Japanese and American Social Security Systems:
Grappling with the Future

Noriyuki Takayama, Ph.D.
(Transcript of a speech delivered on March 24, 1997, at Japan Information and Culture Center, Embassy of Japan.)

Meyers: Good evening everyone. I am here with my colleagues to talk about the important subject of social security and aging of the populations inJapan and the United States. I think we will not be here to try and compare the two systems too much. I have always believed that it's really difficult to say one has the best social security system or another has the best, as many are very good. And I think that Japan and the United States have verygood systems, but each of them also has problems, and will always have some problems. But we can all learn from each other, and I look forward to interesting discussions by Professor Takayama and Mr. Salisbury. Mr. Takayama will go first, and then I will present some remarks as a background for Mr. Salisbury's talk on the American social security system.

At this time, I will introduce both of the two speakers, and then they will go on in turn as I indicated. Professor Takayama has had a very distinguished academic career. He is now at the Institute of Economic Research of Hitotsubashi University, where he is a full Professor. He got his PhD at the University of Tokyo in 1982, and following that he has had a distinguished academic career at two different universities. Also, he is very, very active in many public activities. He is a member of several national committees on subjects such as statistics, taxes, minimum wages, pensions, rice prices, population problems, and so forth. Quite naturally, Professor Takayama has published many excellent pieces over the years in various fields related to aging of the population and prices and wages, and economics in general. He was awarded the prestigious Nikkei prize for the best book on economic issues, named Saving and Wealth Formation in Japan.

Mr. Salisbury is president and Chief Executive Officer of the Employee Benefit Research Institute, which he has been with since it was founded in1978 to provide research and information on various private employee benefit plans, pensions, etcetera, so that this information would be available to the general public and the Congress. I think it is fair to say that his organization, EBRI as it's known, has the highest reputation here in Washington for preparing objective research and giving the facts the way they are, unlike perhaps some think tanks in Washington that decide what the conclusion is first and do the research to prove it. Mr. Salisbury, prior to founding EBRI, had a number of years of important work with the government. In essence he was in on the Pension Benefit Guarantee Organization in their early days, so he's had quite a background that way. And of course, being such a specialist on employee benefit plans, he naturally has an expertise on social security, because this is an important part of the picture of employee retirement and other security.

So, the way the evening will unfold is that Professor Takayama will first speak, then I will say a few words to lay a foundation for what the financial status of the social security system is, and what its basic principles are as I see them, then Mr. Salisbury will talk about the social security program in general and the problems that confront it; perhaps he's got the solutions. So, with that I am honored to present to you Professor Takayama.

Takayama: Thank you, Dr. Meyer. Ladies and gentlemen, I am very much delighted to be participating in today's event. My question is, which matters more, Japan's increasing elderly population or its declining birthrate? The answer is not the former, but the latter. I am speaking on what makes me think so.

Let me first introduce the latest population projections for Japan. These were done last January by the National Institute of Social Security and Population Issues, Japan. The population in Japan has been increasing for nearly 130 years since the Meiji Restoration. At the startup of the Meiji Restoration, we had 34 million people. The population increased up to 72 million in 1945. The rise was especially rapid in the 30 years that followed the Second World War. But, since 1975, the increase has been very slow, and the latest projections indicate that the population will peak out in 10 years at about 130 million and begin to fall. (See Figure 1 in my text.) A sharp decrease in the total number of the population by 40 percent or even 60 percent in 100 years is estimated. Consequently, the proportion of the elderly, 65 years and above, in the total population will be one-third in fifty years, as depicted in Figure 2. Japan will then have oneof the oldest populations in the world.

Japan revises its population projections every five years. The future picture gets much darker than what we had five years ago. The 1992 projections assumed that total births per family would reach the historical bottom of 1.49 in 1994 and would rise to 1.80 in 2025. Contrary to these projections, there is still little sign that the total fertility rate will stabilize or return to a higher level. The current level in 1995 is 1.42. The latest projections have changed their assumptions on the future total fertility rate. The rate was assumed to decline further to 1.38 or 1.28, returning to 1.60 or 1.38 around 2020, and reaching 2.08 in 2150. This is shown in Figure 3.

Before going into a discussion on why the total fertility rate of Japan has been decreasing, I'd like to mention a possible outcome of the decliningpopulation of Japan. This is a long-term decline in the future Japanese economy. Some Japanese say that we can get much better and happier with a smaller population in Japan, and that since the population density would be much less, land prices would tend to be less expensive, and we could have higher salaries. Yes, I know that in the world there are some rich countries with a smaller population, such as Switzerland, Denmark, and Sweden.

But the country we will be faced with in the future is rather different than these countries. We might have an upside-down population pyramid, with fewer and fewer children and a growing number of elderly. A sharp decrease in the young labor force will take place. As is shown in Table 1, from 2000 to 2010 the number of young workers is estimated to decrease from about 16 million to 12 million, a fall of nearly 25 percent. Only in ten years. In contrast, the elderly workers of 55 and over will increase in number in the same period, but its increase will be short of the decline in the number of young workers. Consequently, the total number of the labor force will decrease from 2000. A larger and larger proportion of the labor force will be middle-aged and elderly workers.

Are there any differences between younger and older workers? Young workers are most likely to adapt to new technologies more speedily, while older ones usually cannot. Moreover, young workers are more inclined to the challenges of a risky project. Yes, they make many errors and failures, but their tirelessness and bold challenge will sometimes bring a good result or even a substantial innovation. Generally speaking, young countries are more lively, energetic, and dynamic than others. As Japan gets older, less new investment will follow. A decline in the number of young people will decrease the savings rate.

