American Enterprise Institute

February 20, 2008

[Edited transcript from audio tapes]

8:15 a.m.	Registration and Breakfast
9:00	Welcome:	Henry Olsen, AEI
9:10	Panel I:	Pension and Entitlement Reform in Europe
	Presenters:	Aart Jan de Geus, Organisation for Economic Co-operation and Development
		Ole Settergren, Department of Pensions, National Insurance Board of Sweden
	Discussants:	Henry J. Aaron, Brookings Institution
		Andrew Biggs, Social Security Administration
	Moderator:	Richard Burkhauser, AEI
10:45	Panel II:	French Energy Policy
	Presenters:	Jacques Bouchard, French Atomic Energy Commission
		Michael McMurphy, Areva NC
	Discussant:	Martin Hoffert, New York University
	Moderator:	Kenneth P. Green, AEI
12:15 p.m.	Luncheon
1:00	Panel III:	Markets and Transportation Policy in Europe
	Presenter:	Eugene Hoeven, Civil Air Navigation Services Organisation
	Discussant:	Joshua Schank, Bipartisan Policy Center
	Moderator:	Ronald Utt, Heritage Foundation
2:45	Panel IV:	Education Reform in Europe
	Presenters:	Tapio Christiansen, Kreab Washington
		Simon Steen, Verenigde Bijzondere Scholen
	Discussant:	Matt Miller, Center for American Progress
	Moderator:	Nina Rees, Knowledge Universe Education
4:15	Adjournment

 

Proceedings:

American Enterprise Institute
Gaining Ground:  New Reforms from Old Europe
February 20, 2008

[Note:  Speaker with heavy Argentinian accent is hard to understand in some places, hence the "indiscernible" notations.]

Welcome
Henry Olsen:  Good morning.  Thank you for coming.  I'm Henry Olsen, Vice President at the American Enterprise Institute.  I'm glad to see you bright and early this morning at our conference, "Gaining Ground:  New Reforms from Old Europe."
When Donald Rumsfeld uttered that immortal phrase, "Old Europe," he expressed a sentiment that is all too commonly held among Americans, that Continental Europe is sclerotic, calcified, ossified, resistant to change, looking more to the past than to the future.  The implication was that the United States, and other nations, who do what the United States wanted, is better, energetic, innovative, dynamic, looking to the future and not to the past. 
This strain of thinking is not new to Americans.  Almost from the moment of our founding, when our Puritan forbearers founded the Massachusetts Bay Colony and proclaimed it, the "city on the hill," there has been a strain of American thinking that is considered America to be "a light unto the nations," one that is found in political science, as "American exceptionalism."  That is a topic that we will discuss at a future conference, on April 22nd, where James Q. Wilson will premiere his new book, Understanding America with a collection of authors, who have looked at the differences and similarities between America and Europe in some detail.
But it is worth noting that in addition to differences, we have many similarities.  America, both genetically and intellectually is, in many ways, from European stock.  We obviously derived our political system and adapted it from Britain.  Our higher education system, which is today called the envy of the world, is in fact an American adaptation of the 19th Century German Research University.  Political and social reformers have taken inspiration for centuries from Europe, and it's with great cause that we can talk about Europe and America as forming two pillars of Western civilization, a civilization that has achieved preeminence in the world today.
And so with these similarities, we face similar problems.  We both face aging societies.  We both face the difficulties of delivering welfare services within those aging societies.  We both have difficulties with our energy supplies and seek energy independence.  We both are looking at how to deliver public services efficiently and effectively in an age when we have the same obstacles to reform entrenched interest, both special and popular, that have a vested stake in the status quo.
 The famous American baseball player, Satchel Paige, once said, "Don't look back, something might be gaining on you."  But Americans would do well to look back, because over the last decade and a half, Europe has been quietly, in America, gaining on us.  There are many areas where American domestic policy reforms and domestic policy challenges are unmet, whereas Europe's have moved forward.  We're going to be hearing about four such topics today, from a series of distinguished Europeans, with a series of distinguished Americans to comment, on what we might learn from our neighbors across the Atlantic.  And so we will be looking back to see who has been gaining on us, to see if once more, we can learn from our European brothers.

Panel I: Pension and Entitlement Reform in Europe

 Our first panel will discuss European innovations in Pension Reform and in Disability Policy.  That panel will be chaired by Professor Richard Burkhauser of Cornell University.  He is also a visiting scholar this semester at AEI, where he is writing a book on the reform of America's disability insurance policy.  Please join me in welcoming Professor Burkhauser.
Richard Burkhauser [Moderator]:  Thank you.  It's a great pleasure to be on this panel and to welcome four real experts on disability and retirement, Social Security issues.  One of the tools of cognitive psychology used to encourage an addict to seek counseling is an intervention by the addict's family and friends.  Let me suggest that our first such session today is a public policy intervention for the United States Social Security system, led by two representatives of recovering Social Security systems, Aart Jan de Geus and Ole Settergren, and that we have much to learn from them.
 Thanks to very favorable demographic forces, primarily rapid increases of the younger working age population, relative to the older retirement population, for several generations it was possible to raise Social Security benefits far in excess of Social Security taxes and still stay in pay-as-you-go Social Security balance.  Such a system, where everyone wins and nobody loses from an actuarial perspective can be intoxicating, especially to politicians interested in winning elections.  But every party must end and the same demographic forces that drove Social Security policy expansions in most western industrialized nations now require some combination of tax increases, benefit decreases and/or increases in work to bring them into long-run financial balance. 
 Our speakers will tell us how the Swedish retirement system and the Dutch disability systems have begun adjusting to these new demographic realities.  While most of the audience is well aware of the not-so-distant problems facing the United States old age and survivors' programs, the problems as the oldest of the baby-boom generation that is born right after World War II, in 1965 -- I was born in December, 1945 -- I personify, that this is the face of the problem you see before you.  You may be less aware of the problems facing the U.S. disability system. 
Figure 1, on your right, shows the growth in the two major Federal Disability programs in the United States -- disability insurance and supplemental security income, disability for adults and for older children.  Rapid growth in these two systems, in the 1970's, led to Congressional reforms at the end of that decade and a failed attempt by the Reagan administration to correct the underlying problems.  After about a decade of no, or slow growth, rapid growth occurred in the 1990's and this led to further reform efforts in 1996.  Once again, in this decade rapid increases in SSI and DI have occurred. 
Figure 2 put this growth into perspective by showing the ratio of DI and SSI adult beneficiaries, that is, those aged 15-64 to ILO-defined active workers.  That is the actual number of workers employed in the United States between the ages of 15-64.  The U.S. once has the lowest ratio of this type among OECD countries, while the Netherlands had the highest.  As can be seen in Figure 2, the United States has climbed from around 40 people on DI and SSI per 1,000 workers in 1983, to nearly 80 per 1,000 workers in 2006, with most of that increase occurring over the last 15 years.  While this is still not in the range of the Netherlands, which at its peak was around 150 per 1,000 active workers, or that translates into about 14% of its working age population.  We, in 2006, are about half that, about 7.1%. 
We have had more rapid growth in our system over the last few years than the Netherlands has had over the same period.  In the last 6 years, the Dutch have initiated a series of breathtaking reforms, which have dramatically reduced their beneficiary population.  So it's with great pleasure that I introduce Mr. de Geus, who will tell us about those reforms and what they mean for the United States.
 Aart Jan de Geus:  Thank you for this warm welcome.  My name is Aart de Geus.  I'm the Deputy Secretary General of OECD.  I am responsible for the project that we do on the so-called Political Economy of Reform in OECD.  The Political Economy Reform is about political gain to realize the reform, and that is especially difficult when you have a difference between the winners and the losers of reform, which is the case in many health reforms, labor market reforms, education reforms.  The people who benefit from the reform are people from a future generation and these people are not organized or institutionalized in interest groups, and the people who defend the interests of the past are very well organized and they are, to some extent, the losers.  But it is the political game of bringing this reform through.  And then for politicians, there is the risk that the electorate is not always recognizing what this means for the future.  So it's also for the politician, a risk to do reforms.
 And this project of the Political Economy of Reform is a new project in the context of OECD.  I'm happy to talk with you this morning about the disability reforms in the Netherlands.  And the title of my contribution is "Going Dutch?" -- with a questionary mark -- "Going Dutch?"  I have no slide presentations, but there is handout in your folder, so you can follow my presentation if you want to.
 Why were you talking about the Netherlands?  We were far, far behind every other country in the world with disability.  So what I'm telling you is some learning experiences.  But first of all, I have to tell you please learn from us, but don't copy us.  Don't copy us.  It would take 30 times to come to the results where we are now.  There was a case for change in the Netherlands.  We call it the Dutch disease:  1 out of 7 workers, employees, was disabled or mentally ill.  This is partially to do with the criteria. 
