Transcript
Debate and Panel Discussion: Go to transcript for Question and Anwswer Session
Michael Armacost: Good morning, everybody. I'm Mike Armacost. It's my pleasure to welcome you to this fourth in a series of national issues forums focusing on questions that we at Brookings hope will be at the center of the discussion between the presidential candidates between now and the fall. And we began with a discussion on race issues in January. We've had to subsequent discussions, one on governance issues, one on safety net questions. And this morning we're taking up challenges in aging population. And, of course, some of those issues have been prominent in the debate today on social insurance and health care. There were a number of other issues that will flow from the inexorable aging of our population, and we have a welcome opportunity this morning to get into those.
Before I introduce our moderator, let me simply say the format of the program this morning, as it was conceived, was designed to allow a spokesman for the Bush and the Gore campaigns to outline some of the thinking of Governor Bush and Vice President Gore, and then to have a discussion, including some of our own people and others around town who devote their waking hours to these issues. We're delighted that Glenn Hubbard and Chris Edley are here representing the campaigns. That our own Bob Reischauer, we still refer to him as our own, has taken up since January the presidency of the Urban Institute. Hank Aaron, long time expert on social insurance, healthcare, and a host of other issues. And Stuart Butler from the Heritage Foundation are with us this morning.
We'll have our first presentations from Glenn Hubbard and Chris Edley, and then we'll go directly into a discussion which Dan will moderate. I want to stay before we start that this is being video taped for the Brookings web site, www.brookings.edu. It will be archived, and can be watched later. The transcript will be up by this afternoon. There are additional materials on this subject on our web site, including an online chat that Hank Aaron conducted recently in which he answered a number of issues that relate to the question of aging.
Our next P2K Forum will be held June 14th and will be focused on urban and metropolitan issues. We welcome you here this morning and without further ado, let me introduce Dan Schorr. Dan we regard as one of our own, too. He's been a stalwart at our Friday lunch for as long as I've been here, and for years before. He is, I think, the last active member of Ed Murrow's news team who is still practicing his profession. You hear his analyses regularly on National Public Radio. He has covered virtually every great story for 60 years, both abroad and at home.
And we're delighted to have you, Dan, as our moderator this morning. And if the panelists will come up, we'll commence.
Dan Schorr: The reason for that demonstration is, my understanding is, the reason I was asked to moderate is they wanted somebody truly old to underline some of the problems of the aging. I'm delighted to do it, though. And let me say that I think it turned out to be very fortunate that this is a subject for now, because it was planned a long time in advance, but as you watched this nascent presidential campaign go on, one becomes aware on many, many issues, the two candidates, presumed nominees, are talking past each other, and haven't come head-to-head. If there's any issue which I think has been joined, it is the issue of the aging and Social Security and so I think now we're in a better position to examine the two positions on this, and on many, many other issues which I think they still have to refine before they get to it.
The format will go something like this, we will have Glenn Hubbard of the American Enterprise Institute speaking first on behalf of the Bush campaign. And then Chris Edley, Christopher Edley, Jr., Harvard Law School, speaking on behalf of the Gore campaign. Both, I take it, know the positions of their principals pretty well.
We were then going to have them debate a little bit with each other, but we've made a last minute decision that in order to bring this to the people more, after they have finished, we will then bring in our experts without making too much of a debate. We're really looking more for an illuminating conversation than we're looking for a formal debate.
So, with no further ado, Glenn Hubbard.
Glenn Hubbard: Thanks, Dan. I would like to start by thanking especially Brookings for hosting events like this. In the presidential election season these debates and events are very useful in general, as Dan indicated, especially on this topic. This is a topic, the issue of policies toward the aging, in which there are clear intellectual and policy differences between the two candidates.
Before I begin my remarks, I just wanted to start with a reminder or observation that fundamentally we're here today to talk about a good news subject, living longer and opportunities that are created by longevity and by aging. This is a topic that spans a number of important policy areas in technology policy, healthcare policy, social insurance, pension policy, and economic policy.
Governor Bush's message in this area, a message that he has articulated to his advisors and then to the public since the beginning of the campaign is that preparing for these opportunities is not so much to be thought of as a budget problem but as a call for leadership, to rethink the key structure and financing of our programs without sacrificing past gains and current strengths. Today's topic is a bit broad for 15 minutes, while I hope to return in discussion to private pensions, an area of great research interest to me, and long-term care, and other topics, I want to focus on Social Security and Medicare.
One of the reasons that economists and the policymakers in this campaign have revisited Social Security and Medicare are the very large demographic changes that are affecting these programs. When Social Security was established in 1935, average life expectancy was 61. When Medicare was established in 1965, average life expectancy was 70. The positive demographic changes that we have experienced since that time, positive from the point of view of individuals living longer, are so dramatic that it's impossible and unrealistic to talk about relying simply on economic growth to maintain key social insurance programs. In Governor Bush's view, this is an opportunity as well, an opportunity to reaffirm the social compact among the elderly, the government, and future generations.
Saving Social Security to take that first and foremost involves leadership as opposed to the if it ain't broke don't fix it approach. The OASDI program has been a very successful program for reducing poverty among seniors, but modernization is clearly needed to meet the challenges posed by the pressures of an aging population. Probably the first and foremost challenge that's clear to economists and has surfaced in the campaign are approaching deficits. The system is based on a pay-as-you-go structure since the 1983 reforms, the system is currently producing cash flow surpluses with deficits over the long-term horizon. These interim surpluses have been routinely "borrowed" by the government to pay for various programs. While these IOUs are deemed, in budget terms to be assets of the Social Security system, they cannot be used to pay current benefits.
Indeed, to meet the promise implied by this budgetary activity in the trust fund, the government must eventually raise taxes, cut spending, or borrow more from the public. Under the past eight years, we have seen the present value of unfunded Social Security liability, Social Security deficits, grow by about 60 percent. Financing these deficits really has three choices. One choice that comes up in discussions of generational accounting in which economists compare the well-being of different generations in response to fiscal policy is to simply cut benefits substantially or increase payroll taxes substantially to maintain neutrality across generations.
