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 Thank you very much, Mr. Secretary, Madam Secretary, ladies and gentlemen.
I'm delighted
to join you on a subject which is crucial, as you all know, to the American
economy and to our future. One of the most complex economic calculations that
most workers will ever undertake is, without doubt, deciding how much to save
for retirement.
At every
stage of life, individuals ought to make judgments about their likely earnings
before retirement and their desired lifestyle in retirement. Also implicit in
such decisions are assumptions about prospective rates of return, life
expectancy and the possible accumulation of a nest egg for one's children.
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The
difficulty that individuals face in making these projections and choices is
compounded by the need to forecast personal and economic events many years into
the future.
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Insurance
companies make some of the same judgments in calculating premiums for annuity
contracts or life insurance. Defined-benefit pension plans make similar
calculations for large groups of employees. The Social Security and Medicare
trustees replicate some of the same calculations in their annual assessments of
the actuarial viability of those programs.
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Aside from
these institutional forms of retirement savings, of course, is the discretionary
saving that each of us does consciously by periodically setting aside portions
of our income.
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All of the
above, and more, are required to assess the adequacy of retirement saving for an
economy as a whole.
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Most economic
forecasts are subject to significant uncertainty. At least by comparison,
one judgment looks to be a reasonable sure proposition: the ratio of retirees to
those still working will rise precipitously starting at the end of this decade,
and that ratio will continue to climb through the first third of this century
and remain high thereafter.
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In part, this
projected development owes to the retirement of the baby boomers, but the
phenomenon is broader than that and reflects the aging of our society.
Importantly, according to the Social Security trustees, the demographic
challenge will not go away with the passing of the baby-boom generation.
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 This
ever-larger retired population will have to be fed, clothed, housed and serviced
by a workforce growing far less rapidly. The retirees may have accumulated a
large stock of retirement savings, but the goods and services needed to redeem
those savings must be produced by an active workforce assisted by a stock of
plant and equipment sufficiently productive to meet the needs both of retirees
and of a workforce expecting an ever-increasing standard of living.
Though, from
the point of view of an individual household, saving reflects financial claims
adequate to meet future needs, the focus for the economy as a whole, of
necessity, must be on producing the real resources needed to redeem the
financial assets.
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The role of
finance is to channel saving into investment of the physical capital assets that
assist in the production of the gross national product, which, in turn, serves
both retirees and active workers. Clearly, an efficient system of finance can
more effectively deploy a given stock of capital and thus maximize its
contribution to supporting the population.
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Any analysis
of the amount and type of saving required to finance the bulge in retirements
that is just over the horizon needs to project, one, the number of retirees,
two, the size of our workforce, and three, the productivity of that workforce.
Of the three, productivity is most directly affected by the level of investment,
which of course is financed by saving.
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The size of
the future workforce, excluding immigrants, and the size of the future retired
population are relatively simple to project from today's existing age
distribution.
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The level of
immigration, both legal and illegal, will be dominated by public policy
decisions and by economic forces, both in the United States and in the countries
from which our immigrants are drawn. This forecast is more problematic, and its
level matters: Over the past decade, for example, immigration accounted for
approximately one-third of the increase in our workforce.
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The larger
our workforce in the year 2010 and beyond, the easier producing goods and
services for both retirees and active workers will be. Immigration policy will
therefore be a key component of baby-boom retirement policy.
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The rate of
saving, for retirement and other purposes, may not directly affect either the
number of retirees or the size of the workforce. But it surely affects capital
investment, which it finances, and the productivity that it engenders.
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Besides the
total amount of saving and investment, changes in the allocation of those funds
among different types of capital also appear to have some influence on the
growth of labor productivity. A dollar of new saving flows through
financial markets to firms that allocate it among different types of capital
investment. Clearly, firms' choices about the types of investments to make
matter crucially for how much labor productivity ultimately is boosted.
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In the late
1990s, for example, businesses allocated much more of their investment dollars
toward high-tech, higher-return capital than they did in earlier years.
Businesses made this shift and are continuing to move further in that direction
in response to the extremely rapid decline in the prices of high-tech assets and
the new opportunities that these assets have afforded.
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According to
one set of calculations, of the roughly 2.5 percent annual rate of increase in
output per hour, or labor productivity, between 1995 and 2001, perhaps a quarter
of that growth could be attributed to ongoing shifts in the composition, as
distinct from the dollar level, of capital.
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Improvements
in the quantity and quality of education of our workforce enhance workers'
skills and contribute importantly to the growth of labor productivity.
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But far more
important over the past six years are the gains in output attributable to
technological innovation, especially information technology and the improved
managerial organization and, as I noted in testimony yesterday, the greater
flexibility and resilience of our economy stemming from deregulation, primarily
in finance.