In summary, a probable consequence is a sharp decline in young labor, a decrease in the savings rate, and a decrease in capital formation. All these factors will contribute to the shrinking of the Japanese economy.

Actually we have already had some declining domestic industries.
Medical doctors for pregnancy and infants, toy industries, kindergartens, school teachers, and even university professors. Indeed, colleges and universities in Japan will face a winter season sooner or later. The presence of the Japanese economy in the world will no longer grow, getting smaller and smaller in the twenty-first century.

Along with these processes, real per-capita income in Japan will hardly increase either. As you know, there are two sources for an increase in real per-capita income. One is a declining dependency ratio, and the other is productivity growth of actively working generations. We will have not a declining but an increasing dependency ratio in the future. So this factor exerts a negative effect on per-capita income. The second productivity growth comes from human and physical capital investment. We can still expect continued investments in this area in Japan. So the second factorwill bring a positive effect on per-capita income. Both factors may net out each other, and in future Japan we will have discontinued growth in real per-capita income.

In that age, the Japanese keen appetite for longevity will be much abated. This is what Jonathan Swift described in his famous novel, Gulliver's Travels. Gulliver found a horrible world of old age after he had seen some immortals, as you know. In the end, things might change little between Luggnagg in the early eighteenth century and Japan in the middle of the next century.

Yet some industries exceptionally can be promising and keep growing. Can you guess them? There may be three exceptions. The first one is quite easy for you to guess. It's medical doctors who specialize in diseases specific to the elderly. The second one is not so easy to guess at. It is the pet industry. And the third one is most difficult, new religious parties.

Now, let me go further to discuss why the fertility rate has been decreasing in Japan. First, let me point out three major factors. First, a decrease in the salary gap between male and female workers has been observed since the middle of the 1970s. Second, there is a growing difficulty in reconciling market work and home responsibility. Third, it pays more and more to be an adult with no kids, or dinks. I will discuss these factors in order.

About thirty years ago, our economy was enjoying high-speed growth. At that time, there was a large gap in salaries between men and women. Please see Figure 4. For the age group in their latter twenties, men usually earned nearly twice the salary of women. When a couple had a baby, and the wife was to retire from market work, the husband was able to bring money home, which was nearly twice what his wife earned just before retirement.

The level of living standard would change little after childbirth for the retired wife. This large gap in salary induced the woman to be a full-timehousewife.

But since 1975 market forces have been operating to diminish salary gaps between men and women. Today, on the average, men can have salaries only 30 percent higher than women in their latter twenties. There still exists a trend of decreasing the gap between the salaries of men and women. Generally speaking, men and women have little difference in potentialities in market work. So the recent move in diminishing salary gaps is quite natural.

However, this move involves a difficulty for couples with a new baby. When the wife retires for child-raising, their household income goes down very sharply. They are forced to put up with a much lower living standard. This is shown in Figure 5. If the partner wants to continue working after childbirth, he or she is faced with another difficulty. In Japan men are expected to market work at the sacrifice of home responsibilities. Their working hours are much longer. They often continue working until midnight. Longer working hours per day are regarded as a greater contribution to their company and to their employers. When a woman comes to market work, she is asked to do as men do.

We have exceptional superwomen who manage to do market work as men do, while doing home responsibilities as a full-time housewife does. They have little sleeping hours for their own, however. They are far beyond those categorized as full-time workers. So we have introduced a new naming of work for these superwomen. That's "all-time work." These women are quite exceptional, however.

In Japan, generally speaking, there remains a great difficulty in reconciling market work and child-raising. This is the second major factor that I want to point out.

Turning to the third one, I would like to mention the disincentive mechanism against child-bearing. In the past, elderly people without children were in a difficult financial position, but today this difficulty is almost solved with the generous social security pensions, health care, and long-term care. Tax and transfer systems have been established for social support for the elderly. In the current situation, it pays most for an adult to have no kids, expecting other people to have and bring up their kids. Adults with no kids save time, energy, and money. They can use their time, energy, and money for themselves. Their level of living standard rarely gets worse, as is depicted in Figure 6. They can rely on social security after retirement. They are really free-riders on social systems.

These three factors work together to decrease the total fertility rate inJapan. And given these factors, it is quite doubtful that the fertility rate will go up in Japan.

Some may argue that Japan will probably be involved in difficulties in containing the social security costs, since social security benefits are mainly for the elderly and the proportion of the elderly population is rapidly going up and up. A long-term decline in the future Japanese economy may intensify these difficulties. This problem is my next topic today.

I quite agree with the opinion that Japan will be faced with such a problem. I know quite well that such difficulties are in social security. This is often called a "demographic time bomb." We have learned something, however, from other countries where an aging population is very common andhas been lasting for many years.

There are two major lessons that we have learned from these experiences. Lesson one is that social security should go hand in hand with each country's national economy. Should the economy fail to expand, the real take-home pay of the active workers would decline. Young people of this period couldn't achieve a higher standard of living than their parents, and the current level of intergenerational transfers to the elderly would become hard to maintain. Reducing the real level of social security benefits would be inevitable.

Lesson two: The elderly should share a part of the increasing cost of social security. Generally speaking, elderly people in industrialized countries are no longer poor, as they used to be. By and large, they are now able to continue paying taxes, contributions, and user charges as younger people do.

