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86–497 PDF 2003

S. HRG. 108–30

GLOBAL AGING: OPPORTUNITY OR THREAT FOR

THE U.S ECONOMY?

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

WASHINGTON, DC

FEBRUARY 27, 2003

Serial No. 108–4

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING

LARRY CRAIG, Idaho, Chairman

RICHARD SHELBY, Alabama

SUSAN COLLINS, Maine

MIKE ENZI, Wyoming

GORDON SMITH, Oregon

JAMES M. TALENT, Missouri

PETER G. FITZGERALD, Illinois

ORRIN G. HATCH, Utah

ELIZABETH DOLE, North Carolina

TED STEVENS, Pennsylvania

RICK SANTORUM, Pennsylvania

JOHN B. BREAUX, Louisiana, Ranking

Member

HARRY REID, Nevada

HERB KOHL, Wisconsin

JAMES M. JEFFORDS, Vermont

RUSSELL D. FEINGOLD, Wisconsin

RON WYDEN, Oregon

BLANCHE L. LINCOLN, Arkansas

EVAN BAYH, Indiana

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

LUPE WISSEL, Staff Director

MICHELLE EASTON, Ranking Member Staff Director

(II)

C O N T E N T S

Page

Opening Statement of Senator Larry E. Craig ..................................................... 1

Opening Statement of Senator John Breaux ......................................................... 2

Statement of Senator Elizabeth Dole ..................................................................... 3

Statement of Senator Ron Wyden .......................................................................... 3

PANEL I

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

PANEL II

Paul S. Hewitt, Program Director, Global Aging Institute, Center for Strategic

and International Studies, Washington, DC ...................................................... 29

Sylvester Schieber, Ph.D., Vice President, Watson Wyatt Worldwide, Washington, DC ............................................................................................................. 36

Gary L. Geipel, Ph.D., Vice President, Hudson Institute, Indianapolis, IN ....... 75

APPENDIX

Testimony submitted by Evelyn Morton, AARP, Federal Affairs Department .. 93

Testimony submitted by Richard Jackson and Neil Howe, The Center for

Strategic and International Studies ................................................................... 121

(III)

(1)

GLOBAL AGING: OPPORTUNITY OR THREAT

FOR THE U.S. ECONOMY?

THURSDAY, FEBRUARY 27, 2003

U.S. SENATE,

SPECIAL COMMITTEE ON AGING,

Washington, D.C.

The committee met, pursuant to notice, at 10 a.m., in room SD–

628, Dirksen Senate Office Building, Hon. Larry Craig (chairman

of the committee) presiding.

Present: Senators Craig, Talent, Dole, Breaux, Wyden, and Carper.

OPENING STATEMENT OF SENATOR LARRY CRAIG, CHAIRMAN

The CHAIRMAN. Good morning, everyone. The U.S. Senate Special

Committee on Aging will convene.

Today’s hearing will explore the economics of global aging. When

I say global aging I am talking about the human population of the

world growing older. This hearing was called to help us better understand the opportunities and the challenges that lie before us on

issues of concern to all Americans but especially the baby boom

generation and their children.

The topic of global aging is directly related to many of the important issues this Congress has under consideration. The issues include one, strengthening Social Security, improving the quality of

Medicare, improving long-term care, increasing economic opportunities for older workers, promoting economic prosperity, and providing for national security. Deliberations on these issues tend to

focus on trends in the United States. Little attention is given to the

broader impacts of global aging on our nation. So we are here this

morning to improve our understanding and to build a record so we

in Congress can make policies based on the best available information.

In the United States birth rates are roughly at replacement levels. Americans are living longer and that is a wonderful blessing.

We understand all too well the pressures an aging society will

place on our fiscal health as the baby boomers begin to retire. The

United States faces the challenges of an aging population that if

not addressed, could hurt our children and grandchildren. We in

Congress have the opportunity to address these pressures.

But there is another issue that deserves attention—the impact of

global aging on the U.S. economy—and today we have invited several top experts who will speak to this issue. We will hear about

the familiar fiscal opportunities and challenges ahead. We will also

2

hear about labor and financial markets, economic growth, and the

geopolitical opportunities and challenges before us.

Our first witness really needs no introduction. Chairman Greenspan, I want to thank you for agreeing to appear before us today.

We welcome you to the Special Committee on Aging.

We have on our second panel three top thinkers of the economics

of global aging. Joining us today on the second panel will be Paul

Hewitt, Director of the Global Aging Initiative at the Center for

Strategic and International Studies, Sylvester Schieber, Director of

research at Watson Wyatt Worldwide, and Gary Geipel, Chief Operating Officer and Vice President at the Hudson Institute.

So I want to thank all of my witnesses beforehand for being here

today. We look forward to your testimony and before I turn to

Chairman Greenspan, let me turn to my colleagues here on the

committee and the ranking member, Senator Breaux.

OPENING STATEMENT OF SENATOR JOHN BREAUX

Senator BREAUX. Thank you very much, Mr. Chairman, for calling this hearing and for assembling the distinguished panel that

we are going to hear from.

Thank you, Mr. Chairman, for taking your time to be with us.

We thank you for the good work that you do in advising the Congress in many of these very difficult areas.

I have said many times before that the good news/bad news story

in this country—the good news is that people are living a lot longer

and the bad news to a certain extent is that people are living a lot

longer because we are happy they are—do not get me wrong in that

regard—but because we have more people living longer lives, we

have more people that participate in the entitlement programs, like

Social Security and Medicare.

I have to leave, Mr. Chairman, because Secretary Thompson is

testifying in the Finance Committee right now on the issue of

Medicare reform and it is very clear if you look at demographics

in this country we are looking at a potential time bomb where 77

million baby boomers will soon become eligible for both Social Security benefits and Medicare benefits and we are fast approaching

the time where we no longer are going to be able to sustain the

pay-as-you-go system.

There are some very difficult and very tough political decisions

that are going to have to be made on both of these programs. The

sooner we begin the process, the sooner we become willing to tell

our seniors in this country and their children and grandchildren

the truth about what we are facing, the easier it will be for the

Congress to reach a solution to these very difficult problems.

So thank you and thank Chairman Alan Greenspan particularly

for being with us.

The CHAIRMAN. Senator Breaux, thank you. We appreciate you

staying as long as you can but we understand the importance of

that hearing.

Let me turn to my colleague, new to our committee. Senator

Dole, do you have any comments?

3

STATEMENT OF SENATOR ELIZABETH DOLE

Senator DOLE. Thank you.

Chairman Greenspan, it is always a great pleasure to welcome

you to hearings and I look forward to your comments this morning.

I, too, have another committee scheduled at the same time so I will

have to slip out after your comments but I am delighted to see you

here.

The CHAIRMAN. Without objection. Thank you very much, Senator Dole.

Now let me turn to Senator Wyden of Oregon. Senator, welcome.

STATEMENT OF SENATOR RON WYDEN

Senator WYDEN. Thank you, Mr. Chairman, and I look forward

to working closely with you, as we have in the past, and I am very

pleased to see Mr. Greenspan here, as well.

I am going to have a number of questions with respect to global

productivity and inflation after the chairman has done speaking

but suffice it to say what we are faced with is a worldwide demographic tsunami. There are going to be millions of baby boomers

retiring in 2010 and 2011 in this country and I think suffice it to

say throughout much of the western industrialized world, so it is

critically important that we get into these issues.

I am very pleased that the chairman is here today because I

frankly think government has dawdled on these topics. I think we

have played a bit at the margins but have failed to really articulate

the kinds of policies that are going to let us get our arms properly

around this huge bow wave of retirees that I think literally

amounts to a demographic tsunami.

So I look forward to your statement today, Mr. Chairman.

The CHAIRMAN. Well, with the threat of a demographic tsunami

sweeping down on us, Chairman Greenspan, again welcome to the

committee. Please proceed.

4

STATEMENT OF ALAN GREENSPAN, CHAIRMAN, FEDERAL

RESERVE BANK

Mr. GREENSPAN. Thank you very much, Mr. Chairman. As you

pointed out, the world’s population is growing older as a result of

both declining fertility and increasing life expectancy. These trends

manifest themselves in at least two important dimensions—a more

slowly growing population and labor force and an increase in the

ratio of the elderly to the working age population.

The so-called elderly dependency ratio has been rising in the industrialized world for at least 150 years. The pace of increase

slowed greatly with the birth of the baby boom generation after

World War II but elderly dependency will almost certainly rise

more rapidly as that generation reaches retirement age. The

changes projected for the United States are not so severe as those

projected for Europe and Japan but nonetheless present daunting

challenges.

Of course, it is difficult to predict the age structure of the population in the more distant future. Although we have a good idea of

the size of the working age population over the next 20 years or

so—remember, its members are largely already born—forecasting

the number of children and future immigration and population

growth is much more conjectural. Even with the substantial uncertainty that surrounds these forecasts, population aging in a developed world is not likely to be a temporary phenomenon associated

solely with the retirement of the baby boom generation. Rather,

under current projections the retirement of that generation should

be viewed as hastening the transition between the current distribution of age and one in which the population is notably older.