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Notwithstanding
these more intangible contributions, the level of saving remains a key
ingredient of economic growth. But we need also to know whether the source of
that saving is sustainable and, beyond that, whether the type of financial
assets in which our saving overall is accumulated affects our productivity.
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During the
past six years, about 40 percent of the total increase in our capital stock in
effect has been financed, on net, by savings from abroad. This situation is
reflected in our ongoing current account deficit, which, by definition, is a
measure of our net investment in domestic plant and equipment financed with
foreign funds, both debt and equity.
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But this
deficit is also a measure of the increase in the level of net claims, primarily
debt claims, that foreigners have on our assets. As the stock of such claims
grows, an ever larger flow of interest payments must be provided to the foreign
suppliers of this capital.
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Countries
that have gone down this path invariably have run into trouble, and so would we.
Eventually, the current account deficit will have to be restrained. The nation's
economic potential will be brighter if that comes about through an increase in
domestic saving rather than a reduction in domestic investment.
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Whether the
mix of domestic private and government saving affects the rate of productivity
growth is a more contentious issue. Another is whether the form of private
saving, for example, whether in stocks or debt instruments including bank
deposits, affects productivity growth.
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Ultimately,
the composition of real investment in our economy will reflect, among other
influences, the attitudes toward risk of those who own the financial claims
against the capital stock.
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If savers
become more risk-tolerant, financial risk premiums will decline. In response to
these reduced penalties on risk, firms will eventually adjust the mix of their
endeavors toward more-speculative projects but, importantly, presumably ones
that also offer higher prospective rates of return on average, which more often
than not translate into higher long-term average economic growth.
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The nation's
savers, daily in the marketplace, exhibit an obvious sensitivity to the
association between expected return and risk. Indeed, many are clearly willing
to forgo the higher long-term rates of return on equity for the greater
tranquility of the lesser risk associated with most debt instruments, in effect
forsaking more economic growth for a more stable, less stressful economic
environment.
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As a
consequence, returns on common stocks over rolling 20-year periods have almost
always outpaced the returns on less-risky securities.
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The answer to
whether government or private saving does more to foster productivity growth
arguably thus comes down to the propensity to take risks by U.S. savers. The
less the willingness on the part of the nation's savers to hold risky
securities, the more that business enterprises must be induced to undertake
less-risky endeavors.
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That
inducement will occur as relative preferences shift toward debt instruments and
away from equity, thereby driving interest rates lower and earnings price ratios
higher.
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Government
savings is largely reflected in a retirement of debt. Having chosen to
hold at least a portion of their savings in riskless securities, government debt
holders, when confronted with debt retirement, presumably would chose less-risky
debt securities over common stocks to rebalance their portfolios.
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Thus, an
increased share of saving from the government is a markedly more conservative
financial strategy than if the saving were undertaken in the private sector.
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Obviously,
the federal government could invest in higher-risk assets, such as equities. But
for reasons I have expressed many times before the Congress, I do not believe
that, other than in defined-contribution plans, such investment can be
accomplished free of political pressures that would distort the efficient use of
capital.
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Presumably,
most of those who maintain that greater risk-taking would likely produce faster
long-term growth would also acknowledge that increased competition and economic
growth would bring greater volatility and social stress.
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Because of
the near certainty of a major rise in the retiree-to-worker ratio in the next
few decades, we now face the major challenge of setting policies for enhanced
economic growth.
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What level of
personal stress and, some argue, increased inequality, which may be a byproduct
of a highly competitive, high-octane economy, have we as a nation chosen? Is the
level compatible with the level of domestic saving and possibly risk-taking that
is consonant with the elevated level of productivity growth necessary to meet
the needs of an aging population?
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A national consensus on these questions is clearly
missing. This is doubtless an area for useful debate.
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I cannot close a discussion about provisions for
retirement without a few words on Social Security. Although the program
replicates a private retirement annuity program in many ways, it is also
quite different in several respects.
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It requires contributions of workers, matched by those of
employers. But unlike a privately funded annuity program, the tie between
contributions and benefits deliberately is not tight at the individual
level.
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If the Social Security trust fund is depleted, the law
requires that benefits be paid only to the extent that they can be financed
out of the current payroll tax receipts. But I cannot imagine a viable
political scenario in which full payment of benefits will not be
forthcoming. Does anyone doubt that Congress would prevent benefits from
being curtailed if the trust fund were depleted?
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In addressing the impending retirement of those born just
after World War II, we will need to consider whether Social Security should
better align itself with the funding provisions of our private pension and
annuity system. Policymakers need to consider these issues now if we are to
ensure a comfortable retirement for the post-war generation, while at the
same time according due consideration to the needs of the later generations
that now make up our workforce.
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Thank you very much. I've been delighted to be with you,
and I wish you well.(applause)
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