Demographic Destiny Of Social Security

July 27, 2000

by Pete du Pont

Mr. Chairman, Members of the Committee, thank you for the opportunity to testify this morning on how we might meet the demographic challenges of the U.S. Social Security system.

The Organization for Economic Cooperation and Development's Web site has a map that shows - in color - the fertility rates nation by nation. A fertility rate of 2.1 children per woman is required to maintain a constant population in the long run. Blue indicates nations with fertility rates below 2.1 - and a sea of blue spreads across the map, from the United States and Canada through Europe and Asia and on to Japan and down to Australia. Of all the OECD countries, only Ireland, Mexico, and Turkey meet or exceed 2.1. The U.S. fertility rate of 2.06 last year was one of the highest among developed nations.

At the same time, people are living longer in every developed country. The U.S. life expectancy at birth in 1940 was 61.4 years for a male and 65.7 years for a female. Last year it was 73.7 years for a male and 79.5 years for a female.

What these demographic statistics add up to is impending major trouble for developed nations with pay-as-you-go Social Security systems, of which the U.S. is one. Fewer babies are being born to grow up to be workers paying payroll taxes; at the same time people are living and drawing retirement benefits longer and longer. As the population ages, it becomes increasingly difficult to pay the benefits of the many who are retired out of payroll taxes collected from fewer current workers.

It is no secret that our pay-as-you-go Social Security system is unsustainable in the long run. Nor is that something only recently discovered. Fourteen years ago, in 1986, one poll found that 46% of Americans doubted that Social Security would be around when they retired, and another found that 68% were not confident about the future of Social Security. Even then it was evident that taxing today's workers to pay benefits to today's retirees could not continue indefinitely when the ratio of workers to retirees was shrinking.

I recount these events of 14 years ago to emphasize that the conditions that make Social Security reform imperative have not gone away, and that we can put it off another 14 years only at our peril. Indeed, cash flow in the system turns negative in another dozen years, about 2015. Today, a majority of young people doubt that Social Security will be around when they retire. The ratio of workers to retirees, which thanks to the baby boomers has remained steady over the past two decades, is about to begin a sharp decline. The Social Security system has piled up 14 more years of unfunded liabilities since 1986 - unfunded liabilities that threaten to destroy our retirement system, our tax system, and our economy.

In 1986, I proposed a solution to the problem, what I called the Financial Security Program, which would protect Social Security by giving Americans the options of contributing part of their payroll taxes to private retirement accounts. These accounts would be invested in the market and would finance part of a person's retirement benefit, thus reducing the burden borne by the Social Security system. I pointed out that the cost of transition from a pay-as-you-go system to a funded system to save Social Security would be costly then, and more costly later, but would spare future generations from having to choose between much higher payroll tax rates or deep cuts in Social Security benefits. I also suggested extending the full faith and credit of the U.S. government to Social Security benefits to protect retirees.

In short, the problems inherent in the Social Security system, and their solutions, are nothing new. The only thing that has changed is the American people are more aware of the problem and more amenable to a long-term approach that actually saves Social Security instead of delaying the inevitable wreck for unborn generations to deal with.

Some respected economists have helped raise this awareness. For example, Eugene Steuerle of the Urban Institute wrote in 1994 regarding Social Security, "The next few years should be viewed as a crucial period of opportunity during which the nation should be readying itself for the demands of the future. We should not be lulled into inaction by the relative retiree-to-worker ratios in the near term, while a potent demographic challenge looms right around the corner." And Federal Reserve Chairman Alan Greenspan said in a 1996 speech, "It is becoming conventional wisdom that the Social Security system, as currently constructed, will not be fully viable after the so-called baby boom generation starts to retire in about 15 years."

The plight of Social Security is not a partisan matter, and members of Congress from both sides of the aisle have also helped increase public awareness. For example, in introducing the Senate Bipartisan Social Security Relief Act of 1999, Senator Bob Kerrey, a Democrat, said, "Each day we let go by means tougher tax increases or benefit cuts for future workers and retirees." And Senator Daniel Patrick Moynihan, also a Democrat, recently said that Social Security as now constituted "is a social insurance program that will disappear before our eyes if we do not reform it now."

So this is the moment to act, to make the changes needed to save and preserve our retirement system.

Letting workers put a percentage of their Social Security payroll tax into personal retirement accounts to be invested in real assets continues to be, in my opinion, the best approach. Five of the 13 members of President Clinton's 1994-1996 Advisory Council on Social Security also favored letting individuals invest part of their Social Security taxes directly in the financial markets. As these accounts grow, and the magic of compounding increases them still further, the payroll tax revenues needed to fund benefits will decrease. Several proposals based on this approach have been made by members of Congress of both parties, and some have already offered bills that address not only the mechanism for setting up the personal retirement accounts but also the transition costs involved in meeting current commitments to retirees and future retirees.

Nor is the idea of personal retirement accounts a partisan matter. For example, here is what Senator Charles Robb, Democrat of Virginia, said about the bipartisan reform bill mentioned earlier. "Creating individual retirement savings accounts ensures today's Social Security surplus is set aside for today's workers who will become tomorrow's retirees."

Another Democratic sponsor, Senator John Breaux of Louisiana, said, "I believe we have moved the debate past the argument of whether there should be private investment to how private investment should be done. There is a growing consensus that we can strengthen the safety net provided by Social Security, while at the same time providing Americans with more investment opportunities and retirement choices."

Mr. Chairman, some witnesses may tell you today that the problem is but a small one, requiring a minor adjustment to the benefits paid here, on the taxes levied there. But they are mistaken: the demographic destiny of our current retirement system presents a massive challenge to our economy, our families, and to the Congress.

We cannot save Social Security with some makeshift fixes in an effort to get us beyond the baby boom retirements. The United Nations Population Division projects that by 2050, 22% of the world's population, 33% of the population of developed nations, and 28% of the U.S. population will be over age 60. Further, the Population Division projects that the world's population may be decreasing by the end of the 21st century.

The significance of this demographic information about the world and the United States, it seems to me, is that we must make a choice and make it soon. Either we can make it possible for people to fund their retirement income during their working years, or we can anticipate a ruinous intergenerational conflict that will balkanize America and limit opportunity for everyone.

Thank you.