Republicans Charles Grassley in the Senate and Bill Thomas in the House of Representatives have thrown in the towel for the summer: All efforts to reform Social Security are off until September at the soonest.
And I say, thank goodness! All of today's proposals to solve what President Bush has termed "the Social Security crisis" are doomed to failure.
Congress should use the time off to study my plan for solving the crisis. It has one advantage over anything I've heard from anyone else: It'll actually work.
All existing plans, except mine, are doomed because they're based on the idea that we can save and invest our way out of a global demographic crisis. Because, you see, the crisis isn't a crisis in the Social Security system at all. It's just one part of a global crisis in productivity. The whole world is getting old pretty much all at once, so saving more and investing at higher returns won't do the trick.
My solution is based on common sense and my observations of what people actually do in retirement: They work. It's based on a belief that we'd fix the so-called crisis if we could just get more productive work out of older workers, by improving their jobs so they'd voluntarily stay on at work, or by giving them resources and support to start post-retirement careers.
We like to think of it as "our" Social Security problem. Because the U.S. population is aging rapidly, the number of workers paying into Social Security is shrinking relative to the number of retirees who want to draw money out. And this ratio is about to shift big time when the huge baby-boom generation starts to retire.
In 1985, according to the Social Security Administration, in the U.S. there was one person 65 and older to every five people aged 20 to 64, a "dependency ratio" of 20%. After staying close to that through 2010 (it hits 21% that year), the ratio takes off, jumping by nearly 50% to 31% in 2025. In 15 short years, from 2010 to 2025, we'll have gone from a population in which we have one person over 65 for every five people aged 25 to 64 to a society with one person over 65 for every three between 25 and 64.
No wonder Social Security -- a program that collects taxes from current workers and pays them out as benefits to current retirees -- must, by many projections, dip into its surplus in 2020 to pay benefits at current levels. The surplus could vanish by 2040, 2050 or 2075, depending on which politician is doing the figuring and what brand of snake oil he or she is pushing.
But "our" Social Security story is merely one chapter in the global book on aging populations, and it's by no means the scariest. By 2040, 26% of the U.S. population will be at least 60 years old, up from 16.3% in 2000, according to the Center for Strategic and International Studies. But by that same year at least 45% of the populations of Japan, Spain and Italy will be 60 or older. Even China will have a higher percentage of over-60s than the U.S., with 28% of its population past that age.
Suffering the Consequences
This global aging has two important consequences.
First, it'll dry up the global pool of savings that's providing capital for corporations around the world and to fund the U.S. trade and budget deficits. This has already started. Households save less as they age. The peak savings years are from 30 to 50, and the median age of the population in Japan, whose residents once were among the world's best savers, is now in the middle of that peak range. In Japan there are now more elderly households than savings households, and the savings rate there has dropped to 5% from 25% in 1975. The experts project that it'll be below 1% in 20 years.
More than 70% of the world's financial assets come from just five countries: the U.S., Japan, Germany, Italy and Britain. (China, with its high current savings of 20%, according to some figures, is just too small an economy to earn its way into that club, even though the U.S. savings rate is so much lower at just 2%.) Populations in all these countries are shifting from the saving to the consuming years.
With more countries withdrawing more money from the global savings pool than they're putting in, the next two decades will see a gradual shift from today's surplus of global savings (and low interest rates) to a time when there's intense competition for those savings (and higher interest rates).
Second, the aging of the population and the combination of relatively scarcer and more expensive capital will drive down productivity. Productivity growth in the U.S. since 1995 has averaged almost 3.5%.
A Troublesome Dynamic
But for the next decade, McKinsey Global Institute projects that U.S. productivity will average just 2.6%. And since increases in an economy's size are a function of population growth, which also slows as a population ages, plus productivity growth, the rate of growth in the U.S. economy will also slow just when we need a bigger economy to generate more wages and higher Social Security tax receipts.
