Mr. Chairman, in 1999, CSIS undertook a multi-year research program to assess the economic and financial consequences of population aging in the developed world. Our work began with the recognition that America is not the only nation that faces a sharp rise in old-age dependency over the coming decades. The whole industrial world is aging--most of it, a lot more rapidly than we are. The transition economies of the former Soviet bloc are aging faster than we are. And even such key emerging market countries as China, Korea, Taiwan, Thailand, Brazil and Chile can all expect to have older age structures than we will by mid-century. Given these trends, it's not surprising to find ourselves in the midst of a global revolution in pension reform. This common challenge holds great dangers for the global economy, not least because fiscal catastrophe in any one nation could tip others into crisis. But one advantage of global aging is that it has given us a rich record of reform from which to draw.

Franklin Roosevelt liked to call state governments the laboratories of democracy. The same could be said today of national governments the world over.

Our own research effort, the Global Aging Initiative, is evidence of this cross-national trend. Overseeing our work is a panel of 86 leading voices from three continents, reflecting an extraordinary diversity of political perspectives. Our co-chairmen are former Vice President Walter Mondale, former Prime Minister Ryutaro Hashimoto and former Deutsche Bundesbank President Karl Otto Pöhl. In addition to seven current or former cabinet ministers from Europe and Japan, seven senior members of Congress--four Democrats and three Republicans--serve on the Commission on Global Aging. I am proud to note that both you, Mr. Chairman, and Congressman Matsui, the ranking member of this subcommittee, are Commission members.

Two overarching points can be made about the revolution in pension reform. First, it is not driven by ideology. In Italy, pension reform has been spearheaded by the New Democratic Party of the Left--formerly known as the Italian Communist Party. Germany's individual account law was recently pushed through the Bundestag by Gerhard Schroeder's center-left coalition of Socialists and Greens. These reforms have been nicknamed the "Riester reforms" after Labor Minister Walter Riester, the former deputy national chairman of Germany's largest industrial union, IG Metall. Some of the other social security reforms to be examined in this panel today also were championed by parties of the left. In every case, reform has reflected a pragmatic, non-ideological response to developments that now threaten the sustainability of retirement systems everywhere.

The second observation is that retirement insecurity in the industrial world today stems from social insurance itself. It doesn't matter whether you are in Austria, Belgium, Greece or Japan, public opinion polls reflect the same overwhelming fear among the young and middle-aged that social security will not be there for them when they retire. This is not some international fad that will go away if we ignore it. By 2030, old-age dependency ratios in Japan, Canada and the major continental European countries are projected to roughly double, while in the U.S., this ratio will rise by somewhere between two-thirds and three-quarters. In every case, serious funding problems lie ahead.

In order to insure against this new insecurity, governments are having to work with the private sector. Increased reliance on funding underlies all of the major social security reforms of the past decade. Funded pensions--essentially, retirement saving plans--have two key advantages over pay-as-you-go intergenerational transfers. First, they are not directly affected by changes in the old-age dependency ratio. Whereas a declining ratio of workers to retirees immediately creates the need for higher taxes or reduced benefits, funded systems are only indirectly affected by population aging through structural changes in the broader economy.

A second advantage of funded pensions is that cross-border investment can shield individual retirement security from adverse national economic trends. This is an important consideration in countries where labor forces are expected to decline for the foreseeable future. America's working-age population is projected to grow by about 11 percent between now and 2030--most of this coming before 2010. But decades of below-replacement birthrates has left much of Europe and Japan facing substantial declines in both labor forces and total populations. Japan's Health and Welfare ministry recently estimated that, at current birthrates, there will be just 500 Japanese left in the year 3000. In Italy, Spain, Greece and several other nations, birthrates are even lower.

Over the next decade, these demographic trends will begin to adversely affect our economies. Surging numbers of workers have accounted for between one-half and two-thirds of the rise in the developed world's output over the past half century. In the future, declining labor forces are forecast to subtract one percent a year from economic growth rates in some countries. Pension funding will allow citizens in Europe and Japan to invest in multinational companies whose operations inevitably will shift to faster-growing markets abroad. In this way, the global economy provides an important resource for the aging nations of this world. But it is only a resource to nations that fund their pensions.

There is a lot that we can learn from the reforms adopted in other nations. Great Britain, Australia, Chile, and Sweden have adopted compulsory savings schemes, each with their own contribution levels and unique fiduciary rules, administrative structures, and contingent guarantees. The experiences of these and the many other countries that have moved toward pension funding in recent years should be closely examined as part of any U.S. Social Security reform effort.

Of course, compared to most other industrial countries, America is aging less rapidly; our social security benefits are less generous; our private pension system is more robust; and we continue to be the most favored destination for capital and talent the world over. Our situation, though still serious, is less dire, and this gives America important competitive advantages in the global economy. But we will squander these advantages if we fail to learn from other nations whose situation is different from ours only in degree.

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Information on the Global Aging Initiative can be found at www.csis.org/gai.