These two are both hard options, but more and more elderly people in these countries are coming to understand what is to be done for them. The old parents should be able to maintain their dignity while their working children should be adequately rewarded for their labors. There is no "free lunch" anymore. There seems to be no other solution for the future.

I know that we Japanese have a difficulty in dealing with long-term problems and tend to rely on old systems rather than risky new ones. But when problems become extreme, we are likely to change the old for the new.We are quite flexible and respond promptly once we recognize the gravityof the given problem. We can easily forgive and forget. In our social policies we succeeded in changing the social security pension programs quite drastically twice, in 1985 and 1994. Indeed, through these reforms we succeeded in reducing a part of our earned entitlement to nil. We are not living in a strict contract society.

We still have very generous social security benefits. Many pensioners currently continue saving and are not forced to dissave in Japan. This is due to so generous social security pension benefits. Besides, all Japanese have been assured a prompt access to any hospitals by social security health care, and they are often receiving excess amounts of medicine from hospitals. A part of prescribed medicines used to be abandoned out of use at home. So there still remains much room for further reduction in social security benefits. In the future too, Japan can manage to succeed in containing social security costs for the elderly. On this point I am rather optimistic.

So, what is to be done for the future? I would like to mention here a needfor setting different priorities. Namely, missing is a shift in priorities of social support from the elderly to child-bearing and child-raising. In the past fifty years we had no comprehensive family policy in Japan. We just focused on high economic growth. Social support to the elderly has also been one of the important political interests. Children, however, have been regarded as purely a private affair. Little social support for child-bearing and -raising has been developed.

As I said before, the economy is blind to the needs of parents and children. What the economy sees is only the individual, not the family. The independent child-free individuals or couples can best compete for jobs. They can also better enjoy travel, leisure, sports, and other amusements, because they have enough money and time. Families with children are relatively deprived compared to the childless. Besides, the social security systems unintendedly reduced the value of children.

Needless to say, children are a country's most precious capital. They should be treated as such. Please remember, I am no pro-natalist. Adults should not be forced to have any unintended children. I take it for granted that children are basically a private concern. Children are the object of personal mediation between the individual, the couple, and the constraints given from the outside. But are couples really having the children they want in recent Japan? The answer is no. The number of children they want is two or three, while they have less than two on average. I am saying today that there is much to do for the society to help individuals or couples to have their children as they want.

In my opinion, there will be three main areas in family policy or population-relevant policies. The first one is for individuals and couples. The established sex roles between men and women in market and home work should be revised. Among other things, male Japanese should be recommended to have home responsibilities. As you know, even slaves in the ancient Roman Empire enjoyed bringing up children. Alas, current male Japanese have little time to do so.

The second one is for employers. There still remains an incentive mechanism for long-time work. The longer hours per day they stay at their office, the more they are likely to be rewarded. The time efficient work is not necessarily encouraged, even today. Output-based reward systems should be recommended rather than the current length-of-working-hours-based system. The core time in any office can be shortened, especially in head work. We can do head work anywhere, even at home, at tea rooms, at parks, on trains, or even while driving cars. Today output can be promptly informed to any bosses or partners through the Internet or e-mail.

The third one is for central or local authorities. Parental leave and childday care are the current main concerns. But existing disincentive mechanisms against child-bearing and child-raising should be replaced by incentive neutral ones. I'd like to take social security for example. Old age benefits and social security contributions have to be dependent on the number of children. This is one of my new proposals in reforming social security in Japan.

It should be borne in mind, however, that we face a political dilemma in shifting priorities to the future. In the political field, the competition for resources between the elderly and young children has largely been at the expense of children. The elderly are the voters while the children are not. We currently have not any definite damages from the declining fertility rate. They will appear in twenty or thirty years. Political decisions in the long-term perspective are rare in taking place.

We have another solution. That is, a drastic change in the current immigration policy in Japan. It is basically a historically oriented policy for Japan to severely restrict immigrants. Unskilled laborers are prohibited from coming into Japan. Skilled laborers are welcome, but normally for a very limited period. Say university professors. Non-Japanese professors can currently stay at an institution in Japan for a maximum of three years. Due to this restriction, few smart professors come to stay in Japan.

But when the demographic structure of Japan changes drastically, our immigration policy is to be changed drastically, too. Japan can be seen as active in receiving young immigrants from other countries. It is a change for the main body of our country. The virtue of the Japanese and the traditions and culture of Japan will no longer be preserved. Instead lively activities can be revived in Japan, and maybe Japan will become a country like the United States. There can be a newborn Japan in the world, in the middle of the twenty-first century.

Thank you for staying with me.

Meyers: Thank you very much, Professor Takayama, for your brilliant discussion and description of the many serious and significant problems facing Japan as the population ages. Some of these problems we have in the United States, others we don't. At any rate, I am sure that was in the great interest of everybody here to have heard from you.

I would like to first give a few remarks about the financial status of the social security system, which in this country we call Old-Age, Survivors and Disability Insurance. At the end of last year, the trust funds held assets of some 567 billion dollars, all of this invested in government securities. In the present year of 1997, the assets will grow by about 70 billion dollars. According to the intermediate cost estimate, this growth will continue until the trust fund assets will peak at about 2.9 trillion dollars in the year 2019, twenty-two years hence. But then the trust fund will decline and will be exhausted in the year 2029.

