AGING
A new Gray Dawning
> BY JACK FREEMAN
Copyright © 2002 by The Earth Times. All rights reserved

You were one of the first people to bring up the issue of aging for public debate. How do you feel about the way that debate has been going lately?

It's certainly not a debate based on facts. It's basically a debate based on politics. The aged in this country‹the senior lobby, the gray lobby‹is perhaps the single most organized, the largest group of voters in terms of percentages who vote, much more than young people, because they have time and interest. They are much more likely to write letters and make telephone calls to their congressmen. The AARP (an association of older Americans) is a huge organization. It's got about 35 million members. And it's a force not only to be reckoned with, but almost terrifying to most of the politicians. So you have a situation in which the AARP understandably is very much concerned with providing additional benefits for their constituency. And they're usually much more specific about what additional benefits they want than they are about how we're going to pay for it.

Does that mean that we cannot expect to agree on a political solution to the problem?

We've created a situation in which it's politically very painful for any political leader to say to a group as important as this one, "We're going to have great trouble affording what we have, because these programs are completely unfunded. They're not like a conventional pension plan where money has been set aside. Sorry, but the money has already been spent." This is totally unlike most corporate pensions, where the money is actually set aside and truly funded. So we confuse the American people with words like "trust fund," which is an accounting fiction, a very convenient one, creating the impression that all this money that's been paid over the last 70 years or so has been set aside. It has not been set aside. So, for a political leader to say to a group this big, "Here's what you're going to have to give up in order to get this," suggests that somebody is going to have to sacrifice. And sacrifice is not a politically attractive proposition.

But what is going to happen if that sacrifice isn't made? Why isn't there any sense of urgency about this problem?

Our country, like most modern democracies, is very short term oriented. And this is what I would call a silent and a slow-motion kind of crisis where it's going to be years before the boomer generation retires and the problem becomes obvious. And of all the developed countries in the world, only one has really confronted it, and this is Great Britain under Margaret Thatcher's leadership. She made a variety of reforms 20 years or so ago that did involve some reduction in future benefits, among other things. I asked her one day, "Lady Thatcher, when you political leaders get together in the G7 meetings at the Summit, aren't they aware of this ticking time bomb that's coming." And she said, "Oh my, yes, they're all aware of it." But, she said, the general view is: Why should I take the pain for somebody else's gain? It's not hitting on my watch.

So are you saying that there really isn't a debate going on about the aging problem?

A debate would imply that the facts are presented on both sides and you're having a rational analysis of what's going on here. The problem very simply is the following: You have a pay-as-you-go plan. Those in the baby boomer generation, born in the years after World War II, are soon going to retire, and the retired population is going to double. Now, when this group was growing very rapidly and entering the work force, their payroll taxes were increasing. And the original concept had been that the money would be set aside somewhere. But the money was not set aside. It was spent not only on increased Social Security benefits but on all kinds of other government programs. So, when the boomers retire we will have huge deficits that will be measured in trillions of dollars. And deficits of that magnitude will have very major economic efforts.

What is it that you recommend we do about this?

It would be important, first, to figure out some humane and fair way of reducing the benefits. But we also have to increase private savings and private retirement, because we have a negative savings rate in the United States right now. Huge percentages of the American people have saved virtually nothing. And they have come to count upon Social Security in many cases as their only form of retirement income. More than half of the people getting Social Security now make less than $20,000 a year, and more than half of what they get is from Social Security. So you have a huge social issue here of what are people going to do in their retirement?

Is there a way out of this dilemma?

The solution basically is a gradual and humane reduction in benefits combined with an increased savings pool that's truly set aside‹so it's funded rather than spent. The reductions that I have proposed include a very gradual increase in the retirement age. At the beginning of the 20th century, the average American life-span was 49 years. It's now approaching 75. When Social Security was set up, it was expected people would live about 11 years at age 65. It's now heading toward 18 to 20 years, even without any of these bio-genetic breakthroughs considered. Look at me. I'm 75 years old. I work 10 hours a day. I feel fine. There are millions of people like me. So people not only live longer but healthier lives. So, one of the things we have to do is increase the retirement age gradually, so that people have a chance to provide more for their own security.