We don't insure in the Netherlands.  Your medical or health status, we insure your income capacity, which is the same in the United States, which makes it comparable.  So it can be the case that someone who ends up in a wheelchair but can earn the same money in what he did before, that there is no disability pension.  And it can be the case that someone who has some mental disease, in which he cannot concentrate or cannot stand to concentrate for longer than 10 or 15 minutes, he cannot do any job, while he is healthy, a physically healthy citizen.
 The case for change was that we had, in 2002, low growth and weak participation.  There was a new government, Balkan and the central right government, and this government got a mandate, an electoral mandate for structural reforms.  The Christian Democrats were out of the government.  They had been out of the government for 8 years, and went back, came back with a strong ambition to do the reforms, and Mr. Balkan [sounds like] invited me to come and to speak about it. 
He said, "Well, what do you think about this program?"  I said, "Well, it is ambitious, but necessary."  "Can we think of you, to realize the problem?"  I said, "Why me?  Because I was not in the parliament?  I was not in the Board of the political party?"  He said, "We need someone who knows, who knows the subject of disability, who knows the world of the social partners and we want a new generation of politicians."  I said, "Well, I cannot deny it.  For these three criteria, I would like to join you."
 In these four and a half years of reforms, 2002-2007, the role of the social partners was key.  The role advised, the role also in public support from time to time, and also the role of negotiating.  There were big fights also with the social partners.  My background, having been the Vice Chair of one of the Dutch trade unions was an advantage, but it turned out also to be a very big risk, because people said to me, "Well, Aart.  You know the trade union, so why are you proposing this?  Are you betraying us?"  Well, my position was very much criticized.  So it can be an advantage, but also a risk.
 The Disability Act of 1967 was discussed and revised since 1982.  We were, in 1982, more or less at the point that you, Richard, that you pointed out that you were, here.  So we only succeeded in having the reforms 20 years later.  At that moment, we started a process of discussing the reforms.  My role at that time was that I participated in this Social Economic Council on behalf of the trade unions. 
In the government, we realized structure reforms up to the saving of 2% GDP, structural.  And it was a program where we not only handled the disability reforms, but also with early retirement, unemployment and more reforms.  You can find them in Matchtrack [phonetic].  I think it's, only if you have questions. I would like to tell about the whole package.  But it was important for the process, that there was a package of reforms.  If you have questions, I'm happy to answer them.
 The disability reform, the content of the reform was that we found a way to share the gain, but also to share the pain of the reforms.  Sharing the gain, sharing the pain is how to compensate the losers and how to build consensus among many, many stakeholders.  The first, and maybe most striking point, because it's very exceptional in the world, is that the public insurance only covers the risks after 2 years, 2 years of risk on the shoulders for the employers, and the workers.  And these first 2 years, the employers are obliged to pay 70% of the wage.  So the employer has 70% risk; the worker has 30% risk.  This idea of "Going Dutch" share the risks, where the employer and the worker cover the first 2 years, and then public insurance is coming in. 
It turned out to be a big success in the Netherlands.  Of course, the small and medium enterprises complained because, "Oh, I have only 3 workers, if one of them gets sick, I cannot pay.  I cannot pay."  Then we say, "Well, you go to a private insurer."  And they did, and the private insurer were compelled to develop programs to reintegrate people to other work, so it was a good idea to buy in here the rule for the private insurers.
 After these 2 years, if your income capacity has a loss of less than 35%, there is no public insurance.  So there is a responsibility for the employer to give you another job, because he is not allowed to terminate the employment for that loss of capacity.  Above 35-80%, we defined the risk.  The risk of partial loss of income capacity, we defined it as not a type of pension, but as a type of special unemployment.  Unemployment, where some support is needed on the income side, but also on the accompanying side, the reintegration side.  And we brought in the money to help these people to come back to the labor market. 
This is very important that everybody who is not totally disabled gets some kind of unemployment benefit.  It is designed in a way that the more you work, the more you earn.  Making work pay.  Only those who have total loss of capacity or earning a nice income have a so-called disability pension.
 In this middle part, the so-called unemployment for disabled people, we bring in also the private insurers, and there is -- the premiums for that insurance are experience-rated.  So the employer still has an interest in having less people, and that's key.
 Another part of our reform was that we reviewed all the disabled people under 50 years.  And then they came to me and they said, "Well, Mr. de Geus, maybe I have my capacity to earn some money in the labor market.  But do you have a job for me?  Can you guarantee a job for me?  I was out of the labor market for 12 years now."  I said, "No.  I cannot guarantee a job."  "Then how could you end?  How could you terminate my disability benefit?"  I said, "Well, you have some earning capacity."  "Yeah, but you don't have a job for me."  "Well, I'm not covering your unemployment risk." 
"Well, is that fair?"  That was the question of social justice, also to a trade union.  And I said, "Well, it is fair enough, if we give you some time; if we give you help; and it is fair to help you to come back to the labor market, than to condemn you to be in this low pension from the age of 32 until the age of 65."  And then this was a change in the culture.  Think about people who are outside of the labor market and disabled.  Are they waiting for a new chance to come in?  Or are they waiting for their pension, their old-age pension?  So that part of the    the reform was to review the disabled people under 50 years.
 Some remarks about the process.  I was telling you the winners and the losers.  It's important to compensate them and it is also important to do the selling of the reform in the right way.  I remember that we worked with -- you know when you're crossing a street, you have the red figure, who is standing, and you have the green one who is marching.  You know that?  When you cross the street.  And in our campaign, we said, "It is not about what you cannot do anymore, but this is about what you can do."  We used that march.  And this is a way of thinking.  It is important that you bring in the capacities of the future, the remaining capacities, and there, the people can work with.
 In the process, the campaign was very important.  It came only after, I said, 20 years of attempts.  I would encourage the United States and other countries, please don't give up after the first three attempts.  People who stop smoking, on average, need two times, or two and a half times.  I needed three times to stop smoking, three attempts.  You have to go through several attempts and there OCD can help, because the learning process that you have to go through, you can learn from others.  And there, you can reduce your own learning curve and time.
 Well, it was important in the process that we had a unanimous advice of the Social Economic Council with employers and workers.  It was important that we had an electoral mandate and a clear agenda.  It was also important that during my tenure, we came to a package deal with the social partners.  Not only disability, but also early retirement and unemployment were a part of it.  And then they said to me, "Well, Mr. de Geus, you are asking too much from us."  I say, "Well, we need more participation.  We need the money as a government.  I'm sorry.  We need to do this."  They said, "Well, how can we make this agenda a little bit more, responding to the interests of our workers?" - the unions asked me. 
I said, "Well, you can contribute by a standstill in the wages."  They said, "You asked me to support reforms and also to agree on a standstill on the wages?  So we are paying double?"  I said, "No.  You are asking me how can we adjust this reform program in a way that you want.  The only way is that you contribute by a standstill in the wages."  Then two weeks later, they come to me and they said, "Well, Mr. de Geus, we could have amended for a standstill in the wages, but then   " [audio glitch].  I said, "Okay.  Good.  Now we're talking." 
 We went to a new negotiation process, negotiations.  We went also through a crisis where half a million came to the Hague and were there and the government was almost unpopular as    let me take an example.  Mr. Sacrosi [phonetic] now is in France.  He's in [indiscernible].  I'm not commenting on the United States of America.  We were deep down there, but there was really an interest of the social partners to cooperate and they really agreed on a standstill on the wages for 2 years, which contributed and we could soften the reform package a little bit.  They saw that as a victory for the unions.  I commented, "Yes, it's a victory for the unions."  Because if the unions have a victory, for me, I prefer their signature over their flowers.  I don’t need the flowers of the trade unions.  As a politician, I need the signature to go.  We built a consensus on that.
 After that, we had also to negotiate with the parliament and we had to overcome all administrative hurdles, and that was really annoying.  Because once you have the political consensus, you think, "Well, now we are there," but you are not.  Really, you are not.  You have to go through all this implementation questions and there, the politician has only one instrument for steering the process and that is the element of time.  Because as a politician, you are not an expert.  The only thing you can ask, "I want this to be done before January 1st of next year.  You tell me how to do it.  I tell you when it has to be finished.  It's impossible.  If you need me money, we can discuss." 
But the time is really imperative, and that is where    I felt myself lonely from time to time, because also other parties, and also from my own parties.  They said, "Oh, Mr. de Geus, we're going in the right direction."  But there is to be a little bit more, "Can we postpone this for 1-2 years.  Huh?  Then we can think better about the good content."  I said, "It has to be done now.  It has to be done before the first of January."  That is also a very important part of the process.
 In the process, also the public opinion was very important.  The public opinion, where 1 out of 7 being disabled, we all knew a cousin, or a neighbor, or someone around that was benefiting and we could question, "Well, is this really socially and -- is this a solidarity that we want to pay for?"  When you come to your tennis club and you are playing a game and you are discussing, "Well, what is your living?"  "Well, I'm disabled."  "Okay.  Well, what's your complaint?"  "Well, mentally ill."  "Okay.  So you had a bad time with your employer?"  "Yeah, I had."  "Now you have no employer anymore?"  "No, I don’t have."  "So you can work?" "No, I can't think about working because I'm not going back to my employer."  Okay.  Is this disabled?