Another way of looking at the financial status is to measure the average deficit over the seventy-five year valuation period as a percentage of payroll. This deficit is 2.2%, meaning that if the employer and employee tax rates each increase by 1.1% immediately, according to this estimate, the system would just be in balance for 75 years and have enough money so that at the end of the period, there would be a balance on hand of about one year's "outgo." However, following that there would be problems because outgo would exceed the income.

There are two other estimates, a low-cost estimate and a high-cost estimate using assumptions that produce these results. Under the low-cost estimate, there is absolutely no financing problem for the social security system, not only for the next seventy-five years but forever. These assumptions are all reasonable; it's not too likely that they will all occur, but it is possible, so one can't say that just as sure as today is Monday, that the system is going to go bankrupt sometime in the near future. A high-cost estimate, of course, shows a less favorable picture.

One very important element at the moment that's being widely discussed is the consumer price index, which is used to determine annual cost of living adjustments. Many experts say that the consumer price index overstates inflation and should be reduced sharply. And that if it is such that the annual increases in benefits will be about 1.1% less each year, this would have a fantastic effect on the financial status of the system. It would move the situation much more near to the low-cost estimate. In fact, it would reduce two-thirds of the long-range deficit. So you can see how sensitive the cost of the system, when measured over a long period, is to what appear to be relatively small changes.

Next, let me describe what I consider to be the basic principles of the social security system and some current myths regarding them. The social security program is not an investment program, as some people say. But rather, it's an income-replacement program that tends to pay relatively higher benefits to low income people to set a minimum floor of protectionfor them. Many people frequently make the so-called "money's worth analysis" that shows what people's benefits are worth as compared to what they are paying. And they usually take into account the employer tax or contribution as well as the employee tax. The results of these are, of course, to show that people who retired years ago, or even people who are currently retiring, got great actual bargains, while young people who are retiring in the future will not get good bargains. But that isn't the point of the system. It is not an investment program.

Also, I don't think it is proper that the employer tax should be consideredas belonging entirely to each individual employee. Certainly it isn't that way in most private benefit plans, that each employee gets the average employer cost, but rather some get more and some get less. As, for example, in a maternity benefits plan for female workers, where the male employees get nothing. Also there's some similarity to the much more, greater situation in regard to school taxes. Everybody pays school taxes; people with mansions pay much more than people with modest homes, yet the benefit protection is the same if their family structure is the same. Going even further, people that never have children pay school taxes but get no benefits personally, ever. Of course you can say broadly speaking they get the benefit, as the country's population is getting educated, but if you look at a purely money's worth analysis, it would seem most unfair, whereas it really isn't.

Another criticism we widely hear these days is that the investments of the trust funds are just not valid. The money has all been spent, they are all just IOUs that don't mean a thing, and that there are going to have to be taxes raised later to pay for them. Well, it's true the money has been spent, that's the way it is when anybody buys a government bond or buys a corporate bond or even puts money in a savings bank. The money is spent, and later on has to be made up. So, the investments are just as valid whether they are in the trust fund, mutual fund, insurance company, or in your own account.

It's also argued that you can sell a government bond on the open market--it's different. Well, the bonds and the trust funds are nonmarketable, but they have the feature that they can be redeemed at par at anytime, which can be a great advantage or a great disadvantage, but it still does not destroy the validity of the investments. Furthermore, some government bonds owned by individuals, like the series E bonds, are not marketable, but they are redeemable at some scheduled value. It's also argued that the interest is of no value, it isn't currently used, benefits are paid out of incoming payroll taxes, and when the interest will have to be used, then taxes will have to be raised immediately. Again, this isn't true. Each month, part of the benefits are specifically met by the interest, and the rest of the benefits are met by selling redeeming bonds. It's hard to say whether those bonds were bought by payroll taxes or by past interest.

One other common myth is that we have a great problem, some people would say an insoluble problem, of both the baby-boomers coming along and because of declining fertility. Well, it's true the baby-boomers coming along is a problem, and it's one we've known about for years, but we do not have declining fertility in this country. It's just the reverse.

For the past fifteen years, fertility rates have increased. We are now at about the replacement level, as far as just fertility is concerned. Plus, we have immigration, which you might say is another form of fertility, so that it seems to me very likely that we will never have the situation that Japan is apparently facing of a declining population unless they take some drastic steps. We will always have a rising population that probably will level off, but it doesn't look at all likely that it will ever reach a peak and then decline.

Well, finally, how can the present financing problem of the social security program be solved? Many solutions are being talked about these days, such as privatizing the investments to the trust funds, privatizing the benefits structure completely, like in Chile, or privatizing in part and sharply reducing benefits. Or else, there is talk of just reducing benefits or raising the full benefits retirement age gradually or even rapidly. All of these are being proposed, but I don't see that any solution is imminent.

But there certainly is a lot of talk about it. My own solution follows the traditional one: partly reducing benefit costs, partly increasing income to the system. I would reduce the benefit cost by raising the so-called full benefits retirement age, a little more rapidly that at present into a higher level, and I would go up to age seventy in 2037 instead of the present law of going up to age sixty-seven in 2027. On the income side, I would propose raising the contribution or tax rate by two-tenths of a percent each for employee and employer in 2015, again in 2020, and 2025, and 2030, if this is all needed.

Now if action is taken on the CPI, then much less drastic things would need to be done, and even if the contribution rates are increased slightly like that, workers will still be better off, because real wages will increase more than with these small steps that I mentioned.