A second approach would be to rely on budgetary arithmetic, that is to conceal deficits by issuing more government bonds as IOUs to the trust fund, leaving open, of course, the question of how funds will be raised to pay off these bonds. That lack of budget transparency has figured in proposals from the Vice President to double count interest savings from decreased borrowing as part of Social Security reform.
The third type of proposal is a centerpiece of Governor Bush's proposed schemes on Social Security reform, to use personal retirement accounts as part of a Social Security plan for younger workers, thereby bolstering the rate of return, and offering the opportunity to build real wealth.
Rates of return have been falling since the inception of the Social Security system. Today's workers can expect a real return of less than 2 percent. Future workers negligible. That pay-as-you-go structure and its maturation also create the problem of a lack of real wealth accumulation for many American families.
Just to give you a simple example, if a 22-year-old, a beginning worker, earning $20,000 per year at the beginning of her life, and then experiencing average wage growth, were to invest say 2 percentage points of payroll taxes in a personal account involving a mixture of stocks and bonds, that account would be worth about $100,000 in retirement.
I think it's fair to say that the centerpiece of Governor Bush's plans and discussions on Social Security is to start with principles to initiate a conversation with the American people, and not budget tricks. In particular, Governor Bush has sought to build a bipartisan consensus to save Social Security on the basis of six principles.
Principle Number 1, which I think of going back to the compact argument I made earlier, is that modernization, this improvement upon Social Security, must not change existing benefits for retirees now or near retirees.
Second, as a matter of budgetary integrity and transparency, the Social Security surplus must be locked away for Social Security.
Third, it should be possible not to increase Social Security payroll taxes in a reform.
Fourth, the government must not on its own invest Social Security funds in the stock market, instead those decisions about private investments best reside with individuals as decision-makers, as workers, as retirees.
Modernization must preserve the disability and survivors components.
And, finally, again, harkened as the centerpiece of the plan is that modernization must include individually controlled personal retirement accounts, which will augment the Social Security safety net. In the view of the Governor, based on his discussions with economists, these accounts will earn higher rates of return on average, have parameters of safety and soundness, and help workers build real wealth that can be passed on to their children.
This articulation of a set of themes based on sound economics, sound social insurance, and sound budgetary principles stands in contrast to the lack of a reform discussion from the vice president.
On the Medicare program, let me again start, as I did with Social Security, with the program as it was first conceived, and talk about the need for reform. The 1965 model of Medicare had two parts and does today, Part A, hospital insurance, which is largely financed by payroll taxes, about 87 percent. And Part B, the physician insurance part is financed principally by general revenue, about 75 percent. These two parts of the Medicare program together cover a little over half of the typical senior's health costs with the balance being covered either through medigap insurance policies or out of pocket expenses.
It's fair to say, as with Social Security, that Medicare has had dramatic successes in improving healthcare to seniors, but faces equally dramatic challenges going forward in terms of the scope of benefits, and in terms of solvency.
Taking first the solvency question, on the surface the way budget accounting is often presented, Medicare is okay measured by the short-term health of the Part A trust fund. Just to indicate how much of a lack of transparency there is in such an exercise, the Balanced Budget Act of '97 moved many of the home healthcare costs from Part A to Part B, which was then deemed to extend the solvency of the trust fund. That violates economic reality. In fact, the financial solvency is being undermined by precisely the same demographic changes that are undermining Social Security. That, again, raises the choice of raising taxes, reducing benefits, or reforming the system.
Another part that's clearly missing from the current Medicare program, but fortunately not from the current Medicare debate is the lack of prescription drug coverage. Unlike virtually all plans in the private sector, Medicare doesn't offer a prescription drug benefit, or a cap on out of pocket expenses. A third of beneficiaries currently pay for prescription drugs out of pocket, or go without them, and a tail of the distribution of the elderly spend a great deal of money out of pocket on prescription drugs. The current 65 version of Medicare also fails to provide access to many new technologies, and is bureaucratically complex.
Now, as with Social Security, Governor Bush's goal is to take a leadership role to talk about principles that have to guide any serious reform discussion. The first principle, as with the Social Security compact, is that Medicare's current guarantee of access to seniors and the disabled must be preserved.
Second, every Medicare recipient should have a choice of health plans, including the option of purchasing a plan that covers prescription drugs.
Third, Medicare must cover expenses for low income seniors. That is the entire cost of a health plan, including a prescription drug benefit.
Fourth, Medicare should provide access for seniors to many of the latest medical advances, and streamline regulations.
Fifth, raising the Medicare payroll tax, the HI tax, should not be a cornerstone issue in reform.
And, finally, as a matter of budgetary transparency, reform should establish a new solvency test combining program costs for Part A and Part B.
This idea of principles, not budget games, is, indeed, what has guided much of the debate over Medicare reform. As a starting point, the National Bipartisan Commission on the Future of Medicare with Senator Breaux and Representative Thomas introducing legislation had a reform plan modeled after the federal employee system, the FEHBP plan. That plan also called for a new solvency test, as did Governor Bush, based on the total cost of the program, which guaranteed protections for low income seniors, and a choice of government approved plans. The Clinton-Gore appointees, of course, helped block this reform.
Another bipartisan effort has been the legislation by Senators Breaux, Frist, Kerrey and Hagel. As president, Governor Bush has pledged repeatedly in his discussions of Medicare that he would work with both parties in a bipartisan way to build on these efforts.
So, let me just say a couple of things in conclusion, first to go back to where I began, I don't think we ought to frame the discussion of Social Security and Medicare reform solely as a "budget" problem. The opportunities that are created by aging and living longer are substantial and they are positive. They have and are stimulating thoughtful rethinking of Social Security, Medicare and other programs by economists and by policymakers.
