3. Extend working lives. One of the best ways to reduce the crushing burden ahead is to encourage seniors to work longer -- and make it easier for them to do so. This would require more than raising the age of eligibility for full benefits under Social Security and Medicare. To encourage longer working lives we should abolish the Social Security "earnings test" for beneficiaries who continue to work. (Let me stress that this reform must be implemented along with the affluence test I have described; a stand-alone aberration such as what Congress has recently proposed would be an unearned windfall for senior-citizen CEOs like me.) Yes, there would be a small direct budget cost. But the benefits to the economy and to society, and to seniors themselves, of encouraging later retirement would be far more significant than the small increase in outlays.
The maturity, wisdom, and experience of older adults should not be lost to the workplace. This is a matter not just of combating age discrimination but of unlocking a powerful human resource. The market for jobs for which the elderly might be especially well suited should be explored: for example, full- and part-time service jobs in health care, child care, and various education and training efforts. It is time to do elders the honor of making their phase of life one of ongoing contribution -- of genuine "generativity," to use Erik Erikson's classic description -- as long as they are willing and able.
Not everyone, of course, is able to go on working. Richard Trumka, the president of the United Mine Workers, who recently served with me on the Kerrey-Danforth Commission on Entitlement and Tax Reform, warns that later retirement is simply not a realistic option for worn-out industrial laborers in physically demanding occupations. But such workers make up a small and shrinking share of the total labor force. Under my plan they would still have the option of early retirement (though with reduced benefits) and would be protected by federal Disability Insurance and Workers Compensation, not to mention the system of mandatory personal retirement accounts that I propose below. I would also use a small part of the savings achieved by raising the Social Security retirement age to lower eligibility ages and raise benefit levels under Supplemental Security Income, the means-tested floor of protection for the low-income elderly. In sum, we should encourage the elderly to work but not force work on those who are truly incapacitated. In any case, our national retirement policy should not be determined by the miner retiring at age sixty-two any more than by the police officer retiring at fifty-two or the athlete at forty-two.
4. Establish a system of mandatory pensions or personal retirement accounts. I have concluded -- reluctantly -- that a fully funded, privately managed, and portable system of personal retirement accounts should be mandatory. The system I envision would initially supplement Social Security -- and over time might increasingly substitute for it. But Social Security would continue to provide a floor of protection to all Americans, albeit one subject to the limits of the affluence test described above. Governments around the world have tried to achieve both these objectives -- retirement savings and poverty protection -- in a single system. They have achieved neither efficiently.
Why mandatory? In 1993 C. Fred Bergsten, the chairman of the Competitiveness Policy Council (a publicly financed, bipartisan group), asked me to chair a committee on capital formation. An impressive group of the nation's leading economists joined me in this effort. I had expected to hear that certain tax favors for saving (IRAs, for example) would significantly increase net savings -- that is, savings beyond the cost of the tax incentive that encourages them. I quickly learned otherwise. The net effect of many of these conventional incentives has been marginal, because much of the money deposited in IRAs is simply shifted out of other investments. When I asked how we might increase net savings significantly, one important area of agreement emerged: mandatory pensions or savings accounts covering the entire work force. In addition to boosting private saving, such plans -- by making tomorrow's retirees more self-sufficient -- would allow us to reduce traditional Social Security gradually, thus reducing public dissaving as well. I am perfectly well aware of the libertarian argument that decisions about saving should be left entirely to individuals. The melancholy truth, however, is that many Americans are currently too myopic to save for the future unless compelled, and so end up becoming free-riders in the government safety net.
Why fully funded? First, to boost national savings. A funded retirement system would add to America's capital stock; a pay-as-you-go system does not. Second, because the dynamics of pay-as-you-go financing have encouraged politicians around the world to promise benefits that can be paid for only by excessively high taxes on future generations. The only way to avoid that temptation is to make it clear to everyone that above some minimum safety net a worker's future benefits will be determined solely by the resources that have been set aside for that worker, by some combination of employer contributions and the worker's own savings. These pensions must be invested in diversified investment-grade assets and must be the worker's personal property.
Why privately managed? A sound system of mandatory pension accounts must be publicly regulated to maintain fiduciary standards but should be privately managed to maximize returns. The evidence is overwhelming that publicly managed systems, which are often required to invest in low-return government securities, earn far less than privately managed accounts invested in the real economy.