So, I think all this discussion is very healthy. Each country can see from other countries what they are doing, and undoubtedly in the long run I think we can say that social security will outlive us all, both in the U.S. and Japan. With these dismal words, I turn the floor over to Mr. Salisbury, and after he finished his remarks we'll have time for a few questions and hopefully answers from the panelists. Thank you.

Salisbury: I will try not to be redundant. That's one of the longer introductions that I have ever had to my topic. And I fear the potential therefore of being somewhat duplicative, and potentially suggesting that one of what have been described as myths are not in my mind myths. But that will make the discussion more interesting, I'm sure. As was noted, the background for this system and some of the problems in the United States are similar to those in Japan.

First the degree to which, as this graphic indicates, the proportion of the U.S. population that is moving into the over-65 age category continues to grow rather rapidly. But as was noted by Bob Meyers, at no point do we get to the level or proportion that is faced by the nation of Japan. Along with the issue that was just mentioned at the end of the doctor's presentation, which is the degree to which we have population growth in this country in an aggregate sense. Figure two indicates what is creating the bump in the United States vis-a-vis those demographics that became the "baby-bust"; that is, had fertility rates not dipped before, as Mr. Meyers noted, and come back up to a new "baby boomlette." The younger population of this country now has as many individuals. In fact there are now more individuals in it under the age of 21 than the remaining and surviving baby-boom populations. We are seeing a change in these demographics, but we do have the temporary, if you will, significant decline in fertility rates. And by the nature of demographics that obviously will effect relative flows in social security for decades.

The other factor is life expectancy, and this is one where I am using the Social Security Trustees Report, but I will underline that the Social Security Trustees Report, at least up until last year, has been relatively generous with assumptions about when we will die. If one were to compare those assumptions with the Census Bureau's mid-line demographic assumptions, the Census Bureau expects us to live quite a bit longer than the social security actuaries. If one were to compare that instead to some of the more recent studies of demographers in the United States, they think that the Census Bureau is quite optimistic about how soon we will die. I say optimistic because from the perspective of social security, if all of us would die the week before we would turn 65, there obviously would be no problem.

If one puts that in the context of the financing of the program, as Bob Meyers noted, we end up with a period of shortfall. Dependent on which assumptions one uses, the potential of moving into so-called negative cash flow relative to payroll taxes is around 2010-12. Bob mentioned that there are three sets of assumptions. If one uses the most negative assumptions from the perspective of the financing of the program, one moves into that negative cashflow shortly after the turn of this century, about 2004. If one uses the more optimistic assumptions, that negative cashflow actually stretches out to about 2022-23.

I do not share Bob's view of methodology, however, as it comes to the difference between moving beyond the point that payroll taxes pay all the benefits . . . to shove if they have no choice but to either issue new debt, raise other taxes, or cut other government spending. It definitively enters into the fiscal politics of the nation, and even though on a stand-alone analytic basis one can say this should not be of concern to the social security program, I would suggest that politically it should be of great concern to social security beneficiaries and to future social security beneficiaries. As we have seen in the past, when it comes to politics, it will not be treated as if it is not part of the general budget. So I agree that there are, in fact, bonds in the trust fund that take on a different political favor than the bonds that are held by the general public vis-a-vis the necessity of benefits payments. And that dynamic, I think, will be with us.

If we also look at this in the context of the United States' actual assumptions in general, I sincerely hope that Bob is correct, in that some of the more optimistic assumptions that would push these favorable lines out further might actually be realized. But regrettably, the tradition in the United States is that we have a general tendency to end up from a social security perspective to be less favorable rather than more favorable. If one looks at life expectancy and mortality, and one factors in medical advances--the potential of biomedical research, of the human genome research, of the potential of DNA research and DNA modifications--the potential of life expectancy extending easily out into the late nineties and to what they call the "natural life span," to one hundred years, would play absolute havoc with the financing of social security. Yet the physicists and doctors I know engaged in medical research look at me and say, "That is what the future will be." So I find myself very optimistic about the potential of living a long time, and therefore less optimistic in some ways than Bob about the fact that we can take comfort in more optimistic assumptions.

If we put that, as I noted, in the context of historical assumptions, if the program had behaved and the economy in the world had behaved as was anticipated at the time of the last major system reforms in 1983, we would not be talking about social security problems today. We would be talking about social security policy successes of 1983. But as this indicates, things have not gone as well as was anticipated along the lines of assumptions in the future of the program. As Bob noted, as we move out in time, we tend to add bad years as we lose good years, and so we have a probability of continued deterioration relative to the assumptions.

Now this is a particular challenge for us as a nation, because of the very success of social security and the tremendous dependence of the American retired population on social security as compared to any other sources of income. This Census Bureau data shows by quintile the economic status of the elderly. The dominance of social security in the lower 60 percent of the population cannot be missed.

But also, while sometimes talking just quintiles, we lose track of what it actually means in dollar income. The top of this quintile is at $13,800 per year. So, it is not that we're talking about that it doesn't matter in the fourth and fifth quintile, because those are all people who are wealthy. Even $22,253 per year is not what by most definitions would move people into the world of wealth, yet that is the maximum income as we move from the eightieth percentile to the eighty-first percentile. Even as we move into that highest quintile, we end up finding that social security is responsible for nearly a quarter of the income of that wealthiest 20 percent of the population. It would be far higher except that they are dependent for about 20 percent of their aggregate income from continuing to work, not retiring at age 65, but continuing to gain as much money from social security as from earnings they get from investments, and almost as much money as they gain from a private pension system. So you end up with a dynamic that on the one hand there are fundamental questions about the sustainability of existing benefit levels under social security.

