ROBERT REISCHAUER: ... welcome to First Tuesdays at the Urban Institute. Today's topic involves all of those issues that surround the age at which people leave the workforce and retire. There are a lot of forces at work here. There are societal incentives that come in the form of tax policy and Social Security and Medicare policy and the way we structure pensions that effect those decisions. There are personal conditions and circumstances that might involve one's health, the presence of grandchildren, what's happening to your spouse with respect to work, and there are obviously the personal tastes that individuals have for leisure. And all of these combine to determine when and to what extent people leave the workforce.

Clearly, if we could encourage more workers to stay in the workforce, work more, it would have a very substantial impact on the financial viability of Social Security and Medicare. It also would affect their well-being in their later years, and—if one believes the new research that's going on—it might have some significant effects on their health and on their satisfaction with life.

We have a lot of interesting issues here and a very expert panel to discuss some of these. We're going to start off with Rich Johnson, who is a principal research associate here at the Urban Institute who has been specializing in retirement issues over a number of years and is the author of several of the documents that you have in your little folders as well as other information that you can get on the Urban Institute website.

He will be followed by Syl Schieber, who is a vice president for research and information at Watson Wyatt Worldwide. Syl was a member of the 1994 to '96 Social Security advisory council and currently serves on the U.S. Social Security advisory board. He is the author or editor of a number of books, the most prominent of which is the book he wrote with John Shoven, The Real Deal: The History and Future of Social Security.

Following Syl will be Gene Steuerle, who is a senior fellow here at the Urban Institute and codirector of the Urban-Brookings Tax Policy Center. He is a columnist for Tax Notes, past president of the National Tax Association, and the author of many books and articles, the most relevant for this purpose his coauthorship of Retooling Social Security for the 21st Century, but I draw your attention to the fact that he wrote a book, which we published this year, called Contemporary U.S. Tax Policy.

Last but not least is John Rother, who is director of policy and strategy for AARP and has worked on Social Security issues, retirement issues, and health and Medicare issues for many years and served in various capacities on the Hill, including as chief counsel for the Special Committee on Aging under Senator John Heinz.

The discussion is going to be moderated by Howard Gleckman, who is a senior correspondent in the Washington bureau of Business Week. He's covered fiscal policy issues, entitlement issues, for a number of years, and has become very expert in these things. Sometimes I think he's a staff member of the Urban Institute.

Well, with that let me turn it over to you, Howard.

HOWARD GLECKMAN, Business Week: Thank you, Bob. Thank you all for coming on such a beautiful spring day—in January. (Laughter.) As we jump into what promises to be a historic debate over Social Security, most policymakers seem to be studiously ignoring an immense elephant standing in the middle of the parlor, and that's the question of whether people are retiring too soon, or to put it another way, should we all be working longer?

The benefits of staying on the job are obvious: we have more earning years and thus more opportunity to make money and save for our retirement; we may reduce demands on public programs such as Medicare, Medicaid, and Social Security; and if you're worried about the deficit we'll also be paying more taxes and thus help finance those public programs. Working longer also reduces our propensity to drive our spouses crazy. (Laughter.) But despite those advantages, government and employers seem hell-bent on encouraging workers to retire early. Two of our panelists, Richard Johnson and Gene Steuerle, along with several other colleagues at Urban, recently completed a paper asking the question, does work pay at older ages? I encourage you to read the paper but for now I'll give you the Cliff Notes version. Does work pay at older ages? No.

Syl Schieber, who is vice president of research and information at Watson Wyatt, will talk to us a little bit about how pension and health benefits figure in the mix, and AARP's John Rother will give us some perspective of older workers themselves.

Finally, I suspect we'll be talking a little bit about the upcoming Social Security debate. Of course, 70 years ago Social Security was designed to pay retirement benefits beginning at age 65 for a population with a life expectancy of 61. Today it must support a population with a life expectancy of 77, and a rapidly growing population at that.

Finally, our format today is going to be a little unusual. Rather than a series of formal presentations, we'll try to make this more of an informal discussion. I'll ask our panelists a few questions and encourage them to question one another and then we'll open it up to you for your own questions.

Let me start with Rich Johnson, who did this wonderful paper. And I wonder, Rich, if you can just sort of help us by setting the demographic table for us. Give us a sense of some of these changes that will be affecting labor markets and government policy in the coming years.

RICHARD JOHNSON, Urban Institute: Well, I think the primary change is that the population is aging, and that's because of declining fertility rates and because of increasing life expectancy. Since 1940 the average remaining life expectancy at age 65 increased 4.5 years for women to 19 years. So this means that a woman age 65 today can expect to live until she's 84. A woman born today, some people think, could probably—can expect to live to be a hundred. And what this has done has really increased—in combination with the declining fertility rates—this has increased the share of the population age 65 and older. So in 1950 that share was 12 percent; in 2000 it was 17 percent. The aging of the baby boom cohort is really going to accelerate this trend, and so the Census Bureau is projecting that by 2050, people 65 and older will comprise 27 percent of the population.

What this means is that if current employment rates persist there will be fewer workers to produce the goods and services that the economy needs. In 2000 there were about 4.5 workers for every nonworking adult age 65. So that's 4.5 workers for every nonworking adult 65 and older. In 2020, if current employment rates continue, there will be only 3.2 workers for every adult 65 and over. But if people were to work longer, then much of that decline in the number of workers could be eliminated. And in fact, Gene and I found that if men age 55 and older in 2020 simply worked at the same rate in which they did in 1950, then much of this shortfall would be eliminated. So in other words, this ticking demographic time bomb that everyone is so concerned about could be at least partially diffused, or at least temporarily diffused if there was a change in behavior that isn't really that dramatic.

And I think one of the other just important things to point out is that at the same time that employment rates have been declining at older ages, which I didn't mention, health has been improving and the physical demands of work have been decreasing. And so there's a lot of evidence where they're suggesting that people can work much longer now than they could in the past. I'll just mention one statistic, which is that Gene and I found that in 1971, 27 percent of men age 55 to 59 claimed to have health problems that limited their ability to work. Today, in 2002, that share had fallen to 20 percent. There's been this big decline in the share of workers who claim to have health problems that limit their ability to work.

HOWARD GLECKMAN, Business Week: Rich, thank you. So let me ask you, as this population is changing, let's talk a little bit about how employers are responding to this. Let me ask you first about pension policy. We're seeing some real changes as companies move into hybrid pensions. Let's talk a little bit about how those may be affecting this older population of workers.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: First of all, if you look back at a little bit of history, during the late 1960s and the 1970s when the baby boom generation was flooding into the labor market, many employers in the private sector, and to an extent in the public sector, introduced early retirement incentives into their pension programs that offered substantial encouragement for people to withdraw from the labor force, in many cases as early as their mid-fifties, definitely by their early sixties. In order to make these fully effective, most employers supplemented the pension benefit with retiree health benefits that were heavily subsidized.

Over the last four or five years we have been seeing a move back in the opposite direction. Actually, I guess it goes back somewhat further than that if you track the shift from defined benefit plans to defined contribution plans, but in the mid-1980s, large employers—gradually at first and then it accelerated during the 1990s—began to move from traditional defined benefit pension plans with early retirement incentives in them to hybrid pension plans, plans with certain characteristics that still made them defined benefit plans but other characteristics that made them look like defined contribution plans for workers. They started to shift toward these plans, and then during the 1990s accelerated the shift, and one of the primary elements of that shift was the elimination of early retirement incentives.

In addition to that, because of cost considerations, the ability to fund their retiree health benefits on a tax-effective basis, we're also seeing a significant curtailment of retiree health benefits that are provided by employers, especially in the private sector. I believe you're going to see similar things in the public sector going forward because of some recent accounting rules that have been promulgated by the Government Accounting Standards Board. And as you eliminate the early retirement incentives in the pension system and you eliminate the subsidized retiree health benefits for early retirees, I think we're going to see some market shift in worker behavior: people will stay longer. And actually, among many employers today, employers we deal with, we're beginning to hear considerable sentiment that employers want to keep these workers around longer because with the slower labor force growth that we're facing, the flow of technical workers and other resources that they need simply is not coming online as fast as they would like, in many cases.