Why portable? The new and fluid global economy, characterized by intense competition, rapid innovation, and relentless technological change, has made "lifetime employment" with one company rare. Instead making several major job changes in one's lifetime -- perhaps seven or eight for the average worker now in his or her twenties -- is normal, and therefore many workers lack enough years of service in any one job to qualify for a pension. The plan I propose would vest all contributions immediately, and so workers could take their pension savings with them as they moved from job to job.
To provide adequate retirement income, these accounts would require substantial contributions. In my view, all workers (in some combination with employers) should be required to contribute four to six percent of their pay -- which, added to FICA, would come to a total contribution of 1618 percent of pay. As a point of comparison, Australia's new system of mandatory pensions will ultimately result in total contributions of 15 percent of pay. In the scheme I propose, workers would have the option of making additional voluntary tax-free contributions. Employers who currently provide pensions could divert their contributions to workers' savings accounts as well. The primary function of this system would be to finance retirement and survivors' benefits; in time it might also pay for long-term medical care.
Although mandatory pension contributions would be made in addition to current FICA payroll taxes, and thus would decrease the consumable portion of each paycheck, the system would be linked to the Social Security reforms described above -- and this would prevent FICA taxes from rising to the alarming levels forecast for the next century. Eventually workers would be paying no more (and maybe substantially less) in combined FICA and savings contributions under my plan than they would be paying in FICA taxes alone in a status quo future. By putting more of our income into genuine savings today, we could relieve the crushing payroll-tax rates that unfunded public transfers will otherwise exact on workers tomorrow.
The reform I propose would also require that any current-year Social Security or Medicare cash surplus be transferred, on a pro rata basis, to workers' personal retirement accounts. This provision would be consistent with pay-as-you-go accounting. Meanwhile, workers would have a direct stake in reforms that constrain future growth in federal benefits. To the extent that Social Security declines as a share of payroll, a growing share of FICA taxes would automatically be transferred to workers' savings accounts. Let me repeat: My proposal is for a two-tiered system under which everyone would continue to receive Social Security benefits. But over time my proposal would also allow us to go a step further. As the savings in private retirement accounts built, the current universal Social Security system could be converted into a purer and much less costly floor of protection that paid out benefits only to the truly needy.
A mandatory savings plan would generate substantial net gains in household (and national) savings -- and thus ultimately gains in productivity and living standards. For middle- and upper-income workers subject to the affluence test this system would at least make up for reduced government retirement benefits -- and probably go much further. For lower-income workers, who are the least likely to save (either on their own or through pensions), it would vastly reduce the chances of a destitute retirement. Seniors who were beneath the affluence-test threshold would receive their private pension on top of full federal benefits. True, the deduction from wages would be a burden, but it's worth noting that because of the Earned Income Tax Credit, the existing FICA tax on many of the working poor is now entirely borne by the federal government.
Dismissed until recently as too "radical," "privatization" of Social Security has burst upon the scene over the past year. Major proposals are under development at half a dozen think tanks -- left, right, and center. Privatization has been featured on the cover of Time and embraced by the presidential candidate Steve Forbes, and, in one form or another, is endorsed by seven out of thirteen members of the Administration's official Social Security Advisory Council.
My plan has elements in common with many of these proposals. Where it differs from most is that it would fully pay for the transition to a funded Social Security system -- and would do so without adding to the national debt and without new general-purpose taxes.
The challenge is that a single generation must somehow pay for two retirements -- its own and that of its parents. Some proposals simply ignore the challenge. Take Steve Forbes's plan to keep all benefits for current retirees intact and yet permit younger workers to shift a substantial share of their FICA contributions into personal retirement accounts. What his plan would add to private savings it would cancel out dollar for dollar by increasing the federal deficit. Other proposals would issue Treasury debt directly to Social Security beneficiaries in the amount of the system's accumulated liabilities. This, too, is a zero-sum game that will leave tomorrow's workers no better off than if we had never reformed the system. A few proposals, like that of the Social Security Advisory Council, are more honest. But to pay for the transition they would resort to large general-purpose tax increases.
My plan would pay for transition costs the old-fashioned way: not with smoke and mirrors but by taking the essential step of asking current beneficiaries and current workers to give something up -- the former by forgoing some benefits, the latter by saving more. This would not be painless. The magic of compounded returns from the stock market and other long-term investments cannot solve all our problems. To save more, we must consume less, at least temporarily. This "transition cost" is the price of escaping the generational chain letter we have so far depended on.