Most particularly if we get the medical breakthroughs that lead to a significant extension of life, which I personally believe we will get, we are faced with the challenge of: if we do anything to reduce social security in terms of its income levels, where exactly does the replacement come? And it at least leads me to the only issue: how long do we require individuals to work? Should I anticipate, instead of under Bob's proposal, retirement at 67 versus current law age 66, and should it really be that I shouldn't contemplate receiving social security benefits unless and until I am disabled and cannot work? And so I think there is a fundamental evaluation of retirement continuing to be a presumption as opposed to individuals working until they are physically unable to work. If we move up with medical advances that allow most individuals to live into their eighties and nineties, that may be the type of question we have no choice but to get into a discussion of.

In today's social security reform debate, I am intrigued by the degree to which we only talk about retirement age in the United States, but there has been fundamentally no discussion whatsoever of a reexamination of the concept of retirement in and of itself vis-a-vis public policy. If we look at why some of that income experience is there, it is basically because as a nation, we have not had either retirees, and today do not have workers, who spend any time thinking about what it will mean to be able to retire.

If one looks at public opinion surveys, the notion of planning for retirement is, "I will be able to retire the day I am eligible for social security." And we for decades have left the impression, which the public opinion surveys made clear, that individuals believe that social security will provide an income adequate to retire. Yet, after the fact, we find that while they thought that, they obviously didn't spend much time doing any calculations on it. It's only after they have physically retired that they end up discovering that it is not, in many, many cases, an adequate income. So there is a tremendous amount of reeducation, both necessary in the U.S., but also currently taking place.

The American public has now gone to an opposite extreme as the young age. Those under the age of 39 today only believe at about the twentieth percentile that they will get as much from social security as the current program is promising them. They can't even tell you what it promises them! They just don't think they will get it. And that is a fundamental change from the past. Now, is that accurate? No, they will get something from social security. Does the 18 percent who think they will get nothing, are they likely to experience that in the United States? Absolutely not. But having said that, if a little bit of paranoia causes more people to start moving into the category of having attempted to figure out how much income they will need in order to retire, doing some advance planning, then it might not be a totally bad thing for people to at least be concerned about their future.

Most particularly, we go to the next question that is logical in the American experience and in other countries as well, which is, "Can we make it up out of a pension system in complement to social security?" And if one looks at even relatively generous pensions, there are those that do a benefit accrual of 2 percent a year, which I will quickly add that there aren't many left in the United States. That is not the system now in place for federal employees hired after 1984. It was before. States like Michigan have just eliminated their defined benefit pension plan for public employees in favor of a public employee defined contribution plan. The District of Columbia eliminated its defined benefit plan for civil service employees in 1986, something that seldom shows up in the papers that talk about the crisis of pensions here. And D.C. employees, under the most recent budget, would have social security plus a defined contribution account to which 6 percent of pay will have been contributed. So they will hardly get to the point that even with thirty years of service, there are still relatively low replacement rates, with a very generous defined benefit plan.

If one instead focuses on actual turnover rates in the economy, the fact is that median job tenure was just reported by the Bureau of Labor Statistics for those age fifty-five to sixty-four to have now dropped to a historic low in the post-World War Two period of 10.1 years, which is down from 15.5 years as recently as 1991. We are in an economy of which at this point only 14 percent of those over age fifty-five report having worked for their current employer for thirty or more years. And only 30 percent of that age group report having worked for their current employer for twenty or more years. So the prospect of filling in the social security gap with the earned income pension system, whether it be for public employees or private-sector employees, has always been doing it for a relatively small proportion, and it will do it for an ever smaller proportion in the future, unless individuals begin to save on their own.

Now that ends up creating what one might describe as a dilemma. The numbers in terms of the proportion of various age groups that have met these various ten-year periods just underline the degree to which, if it takes twenty to thirty years to earn the benefit, the very small proportions of the labor force will achieve that. Now if one puts this in the context of what Bob was talking about, of affordability, I'll just underline a slightly different point off of this slide, which is relative to public confidence in the social security program, the other end of the spectrum. If one were to solve the "social security seventy-five year issue" by slowly decreasing the value of benefits as compared to the current benefit promise, even if one waited to 2022 to begin doing anything, the program would still be able to afford to pay approximately 70 percent of the benefits that are promised, all the way through the seventy-five year period. I only underline that, not to suggest that is what the nation wants to do, but to underline the fact that for purposes of the young today who are paying taxes and worrying about getting nothing back, even under a "don't raise taxes, cut back benefits" scenario, those individuals are in a position to get back at least 70 percent of the promised benefit. Not adequate, if you will, as the current program is not adequate, but clearly substantially more than zero. So there is room on both the tax side as well as the benefit side as we move forward to make adjustments.

I'd close simply with the notation of the difficulty of the political process in the United States. Everyone outside of the United States, I'm sure, through reading the Economist and other publications, understands the types of difficulties that the last Congress had in reforming the American welfare program. And I will note that in our last survey, only 22 percent of Americans identified welfare as a program that they valued in the American society.