You have also proposed an "affluence test" for Social Security, haven't you?

When you've got a crisis of the type we face, I find it morally unthinkable that a rich "fat cat" like myself should be getting their full benefits when, if we don't reform these programs, we either run huge, huge deficits that will cause serious, serious negative effects or my own children and grandchildren will have to pay an astronomical amount of payroll taxes. There's a moral issue here, and not only how do we take care of the people who are poor and really need these benefits, but there was a philosopher who said that the "ultimate test of the moral society is the kind of world that it leaves to its children." I think we have a responsibility to our children, since it is we‹my generation and the boomers’ generation‹who have created this problem, to help solve it.

You have also called for reducing cost-of-living allowances, or COLAs, haven't you?

All these programs, unlike any private pension plan in the world‹I mean, any corporate pension plan that I'm aware of‹have 100 percent cost-of-living allowances. Those costs add up enormously over a period of time. There are some very serious people who believe that these cost-of-living allowances are exaggerated, and therefore, we've got to have something different‹I call it the diet COLA. It reduces those benefits somewhat. One of the difficulties is that the benefits go up with wages. And wages go up with productivity, so that as productivity goes up, the costs go up which makes it hard for us to "grow our own way" out of it. Now, another thing that Margaret Thatcher did was to break that link and only have benefits go up by some percentage of inflation. So the benefits were not increased in real terms. That made a huge difference.

But not huge enough to solve the problem entirely?

I happen to believe that it would make sense to set up some kind of funded program. Because what our democracy has shown, and other democracies have shown, it's very hard for a politician to see a surplus and not spend it, as we're now observing. One of the key reasons for taking this money and putting it aside is it will really be there, instead of just running up future deficits and debts. So we have to move towards some kind of funded plan.

What else do you say to people who argue that we can solve the problem through economic growth?

One of the things that we have to come to grips with, and the rest of the world really has to come to grips with, is that the growth of an economy is the product of two forces: how fast the work force is growing and what the productivity per worker is. The growth is the product of those two numbers. The birth rate now in this country is much lower than it was at the time the boomers were arriving. It's about two babies per woman. And we have quite a few immigrants. So we're projected to have very, very slight growth in the work force. Numbers as low as 0.1 percent over the next 50 years. It has been growing by something like 1.7 percent. So we've had a rapidly growing supply of workers, which added to the growth of the economy. In Europe the birth rate is way below two. So they're going to confront something unprecedented, a very serious shortage of workers, which will have major effects on the economy.

One of the goals of Social Security, from the beginning, was to take older people out of the work force to reduce unemployment. But you're saying that's no longer an objective.

Yes, a labor shortage is something many developed countries will be facing. There are several arguments for increasing the retirement age. Number one: A lot of these people will need to work because their savings are so low. Secondly, the economy will need to grow. Third, contrary to popular assumptions, most surveys show that about three-fourths of the elderly actually want to do some work, and retirement is not the wonderful heaven they may have assumed. It helps them make a contribution, and the society needs their contribution.

Frankly, while it's easy to talk about the problems, which are essentially in the fiscal and economic area, I don't want to present such a dollar view of increased longevity, because who doesn't want to live longer and live healthier?

It's a magnificent blessing that we have been granted, due partly to rising affluence. And obviously, very important, due to wonderful breakthroughs in technology. Who doesn't want their parents to have healthy, healthy lives? It gives us the workforce, and encourages them to make contributions to society. Most of them will probably be happier if they're contributing.

In your writings you stress the issues of morality and humane treatment of people as we approach the need to reform Social Security.