As you know, the aging of the population in the United States

will have significant effects on our fiscal situation. In particular, it

makes our Social Security and Medicare programs unsustainable in

the long run, short of a major increase in immigration rates, a dramatic acceleration in productivity growth well beyond historical experience, a significant increase in the age of eligibility for benefits

or the use of general revenues to fund benefits. Indeed, according

to the intermediate projection of the Social Security trustees, the

level of Social Security contributions under current law begins falling short of legislated benefits by approximately 2017.

While the prospect of a shortfall in Social Security is reasonably

certain given the changing composition of the population, the range

of possible outcomes in Medicare is far wider. Rapidly advancing

medical technologies, essentially inelastic demand for medical services for the elderly, and a subsidized third-party payment system

have created virtually unconstrained demand.

How the financing pressures that accompany increasing retirement are resolved will have profound but uncertain effects on the

structure of both private and public pension plans. The total investment income of these funds, in conjunction with retirees’ other

forms of income, must be sufficient to finance a satisfactory standard of living.

The real resources available to fund pension benefits depend on

the economy’s long-term growth rate, which in its simplest terms

is determined by the growth rate of labor employed plus the growth

rate of the productivity of that labor. Because of the demographic

5

trends associated with aging, by 2030 the growth rate of our working age population is expected to decline by half.

One natural response to population aging will almost surely be

for a more fit elderly population to increase their participation in

the labor force. Americans not only are living longer but they are

generally living healthier. Rates of disability for the elderly have

been declining, reflecting both improvements in health and changes

in technology that accommodate the physical impairments that are

associated with aging.

In addition, work is becoming less physically strenuous but more

demanding intellectually, continuing a century-long trend toward a

more conceptual and less physical economic output. For example,

in 1900 only one out of every 10 workers was in a professional,

technical or managerial occupation. By 1970 that proportion had

doubled and today those types of jobs account for about one third

of our total workforce.

Despite the improving feasibility of work at older ages, Americans have been retiring at younger and younger ages. Some analysts believe this trend has slowed, although few anticipate a rapid

turnaround. But rising pressures on retirement incomes and a

growing scarcity of experienced labor could induce greater labor

force participation.

Immigration, if we choose to expand it, could prove an even more

potent antidote for slowing growth in the working age population.

As the influx of foreign workers in response to the tight labor markets of the 1990’s showed, immigration does respond to labor shortages.

An expansion of labor force participation by immigrants and the

healthy elderly offers some offset to an aging population. However,

it is heightened growth of output per worker that presents the

greatest potential to boost the growth of gross domestic product. A

significant rise in the growth of labor productivity will be necessary

if the standard of living of retirees is to be maintained and that

of workers is to continue advancing.

One of the more direct ways to raise growth in output per hour

is to increase saving and investment, which augment the capital

stock available to workers. Another is to increase the incentives for

innovation. Efficiency gains, broadly defined, currently account for

roughly half the growth in labor productivity. Though augmenting

saving and investment should raise future labor productivity and

thereby help provide for an aging population, the incremental benefit of additional investment may itself be affected by aging. Without

a growing labor force, the amount of new equipment that can be

used productively will be more limited and the return to capital investment could decline as a consequence.

What actually happens to the saving rate in the next three decades will depend importantly on the behavior of the baby boom cohort during their retirement years. Over the post-World War II period the elderly in the United States, contrary to conventional wisdom, seem to have drawn down their savings only modestly. The

reasons are not entirely clear. Often people bequeath a significant

proportion of their savings to their children or others rather than

spending it during retirement. If the baby boom generation continVerDate 11-MAY-2000 10:51 Jun 05, 2003 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\DOCS\86497.TXT SAGING1 PsN: SAGING1
6

ues this pattern, then the U.S. household savings rate may not decline significantly, if at all.

Future labor productivity, however, is determined by more than

just saving, investment, and capital intensity. One of the remarkable features of the economy over the past 7 years or so has been

the acceleration in the pace of the innovative use of capital by

workers rather than increases in the amount of capital per worker.

Therefore, it is important to address the possibility that aging

will affect the rate of innovation either through a rearrangement

of existing capital resources or through technological advance. Although discovery of new technologies is to some degree a matter of

luck, we know that human activities do respond to economic incentives. A relative shortage of workers should increase the incentives

for developing labor-saving technologies and may actually spur

technological development.

Economic historians have argued that one reason that the United

States surpassed Great Britain in the early 19th Century as the

leader in technological innovation was the relative scarcity of labor

in the United States. Patent records for this period show that innovation did respond to economic incentives and that the scarcity of

labor clearly provided incentives to develop new methods of production.

The aging of the population means that the government will inevitably need to make a number of changes to its retirement programs. These changes in themselves can have profound economic

effects. For example, aside from suppressing economic growth,

large increases in payroll taxes can exacerbate the problem of reductions in labor supply, whereas policies to promote longer working life can ameliorate it.

Reductions in benefits through changes to the age for receiving

full retirement benefits or through reforms to slow the growth of

Medicare spending or through other means can affect retirement,

the labor force, and saving behavior. In addition, policies that link

increases in longevity over time to the eligibility age for Social Security and perhaps Medicare may need to be considered. Such linkages would help protect the financial and hence the economic viability of these programs.

The aging of the population is bound to bring with it many

changes to our economy, some foreseeable, many probably not.

Though the challenges here seem great, the necessary adjustments

will likely be smaller than those required in most other developed

countries, but how we adjust will also matter. Early initiatives to

address the economic effects of baby boom retirements could

smooth the transition to a new balance between workers and retirees. If we delay, the adjustments could be abrupt and painful.

Fortunately, the U.S. economy is uniquely well suited to make

those adjustments. Our open labor markets can adapt to the differing needs and abilities of our older population. Our capital markets

can allow for the creation and rapid adoption of new labor-saving

technologies and our open society has been receptive to immigrants. All these factors put us in a good position to adjust to the

inexorabilities of an aging population.

Thank you, Mr. Chairman. I request that my full text be included in the record.

7

The CHAIRMAN. Certainly it will become a part of the record, Mr.

Chairman, and again we thank you for being here.

We will move to a round of questions for those senators who are

here and thank you, Senator Dole, for attending.

You have obviously offered up some substantial challenges to us

as it relates to an aging population in this country and the rest of

the world. Mr. Chairman, historic experience suggests that the impending global labor shortage has the potential to unleash an era

of technological progress. If this were to occur, what would happen

to relative returns for savings and investment?

Mr. GREENSPAN. Well, Mr. Chairman, I think it depends to a

large extent on the type of investment that is made. It is fairly apparent if you just think in terms of what would happen if you had

a decline in the population but the same capital infrastructure, it

is pretty obvious that there is a surplus of capital and the rate of

return would fall. But if you can find technologies which enhance

the capability of individuals to produce or, as I like to put it in the

extreme form, if human beings produced robots which did the same

thing they did, then clearly there is a very significant rate of return on that. Our actual equivalent is in the high-tech area in computers, which clearly have enabled us to do types of things which

human beings do and in many cases do them in a far superior

manner. Those types of investments will tend to have fairly significant rates of return.

The CHAIRMAN. I think I know the answer to this but what effect

would this have on the value of financial assets, then?

Mr. GREENSPAN. The value of financial assets is going to depend

to a large extent on two things. One, of course, is the innovations

and the nature of the types of investments that are made but also

how we address and resolve the issue of the huge increase in benefits which in projected to start sometime in the beginning of the

next decade and under current services budgeting would create a

very substantial increase in the unified budget deficit, higher real

interest rates, and presumably a weakening in the capital values

throughout the economy.

So it really depends on, whether we, in fact, create these innovative types of equipment which could be a major solution to the

shortage of labor but unless we restructure the underlying governmental programs, all of the potential benefits that could accrue

from these innovations could be unwound because of fiscal distortions which work their way through the financial system and, by

moving real long-term interest rates higher, must invariably move

the capitalized value of other assets lower.

The CHAIRMAN. Let me ask this last question. You indicated that

delaying initiatives in strengthening Social Security and improving

Medicare, and our colleague just left to go down to a Medicare

hearing where we are looking at some reform, will make program

adjustments more painful for baby boomers when they eventually

retire. Can you describe the potential economic effects of delay on

the baby boomer generation and their children?

Mr. GREENSPAN. I am sorry; of delaying changes in the programs?

The CHAIRMAN. Yes.

8

Mr. GREENSPAN. Well first, one of the better ways of getting a

context here is if you ask yourself when you are dealing with major

programs, government programs which affect the economy, ask

yourself how would the economy adjust if those adjustments had to

take place solely in the private sector and there were no government programs?

For example, we can very readily determine that if Social Security, Medicare, and Medicaid benefits only rose at the rate that the

GDP was rising, say in the year 2010 and going forward, and you

therefore obviously covered a very significantly less proportion of,

for example, medical expenditures than indeed the population

would want, then you ask yourself well, how would the rest of it,

if it needed to be done, be financed in the private sector? Clearly

what would happen is that medical services, which are highly valued in the system, would probably elbow out the second and third

cars that we see in a lot of people’s garages. People would probably

spend less on certain leisure and entertainment issues. In other

words, what you would get would largely be what we get now, on

allocation of consumption expenditures over a broad set of products. In that environment you would probably not get a change in

the budget deficit. You probably would not get increases in interest

rates.