HOWARD GLECKMAN, Business Week: So is there any evidence that workers are changing behavior as a result of these changes in pension and health and retirement?

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Well, there has been some survey work done on cases where employers have shifted to these hybrid plans where workers have been asked what their response is going to be to the new plan structures, and they tend to suggest that one of the responses will be that they work longer. There has been some slight trend evidence in the current population survey that maybe the retirement patterns at early ages are flattening out and maybe labor force participation rates among some of these younger retiring men are rising. Women's rates have been going up because of the general increase in female labor force participation.

To say that there's strong evidence that it's having a significant effect yet, I don't think it's there, but certainly the incentives have been remarkably changed for the people in the generation sitting in this room today relative to the people who retired 10 or 15 years ago.

HOWARD GLECKMAN, Business Week: Thanks.

Gene, we've talked a little bit about the corporate responses; let's talk about government's response to this. How does the tax code play into this and how is that affecting people's decisions to retire or to continue to work?

EUGENE STEUERLE, Urban Institute: Well, there's two ways in plays in. One is one that you alluded to in your question to Rich, which had to do with what goes on within Social Security itself. That is, in the paper we asked about whether work paid at older ages: what are the tax rates people face as they move into retirement? What are the net benefits they see? And to some extent, the current system doesn't give older workers anything back for their taxes. So if you pay more Social Security taxes because you worked between 62 and 65, or more taxes because you worked between 65 and 70, or beyond 70 even, you really get almost nothing back for those taxes, unlike younger workers who are more likely to get something back in the Social Security system—maybe not a lot but something back for those taxes.

So the actuarial adjustment in Social Security is such that as you make additional contributions to the system you really don't get anything on that back. So that's a net tax that people—that probably discourages employment. I don't want to overclaim the case for that because older workers typically, if they're working at a lesser level or fewer hours, often face a lower income tax rate, so I don't want to push that too far, but still, it's not the type of thing you'd see in the private sector. The government—well, I shouldn't say that—you hope you wouldn't see in the private sector except for the design of defined benefit plans that was alluded to.

The second area where the government comes into play has to do with the tax incentives for private pension plans, and in many ways this is not unrelated to the individual account debate, although a few people draw the two together. But we have a whole variety of tax incentives for making deposits to retirement plans, both by the employer and by the employee, and by the individual in the individual retirement accounts. And it turns out that if you look at the statistics today, the net amount of tax subsidies that we spend every year—and there are problems with this measure but let me use it anyway—is in excess of $150 billion a year. The personal saving in the United States is below that. So we have a tax system that supposedly is encouraging saving—hopefully saving for retirement in no small part—and yet we see personal saving on the order of magnitude of less than the actual amount of tax subsidies we're spending. And it's total personal savings less the tax subsidies for pensions alone.

And the reason for that—and I don't want to spend too much time here—is that the subsidies are really not for net saving; they're for deposits. They're basically subsidies for making deposits, and you can go off and borrow on the side and not save at all and make all sorts of money out of the tax system. In fact, in technical language you can arbitrage the tax system—you can game the tax system. So we really don't have much in the way of tax incentives for savings. We have a lot of incentives for making deposits and then doing our borrowing elsewhere.

HOWARD GLECKMAN, Business Week: Let's ask John Rother a little bit about the workers themselves. We just talked about the government response; we've talked about the employer response. What about the workers? Do older workers want to continue to work? Do they feel the opportunities are there? Do they feel they're being forced into working longer than they want?

JOHN ROTHER, AARP: I think it's important to start by recognizing that we're talking about a very diverse group of people in extremely diverse circumstances and it's hard to generalize. But I do think that what we see—and we do a lot of surveys—is a change in expectations among younger workers. They do expect to work as part of their retirement, more so than a previous generation. And part of that may be indeed driven by changes in benefits, but I think part of it may be changes in the nature of work. This is a more highly educated generation, more likely, like most of us, to do thought work rather than manual work, more likely to find work as a form of self-expression and self-identity. And all of those things contribute, but, again, in our surveys, though, the two major reasons that people give for considering work or actual work past normal retirement age is, one, they need the money, or, two, they need health benefits.

So I think there's a lot going on, but part of it is changes in expectations by boomers and those a little over. Part of it is changes in the labor market and part of it's changes in benefit patterns.

HOWARD GLECKMAN, Business Week: I'm going to throw this out to anybody who wants to answer it, but John just referred to those workers who are in sort of employment where they used their brains rather than their bodies, their arms or their legs, but what happens in this new system for somebody who does manual labor? I guess they tend to be lower-income workers? What's going to happen to them if we want them all to work to 70? Is there are realistic opportunity for them to do that?

Richard?

RICHARD JOHNSON, Urban Institute: Well, I mean, I think in any—clearly in our society we protect the most vulnerable members, and it's important that we have income supports for people with disabilities, and now about 13 percent of men age 60 to 64 receive disability insurance from Social Security; about 10 percent of women 60 to 64 receive disability benefits from Social Security, and if the retirement age were to increase, then those numbers would increase, and probably we would see the share of the disabled rising. But I don't think that that's a reason for not increasing either the early entitlement age from 62 to maybe 65 or a somewhat higher age, and increasing the normal retirement age from 67, let's say, to 70. I mean, I think if one person calls in sick, the whole company doesn't get the day off, but we do need protections for people with disabilities definitely.

JOHN ROTHER, AARP: I'll take exception to the retirement age comment. I think when we ask our members and the public at large about retirement age, their thought process goes like this: let's see, when I'm 67, who's going to hire me? And they look around and they don't see a lot of employers recruiting 67-year-olds. And the thought that the retirement age might go to 70 therefore is not about working longer but rather about the forced receipt of lower benefits because they don't see the jobs there. Now, hopefully that could change, and we ought to do more as a society to free up options for people as they get older. But right now, of all the options that we put in front of the public regarding Social Security, raising the retirement age is the least favored, to put it mildly, because people interpret it in very personal terms and they don't see those job opportunities there.

HOWARD GLECKMAN, Business Week: Do you think they would be willing to work if the job opportunities were there?

JOHN ROTHER, AARP: Well, I think that depends on the individual, and I think that some of us probably would. I think people want more flexibility as they get older, and they may want the social benefits—they certainly will continue to want the economic benefits, but it becomes a very personal choice and I think it's very hard to generalize.

HOWARD GLECKMAN, Business Week: Syl, are companies doing much in terms of creating this sort of flexibility?

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Well, one of the motivations for some of the plan structure changes—certainly there are cost issues. The employer community in some regards has to be more responsive to the cost issues than maybe public policymakers do because credit markets and other things limit their ability to sustain abnormally high costs over the long term. But in many cases, they are being motivated by concerns about where they're going to find the adequate numbers of workers to do the work that they need to have done in order to sustain their operations, and so they are changing the structures and the incentives of their benefit programs and their compensation programs to try and encourage these older workers to stay around longer.

Now, I think one of the things we do need to be careful about is looking in the rearview mirror—and we all probably tend to think about the environments in which we work and the people that we work with, and think about that generation ahead of us as kind of setting the pattern that exists within our organizations, and we believe that we may follow a similar pattern to those that went before us. But when we look at the projected labor market growth in the United States, when we look at the costs of sustaining the patterns that we have today, I think the dynamic five years and 10 years from now is going to be very different than what we have experienced with the generation ahead of us as we've gone through our working careers.

When we put these incentives in these programs it was partly to encourage people to retire early because we had surplus labor. If we're not facing that phenomenon going forward, the attitudes on the part of employers, and probably the attitudes on the part of workers, will change somewhat.

EUGENE STEUERLE, Urban Institute: The demographics are really coming to a head right at this point in time, for several reasons. One is even though we've had this 50-year trend of people retiring earlier and earlier, in particular men who were in the labor force in the early years that Social Security was created, if you look at labor force participation as a whole, the adult employment rate—the percent of adults who worked over almost the entire post-war era increased every year except for recession years.