 There was a case for change in the public opinion notes.  The result is that we ended up in a 50% reduction on the structural basis.  The influx of new cases was reduced and also the review had about the same result.  It was important that we had also the support of the doctors.  We developed new medical guidelines:  How to appraise; how to treat; how to help.  I think there, these medical guidelines, crosscutting all medical doctors into several parts of society, was a very, very important instrument.  I hope that there is something that the United States could learn from the Netherlands.
 I also think that the story of the reforms is not completely a success.  We suffer -- a large number of young disabled people, who start their career as disabled.  So there is not an employer you can make responsible; and there is no way to "go Dutch" with that people.  We have to think about it, and this is really on the agenda.  The story is not finished.  It is never-ending, but I am happy that I could contribute as the Minister of Social Affairs in the years that are behind, and I would really appreciate to discuss this further on.  And maybe we have also the opportunity to see each other in the context of OECD.  Merci.
 Richard Burkhauser:  Thank you very much.  Our next speaker, Ole Settergren, who is the head of the Pension Department at the Swedish National Insurance Board, and will talk about Swedish Pension Reform.
 Ole Settergren:  Thanks a lot.  Actually I'm no longer the head of that department.  I hope to get out of pensions and retirement policy before I retire, and I've got a new job Monday, working for the Ministry with sick pay and disability.  But the first question I got, was to go here to speak about what I do know a little bit about, mainly retirement policies in Sweden, which I have been working on the whole of my career.
 But this is an early morning.  I thought perhaps that we should start with some entertainment here.  If you look at the geography of this map, which shows the world as we know it, by surface.  But if we change it from surface to population, here the surface represents how large a share of the world population each nation has.  You see how China grows enormously and India grows, Japan also.  The U.S. shrinks a bit; Europe grows, highly dense populated areas.  Holland, not the least very highly populated. 
If we go further and look - where do the old people live in the world?  It looks like this.  You can see Japan is perhaps the most striking example, but also Europe grows significantly.  If you go back to the surface, this is Africa.  It shrinks as you go to population.  And if you go to elderly, it shrinks a lot more even.  And to go all the way through the demographic pyramid here, we go to children.  Then Africa grossed bigger; America shrinks; India grows even bigger; and China shrinks; and Japan is very much smaller again. 
This is a way just to, in a rapid sense, tell you a little bit about the background, about pension issues in OECD countries.  A lot of the pension discussion is about the demographic changes.  They hit us more or less the same way, with the exception I would say that they are a lot less strong effects in the U.S., as we could have seen if you captured these figures correctly.  The U.S. is exposed to less strong growth in its older population relative to other OECD countries. 
 Okay.  My presentation here will be about the Swedish Pension Reform and not about the world demographic situation.  To give you a little bit of background about Sweden, this slide shows you that the public pension scheme in Sweden is big. Relative to all pension payments, we have some 75% of all payments come from the public pension scheme; 15% occupational, 10% private.  However, the occupational schemes are growing.  They are important in Sweden, partly due to a, perhaps, strikingly low income ceiling within the public scheme in Sweden.  The ceiling is some 1.2-1.3 times an average salary in Sweden.  In the U.S., you have a lot higher ceiling for your Social Security benefits.  In Sweden, those incomes above the ceiling are insured and occupational schemes.
 In Sweden, we did this reform in the sort of yellow, or orange sector here.  The public, 75%.  And often in the European discussion anyhow, you make the distinction between parametric reforms, when you change some of the pyramids of the scheme.  Perhaps the retirement age, or how you index benefits.  Then there's another type of reforms, where you make structural changes.  The Swedish Pension Reform is an example of a structural change, where everything was changed, and not the pyramids of the old scheme.  Actually the word "reform" is wrong and it's only used for euphoric reasons, because the social democrats in Sweden, they could not tell their electorate that there was a new pension scheme coming in.  They told us, the bureaucrats and experts, to use the word "reform" and not "new pension system" because it was a new pension system.
 Okay.  Reform Objectives.  They are more or less the same all around the world, but the solutions are very different, perhaps with a little bit different focus in Sweden on this political stability issue.  I mean the main focus and the main reason for reforming the pension system was that it was an identified deficit in the scheme.  We saw we have a trust fund in Sweden, which like in the U.S., and in our projections, it would run down to zero in 2015, if the scheme was not reformed.  So this was the main driving force for changing the scheme. 
But there was also political desire to achieve a pension system in a broad consensus, because the old pension scheme was the child of the social democratic party in Sweden and it was highly criticized from the right and center of Swedish politics, and perhaps a bit strangely, but we can come into it.  There was also big reasons for the social democratic party to want to change this pension plan.  That had been one of the reasons for why they'd be so successful in Swedish politics.
 Transparency.  It's a word that you hear a lot about.  It's perhaps more difficult to define.  But the old pension scheme in Sweden had a lot of income transfers within it, that were inefficient and also not very transparent, and that was a desire to change that situation.
 There has been an idea in this scheme, at least in the pay-as-you-go part of the scheme, to maximum intergenerational fairness.  You cannot say that about the funded part.  But in the pay-as-you-go part, there was such ambitions.  Also, of course, to create better working centers, especially for older workers.  And, of course, there was also a decide to maintain an old age basic income security, that resembled a lot of the features of the old system.  It's done in a technically completely different way, but the economic effects are that it's very much the same situation as it were before the reform.
 Okay.  Something about the reform process.  And it was long in Sweden.  It started, you could say, with the center to right government.  In Sweden, we rarely have center to right governments.  We have one right now, but traditionally there's democratic governments.  In 1991, there was a center to right government that came into power and they set off to try to reform the pension scheme together with the social democratic party, which was done in opposition.
 And in '91, a Commission was set up.  Already after one year, there was a draft of a new pension plan.  To me, it's very surprising to see, when I read that draft, how close the final legislation came to this draft.  It took only a year to do this draft, but it took a lot longer to develop the legislation.  It took until 1998, when the main legislation of the new pension plan was enacted.  And in 2000, the premium pension funds, which I will speak most about here, because that's what I heard that you were interested in, opened in 2000.  Money had been collected since 1995 for these funds, but they could not be placed by the individuals until the year 2000. 
 And since 2003, we are paying benefits according to the new rules, both from the funded part.  Very little money, of course, per person, almost nothing.  People get annoyed by saving a dollar or two from the funded portion, because they have not been in the system so long.  But in an economic sense, the transition from the old rules to the new rules is very rapid in Sweden.  For the working population, I would say they're almost 95% in the new system already. 
 Okay.  A little bit of theory here.  I hope you won't fall asleep.  Often when you discuss pension design, you have this distinction between how close is the time between the contribution paid by you or your employer and the accrued pension credit?  It could be 0%, if you have a flat-rate benefits system, where everyone gets the same pension irrespective of what they pay-in.  And you can have a very close tie, and it can be up to 100% in the defined benefit schemes.  But defined contribution, they are quite characterized by a one-to-one relationship between what you pay and the pension credit that you receive.
 Another dimension is, of course, the degree of funding.  This is what causes a lot of debate and a lot of emotions.  It's often an ideological question, of course.  If you have zero or only a little funding, as you have in Sweden, in the big scheme, there's a pay-as-you-go design; and you can have the 100% funded schemes that are funded.  This gives you four design options.  But of course, perhaps more correctly than this tie between contribution and accrued pension credit, where's the risk in the scheme?  How is it distributed?  Is it with the insured, as it is in this number 2 and 1 here, the DC scheme?  Or is with the insurer, which in a public pension system is the taxpayers, of course.
 Okay.  And the reform strategy in Sweden was to move from this traditional defined benefit scheme, the pay-as-you-go scheme, to 2 different types of defined contribution.  Many economists would deny that there is such a thing as a defined contribution pay-as-you-go system, while Swedish bureaucrats and politicians think that they can do this, and they've done this in the notes [sounds like] and defined contribution scheme, which is the big part of the Swedish plan, with 60% of the contributions is going into that scheme; 2-1/2% of salaries, is directed toward the premium pension funded scheme.  And to do this, you have to sort out the disability benefits and the minimum guarantee and the survivor pensions out from the other pension system, which was integrated in the old scheme, and that has been done also.
 Okay.  I have only a little time.  I'll skip this.  So, in Sweden, there's a Notional account scheme, individual Notional accounts.  You have credited contributions.  It works like a bank account.  It accumulates.  If you save in a bank, you have an interest rate and interest on your money, and since it's an insured system, you have survivor bonuses, and then I should have my salary, so there's a deduction for administrative costs.  This gives you a net indexation. 
And when you retire, you have a fictitious account balance and that account balance is converted into the annuity by matching life expectancy at the time when you retire.  There's an interest rate imputed and this give you an annuity device, which is used to divide the account balance with, and gives you a pension.  That was the Notional account.
 But the funded scheme.  Now I changed the headline here.  The funded account works very, very much the same way.  It's just that the contribution is equal to the investment into the funds; and the indexation, which is in the Notional system is by the average wage growth.  There's now a return on investment.  You still have a survivor bonus and you have administrative fees, and it works the same way.