Therefore what all of this tells you is that it is crucially important to find a way to appropriately bring the private sector into the

issue of financing medical care in a much broader way than we

have done. If we are going to get an appropriate solution between

the portion of Medicare that is financed and whatever part of it is

not publicly financed, make certain that it is financed appropriately by whatever incentives or whatever we have to do in the

private sector.

In other words, it is going to require something different from

what I would call the hard-edged problems that you get if you have

basically mandated programs when we are dealing with a very

large shift from people in the working age population into retirement.

So I think there are solutions here and the sooner we begin to

think of how to phase in, the easier it is going to be because there

is no doubt that while economists may not be terribly good in making long-term economic forecasts, demographers are extraordinarily

accurate in making forecasts of what the population will look like

10 and 15 years ahead.

The CHAIRMAN. Well, thank you. Let me turn to my colleague

from Oregon, Senator Wyden.

Senator WYDEN. Thank you, Mr. Chairman.

Chairman Greenspan, I think we would both agree this question

of global productivity is right at the heart of the ball game in terms

of a bright retirement future for seniors here and around the world.

Let me ask you about this. Of the western industrialized nations,

our country and throughout the West, the United States has higher

wages, better health care and better pensions. When you hear the

question of improved global productivity, the first thing that comes

to mind is, why not leave those places and go other places where

there are lower wages, lower health, and lower pensions? When we

talk about global productivity, what would you advocate in terms

9

of global productivity initiatives that would lift a lot of boats

around the world so as to be responsive to this demographic trend?

Mr. GREENSPAN. Well, Senator, I think the issue of productivity

worldwide goes beyond the global aging issue. I think that the socalled development economists have been struggling now for quite

a good deal of time and have become a fairly significant segment

of the economics profession and they are beginning to identify the

necessary if not always sufficient conditions that create productivity in various different areas.

I do think, however, that as you are implying, the aging does

make a difference. I would think, for example, that since productivity—let us take the United States—would be greater if our population growth and working age population is moving up, so, ironically, what that suggests is that increased immigration in the

United States could very well be a factor in improving overall productivity and indeed I think it has already been a factor in that

regard.

What will tend to happen if the demographers are right—and

in this case they can scarcely be wrong for the next 10 or 15

years—but if they are right then there will be very significant pressure for individuals, younger individuals residing in so-called

emerging economies to move to those developed economies which

are projected to have fairly significant declines in population. It

will be the extent of the political resistance to that flow which will

to a large extent, I think, determine, as you may put it, world aggregate productivity. The flow of people probably matters more

than we realize in this context.

Senator WYDEN. Another issue that is very much on the mind of

seniors of this country, and we talked briefly about it when we visited before the hearing, is millions of seniors have much of their

net worth today in their home. There is significant concern among

seniors and frankly other people about the possibility of a real estate bubble, a housing bubble, and that somehow this would cause

them great economic damage.

What is your sense about the prospect of a housing bubble, a real

estate bubble? You and I talked about it and we were concerned

some years ago about a technology bubble and I was encouraged

by your answer with respect to the housing bubble and I think it

would be helpful for the country to know your view on that.

Mr. GREENSPAN. Senator, I think the issue of the housing bubble

arose mainly as an analogy to the stock market bubble. The one

thing I think we can say with reasonable assurance is that the

analogy is pretty stretched because, as you know, if you sell a

home, you have to move out and besides the transaction costs on

the sale are really quite large and that inhibits the degree of turnover.

But more importantly, there is not a national housing market in

this country. There are localized markets and indeed it is possible

in localized markets for bubbles to emerge and indeed there are

cases. We can name a number of metropolitan areas in which home

prices have surged and then come down very dramatically, obviously Silicon Valley being one of the obvious cases, but there are

a lot of them.

10

But an overall decline would probably require that the demand

for new housing significantly weakened. But on the database that

we make our judgments from, it looks as though the level of replacement of housing is not very large, meaning that the absolute

level of home completions plus mobile homes is not that much larger than the change in household formation. A significant part of

household formation reflects immigration, which is holding up

household formation, and one must presume holding up new construction.

While I am not going to say that there is no possibility of house

pricing declining—there is; house prices declined 20 or 25 years ago

for a while—but the notion of a bubble bursting and the whole

price level coming down seems to me as far as a nationwide type

of phenomenon really quite unlikely.

Senator WYDEN. Thank you; that was an issue important to my

constituents.

I want to ask you about inflation and seniors, as well. Suffice it

to say we all understand that for so many seniors their income is

fixed and inflation essentially gobbles it up. Compounding the

problem is, of course, today a lot of the investments that seniors

turn like CDs, paying relatively low rates of return.

In your view what rate of inflation would allow the economy to

grow at this point while, at the same time, keeping seniors from

getting shellacked? In other words, we are trying to figure out how

to balance these two kinds of considerations and given the fact that

you are in the monetary business, I would be interested in your

thoughts on that.

Mr. GREENSPAN. Well, Senator, we have always argued that the

optimum price pattern to facilitate maximum sustainable long-term

economic growth is effectively stable prices. As I and a number of

my colleagues at the Federal Reserve Board in fact, the Federal

Open Market Committee—have been pointing out for now quite a

while, we are pretty close to price stability. The reason we say that

is that the price indexes which we tend to follow have still, despite

the major improvements in them, a fairly significant amount of upward price bias and as a consequence of that, as sort of a rough

cut, we are probably not all that far from price stability and that

is probably where we should be—neither, I might add, in an inflationary environment or a deflationary one.

Senator WYDEN. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Wyden.

Now let me turn to my colleague from Missouri, Senator Talent.

Welcome.

Senator TALENT. Thank you, Mr. Chairman. I want to thank you

for holding this hearing and thank the chairman of the Federal Reserve Board for being here.

The CHAIRMAN. You were not here for opening statements. If you

have comments——

Senator TALENT. No, although I will probably have a comment

before my question. Normally one comes to these hearings to ask

questions and I cannot stay as long as I want but I think I probably learned as much by your questions and the questions from the

senator from Oregon as I may from my own.

11

Let me just ask you to elaborate a little bit, Mr. Chairman, because the tenor of your testimony—I caught the tail end of it but

I have managed to read through it—was, I think, very encouraging.

Let me sum that up and then ask you to elaborate a little bit.

We in this committee have to deal with the coming problems that

we are going to be confronting with Social Security, and Medicare,

not to mention issues like long-term care, and demographic

changes that if the world we are in does not significantly change

and begin changing pretty soon are going to present very, very difficult problems.

What I appreciated about your testimony was your suggestion,

that if, we begin changing soon, there are a number of different

strategies that we could follow which will minimize if not eliminate, a lot of the pain that we would be confronting, but we have

got to do something and begin doing something soon.

How true is it? Is it fair to speculate that if we could agree on

reasonable strategies to promote growth and productivity that we

really could have some confidence that we might grow and produce

our way out of this thing, along with other changes that would naturally occur as people react to this coming crisis? One of the things

you point out, for example, is people simply working longer because

they want to. They are healthier, they work longer, they produce

longer, which is already happening.

I mean if we will agree on what we can do to make this great

economy grow and produce regardless of then how we are going to

distribute what it produces and the social goals and the rest of it,

cannot we have some confidence that maybe this thing is not going

to be as terrible as if you look at it right now you think it may be?

Mr. GREENSPAN. Well, Senator, there is just no question that a

necessary condition to get us beyond the big bulge of the baby

boom retirement is a marked pick-up in the rate of growth. It does

not seem likely, however, that if we stay with the existing obligations that we have committed and project them through the period,

say 2025, that we can accelerate economic growth so that that

would be the sole means by which to achieve a solution.

The reason why I suspect not is that largely because of the fairly

significant changes in productivity that have occurred, say, since

1995 and the pace that continues today, we are already up sufficiently high where the amount of additional increase in the rate of

change of productivity is not what it was in 1992 where we then

had a lot of leverage to go back up.

So what we will be doing is finding that while we can get up to

what our historic maximum levels have been, we are the cutting

edge economy in the world. That is, there is a limit to how far a

cutting edge economy’s productivity can grow and it is essentially

determined by the state of knowledge and the state of intelligence

of a particular population.

I mean one may ask if we were much smarter we could have

foreshortened the increases in technology or the changes in our economic structure that occurred say between 1900 and 2000 and done

it in 50 years instead of 100. Now the trouble with it is we are

human beings and we have certain capabilities.

Therefore I think it is important for us to do everything we can

do to improve economic growth. If we do not have economic growth,

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I do not think there is a solution here, period, in what we are dealing with. But if we can get first maximum economic growth and

then make certain types of adjustments as we phase into the

marked increase in the commitments that occur after 2010, then I

think this is a solvable situation. But I think we have to understand that over the years we have committed to the American people a level of benefits in Social Security and in Medicare which are

high relative to the capacity of the economy to support and we have

to make judgments as to whether, in fact, we are capable of

ratcheting up the growth rate to effectively say we can afford it

and if not, and I must say to you I expect not, we have to review

what the nature of those commitments is and make them far more

capable of being fit into the capacity of this economy to service

them.

Senator TALENT. As I search for areas where we might achieve

enough of a political consensus and therefore a political will to do

something, it just strikes me after all the struggle over Social Security reform and the rest of it, that maybe it might be better to devote some of this energy into coming to some agreement about how

we really do maximize growth and how we can all reach a way

where politically we can do that, which all of us agree will at least

make it possible or easier to deal with the problem.