Anyway, so how can people be retiring more and more—earlier and earlier—and yet the labor force supply is actually going up as a percent of the adult population? Well, it's because women entered the workforce, and not just women entered the workforce but the baby boomers happened to be coming into the workforce right at this time too, so this boom of workers coming both from female labor supply and from baby boomers entering really sustained our employment rate and allowed people to retire earlier and earlier. So it basically sustained this societal tendency to put more and more of our resources into later years. Well, it all is ending all of a sudden at once.

The metaphor that people often use is that the baby boomers affect the economy like a pig being swallowed by a python. You know, first it affected the demand for primary and secondary schools and then colleges and then the home mortgage market. There's some debate as to whether it's affected the stock market in the '80s and the '90s, but now as they move out about 2008, that could quickly cause a reduction in the adult employment rate, the percent of adults who work, in ways that we just haven't seen historically.

The positive side of this is I actually think that there is a substantial demand for labor, as reflected in this post-war era, that most economists actually are ignoring when they just look at the narrow issue of what percent of men 60 or 55 or 65 end up working, or women now, and that this labor demand is still there and it's going to cause substantial shifts, not just in public policy but in the private pension policy that—or private—it's not just—it's the whole employment policy as well. But what makes it really unique is that because of this baby boomer bulge, it has to happen fairly quickly, and it probably will happen fairly quickly.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Can I just —

HOWARD GLECKMAN, Business Week: Sure, go ahead.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: I hope that it does and the market offers people more flexibility, but what I suspect will happen is instead, the people with high skills will be recruited and will have those options and everybody else will not, and to that extent, this could really operate to continue that gap between the haves and the have-nots that's already characterizing our labor market and could expand it as people go into retirement. People with desirable skills, they're not going to have a problem. If I had a good retired plumber I knew I'd keep them very busy indeed—(laughter)—but on the other hand, somebody who has been an office worker or somebody who's not had a particularly strong skills set going into retirement, they'd be faced with a very unpleasant set of options.

So I think that there will be a labor market response where there are skills that employers need that they're short on, but what about everybody else is my concern?

RICHARD JOHNSON, Urban Institute: I think also we really need to keep in mind how the health profile of workers is changing. In the mid-'70s, 27 percent of 62-year-old men were in fair or poor health. In the mid-'90s, only 20 percent of men were in—62-year-old men were in fair or poor health, and today a 62-year-old man in the mid-'70s is about equivalent to a 72-year-old main in the mid-'90s in terms of probability of being in fair or poor health.

So we're setting these retirement ages and thinking about how long people should work. I think we need to keep in mind that there's always going to be some people who will never be able to make it up to the normal retirement age or the early retirement age, and that's why we have disability, but I think the question is where do we set that line, and given these dramatic improvements in health that we've seen at older ages over the past 20 years, it probably makes sense to move that line back a little bit.

HOWARD GLECKMAN, Business Week: I think the interesting question, though, is what about people who are—they're not on disability; they just can no longer do the sorts of jobs they used to be able to do. Think about, for example, home health aids, somebody who maybe at 40 or even 45 can transfer a patient from a bed to a wheelchair but at 65 they probably can't. Now, they're not disabled by any definition but they can no longer do the work that they're trained to do. What happens to them in this new environment?

RICHARD JOHNSON, Urban Institute: I think, considering about different types of income supports might be worthwhile. But again, I still keep coming back to the idea that just because someone can't work at a certain age doesn't mean that we should give everyone the opportunity to retire early.

EUGENE STEUERLE, Urban Institute: Howard—(inaudible). We still define retirement at age 62 and 65 as part of an old age and survivors' insurance. I once, only half in jest, said that I thought when we started providing benefits for more than 14 or 15 years we should have in the law a requirement that we redefine the system as the middle-aged and old-age retirement system. And so I'm going to throw back at you your question and say, what about all the other middle-aged men, not just those in their sixties, because they are middle aged, but the people in their fifties, who are often in about the same health, often have to make job switches.

It seems to me your issue having to do with job switches and unemployment and issues like that are not just issues that affect middle-aged people in later middle age but it affects people in middle-middle age as well, and so the issue you're raising is a more general one and it's not clear to me why you would pick one segment of the—you might pick people who were very old if you thought a very, very high percentage of them were in poor health and couldn't work. That was the notion of providing Social Security in the beginning. But once you become a middle-aged retirement system, it's not clear to me why you want to all of a sudden create a system to have people retire for the last third of their adult lives, which is what we now provide, because some modest portion of them at those earlier ages are in fairly bad health or they have perhaps some greater problem transitioning to other jobs than other people would. That may sound a little harsh but I think it puts a different light.

HOWARD GLECKMAN, Business Week: Let me ask you about financial assets, if I can, or assets in general. I often have the following conversation with financial planners. They say somebody at 50 or 53 comes into my office and says, well, I'm ready to retire; I want you to build a retirement plan for me. And they say, fine; how much do you have in assets? And they say, oh, about $100,000. And the planner looks at them sadly and says, your retirement plan is to go back to work.

Gene, I know you've thought some about the whole idea of assets of middle-aged workers and where this fits into the scheme. Tell us about that.

EUGENE STEUERLE, Urban Institute: Well, as I indicated by my earlier statistic on personal saving, we don't really save a lot in our society and most people do not have a lot of savings. For over 80 percent of retirees, the lifetime value of their Social Security and Medicare benefits—that is, if you added it up over—the couples, the 25 or so years they'd be receiving benefits, it's about $600,000 for a couple today. That $600,000 is a figure that is greater than all of the assets of 80 to 85 percent of the population. That is, for only 20 percent of the population are there private assets in excess of what they're going to get from the government. So most people, when they go into retirement for this last third of their adult lives, they're basically dependent upon the government.

In terms of financial planning, I think in many ways we misled people greatly. You know, we get them into financial planners and we have them debate whether they need to invest their $50,000 or, in your example, $100,000 in corporate stock or in bonds or whether they should annuitize or not annuitize the $100,000. That's actually a very small number relative to how they're going to treat their retirement, Social Security, and Medicare, but it's also a small number for most of them relative to their other assets, and that's the primary asset for most people in the population. That's their human capital, their ability.

When we make that decision to retire, that's probably the primary portfolio decision, financial decision we are making. It's probably more important than any decision, whether we invest in GM stock or technology stock or bonds or anything else like that. For most of us, that decision to retire, not to earn another $50,000, or whatever it is, for another year or two or three, is the primary portfolio financial asset decision we're making, and very seldom do we actually pose it this way. I think it's partly, Syl, because people in your business don't get a lot of commissions out of telling people they need to work longer, but they might get—I don't mean your business but—(laughter). Let me turn it back—our business. We economists love to talk about finances and I don't think we've talked enough about work. You know, we talk about Social Security as a trust fund problem or an individual account problem, thinking we're going to solve a labor market problem with financial solutions, but I think the primary solution is the labor market.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: First of all, we don't consult with individuals on their retirement decisions. I think I agree with Gene; I believe the financial planning community has not done a very good job of helping people understand what their true asset and income streams are under alternative scenarios and focus a lot on investing a relatively small part of what their true wealth is. I think that's an industry at some juncture that might deserve some very careful scrutiny, not only because they tend to focus on a relatively small part of the portfolio but they probably also have a vested interest, in many cases, in how that portfolio gets invested. But I'm not sure that's going to actually solve the worker retirement problem even if we can fix that.

I think for many people, regardless of their health status, regardless of what their total assets might be, if they can face the opportunity when they reach their early sixties of having a stream of income that allows them to maintain a standard of living that they perceive is roughly equivalent to what they're going to realize from getting up and going to work every day, many of them are going to take the retirement option, and we're holding this out to people, and I don't think we should be surprised when they take that option. For years the people that studied our welfare programs worried about the work disincentives in our welfare program for low-income people. Well, why don't we worry about some of the work disincentives in our welfare programs for high-income people that Gene characterizes being middle-aged, and they probably really are middle-aged.

HOWARD GLECKMAN, Business Week: John, would you like to respond?

