For release: Feb. 24, 2005

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United States "Not Alone" in Facing Government-Run Pension System Funding: St. Louis Fed’s Poole

link to speech

Canton, MO. — The problems the United States faces in funding Social Security are basically the same as those faced by almost all economically advanced countries, said William Poole, president of the Federal Reserve Bank of St. Louis.

“The funding problem all of these systems face has arisen because the number of persons drawing benefits is rising faster than the number of workers paying taxes to fund those benefits,” Poole said. “Demographers project that these trends will continue for several decades, so without reforms, the funding problems of Social Security and similar programs of other countries will only worsen,” he said.

Poole’s comments were included in a speech to students, faculty and community leaders at Culver-Stockton College.

Poole noted that in the 1940s, there were about 40 persons paying into Social Security for every one person drawing benefits. That ratio declined to some 16 persons in the 1950s and is now just over three persons paying taxes to support every one person receiving benefits. Demographers, said Poole, predict that in 30 years, with the normal retirement age still set at 67, the ratio will fall to 2 to 1.

What’s behind these trends? “First, over the past century, the United States, like most if not all economically advanced countries, has experienced an increase in average life span,” Poole said. “Second, these countries have also seen a declining birth rate, especially since 1960 or so. Consequently, the number of persons reaching the age at which they’re eligible for benefits has been rising faster than the number in the labor force paying taxes.”

Poole said, “It is a great achievement that people are living longer and usually in better health and financial comfort than their parents or grandparents. The downside, however, is that benefits from existing government-run pension systems will in the near future exceed the inflow of tax revenues to finance those payments unless steps are taken to reduce benefits, raise the retirement age and/or increase taxes on current workers and their employers.”

Several countries, Poole said, have taken steps to encourage people to remain in the labor force as they get older. “Some have done so by strengthening the link between contributions and benefits,” he said. “For example, Sweden has introduced ‘notional accounts,’ by which participants can see their potential pension benefits rise as they work longer and contribute more to the system. In this sense, Sweden’s system has become more like the U.S. Social Security System.” Other countries, he said, have taken steps to reduce payments to persons retiring before the normal retirement age.

“There are no easy solutions to the problem of how to ensure that our public pension system remains sound in the face of inevitable demographic changes,” Poole said. “Compared to many countries, however, we in the United States are lucky. We have a strong economy supporting a high standard of living, a high rate of labor force participation and our Social Security system imposes relatively little distortion on the retirement decisions of persons younger than age 70. Still, we must make some changes to ensure our system’s long run solvency, and that will involve hard choices. Understanding the nature of those choices, why they must be made and lessons from experience abroad should help the nation address these important issues in a sound, long lasting way."

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