by Cathy E. Minehan

I would like to begin by reviewing why we at the Federal Reserve Bank of Boston chose Social Security reform as the focus of our forty-first economic conference. In its conduct of monetary policy, the Federal Reserve System pursues the twin goals of price stability and maximum sustainable employment. Our ultimate objective is an economic environment that is conducive to growth in living standards. Price stability is an important component in creating such an environment, and I believe the Federal Reserve must continue to be vigilant and proactive in ensuring that the fires of inflation are not reignited. But price stability, while vital, is only the backdrop -- a necessary, but not sufficient condition for growth. Living standards rise only when overall economic growth rates increase faster than rates of population growth. How such economic growth can be encouraged directly is a deep concern of the Federal Reserve Bank of Boston.

At our conference last year, we focused on the relationship between technological change and economic growth. This year our conference focused on another aspect of economic policy closely tied to future living standards, Social Security reform. The United States, like the rest of the industrialized world, faces a transition to a demographic structure characterized by low fertility rates, long life expectancy, and a growing population of post- retirement-age individuals.

This transition presents a major challenge to policymakers. Social Security, Medicare, and other transfer programs geared towards the aged have greatly improved the economic well-being of that population. But as the ratio of workers to elderly beneficiaries drops, these transfers will become increasingly burdensome to society. Maintaining the transfer programs "as is" could produce either intolerably large national deficits or higher payroll tax rates. Future generations could feel they are being unfairly treated relative to current ones, and the political sustainability of the system could well be threatened. Moreover, many have argued that leaving the social insurance system on a largely pay-as- you-go basis misses an opportunity to increase national saving and investment, thus eventually increasing living standards for everyone. As a result, many proposals for change in our system of social insurance are being considered.

Awareness is growing about the fiscal problems that could result if existing social insurance programs continue without change in their nature and funding. Moreover, this understanding occurs at a time when the entire industrialized world has recognized the macroeconomic folly of incurring national deficits that are excessive relative to rates of economic growth. The challenge is to identify reforms that not only preserve some of the safety net and income transfer aspects of Social Security, but also help to maintain or reduce national deficits relative to GDP and improve economic efficiency and prospects for growth. This is without doubt a tall order. Most if not all aspects of Social Security reform are far more complex than they appear at first glance. Moreover, many of the ways reform might affect economic behavior are not fully understood.

The purpose of our conference was not to debate the specifics of any individual proposal, but rather to investigate the likely economic impacts of some of the reforms that have been proposed. I hope our conference papers and discussions will help to advance understanding of these issues and enable us to consider reform on a worldwide basis from a more informed perspective.

Cathy E. Minehan
President and Chief Executive Officer
Federal Reserve Bank of Boston