JOHN ROTHER, AARP: Yeah, I think—two caveats first. Work and retirement are not necessarily opposites. In fact, most of our younger members see work as part of their retirement. And what they mean by that is they want flexibility. They want to work on their own terms. They want to work in what they view are socially meaningful jobs or they want to have control over their own schedule. They want more balance in their life, and who can blame them? So we have to be careful. Sure, some people are going to collect their retirement check but they could still be quite productive in work roles going forward.

It just seems to me that the group that Syl is talking about are people who have a guaranteed stream of income that's going to be sufficient to maintain their standard of living. That's a pretty small group and it's getting smaller as defined benefit pensions wear away and people are left with 401(k) plans, which, for most people, do not amount to that much. So I'm looking at a scenario where more and more—at least of the boomer generation—are really going to be looking for ways to continue producing income, at least past 62 or 63. Now, when you get to 65, maybe that's a different story, but if we could go from 62 to 65 that would be a pretty big jump in labor force participation.

EUGENE STEUERLE, Urban Institute: We should mention, I think, when several of us talk about increasing the age perhaps even beyond 65, we're also talking not about doing it right away; we're talking about it over a course of years as longevity also increases, and we're also talking about once you hit something like perhaps 65, of indexing that for longer lives. So it's not that we're saying you jump to 70 tomorrow or you jump to 68 or whatever else it is, but I'm not so sure your numbers are really that different. For instance, one of the ones Rich used earlier—

JOHN ROTHER, AARP: On the other hand I think that 65 doesn't exist for Social Security now, so we've left that behind, but I think it's very much still in the minds of most Americans, if for no other reason than Medicare is 65. And I think in some ways health coverage now may be the dominant factor in the decision to retire or not. If you can't have health coverage from your employer pre-65, then you're pretty much out of luck because the individual market is simply not going to be there for most Americans.

HOWARD GLECKMAN, Business Week: Syl, I know you've looked some at some of these middle choices, as John said, at somewhere between retirement and fulltime work. You look, for example, at phased retirement. Why don't you talk a little bit about what employers are doing in that area?

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Well, many employers have been—I guess agitating is the appropriate word—employers with defined benefit plans have been agitating for some time that they be given greater flexibility with their defined benefit payouts in terms of making payments to people who moved into a partial retirement status, and the rules historically have said that if you come back to work for your employer where you're drawing a pension and do substantial work for any period of time, that the benefits have to be suspended. There is now a sense that the flexible retirement option, or phased retirement option, may be something that we want to move forward with, and there are some regulatory developments here that suggest maybe this will become more viable in the future, so workers, late in their career, could continue to work for their career employer for some extended period of time on a phased-down basis and receive pay for that and then also receive a partial pension.

The fact of the matter is, for many people when they get to retirement, their human capital is more valuable within the organization where they've been working for a number of years than it is elsewhere in the marketplace, and keeping them in that environment where they've been making a contribution could probably increase their margin of productivity in a social context as well as increasing the rewards that they get for staying with that employer. So this is something we really should be pursuing, I think somewhat aggressively.

HOWARD GLECKMAN, Business Week: John, does that make sense to you?

JOHN ROTHER, AARP: Well, let me ask Syl a question. Why aren't employers, then, treating recent retirees as a consulting pool that they can hire back and work part time?

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Because there has been a sense on the part of companies—I've got a couple of people myself that have retired from my operation where I've tried to bring back, and there are legal concerns that the IRS is going to come back and perceive that somehow we're trying to skirt the suspension of benefits in the accrual rules under the pension plan and that we might be discriminatory in terms of how we're doing this. So we need to work these rules out so people know what the rules of the road are and can actually make this work.

I don't think most employers are trying to maliciously mistreat older people or former workers in this. I think they're concerned about the legal hurdles that they faced.

EUGENE STEUERLE, Urban Institute: And you know there are a number of—Pamela Perun contributed an article that Rudy Penner and I also coauthored, but she was the main one who examined some of these legal issues, and it's not even that these employers necessarily are doing things that are illegal but often they don't know, and then they're threatened with suits under age discrimination, they're threatened with suits under labor laws, under the pension laws to see whether they're giving benefits adequately, and they're threatened with suits under the tax law. And so they end up facing all of these potential suits and they finally decide it's just not worth the hassle, so they've got the problem on that end.

They've got another problem which I think has been developed over our larger society for several decades, which is seniority pay systems are really, I think, out of whack with modern demographics. I mean, a lot of us rise up in organizations and we peak out at some point, and if our marginal productivity falls, that organization doesn't know how to sort of let us gradually reduce our wage rates, and so basically we're treated, as we say in the tax code—(unintelligible). You basically collapsed and you replaced it with another one and it never depreciated. So you depreciate to zero—basically you throw the people out of work rather than reduce their work.

And then finally the one that John mentioned, which is Medicare. Medicare requires that employers with health plans be the first level of payment for workers rather than letting them get their Medicare. And that ends up to be a huge tax on the system, which we could alleviate if we just say that Medicare could be the primary payer. If you're entitled to Medicare—maybe Medicare shouldn't be 65, but whatever the age is, once you've got it you should be able to keep it and not have to sort of give it up and force the employer to pay, which often ends up to be a very high health expense, if that employer maintains you. So we've got all these obstacles to work at an older age that are sort of working together.

JOHN ROTHER, AARP: We haven't mentioned what may be the biggest obstacle of all so I'll—I think it's the elephant in the room here, and that is employer attitudes and age discrimination. I really think that we have to confront this, and even though it's been illegal for many years, the fact is it exists and it's pervasive. And there are lots of surveys that document that. So I think changing these rules are necessary things, but there's even a deeper change that has to take place.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: But part of it goes back to the point that Gene just made. It's the practical economics of keeping an older worker when there's an alternative worker who would be much cheaper. And if you've got two workers whose margin of productivity is essentially the same but you've got a compensation structure that rewards that older person 20 or 30 percent more simply because of tenure and because of the structure of our health benefit programs and our pension programs, then you've got an economic situation that is hard to ignore, and no matter how much we might wish that our fellow human beings would look at this in something other than economic terms, they're out there—these employers are out there competing in a pretty vicious economic environment.

And so we need to step back and look at some of these issues and allow flexibility in the system that can address them. I think if we can get people onto a reasonably comparable cost basis many of these attitudes would change.

HOWARD GLECKMAN, Business Week: Let's open this up to questions from the audience. I have three requests of you. One of them is wait for the microphone. The second one is please introduce yourself. And the third one is please ask a question.

Peter, do you want to start?

PETER ORSZAG, Brookings Institution: I want to ask a question about whether we're actually implementing adjustments to life expectancy increases correctly when we talk about increasing the normal retirement age or moving things, for two reasons. First, increasing the normal retirement age actually overadjusts for improvements in life expectancy. That is to say, lifetime benefits are lower, the longer life expectancy is. Look at the comparison between model three and just keeping lifetime benefits constant as in Diamond-Orszag. Increasing the retirement age, as in model three from the president's commission, has twice the actuarial effect, and the reason is that adding an extra age of life expectancy out at age 85 or 86 has less present value cost than increasing the age at age 65 or 66 or 67. So the first question is, are we sort of being too flip about how we actually do this?

The second dimension along which it's worth considering is everything is framed in terms of average life expectancy. One of the things that we sort of touch upon with regard to health but you really haven't nailed is differentials in life expectancy by socioeconomic status have exploded. There is a new paper by John Skinner out that shows just in the 1990s top decile versus bottom decile, life expectancy gap at age 65 increased by more than a half a year just in the 1990s.

So are we kind of also being a little too flip—

(Audio break, tape change.)

EUGENE STEUERLE, Urban Institute: —policy issues, which means that if we take the Social Security annuity benefit that the average couple now gets for 25 years—that's how long the longer living of an average couple will live if they retire at 62—25 years we're making payments. That's one reason why the annual payment is as low as it is relative to the lifetime. The lifetime payment is moderately high but the annual benefit is fairly low if you're going to get it for 25 years.