Having said that, you don't have to be a budget bean counter to realize that we can't continue the policy of the past several years of hiding our head in the sand regarding the budgetary situation in honest and transparent terms of Social Security and Medicare. There are good principles and approaches with the support of both parties in the Congress and by leading economists and policymakers for Social Security and Medicare reform. Many of those proposals fit very comfortably within the general budget framework Governor Bush has articulated for his campaign. Governor Bush will work to provide the leadership for these important efforts to shore up the commitment to seniors, the positive part of this message, and the opportunities and challenges of aging.
Chris Edley: I also want to thank Brookings for hosting this series, and for inviting me and, like Stuart, I take heart in the title of today's session, Living Longer, suggests that there may be life after the campaign, even if the other guys win, and notwithstanding the risks.
Of course there's reason to be hopeful and pleased at the good news of longevity. Economists, on the other hand, tend to be Malthusian about this, and talk about all the terrible problems that it will generate. And, in fairness, there are problems, indeed, that have to be faced.
I want to cover three quick topics. First, Vice President Gore's overall conception of those challenges. Second, summarize for you some of his affirmative policy ideas concerning Social Security. And third, some of the affirmative policy ideas concerning Medicare. I think our discussion afterwards will provide ample opportunity to explore concerns with Governor Bush's proposals.
So, first, the nature of the challenge. Obviously, the demographic news is the key, and the doubling of the elderly over the next 30 years, but also I think some less noted aspects of demography that shape the way in which we have to respond to changes in Social Security and Medicare, changes such as the shifting ethnic and racial mix which, for example, suggests the need for more focused attention to disparities that emerge, changes with respect to immigration patterns, and the difficulty of forecasting the impact of immigration on the nature of the workforce, and on wage rates, and the like.
The second aspect of the challenge relates to trust fund solvency, particularly the 75-year time horizon that is customary in thinking about it. Of course, on an accrual accounting basis in Social Security, I guess, I've seen estimates as much as $12 or $13 trillion of accrual deficit in present value terms.
But our tendency is to focus on will the trust funds be on balance 50 to 75 years hence, and the economic experience of the past decade suggests that however difficult projections may have been heretofore in these times it seems to be even more difficult.
Third, family structure and responsibilities. Now here, again, the obvious points of birth rates, marriage, divorce rates, are familiar, but the changes in family structure and expectations about roles and workforce participation today we can recognize the need to modernize Social Security and Medicare benefits to reflect, for example, the change in women's roles, but it is almost imponderable to think about what kinds of challenges will be posed in the decades hence as a result of similar kinds of changes in family structure and, indeed, in the nature of work, which leads me to a couple of other less familiar ways of framing the challenges that Vice President Gore has spoken about often.
First, of course, is the economy, and the centrality of a healthy and sound economy in ensuring the health of Social Security and Medicare. The centrality, if you will, of electing a president with the skill and the will to stay the course, the course which balances fiscal prudence for the future with a measured, cautious investment in growth and in opportunity. In facing the various challenges we've already mentioned, of course, a strong economy gives us an opportunity to act cautiously and wisely rather than precipitously. And, moreover, a strong economy changes the choices that individual families face, how much and how to save, whether and when to retire, how and how much to pursue education and training, resulting in higher earnings, immigration patterns, unemployment rates, and so much more. In sum, on this most important challenge, we must not forget the failed policies of the 1980s, no one should be stupid again, it's still the economy.
Finally, science and technology I think is an important part of the context in thinking over the long run about the future of Social Security and Medicare. If you follow developments in science, even 5 percent as much as you follow developments in the NASDAQ, then you know that here's one index that has never seen a negative first or second derivative. I'm sorry, for the political scientists among you, I mean it's headed up and accelerating. The information technology aspect of this technological change means that the very nature of work is shifting in faster and perhaps even less predictable ways than before. The concepts of workplace, of office, of production worker, of part-time worker, of retirement, all these notions surely will require reinvention before my now teenage son visits me in the assisted care wing of the faculty office building at the Harvard Law School, which is assuming that we still have office buildings for people as well as web servers.
The policy planning that's required for Social Security and Medicare in this context strikes me as extraordinarily difficult, but it's not just information technology, just to pick another example, this is the biomedical sciences, where we're familiar with the increases in longevity. The new biomedical sciences, the human genome project, and so forth, are on the verge of producing and avalanche of discoveries that will require not only investments in bringing new drugs to market, but will make the prescription drug benefit, the sort of thing Stuart mentioned, absolutely critical to matching Medicare to the current realities of healthcare needs. But, over the longer term, what changes will biomedical science and technology have on the need for social and medical insurance, the answer is, we understand it all too poorly. So a certain amount of modesty is needed as we appreciate the challenges and the context here.
Second, affirmative policy ideas, first with respect to Social Security. Well, let me list a few points that Vice President Gore speaks about frequently. First, of course, is to continue to balance the budget, because that is the anchor for macroeconomic policies most likely to sustain a remarkable economic success of the past decade.
Second is to pay down the national debt and make that a significant priority. The great amount of that debt, of course, was accumulated during the Reagan and Bush eras, but there will be a growth dividend resulting from reducing that debt burden and the interest payments on it.
Which, of course, leads me to point number three, by reducing the amount of debt, we will save interest costs. But rather than spending those savings for tax cuts or star wars or other consumption, deposit those interest savings in the trust fund, extend the trust fund solvency to at least 2050. And, yes, this is an infusion of general revenues, and we are unapologetic about it. There is an intergenerational logic to it, and at least in this instance the ends justify the means.
Fourth, reinforce the compact by modernizing Social Security in some crucial respects, specifically the vice president has proposed using 5 percent of the Social Security surplus, just 5 percent of the surplus to raise benefits for widows, and to eliminate the so-called motherhood penalty that reduces penalties for women who take time off from work to raise their children.
The poverty rate for single elderly women is 19 percent. Social Security was not designed for the work experience, and for the family structure that we have today, and it needs to be modernized. Finally, the vice president talks frequently about the need to continue the commitment to today's guaranteed benefits, and he has spoken repeatedly in opposition to extending the retirement age.