Then second, take some confidence from the fact that the American people will on their own make adjustments in response to

what they see coming. I had an economics professor who said

‘‘Look, the most important principle in human behavior is this, that

the crew of the Titanic stopped doing dishes when the ship hit the

iceberg.’’ As people see us approaching the iceberg, they will plan

on working longer. They will accommodate to it. I think lifestyles

will begin changing. Those two things, the points I am making, I

take from your testimony.

For example, you mention that the post-war population as it

aged ended up spending a lot less of their savings than people

thought. My parents certainly did that. If the baby boom generation does the same, which I think it will because I think the baby

boom generation is going to see the greater need of their children

to have some of their assets than maybe they might have figured

all of these trends, these reactions will work in our favor and

maybe make this easier to handle, but we do have to begin thinking about this, planning about this, and working together now.

That is the clear import of your testimony—we have to begin doing

something now or soon.

Thank you. I guess that was an opening and closing statement

combined, Mr. Chairman. I appreciate that.

The CHAIRMAN. Senator, thank you.

We are joined by Senator Carper. Senator, welcome. Questions,

comments?

Senator Carper. Thanks, Mr. Chairman.

Chairman Greenspan, nice to see you again. It has been almost

24 hours. My wife has been on a business trip and comes home

today and I was sitting here thinking that I have seen more of you

in the last week than I have seen of her and I am looking forward

to her return. But you look great; you look great.

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Mr. GREENSPAN. I have seen more of you than my wife and I

wish she would return, too.

Senator Carper. We have a common bond here.

Senator Talent was saying that after the Titanic hit the iceberg

the crew stopped washing the dishes. As we approach this fiscal

iceberg that lies ahead, I am not sure that people will stop washing

the dishes. Maybe they will stop eating out and then they will start

washing dishes again. We will see what happens.

I have been here a little over 2 years and as fiscal year 2001

began, we saw budget surpluses are far as the eye could see and

there was talk of retiring our publicly held debt and how that

would affect the Social Security Trust Fund. I am just going to ask

you to kind of walk us back in time to those heady days of late

2000 when we were much more optimistic about our fiscal future

than we are today.

Just to refresh our memories, what were going to do with all

those extra monies? How were we going to pay off our public debt?

How did that figure into the long-term health of Social Security

and Medicare?

Mr. GREENSPAN. Well, Senator, as you recall, the Congressional

Budget Office, in evaluating what the current policy outlook, was

estimated that over the 10-year period there would be approximately, as I recall, $5.7 trillion worth of accumulated surpluses.

The basic reason for that was not that they were blind-sided on the

impact of stock prices on the revenues that had occurred earlier

but very small technical changes were made in the relationship between incomes, capital gains, and taxes on stock options. All that

was well known. What was not in the CBO’s forecast was a 50 percent decline in stock prices and what that did to those revenues.

But when they looked as though they would be out there, there

was a very strong presumption that if we retired the debt, that as

we moved into the early years of the next decade, while we would

invariably be running fairly large unified budget deficits, the level

of the debt to GDP would be starting at a quite low level and that

we could probably sustain running significant deficits for a protracted period of time because the debt started off very low, if I

may put it that way.

Now regrettably, that choice has been lost and we are back to the

same problems that we perceived back in the mid–1990’s. We had

conversations back in the early 1990’s which replicate very much

what we have been talking about today. There was that period,

though, where there was the possibility or perceived possibility

that we would have adequate revenues to essentially book the forward unified budget deficits and then sort of capture them by lowering the debt and essentially find that the amount of adjustments

that would be required would be much less than we are now obviously going to have to face.

Senator CARPER. A number of people including, I believe, the

president, have suggested that we ought to lower Social Security

taxes for some of our workers and allow them to divert a portion

of their Social Security, their payroll taxes, into other investments.

We still have an obligation to, my mom, for example, that she and

her generation would continue to receive the benefits that have

been promised to them under Social Security but we would allow

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a younger generation, maybe my children, to divert a portion of

their payroll taxes into other kinds of investments but still pay

something into Social Security.

That was an idea that intrigued a number of people, maybe still

does, but it was, I think, more intriguing 3 years ago than it is

today.

One of the things I wrestle with as we face that proposal is how

are we going to pay the obligations to my mother’s generation and

maybe to the boomer generation that I am a part of if we divert

the monies that otherwise would be needed to pay those benefits?

It was not as difficult a mountain to climb 3 years ago as I believe

it is today. I would just invite your comments on that observation.

Mr. GREENSPAN. There are several issues involved here. I have

always been attracted toward moving significant amounts of retirement resources into the private sector. In fact, I had a long presentation about 5 years ago before this big revenue surge and then

loss occurred before a special task force of the Senate Budget Committee in which I raised the issue of various different ways to essentially move funds from the public to the private sector and have

minimal guarantees and mechanisms which I thought would be

useful for coming to grips with the Social Security problem.

I suspect, although I grant you it certainly does not sound this

way when one hears the rhetoric, that the Social Security problem

in quotes is a relatively small one that has to be adjusted. I think

the really serious fiscal problem is Medicare and the reason for

that is that, as I pointed out in my prepared remarks, we have had

a remarkable increase in technology, and the advent of being able

to get very much greater insight into the structure of how we function as human beings has opened up huge potential avenues for

pharmacology and for other types of technologies which I think

over the decades in the future are going to be in increasingly greater demand.

So we have got this very difficult problem, as Senator Breaux

said, which is a difficult problem and a wonderful solution of this

remarkable technology which we are dealing with but which has

increased the cost of medical care generally.

I personally do not think it has increased the price of medical

care. I think our price indexes are just plain overdoing it. I do not

think all of this increase in cost is real. I mean it is a major improvement in medical services and the demand for that because it

is so good is creating the possibility of a much larger demand than

I think people have previously anticipated. Certainly when the

original debate on Medicare was occurring there was not even the

remotest notion of what potentially lay out there in improved technologies.

This is something that I think we have to become aware of and

try to find a way in which with our limited economic resources we

can capture this technology in the most effective way for the American people. That is going to be a more difficult problem, I suspect,

than Social Security.

Social Security, as difficult as it is, is basically a defined benefit

program with actuarial calculations and judgments and estimates

and we are pretty good at that. The real problem is going to be how

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we take this wonderful bonanza of technology and find the best

way to employ it.

The CHAIRMAN. For the sake of our time and the chairman’s, I

would limit all three of us to one last question each. Senator Carper? We will just work our way back.

Senator CARPER. OK, good.

I have heard you talk before about the way we determine how

benefits should be raised, how benefits should be raised and the

market basket that we use to determine what the increase should

be and benefits each year and I have heard you say that there are

other options that we should consider that are truly reflective of

the price increases that people who are retirement age face. Would

you just take a minute and talk about that again, please?

Mr. GREENSPAN. Senator, if you go back to the original Social Security legislation you are going to find that the escalation of benefits essentially, according to the will of the Congress, was to increase benefits according to the cost of living and at the time, the

only measure that we had of the cost of living was the Consumer

Price Index, which is effectively what we use. But it has always

been an issue of whether that really, truly measured the cost of living and one of the reasons basically is that it has a fixed weight

system which biases it upward.

Since the original views of indexing both Social Security and the

tax structure, we have improved our ability to measure the cost of

living and indeed the very latest version is the Bureau of Labor

Statistics so-called chain-weighted price index, which is a far superior measure of the cost of living. I suspect that judgment would

be agreed to by virtually every economist I know.

Therefore, the issue arises whether we really want to index benefits more than the cost of living or is it the will of the Congress

to stay with the cost of living? If it is the latter, it makes a big difference. You will find, for example, if we had used the chainweighted CPI, we would have probably had a budget deficit about

$40 billion less in fiscal 2002, a little more than half because of the

tax bracket shifts and a little less than half on the issue of benefits.

So if you want to come at the budget in a manner in which technical changes are appropriate, I think you will find that cumulatively over the years it makes a very significant difference and if

we do it now it would make a rather large difference by the year

2010.

Senator CARPER. Thanks very much.

The CHAIRMAN. Senator Wyden?

Senator WYDEN. Thank you.

Mr. Chairman, I want to go a little bit further on this question

of health care productivity. We sort of touched indirectly on it, but

one of your many contributions, was early on you pointed out that

information technology a few years back was going to give us a

chance for this incredible opportunity for productivity growth. I am

curious about your thoughts as it would apply to health care in

particular.

For example, electronic medical records could be an extraordinary opportunity for increasing health care productivity. We

know if someone sees three doctors today that there is a very high

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likelihood that doctor three will not know a whole lot about what

doctor one and doctor two have done, so you have to basically start

all over.

I see nurses when I go to health care programs spending astronomical amounts of time charting, for example. If they had a palmlike device, for example, they could probably handle a lot of that.

I am curious if you have given any thought to steps that would

increase health care productivity, basically taking what you said

about IT, information technology as related to the economy as a

whole, and brought it to the health care field, particularly as it applies to government. I mean if you look at these government health

care programs, I think it is fair to say we are technological

Luddites. We are not making the investments in these technologies

that it seems to me could do in health in terms of increasing productivity what you have correctly advocated in other areas and I

am curious about your thoughts with respect to increasing health

care productivity.

