||China Can Help the U.S. Tackle Its Social Security Crisis
Prof. Jeremy J. Siegel
has been written about the looming pension crisis in the U.S., Europe
and Japan, whose populations are aging. Wharton finance professor Jeremy
J. Siegel argues that economic growth in China and the rest of the developing
world holds the key to dealing with the impending crunch.
and the U.S. social security system seem to be worlds apart. China is
grappling with the problems of rapid industrialization with a young
and vigorous working population while the U.S. will soon be struggling
with an aging population that will push current Social Security and
Medicare systems to insolvency.
are deceiving. If you study the demographic trends around the world,
you come to the conclusion that the economic growth of China, as well
as other developing countries, is not only the key to solving the pending
U.S. social security crunch, but in fact is the only solution to the
developed worldıs looming pension crisis. If China, India, and the rest
of the developing world stumble, we are doomed to sharply higher retirement
ages, declining living standards, plunging asset prices, or some combination
of all three.
Much has been written about the aging of the population in the U.S.,
Europe, and Japan. There are several important features of this trend.
In most of the developed countries, fertility rates, the number of children
per couple, have now fallen well below the level that keeps the population
constant. Furthermore, life expectancy has been increasing and the average
age of retirement has been falling. In 1950, life expectancy in the
U.S. was 69, only two years more than the median age of retirement.
By 2000 the median retirement age fell to 62, while life expectancy
rose to 76.5, increasing the length of retirement by almost 13 years.
the retirement age does not decline further, the number of workers per
retiree in the U.S. will plummet from 3.9 today to 2.2 in 2030, in Europe
from 2.98 to 1.70, and in Japan from 2.85 to 1.46. Fifty years ago,
by comparison, the U.S. had 7 and Japan 10 workers for every retiree.
of these demographic trends, the Social Security system in the U.S.,
as well as virtually all public pension funds abroad, are seriously
underfunded. Under current projections of the Trustees of Social Security
System, the cost of the benefits will exceed the taxes collected in
2017, and the Trust Fund will run out of assets in 2041. In less than
four decades, the revenues of the program will only cover about 73%
of the costs, and the shortfall increases further in subsequent years.
crisis for the Social Security System will come well before the Trust
Fund runs out of assets. The bonds in the Fund will have to be sold
in ever increasing quantities to fund retirement benefits after 2017.
question is how will the market absorb these hundreds of billions of
dollars of government bonds that are going to be sold into the markets?
The younger generation is far too few in number and has too little buying
power to absorb these assets except at distressed prices. The sale of
these bonds will send interest rates soaring and capital markets crashing.
crisis facing Social Security is just the tip of the iceberg. The bonds
sold from the Trust Fund represent a small fraction of the trillions
of dollars of stocks and bonds that baby boomers stashed away in IRAs,
Keoghs, and 401k plans. These assets, which are supposed to be the tickets
to a comfortable boomer retirement, will cascade onto a market that
will be incapable of absorbing them at anywhere near the price that
boomers have paid for them during the bull market of the 1990s.
A simple solution to the aging problem is for workers to defer the age
of retirement. We have developed a model that calculates, given projected
population and productivity trends made by the UN Population Division,
how much the retirement age must increase in the developed countries
over the next thirty years in order for the workers to reap the gains
of higher productivity and still produce sufficient goods to support
the growing retirement population. This is shown in the accompanying
figure along with historical data over the past 50 years for the U.S.
is not pretty. Although the retirement age has dropped five years since
1950 to its current level of 62, it will have to increase steadily to
69 years by 2030 in order to feed, clothe, and pay for the medical care
of the retiring boomers. The increase in retirement age outpaces the
expected increase in life expectancy, so that for the first time in
modern history future generations will not only have to work longer
but will have a shorter period in which to enjoy the fruits of their
some accept an extended working life as a natural consequence of a rising
life expectancy, few realize how dramatic these changes are. From the
Industrial Revolution onward, workers have steadily gained shorter workweeks
and longer retirements and view these developments as inherent benefits
of economic progress. In Europe, some of the public and private pension
plans start paying workers in their 50s, so that a shift to a higher
retirement age would be for many a traumatic turn of events. Even if
workers accepted the increase in the retirement age, there are legitimate
questions whether the older workforce would be accepted in the labor
market and whether they could achieve the same productivity gains that
are expected from younger workers.
have correctly noted that the demographic trends in the U.S. are still
significantly better than in Europe or Japan and with increased immigration,
projected population numbers are stable. But this should give Americans
no solace. What is important is the total demand for goods from retirees
worldwide, not just in a single country. Just as the price of oil is
determined by the interaction of world demand with world supply, irrespective
of which country produces or consumes the oil, the price of goods demanded
by retirees will be determined by their demands worldwide, not just
from any single country. Unless we close our borders to imports, a move
that would devastate our standard of living, the price of goods Americans
consume will be greatly affected by the aging populations abroad.
