Dollars and Jens
Friday, December 02, 2005
The Chairman Speaks
Greenspan had a speech today to the Federal Reserve Bank of Philadelphia, and much of it is recited below.
I do not mean to suggest that the nation's budget problems will be solved simply by adopting a new set of budgeting rules. The fundamental fiscal issue is the need to make difficult choices among budget priorities, and this need is becoming ever more pressing in light of the unprecedented number of individuals approaching retirement age. For example, future Congresses and Presidents will have to weigh the benefits of continued access, on current terms, to advances in medical technology against other fiscal initiatives.As a point of clarification, that lag means there is some help to be had from productivity gains, even under the current Social Security structure; they are, however, circumscribed.
Because the baby boomers have not yet started to retire in force, we have been in a demographic lull. But this period of relative stability will soon end. In 2008--just three years from now--the leading edge of the baby-boom generation will reach 62, the earliest age at which Social Security retirement benefits can be drawn. And in recent years, about half of those eligible to claim benefits at that age have been doing so. Just three years after that, in 2011, the oldest baby boomers will reach 65 and will thus be eligible for Medicare.
Currently, 3-1/4 workers contribute to the Social Security system for each beneficiary. Under the intermediate assumptions of the program's trustees, the number of beneficiaries will have roughly doubled by 2030, and the ratio of covered workers to beneficiaries will be down to about 2. The pressures on the budget from this dramatic demographic change will be exacerbated by the anticipated steep upward trend in spending per Medicare beneficiary.
The soaring cost of medical care for an aging population is certain to place enormous demands on our nation's resources and to exert pressure on the budget that economic growth alone is unlikely to eliminate. To be sure, favorable productivity developments would help to alleviate the impending budgetary strains. But unless productivity growth far outstrips that embodied in current budget forecasts, it is unlikely to represent more than part of the answer.
Higher productivity does, of course, buoy revenues. But because initial Social Security benefits are heavily influenced by economywide wages, faster productivity growth will, with a lag, also raise benefits under current law. Moreover, because the long-range budget assumptions already make a reasonable allowance for future productivity growth, one cannot rule out the chance that productivity growth will fall short of projected future averages.
In fiscal year 2005, federal outlays for Social Security, Medicare, and Medicaid totaled about 8 percent of gross domestic product. The long-run projections from the Office of Management and Budget suggest that the share will rise to 9-1/2 percent by 2015 and to about 13 percent by 2030. So long as health-care costs continue to grow faster than the economy as a whole, they will exert budget pressures that seem increasingly likely to make current fiscal policy unsustainable. The likelihood of growing deficits in the unified budget is of especially great concern because the deficits would drain a correspondingly growing volume of real resources from private capital formation and cast an ever-larger shadow over the growth of living standards.A beneficiary can retire at any point between 62 and 67 and start claiming Social Security, but gets a bigger monthly check in exchange for a later retirement. The upper end on this program will need to be raised, whether the lower end is or not; this would expand the resources the economy is capable of producing, which will in any case still be strained:
I fear that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver. If existing promises need to be changed, those changes should be made sooner rather than later. We owe future retirees as much time as possible to adjust their plans for work, saving, and retirement spending. They need to ensure that their personal resources, along with what they expect to receive from the government, will be sufficient to meet their retirement goals.I'm not sure why this point isn't paired more closely with "the deficits would drain a correspondingly growing volume of real resources from private capital formation"; just as debt pulls such resources out the back door, taxes do out the front. In this sense, as taxes plus debt equals spending, it is spending that is the problem. (I personally think this analysis of it is a bit over-fixated on money; in a Von Misian sense, it is more directly the spending that is the problem, with those goods and services the government purchases (or their opportunity-cost alternatives) removed from the private sector. It's easier to talk to people in more classical terms, though.)
Addressing the government's own imbalances will require scrutiny of both spending and taxes. However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base.
Our current, largely pay-as-you-go social insurance system worked well given the demographics of the second half of the twentieth century. But as I have argued previously, the system is ill-suited to address the unprecedented shift of population from the workforce to retirement that will start in 2008. Much attention has been focused on the forecasted exhaustion of the Social Security trust fund in 2041. But solving that problem will do little in itself to meet the imperative to boost our national saving. Raising national saving is an essential step if we are to build a capital stock that by, say, 2030 will be sufficiently large to produce goods and services adequate to meet the needs of retirees without unduly curbing the standard of living of our working-age population.This feels increasingly, to me, over-fixated on money, though the comment about capital stock at least hints that the chairman himself isn't confused by this language. Piling up green pieces of paper somewhere, to be unleashed in an economy-wide manner when we need more goods, is simply going to produce inflation — if there aren't goods to be purchased, any goods purchased for the retirees will have to come out of the standards of living of workers and others. If we are hoping to consume more goods per worker in the future — and since the rest of the developed world faces the same problem, we might as well imagine we have a closed economy — we will have to increase future productivity per worker, and the clearest way to do that is to divert some consumption spending toward investment in the capital goods that will allow workers to be more productive.
Unfortunately, the current Social Security system has not proven a reliable vehicle for such saving. Indeed, although the trust funds have been running annual surpluses since the mid-1980s, one can credibly argue that they have served primarily to facilitate larger deficits in the rest of the budget and therefore have added little or nothing to national saving.
(It's entirely possible he doesn't intend "saving" to evoke what it evokes to me; certainly global net saving into the financial system is going to be pretty much equal to global net investment in these capital goods. Perhaps that's obvious to his audience. Perhaps he merely assumes it is.)
Crafting a budget strategy that meets the nation's longer-run needs will become more difficult the more we delay. The one certainty is that the resolution of the nation's unprecedented demographic challenge will require hard choices that will determine the future performance of the economy. No changes will be easy, as they all will involve setting priorities and, in the main, lowering claims on resources.
It falls to our elected representatives to determine how best to address the competing claims on our limited resources. In doing so, they will need to consider not only the distributional effects of policy changes but also the broader economic effects on labor supply, retirement behavior, and private saving. In the end, the consequences for the U.S. economy of doing nothing could be severe. But the benefits of taking sound, timely action could extend many decades into the future.