edward m gramlich : a first step in dealing with growing retirement costs remarks by mr edward m gramlich, member of the board of governors of the us federal reserve system, at the spring 2005 banking and finance lecture, widener university, chester, pennsylvania, 21 april 2005. * * * population aging is a worldwide phenomenon. in this country the looming retirement of the baby boom generation will take the united states ratio of workers to retirees from 3. 3 today to 2 in about thirty years. around the world, under present policies and demographic trends, the ratio of workers to retirees is likely to fall to less than 2 for countries as diverse as australia, brazil, canada, china, france, germany, korea, mexico, russia, turkey, and the united kingdom. the ratio is likely to fall to less than 1 for italy and japan - that's right, in a few decades these two countries will be looking at a population situation in which they will have fewer workers than retirees. demographic movements of this magnitude will require significant policy changes. the public costs of retirement systems will rise markedly unless countries raise their age of eligibility for retirement program benefits or cut these benefits. moreover, small tax increases or benefit cuts will not do the job - the implicit actuarial deficits of these programs are so large that halfway measures will not be adequate. the united states is in relatively good shape by international standards. in contrast to other countries, the united states birth rate is not far below the rate that stabilizes population levels, and the tax rates necessary to finance our main retirement programs, social security and medicare, are relatively low. but while the present situation of the united states may not be alarming, the outlook comes closer to being so. outlays are projected to rise slightly more than program revenues for social security and much more than program revenues for medicare. the recent annual report of the trustees of social security and medicare projected rapid deterioration in the trust funds financing both programs, with the medicare fund being exhausted in fifteen years. their implication was that substantial tax increases or benefit cuts would be necessary to put both programs in long - term actuarial balance. what should we do to ensure the viability of social security and medicare? disaster is not imminent, but it seems pretty clear that in the not too distant future the united states, too, will have to confront some distinctly unpleasant policy choices. in this talk, i want to anticipate some of these choices. up to now

, as well as by his friend david hume, his mentor francis hutcheson, and other participants in the enlightenment. early political economists had made impressive contributions, many of them anticipating parts of smith's global view. but smith reached beyond his predecessors and subjected market processes to a far more formidable intellectual analysis. one hears a good deal of franz joseph haydn in the string quartets and symphonies of wolfgang amadeus mozart ; yet to my ear, at least, mozart rose to a plateau beyond anything haydn and his contemporaries were able to reach. so, too, in his sphere, did smith. he concluded that, to enhance the wealth of a nation, every man, consistent with the law, should be " free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of... other... men. " 2 " it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. " 3 the individual is driven by private gain but is " led by an invisible hand " to promote the public good, " which was no part of his intention. " 4 this last insight is all the more extraordinary in that, for much of human history, acting in one's self - interest - indeed, seeking to accumulate wealth - had been perceived as unseemly and was, in some instances, illegal. in the opening paragraphs of the wealth of nations, smith recognized the crucial role played by the expansion of labor productivity in improving welfare when he cited " the skill, dexterity, and judgment with which labor is generally applied " as one of the essential determinants of a nation's standard of living. " whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must in that particular situation, depend upon... the productive powers of labor. " 5 more than two centuries of economic thought have added little to those insights. smith, on remarkably little formal empirical evidence, drew broad inferences about the nature of commercial organization and institutions that led to a set of principles that would profoundly influence and alter a significant segment of the civilized world of that time. economies based on those principles first created levels of sustenance adequate to enable the population to grow and later - far later - to create material conditions of living that fostered an increase in