Third, let me move to Medicare, the basic problems I think are familiar to us all here, a program designed to be comparable to private medical insurance available in the '60s today is woefully inadequate because it is missing prescription drug coverage, because it lacks any kind of catastrophic coverage, because it does not address long-term care needs, and because it is lacking with respect to many preventive services. Most of these are covered by ordinary private health insurance plans. Medicare must be modernized.
What has Vice President Gore spoken about? First, he has spoken about allocating $432 billion, that's $432 billion, over the next decade of the surplus to narrow the Medicare budget gap and to modernize the program by adding a prescription benefit for seniors. That prescription benefit would include first dollar coverage of 50 percent of all prescription drug costs up to a ceiling of $5,000 per year. It would subsidize those costs for seniors below 150 percent of poverty, and subsidize them completely for seniors below 135 percent of poverty. That's roughly a third of Medicare beneficiaries would pay nothing for this prescription Medicare benefit.
Second, he's talked about catastrophic coverage within that prescription benefit package, to pay all drug costs once out of pocket costs exceed $4,000 annually.
Unrelated to prescription drugs, another Medicare modernization the vice president has discussed involves Medicare coverage for cancer screening and diagnostic tests, because prevention is so important. Screening and diagnosis on some of the most basic, common cancers can have enormous dividends in prolonging life. If we do, over the next few years, what we already know works in terms of screening and diagnosis for prostate cancer, for colorectal cancer, we could reduce by 50 percent deaths from colorectal cancer within just a few years, if only we did what we know will work. Expanding Medicare coverage to cover screening and diagnosis is key to that. And he's also proposed expanding Medicare coverage for clinical trials that are needed to develop new treatments for cancer.
In long-term care, not properly part of Medicare, but obviously a crucial challenge as we look to the future, all of us thinking about care for our parents, care for relatives, care for ourselves, the vice president has talked about a $3,000 long-term care tax credit that will benefit two million people, as well as the plans within the administration now developing for a national family care giving program to support families with the information and with respite care so desperately needed when caring for a loved one.
Third, the administration has obviously moved with the Congress in a 1997 legislation to introduce more efficiency and competition in Medicare, but much, much remains to be done. More recently, the administration proposed a competitive defined benefit program, which in short summary would allow private plans to compete with HCFA's fee for service Medicare package by offering a defined benefit and then competing in quality and price. For beneficiaries who elect a package that is of lower cost than Medicare, savings would be shared between the beneficiary and Medicare. Now, over 10 years, this proposal would strengthen somewhat the Medicare system, but not substantially, and the principal reason, I confess it will not substantially strengthen the budget gap, is because of our commitment to ensure that beneficiaries retain the ability to choose a fee for service option, a fee for service option rather than being forced into managed care plans. The reason for that right now is quite simple.
The problems, the structural problems in the managed care system are legion. That's why the patients bill of rights is such a high priority for the administration, for the vice president, and the Congress this year.
Let me wrap up simply by saying this, fundamentally, when the vice president talks about Social Security and Medicare, he speaks about these forms of social insurance as inventions that need renovation, but also preservation. That they are hallowed portions of the nation's strategy for creating opportunity, and are strategy for intergenerational equity.
What he is not willing to do is risk the soundness of either of these systems on ideologically driven plans, however attractive market-based remedies may be. The focus of the social safety net must be not only on ordinary Americans, not only politically powerful Americans, but on the least among us.
Thank you.
D. Schorr: All right. May I now invite our panelists, Henry Aaron, Stuart Butler, Robert Reischauer to come up here. And let me merely say as they are coming up here that we're going to try to keep this rather informal. So, let me say to the two who presented the two positions, you will get an opportunity for rebuttal, but even so, if you hear a point made that one or the other of you feels needs immediate comment, go ahead.
All right, Henry first, and then in that order.
Henry Aaron: I'm a strong believer in alphabetical order. Both of the first two speakers emphasized that we have two issues with respect to both Social Security and with respect to Medicare. The first is how to close a projected long-term deficit. We need to do that in order to balance the books for both programs.
The second question is whether the structures of those programs as currently designed are the ones we want as we move further into the current century. I'm going to focus just on Social Security and give you some numbers to keep in mind, because I think, in the end, if we're going to make the program balance, either through the current structure or a new one, we have to have things add up.
Currently, Social Security over the next 75 years, the period that has been used for projecting solvency since the program was initiated, the program faces a projected long-term deficit equal to 12 percent of promised benefit payments. That is to say, revenues equal 88 percent of projected benefit costs.
The question is, how to close that gap. The vice president has proposed to close about half of that gap by diverting from general funds into Social Security funds that might otherwise be used for spending or tax cuts. Compared to those outcomes, a diversion of general revenues does represent a real economic policy that will add to productive capacity and help the economy bear the burdens of paying pension costs. It's not a phony thing, it's a real thing, if the alternative to transferring the funds to Social Security is to support either tax cuts or increased government spending. Those are forms of consumption, transferring the funds to Social Security is a form of saving, and will add to long-run economic growth.
The vice president has not told us how he would close the remaining approximately half of the projected long-term deficit. I think it would be useful in the course of the presidential campaign, as I shall indicate, that both candidates become more explicit and tell us a full program for dealing with these problems.
A key element that distinguishes the vice president's program from Governor Bush's is that the vice president would retain the current structure and, in fact, add, as indicated by Chris Edley, two new benefits. In contrast, Governor Bush proposes to divert a portion of current revenues from Social Security into newly created individual accounts.
Here's where the arithmetic comes in. The numbers that are bruted about for diversion are 2 to 3 percentage points of the payroll tax. If that amount of payroll tax is diverted from Social Security into individual accounts, the deficit in the basic Social Security program goes up from 12 percent to somewhere between 27 and 33 percent of benefits over the next 75 years. Governor Bush has promised that benefits would not be cut for current retirees, nor would they be cut for workers approaching retirement, which I take to mean within say the next 10 years, although he has not been specific on that point.
