Our current, largely pay-as-you go social insurance system worked well given the demographics of the second half of the twentieth century. But as I have argued previously, the system is ill-suited to address the unprecedented shift of population from the workforce to retirement that will start in 2008.

Raising national saving is an essential step if we are to build a capital stock that by, say, 2030 will be sufficiently large to produce goods and services adequate to meet the needs of retirees without unduly curbing the standard of living of our working-age population.  Unfortunately, the current Social Security system has not proven a reliable vehicle for such saving.

The trends, especially for Medicare, are so alarming that these two programs [Medicare and Social Security] alone could, in the space of little more than a decade, account for about half of federal spending. Changes have to be made in these large entitlement programs to avoid a real fiscal disaster.

We will have to either raise the retirement age for the current level of annual benefits, reduce the level of benefits in current law, raise taxes on working persons, or adopt some combination of the three options.

The demographics are inexorable and call for action before the leading edge of baby boomer retirement becomes evident in 2008.

The structure of essentially a pay-as-you-go system, which is what our Social Security system is, which worked exceptionally well for almost 50, 60 years, that system is not well suited to a period in which you do not any longer have significant overall population growth, and therefore a very high ratio of workers to retirees.

Our problem with respect to retirement has got nothing to do with finance. It's got to do with real assets, real physical resources, and goods and services that people consume.

I think we should maintain the principles of Social Security, but I think the existing structure is not working. And...until we can construct a system which creates the savings that are required to build the real assets so that the retirees can have real goods and services, we don't have a system that's working. We have one that basically moves cash around, and we can guarantee cash benefits as far out and in whatever size you like. But we cannot guarantee the purchasing power.

I'm...of the belief that we probably ought not to address the medical issue quite yet until we get very far - much further down the road in the advance in information technology in the medical area...So I think that people who are saying we ought to do Medicare first before Social Security because it's a much bigger problem - I agree, it is a hugely much more difficult problem but I'm not sure I would agree with the issue of the sequence wholly because of the nature of what's now occurring in medicine.

What are we trying to accomplish with [Social Security]?...We don't want the elderly living in poverty, and right now much of the elderly is not living in poverty.  One thing we might think about is a much more narrow program.

In other words, there is almost a 100 percent probability that we are overcompensating the average social security recipient for increases in the cost of living, and almost a 100 percent probability that we are causing the inflation-adjusted burden of the income tax system to decline more rapidly than I presume the Congress intends.  A major reason for this is that consumers respond to changes in relative prices by changing the composition of their actual marketbasket. At present, however, the marketbasket used in constructing the CPI changes only once every decade or so. Moreover, new goods and services deliver value to consumers even at the relatively elevated prices that often prevail early in their life cycles; currently, that value is not reflected in the CPI.