 So it's very much the same thing in the Swedish setup.  The monies is extracted by the taxation of this, and it's sort of, all the transfers are going very similarly.
 Okay, more details on the funded system.  There's an agency setup called the Premium Pension Authority.  You see PPM here, there in my slides.  That's not where I worked.  I work for the Swedish Social Insurance Agency, which was a separate agency.  But the PPM runs the clearinghouse established to run this Premium Pension system.  There are a lot of firms, as you can see -- 800 firms participating in this scheme. 
The PPM nets all buy and sell orders of the pension service in this scheme.  Because insureds, they can have up to 5 funds each, and they can change them daily, on a daily basis, if they want to.  Some do.  To be able to join the PPM system, fund managers must comply with the EU legislation defining a mutual fund and they must also accept PPM's discount amounts and management fees.  Then they also need the information technology to be able to integrate with the agency.
 Okay, the fund managers, they do not see the end investor.  As far as they know, the PPM is their client.  Okay?  The Premium Pension system is an insured system; in the sense that if you die, it will not be your spouse who inherits your money.  It will be the survivors in the PPM system.  So the survivor bonuses is distributed among the insurance collector, not among your relatives.  When you retire, the Premium Pension authority issues 2 types of annuities.  It's a fixed annuity; interest annuity, a traditional one and a variable annuity, where your pension will vary with the value of your funds, of your investments. 
 Okay.  If you do such a scheme as this, as there was in Sweden, you have to take care of people who do choose to invest their money.  They get information that they have this money and they can invest it, and then they don't reply to you.  There was a default set up in Sweden, a default fund.  Some 30% of the capital is now in the default fund; 70% of the capital is within the actively chosen funds.  But there's a very highly concentrated into few of these 800 firms who have all the money, mainly the funds of large Swedish banks, who had a lot of marketing power in this process.  It's a very risky investment strategy that most have chosen.  Even the default fund, a lot of equity; 90% equity in this system.
 Okay.  Eight years of administrative experience.  It started in some sense, 1995, this scheme with the collection of contributions; but the funds were only chosen in 2000.  Sweden is a small country.  We have only 9,000,000 people.  I’m very honored to be here, to speak to this large nation here.  There's only some 5.7 million servers in this system.  But it's almost everyone who's working, and some who aren't working as well.  There were some retirees in this scheme already.
 The number of funds has increased a lot.  It started out with a lot of funds already; 465, and now there's 785.  The percent of new savers who made an active choice fund has dropped significantly, from 67%.  This was a shockingly high figure, when the system opened, and then it has decreased every year.  There are good reasons for this but the decrease has perhaps been more important than one would have liked, or thought. 
 There is a lot of activity still in this scheme.  The number of loggings from personal accounts, in percent of total accounts.  Over 418%-something now, because there a few number of persons who are very active in this scheme.  Fund changes also are high, if you look at the aggregate number; but it's the same thing.  There's a few persons who are very active, and you can see the number from close to the service center is about 2%.  It's a very stable figure.
 What has the result been in terms of annual return?  Well, the first 5 years, they were invested in government bonds, before the placement in the private accounts.  Then you have a very volatile development since.  If you compare with the return in the Notional account system, it is a big difference.  But it's a higher return but more volatile.  A standard deviation of 15% as to 1% in the average earnings growth.  And of course if you have these 800 firms, people invest differently, so there's distribution of this return also.  You can see that the majority lies in the 2-4% average annual return.  Some do better, some do worse.
 Fees.  The PPM charges now 0.13% of capital, and the fund managers, they charge at present 0.33%.  That makes a total, or a combined of 0.46%.  This is quite high fees still.  Even though this system is among the more efficient in Europe.  In the U.S., you have much more efficient systems than this.  But in Europe, this is quite the local scheme.  Costs are projected to drop significant, as managed capital grows.  But costs should come down first.
 Okay.  More on politics then.  In Sweden, the introduction of this funded part was very controversial and the social democratic hardliners opposed it a lot.  They did not want this funded part.  So you could perhaps ask yourself, "How come, that they accepted it?"  Because 85% of members of parliament voted for this scheme.  Well, the right side of Swedish politics, they wanted the funded part for ideological and historical reasons.  Conservatives and liberals in the Old World sense, more like a conservative perhaps in the U.S. have disliked pay-as-you-go, and wanted funding, and preferably individual funding, and this brought to promote individual ownership; personal responsibility; economic rationality and to make pensions more safe from political decisions. 
Core constituencies would not have accepted an agreement on pensions in Sweden, but in some aspects actually, it increased and expanded government social policy.  This was done in collaboration with social democratics.  This was tough.  Though to do for some conservatives, and they demanded this fund, that the parts to go along with the others parts of the pension reform.  So it's very much a compromise agreement.
 Then I think also the left and the right, they could perhaps agree that there was a possibility to give high pension from high returns, introducing this funded part.  I think there was some agreement on the upside having a rich distribution within the public pension scheme that was more spread.  Some small part in the capital market and the one big part in the Swedish economy and its wage growth.
 Reasons for the left accepted the fund.  The DC pension, was that it reduced by some social democratic politicians, risk for a low contribution rate, and thus low public pensions.  There was a potential here for an add-on, if you I think use that expression in the U.S., rather than a carve-out.  The funded part was considered to be reassuringly small.  Then also, they thought this will not expand.  Many conservatives think or hope that the funded part will expand.  Many social democrats who are opposed to this, think that it will not expand due to the design of the new pay-as-you-go system. 
It's very difficult to direct contributions from the new pay-as-you-go system to increase funding.  That will immediately cause big problems and visible problems in the pay-as-you-go scheme, due to its design.  And perhaps most importantly, it was absolutely necessary for the social democratic party to accept this to get an agreement.  They would have not have gotten the agreement without it.
 Okay.  More factors that made the reform political possible.  I mean, the post-World War II history on pensions was a very negative political expansion and pension policy.  Very controversial; very much one party owned the whole system.  The system did not work well.  I think that was the reasons for reform, and to reach an agreement.  It was clear goals and a clear will to create a long-term solution among politicians. 
 I have zero minutes left, so I'll go rapidly through this.  There was a knowledgeable, strong, engaged and hardworking politicians.  And I think, at least from my 15 years in the bureaucracy, I've never seen politicians of this quality in Sweden that took on this issue.  They were extremely dedicated and hardworking in this field.  They became a tight group, who sort of opposed their opponents within their parties, rather than among themselves. 
And, of course, there was an ongoing severe economic crisis in Sweden in the mid-1990's and this crisis brought about the general crisis awareness.  But you should also say that the crisis was an obstacle for the reform.  Because this reform actually increased government spending initially, to decrease it in the future.  To do this in the middle of a severe economic crisis was, of course, fiercely opposed by the Minister of Finance.  So the pension reform was much a battle between the social policy deciders and the Minister of Finance.
 That's my last point here.  Also, the existence of a large buffer fund, in the pay-as-you-go system, made a financial and political room for maneuver, to introduce these funded parts.  Without it, I think the Premiere Pension system would have been difficult to introduce.
 Okay.  The one undisputable success of the Swedish Pension Reform.  I think that it happened, I think.  That was the one undisputable success.  In a scientific sense, we will not know if it has been a success or not, because we have no counter experience.  But the general mood about the Swedish Pension system and the Swedish Reform in Sweden is, on average, more positive than negative.  Thank you.
 Richard Burkhauser:  All right.  Quite an interesting discussion of the Swedish Pension System.  We'll have a chance to talk much more about this in the Question period. 
I'd like to now turn the floor over to Andrew Biggs, who until recently was the Deputy Commissioner of the Social Security Administration, where he headed the agency's representation to the Social Security Trust between his workers' group, and did other good things.  He will join us as an AEI Fellow, a resident Fellow in March.  Andrew, 10 minutes.
 Andrew Biggs:  Oh, thank you very much.  Usually in something like this, I have to state that I'm speaking for myself and not for my organization.  But given I'm in a brief, but a very happy period of unemployment between SSA and AEI, I don't have to say that.  I'm speaking only for myself today, and happily so.
 I'm going to speak mostly about Sweden today.  I may touch on -- given time, I'll touch on the Netherlands a little bit on the end, that's mostly because I'm primarily somebody who works in the retirement end of things.  So more things about Sweden pop out to me as interesting or relevant to the U.S.  But certainly the Netherlands, a lot to say on disability as well.
 I'm just looking through a number of main points.  Given I have 10 minutes, I'm going to try to go through quickly here.  In looking at Sweden, I was really surprised at how many interesting topics and points it brings up that are relevant to the U.S., not in a specific sense, of saying, "Oh, well, we should adopt the Swedish system wholesale."  But in terms of thinking about different things that might be applicable for Social Security in the U.S.