If that is the case, then nothing is going to be saved in the early part of this 75-year projection period, and the reductions in benefits later on in the core program, in order to achieve the requisite cuts to achieve long-term balance, would have to be much larger than 27 to 33 percent. My estimate is that somewhere in the vicinity of 35 to as much as 50 percent would have to be cut eventually from the core benefit program.
D. Schorr: Henry, that is such a key issue that I'm going to interrupt and ask Glenn, do you want to address that?
G. Hubbard: Sure, but are you done with the point?
H. Aaron: I'm almost done. Let me say, of course, it is the case that the accumulations in individual accounts would provide some replacement for benefits that would be cut back in the core benefit program, they would be subject to financial market risks to which Social Security benefits are not subject, but there would be some offset from that source.
But I think if we're to have an informed debate, just as the vice president should complete this agenda for restoring long-term financial balance, Governor Bush should tell us how he plans to curtail benefits in the core program in order to achieve long-term balance in the plan as he proposes it. Otherwise, I fear that we're going to have a presidential campaign that will operate at very high levels of generality about glowing principles which all sound good, but we will not have given the electorate the information they really need in order to decide which of the programs they prefer.
D. Schorr: I'm torn. Well, let's proceed, and we'll come back to it, but I thought that the issue has been joined in such a key way.
G. Hubbard: I actually liked your first intuition, may I join?
D. Schorr: Go.
G. Hubbard: Let me start first with the statement about principles. I think in the presidential campaign, particularly with the discussion of something as different and as specific as personal accounts, that is, indeed, the right level of specificity. As to your questions, and let me take them in a long-term and a short-term part of what you said, in the long-term, remember that the average return on the private accounts will exceed their return on traditional Social Security. The average return in financial markets exceeds the rate of growth in the wage base. So you are getting extra income from those private accounts that can help provide replacement.
The second point in the short-term has to do with what your baseline is. There exists a baseline that is consistent with the argument, I don't think it's realistic. Let me give the following example. If your baseline is that part of or perhaps much of the Social Security surplus will not be saved, the commitment to private accounts is a direct increase in national saving. That increase in national saving will flow in large part to the corporate sector, where it will generate corporate income taxes, and capital income taxes at the individual level. In a paper by Martin Feldstein and Andrew Samwick [sp] in the NBER Macroeconomics Manual, well, one version of such a proposal, not necessarily what the governor would suggest, that addition would be sufficient for the long-term.
The other point that you raise that I just don't want to let go unchallenged is the notion that financial markets are risky and not the current system. That's just not true. While financial markets are, indeed, risky in that fluctuations in market returns clearly occur, over long periods of time financial market portfolios do yield a much higher rate of return and the rate of growth of the wage base, and as your own comments suggest, the political risk in suggesting that the current system is sustainable is surely at least as large as that interim financial is.
H. Aaron: Could I interject one point? I'm not going to try to answer Glenn specifically. I do want to point out, however, that if Social Security builds reserves, and the comparison is an increase in government spending or a cut in taxes, precisely the same increase in corporate investment, increases in corporation income taxes will arise as would arise under individual accounts. And, therefore, if one wants to take credit for the addition of revenues in the way of corporation income taxes in an individual accounts plan, one should equally give credit to the vice president's plan.
In both cases, if Social Security adds, as it is this year, $150 billion to reserves, that lets the Treasury buy back from the public $150 billion in bonds that would otherwise be in the hands of the public, $150 billion is available for investment. Who is going to do that investment? U.S. corporations here and abroad. So the effects on real economic activity from out of saving, whether it occurs through individual accounts or through accumulation of reserves in Social Security is identical.
G. Hubbard: Can I just make a teeny-weeny point? It will be very small.
D. Schorr: The last one.
G. Hubbard: Okay, the last one, you can cut me off. I think you've identified the right issue, and the plausibility test is there. So we know there's 100 percent chance that money put in individual accounts is saved, it's in the individual accounts. There's substantially less than 100 percent change, some might even say a small chance, that the Social Security surplus would be saved in the way you just described.
D. Schorr: Okay. Stuart Butler.
Stuart Butler: I want to begin also by thanking Brookings for organizing this series. It's a very important set of issues that are being discussed. And I think in the case of the issues associated with the aging, we also have a situation where it is possible in my mind to take advantage of both a strong economy, which does allow us to take some actions now in a prudent way, and also we can take advantage of what seems to be a growing bipartisan, or almost multinational trend and agreement about what some of the broad approaches need to be to deal with these issues.
I want to just break down my remarks into really two halves, and really the two parts of the debate I think over policymaking in this area. The first, of course, concerns the financial viability of the major programs, particularly Social Security and Medicare. And I think there's complete agreement, not necessarily about the numbers in precise terms, but that you have two programs that with the kind of scientific advances that have been mentioned in the medical area, and with the unfunded liability in Social Security, cannot continue in the way they are today without some fundamental changes in policy to deal with them. And it seems to me that we have a debate shaping up between two ways to do that.
The first is, in fact, to take the opportunity of the bipartisan opportunity and the opportunity of the economy to begin to make some structural reforms in those programs, that curbs the long-term expenditures and liabilities of those programs, and deals with the kinds of bridging questions, the transition issues, and other kinds of issues that involve any of these kinds of structural reforms, or essentially to say if we simply engage in some bookkeeping and move some money around, whether it be what we have done previously in Medicare in terms of shifting from A to B, or saying we're making savings, to have notional savings, and put them into notional trust funds, and somehow say we've solved the problem.
That seems to be the two sides of the debate that we have before us, and I think that's what we will be shaking out a little bit when we get into the detail of discussion. In addition, that second approach to not only not engage in structural reform, but add new liabilities, new programs, additions to both of these programs without dealing with the structural issue.