Now you compare that to social security, where 77 percent of Americans still place very high value on the social security program. Yet, understanding of the social security program is almost as low as understanding of the welfare programs in America. Even a recent survey that was put on my desk today by Lewis Harris, which asked the population and the young in particular, had two extremes of questions. And in this one it asked, "Do you have faith that you will get social security?", and of the under age twenty-nine population, the favorable response was only from 17 percent. Yet, when asked whether or not they, in the year 1998 and 2000 elections, would be inclined to vote for or against a politician who suggested significant reductions in future social security promises, 78 percent said they would be less likely to vote for a politician who suggested cutting social security. Now, just to show that they were as negative on tax increases, 68 percent said they would be less likely to vote for any politician who proposed raising taxes in order to allow social security benefits to be maintained. So this is at a relatively early stage, I would argue.

Politically in the United States, we are far from reaching a consensus with the electorate on what they will reward politicians for doing, and if one looks at the charts and the system in Japan, and basically sees the process they are going through, one can only take pleasure in the United States that we are having any discussion so early on the demographic curve and so early on the fiscal curve relative to other nations. We have the prospect over the next five, ten, and fifteen years of building a political consensus that provides a basis for preservation of a social security system. Whether that be based on an adjustment of taxes, benefits, of the philosophy of work versus retirement, I will leave to others to decide, rather than getting into the advocacy debate on that. Thank you for your attention.

Meyers: Now comes the best time of the program, when you folks can fire questions or comments at the panelists.

Question: How do the concepts of money's worth and the rate of return factor into discussions of the social security system?

Meyers: The question of rate of return or money's worth is interesting, but not really relevant. I think it would cause more confusion than do good, because people don't keep in mind that those who retired in the early years, or even those who are on the rolls, who now have high rates of return, when they were at their working ages, they supported their parents in whole or part. Whereas now, workers don't individually support their parents, so there are many facets to the subject, and looking at just one of them distorts the issue.

Salisbury: I personally share Bob's view on the irrelevancy of the money's worth discussion, as it relates to an individual-by-individual basis. If one could figure out how to do what I will describe as a family's money's worth calculation, so that one were able to, if you will, put more that one money's worth number on that statement, then I might view that as relevant.

The reason I say that is that my grandmother drew social security benefits for thirty-three years. It was her sole source of income. My mother and father (81 and 83) were born at a time when their life expectancy at birth said they should never get social security benefits, but now they are almost solely dependent on that as a source of income. We have purposefully, in some of our survey work, asked individuals whether they have retired parents and grandparents, and the number is quite high. When you then ask them if they know the financial circumstances of their parents and grandparents, the numbers are very low. They are quick to say, "Oh, they're doing fine," but if you ask them what their parents' or grandparents' income is, they haven't any idea. What their assets are, they don't know, and what portion comes from social security, they have no idea.

But if you ask them if their parents were not to have any income, would they feel that it would be likely that they would provide direct financial support, many of them say "yes." So, if we are going to eliminate social security, then individual money's worth is an investment, and relevant. But in the context of social security insurance, just like my homeowners and auto insurance, the concept of money's worth and rate of return has very little place. In fact, with my homeowners, auto, and medical insurance, what I pray for every year is a very negative rate of return, because I would prefer to never have to file claims against any of them. Yet in an individual-account type of mentality, I would find it relevant. I happen to think there is a dramatic need, as evidenced by my own family, for social insurance in this country. I think the issue is what is the design and nature of that system and what is affordable. Money's worth doesn't seem to go together with this.

Question: How do proposals such as the recent index-fund proposal impact social security financing, and how will it change in the future?

Meyers: You are describing one of the advisory council proposals where eventually up to 40 percent of the assets would be invested in an index fund run by the government. As part of this proposal, a relatively large fund would be built up, so that it would be meaningful. Because if you had pay-as-you-go financing, it doesn't make any difference how you invest the money. But the net effect of this was scored by the actuaries, and this did help the financing of the program, and it closed part of the gap of the deficit. But not all of it, roughly as I recall.

Salisbury: It was eight-tenths of 1 percent out of the 2.2 percent.

Meyers: So it still wasn't a big deal, but it helped the people who made that proposal not have to propose more benefit cuts.

Salisbury: I think there are two pieces to the issue. One is a philosophical discussion of whether or not the money should be invested in the equity markets. The second is one that goes more to the issue of pension finance. And in the world of pension finance, the federal government has chosen to say to the sponsors of pension plans that you essentially, by law, cannot use generous accrual assumptions. When former commissioner Robert Ball was asked why he favored that particular approach, he said, "Well, I really don't favor the approach, but it helps the accrual assumptions." Well, what he wanted is exactly what many private corporations in the past have been.

But if you look at the defined pension benefit system and the roles of the benefit guarantee corporation, they go so far as to say, not only can't you do that, but if you look at the defined pension benefit system and the roles of the benefit guarantee corporation, they go so far as to say, for determining whether or not you are funded or unfunded, you must use an artificially declared rate that is based almost on current short-term money market rates. So you will value your pension plan. They just announced that the new rates are 5.7 percent. That is even on many of these funds in the last year, because they were invested in equities and had actual rates of return on their aggregate portfolios in excess of 20 percent, but are mandated to use this 5.7 percent rate.

