In response to:
On Golden Pond from the May 6, 1999 issue
On Golden Pond from the May 6, 1999 issue
To the Editors:
When an author responds to his reviewer, there may be nothing less original than the quip that the reviewer must have read the wrong book—or didn’t even finish the flyleaf of the right one. But after reading Robert Solow’s review of Gray Dawn [NYR, May 6], I don’t mind reaching for this old standby, and, in fact, feel I must. At great length, Solow critiques my views (real and imagined) on the future of the US Social Security system. This question did indeed figure large in my previous book, Will America Grow Up Before It Grows Old? (Random House, 1996). But Solow nowhere mentions that in my new book, US Social Security arises only in passing (and is covered in only about ten pages).
Gray Dawn examines the profound economic, social, and political implications of rapid demographic aging throughout the world. It is not mainly about cash pension programs such as Social Security. It is about the total fiscal cost of supporting the rapidly growing number of dependent elderly, not just cash benefits but also the cost of health-care spending, which virtually all policy experts agree have the greatest potential for long-term growth and present far more daunting programs to reform than Social Security.
Nor is the book mainly about the United States. I cover all the major global regions—with extensive attention to the two dozen “developed” economies of Europe, Asia, and North America, and also to China, Eastern Europe, Southeast Asia, and Latin America. Nor does the book regard even broadly defined fiscal projections as the bottom line. As I explain, the coming global age wave will have a profound impact on global savings flows, on global migration flows, on regional economic growth, and on regional security and geopolitics—as well as on the politics, culture, businesses, and living-standard growth of all of the major economies.
I repeatedly emphasize in Gray Dawn that most of the other developed countries (in particular, continental Europe and Japan) face a far tougher fiscal challenge than does the United States. “In most of the other developed countries,” I write in the book’s introduction, “populations are aging faster, birthrates are lower, the influx of younger immigrants from developing countries is smaller, public pension benefits for senior citizens are more generous, and private pension systems are weaker.” Even this favorable contrast of the US situation to that of other countries is not enough to derail Solow from declaring me an “alarmist” about US Social Security.
Solow’s dislike for “alarmist” metaphors like icebergs leads him to imply that I’m something of a downbeat crisis-monger. But am I really? I clearly acknowledge that the aging challenge is partly the result of trends we all should welcome (most importantly, longer lifespans, which I describe as an unambiguous blessing). And I emphasize that we could entirely avoid this iceberg if we turn the wheel soon. If we don’t, I explain why “most developed countries will have to spend at least an extra 9 to 16 percent of GDP annually to fulfill their old-age promises.” This translates into roughly $70 trillion in unfunded liabilities. Paying for it, equivalently, would require a payroll tax increase of 25 to 40 percent of payroll—on top of the 40 percent of payroll that the typical worker already pays in developed countries outside the United States. How massive, I wonder, do the numbers have to get before Solow will allow himself the liberty of a metaphor that might help get the public to focus on the challenge?
To justify his aversion to icebergs, Solow could have explained why he regards the projected trajectory of cost growth as sustainable. But he doesn’t. Or he could have explained why my overall cost projection is excessive. But he doesn’t do this either. I would truly welcome a serious debate over not simply alternative Social Security reform plans, but over the demographic, economic, and policy assumptions underlying these official UN, OECD, and national government projections. Though I adopt them in my book to avoid any question of partiality, I believe these official statistics are often optimistic. Consider, for example, advances in longevity. Incredibly, in an era of breathtaking progress in biomedical and biogenetic technology, the official projections show that the United States will achieve slower longevity advances in the future than it has in the past—and that US life expectancy fifty years from now will be no higher than it is in Japan today. (Remember, actuaries regard early death as an optimistic outcome!) More reasonable assumptions might lead to projections considerably worse than those I show.
At one point, Solow aims the alarmism charge not just against my book but also at the Concord Coalition, which I co-founded and have helped to direct along with such distinguished and reasonable non-alarmists as the late Paul Tsongas, Warren Rudman, Sam Nunn, and Paul Volcker. On behalf of Concord’s members, let me simply say that we are proud of the role we played in helping to achieve (after many years of struggle) a balanced federal budget. We are also determined to persevere in our other long-term goal, which is to bring the future cost of federal entitlement spending under control. This goal is consistent with the report of President Clinton’s Kerrey- Danforth Entitlement Commission, which found that entitlement spending under current law is indeed “unsustainable.” This report was unanimously approved by all twenty Democratic and Republican senators and congressmen serving on the commission. One hopes Solow won’t dismiss them all as “Chicken Littles,” like me.