The second part of the debate that I think we've got to fully recognize is that notwithstanding the big financing questions, we've got two programs, Medicare and Social Security, which I think we can make a case very strongly are very much out of date in terms of the kinds of services, and the kinds of structures that they have, and the way they operate.
In the case of Medicare, for example, we're all debating the inadequacy of the benefits, and really they're almost ancient benefits when you compare that with modern health plans that are available for people. We have out of date benefits, we have administration of that program where the federal government finds it difficult to even produce handbooks on time, let alone regulations to deal with all of the issues that have to be involved. We must recognize that this is not just something that happens, it's a structural issue with the Medicare program itself, in the way the benefits are designed, the way that Congress has to basically micro manage and design specific benefits, and the way it's operated.
It's time to start looking at a different way of running that program. And there is, in fact, a strong bipartisan support for doing that, for giving people more choices and control over the types of healthcare that they get, and some modest changes in the way in which they can choose different benefits to give more support to low income people, and less benefits to people who don't need them, don't need the financial support from Medicare, because they're very affluent, and by reorganizing the basic structure of the program away from centrally designed, centrally managed, to a much more hand-off approach, such as that used in the Federal Employee Health Benefits Program. And there is, in fact, broad bipartisan support for going in that direction. And I think it's time that we see a presidential debate which recognizes that, and says, let's go in that direction.
In the Social Security area, if you ask any financial advisor, as a worker, what do you need to do to have a secure financial retirement, they will basically--at least my experience has been, maybe I picked the wrong ones--they'll say basically you need three components. You need good insurance, in case things go wrong and you have problems, you need to make sure you will have a basic, sufficient income, even if you live to be as old as Methuselah, and thirdly, you really ought to have a way of building up some savings over your lifetime so you have assets in cash when you retire to deal with unforeseen circumstances, to buy a condo, to go into business, whatever you want to do. Those are the three components, and virtually every advisor I know of tells you to do each of those.
Well, Social Security doesn't do a very good job in itself of covering all of those. It certainly gives you a fairly good insurance protection, and there's no argument about changing that or reducing it. It does give you, or can give you a good base income, no matter what your income is during your lifetime, because as appropriately there should be income transfer between people of different incomes. But, it's not very good at allowing you through the Social Security system to build up some cushion, or nest egg, whatever you want to call it. And also to do so by taking advantage of the growing economy, and economic improvements that have continued, and surely will continue in the future.
Proposals, there are several proposals, one which Governor Bush has put forward, bipartisan groups in Congress have put forward proposals that say, let us take some portion of the taxes that people put into traditional Social Security to build a wealth element, a savings element to diversify the kind of financial protection you get during your lifetime. This has been denounced as playing a roulette wheel, gambling no the economy, and so forth. It's the kind of arguments I used to hear in the 1960s from my left wing opponents back in college, that somehow the market, the economy is something that nobody wants to touch and shouldn't be involved with. It's an argument, against, as far as I'm concerned, all savings for any purpose whatsoever. I think it's a false argument, it's an argument I'm sure we will get into, certainly Henry and I, if not others around the table. But, that is the argument about making that basic reform to allow people to diversify.
Now, let me just end by reminding everybody that we're not unique in the Untied States in recognizing this problem, and looking at these kinds of solutions. Country after country has recognized this, and has gone in this direction, countries like Britain, countries like Australia, countries like Sweden. The Social Democrats in Sweden are leading the movement toward diversifying their retirement programs in this way. So I think they ought to be looking at reforming the Social Security system along the lines that Governor Bush and others on both sides of the aisle in Congress have argued for, to diversify Social Security, to recognize that when you do that you've got to deal with the benefits that you promised to the existing elderly, and there's no argument about that. But, let's discuss how to do that so that we can transform from the current system into one which is much more modern, much more diversified, and deal now with the advantage of a strong economy and a large surplus to deal with those issues in a proven way.
C. Edley: May I jump in here? I think that there's a problem of perspective in much of what Stuart just said, to my mind. It is a mistake to expect that Social Security will be a full and complete retirement system for the United States, or to judge it by that standard, just as it is a mistake to think that Medicare should be a full and complete health insurance system for the United States. These are social insurance programs designed to produce a safety net, not designed to be a substitute for whatever choices all consumers might make, given the wherewithal, in the marketplace.
Should individuals have the wherewithal to accumulate wealth? Yes, of course. And that's why we have tax policies, that's why we have private pension plans that promote savings and wealth accumulation. The hard question that I think is joined by this debate is whether Social Security resources should be diverted from the primary goal, which I take to be a defined benefit insurance program, a defined benefit pension program, whether resources should be diverted from that core purpose toward this wealth accumulation goal.
Now, the problem as I heard it between what Stuart articulated and what Glenn articulated is Stuart said, let's have some wealth accumulation within the Social Security system, but let's not cut benefits and let's assure people a certain benefit, which to me sounds like he's not saying, let's take out 2 percent of the payroll tax, he's saying let's add 2 percent or 3 percent, but have individuals apply those resources into private savings accounts. Well, that's not at all what Governor Bush has talked about. What Governor Bush has talked about is to take 2 percent of the current resources and divert those out of the core program of a defined pension benefit, into a somewhat riskier, market oriented, equity investment oriented, presumably, financial market oriented individual savings account. And that's a quite different strategy. That's point number one.
Point number two, although it is true that--
D. Schorr: Excuse me a moment. Illustrating one of the problems of the aging, I'm going to have to leave in a moment. And after that, can you go on automatic pilot?
Robert Reischauer: Can I talk now? I mean, we were each instructed to talk for no more than three minutes. So I finished 15 minutes ago. And one of the problems is, Chris has said almost everything I wanted to say.
