|John F. McDonnell|
Chairman of the Board
|Thomas C. Melzer|
President and Chief Executive Officer
This year's annual report analyzes the thorny issue of Social Security. With the release of the government's Advisory Council report on Social Security, the debate has heated up about whether our nation's program can continue to provide benefits in the future like those we enjoy today - and if so, at what cost. As this report makes clear, the current system, if left alone, won't support us very far into the 21st century.
The U.S. Social Security system, like that of many other countries, operates as an intergenerational transfer - the benefits of current retirees are paid by current workers, whose retirement will be financed by their children's generation. Declining birth rates, increasing life spans and slowing productivity growth, however, have all reduced the long-term viability of the system.
The United States is not alone in facing this problem. As this report points out, the viability of public pension programs is at risk in every major industrial nation. And although each nation faces difficulties unique to its own program, all confront a broader challenge that crosses national boundaries - how to ensure an adequate retirement for the elderly without bankrupting the young.
Many countries, including the United States, have established committees of experts to examine the available alternatives. While the solutions vary across countries, and even within committees, all have been unanimous in concluding that something must be done.
|The viability of public pension programs is at risk in every major industrial nation.|
Currently, U.S. worker contributions to Social Security (payroll tax revenues) exceed payments made to retirees. This surplus is accumulated in a trust fund invested in government securities. In recent years, the trust fund surplus has reduced the federal budget deficit by 1 percent of gross domestic product (GDP). But by 2012, when the first of the baby-boom generation reaches retirement age, Social Security contributions will not be enough to cover payments, and we will be dipping into the trust fund to cover the shortfall.
Under current policy, the President's Council of Economic Advisers estimates that the federal budget deficit will rise from 1.4 percent of GDP today to 20 percent of GDP in 2050, primarily because of shortfalls in the Social Security and Medicare programs. Unless these programs are changed, the federal debt will rise to more than twice the entire output of the U.S. economy - double the previous record, which occurred at the end of World War II.
The unsustainability of such budget trends necessitates that we reform Social Security to restore it to long-term balance. While the reform options discussed in this report are not painless, delaying reform will only increase the magnitude of the required changes.
Delays may also affect monetary policy. Governments that find themselves in fiscal crisis, including ours in times past, often have put pressure on central banks to print money to finance their debt, resulting in sharp rises in inflation. And inflation - even at current rates - creates distortions that inhibit the economy from reaching its potential. As history shows, using monetary growth in an attempt to solve fiscal problems has been the cause of every episode of hyper-inflation worldwide, and these episodes have always cost dearly in terms of output losses and economic waste.
I hope this report will illustrate the common problems facing public pension systems in the world's major economies, as well as contribute to an informed discussion of the alternatives for reforming Social Security.
Before beginning, I'd like to thank several retiring directors for their years of service to our boards: Warren R. Lee, St. Louis; James V. Kelley, Little Rock; Robert M. Hall and Charles D. Storms, Louisville; and Woods E. Eastland, Memphis. These dedicated individuals have helped us exert a private-sector discipline on our day-to-day operations and make informed policy decisions about our economy. Their guidance, as usual, has been invaluable.
Thomas C. Melzer
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