 The first question -- this came up before -- was really how much should we require people to save?  The Social Security program, at least in the U.S., does a number of things.  The main thing, in my opinion, is simply forced savings.  Myopic people who wouldn't save, it forces them to put aside a certain amount of money.  It also forces annuitization, which it has some efficiencies.  It does some redistribution.  But the main thing, in my view, is essentially requiring people to put aside a certain amount of their money for retirement.
 When you first look at the U.S. versus Sweden, the tax rates strike you as very different.  The U.S. is about 12 1/2%; Sweden is around 18 1/2%.  What is not remarked on, is really that the ceiling in the U.S. is quite a bit higher than in Sweden.  The ceiling on which taxes apply in the U.S. is about 2.9 times the average wage.  In Sweden, it's only around 1.3 times. 
This is relevant only in the U.S. because there are proposals to lift or eliminate that top.  Among OECD companies, Sweden is on the low end.  The U.S. is on the high end of the ceiling.  But I think it raises interesting questions of social policy, but essentially, how much should we require high earners to save for their retirement?  How much should we simply leave it to them to do?  Sweden leaves more towards high earners to make their own choices.  We push them more towards participation.
 Another question which we've been interested in quite a bit with Social Security and the Social Security Trustees is the resiliency of the solvency of the system.  The Social Security Trustees make projections going forward of how the system will fare in the future based on economic and demographic factors.  But we know those are highly uncertain.  Uncertainty has a cost to people.  It has a cost to the government.  It makes it difficult to set policy or set expectations going forward. 
Sweden's system adjusts for that automatically.  Essentially the rate of return on the contributions earned the Notional Defined Contribution part is equal to the growth rate of average wages.  So if wages grow faster, then the accounts earn more.  If they grow less, they earn less.  So you're automatically indexed there.  Also the annuity factor, the amount that you would get in a monthly benefit from your account or retirement is also adjusted for mortality.  That's another source of great uncertainty for us.  A number of people have talked about putting this sort of auto-correction mechanisms into place in the U.S.  I've run a few numbers, which I think would show how much doing, so could reduce the uncertainty of the system.
 What we have here is a chart that's derived from the Social Security Trustee's Report.  It looks at the uncertainty of the U.S. Social Security system's cash flows.  While they all show a decline into deficits in the future, the median outcome shows a surplus around 1-1/2% of payroll today, to a deficit of around 4 1/2% of payroll in the future.  We see that could have a great deal of variation.  There's a 1% chance we may be back almost to positive cash flow over 75 years.  There's also around a 1% chance we'd have a deficit of around 12% of payroll.  So you have a great deal of uncertainty here.  Given the Social Security reform is about really smoothing burdens between generations, this sort of uncertainty makes things difficult, in terms of coming up with a best policy.
 But here are some simulations I ran, where I indexed benefits to changes in the worker to beneficiary ratio.  Doing that accounts for mortality, because essentially longevity, because that changes the number of retirees.  It accounts for fertility as well.  The benefits of Social Security are already indexed wages.  You can do a very similar exercise if you index the tax rate to the worker beneficiary ratio.  It doesn't make much difference.  But what you can see here is you really tighten the range of outcomes quite a bit, so we have much, much less uncertainty in the system.  I got the idea for doing this from looking at the Swedish system.  I think there's a lot we can learn from that, in terms of auto adjustments.
 The rate of return on a pay-as-you-go system is essentially equal to the growth of aggregate wages.  This is a finding from a Henry Aaron paper from quite some time ago.  That's implicit in Social Security in the U.S.  It's made explicit in the Notional Defined Contribution system of Sweden.  In a sense then, the pay-as-you-go element could be treated just as another financial asset. 
But from that, we can say, "What sort of allocation of assets do we want to have?"  For those of you who don't know finance, you have something called the "efficient frontier," which is essentially a line showing, a recur [sounds like] showing "for any given level of risk, what is the maximum rate of return you can get from a different portfolio?"  I ran that, looking at stocks, bonds, corporate bonds and wage growth in the U.S., treating it as a portfolio.  What this shows is, the "X" access shows the expected rate of return that somebody would desire.  Then the "Y" access shows the percentage of their total portfolio they would want to have in each given asset.
 What you can see is for somebody who's looking for a very low risk portfolio for retirement, the pay-as-you-go asset, the sort of pay as you bond really has an important role to play.  It could be the dominant asset in your portfolio.  However, as people start looking for higher returns, the pay-as-you-go bond becomes less important.  Things like stock, that have higher returns, become more important. 
Now, I think it's important to emphasize that while you can treat the pay-as-you-go bond or the Notional Defined Contribution as an investment asset.  We can't simply reallocate between the two at no cost.  As Ole pointed out, once you start doing that, the pay-as-you-go element is unfunded; the others are funded.  So you come into this issue of transition costs, and there's really a very, very important thing. 
But if you are thinking of doing a partially funded system, I think an exercise like this can tell you, "Well, what sort of allocation do we want to have between them?"  Ole pointed out that most people in their personal accounts in Sweden are choosing what would be characterized as fairly risky portfolios.  You know, going very heavily into stocks.  But at the same time that account is only about 15% of the total, so it probably makes sense for them to do something like that.
 Prediction risk.  This is referred to before as transparency.  The Swedish system is far simpler than the U.S.  It's a fairly straightforward affair, if people understand how benefits are accumulated, how they're paid out.  In the U.S., the system is much, much more complicated.  The typical person could never calculate it by themselves.  So what you find is that many Americans really don't know what they're going to get from Social Security until they actually reach retirement.  Now if Social Security were a very big system; if it covered your entire retirement income, that wouldn't be a big problem.  But when we have a relatively small system, where people have to coordinate their other savings decisions with Social Security, it's important that they be able to understand what they're going to get from the system. 
 We send out annual statements, much like your orange letter that goes out, which is designed to help people understand it.  Even then though, a lot of people don't really know.  This chart shows -- this is based on the HRS Survey, where people in their mid- to late-50's were asked to predict what their Social Security benefit was going to be, and then this was compared with what their actual benefit turned out to be.  You can see at the median, that the fiftieth percentile, people are almost exactly right.  So you have a large number of people who significantly over-estimate their benefits; a large number who significantly under-estimate them.  Neither is a good thing.  Both are showing that you're not optimally smoothing your consumption over your lifetime. 
 The findings from this study show that it tended to be low-income people who most over-estimated what they were going to get from Social Security.  That's very problematic.  I think when we think about reform in the U.S., going for something that is simpler and easier to understand, has some real merit.
 The question here is targeting of benefits.  The Swedish system is less progressive.  It targets benefits less than in the U.S.  It's a fairly straightforward affair, in terms of what you're going to get.  It's largely based on your own earnings, your own contributions.  There is a guarantee benefit for lower earners.  But your typical person, it's really based on your own earnings.  The U.S. Social Security system is much more targeted.  It targets based on earnings levels, based on whether you had a long marriage, 10 years or more; based on relative earnings between spouses.  The question I think about is what are we gaining from that targeting, relative to a simpler system like Sweden? 
This chart shows something.  The vertical access shows people's replacement rates.  Their Social Security benefits relative to their pre-retirement earnings; and the horizontal access shows the lifetime earnings percentile.  You can see, because the line is sloping downward, it essentially shows we have a progressive system.  This has some benefits to it.  In a sense, you're providing people insurance against having low lifetime wages.  That's something that could be valuable because the markets don't provide that. 
But I ran this with a micro-simulation model.  This essentially shows the average.  When you actually fill in the data points, you can see that the targeting is really, in my view, all over the place.  At any given level of lifetime earnings, you have enormous dispersion in the replacement rates people receive.  In other words, you have some very low-income people who get very low replacement rates.  You get some high-income people who get very high replacement rates.  So because the system is not well targeted, I'm not sure we're getting all the bang for the buck we could be in terms of assisting low income people. 
I think a simpler system, something that had something like the guarantee benefit in Sweden, plus a purely earnings-related element, might actually give you a more efficient social insurance program in a much simpler way.
 Okay.  I'm running late, so I'll just quickly talk about disability.  I'm certainly not an expert on this.  Henry and Richard would be much stronger.  I think one interesting thing is although we've seen a rise in the number of people on the disability insurance program in the U.S., the disability incidents rate has not really risen all that much.  A lot of it is because of demographics.  People are entering the prime years, in their 50's, for claiming disability.  Even then, I find this a little bit counterintuitive. 
You say, "Well, if we were back in the days when people were working in steel mills and coalmines, they should become disabled."  Today, you have somebody using a mouse and maybe getting carpal tunnel syndrome.  At the same time though, in a service economy, if you have mental or emotional problems, it really makes it a lot harder for you to work.  You could work on a factory line; you couldn’t work in a call center or something like that. 
I think partly, you know, the Netherlands has very generous benefits relative to the U.S.  The U.S. is sort of middle of the pack, but at the same time, some work done by Doug and Otter [sounds like] finds that because of the increase in income inequality in the U.S. and because our benefits are indexed to average wages, replacement rates for low income people are tending to rise, and so the incentives to claims rise. 
