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G-7 Should Tackle Entitlements

As leaders of the Group of Seven industrialized countries sit down together in Lyon, France, an important voice is absent. Missing are the children and teenagers of the US, Canada, Japan, and Western Europe, who will have to pay the multitrillion-dollar bill for social security and other entitlement programs that their governments are now promising their "baby boomer" parents when they retire.

No civilized society can fail to provide adequate support to its needy or its elderly. But without alterations in the way government retirement plans are funded and allocated, current commitments to support the coming enormous bulge in baby-boom retirees are likely to lead to financial crisis, government defaults to many retirees, and intergenerational acrimony.

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To avert such an outcome, President Clinton and his G-7 counterparts should tackle this issue at Lyon - directing their officials to produce recommendations on reform by next year's summit.

This looming crisis is the direct result of large financial commitments by governments and of powerful demographic forces. Millions of baby boomers will begin to retire early in the next century; and most will live a lot longer than their parents. Many of these people will rely on government support as their primary source of income. In the US, roughly five taxpaying workers supported each retiree on Social Security in 1960. Today a retiree is supported by roughly three taxpaying workers. In 20 to 30 years that figure will drop closer to two.

In Canada, France, Italy, and Japan the amount of unfunded government liabilities for current and prospective retirees a few decades into the next century will approach and then exceed the size of their gross domestic product - the value of all the goods and services their economies produce. In the US the figure is lower - but still substantial. The amounts are far greater if health-care benefits to retirees are included.

Considerable thought has been given to ways to avert an entitlement crisis. The longer reform is delayed, however, the more painful it will be - as more and more people become used to benefits that ultimately could become unfinanceable. Such benefits will be less and less secure, and the elderly will feel increasingly threatened.

Unless leaders today begin reforms, permitting them to be phased in over the next two decades, their successors in 2020 or 2030 will be under pressure to sharply cut commitments to retirees - with tragic consequences for many needy people. Or workers at that time will be forced to pay much higher taxes - which doubtless they will resist.

To avoid such dire alternatives, governments might try to borrow the money. But that would trigger a sharp rise in interest rates, pushing economies into deep recession. And because each major industrialized nation will confront similar problems, none will have a superabundance of funds to lend. Developing nations, increasingly important sources of investment and saving, will be reluctant to risk loans to "mature" economies that cannot get their economic houses in order.

To avert disaster, G-7 governments must begin immediately to tackle this issue. We should consider the experience of countries that have mandatory retirement-savings plans over and above social security, incentives for increased voluntary savings, investments of pension assets in securities other than government bonds to increase returns, a retirement age being raised over time, or an allowance for older people to collect partial social security even if they work past retirement age.

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Leaders should reflect on their responsibilities to retirees and to the coming generation. Each G-7 nation will approach the subject its own way, but a common commitment can embolden governments to undertake reforms before they run out of money to pay needy retirees - and out of political support from the generation that has to pay the bill.

* Robert D. Hormats is vice chairman of Goldman Sachs (International), New York.

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