If we take into account your variation, what we're actually saying is that for people in this room, for instance, the average life—if they are couples, they are liable to be getting benefits for more like 28 or 29 years, which raises even further the question of whether we want to have a system, in Rich's language, where we have all of us retire or let all of us retire for that many years.

It also raises John's question: well, what about the people on the other end who don't live as long and how do we make adjustments for them? There it is a tougher question because in many ways I think that that issue goes beyond Social Security. I mean, I think there the issue often is do we need to make adjustments even during people's lives through things like earned income tax credits and other issues like this because if you don't make it to 62, it doesn't matter much what you do on retirement age or other issues anyway.

And as you well know, Peter, there is even a further issue which we haven't gotten into which is because of this life expectancy, it ends up forcing people into annuities, and we're going to do that whether we have individual accounts or whether we have a Social Security system as we have now. That particular choice discriminates against lower earners and people in worse health. And so we end up trying to compensate some other way.

In the current system, we compensate by having a progressive benefit formula. Well, if we have individual accounts or we do anything else, we have to figure out ways to compensate as well there. Again, I'm not sure all the compensation should be yet at retirement age. Things like disability insurance restore progressivity to Social Security; things like earned income credits restore progressivity to the system as a whole, and I think you've got to think in areas like that to deal with this differential in longevity.

HOWARD GLECKMAN, Business Week: John, anything you want to add?

JOHN ROTHER, AARP: Well, I think the biggest differential is not economic class; it's gender. And so what do we do with that? Social Security is a system that works as it should to support those who are longest lived and those are women. And when we start making some of these changes or proposing some of these changes, I think the situation of women in the labor force and their work patterns are different than men. So if we are going to start to fine-tune it, this raises a lot of tough questions.

HOWARD GLECKMAN, Business Week: So are you suggesting that we not go there or are you suggesting—that we should—(laughter)—

JOHN ROTHER, AARP: I think there are ways to deal with Social Security's future that would avoid some of these tough questions.

HOWARD GLECKMAN, Business Week: Yes?

NICK WALSH, LaRouche Political Action Committee: I was noticing what—your name is Gene?—what you said about how economists get so focused on the financial part of economics and lose sight of the workforce—the labor force I think is what you said a little bit earlier. And I kind of really agree with that. I had a question—I think that this elephant in the room has been brought up a couple of times. I think there is an even bigger elephant which has to do at this point about the financial system, as if the whole global financial system as far as I can see is completely bankrupt.

HOWARD GLECKMAN, Business Week: Let's keep this on the subject if we could. The global financial system is a whole other world. We're talking about retirement age.

NICK WALSH, LaRouche Political Action Committee: Right. We're talking about Social Security, right? Because—

HOWARD GLECKMAN, Business Week: We're talking about the retirement age.

NICK WALSH, LaRouche Political Action Committee: Oh, the retirement—just the retirement age?

HOWARD GLECKMAN, Business Week: Well, if we can keep it as close to that as possible. The global financial system is kind of a far piece from the retirement age.

NICK WALSH, LaRouche Political Action Committee: The thing is that the—I mean, if you're going to move the retirement age up or down or have a debate about how you're going to pay for retirees and the age bracket of retirees, we have to have a physical economy which is actually producing a growing amount of—let's say a growing market basket of physical goods; you need some technological progress going. We don't have that. I mean, you're talking about employers. Wal-Mart is the number one employer in our country. They don't care about human beings. They have no concern for humanity whatsoever. And this free trade system that we have—

HOWARD GLECKMAN, Business Week: Question?

NICK WALSH, LaRouche Political Action Committee: Well, here is my question. (Laughter.) The present—what do you guys think about, a—I guess I have to really do this fast—I mean, a new Bretton Woods monetary conference, and, two, Bush's plan to privatize Social Security—he's admitted it—is based on the Augusto Pinochet model of Chile, which was implemented in 1981 down there. We've already—if you look at Chile's social security privatization plan, it's devastated the labor force; they are completely wrecked by this thing.

HOWARD GLECKMAN, Business Week: I still don't hear question, I'm sorry.

NICK WALSH, LaRouche Political Action Committee: Those two questions—can you guys comment on why is Bush pushing a privatization model that has destroyed the retiree force in Chile and should we have LaRouche's new Bretton Woods monetary conference soon?

HOWARD GLECKMAN, Business Week: Bob, if you want to have a conference on Bretton Woods, we'll be waiting for that. (Scattered laughter.)

EUGENE STEUERLE, Urban Institute: Let me just answer something there, which is something we haven't talked about a lot, which is individual accounts. I don't think we want to have that debate today but the individual account debate, it seems to me, gets at the debate of whether one wants to add saving into the retirement system as well. I mean, we've talked about responsibility perhaps for working longer; we've talked about inadequate savings.

So it seems to me that the individual account debate, as well as sort of what I'm calling the private pension debate—which I don't think the two should necessarily be separated—really gets to the issue of are there ways to increase saving in society? And, you know, we may differ on whether we think the individual accounts can work or whether there needs to be a subtraction method, taking out the current taxes, or an add-on method, which actually I think even—they are part—did not oppose Clinton's proposal there as an add-on.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: He supported add-ons.

EUGENE STEUERLE, Urban Institute: Yeah, yeah, so I think that's the issue which comes in there, which we haven't really addressed greatly today, is do we also have a saving side to this question? Again, my view is it's primarily the labor force issue but there is this saving issue that we haven't totally addressed.

HOWARD GLECKMAN, Business Week: Yeah.

MIKE WYAND, BNA: I have a question on retirement decision-making. I have not heard long-term care mentioned at all today. Is or should that be an issue in making a decision on retirement?

RICHARD JOHNSON, Urban Institute: I'll take it I guess, unless you want to. One of the things that I've looked at is how caregiving demands effective retirement decisions. And there is some evidence that people who have older parents that they need to care for—also spouses that they need to care for—are forced to reduce their labor supply as a result. So certainly that is, I think, an important issue in the retirement decision. But it's, I think, a small—has a smaller impact than one's own health; it has a smaller impact than the availability of retiree health insurance; it has a smaller impact than one's own financial assets, but it certainly is a factor.

JOHN ROTHER, AARP: Well, I mean, the problem here is we're generalizing. I think if your mother has Alzheimer's and you're it in terms of providing the care, it could have an overwhelming impact on not only your work life but your own economic security in retirement. So for the people it affects, it can be a complete disaster, and we don't do anything to support those people until after the damage is done. I think, as probably a societal-wide case, it's not as great an impact, but the point is that when it happens to you it's overwhelming.

RICHARD JOHNSON, Urban Institute: I think the one thing that does tend to make it a little less important of a—or perhaps a smaller problem is that often these long-term-care needs hit when people are quite old and already out of the labor force. What I mean is that often—the child has often already stopped working when the parent becomes ill, requires long-term care, and very often the spouse has already stopped working, but there are exceptions to that of course.

HOWARD GLECKMAN, Business Week: Over here.

NELL HENDERSON, Washington Post: I just wanted to piggyback on this last question. When you talk about caregiving, it seems like you're forgetting the other end of the age spectrum: that a lot of baby boomers delay childbearing, both women and men. There is the whole baby boom echo generation that has been studied. Did you look at this when you were looking at caregiving at both ends? Some large number of baby boomers who are in the fifties and forties are going to have kids in school and in college, you know, for the next couple of decades, and did that bear at all in any significant way on the decision to retire?

RICHARD JOHNSON, Urban Institute: The one thing that has been noted is that having a child in college does tend to delay the retirement decision. (Laughter.) I mean, it's not only common sense; actually the data really do support that, which is always comforting.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: It ends any hope of retirement. (Laughter.)

HOWARD GLECKMAN, Business Week: Right here. Sure.

LEAH CARLSON, Employee Benefit News: And, you know, I understand that older workers do tend to be a lot more costly to employers than younger workers. And is there any way to address that or—I mean, or is that just always going to be the way it is? And also, how does that affect phase retirement or, you know, an employer that might want to look at having phase retirements or even employees that want to suggest that to their employers?