5. Shift our tax base from income to consumption. In an aging society taxpayers should be penalized for what they take out of the economy (consume) as opposed to what they put in (save). I therefore propose that only "consumed income" -- spending, that is -- be taxed. It is true that by exempting savings from taxation this reform would narrow the tax base. On the other hand, it would also widen the base, by rendering taxable various forms of government-financed and -subsidized consumption -- from Social Security benefits and the insurance value of Medicare to employer-paid health care -- which today are partly or fully tax exempt. Tax rates thus need not be any higher than they are today.
Many will object that consumption taxes are regressive; but the consumed-income tax plan introduced by Senators Sam Nunn and Pete Domenici -- in which the more one spends, the higher one's tax rate -- demonstrates that consumption taxes need not sacrifice the principle of progressivity, which I support. Moreover, without increased saving we cannot expect the real income of the typical American household to grow again -- and without such growth the distribution of incomes will continue to widen. The zero-sum politics of economic stagnation will overwhelm whatever weak contribution to economic equality we might continue to derive from our current system of progressive income-tax rates.
We are currently bombarded with tax-reform proposals of every variety -- from sales taxes to flat taxes. Some want to get rid of the Internal Revenue Service. Some want tax returns that can be filled out on a postcard. Who doesn't want simplicity? And who likes the IRS? But I would suggest a more important criterion for evaluating tax reforms: Which is most likely to increase net national savings?
6. Mount a broad-scale public-education effort to promote saving. National leaders must help to mobilize citizens by articulating a sense of moral imperative. A thrift plan needs a bully pulpit.
Can the right kind of education and exhortation make a difference? Consider Japan. Until the 1950s, when the country rallied behind a campaign to promote thrift, the Japanese were poor savers. Since then they've become famous for their saving. Or consider Singapore, whose Central Provident Fund has furnished much of the investment capital that has fueled Singapore's legendary economic growth -- not to mention the savings that have enabled nine out of ten households to become homeowners. Or consider Chile and Australia, which have also established national pension systems based on the principles of full funding and portability. In each instance public education was crucial to securing public support. In Chile, for instance, José Piñera, then the Minister of Labor, went on national television, often weekly, to explain why the mandatory pension plan was such good news for Chileans.
In a society like our own, where grassroots consensus is so important to governance, public discussion and debate are all the more important. The problem is that for at least three decades leaders have been telling us that consumption, not savings, is the key to prosperity. The campaign in favor of consumption has worked -- all too well. Now it's time for a different kind of campaign -- one in which not only our political leaders but also our businesses, our universities, and our public-policy institutions must persuade Americans to adapt to the realities of our aging society.
What we need most of all is a moral vision, a Middle-Class Bill of Responsibilities -- not a gaggle of leaders falling over one another in their rush to propose a Middle-Class Bill of Rights, or the middle class silently rehearsing the mantra "We are not part of the problem and we need not be part of the solution." Instead we must be encouraged to ask, What do we expect individuals and families to do for themselves, and what do we expect federal, state, or local governments to do for them? What are our responsibilities to our own children and grandchildren? How can we strengthen families so as to provide support for older people? What are our obligations as a nation to our collective progeny?
The manual for Germany's social-security system looks, at first glance, a lot like our own -- page after page describing the benefits due if one retires, is widowed, or loses one's job. The most obvious difference is the generous benefits to German children. But there is a more striking contrast. For each benefit, alongside a box describing "Your Rights" is a box describing "Your Duties." Citizens are thus reminded that society must always balance the payer against the payee, the future against the present. We need to find that balance again in our culture.
Why can't the President call for a White House Conference on Aging different from the one held last year -- not one that panders to the senior lobby but one that encourages serious dialogue between old and young? Why can't the President call for a global summit at which the leading economies focus on reducing their tremendous and unsustainable unfunded liabilities, and at which developing economies with younger populations concentrate on avoiding the mistakes the industrial countries have made in providing old-age security?
Companies also have a major educational responsibility. With their human-resources and accounting departments, they are able to educate workers on the basics of saving -- why they should save more, the power of compound interest, how to invest. They can also make it easier for their employees to save -- through automatic salary deductions, 401K plans, stock-purchase and dividend-reinvestment plans.
Bringing our youth into the savings crusade is another key. John F. Kennedy once challenged us to ask not what our country can do for us but what we can do for our country. Today's youth see the most conspicuous interest groups in our political system busily asking what the country can do for them. But who represents the future and the general interest? The young, alas, are the new silent majority. The demographer Samuel Preston once remarked apropos of the relentless growth in senior entitlements that the political system would behave a lot differently if people were forced to live their lives backward -- that is, if they had to look forward to the burdens imposed upon youth as their own future.
