Can governments meet future retirement needs without financing them at least in part through private investments? Not easily, argued Professor Martin Feldstein of Harvard University, former Chair of the President's Council of Economic Advisers. He believes that the tax increases required to meet social security's commitments to today's workers will be so large as to risk not being politically acceptable. The system needs the higher returns that market investments generate to fulfill its obligations. Professor Feldstein used his keynote address to propose a plan to invest 4 of the 11 percentage points of the current US social security payroll tax in private investment accounts. The income generated by such real investments should be sufficient to finance the gap between the rising expectations of retirees and expected increases in payroll tax revenues.
Yes, argued Professor Alicia Munnell of Boston College, who had also served on the President's Council of Economic Advisers. The public social security system is only one of the several tiers of a modern retirement finance system (company pensions and private investments are others), and it is appropriate that this base tier remain guaranteed by government, even if that takes higher payroll taxes. It is also the only part of the system that incorporates social insurance features that cannot be provided by markets.
Other prominent participants, including Nobel Laureate Franco Modigliani, Professor Stephen Cecchetti (joining Brandeis), and experts from financial companies and several countries, took up the challenge of retirement finance in different ways. The proposals ranged widely, from improved "pay-as-you-go" schemes to government guaranteed private investments and fully funded pension schemes.
A luncheon address by Geir H. Haarde `73, the Finance Minister of Iceland, made the case for a hybrid system, using the evidence of some very successful adjustments achieved in Iceland, where the long-term solvency of social security has been assured by a mix of government funds and market investments.
A clear message that emerged from the symposium was that governments and international agencies around the world had come to an increasing awareness of the issues posed by changing global demographics, as emphasized by speakers from Argentina, the UK, Germany, and other industrialized and emerging economies. But this awareness has not yet generated solutions. The longer policy decisions are postponed about these critical issues, the larger the problems become, and the more difficult it will be to handle them politically. Time is not on the side of good policy.
The symposium, held in partnership with the TIAA-CREF Institute, drew participants from leading universities, think tanks, business, labor, government and international organizations. They participated in a unique, multidisciplinary analysis of the financial strategies that countries around the world are using to address an issue that will affect the welfare of people around the world.
Dean Peter Petri of GSIEF commented: "It was a privilege for the School to organize this symposium, which gave an opportunity for some of best minds in finance and aging to focus on an issue of great importance around the world. The discussions set a very high standard for future Rosenberg Institute initiatives, which we will continue to focus on the toughest challenges confronting the global economy."