 So I think there's a number of things we can look at from the Netherlands that could be helpful in thinking about how to reform things in the U.S.  I particularly like the idea of getting the employers involved in trying to keep people on the job.  What we found is once somebody gets on disability, it's almost impossible to get them off.  So really, anything you can do in terms of redirection would be very, very helpful.  I will stop now.  Thank you.
Richard Burkhauser:  Thank you, Andrew.  Our final speaker is Henry Aaron, who is a long-term fixture at the Brookings Institution, who I remember most fondly as my first boss at Ashby in 1977.  Henry, the floor is yours.
 Henry Aaron:  It's a bad sign, when one is a former boss of somebody with as much white hair as you have.  I'd like to start off with an anecdote, which is a true fact.  Years ago, I was in a conference at Brookings, where Bob Solo, the Economist, was discussing on something related to monetary policy.  At some point, he said somebody had evoked Milton Freidman.  He said, "You know, everything in the world seems to remind Milton of money.  Well, everything in the world reminds me of sex, but I don't build my economics around it."  The reason I tell you that story is that everything in the world, these days, reminds me of the fiscal challenge posed by the U.S. health care system.  Although this is a session on disability and retirement pensions, I'm going to get back to the issue of health care.
 We have three outliers under discussion today, nations that are outliers.  The Netherlands was an enormous outlier with respect to disability benefits, partly because it served three functions:  One, it provided genuine long-term disability benefits; second, it provided short-term and partial disability benefits -- a service that we don't have really at all here in the United States; and it provided extended unemployment benefits as well.  And since we don't even provide any unemployment benefits to more than about 30% of the unemployed, you can see that with respect to the United States, at least, the Netherlands had a far more generous system.
 Sweden was, and to a significant extent, still is, a huge outlier in terms of overall fiscal burden.  They have an ingenious new pension system that was described.  If some of you didn't get it all but are familiar with cash balance plans here in the United States, think cash balance.  The system is very much like that.  I would only add at this point, cash balance plans legally in the United States are called Defined Benefit Plans.  I think that's something to keep in mind in interpreting the Swedish system. 
 A number of countries around the world have done vastly more than we have here in this country, to deal with the challenges of disability and retirement pensions.  We've heard about the Netherlands, where there's a major reform.  I still remain a little unclear.  Perhaps you can clarify as to whether all of the reduction in disability is genuine or is some of that reduction shifted over into what are called unemployment benefits?  But nonetheless, the transformation is enormous, and I'll come back briefly to that.
 In the area of old age pensions, a number of countries have done absolutely huge changes.  We heard a lot during the years of Margaret Thatcher, about the change in the pension system in Great Britain, which was truly revolutionary.  Of more interest perhaps to the United States is what has been done in Japan, where the generosity of pensions has been cut, hugely, going forward with an element of indexation; a relatively weak element of indexation.
 I'm not an expert on disability.  Rich is the one on the panel who really has that distinction.  I do know enough about the U.S. system to know that it is very seriously flawed at all steps of the system.  We have a uniquely cumbersome bureaucratic method of determination of eligibility; a multi-stage appeal process, where something on the order of half at each stage get approved.  So if you have three or four stages, you can do the math.  Most people get approved, but the question of whether it is a rational determination, I think is very much open to question.  The Dutch systems sounds like they have made a huge improvement, relative at least to that in the United States, and relative to their own system. 
 They've also made revolutionary changes with respect to encouraging people to get off the rolls.  I think that is critically important, both for the actual rolls, but for the whole ethos associated with the receipt of benefits.  It isn't a sinkhole.  It's being treated as a way station, to the extent that that spirit can be brought into the system.  It's good for applications.  It's good for people who are receiving benefits; and it's good for encouraging people to get off.
 On the subject of pensions, just one other point on the Swedish system.  The administrative costs of about a half a percent of funds on deposit per year is actually extremely low by comparison with standard private management fees here in the United States.  There are outliers, Vanguard for example, and some other companies that have driven down management fees way below that, but most U.S. funds charge a great deal more.  A critical question in the design of any public defined contribution plan will be administrative costs.  It's a subject to which a fair bit of analysis has been devoted.  There's a very careful study by the National Academy of Social Insurance.
 Thank you.  Let me turn now to the subject that I really wanted to get to, which is the issue of how we account for the long-term costs of pensions here in the United States.  The reason I want to focus on this is that I think it is fraught with confusion.  We have two completely distinct ways of looking at the costs of pensions, and I would add of health care, here in the United States.  They lead to very different modes of discussion, but they get jumbled together and produce a lot of confusion. 
One is the trust fund approach, where the pension or the health benefit is a self-contained entity financed by taxes that are earmarked to it.  The trust funds direct us to focus on this method of accounting.  And then there's the budget accounting framework.  This is one that's used by the Congressional Budget Office, if you look at their long-term projects.  They lead in quite different directions.
 Let me start with the trust fund framework.  I'll ask you a question.  "Going forward, considering all Social Security -- that is, old age survivors and disability benefits that will be paid in the future -- will they be paid to workers who have paid enough in taxes, themselves or their employers, to cover those benefits, or will they not?"  I'm willing to bet that virtually everybody in the room would say, "No, not enough.  There's a big deficit going forward."  That's wrong. 
The actuarial projections indicate that for benefits going forward, they will be fully paid for by taxes levied on workers and their employers, 100%.  Almost exactly 100% of the very real deficit in the Social Security system is attributable to benefits that have been paid, that for which taxes were insufficient to cover those benefits.  The so-called legacy deficit of the Social Security system.  I want to suggest that that deficit is on all fours with the public debt, and there's really no good reason for thinking about that deficit within the trust fund in terms any different from those in which we think about the standard public debt. 
I'm not making these numbers up.  You can look them up in the Trust Fund Report, which comes out each year.  There's a single table that will verify exactly what I just said.  Now, that doesn't suggest we don't have a shortfall in the trust fund that needs attention, but it raises a question of what the appropriate public policy response is to that deficit. 
 I'd like to shift now to the budgetary framework.  And here, I'm presenting a chart, which is based upon the most recent long-term projections of the Congressional Budget Office of fiscal shortfalls in the United States.  What I've done is decomposed the Congressional Budget Office's alternative fiscal scenario.  Their baseline scenario, they acknowledge, doesn't make a lot of sense, because they make a lot of assumptions where they are constrained by current law that everybody knows is going to change.  For example, the physician fees are projected to go down like a rock, which people know isn't going to occur.  Politically, Congress has caved every year and there's no sign they're going to stop caving.  There are big differences on the revenue side as well.  The alternative scenario has more reasonable assumptions.
 The slashed bars show you the Congressional Budget Office projections of the size of the primary budget deficit, that is revenues less expenditures, excluding interest on the debt; going forward, if you include everything in the budget.  What you can see is that the projected deficit is huge, as we move further into the century; so huge it just really cannot occur.  If those kinds of deficits arose, the interest rates would skyrocket; foreigners would have a run on the U.S. dollar, dumping them.  We would look like Argentina did a few years ago.
 What happens if you take out the contributions of that deficit from the projected excess growth of health care spending?  What you're left with are the black bars, virtually nothing.  No deficit, according to CBO's long-term projection.  Those black bars include Social Security.  They include disability benefits.  They go up as a share of GDP, but some other things are projected to go down as a share of GDP and basically they fight each other to a draw.
 What this chart says is, we, in the United States, have a big health care financing problem, not just public, but private as well.  That's the problem we need to focus on, from a fiscal standpoint.  And if we deal adequately with that, there is no remaining long-term fiscal problem arising from Social Security, from disability benefits, from anything else, unless policy changes in ways that are different from those that the Congressional Budget Office has built into its long-term projections.  Yes, there is still is a trust fund problem.  We do need to address it, but we need to have our glasses on and look at it clearly.  Thanks.
Question & Answer Session
Richard Burkhauser:  All right.  We've managed to save 10 minutes for questions.  Anyone from the audience who has a burning question to ask?  We have a person over there.  Would you say who you are and who you represent?
 Matt Miller:  My name is Matt Miller.  I'm with the Center for American Progress, and I write for Fortune magazine also.  I'm curious.  I'd love to hear, just briefly, how does the automatic correction work in the Swedish Reform System and how was that sold politically?  Was there political discussion about that?
Ole Settergren:  I'm very happy you asked me that question, because that's my main field of work the last 10 years, to design that balanced mechanism.  Actually it works quite simple, in the sense that all the debts, all the liabilities in the systems is aggregated together, calculated. Just nominal figures actually.  Those Notional account balances are added together and there's an estimate also of what the nominal debt for persons being paid are.  That liability is contrasted to an estimate of the value of the contribution flow, is estimated in a little bit strange, and then perhaps you could say innovative way.  So there's a consolidation figure. 
If the assets, the value of the contribution flow is larger, together with a buffer fund.  If those assets are larger than the liability, you have a solvency ratio above 100% and the indexation runs as it's supposed to by average wage increase.  And if this solvency ratio is below 100%, the indexation is reduced in such a way so that solvency is regained at 100%.  So that's the technique.  It's simple and it's sort of registrated and communicated in an annual report of the system, which looks quite    it attempts to look like a normal insurance company annual report.
