alan greenspan : future of the social security programme and economics of retirement testimony of mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the special committee on aging, us senate, washington dc, 15 march 2005. * * * mr. chairman, senator kohl, and members of the committee, i am pleased to be here today to discuss the issues of population aging and retirement. in so doing, i would like to emphasize that the views i will express are my own and do not necessarily represent those of the federal reserve board. the economics of retirement are straightforward : enough resources must be set aside over a lifetime of work to fund consumption during retirement. at the most rudimentary level, one could envision households actually storing goods purchased during their working years for use during retirement. even better, the resources that would have otherwise gone into producing the stored goods could be diverted to the production of new capital assets, which would produce an even greater quantity of goods and services for later use. in the latter case, we would be raising output per worker hour, our traditional measure of productivity. the bottom line in the success of all retirement programs is the availability of real resources at retirement. the financial systems associated with retirement plans facilitate the allocation of resources that supply retirement consumption of goods and services ; they do not produce goods and services. a useful test of a retirement system for a society is whether it sets up realistic expectations as to the future availability of real resources and, hence, the capacity to deliver postwork consumption without overly burdening the standard of living of the working - age population. in 2008, the leading edge of what must surely be the largest shift from work to retirement in our nation's history will become evident as some baby boomers become eligible for social security. according to the intermediate projections of the social security trustees, the population 65 years of age and older will be approximately 26 percent of the adult population in 2030, compared with 17 percent today. this huge change in the structure of our population will expose all our financial retirement systems to severe stress and will require adjustments for which there are no historical precedents. indeed, retirement, generally, is a relatively new phenomenon in human history. average american life expectancy a century ago, for example, was only 47 years. relatively few of our citizens were able to enjoy many postwork years. one consequence of the sizable baby boom cohort moving from the workforce to retirement is an inevitable slowing in the

percent to 80 percent of pre - retirement income, average workers by the middle of this century should be aiming to replace about 45 percent of their pre - retirement income, rather than today's 33 percent, out of some combination of private employer pension benefits and personal saving. the required increases in private saving would be less to the extent that social security tax increases are part of the solution. however, to avoid any changes in replacement rates, the social security tax rate would have to be increased from the current 12. 4 percent to about 18 percent at the middle of the century. * * * once we have determined the level of benefits that we can reasonably promise, we must ensure that we will have the real resources in the future to fulfill those promises. when we evaluate our ability to meet those promises, focusing solely on the solvency of the financial plan is, in my judgment, a mistake. focusing on solvency within the social security system, without regard to the broader macroeconomic picture, does not ensure that the real resources to fulfill our commitments will be additionally, we could borrow from abroad, which would build up the capital stock. in so doing, however, we would also build up a liability to foreigners that we would have to finance in the future. the replacement rate is the ratio of social security benefits to wages in the year preceding retirement. there. for example, if we build up the assets in the social security trust fund, thereby achieving solvency, but offset those efforts by reducing saving elsewhere, then the real resources required to meet future benefits will not be forthcoming from our economy. in the end, we will have accomplished little in preparing the economy to meet future demands. thus, in addressing social security's imbalances, we need to ensure that measures taken now to finance future benefit commitments represent real additions to national saving. we need, in effect, to make the phantom " lock - boxes " around the trust fund real. for a brief period in the late 1990s, a common commitment emerged to do just that. but, regrettably, that commitment collapsed when it became apparent that, in light of a less favorable economic environment, maintaining balance in the budget excluding social security would require lower spending or higher taxes. last year, social security tax revenues plus interest exceeded benefits by about $ 150 billion. if those funds had been removed from the unified budget and " locked up " and congress had not made any adjustments in the rest of the budget, the unified budget deficit would have