Where Solow does engage specific arguments in my book, he often does so carelessly—which is surprising for such an eminent economist. Solow writes that “raising the minimum age of eligibility for Social Security benefits” in the United States is a provision “already written into current law.” This is incorrect. The 1983 Act will extend the so-called “normal retirement age” from sixty-five to sixty-seven early in the next century—reducing initial benefits at every age of retirement—but will do nothing to raise the minimum age at which some Social Security benefits can be obtained. Solow finds my discussion of pro-natalism “foolish,” because he somehow infers that I advocate it for the United States. (I do not.) Rather, I observe that some European countries (Sweden and France for example) already have such policies and that many more may adopt them once rapid depopulation inevitably sets in. Solow goes on to say that pro-natalist policies, if successful, must result in overpopulation. For countries like Spain or Italy, whose total fertility rates (at around 1.2) are barely half of the replacement rate (of 2.1), this would seem a non sequitur.
At another point, he argues that the growth in the US ratio of dependents to taxpayers is not so great if one considers that the child population will be declining while the elderly population will be growing. This argument ignores the enormously greater per-capita fiscal cost of the elderly. (In the United States, for example, federal per-capita spending on the elderly is roughly ten times greater than per-capita spending on children; at all levels of government, including education, it is over three times greater.) Either that, or it ignores the vast distinction—obvious to all except a certain stripe of Olympian social planner—between resources informally and voluntarily circulated within a family and cash transferred through tax-and-transfer programs run by the government. Though the economist John Shoven recently dismissed this latter assumption as “rather ridiculous,” Solow apparently takes it seriously. In this same vein, he savages “filial obligation” because it merely replaces a state burden with a personal burden. In fact, it is already regarded as an important fiscal strategy in many Asian countries. For one so focused on the US Social Security system, I would have thought that instead of referring to filial support as one of “Peterson’s strategies,” he would have noticed my saying, “No one supposes that Western Society can or should import the Confucian ethic.” Solow displays a similarly bloodless mindset in his dismissal of personally owned and fully funded retirement accounts.
I am pleased that Solow agrees with me that increased productivity is part of the solution. To this end, I have long supported (as Solow rightly points out) more investment in education and R&D as well as in plant and equipment. Yet let’s be realistic. As Fed Chairman Alan Greenspan points out, the long-term annual rate of productivity growth would have to triple in order to bring Social Security into balance. And such long-term productivity improvement seems unlikely unless we raise national savings—which in turn seems unlikely unless we put a limit on the share of federal resources consumed by senior benefits.
Solow sometimes sounds as though the entire fiscal challenge can be handled by pushing a few painless buttons. Though he warmly supports President Clinton’s long-term fiscal proposals, he fails to mention that their only certain result for Social Security would be to push this program off the table politically (by stuffing trillions in unfunded budget authority into its fictitious trust fund) without doing anything to reduce its future cost.
Peter G. Peterson
New York City
Anyone who writes a book that “covers” all the major global regions, global savings flows, global migration flows, regional economic growth, regional security, and geopolitics, not to mention the politics, culture, businesses, and living-standards growth of all the major economies, has to expect a reviewer to be selective. I focused on the case of the US and the implications for Social Security because that is what readers here and now will find important. (The book does not skip over these matters as lightly as Mr. Peterson now suggests, and neither does his letter.)
My review was not mainly about cash pension programs either. In fact I looked at the economics of an aging population from a very broad point of view, and put the basic principles governing income per person in the center of the picture. Once total income is given, total fiscal cost matters too, but I wish Mr. Peterson understood more clearly that it is fundamentally a distributional matter, a decision as to who gets and who pays. Distributional matters are almost by definition divisive. That is a good reason for being clear about them. For instance, it will not do to make high-minded remarks about the superiority of within-family transfers over tax-financed transfers without at least asking if that kind of shift would not also transfer a burden from the well-off to the poor.
I thought I was pretty precise about what could be expected from higher productivity, and certainly never suggested it could “bring Social Security into balance.”
It was Mr. Peterson, not I, who listed “Stress Filial Obligation” as one of his seven “New Strategies.” Similarly I thought I was quite careful to say that a dependent child makes a smaller claim against the social product than a dependent old person. That does not justify treating that claim as zero, which is essentially what Mr. Peterson does. (The quotation in his book from a levelheaded economist like John Shoven does not support the use he makes of it.)
Another of the “New Strategies” is “Raise More—and More Productive—Children.” There is no argument about the “more productive.” I did not describe Mr. Peterson’s, or anyone’s, pro-natalism as foolish. What I did describe as foolish—maybe “thoughtless” would be a better word—is a proposal to aim for a higher birthrate as a matter of public policy without considering many more of the consequences than just the effect on the average age of the population. None of these is discussed in the book.
A general debate on the issue of “alarmism” sounds pointless to me. Maybe it is a matter of temperament. I think the tone of Mr. Peterson’s book tends to foreclose clear and careful thought. He thinks I am fiddling while Rome burns. As a matter of logic, however, I have to remind him that to say our present course is unsustainable does not imply that only immediate and drastic action will avert disaster. I see no reason not to take enough time to get this decision right.