It's this dynamic that dooms most current proposals to fix Social Security by raising savings rates and using private accounts to boost investment returns. Savings rates fall as populations age, and it'll take huge incentives, far larger than anything imagined in current proposals, to push up savings rates in the U.S. against that demographic tide. In addition, with rising interest rates and falling productivity and lower rates of economic growth, investment returns are likely to be lower over the next few decades than they've been in the last 20 years.
The same McKinsey Global study that projects slower productivity growth also predicts slower growth in household financial wealth over the next 20 years. Growth in household financial wealth in Japan, Europe and the U.S. will drop to an annual 1.3% by 2024, from 4.5% a year right now.
So if we can't get people to save more and we can't get higher returns on our Social Security savings, do we have any alternative to cutting benefits and raising Social Security taxes?
Yes: It's called work.
Now I know that work has been part of the so-called Social Security debate, but it's usually been framed as a question of raising the retirement age so that people have to work longer before they collect.
But I think there's another way to look at work as the solution to the global retirement crisis.
Start by thinking about any healthy retired person you know. My dad, for example, took early retirement at 62 and was happy to get it. But, like most "retired" people, he didn't stop working. He went from his job as a maintenance electrician at a factory 15 miles away from home to a job as a maintenance handyman at a nursing home three blocks away. The hours were more flexible, the travel time was less, and the working conditions were more pleasant.
After years at that job, he "retired" again and worked cutting grass and doing general yard work for what he called "the old people" in the neighborhood. The hours were even more flexible. He was his own boss. And he got to gab with the neighbors while he worked and poke his nose into everything happening in the neighborhood. My dad is now 88, but it's only in the last few years that he's really stopped working, more than 20 years after he officially retired.
What We Really Want
In my experience, my dad isn't especially unusual among the retired. Many of us don't retire because we want to stop working but because we think our jobs stink. We work for incompetent but egomaniacal bosses who take sadistic pleasure in enforcing corporate rules that stifle our creativity and independence while treating us like children or potential delinquents. Think I'm exaggerating? A recent survey by Harris Interactive found that 38% of people who work for large companies feel they're at dead-end jobs, and 42% say they're coping with feelings of burnout. (Full disclosure: Any similarities between that description and my own boss are purely coincidental. And besides, he's on leave...)
So is it surprising that we dream, not of loafing in retirement, but of running our own work lives or working with just a few of our best colleagues? Of having control over our work lives and of being treated with respect?
Some countries have begun to experiment with keeping workers on the job longer, not by requiring them to wait another year or three before collecting benefits, but by changing the quality of work for older workers. For example, in Finland, where the baby boom hit even earlier and harder than in the U.S., workers over 58 can become "age masters." This entitles them to extra days off, free use of a fitness club and seminars on topics such as managing stress. Those benefits are useful in helping older workers stay healthy, no small benefit to the Finnish economy and governmental budget.
But just as importantly, age masters are given more authority in the workplace, more responsibility to design work and more recognition for their skills, acquired from years on the job. It works. At one company, after four years, the average retirement age climbed to 63 from 59.
Only the Beginning
This is a good start, but it's just a start. The focus in the Finnish program really is just a kinder and gentler version of policies that keep workers on the job after 60 or 65 by raising the age at which retirement benefits kick in. Such programs attack the global retirement pension system crisis by decreasing the years that workers will draw benefits.
But what if, instead of a focus on limiting pension expenditures, a program was designed to go after the other economic problem of an aging world, falling productivity? The millions of retirees who become consultants or freelancers could be made more productive with low-cost business loans, training to update or redirect skills and expertise in marketing, advertising and bookkeeping. Retired workers could be linked with peers who can offer them support and advice for their new businesses. We could develop our own version of the Finnish age master program for workers who wanted to stay on with their employers.
Doing this with just a few million bucks here and a wave of the hand there won't make a dent in our problem. But if we instituted a crash program to raise productivity by 0.5% or 1% a year -- enough to bring productivity roughly back to where it was -- we could make a difference.
And maybe we could even solve our Social Security crisis without resorting to benefit cuts or pipe dreams. Think about it.