Do you remember what the original concept of Franklin Delano Roosevelt was for Social Security? It was the safety net for the truly needy. And if we get at this problem, under my proposal, we don't cut the benefits for the bottom half of the people. You can, if you just make up your mind, honor that contract for the needy. But what we've got now is kind of a well padded hammock for the middle and upper classes, because these programs have gone from being safety nets for the needy to universal retirement programs for everyone, including "fat cats" like me. I think, if we move promptly, you can have a moderate, humane, moral, compassionate approach to this problem.

Now, what happens if we don't? Well, I think there are a couple of implications. First of all, those huge deficits will have huge effects on interest rates and mortgage rates and the growth of the economy and on taxes and all kinds of things. It'll be very harmful.

You also have the moral issue of what happens if people don't save more‹if we suddenly are confronted with huge, huge deficits, and then, in the midst of a crisis, we have to slash the benefits before people have had a chance to prepare. And what worries me the most is that, at that point, you may have to slash benefits for twice as many elderly as we're going to have now, many people who are poor and really need them.

So the alternative to doing nothing, I find, is a very self-destructive concept, both economically and morally and socially. But I can tell you this: Anybody that talks about reducing the benefits is a cold hearted grinch.

But is there no way out of this impasse, given the nature of the political situation?

It's kind of hard for people to vote against tax cuts, just the way it's hard to vote against spending more. I've asked several top government officials who are no longer in government, and therefore they can speak the truth, "Do you think we're going to get our act together in time, or is it going to take a crisis?" And I think most people feel it's going to take a crisis of some sort, and not just in our own country. Japan never had a baby boom. And the work force under the age of 30 is going to drop by a stunning 25 percent by 2010. It's extraordinary. They're the most rapidly aging population in the world. They, as you know, are huge savers, and they've been shipping a lot of their money over the years to the US, and they've been financing a lot of our deficits. They're now going to have their own problems with the aging society. And if you talk to any leader of Japan, they'll tell you the aging society is their number-one imperative. They may need their savings for their own purposes instead of financing America's deficits.

How does this impact the world's developing countries?

Again, you can see it as a huge problem, or you can see it as part of a solution. The birthrate of the developing countries has fallen dramatically, but it's still above the replacement rate. So you have a phenomenon in which you have a rapidly shrinking population in most developed countries.

The populations in the developing countries are very young and they're growing. Now, if you wanted to put a positive spin on this, the developed world is going to need more young workers. And, for a variety of reasons, I don't expect the birthrate [in the developed world] to increase substantially. So it is possible you can make some good news out of developing countries, in that they have a supply of labor that developed countries are going to need. I think there's going to be a whole new bargain between developed and developing countries. Some kind of joint ventures and so forth where we use more of their workers.

Your personal engagement with foreign policy issues and your extraordinary philanthropy have strengthened institutions such as the Council on Foreign Relations. Do you see yourself playing a more visible role in the global question of aging as it relates to economic and social development?

The right solution here is the global solution. Because we're in such a global economy, you know, with capital and trade flows and so forth, that if only one country solves this problem and the others don't, well, you can export your problems to others. And it's obvious from capital employers. So yes, I've been very much involved with that.

What about concerns that proposals to privatize part of Social Security will be depriving the system of money rather than bolstering it?
There's a huge problem called "transitional costs." And what a lot of the optimists don't want to take into account, as much they should, is that if you're going to go from an unfunded program to a funded program, you essentially have to pay for two retirements at the same time, not one. Since the money has not been there to pay for the current programs, you know, you're paying as you go. Then you've got to pay a lot of money for the current benefits when the current boomers retire. Well, in addition to doing that, you're funding a new program for the younger people. Then where is the money going to come from to pay the benefits to the existing people? And that, to me, is an argument for two things. Number one: You have to reduce the benefit gradually and humanely. And, two, you're going to have to have more funding. But if we had more funding, I don't want to go to the government so they can spend it. I'd like it to go into some kind of a mechanism where it goes into the hands of the people. So, I'm for a funded plan if it's funded. I'm not for a funded plan that's Disneyland.