I suggest that young people embark on dual careers -- a private career and one as a citizen. As citizen lobbyists in behalf of the future, they are responsible for becoming informed about the debts they are going to assume, the unfunded liabilities they are going to pay for, and the unsustainable taxes they are going to bear. Once they are informed, perhaps America's youth will initiate an honest dialogue with their parents and grandparents, without assuming that their elders are greedy old fogies who don't care. My generation may be uninformed and even misinformed, but we do care about our children, our grandchildren, and our collective future. But if anyone is to create a general-interest lobby in behalf of the future, youth must lead the way.
If we expect our leaders to lead, the voters must make it safe for them to do so. The Concord Coalition is a bipartisan grassroots "lobby for the future," dedicated to breathing new life into the American Dream. The warm reception we have received from countless concerned citizens has rekindled my faith that we can still build a special interest in behalf of the general interest.
And what of the special role for geezers like me? Pessimists say, "Forget it" -- Americans will not reform senior benefits until a severe crisis is actually upon us, but will persist in viewing them as contractual obligations that by definition are always affordable. After all, an America that acknowledges limits is an America that has lost the one illusion that makes it unique and creative. According to this view, America must always be an unteachable force of nature that can never back away from any promise or expectation, no matter how extravagant. This, pessimists say, is why American voters repeatedly elect leaders who promise lower taxes, higher benefits, rejuvenated economic growth, and a magic bullet for every social problem -- without caring how the pieces fit together.
But I have a more optimistic view. Two years ago I was interviewed by 60 Minutes about the need to enact gradual but far-reaching structural reforms in federal entitlements for the elderly. The show's producers, after patiently taping my arguments, invited me to join them at a middle-class retirement community. Here, they said (with a few wry smiles), I could explain my suggestions to those who would be immediately affected.
Standing before this group of retired grandparents, I began by showing photographs of my own grandchildren. I explained my concerns about their future and the world they would inherit. I then reminded the retirees how much of our national affluence today rests on the willingness we had to make collective sacrifices during the Great Depression and the Second World War. Back then we felt that we were "all in this together" for the sake of tomorrow. I told them that the German theologian Dietrich Bonhoeffer said it best for us when he observed, at the height of the Second World War, "The ultimate test of a moral society is the kind of world that it leaves to its children."
Sooner or later, I told the retirees, we will have to prepare for the future. We will have to balance our public budgets, trim back benefits to those who need them least, save more as households, retire somewhat later from the work force, explore innovative means of economizing on health care, take a more effective public interest in the welfare of children, and offer the rising generation some tangible evidence that we are willing to make sacrifices in their behalf. If we do so sooner, we still have time to plan for a gradual and humane transformation. If we do so later, the changes are likely to be forced upon us, suddenly and painfully, in the midst of an economic, political, and family crisis that will leave the eventual outcome much in doubt.
Given all that, I asked them, if everything else were also put on the table and it really would lead to a balanced budget, how many of you would be willing to give up some share of your federal benefits, above what you need to live on, in order to ease the deficit burden on younger generations? To the visible surprise of the 60 Minutes producers nearly everyone raised a hand.
The generation I was speaking to survived the Depression and fought and won the Second World War. After the war this generation provided its returned veterans with college educations, built the interstate highway system, eradicated polio, took us to the moon, and won the Cold War against communism. Against these monumental accomplishments what it would take to solve our current crisis seems small. I believe that this generation is capable of doing the right thing, and that politicians might well discover that it is better to appeal to their nobler instincts than to pander to their baser ones.
A people who have made a tradition of quick gratification must now be asked to focus on the requirements of a society graced with the patina of age -- on saving rather than consumption, on prudence rather than desire, on collective restraint rather than individual satisfaction. As Americans grow older, they will have to recognize that the live-for-today attitude that may be endearing or at least understandable in youth is not just unseemly but ruinously dysfunctional at the far end of life. They would do well to heed the eighteenth-century French moralist Joseph Joubert, who warned, "The passions of the young are vices in the old."
The online version of this article appears in two parts. Click here to go to part one.
Illustrations by Nicholas Gaetano
The Atlantic Monthly; May 1996; Will America Grow Up Before It Grows Old?; Volume 277, No. 5; pages 55-86.