 Politically, yes, it was difficult to sell.  I think there was a very small, narrow window of opportunity to introduce such a mechanism in Sweden.  If we would have been a few years earlier, it would not have been possible.  If it was a few years later, it would not have been introduced.  That's my perception of things. 
The whole Swedish Pension Reform, especially on the pay-as-you-go scheme, you could say, was extremist in the way that the system should be 100% financially stable.  So I do not agree with the slide that says that we do not take into account the fertility of the economy.  We do take care of the fertility with balance mechanism.  We take care of everything in the balance mechanism.  Even things that you have not heard of mostly in pay-as-you-go schemes. 
So there was a window of opportunity where the people responsible for this reform were    they had problems if they could not prove that this pay-as-you-go system was 100% financially stable.  And also, the Minister of Finance was fighting this plan fiercely because they did not trust the social politicians to construct the pay-as-you-go scheme that was 100% financially stable.  So they were more or less forced to go ahead to introduce this balance mechanism, to prove that they were sincere about doing such a tough scheme.  Because if the economy goes down, this indexation will be quite tough on the retirees.  Whether that will happen or if legislation will be changed, if it happens, remains to be seen.  Thank you.
 Richard Burkhauser:  Question over there.
 Lucy Robertson:  Hi.  Thank you.  My name is Lucy Robertson.  I'm here from ASCD.  That's a local education non profit.  My question is for Mr. Settergren.  You mentioned that the rapid decrease of contributors to the Premium Pension Plan, the active option one, was a foreseen but negative result.  Why is that negative, and what do you see the impact being?
 Ole Settergren:  It's a good question.  For me, it's not a problem, that there's a low activity in choosing funds.  For choosers, it's actually very rational to be not so engaged in this.  Because the forward [sounds like] fund is, in expectancy, just as good as doing anything by yourself.  But, of course, if you want people to be actively engaged for some reason in this scheme, you want to see a high number of persons who actively choose funds.  But to me, it's not a problem.  And it's not a problem in a sort of mechanistic sense.  But it's perhaps a PR problem in some sense, that if you have this huge option 800 funds and nobody uses them, why run the scheme with so many funds?
 Male Voice:  Why indeed?
 Richard Burkhauser:  Another question?
 Ole Settergren:  I should also, per se, that one reason few choose, of these newcomers to the scheme, is that they had worked their first year in their career.  They have virtually nothing on their account to place, so it's not surprising that there's a low percentage that do choose.  After they work and they've been working some, 10 years perhaps, they would have a fair amount in their account in the default fund, and perhaps they would want to choose then.  So it's not surprising in that sense.
 Richard Burkhauser:  Let me give Andrew a chance to respond.
 Unknown Male:  On this point or --?
 Andrew Biggs:  I was actually going to touch back with -- One of the things, which I think is very interesting or helpful about the auto adjustments, or auto correction in the U.S. context, is that -- when people talk about Social Security, often there's a great deal of skepticism about the assumptions that are made to Social Security trustees, or about CBO going forward.  People say, "Oh, it's debts and it's overstated."  With these auto-correction mechanisms, it's a way of telling people, "Well, if the deficit turns out not to be so bad, we're not going to over-correct for it." 
People are reluctant to take large steps today in anticipation of a problem that might not come about.  These sorts of mechanisms make sure you don't over-balance or don't under-balance.  I think in that way, helps smooth things a little bit better across different [indiscernible].
 Henry Aaron:  On the auto-correction, I agree completely with what Andrew just said.  There is, however, bound to be a huge political fight over what those auto-correction mechanisms will be.  On the one hand, you can say, "We will adjust taxes to cover any deficits."  On the other hand, you could say, "We will adjust benefits to cover any shortfall" or you could so a combination of the two.  Since, and this comes to the second point, defaults matter hugely, this initial decision has profound significance. 
Yes, of course, the legislature could change its mind later on, but moving away from whatever the status quo is, takes a bigger nudge politically than staying where you are.  The selection of that auto-correction provision is critically important.  That explains, I think, in large measure, the inertia why people have shifted to the default fund to a significant degree.
 If you look back at that chart that was shown to us, Sweden had the bad luck to start the investment at the time when the stock market fell out of bed -- by what? -- 30% or something like that.  People got stung badly.  They had, I think, to a significant degree, chosen aggressive investment vehicles.  And so the reaction was to recoil and say probably something like they know best.  The default is a balanced portfolio.  It's prudent to go into.  I'll stay there until and it's analogous to changing the default rule as an adjustment mechanism, until there's some strong reason why I should do so.
 There's an abundance of research on the powerful importance of default, which led Richard Thaler and Cass Sunstein to write a fascinating article called "Libertarian Paternalism" on the significance in influencing what people do by choosing defaults that they can reverse virtually costless.  So they're not real constraints, except where you set the default has a powerful do you define    do you say that people choose a joint and survivor pension automatically?  Yes, you can sign off and have a single life annuity.  Or do you say it's a single life annuity and you can switch to joining the survivor? 
In experiments, where an enormous difference in the share of what actual pension choices, were hinged on that default.  Richard Thaler has fathered savings plans where the default is "you are enrolled in your IRA" rather than the default is "you aren't and you have to go and apply."  Huge differences in enrollment percentages, although it's virtually costless to reverse the presumption.  So I think the importance of defaults is critical and I also think 800 is too many.  One is too few.  The truth lies somewhere in between.
 Richard Burkhauser:  Well, thank you, and with that, I want to thank our speakers today.  We'll close the session and we'll start the next one in five minutes.

Panel II: French Energy Policy

 Kenneth P. Green [Moderator]:  If you all could take your seats, ladies and gentlemen.  We're ready to begin the second panel.  Well, thank you.  Good morning.  I'm Kenneth Green.  I work here at AEI.  I'm a resident scholar and I study energy, and environment and climate change.  I apologize if I am coughing today.  As you've probably heard, traveling around the city, this year's cold has manifested itself as a cough.  My environmental activities riding the Metro come with consequences.
 Over the many years I've studied and written about climate energy and environment policy, one subject has always been a conversation stopper.  Even a meltdown trigger, which is the subject of nuclear power.  Whenever you brought up nuclear power, whether you were talking about conventional air pollutants in the 1980's and '90's, or whether you were talking about climate change, in recent years, you run immediately into discussions of Three Mile Island; Chernobyl and nuclear waste, and you rarely get past that to actually have a meaningful discussion of what nuclear power might contribute to climate change and energy solutions.
 It's been very frustrating for me, since I grew up with asthma and I've always liked the idea of clean power.  Now that climate change is a looming reality, I've always felt that it's sort of a test of sincerity.  That is, I have a bit of doubt about people who want to press regulatory schemes on climate change, but who are unwilling to accept those things, which are on the shelf now, available, possibly economical, because of their political views.  It makes me wonder if the regulatory scheme they want is more based on their political views than about solving the problem as well.
 In the last couple of years, I've seen some cracks appearing in this though, and people are beginning to discuss the nuclear power options.  It's only half-heartedly.  That it's going to be a part in any future scenarios.  So in the hopes we can learn some new things about nuclear power, it's going to be my pleasure to moderate the panel today.  We're going to hear about both, the two most important elements of the question, which is the technology of safety and the technology and efficiency; or the three elements of the question.  And then the question of fuel availability, which is often overlooked, even if you managed to get into discussions of safety and economic liability.
 Our first speaker, therefore, will be -- we're going to go according to the program today.  Jacque Bouchard is a Special Advisor to the Chairman of the French Atomic Energy Commission.  He joined the Commission as an Engineer working primarily on pressurized water reactor technology and physics for fuel cycle applications.  In 1982, he became head of the Fast Neutron Reactor Department in Cadarache.  In 1990, he was appointed head of the Commission's Nuclear Reactor Division.  From '94-2000, he was the Director of the Military Application Division; and from 2002-2004, he was in charge of the entire Nuclear Energy Sector at the Commission. 
Mr. Bouchard was President of the French Nuclear Energy Society from 2001-2003.  He is a Professor at the Ecole des Mines in Paris, and also serves on the Boards of several companies.  In November 2006, he was elected Chair of the Generation for International Forum, a gathering of 12 countries and the European Union involved in the development of future nuclear energy systems.  With that, I give you Jacques Bouchard.
 Jacques Bouchard:  Thank you.  Good morning, ladies and gentlemen.  It's a real pleasure to be here this morning to try to give you some facts about the French Energy Policy, at least the French Nuclear Energy Policy, I would say.  Because the rest it too much to discuss.  Anyway, I will try to focus on a few elements, and then to let time, sufficient time to address questions.  Because I think the most important is to answer to what you can question.
 Let me say, give a few figures first to recall that France is not a very big country, so we are only consuming approximately less than 3% of the world's energy supply.  What is important is that we have a clear deficit in energy, that means we are producing only approximately half of what we are consuming, even with our big nuclear energy program.  This is mainly due to the fact that we have no resources at all:  No coal, no oil, no gas, at least not a sufficient size.  The rate of energy independence has considerably increased when we have decided to start this nuclear program.  We'll come back on that. 
