that we're in right now uh... senator moinehan once said everybody's entitled to his opinion but not everybody is a tight entitled to their facts uh... alivia is wrong when she says personal accounts are a wash under the accounting methods used by the social security administration under the methods used by the social security administration the president's personal account proposal increase these projected seventy-five-year deficit well that's that's what used in the political world that's what i'm doing that's right uh... you can't one can't uh... assume away the metric that is used as a standard matter uh... in uh... analytical discussions it increase a proc increases the size of projected deficit by about one-third now as for a uh... sitting us down in a room uh... point is three is a base closer closure commission and i think the answer to your question sheldon is yes if and the if is if uh... we can do it without uh... a carve out personal accounts if uh... that's part of the discussion and the answer is no we couldn't uh... reach agreement uh... to be quite specific uh... we would uh... i think agree on some increase in the so-called full benefits age which is sometimes miss named the normal retirement age which isn't normal at all because i've pointed out the normal retirement ages age sixty-two uh... we would uh... include state and local government employees uh... which helps on the seventy-five-year numbers more than it does on the infinite horizon numbers but it does help over the seventy-five years we would probably adjust the price index uh... to take account of certain biases in the cpi currently used uh... we would rate slightly raise the wage base and uh... i would suggest although i might lose my two colleagues on this slightly raising the uh... payroll tax rate if you took a little bit of each of those uh... you could put together a proposal that uh... would easily deal with uh... financing problems over the next seventy-five years and i'd like to speak to the issue whether it makes sense to use infinite horizon hereby taking on both my friends on uh... on each side uh... the idea that one would wait in current decisions present value of surpluses or deficits between to pull two years at random the years three thousand and seventy five hundred on the same basis as one would uh... factor in the present value of numbers over the next fifteen or twenty years that is not incorrect uh... it is present value could i speak on behalf of infinity if you haven't heard the case of post uh... well uh... i know it's coming they don't they don't do you want to give the case uh... let me hear the case against it it's uh... not that we uh... think that we can predict uh... things uh... well in your seventy six plus but i think there is a big political problem in using uh... seventy five year uh... standard in sticking to it when you've got a situation where we know perfectly well that the seventy fifth year is a year of very large deficit because that means we have a political convention we come we solved the problem and one year later we haven't solved the problem and i think that's a big political problem and i think that uh... we would be better off uh... mathematically it is a simple matter to work out something uh... the way we actually do this is not by projecting things in yet year seventy six and on it is just by stabilizing the trust fund ratio in last year and mathematically that is really can amount to just using the information in the first seventy five years and avoids the political embarrassment uh... that happened even to the greenspan commission of uh... waiting a few years and having their their supposed fix not be a fix anymore so that's uh... that's the argument for infinity uh... that isn't the argument for infinity it's an argument for using seventy five years and a stable trust fund at the end of the period those are not equivalent they are not equivalent because the effective compound interest is uh... divergences stretch out into infinity but they are short circuited by using that so uh... perhaps you should let me finish the uh... let me just make one quick response a long time ago social security in fact i've talked to other countries finance ministers where they use a projection window of two years to decide if social their social security system is solvent you know some small countries in the Caribbean i say well wait a minute you know there's some folks going to be there at the third year in the fourth year in the fifth year so aren't you going to factor them in and that's just not their philosophy and it's a tough sell in the u.s. we've had ten years over the period of time the trustees have been encouraged to go to a seventy five year window and that sort of seems appealing because the sense is most folks who are going to be around in seventy five years are probably born today and we can set up something that works for them the issue is when you have a long-term pension system as was correctly pointed out you don't want to fix it for today have the window move forward a year and go back down the tubes again point number one point number two any arbitrary cutoff is biased against certain kinds of policy reforms in particular reforms that move to funding because moving to a funded system requires an investment now a cost and reaps a payback later a benefit if you arbitrarily cut off at ten years or seventy five years or what have you you lose all the benefits going forward it's a policy decision what cutoff you use and i believe you should add a minimum talk about both numbers which is what the social security actuaries have now done and in fact this part of ongoing policy i just want to make a quick comment which is if you take apart the trust funds from the general fund deficit and you go to the end of the bush administration uh... don't we have an eleven trillion dollar debt which is and and we look at it currently for deficit spending and say it's okay we have six and a half trillion a trillion trillion seven in the in the trust fund we're going out at six or seven hundred billion a year uh... so i mean all of a sudden it's okay if we do a general thing and i'm not suggesting that social security isn't important i think we need to look at where are the most important issues to look at and the current deficit is a bigger problem than social security health care is a bigger problem and i guess that's it i think the chief argument for dealing with social security is the one that uh... was suggested by sheilden's uh... challenge to us which is it is a manageable problem sometimes by dealing with a problem that isn't the most important but is one on which uh... the technical obstacles are not excessive uh... if you can deal with it get it behind you it helps establish an environment that facilitates dealing with others uh... this is in no way to uh... downplay the significance of the overall deficit uh... which is something on which i believe we can have also current uh... significant current progress i agree entirely with net's comment that uh... health that is uh... a very difficult challenge you're at a closing point i want to thank everyone on our panel all of our speakers today thank you all for coming