JOHN ROTHER, AARP: You know, there are reasons to dispute the higher cost theory and there are three I can think of right away. One is that I believe the highest costs in terms of health benefits for your employees come when you have an employee with an adolescent child when you're offering family benefits. And oftentimes, second, older workers are a self-selected group, in good health. It's their peers who had to retire early who are in poor health and racking up the health care bills. And third, if you factor into the cost—whether your investment in that person is going to play out over a period of time. In fact, older workers have a higher rate of loyalty and stability and stay with the employer, where oftentimes if you bring in a younger worker and train them, and then they are off to the next big job.

So I think there are reasons to really dispute the stereotype of always having a higher cost. However, I will say that from an actuarial basis, it doesn't help to have your workforce be skewed old and that's what many employers are reacting to.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: But the fact of the matter is that at least among most larger employers, they traditionally have relied on tenure-based compensation programs where overtime pay goes up partly related to time and service. To the extent they have sponsored traditional pension plans, the accrual of benefits has been very heavily back loaded in those plans. And if you start to extend the working career significantly, then the likelihood that you're going to have the health costs rising—I think relative now especially to a system where you are hardly providing any benefit to the retiree population anymore—it could become a significant cost.

And I think it's one we—John is right; we need to be a little bit careful about making generalizations, but the fact of the matter is when you look at the compensation structure in a lot of large employers, I think there is a built in bias here that we need to step back and reconsider.

HOWARD GLECKMAN, Business Week: Jim?

JIM KLUMPNER, Senate Budget Committee: I wanted to sort of refine something that Peter Orszag was talking about earlier and that John Rother talked about and that's the diversity of the elderly population and ask an informational rather than a rhetorical question, which is in what ways has diversity among the elderly population increased or decreased, whether it be health status, whether it be primary earner status, whether it be along income—certainly the income distribution has gotten more dispersed; you'd expect that to be true in the elderly population—and the wealth distribution, and maybe many other things that I haven't thought of?

What motivates the question is if it is the case that the elderly population is becoming more diverse, then that suggests that for Social Security—which is intended to be insurance guarding against bad outcomes—that would suggest that adjusting a single uniform retirement age might be an increasingly blunt instrument.

So has the elderly population gotten a lot more diverse, which makes this a harder problem?

HOWARD GLECKMAN, Business Week: Rich, you want to start?

RICHARD JOHNSON, Urban Institute: One of the big differences going forward at least is that the elderly population will be much more racially diverse in the next 20 or 30 years than it is now. And to the extent that that reflects changes or differences in income and wealth, that would lead to a more diverse older population in the future. We know that income and equality become more unequal as people age. I expect that that is—that within the older population, inequality has increased as well over time but I'm not sure about that.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Certainly one of the outcomes at the end of your career in terms of your retirement accumulation is reflective of what you've done during your working career, and to the extent that we're having a broader and broader distribution of incomes during the working years, one would guess we're going to have a broader and broader distribution of outcomes on the retirement end—except to the extent that Social Security ameliorates that through its redistributive characteristics.

JOHN ROTHER, AARP: But it's not just Social Security that redistributes; it's employer pensions and employer health insurance. And to the extent that we're moving away from shared risk pools into more individual arrangements, some people are going to be lucky with their investments and some people aren't. And so that also contributes to greater disparity of outcomes in retirement.

EUGENE STEUERLE, Urban Institute: Could I just follow up on Jim's implication though?

HOWARD GLECKMAN, Business Week: Sure.

EUGENE STEUERLE, Urban Institute: He said the implication is maybe—adjusting the retirement age is a blunt instrument. And I would disagree to this extent, Jim. The problem we have when we discuss policy options is we tend to discuss them one at a time. And as you know—for instance, if your goal is, for instance, to hit a certain distributional outcome, which is sort of what some of your questions were gearing towards, there are lot of ways of getting there. So if you adjust the retirement age upward, you could also adjust the progressivity of the benefit formula; you could also adjust, as I say, things outside of Social Security.

I think it's a mistake, again, to think about what happens when you change one parameter and how that affects everybody. What you want to do is what you're doing systematically to people as a whole, and if the issue is progressivity or diversity of the population, then you might want to make other adjustments. Maybe you need to make adjustments in disability insurance; maybe you need to flatten the benefit structure so that you're not discriminating in any way on the lifetime basis against one group versus another.

TOM MILLER, Joint Economic Committee: One of the underlying factors in some of the pessimism about the projections of future economic growth, particularly from the Social Security trustees, is the lack of growth in the labor force and that kind of shows up in terms of what's expected in terms of the growth. Looking ahead, depending upon which way this changes with the elderly either working more or working less, what does that imply in terms of the ability of our economy to grow and the relative shares that are going to be paid to labor versus capital in those markets of the future in terms of where we're going to have to in effect get our growth from?

HOWARD GLECKMAN, Business Week: Rich, you want to talk about that?

RICHARD JOHNSON, Urban Institute: Clearly if people are working longer, it's going to, I think, lead to more economic growth; it's going to increase productivity. So we would see more growth. I think that that would tend to suggest that the Social Security assumptions might be overly pessimistic in terms of productivity. Gene probably knows more about capital and labor.

EUGENE STEUERLE, Urban Institute: Well, I mean, people run these econometric functions that—some of them everyone knows, like Cobb-Douglas and other functions like that—and when they run them, they tend to say, well, the decline in the growth rate in the economy is only maybe three-tenths of 1 percent a year. That's actually right now in the Office of Management and Budget and the Congressional Budget Office assumptions.

If you look closely at them, they project a slowdown in the rate of growth of the economy after about 2008 when the baby boomers retire. But that's presuming that everything else works really well; that the capital is still getting fairly high returns; that there is no effect on all these exogenous factors—these factors we can't explain that we just add on to give most of the growth.

And maybe the biggest question of all is that the industrial world as a whole has never before, in the history of humankind, gone through this type of transition toward potentially a not only lower adult labor force and employment rates but in some countries like Japan, actual declines in employment and population. And we really don't know how that is going to play out. To me it warrants for caution not to make promises we might not be able to keep. We could always make adjustments on the other end to bump up the promises, you know, if things turn out a lot better than we expect.

HOWARD GLECKMAN, Business Week: Gene, let me flip that around. I mean, if we could change this system so that people from 62 to 70 were working more, could we get a material increase in GDP that would sort of help solve the rest of it?

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: You'd have more people contributing and so you would be making a bigger pie, and ultimately what we're doing—except we borrow a lot—(scattered laughter)—is we're allocating the pie that we make among the people that are living here.

EUGENE STEUERLE, Urban Institute: And for whatever tax rate we're going to pick, we could actually provide more lifetime benefits in Social Security and Medicare with the bigger pie than if we don't.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Now, the interesting thing is when you start to think about the retirement system in this context, the retirement system is simply a reallocation mechanism that we use to take some of this production that workers are making and give it to people who don't work. And if we cannot keep our economy growing at the rates at which we've become accustomed to and aspired to, what our retirement system is going to become—it's going to become the mechanism that allocates disappointment; that it allocates a disappointment between either the working population and their dependents or this retiree population.

And if you look at Germany and you look at Japan, and you look at some of these countries where they are actually now facing the prospect of a shrinking workforce, that's the prospect they face. And if you look at what just happened in Germany and Japan where they just had legislation where they reduced their pension benefits—and it's not just for people on a prospective basis; it's for people that are going to the pension office today—that's the prospect we face if we're not careful.

JOHN ROTHER, AARP: The way I would say this is that we have a lot of tough choices ahead of us with our retirement programs. And clearly the most benign policy of all the choices we face is to do things to promote a more vital labor market for older workers and to promote choices to make it attractive for people to work longer. Of all the choices we face, that's the most benign. And therefore it seems to me we ought to really focus on that, maybe just as much or more than tinkering around with Social Security because this has long-term impact not only for financing of Social Security but for financing everything else in our economy.

HOWARD GLECKMAN, Business Week: Over here.