Mr. GREENSPAN. Senator, I think you are hitting on one of the

areas where we are still back in pre-World War I days. I am still

looking at prescriptions written by doctors. I cannot understand

them now any more than I could when I was young. There is a remarkable amount of actual paper that goes on prescriptions and

then building into the health care records of individuals and I

think you are quite right, that we now have the technologies to integrate a very significant amount of medical records of individuals

into central systems.

You do have a privacy issue here, which has been one of the

major problems preventing that, and I am not sure how you get

around it. But technology is there to very significantly reduce administrative expense.

Remember a very large part of improved technology in medical

care does not come from biomedicine or pharmacological insights.

It comes from information technology systems. I mean MRI is a

system which has got very little to do with biochemistry. It is an

electronic insight of remarkable importance. I think that the

synergies of various technologies are clearly where a great deal of

overall innovation is going to occur and especially in the medical

area.

Senator WYDEN. I want to observe the chairman’s rule about just

one question. I would hope, because I thought what you said about

IT made a huge difference early on as it related to the economy

generally, that you and your excellent staff people would look some

more at health care productivity because I think even as it relates

to privacy, if we were to do nothing else in this country other than

to say on a voluntary basis, on a voluntary basis if someone wanted

to direct their health care providers to have electronic medical

records, this could very significantly boost our productivity and go

right to the point that you have talked about for years in terms of

output per hour.

I may follow up with you some more on this because I think it

is a chance to really extrapolate from what you said about productivity generally in the health care field where, of course, costs are

rising.

So thank you, Mr. Chairman.

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Senator CARPER. Mr. Chairman, could I just make an observation? Senator Wyden has put his finger on a very important point.

I have just written a piece for a DLC publication, Blueprint, on this

very issue.

I recently met with some folks visit from the Patient Safety Institute and the Delaware medical society who put something together

called the Delaware Health Information Network. I believe they

are onto something. I talked to a guy the other day who told me

he was taking 15 different medicines, he has seven doctors, and my

guess is that those doctors are not talking with each other and are

not aware of the kind of interaction that those meds are having.

There are ways not just to save money here but really to improve

patient care.

I think the issue about privacy can be addressed.

The CHAIRMAN. Well, I thank you for that. If you will recall some

weeks ago we had a hearing that touched—we had a couple of witnesses that touched on that as it relates to the kind of voluntary

effort of counseling that is going on now with our seniors, but the

technology side of it for all is very, very significant.

Mr. Chairman, one last question for me. You talked about large

increases in payroll tax would suppress economic growth and reduce the incentive to work in what will likely be an era of labor

shortages. This seems to make a strong economic argument against

raising payroll taxes in an effort to strengthen Social Security or

Medicare in any significant way. Can you elaborate on how increases in payroll taxes would suppress overall economic growth?

Mr. GREENSPAN. Well, all taxes, by their very nature, suppress

growth. The question is that they are there hopefully not just to

suppress growth but to raise revenue for purposes that the government thinks are important.

I think with respect to Social Security and Medicare as a first

approximation, I would certainly say not to solve the problem by

moving up taxes. You may end up at the end of the day with a

whole series of adjustments that you have made and there is a

small part that still has to be done and you may decide that it is

the least worst final alternative, but one has to keep in mind that

raising taxes is not merely a revenue-raising phenomenon; it has

negative impacts on the tax base from which you are making those

revenue increases.

The CHAIRMAN. Well, Mr. Chairman, again we thank you very

much for coming this morning and expressing your views on this

very important issue. You have offered us great insight. I think the

record we build here—as you know, we are not an authorizing committee but we value our ability to be the town crier on occasion,

as many of the authorizing committees move in certain areas that

we are involved in, to build records that we can then make available to our colleagues here in the Senate as decisions are made.

So again thank you very much. We appreciate it.

Mr. GREENSPAN. Thank you, Mr. Chairman.

[The prepared statement of Mr. Greenspan follows:]

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The CHAIRMAN. Now let me invite our second panel forward.

Again let me repeat that joining us today on our second panel will

be Paul Hewitt, director of the Global Aging Initiative at the Center for Strategic and International Studies, Sylvester Schieber, director of research at Watson Wyatt Worldwide, and Gary Geipel,

chief operating officer and vice president of the Hudson Institute.

Paul, we will start with you if you will pull the microphone as

close as possible to your comfort so we all can hear. Please proceed.

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

Mr. HEWITT. Thank you, Senator. Mr. Chairman, thank you for

your leadership in scheduling this hearing on the opportunities and

threats of global aging. I would be remiss if I did not also acknowledge the contributions of Senator Breaux to the CSIS Commission

on Global Aging, which has been examining this question for 3

years now.

The commission’s central finding was that the challenge posed by

global aging is pervasive, it will affect everything from individual

life plans to international security agreements. Global aging will

generate important economic opportunities but it will also create

unprecedented dangers. Which of these forces triumphs will depend

on the course of policy reform over the next few years, not just in

the United States but in countries the world over.

It will surprise some to learn that America is probably going to

age less over the next half century than any other country in the

world. The Census Bureau projects that our median age will rise

by just 3.6 years, barely half the rate of the previous 50 years. The

median age of the world is on track to rise by 9.7 years over this

period, while the typical Mexican at mid-century is expected to be

16 years older than her counterpart of today. As shown in the first

table in my testimony America’s age structure will be converging

with that of the developing world and diverging from those of our

allies.

Population aging is creating important opportunities in the developing world. In a phenomenon known as the demographic bonus,

falling fertility directly increases per capital incomes even as it

frees women to participate in labor markets and enables families

to spend more on health and education. The result can be a virtuous circle of economic growth and political stability.

Falling fertility has made such a difference in China. Last year

China produced 5 percent of global output but accounted for onethird of global growth.

Yet in order to capitalize on this bonus, societies must also provide employment. Without jobs, growing labor pools translate into

ballooning legions of unemployed who, in turn, are the source of social unrest. It was the recognition that unemployment had caused

so much upheaval in the first half of the 20th Century that led

every industrial country to establish generous welfare states in the

aftermath of World War II. Yet safety nets are expensive and this

means they are likely to remain modest in the low and middle income countries for the foreseeable future. This means that social

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peace in these regions will depend perilously on the state of the

global economy.

For example, China estimates that its economy will need to grow

at 8 percent a year just to prevent unemployment from rising.

A particular concern then is the fact that aging is increasing the

potential for crisis throughout the developed world. As shown in

Table 2 on the right, CSIS estimates that by 2040 today’s old-age

benefits will consume an additional 12 percent of GDP a year in

a typical developed country. Were these imbalances permitted to

accumulate, by the mid–2020’s budget deficits in the rich countries

would consume all of their savings, making them dependent on

capital flows from the Third World to fund domestic investment.

Long before this happens, of course, capital shortages and default

risks would spill over into the global markets and disrupt growth

everywhere.

Mr. Chairman, a complete discussion of these budget estimates

can be found in the 2003 Aging Vulnerability Index, which is published by Watson Wyatt and CSIS. I would like to request at this

time that a copy of this report be inserted in the record as an appendix to my written testimony.

The CHAIRMAN. We will do that. We will file that and

appendicize it to your testimony. Thank you.

Mr. HEWITT. Thank you. In fact, we are concerned that the potential for fiscal crisis may be much greater than these numbers

suggest, as was hinted by Chairman Greenspan just a moment ago.

Labor shortages are projected to cut GDP growth by an average of

.7 percent a year in Japan and .4 percent in the EU–15 over the

next 25 years. This means that even at full employment, economic

growth in these regions will fall under 1 percent after 2015.

Growth is essential.

More immediate and worrying, however, are the effects of depopulation on product markets. In Germany and Japan shrinking

numbers of older and thriftier consumers already are creating overcapacity in many industries, from construction to retail, that used

to be engines of economic growth. The loss of pricing power in these

sectors not only has been deflationary but fiscally destabilizing as

collapsing corporate profits and rising bank losses have deprived

governments of needed corporate income tax revenues.

If demography is the culprit in this malaise, as I believe is the

case, then there is a high potential for fiscal instability in the near

term. It remains that properly managed, the industrial world’s

aging could prove a boon for the developing world. Slowing growth

in the rich countries will translate into fewer profitable investment

opportunities in our domestic economies. In response, managers of

capital increasingly will look abroad to developing countries with

large labor forces and low productivity where infusions of capital

and technology and know-how can generate out-sized returns. In

this win/win scenario, rich country retirees would maintain high

rates of return on their nest eggs while helping to accelerate economic development in the poorer regions.

Realizing this potential will require an historic expansion of global trade and investment alongside fundamental structural reforms

in both the developed and developing regions. The rich countries

will need to place much more of the retirement burden on saving—

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for example, by expanding private pensions—to ensure that they

remain capital exporters. Meanwhile, the developing countries

must create physical, educational, financial and legal infrastructure so that they become safer, more productive places to invest.

Last but not least, we will have to find some way to avoid instability in the Middle East and sub-Saharan Africa where an ongoing

explosion of youth foreordains higher unemployment and falling

living standards for at least the next two decades and possibly beyond.

In conclusion, Mr. Chairman, America and the other developed

countries must avoid the temptation of spiraling deficits that divert

our saving into unproductive government debt. It is essential that

we tackle entitlement reform not just for ourselves but for the economic and political stability of the world. Thank you.

[The prepared statement of Mr. Hewitt follows:]

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The CHAIRMAN. Paul, thank you very much.