What could save us from this gloomy scenario? There is only one answer:
A dramatic increase in the rate of productivity growth. Productivity
growth increases the output of workers relative to the consumption of
the retired and counteracts the population imbalances that will develop.
hear all the voices crying out: This is why we must increase saving
and encourage individuals to supplement social security. Saving will
make the next generation of workers sufficiently wealthy to buy the
assets from the retiring boomers and productive enough to produce the
goods they need.
increases in productivity necessary to keep the retirement age constant
are staggering. We estimate that productivity growth need rise to almost
8% per year in the developed world over the next three decades to close
the gap between the consumption of retirees and the output of workers
in order to maintain the retirement age at 62. This is more than three
times the historical average rate of productivity growth for developed
increasing saving, for all its virtues, cannot begin to generate this
level of productivity growth. Most economists believe that if the long-run
increase in productivity growth can be pushed from its historical average
of 2% per year to 2.5% or at the very most 3.0%, it would be an extraordinary
accomplishment. Furthermore, most of the historical productivity growth
does not even come from increased capital, but instead from technological
discoveries and inventions (called multifactor productivity) that depend
little on the saving rate. Even if the new information and communication
technologies would boost long-term productivity by one percentage point,
we would still, as the accompanying chart shows, fall seriously short
of the growth needed to counteract the demographic crisis.
China and the Developing Countries
If the developed world cannot grow fast enough to solve the demographic
problem, what can be done? Fortunately, the developing world not only
stands at the brink of rapid productivity growth but its huge population
has a profile that is sharply different than that of the developed world.
The bulk of Chinaıs population is young and set to be entering the prime
of their working life at the same time the boomer generation in the
rich countries will be retiring.
importantly, the productivity growth in China is awesome; the Chinese
have increased real per capita real GDP at a rate of over 8% per year
over the past five years. And, despite Chinaıs dramatic economic surge,
their per capita income is still only one-tenth that of the U.S. That
means that their rapid productivity growth can continue for many years
without running into technological boundaries that exist in Japan and
the productivity of Chinese workers help baby boomers? The Chinese must
find an outlet for all the goods that they produce and locate assets
to buy with all the dollars, euros, and yen that they will acquire through
their growing trade surpluses.
think of the world of the future as one economy, not as separate nations
each attempting to provide goods for its own citizens. No one fears
that the state of Florida, with its large population of retirees will
fall into an economic slump, since we know that the consumption of the
elderly can be supported by the younger population in the remaining
49 states. Likewise the boomer population in the U.S., as well as those
of Europe and Japan can be supported the by the other 80% of the worldıs
population, as long as they continue on the path of economic development
is no reason why China alone will enjoy the privilege of providing goods
to the retirees of the developed countries. India has an even younger
population than China and is set to surpass China in population by 2040.
India has accelerated its productivity growth in recent years but still
lags China. Furthermore, there are 3 billion people outside of India
and China that also share in the fortuitous demographic mismatch. In
fact, if the developing world averages 6% productivity growth, which
is below Chinese levels today, retirement ages will need only increase
marginally despite the steadily growing retiree population.
of productivity to 6% might sound too hopeful, but it is certainly in
the range of possibility. From 1950 through 1973 Japanese productivity
grew at 9% per year, and productivity in South Korea, Taiwan, Singapore,
and Hong Kong all grew faster than 6% for a 30-year period from 1960-1990.
There is no reason why the rest of the developing world, whose per capita
income is only 10% of the U.S. today, cannot grow at 6% a year over
the next several decades. If they do so, they would still only reach
31% of U.S. income by 2030.
Flows and Demand
The growth of the developing countries also answers the question of
who will buy the assets from the baby boomers when they retire. The
assets will be bought by the worker-savers of the developing world.
They will be purchased willingly as the huge increase in their saving
finds assets that are reasonably priced and discovers them being sold
from the private and public pension funds of the developed world.
patterns of trade will cause increasing trade and current account deficits
in both the U.S. and the rest of the developed world. But this is no
cause for concern, no more than the state of Florida running a current
account deficit with the other 49 states. If any country was perceived
to be spending more than would be justified by the orderly liquidation
of its assets, the foreign exchange market would immediately signal
this through a drop in the currency and a rise in the price of imports,
a signal that consumption must be slowed down.
of the worldıs output will be produced by the developing nations, eventually
most of the assets the U.S., Europe, and Japan will be owned by investors
in the developing world. Chinese, Indians, and other non-Western investors
will control most of the large global corporations. This is also a trend
that should not be feared and, indeed, a world market that is truly
integrated would have the shares of wealth closely match the sizes of
their individual economies.
Once we understand how critical the developing of the worldıs economy
is for the welfare of the already-rich nations, the tasks before us
become clear. We must encourage free trade, lift tariff barriers, promote
foreign direct investment, and advance the globalization of the worldıs
also strive to bring those countries that have lagged in economic development,
such as the Mid East (outside of oil), and Africa back on track. Stopping
the spread of AIDS, a goal supported by many organizations, and particularly
the Gates Foundation, should assume new urgency. Such an objective is
not only a worthy humanitarian goal, but any impediment to the growing
productivity of developing nations is a threat to our welfare as well
clear that our most important task for offering the aging population
hope that they can maintain a prosperous retirement is to support global
economic development. Economic success in foreign countries is not only
good for their people, but essential to the continued prosperity of
our society. As we look ahead to our and our childrenıs welfare, there
is no other economic goal that should have higher priority.
- Jan 29 - Feb 11