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Heading Off the Retirement Crisis

While official Washington is crowing about the prospect of balancing the budget, more serious minds are focusing on the fiscal problems lying in wait just beyond the government's short-term horizon. The most worrisome of these concerns is the imminent retirement of the baby boom generation.

As the National Commission on Retirement Policy - a bipartisan, blue-ribbon group of members of Congress, corporate executives, and specialists in various aspects of retirement finance - warns in its new report, "Without major policy changes, entitlement programs could soon absorb the vast majority of federal tax revenues, and Social Security and Medicare could face huge unfunded liabilities."

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The commission estimates that payroll taxes would have to be increased by nearly 20 percent to maintain currently authorized benefit levels in Social Security. That's the "good news," because prompt action is assumed. The bad news is that, if nothing is done during this current period of budget euphoria, far more painful action will be needed in the future. Despite these scary scenarios, it might be possible to avoid both tax increases and benefit reductions, but that will require a variety of innovative changes in public policy.

First of all, we need to understand the dimensions of the problem. As a nation, we have promised our fellow Americans more retirement benefits than the current financing system can deliver. Moreover, as individuals we have set aside too little of our resources to maintain current living standards after retirement. Most of us have not built adequate nest eggs for the time we will no longer be working.

To compound the problem, we are living longer but retiring earlier. In 1900, only 1 in 25 Americans was older than 65. Today, that number is 1 in 8. And we are not working as long as we used to. In 1965, 57 percent of the population over 55 was in the work force. Today, that figure is only 38 percent. Moreover, more than 70 percent of Social Security beneficiaries start drawing benefits before they turn 65. The fiscal implications are staggering: Men reaching 65 can expect to live another 15 years, women nearly 20 years.

No "silver bullet" will solve the cluster of retirement financing problems. Yet sensible changes could help. Fundamental tax reform would deal with the fact that Americans save so little. Taxing savings less sharply than at present would be a positive response. Also, the time has come to eliminate the innumerable discouragements to private pension plans imbedded in the tax code. The notion of a savings-exempt income tax looks more attractive all the time.

Government programs that encourage people to take early retirement should be reexamined. The popular retirement age of 62 - the age at which Social Security benefits can start - is an anachronism given the impressive improvements in health and longevity.

Finally, we need to consider the role of privatization - partial or full, voluntary or compulsory - in strengthening Social Security.

There likely would be no future shortfall if individuals had been allowed to invest their Social Security taxes in diversified portfolios of corporate stocks and bonds. College teachers' retirement funds have judiciously managed the contributions entrusted to them while earning high returns for beneficiaries.

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NEVERTHELESS, public opinion is far from any firm conclusions on the retirement financing problems that will face Americans early in the 21st century. At this time, the public debate should focus on basic aspects of a new strategy. The National Commission on Retirement Policy has sketched out the four essential components: Reform Social Security to provide long-term solvency; enhance employers' ability to provide pensions and savings plans; stimulate growth in personal savings; and educate the public to plan, save, and invest for retirement.

* Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University in St. Louis and a member of the National Commission on Retirement Policy.

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