Mr. Schieber.

STATEMENT OF SYLVESTER SCHIEBER, PH.D., VICE

PRESIDENT, WATSON WYATT WORLDWIDE, WASHINGTON, DC

Dr. SCHIEBER. Mr. Chairman, thank you for the invitation to testify here this morning. I am going to focus on capital market issues

that I believe are likely to arise in response to the global aging

phenomenon that we have been talking about here this morning.

Capital markets, like others, have both a supply and a demand

side and we have to look at both to understand the implications of

aging. According to the prevalent economic thinking today, we are

in a period when savings rates are relatively high in the developed

world. The role of savings is to supply capital to our economies to

spur economic growth. In the future, however, as our populations

age significantly, current models of behavior suggest that savings

levels are likely to fall.

It is not just the supply of savings that is important; it is also

what we do with those savings. If a large portion of personal savings are soaked up by government deficits as developed societies

try to maintain their current support levels for the elderly, then

those savings will not be available for investment to spur economic

growth. When we look at our own social insurance systems and

others in the developed world, there is real concern in this regard.

It is also possible that private savings will be squandered as

some countries try to prop up sagging demand associated with advanced aging. What has happened in Japan in the last decade. It

is a good example of what we should strive not to emulate.

Because of the relatively high savings rates that now exist in the

developed world, an interesting phenomenon is unfolding. The ultimate surge in retirements that we are going to experience is still

sometime off but we are in a situation now where labor forces in

some of these countries may already be shrinking.

As Chairman Greenspan noted earlier, with savings rates increasing at the point where workforces are stabilizing or possibly

declining, you may end up with excess capital. At least for a while,

there is going to be a tendency to substitute capital for labor. In

fact, when we look at Germany, France, and Italy, labor shares of

business sector output have already been falling over the last 10

or 15 years, reflecting more intensive capital usage. But economic

theory tells us that as capital intensity increases, rates of return

will fall.

In my prepared remarks I present some analysis that we have

done looking at rates of return across the corporate sector across

the developed world, and what we have found is that the rates of

return, the ability of corporations to create surplus value in the

older countries is significantly less than in the younger countries,

countries with lower aged dependency ratios. In fact, we found that

a country that has a 0.10 higher dependency ratio will have companies on average that have an 18 percent lower surplus value in

their corporations—a very significance difference just on the basis

of the aged dependency ratio within those countries. The results of

that analysis are in Table 4 in my prepared remarks.

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Table 5 in my presentation, the first Table 5—I apologize; there

were two Table 5s—the first Table 5 shows the aged dependency

ratios in a number of the major developed countries across the

world. At the end of the 20th Century the United States had one

of the lowest aged dependency ratios among these countries and we

have undoubtedly benefited from the ability to generate higher returns because of it. Over much of the last 15 to 20 years the United

States has been a significant importer of capital, in large part because our domestic savings rates are relatively low but also because our returns on investment have been relatively high.

As we look to the future, the aged dependency ratio in the

United States and elsewhere around the world is projected to increase and to increase significantly. For some period of time the

United States might be the beneficiary of this evolving picture as

we continue to attract capital because we are in a so much better

position than the rest of the developed world. But as our own population ages it will become increasingly efficient to seek alternative

places to invest our own capital.

With an abundant supply of labor and a lower stock of capital,

developing nations had the potential of generating higher rates of

return to capital investment than countries with high capital/labor

ratios. This is not simply a one-sided proposition, for the developed

nations. The shifting of capital has a tremendous potential to dramatically increase the productivity rates and the standards of living in the underdeveloped economies of the world over the coming

decades.

Getting the economic and legal infrastructures in place in the developing countries of the world to solve the global aging dilemma

is a great challenge. When we look at Table 7 in my prepared remarks we see that much of the supply of surplus labor that is going

to be available in the world over the next 30 years will come from

countries that have cultures that are very different than ours.

Beyond cultural differences there are other potential barriers to

significant investment in these nations. Capital owners must be

able to invest in opportunities within a framework of regulatory

and civil law that is enforced on an evenhanded basis. Business

dealings must be aboveboard and open to review. There have to be

statute- and case-based legal systems that allow disputants in business deals to resolve differences when they arise.

Concerns about the financial markets and the political and legal

infrastructures lead many investors in the developed world today

to have a home bias in terms of their investing. To continue this

pattern in the face of aging populations will be extremely inefficient. It will be inefficient for those countries themselves.

As we put all of the elements of this picture together, the United

States is in a better position to weather the aging of its population

than virtually any of the other countries of the developed world.

We should remain a relatively attractive market for investment

much further into the global aging phenomenon than most of the

other developed countries and should continue to see foreign flows

of capital into our economy. At some juncture, however, the slowdown in our own labor force growth will inevitably mean we will

suffer the consequences of capital deepening that are already hitting other developed nations. Before that occurs we should pursue

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policies that allow us to take our own surplus capital to other parts

of the world where there will be sufficient labor to use it effectively.

As we think about the challenges the aging developed world

faces, we ought to quit concentrating so much of our energies on

the immediate reform of social insurance programs in the developing world and help get in place operating frameworks where capital

can flow freely to stimulate real economic growth. As the developed

countries realize rewards of capital infusions that allow their own

national incomes to rise, there will be plenty of time to reform their

own national retirement systems. Thank you very much.

[The prepared statement of Dr. Schieber follows:]

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The CHAIRMAN. Thank you.

Now let me turn to you, Gary. Please proceed.

STATEMENT OF GARY L. GEIPEL, PH.D., VICE PRESIDENT,

HUDSON INSTITUTE, INDIANAPOLIS, IN

Dr. GEIPEL. Thank you very much, Senator Craig. It is a great

privilege for me to represent Hudson Institute before this committee with its crucial agenda. It is also a privilege for me to join these

particular colleagues on this panel. Hudson Institute prides itself

on a reputation for understanding workforce development, but with

regard to the implications of global aging, there is very little we

could do to improve on the work that CSIS and Watson Wyatt have

done, particularly represented by these gentlemen. They have almost single-handedly carried the burden of describing the magnitude of the challenges and some of the potential solutions, so I

am privileged to join them.

I was asked specifically to address some of the implications of

global aging for workforce issues and to begin I would offer the

headline that the challenges posed by global aging for the U.S.

workforce are serious but perhaps not as bad as some of the implications posed by entitlements and capital flows, which we have already heard about today. They are also relatively much less serious

in this country than they are in other parts of the developed world,

and I would argue they are perhaps a bit more subject to influence

by public policy in a way that is less politically contentious and

sensitive.

I would like to, given the time involved here and the fact that

we are at a fairly stage in understanding these challenges, I

thought my contribution might be best focussed on offering a big

picture sense of the equation that is involved in understanding the

impact of global aging on the workforce. I offer what amounts to

a four-part equation, starting with, of course, the challenges in general of global aging for the workforce, which I will try to unpack

in more detail. Second, factors specific to countries or indeed regions within countries that either exacerbate or mitigate the more

general challenges. Third, the policy levers that are available, both

public and private, to help ease some of the challenges for the

workforce. Finally, a set of wild cards that could dramatically bring

about either the worsening or the bettering of the situation. I

would argue that only by looking at that full equation can one truly

understand the outcomes likely to occur for the workforce as a result of global aging.

So just briefly, what are the general challenges? Well, if you assume that the available workforce for the next 25 to 50 years consists only of the current population in any given country and the

children they are likely to have, then clearly you have a problem

on your hands in most of the developed world, at both ends of the

talent spectrum. You have a double whammy on the high-skilled

end, where you have the retirement or death of your most experienced and knowledgeable individuals at the same time as you have

smaller numbers of younger college graduates coming into the

workforce due to low birth rates. You also have a double whammy

on the low-skilled end of the spectrum. Because of wage premiums

that are out there for skilled work, more and more people are

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pulled in that direction, at the same time as demand for low-skilled

work is increasing due to the demands imposed by an aging population for things such as long-term care, entertainment, travel, and

leisure activities.

So especially on the high-skilled end of this, you have an increasing global battle for talent that will intensify both within and between countries. You have a relocation of labor-intensive operations

in both manufacturing and services to countries where the labor

shortage is less severe. You have continued upward pressure on

wages and benefits in the high-skilled labor force. You have relentless efforts, as Chairman Greenspan already alluded to, to squeeze

more output from fewer workers through the application of technology. So that is the basic picture.

Part two of the equation, is that not all countries will join this

battle, if you will, on a level playing field. Relatively speaking, the

good news for us is that the United States starts much stronger

than many other countries in the developed world.

First of all, the basic aging problem is less severe, as Paul Hewitt has already indicated. Americans especially our recent immigrants, have more children. We are still very much the preferred

immigrant destination at both the high-skill and low-skill ends of

the talent spectrum. Our magnetism is very strong, including our

magnetism with regard to skilled workers from other developed

countries. I would think that France and Germany would be concerned that they typically end up in the Top Five list of countries

that are supplying workers to the United States under H1B visas,

even though they have their own skill shortages.

Our higher education systems in this country are amazingly

magnetic with regard to young people, which is a huge benefit to

us. Just ask yourself how many Indian, or Chinese, or Polish young

people dream of studying at a university in Japan—arguably very

few—but millions of them dream of studying at a university in this

country.