So my comment would be that we should separate the issues. With or without the assumption issue, there is either reason or no reason to invest part of the money now in bonds and equities. That would be one decision, but separate and apart from that decision, I would say that whatever rate is good for the private sector is good enough for the social security actuaries. And if they do that, we should simply require that what is in equities have nothing to do with the actuary valuation, and that they do the equivalent of the PBGC rate, whatever the government says that is, this year 5.7 percent. I believe they are using in the report this year about a 7 percent rate, so what it would end up doing, regardless of equities, is saying that the social security system is in a more challenged position than what the current actuaries say.

Question: How much is the social security system worth, and how does, if it does at all, the unfunded accrued liability concept fit in with the system?

Salisbury: The low end of those assets would be about 8 trillion dollars, and depending on whose numbers you see, some put it as high as 13 trillion.

Meyers: On that point, the 8 trillion is a figure derived from the concept that I don't think is relevant. It's the concept that you take no more new entrants into the system. To get a higher figure, like 13 trillion, you have to assume that the system terminates today, and people get whatever benefits they have "earned," which is difficult to define. So, again, I think that the unfunded accrued liability concept, as it is applicable to private pensions where the employer might go out of business, is not applicable to a national social insurance system, where if the country goes out of business, there're lots bigger problems than that.

Question: Obviously the handling of the extension of lifespan is dependent on making social security responsive to artificially enhanced lifetimes, such that people don't receive social security on the basis of age until they are individually in need of it. If you don't do this, most likely governments will not allow us to have extended lifespans, because they can't afford us. I would like our experts' opinions on the prospects for making our social security system responsive to changes in the patterns of aging as to the onset of benefits in Japan and the United States.

Takayama: In Japan there is a discussion taking into account the longer lifespan in social security. We currently have the defined benefits system of social security, and pensioners don't bear any burdens arising from the longer lifespan. Japan and Germany are now discussing a reduction in the level of benefits as we live longer. Raising the retirement age is also another alternative to the changing situation.

Question: What are the responses to people aging more slowly in the Japanese social security system and what are the problems to having that as part of the solution?

Takayama: Many Japanese people really want to retire early.

Meyers: If I understand your remarks, they jibe exactly with what I say. If you want to solve demographic problems, use demographic means. If people live longer, they should work longer. Those who can't should have good disability benefits.

Question: What obstacles would there be in making such accommodations, and what is the solution?

Meyers: Well, that was my proposal. Beginning in 2003, we would gradually increase the retirement age and get up to age seventy or index it, and slow it down.

Salisbury: I would suggest that it is going to be politically difficult, whether one likes the idea or not, as we have assessed in each of the last several years, among those who already under the law will not be eligible as the law is written today for benefits till 66 and 67. With near unity they all believe they are still going to be eligible at 62 and 65. It has not yet sunk in to the American public that the U.S. Congress has done anything already. Secondly, when those very people that are not going to be eligible until 66 and 67 are asked in surveys whether or not they would favor increasing the retirement age above 65, they are unilaterally opposed.

The only segment of the population that has expressed enthusiasm for having the retirement age raised are those that are already retired. I put it in the context of welfare reform. This is going to be a difficult issue to deal with. The proposals that Bob mentioned, and others, have logic placed behind them vis-vis the time that one is paying benefits, but the fact is that in all the surveys, the issue is how to retire earlier. I recommend to you the April issue of Money Magazine, in which a young couple just turned 30 is overspending their current income by 40 percent, according to the article. They are talking about how they hope to retire at 50, and the financial advisors are suggesting the types of things they need to do to achieve this. And you sit there wondering why you are reading it, and why they wrote it.

Meyers: In summary, certainly it is going to be difficult, but it is the least worst way of solving the problem, because something has to be done.

Question: Professor Takayama, in response to the demographic and other changes that are taking place in Japan, what kinds of changes in the social security system are being thought of?

Takayama: Things are quite the same between the United States and Japan. The Japanese government will propose a reduction in the benefit level of social security while increasing the contribution rate.

Question: What about medical care benefits as a part of the social programs for the aged? And why haven't you addressed this issue tonight?

Takayama: Japan has a very comprehensive social security health care system. It covers all people of Japan, and its benefit level is generous, while the elderly co-payment is very low, about five dollars per visit. So, the elderly enjoy a very generous health care system, but a major part of the cost for elderly health care is shared by the active generation. The government will probably propose a new, independent system for the elderly, but discussion is still alive, and no decisions have been reached.

Salisbury: The discussion tonight was on cash-income programs explicitly, and not HI. I am glad, because there are far more difficult issues with the medical program. As you well know, under the intermediate assumptions, Medicare has a 66 percent benefit problem and a payroll tax problem of nearly 6 percent on a relatively reform basis. Congress' reluctance to deal with this program makes me think that they will take a long time to deal with the social security issue. The magnitude of the Medicare challenge and nursing home care, etcetera, add tremendous magnitude in the U.S. to what all of us are going to have to face. The Japanese government has similar financing challenges, particularly on the long-term care nursing home issues as well as medical finance issues. A discussion on the health issues facing retirees would easily turn this into a lecture series, here at the JICC.

Question: In Japan, is there a mandatory retirement age, and is there discussion about changing this age in light of the aging population?

Takayama: Yes, we have a mandatory retirement age of 60. A majority of workers don't want its upward change. Some experts assert raising the mandatory retirement age, while others propose its abolishment. The current discussion on this point seems not so alive.

Meyers: With that, we have come to the end of the program. Thank you for staying so long, and thank you to our two panelists for their presentations.

(The above article is offered for reference purposes and does not necessarily represent the policy or views of the Japanese Government)

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