C. Edley: But, let me just make my second point and then I'll subside. And that is this.
R. Reischauer: And leave me with dead nothing.
C. Edley: Henry says that the candidates must show how they will close the full 75 year budget deficit to meet his standard of faithfulness to the democratic process. Well, at least I would like credit for the fact that my candidate has moved in the right direction by reducing the budget gap by half. Whereas the other candidate seems to have, again, as measured by the requirement of funding a core program of a defined pension benefit, the other candidate is moving in exactly the opposite direction. So I want at least partial credit for my candidate having narrowed the gap. And I would also like to say that my experience certainly with economists in campaigns is that, whether they are one-handed economists, or two-handed economists, each hand holds a cup of hemlock being proffered to the candidate.
R. Reischauer: Gee, thanks, Chris.
Most of what should be said has been said, at least once. But, let me just start by saying that with respect to Social Security neither candidate has really put out a plan that solves the long-run problem. Both will move us a bit in the right direction. But, both approaches have left more unspecified than specified. And that which they have left unspecified is the politically unpleasant.
Bush has not told us how he will make up the gap that will be created by diverting two percentage points of the payroll tax into private accounts. Henry has assumed that that's going to come out of benefits. Another response might have been it could come out of general revenues, and the surpluses we anticipate will develop, because we will hold down spending in the future. So we won't have some of these adverse consequences within the Social Security system.
Gore has not told us, or stressed, that because of his approach we will be paying higher general taxes than we otherwise generally would, or spending less on non-Social Security programs than we otherwise would, assuming that we are going to maintain the discipline of a balanced non-Social Security portion of our budget. That will be true in the current period, and in the future period under the Bush plan.
What we have going on now in Social Security is really a debate, as Chris suggested, over the question of how the nation should structure its compulsory pension plan. Should that pension plan be entirely a defined benefit plan, as Social Security is now, or should it be a slightly smaller defined benefit plan augmented by personal accounts, which would be tightly regulated. There's no right or wrong answer to this question, it's a matter of values. If you opt for the hybrid of defined benefit plus a small personal account, the amount of redistribution that will occur in our mandatory pension plan will almost inevitably have to be less. Redistribution between high wage earners and low wage earners, and between those with spouses and those without spouses, or those without working spouses. That's a value judgment, whether we have too much or too little redistribution, or whether the redistribution that occurs now is appropriate.
The benefit that one receives will be slightly less certain under a hybrid plan. Now, Glenn can say, but it's almost assuredly going to be as high or higher. That may or may not be true. But, an individual will have less certainty on what exactly it will be as they move through their life. And there will be more variability that is unknown between individuals in the same age cohort.
An issue was raised about what should Social Security actually be. I thought always that it was an insurance policy, it was the base upon which other retirement income should be built, that wealth accumulation was not a part of the fundamental role of Social Security. Stuart has suggested that that's not true, that it would be nice if it would also allow wealth accumulation. I'm going to suggest that that really is an unreasonable expectation, because with private accounts of the level that we're talking about here, two percentage points of payroll through life, almost assuredly, with a reduced defined benefit pension, people are going to want to annuitize that when they reach age 62 or age 65. When you annuitize you are basically writing off that wealth accumulation.
By the way, I want the unpaid annuities if I had lived to my life expectancy to be given to my heirs. You can design programs that do that, but inevitably the annuity is much smaller. So this notion that it can do both, wealth accumulation and the social insurance function, I think is really an incorrect one.
Let me conclude just with a word on Medicare. And here I would argue that there really isn't a lot of difference between the two approaches that have been put forward, or the two candidate's views. Both are advocating drug coverage and an expanded benefit package for the elderly. That's an essential thing. I think the nation should move in that direction. There are arguments on how it should be done, but the basic thrust is the same. Both are saying we should have competition, that we should have an array of plans and plan types available to people. The president's proposal, which the vice president has endorsed, has this competition occur around a referenced price, which is the cost of providing fee for service Medicare. The competition in Breaux-Frist, or Breaux-Thomas, or any of these other plans is around the average bid that these plans would put forward.
My guess is that the approach that has been suggested by the bipartisan commission that has been endorsed by Bush is probably undoable in the short run, and you would have to start with something like the president's competition, and move toward that other competition. And what we're really talking about is timing and degree rather than kind.
One final point, which is Chris' point, which is Medicare isn't all one should expect. It is sort of a safety net. I disagree with that fundamentally. Everybody in this room has a single health insurance policy. You don't have what your employer provides and then go out and buy some more. There might be a few of you who do, but it's irrational. It's costly, it isn't worth the money almost ever. What we really need in Medicare is the equivalent of the employer sponsored policies for the working population, which is an adequate package of benefits that does not send people out to buy supplemental insurance that confuses and causes also some problems with the market. So we do want to move in the direction that both of the candidates have endorsed.
C. Edley: Just a personal thing, I agree with your last statement. I didn't--I certainly think that Medicare ought to provide an adequate level. I simply meant to suggest it's a Chevrolet versus Lexus issue. And we shouldn't be designing a Lexus, one should recognize that there will be a market.
G. Hubbard: Well, or a 1965 versus a 2000 Chevrolet. Could I say one--there's a couple of points that came up that involve some facts, and I just want to put them out on the table. The question is about redistribution in the current Social Security system. Social Security is not nearly so progressive on a lifetime basis as is commonly thought of. There's a recent NBER paper by Don Fullerton and others that actually concludes the system is mildly regressive. But, let's just say neutral for the perspective of argument. That suggests that it's by no means clear that the private accounts proposal as part of Social Security, that Governor Bush has advocated, is less redistributive. We know there are differences in mortality probabilities across groups in our society. And it's by no means clear that the real wealth accumulation won't be much better as a result.
R. Reischauer: Glenn, whether I invest in stocks or I have a defined benefit isn't going to change when I die.
G. Hubbard: No, but you don't have to annuitize 100 percent.
R. Reischauer: Nor is somebody going to annuitize me, or able legally to annuitize me based on the fact that I've been a low income factory worker as opposed to a professor at Columbia.
G. Hubbard: No, but the point is that if I die early then I have a bequeathable asset which I do not have under the current Social Security system.