IRV CHAPMAN, Bloomberg Radio: First a factual question. You made a passing reference to the tax system discouraging retiree health benefits. Would you explain what it is that you—what you meant? But more than that, in terms of the higher cost of tenured employees, what good would it do me or the national economy if my employer came to me at a given age and said you're making 75 thou; I can get somebody three years out of school to do your job—maybe not as well, but for 35. Would you accept 37.5 for next year? Would our national body politics, let alone my ego, benefit from that? (Laughter.)

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Two questions: the first one has to do with the funding of retiree health benefits. For decades and decades we've allowed employers to fund pension benefits, and they are accruing during the worker's career as the benefits are being earned. And in fact, with the passage of ERISA, we attempted to actually require that that be done. Now, there have been some developments recently and historically that show that ERISA maybe isn't working as well as it should in terms of companies funding their benefits as they are being accrued.

In 1982, with the adoption of the Deficit Reduction Act, we basically precluded employers on a pre-tax basis from funding retiree health benefits as they accrue. You can fund a small portion of them. If you look at the Fortune 1000 today, the sponsor's benefits—retiree health benefits, about a third of them have some funding, and they on average have funded about a quarter of the retiree health benefits because of the way the tax law works.

As a result of that they are accruing significant obligations that they can't fund. Now, if you would go back and you'd look at what happened in the steel industry over the last three or four years, these employers have gone bankrupt. There are these massive liabilities that were based on steel that was made 25 or 30 years ago that is now rusting out in the junkyards of America that we didn't price properly back then because we weren't accruing these benefits and funding them when they were being earned.

The second point I said when I gave the example was that in many cases employers are facing the situation where the two workers actually have the same levels of productivity. You posed an example where your productivity is higher. I am not suggesting that we cut your salary from 70,000 to 35,000, or whatever your numbers were. What I am suggesting is we need to find mechanisms where we have parity—greater parity on the basis of age than we do now. We should not have these tenured-based compensation structures because it drives the economics against maintaining older workers in the employment situation for extended periods of time.

HOWARD GLECKMAN, Business Week: Over here.

KATHERINE LEWIS, Newhouse News Service: I have a two-part question. The first is that I've heard the argument that—to talk about the Social Security problem as a baby boom problem is sort of a misleading shorthand; that it's really more about life expectancy, as you mention, and declining fertility rates. So that's—my first question is just to comment on that.

And then the other part is also sort of a question about how much of this problem is systemic and, you know, having to do with life expectancy, and how much could potentially change in the next 20 or 30 years given immigration, given potentially a change in fertility rates to alleviate some of the problems that we're seeing in the Social Security System.

RICHARD JOHNSON, Urban Institute: In answer to your first question, yes, that is right. I mean, what the baby boom has done is really accelerated what is a much longer-term problem. Fertility rates have been declining throughout the 20th century, I think, overall, and life expectancy has been increasing probably even faster. So, yes, what the aging baby boom has done is really focus our attention on this issue, but it would have come about either way.

EUGENE STEUERLE, Urban Institute: And it's there after the baby boomers are gone.

RICHARD JOHNSON, Urban Institute: And it's there after the baby boomers are gone, right. I mean, it doesn't disappear once the baby boomers have died.

And your second question: how much could, let's say, immigration improve the problem? Well, I mean, the problem with immigration is that immigrants eventually collect Social Security benefits. So it's not clear how much immigration is really going to solve the problem. And is fertility going to—and also it depends sort of what time—at what age immigrants arrive in a country, and so it's really kind of complicated to sort of work through what would be the impact of immigration. Some people say it's really not worth focusing a lot of attention trying to understand—or trying to look at the sensitivity of the problem to different immigration assumptions.

And in terms of fertility, I mean, I think fertility growth would help, but again, it's probably unlikely that we're going to see fertility rates as high we did in 1900, just given how the economy—the movement to an industrialized economy.

HOWARD GLECKMAN, Business Week: Over here.

BILL MCNAUGHT, U.S. Naval Academy: I'd like to return to something that John Rother said earlier about workforce dynamics. We could beat this economics problem or at least lessen it if we could find something older workers were better at than younger workers, and might that not be interpersonal skills in the job, and would the growth in customer service positions—why can't we develop structures to help older workers move to that in the later stages of their career?

JOHN ROTHER, AARP: I think there is some truth to that. I guess the only downside is the service economy is not a particularly well-paying economy. But as a second career for someone who can no longer perform their first career job, I think that makes a lot of sense and we're trying to engage many employers directly today, trying to get them to view the world that way and to hire older workers precisely because of their superior patience and interpersonal skills.

EUGENE STEUERLE, Urban Institute: That reminds me, every time we bring up examples of people with whom we should be sympathetic, it often ends up to be an example of a late, middle-aged worker in a steel industry or heavy industrial industry when probably—if we really wanted to use prototypical workers who are moderate-income, it would more likely be a woman working in Wal-Mart than a man working at a steel company.

And if we really do care about some of these issues—I mean, an issue that gets down on the table—(unintelligible)—the system has an enormous discrimination against single heads of households or singles because there is a whole part of the system—about a third of the system that is not work-related at all; it's just a total bonus for which you don't pay anything as you would in the private system to pay for it. That's the spousal survival benefits. And who doesn't get it? Well, anybody who doesn't have a spouse or survivor or who doesn't have a spouse for more than 10 years.

So if, you know—and these are women often who are forced—they are usually women and they are often forced to work very much in the later ages because they don't have entitlements to those benefits. So I think there are a lot of other adjustments we could make in this system if we really are worried about distributional aspects and who could work and who can't that go beyond I think some of the stereotypes we typically use.

HOWARD GLECKMAN, Business Week: I'd like to just follow-up.

John, you just alluded to the fact that AARP is actually working with employers. Tell us more about what you're doing.

JOHN ROTHER, AARP: I'm happy to. The latest example is Home Depot where we have entered into a formal agreement to promote older workers being hired by Home Depot as part of our Title V sponsorship for low income. And they will be trained to provide customer assistance and also to provide a very particular kind of customer assistance: people who need to retrofit their homes or adapt their homes to the needs of an aging relative or their own aging.

So Home Depot gets to sell a few more handrails and things and I think they view that the investment in the older worker—or the older workers that they're going to hire in significant numbers is a smart economic investment. But, you know, these are not terribly well paid jobs but they are jobs, and they are jobs for people who need jobs.

HOWARD GLECKMAN, Business Week: Yes, here.

EDANA LEWIS, Equal Employment Opportunity Commission: I just want to say thank you to the panel and the audience because this has been most interesting, first. And my question is actually a good segue. What are, I guess, the employer perceptions around retraining older workers before age 60 or the late fifties? And then also, you spoke earlier about bringing back consultants to work with firms and there are various IRS issues involved. How open are employers to working with contracting firms where the employee that you're trying to bring back actually works for, you know, the contracting firm and not again for you?

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: I'll take a shot at that and then anyone else can pick up. I'll sound like an ogre again but it's the world I work in.

If my employer makes a large investment in my human capital, to a great extent at the end of the point of that investment I own that human capital and the employer has to compensate me accordingly or I'm going to take that added human capital somewhere else in the marketplace and I will be compensated for it. I think if we are pursuing retraining policies to retool, you know, people that are some years out of what we traditionally think of as our educational system, we're going to have to rethink how we get that done. If we're going to expect that the employer community do it, I do not believe the economic incentives are there for a significant investment.

Now, to train people to do the jobs that have to be done in that organization, they are certainly going to do that; they do that now. But I do not believe they are going to make a significant public good investment to retool a workforce so that workforce can go work somewhere else. And we need to keep in a line of sight the practical economics of what these programs mean.

The second question was —

EDANA LEWIS, Equal Employment Opportunity Commission: About contracting firms.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Oh, contracting firms. You know, I think employers in the United States, larger employers particularly, have shown a remarkable willingness to outsource jobs. Now, I'm not talking about off-shoring jobs, I'm talking about outsource—using contract employees to do a wide variety of things. And certainly I think many of them are open to going back to contract agencies and to the extent they can get people that can do their work more effectively, those are the kinds of people that they are going to want.