 We are the second nuclear electricity producer, just after the U.S., of course.  As you can see, we are also the second producer per capita.  Sweden is effectively the first one, at the current time.  But anyway, let's say that with more than 50 reactors and with this important -- what is mainly important is that it means approximately 80% of our electricity production at the present time.
 Of course this important prediction from nuclear energy led to a [indiscernible] of electricity supply, mainly because of steady prices for a long time.  But now, it shouldn't do that, because of the increase, of course, of the [indiscernible], the other energies.  The main factor, of course, of the electricity production was utilized to get, first, steady prices.  Then we have also the [indiscernible] was to be the first [indiscernible] exporter in the world, because our power plant has been quite successful.  As you can see, so we have a lot of electricity we can sell to other European countries.  What is quite important to mention is that if we did not have nuclear energy, our energy bill will be very high, because we would be obliged to import all our energy.  We will produce 150,000,000 tons of CO2 additionally each year. 
This brings us to this release of CO2.  You can see that even if we are among the main producer of energy -- sorry.  We are only the 21st for the emission of CO2, a very low level, and it's the same if we look to the ratio, to the GDP, it's here that we are in a good situation because of this nuclear energy program.
 The independence, the energy independence, which was in the '70's, which has been considered as an important factor.  Because in the '70's, we were very dependent of the import of energy and we had only a 25% energy independence rate at the time, and the reconstruction of the nuclear plant, for one, has led us to approximately 50% of independence.  As I said before, we are producing approximately half of what we are consuming for what [indiscernible].
 A brief record of the story of the French nuclear program.  In fact, it was started just after the Second World War.  The third generation of nuclear electricity has been done in '56, which was behind, of course, the [indiscernible] in this country, of course.  But it was quite soon in Europe.  The big decision, which has led to the present situation was made in the '70's, in relation with the oil prices of the time.  Just a few pictures of the past to record that we have started the reactor in '48.  We have made the first electricity production with this plant in '56; and then we have moved to another kind of plant quite soon, with the '70's decisions. 
 I don't know if you are familiar with what we call the generation of the nuclear power.  It is straight, the story of nuclear power in the world by those four generations.  The first generation was put up and the first power plants in the '50's and '60's.  Then the second generation is all the industrial program, which has been built in '79 and '80's around the world.  Most of these plants are still operating, so most of the existing power today is Generation II systems. 
And Generation III of the plants, which are built now with some improvements and, in particular, for we are concerned, the safety.  So those plants will be built for, still many years.  And after that, we are working on Generation IV design.  We'll come back later on that.
 But if I pursue with this story, what we call the [indiscernible] program research was in fact the main decision of building this rush for a nuclear program in France.  The decision was taken in '70's.  So Ismael was the Prime Minister of the time, so it gives the name to the program.  But I mean the main decision comes from the oil prices of '73-'74.  At the time, we had – we were, it was clear that we had no oil in France and we needed to take another direction than purely importing energy because of the cost and the [indiscernible] risk.  And so it was decided to order 34 reactors of practically the same type.  The decision was taken once, I would say.  Even after that, it means 10 years to build them.  But a decision was taken at the time. 
We have continued after that with larger plans in such a way that today the EDF, our UTT generation fleet includes 58 power reactors, and that means that nuclear represents approximately 65% of our electricity capacity.  That’s more than 88% of our electricity production.  This is due to the fact that we are some fossil fuel.  We are a fossil fuel plant, which are the only to backup in case of a real need of energy.  You can see also that we are an important part of hydro-electricity, but the rest of the [indiscernible] are still    it's a very, very [indiscernible], and even if we have been building a lot of windmill in particular.
 The distribution of the plants in France is shown there.  You can see the 58 reactors are practically everywhere in the country, in such a way that we are not too much problem with the distribution of electricity.  All these plants are of the same types.  They are light water reactors.  They're pressurized light water reactors and there have been a lot of standardization made in the construction of this reactor, in such a way that it has allowed to, of course, decrease the cost of construction first, but also to facilitate the maintenance and to facilitate the fuel supply and so on.  All the reactors are of three types.  In fact, we are 900 electrical megawatts, 1300 electrical, 1500 electrical megawatts, and for each of these category, we have a lot of plant, which gives us all the advantage of this standardization.
 Closing the fuel cycle has been, from the beginning, one of our main concerns.  Once more, because we are not in a very large country, it was clear for us that we needed to make the necessary steps in order to reduce the waste and to burn all what can be burned.  It has been the policy from the beginning now for more than 25 years.  We have been reprocessing the fuel, most of the fuel at least. 
You can see the figure there; the amount of fuel which has been recycled is very, very high.  And we are recycling systematically the plutonium produced by those reprocessing.  We are recycling it in light water reactors, in such a way that we have no [indiscernible] shared you see.  But on the contrary, we have a compliment of electricity, our energy production from this plutonium burning.  So this policy is, of course, is continuing for the future.  We'll start in Libya, an important future of the next step.
 Just to try to explain how it has been done, because the question was, in particular how it is related to the private sector and the public sector in all this program.  Let's say that we have several factors in the frame.  Several, but not too much.  I would say one on each problem.  We have a policy, which is defined by the government, which was defined by the government.  It was a policy of energy supply.  It was one small problem of independence.  Today, it's also a problem of a risk of climate change.  But at the time, in the '70's, it was not yet -- this genre was not built on that.  It was made on the fact that we needed to have an independent energy and a supply of energy with steady prices.
 So we have a policy once more fixed by the government.  We have a safety controller, a safety authority completely independent with a lot of precaution taken.  Clearly, we have a waste management agency, which is in charge of all this problem of waste management, after we're processing.  It means after extracting all, what can be recycled.  We extract first what can be recycled and then we put the rest in the waste and we have an agency for treating these waste.  Of course, we have a research and development organization, which is in Syria.  We have the UTT here and we have the main suppliers for all the nuclear business and a [indiscernible].
 I will give so much details on the organization of safety.  If you want, you can certainly inspection.  Just if you will, about the waste management.  Of course the waste management is not an easy issue for nobody.  It has been a real crisis in France in the beginning of the '90's.  It was such a crisis that the parliament at the time decided to [indiscernible] a special situation to fix, a given time -- 15 years -- to make more strategies and to decide what to do. 
And after those 15 years, last it was in 2006, 2 years ago, they have made a new law, which gives all the following steps.  It has been well accepted because during all this time, there have been a public debate with agency and so on.  And at the end, we have a new Act, which gives all the principles and in particular, which fix how we'll be the [indiscernible] of final disposal for all of the waste.  We have already a final disposal for all of the waste.  We have a new one for high-level waste, but the law fixed also the finance arrangement.  The R&D to pursue in order to still improve, I would say the cleaning of the waste.  That means to still improve the extraction of everything which can be recycled.
 The French people's confidence in nuclear energy is not spectacular, contrary to often a price position.  We have just a positive opinion, but not very -- as you can see there, it's not very strong.  It values, and it's [indiscernible].  In some years, the beginning of this century, when it was just the reversal.  It's quite easy to criticize nuclear, when you have 80% of your electricity coming from that.  It's not a big issue. 
But anyway, I would just like to mention the fact that the success for one, has not been due to a special confidence of the people, even it never been in a stronger position.  The success of the program came mainly from the political aspect, and from the fact that whatever the side of the political governments, the position has been the same, to continue the program and to build all these plants.
 Now as I said, we're on the path for the [indiscernible] type of a plant.  One of them is in construction in Fransia [sounds like].  In one of the plant [indiscernible], we are building now besides 2 older reactors.  We are building a new EPR, what we call EPR, the Evolutionary Power Reactor.  The pressurized reactors, right?  Which is proposed, however, and which is also in construction presently in Finland, on the site of Olkiluto, which will also be built in China and we hope in other countries.  But I mean, which is important that even with more than 80% of electricity coming from the diplomacy, we are still continuing to build.  We don't intend to stop to build.  We intend to cover the expansion of the needs and we intend also to renew the existing plant when the times come, in order to keep with the advantage of the system.
 Finally, as I mentioned, the law under the new Act on the waste, which has been brought in 2006, gave a lot of precise direction to the final execution of the waste management.  Some of these directions are newer in the system, which are partly made in the frame of these Gen-IV program for the European future energy systems.  Gen-IV, I will not give too much detail, but we have an international forum, an international forum gathering 13 members, as you observe the flag on the right. 
We are already working for systems, which will be built on an industrial scale in the 30's or even in the 40's.  We need that in order to prepare, to face all the consequences of a new phase of nuclear energy used in the world.  It was not exactly the topic of my presentation, which was more focused on the French program.  So thank you very much for listening.  I'll let Mike give another view of the same program.  Thank you.
 Kenneth Green:  Thank you very much.  That was very fascinating.  I enjoyed seeing all the data.&nb