R. Reischauer: You say, if you die before you begin collecting benefits, which is not the usual pattern, and certainly not a desirable pattern to set policy on the basis of.
G. Hubbard: The point is whether it's possible to have bequeathable wealth, and I think the answer to that is yes. The other point that came up is on, again, where does the money come from in terms of the Bush plan in the intervening period. Again, two sources, as I said before, I'll just mention them again. One is the higher return that's available on private accounts, and the second is a transfer made possible by the increased tax revenue from new saving. If you want to see a nice arithmetic example of this, I just came back from Zurich, but I gather Marty Feldstein had an op-ed piece this week with exactly that sort of calculation in the Wall Street Journal.
R. Reischauer: As Henry said, that's an absolute phony, because that money is already built into the baseline projections, which assume that these surpluses are all saved. And therefore the investment is occurring, and the corporate taxes are being collected.
G. Hubbard: No, no, no, no, no. Two pieces of the argument, one is the fact that the financial markets deliver a higher return on average than the rate of growth and the wage base is incontrovertible, part one. Part two is a question about baseline. As I said before, I think it is entirely unrealistic, and almost dishonest, to assume a baseline in which 100 percent of these surpluses are saved. That's an arithmetic exercise, and it is okay as such. It is not feasible budgetary policy.
H. Aaron: Could I get a seat at this--
R. Reischauer: You're talking about 100 percent of the Social Security surplus.
G. Hubbard: Yes, Social Security surplus.
R. Reischauer: Woe be the politician who enforces that position.
C. Edley: I'm surprised if that's the governor's position, that he just doesn't believe that it's--
D. Schorr: Can Henry interrupt your interruption?
C. Edley: Yes, sir, absolutely. Always.
H. Aaron: I wanted to make two points here. First, Glenn's comment about contrasted guaranteed savings through individual accounts and non-guaranteed savings through accumulations of Social Security reserves is not, I think, on close scrutiny a position he really wants to adhere to. As he well knows, individuals can easily offset mandatory saving in one form by not saving so much in others. And the history of tax sheltered savings in the United States documents that. There has been more than one dollar of reduction in voluntary private saving, for every additional dollar of tax sheltered saving. As we have introduced tax sheltered savings, saving in that form has increased, saving in other forms has dropped like a stone. That's point one.
Point two, Congress abets this, because increasingly it has authorized individuals to withdraw funds from tax sheltered savings accounts before retirement. That was the original purpose, so that the funds don't represent additions in the end to retirement savings.
But, I want to go in some depth into this issue of annuitization. It is an example of the kind of detail, if you will, that Glenn suggests we don't really need to confront in the course of the campaign, but I think it's absolutely vital that the public understand. Two points, first if you allow people to withdraw funds, not to annuitize, not to convert their savings, who is going to do that? I'm going to do that. I have plenty of income from other sources, and if I can maintain funds in this tax sheltered form and bequeath them to my heirs, I'm going to do it. People with modest incomes, who fit the description Bob Reischauer just described, won't, they will annuitize. In short, the upper income people will be able to walk with their funds, thereby withdrawing a resource from the system, thereby increasing the cost of the core retirement program.
Point two, if you have mandatory annuitization, as is the case in Social Security, you pay an annuity based on the average life expectancy of everybody involved. But, there are 62 or 65 year olds who are terminally ill. There are 62 or 65 year olds both of whose parents died at an early age. They will rationally conclude that it doesn't make sense to convert their funds into annuities, they will walk with the funds, thereby withdrawing resources from the available pool for current retirement income. By so doing--
G. Hubbard: Do you suggest--
H. Aaron: Let me just complete the point here. By so doing, the remaining pool of people for whom annuities are calculated have much higher than average life expectancies. The companies that do the annuitization know that, and so they have to jack up the price they charge for annuities. So by allowing individuals voluntarily to elect not to annuitize you increase the cost and make annuitization more difficult for the very people who need it most, those of modest income. This idea that voluntary annuitization is just a good thing, and you want to have it is false. It is costly, and it breaks down a kind of social compact that exists within Social Security.
G. Hubbard: Dan, could I just--
G. Hubbard: Again, two things that regard facts, and another that's a red herring. The first, regarding facts, I don't think anyone believes that low income households can offset forced saving through Social Security. Households way up in the distribution of wealth in the United States have very little financial assets, offsets are stories about high income people, not the people who are the focus of this debate. Second fact on the tax shelters--
C. Edley: A lot of people have IRAs, and Keoghs, and voluntary contribution pension plans.
G. Hubbard: But, they don't have enough to offset Social Security below the 50th percentile. This is a detail we can come back to, but it's just factually inaccurate.
C. Edley: But, it does go, Glenn, to your argument that 100 percent of whatever money is taken out of the core Social Security program and invested in your program--
R. Reischauer: 70 percent of people are home owners, they can pay down their home mortgages more slowly.
G. Hubbard: That actually brings me to my second factual point. The evidence that Henry characterized on tax sheltered savings is not accurate. If you want a general introduction to this literature, Journal of Economic Perspectives, Fall 1996, and you'll have al the points of view. I just returned from Switzerland, discussing a paper by one of Henry's colleagues that actually argues for 50/50. So that's just extreme.
The red herring is the issue of annuitization. I don't think any of the proposals that are out there have talked about what Henry referred to as voluntary annuitization. The issue is partial mandatory annuitization. So all those pooling arguments that you heard are very fine, and of course, true, but I don't think are part of any of the proposals I know of in the debate.
R. Reischauer: You might want to ask yourself about political sustainability of that, if you're going to talk about political sustainability of budget surpluses.
C. Edley: It's also political sustainability of the reduced overall pension return for those individuals who happened to have bet incorrectly in the marketplace, or who retire and need to draw payments at a time when the stock market is down, rather than up.
D. Schorr: The lenient hand has its limits, when I see that there are people here who may have questions of their own. So I'm going to call an end to this part of our discussion, and open it up.
Question and Answer Session