We also, I would argue, start in the United States with a culture

that is more positive about the prospect of remaining in the workforce past the age of 65. A phenomenon that I think most of us

have encountered—the 75-year-old or 80-year-old greeter at Wal

Mart or Target is not something that I have ever seen in France

or Germany or in many other parts of the developed world. It

speaks well for the desire of many Americans to remain engaged

in the workforce even when economic necessity does not require it.

Finally, the volunteer sector in the United States is much more

developed, by an order of magnitude, than in the rest of the developed world. Again this is all to the good because it suggests that

many of our older adults, even if they are not in paid work, will

still be engaged in some type of quasi-employment situation, to the

good of society.

This leads us to what the question of policy levers can do to further improve the situation the United States enters into? I would

suggest that you can group most of the policy responses into five

areas.

First of all, benefits and entitlements. We have heard a lot about

that already today. I would simply say that the challenge here, in

general terms, is to blur the line between work and retirement. It

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turns the last 50 years on its head. We have spent a lot of time

in public and private policy coming up with all manner of benefits,

programs, and rules that pivot around the magic age of 65 or some

other such magic number. I think what we need to do now is to

come up with all manner of benefits, programs and rules that

cause people to ignore the age of 65 and move in the direction of

much more flexibility, keeping all-or-nothing choices to a minimum.

Education’s, similarly important in this area. Life-long learning

is a cliche that we need to start turning into something more than

a cliche. We do not need to come up with new curricula or course

work that is directed at ‘‘old people.’’ What we need to understand

is the importance of incremental opportunities throughout one’s

working life to continue to upgrade skills. We have to frankly recognize that dealing with the ongoing K–12 problem is very much

a part of responding to the challenge of global aging. You do not

want to let anybody slip through the cracks and I would argue that

‘‘No Child Left Behind’’ could be understood as No Worker Left Behind.

Some of the work that this committee has already done to look

at disease management, to look at the outcomes-based revolution,

is very important, to re-orient ourselves away from treating the ‘‘inevitable manifestations of aging,’’ to move away from that and

more toward looking at strategies of disease management that will

avoid those ‘‘inevitable’’ outcomes.

Finally, of course, immigration policy. A sophisticated immigration policy that links workforce needs to recruitment is very important.

In conclusion, allow me to put forward some wild cards that

could vastly change this equation. First of all, there is the wild

card in which the problem of global aging evaporates as a result

of what some have called hyperaging. If we truly get exponential

breakthroughs in medical care, such that 65 becomes middle age

with life spans extending beyond 100, that would change the global

aging calculus dramatically. Second, at the other end of the spectrum, the problem worsens significantly. Some type of disease-induced population decline as a result either of deliberate action or

otherwise, could significantly worsen the aging problem by reducing the population that might be available for work in the developed world.

Third, we could rewrite the output equation. There is some hope

that the marriage of artificial intelligence and robotics, for example, will cause labor saving on an exponential scale.

Finally, I think it is worth referencing that the War on Terrorism

potentially does have an implication here. If a backlash to further

potential terrorist strikes on the order of 9/11 were to occur, that

arguably would create a potential fortress mindset in this country,

at the same time reducing some of the freedoms that are precisely

the appeal that we have in this battle for talent globally. Thank

you.

[The prepared statement of Dr. Geipel follows:]

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The CHAIRMAN. Gary, thank you. Gentlemen, thank you very

much for your testimony, both your spoken word and, of course,

your full statements will become a part of the record.

Paul, I am most struck by the global aging linkage to so many

policy issues and, of course, that is what we are about here. The

word you used to describe these linkages was pervasive. How informed are officials in other countries regarding these linkages?

Mr. HEWITT. They are not well informed at all. We have managed to put together a fairly impressive group in the Global Aging

Commission that has, I think, helped us spread the word. But for

the most part, people are surprised. Prime Minister Gujral of India,

former prime minister, confessed after we first had him to one of

our meetings that, for the first time, he realized that India’s population was not just a burden to the world. I recall sitting down with

the chairman of the foreign affairs committee in the Bundestag, the

German parliament, and after a fair amount of talking, he just

started shaking his head, and he said, ‘‘You know, if we’d begun

10 years earlier, we would have had a chance.’’

So politicians, I think, have not really focussed on these questions. They need to; it is essential that they do. One of the reasons

why they do not, though, is that the problem, the challenge of global aging is entirely unprecedented. Imagine a society that is beset

by chronic labor shortages, that has to get used to the idea that

job creation is not the best measure of economic success. In fact,

it is intelligent job shrinking that we will need to be doing.

Of course, there is another new phenomenon: shrinking numbers

of consumers. This is posing incredible sectoral problems throughout the global economy and in particular, national economies like

Japan’s where you have vast overcapacity. One out of five workers

in Germany is in construction. They think this is an essential sector. Yet, the demand for construction is declining because the German population is shrinking. There are more deaths than births.

So all of these things, I think, are interconnected and it is essential that we do the education. We really do not have much time so

your efforts here are very much appreciated.

The CHAIRMAN. North America appears to be in a better position.

I think all of you speak with a certain degree of optimism about

our opposition relative to the rest of the world, obviously with caution and making certain assumptions, but Paul, North America appears to be in a better position regarding aging pressures than

other nations or regions of the world. Can you describe a likely scenario for the economic and geopolitical relationships between the

United States and its neighbors, Mexico and Canada, in 10 or 20

years?

Mr. HEWITT. I think to do so with any degree of confidence would

be impossible because so much depends on what happens outside

of North America. Gary Geigel was mentioning that if there were

another big terrorist shock that slowed down global trade it could

certainly gum up the borders, as it did directly after 9/11.

The CHAIRMAN. In other words, walls built.

Mr. HEWITT. Yes. Then, of course, what are the often contingencies? Well, Japan does not look like they are going to last the

decade without a default and an IMF work-out. What would that

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do to China’s economy and to the U.S. economy and to Southeast

Asia, for which Japan is a major export market?

Then there is the larger questions of capital productivity. For example, how do we get capital to be more productive, and not just

labor, so that we get higher returns on our money?

Now in this context some of the relationships between Canada

and the United States and Mexico, the NAFTA countries, evolve in

different directions. If you look to the end of this 20-year period,

in Mexico you are going to see a great diminution of immigration.

Our immigrants are going to come from different places, wherever

that may be, because not just Mexico but virtually all of Latin

America is going to be aging at a very, very rapid rate. Increasingly, we expect they will be capitalizing on their demographic bonuses and they will not be sending so many people abroad; there

will be plenty of opportunities in their home countries.

Growth is going to slow in Canada. The birth rate there is 1.6.

That is almost a quarter below replacement. So even if Canada has

very robust immigration, its population will stop growing and this

will dramatically slow the growth of markets and certainly the

growth of productive potential. So Canada is kind of a piece of Europe on our northern border.

Of course, we can expect that Europe will become a big drag on

global growth, as Japan has become. In fact, all of this has contagion potentials, too.

Managing these issues, of course, really are going to require very

sensitive management, sensible management, in U.S. diplomacy.

The CHAIRMAN. Doctor, you were wishing to get into that question, I see, and certainly all of you can join in or make additional

comments if you choose. Please.

Dr. SCHIEBER. To the extent that the developed world is facing

the prospects over the next two or three decades of labor shortages,

Mexico will be a tremendous asset for us. Today the Mexican working age population is virtually the same size as the German working age population. By 2030 the Mexican working age population

is going to be twice the size of the German working age population.

There is a phenomenal shift going on.

As Paul mentioned, Canada is reaching almost the point of stability in terms of their labor market. My guess is that Canada will

continue to be a strategic partner because of our cultural linkages,

the proximity, the length of the border——

The CHAIRMAN. Resources.

Dr. SCHIEBER. Resources, a whole variety of things, although we

do discourage them bringing lumber down here.

The CHAIRMAN. Well, at the moment. Put a few of my people out

of work. We’re trying to balance it out.

Dr. SCHIEBER. I know. I go there frequently and they remind me

about this every time I am there.

Canada, I think, will continue to be an important partner but to

the extent we have labor shortages, we have a nation right here

on our border where there are tremendous cultural linkages and I

think there is a fantastic opportunity here, if we can get this relationship worked out, to really take a step ahead relative to the

other nations, developed nations in this world.

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If you think about the countries encircling Europe and the

European Union—Northern Africa, the Middle East, on over into

Asia—and the nature of those exploding populations the cultural

differences and the reluctance on the part of the Europeans to

allow them into their societies, the potential relationship we have

with Mexico ought to be one that we look at very carefully and try

to develop in an extremely healthy way.

The CHAIRMAN. I think that is a phenomenally astute observation. One of the questions I get asked quite often when I am out

in my State or traveling the country, is what is wrong with the

French as it relates to the specific issue at hand at the moment

that the world is debating, and I said ‘‘You have to look at—what

is wrong with the French are the French, I mean in regard to their

whole history and culture and how they interact.’’ But within that

population base is a phenomenal in-migration of Muslims over a

short period of time that can create great political unrest if they

move in certain directions and are trying to factor that into their

decisionmaking. It is the lack of the ability to assimilate them into

their culture. They have literally put them into, if you will, not a

ghetto but a separate suburb.

Dr. SCHIEBER. It is a ghetto.