Again, though, to expect this to happen in a massive kind of fashion where there is the prospect of, you know, concerns about the legal ramifications of what you're doing, most employers are not going to take on that risk.

HOWARD GLECKMAN, Business Week: I want to ask a Social Security question and maybe all the panelists can take a crack at it. We've talked a little bit earlier today about the blunt instrument of raising the retirement age and certainly when I talk to people on the Hill, it's dead on arrival; it's got no chance at all. Are there other ways? And I wonder if we can be as specific as we can about other ways to accomplish the same thing without just raising the retirement age from 67 to 70.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Price index the benefit formula.

HOWARD GLECKMAN, Business Week: Explain that.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Well, there is an article in this morning's Washington Post that the benefits—the initial benefits grow over time for subsequent cohorts of workers based on average wage growth in the overall economy. If you move to indexing the benefit formula so initial benefits grew with the rate of growth of prices, you would slow down the gradual growth of benefits over time, which is in essence exactly the same thing as we're doing with the introduction of higher retirement ages in the benefits structure right now.

JOHN ROTHER, AARP: Let me just comment on this. If you want to change Social Security benefits, there are lots of different ways to do it, but a sales a point I think is worth emphasizing, that raising retirement age doesn't mean people work longer; retirement age is already going to 67. The average median age of retirement I believe is still under 63 today for initial claim of benefits. And what we're really doing is just an across the board benefit cut. And is that the most humane way to balance the Social Security system long term? I think it is a pretty blunt instrument. I would do it other ways. I wouldn't raise the retirement age and I certainly wouldn't price-index benefits.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: I didn't say I advocated it; I said it was an alternative.

(Cross talk.)

JOHN ROTHER, AARP: I'm glad you're saying that but there are certainly other ways to adjust benefits and adjust revenues to keep it in balance that are less draconian than that. But I do think raising the retirement age—a lot of the debate is—assumes that people will then work that extra year and as I think this discussion has illustrated, there are a lot of other factors that go into people's decisions or employers' decisions. And really Social Security normal retirement age is usually not one of them; it's just not a factor in how people actually decide to retire.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: One of the interesting things here that I think people lose perspective on—Olivia Mitchell and a colleague of hers at Wharton several years ago did a paper using the health and retirement survey. And they were looking at kind of the cumulative wealth of people on the cusp of retirement. And in wealth they included the Social Security benefits, their pension benefits, their private assets, and only the value of equity in their home.

I took the value of equity in the home out of their distribution and then looked at this distribution of wealth across the array of wealth holdings. And at the 10th percentile of wealth holdings, about 95 percent of wealth is in the form of Social Security. Up at the one-third point of the distribution, it was still heavily skewed toward Social Security; at the two-thirds, it was a little over 50-50 in private assets; at the 90th percentile, about 90 percent of assets were not in Social Security.

Now, if you have a 10 percent—let's say a 20 percent across the board cut in Social Security benefits, this poor schmo down here at the 10th percentile has just taken an 18 or 20 percent cut in their retirement wealth and me sitting up here at the top of the distribution has taken a couple of percent cut. That's why I think we need to be very careful about across the board cuts and that's why we need to be a little bit careful about just across the board raising the retirement age without doing some other things to make up for it or to just across the board price indexing.

So we really need to think about this in the larger context.

HOWARD GLECKMAN, Business Week: I'm sorry. Richard, go ahead.

RICHARD JOHNSON, Urban Institute: Two things I wanted to point out. One is that—you know, we've been talking about how increasing the normal retirement age for Social Security would not necessarily encourage people to work more; that's true. I think, though, increasing the early entitlement age, which is now 62—increasing that would really increase work effort a lot at older ages.

And just to sort of follow up on what Syl just said, another common proposal to deal with Social Security is to reduce the cost of living adjustments. And again, that's something that would really disproportionally hit low-income people because, again, so much of their income is from Social Security so that—and it will also hit people much later in life—people in their eighties because for them, that cost of living adjustment really accumulates—let's say over 20 years, becomes quite sizeable; once you reduce that, it's really going to hit people in their eighties much more than people in their sixties. And it's people in the eighties who tend to have higher poverty rates, who tend to have less incomes than people in their sixties.

I think if we're trying to encourage work effort at older ages, one thing we could do—one of the things we found was that—as was mentioned earlier—is a deterrent to work is the high replacement rates that people in their sixties face. And if we were to tilt Social Security benefits a little bit—maybe lower them for people in their early sixties and raise them for people in their eighties—that would reduce the replacement rate that people face, would encourage them to work more in their sixties, and then they would end up with more benefits in their eighties when they really need it, particularly when health care costs are going up quite a bit with age.

HOWARD GLECKMAN, Business Week: Gene, we just have a minute or so left. Your alternative to the—(inaudible)?

EUGENE STEUERLE, Urban Institute: I'm really glad you asked the question because this is exactly the type of question that is not being asked in the Social Security debate. We have this one side that says let's do individual accounts and another side that says keep the current system and without even stating any objective of the system. For instance, you're asking the question, how can we do this in a way that at least, for instance, it has an impact on poverty or does the best effect on policy?

We can measure these things. You look at the commissions that are set up, they don't even—Social Security often—it doesn't even measure the impact of these systems on distribution: who benefits and who doesn't. So we talk about it loosely without doing the measurement.

And Rich is right; we could move more benefits to older age, take some benefits away from ages even if you didn't change the retirement age. That would induce people because of the income—having lower income to work longer. It would also, as a result—without reducing lifetime benefits at all—increase the well-being of people because they would have more income when they are older.

There are a lot of adjustments we could make. And I guess I would disagree slightly with John—for a given tax rate, the least harsh effect is actually to increase the retirement age because if I increase the retirement age, I get more revenues in the system and therefore I can keep lifetime benefits a lot higher if I increase, like, the early retirement age, maybe even at the normal retirement age. If I increase the early retirement age I can keep a lot more benefits in the system than if I just have the across the board type of benefits cuts that are going to come—you might disagree on how large they are going to be—but we can make those much less harsh if we increase the retirement age.

So I think there are a lot of adjustments we can make. A lot of it is to provide more benefits in old age, to then make adjustments in progressivity so we don't affect—so we maintain, if not increase, the progressivity system and make it a more effectively antipoverty system.

JOHN ROTHER, AARP: Let me just raise one question that your comment raises, which is the thing we really haven't focused on: the early retirement age. You know, I find this a hard issue because I think there are a lot of systemic reasons and economic reasons to say people should work longer if they can. On the other hand, for somebody who is making an informed decision and they want to spend more time with their grandchildren or they want to volunteer, or they want to pursue their interest in the arts, why would we say you can't?

EUGENE STEUERLE, Urban Institute: But carry the question a step further, John. When we used to provide 14 or 15 years of retirement we could have said, well, why don't we provide 17 or 18? If we provide 17 and 18, why don't we provide 20 or 21? If we provide 20 or 21 for the average female—whatever it is right now—why don't we say why don't we provide 25? You know, once you decide you're going to have an age, then you have some criterion and it seems to me the criterion is going to have to be based somewhat on ability to work in needs of old age.

I mean, to some extent, if we didn't have a system that was creating transfers—you know, if it was purely a system where there was private saving and you wanted to spend your private saving, you don't want to interfere. But you're asking the public to make a transfer. So if the public is going to make a transfer—and it is a transfer system—it seems to me you want those transfers to go to where they are most needed. And that's, to me, the response you have to make.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: The one thing we should not take off the table is that if we're going to maintain these higher benefit levels for the extended period of time, that the way we pay for them is through a tax on workers—workers who are trying to support, educate their own children and prepare themselves for their future needs. So we need to be very careful about how we balance this whole thing.

HOWARD GLECKMAN, Business Week: Syl has the last word. To be continued. I don't think this is the last we're going to hear of this discussion.

Syl Schieber, John Rother, Rich Johnson, and especially Eugene Steuerle, who did this on about an hour's notice, thank you all for doing this and thank you for some great questions. (Applause.)

(END)

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