The CHAIRMAN. Yes, all right. I did not want to use that word

but you are right.

Dr. SCHIEBER. If it quacks, it is a duck.

The CHAIRMAN. Yes. Well, Doctor, your testimony highlights the

mutual benefits of U.S. and European business investment flowing

into developed countries. From the outside looking in, it seems as

if cultural values undermine the rule of law in many of these countries. What ideas do you have for improving the free flow of business investment into the developing world?

Dr. SCHIEBER. Well, we have institutions that we sponsor here

that reach out into nations all over the world and try to help them

structure their economies in ways that will enhance the welfare of

their people. These are organizations like the World Bank, the

International Monetary Fund, and other groups like them. I believe

that they have spent a lot of their energies in recent years focussing on things that should not have been a first priority.

One of the reasons that behavior is different in some of these less

developed countries is that graft was the way that people get

things done. These traditions do not mean that the governments

cannot be reorganized and business processes cannot be carried on

in a different fashion. I believe we ought to devote more of our energies to helping these countries establish legal frameworks, to establish regulatory frameworks, help them get their capital markets

created so there is an infrastructure that will take our capital and

allocate it across the market efficiently.

I think in some regards we have made tremendous progress in

places like China over the last decade. There is still a great way

to go. There is a natural tendency when capital goes into China to

try to link that capital up with state-owned enterprises, and then

it does not become an investment; it simply becomes a way to hide

the true cost of the rotting industries that are a remnant of the old

communistic system.

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We really need to work directly, government to government and

through these other entities, to try and put in place true market

structures that will allow us to take capital and invest it there and

have it be used efficiently. If that happens, we have tremendous

opportunities to raise the productivity and the standard of living of

workers there. Then we can repatriate the returns on that capital

to help finance the consumption of a larger aging population without having to do it purely on the backs of our own workers. We

really do need to think about this.

Mr. HEWITT. If I could just add one short point: it is that a lot

of this investment that is happening in China is coming from companies in the form of foreign direct investments. Watson Wyatt is

over there. Citigroup is there. General Electric is becoming a major

employer. Volkswagen regards China as its second-largest market

in the world, larger than the United States.

So some of this process is going to be accomplished through

multi-nationals. That leaves a substantial role for the multilateral

institutions to focus on institutional reform.

The CHAIRMAN. Doctor, one last question to you. I guess the

thing that intrigues me now, during my college years and younger

years one of the things to talk about was the dynamics of the great

Japanese economy and all that was going on over there and we

were trying to search out why we could not have some of our institutions interrelate more like theirs did and all of that. Yet now, of

course, we have seen almost a decade of stagnation or flat economy

in Japan.

You talked a bit about Japan’s economic situation. Are there policy changes that Japan can make to improve their economy now?

How do they work their way out of where they are?

Dr. SCHIEBER. Frankly, the bottom line is I am not sure they can

work their way out of where they are right now.

The CHAIRMAN. Somebody referenced a default. Maybe it was

you, Doctor.

Dr. SCHIEBER. No.

The CHAIRMAN. Oh, it was you, Paul. That is why I thought that

question fit most appropriately now.

Dr. SCHIEBER. First of all, they do have tremendous structural

problems, the way their corporate sector works, the interrelationship of the corporate sector with the banking sector, and so forth.

Beyond that, they are an extremely old society, even relative to

most of the rest of the developed world. They are way ahead of us.

Their fertility rates are very low, around 1.25, 1.3, and my guess

is they are going to fall. They have virtually no immigration. It is

just a closed society.

They have very high rates of saving, personal saving. There is a

table in my presentation that shows almost an astronomical one,

but they have totally squandered that over the last decade and I

think this is the lesson we really need to focus on because in so

many other ways we are very different.

We do have dynamic regulatory structures that allow our industries to change and for there to be a true creative/destructive process. We have the highest immigration rates in the developed world.

We have high fertility. Many of their problems we do not have.

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But what they have done over the last decade is to have taken

a very high rate of personal savings, and for all practical purposes

they have squandered it. They have squandered it largely through

fantastic government deficits that they have run. They have gone

from one of the lowest government debts in the developed world to

the highest. It is around 1.5 times GDP now?

Mr. HEWITT. It will be 160 percent this year.

Dr. SCHIEBER. A fantastic, fantastic debt that they have run up.

They built the big airport out in Osaka that is now sinking into the

sea and these massive infrastructure projects that are not going to

provide any rate of return to the Japanese society over the long

term.

The thing we have to be very careful about is spending our resources through government regulation or government investment

that are not going to net us a return. We have to be very careful

about protecting dying industries. For example, we need to think

very seriously about what we are doing with the steel industry.

We also need to be very careful about sucking out the savings

that does go on in the personal sector of our economy. We should

not use personal savings for deficit financing at the government

level to support consumption for a relatively young, healthy elderly

population. If we squander our savings they will not add to the

value of our overall welfare.

So I think that the waste of the resources they have is something

we should pay very close attention to. I do not think they can work

their way out of most of the other things.

The CHAIRMAN. Well, you have answered—the follow up was

going to be lessons learned from them that we ought to apply.

Dr. Geipel, in your testimony you touch on the strength of the

voluntary sector. The folks who engage in these activities contribute greatly to the vibrancy of our society. This is, I think, clearly

an opportunity. Do you have any policy recommendations at the

Federal level to better enable the voluntary sector?

Dr. GEIPEL. You are right to highlight that as an opportunity and

something that really sets the United States apart. At the risk of

straying into Euro-bashing, I have spent a lot of time on the continent and I am struck by the retirement patterns that seem to

take people in one of two directions, either toward a very inward

focus tending to the garden or to whatever few of grandchildren

might exist, or to the other extreme, a kind of manic tourism,

notching off the number of countries one could conceivably visit before one’s strength dissipates.

It seems to me that what is missing in that—I do not want to

disparage either one of those pursuits——but what is missing is

the opportunity for something in between, which is something larger than one’s own home and garden but focused on the community,

giving back with the opportunities that we have through our

churches, through community organizations, volunteer groups,

which I do believe can significantly offset labor shortages that

might arise in the future with regard to care of individuals in nursing homes, dealing with indigent populations, and so forth.

So it is clearly an opportunity for us. What can Federal policy

do? There I would say essentially it is looking to stay out of the

way. It is one of those things that seems to be working reasonably

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well in the United States, and what Federal policy can do is simply

look for additional opportunities to encourage private philanthropy,

which very much undergirds the voluntary sector, doing things

which I think the Federal Government is already doing.

I think the approach of the so-called Faith-Based Initiative right

now is appropriate, because what it does is simply look at what the

Federal Government can do to remove barriers, to level the playing

field between faith-based organizations, voluntary groups, and government agencies, paying attention along the way to the separation

of church and state, but what can government do to simply level

that playing field to engage those organizations more?

The efforts that are being made to create Federal programs for

volunteering I realize are sometimes controversial, to the extent

that public dollars are used, to create, in effect, paid volunteers.

My attitude is that it reflects an important experiment, the Senior

Corps now and so forth, that reflect an important experiment.

There may be certain individuals in retirement who respond more

to those types of incentivized programs for volunteering, so I see

no harm in the Federal Government trying to experiment with the

impact of those.

But in essence, I think the bottom line is the best thing the government can do is simply not to do anything that would constrain

the health or growth of that sector.

The CHAIRMAN. If you will, I am not coining a phrase; I am

reusing one that has gained attention over the last few months,

Old Europe versus New Europe. I have watched and understood

that countries emerging out from behind the Iron Curtain and reentering a market economy and a more democratic or representative process recognized in some instances that they could not get

it all done through government, that they had to work to stimulate

a voluntary sector back into their economy.

Is there a difference today between a Poland or a Czechoslovakia

and let us say a France or Belgium as it relates to volunteerism

and a greater support, or is this just a European phenomenon of

the little garden in the back yard and I think you said checking

off the countries?

Dr. GEIPEL. No, I think there are some differences. It is interesting to me to refer back to Chairman Greenspan’s comment that in

earlier times, the shortage of labor in the United States spurred us

to look elsewhere, toward technological innovation. I would argue

that the absence of the alternative of big government in some of

the emerging post-Communist nations has caused more attention

to be paid to private alternatives, philanthropic alternatives. The

community foundation movement, for example, which has been

thriving in the United States, is further along in some parts of

Central and Eastern Europe than it is in the West. That is an indication.

I also think that we should not overlook the role of the church,

of various churches of all faiths. Poland is an obvious example, a

more religious society, religious in the sense of active participation

and practice, not identification in the secular sense but active involvement, Poland clearly and other parts of Eastern Europe, as

well, that is more of a role. I think that again leads people to find

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opportunities through the church that perhaps they are not finding

in places such as Germany and France.

The CHAIRMAN. Gentlemen, I wish I had more time. I have more

questions but I am out of time and I suspect probably you are, too.

So we thank you very much for coming, being with us today and

helping us build this record. We will continue to work on this issue.

We think it is extremely valuable that collectively I and my colleagues know more about and look at what we do here policy-wise

through some of these glasses of understanding. I think it will be

helpful in the long term. Obviously in the next decade we have

some very critical policy choices to make here that have long-term

impact and I think you reflected on those today.

So thank you very much and the committee will stand adjourned.

[Whereupon, at 11:51 a.m., the committee was adjourned.]

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