by Sean Wright
On March 17th, the Economics Department hosted Dr. James Poterba as part of the Cornelson Distinguished Lecturer Series. His lecture, entitled "Economic Implications of an Aging U.S. Population," focused on the impending issues that may arise as the baby boomer generation grows older. Dr. Poterba, a prominent economist who is highly respected within the field, is the Mitsui Professor of Economics at MIT. Additionally, he is the President of the National Bureau of Economic Research, and in the past, served as director of the American Finance Association. He is also a member of the National Academy of Sciences. Dr. Poterba specializes in tax policy, and likes to look at how taxation affects the decisions of firms and businesses. I had the opportunity to chat with Dr. Poterba about his past experiences, his thoughts on our country’s welfare programs, and some advice for undergraduates.
Sean: So how did it all begin; where did your interest in economics originally come from?
Dr. Poterba: Originally, I was interested in economics as a high school student, although I didn’t think I was going to be an economist. In fact, when I started college I thought I’d be a chemistry or chemical engineering major, but when I was in high school, I was very active in my high school’s debating team. The topics we debated had a lot of economics in them. There was a question on a guaranteed national income, which is basically a big transfer and tax program. There was a topic on allocating scarce world resources, and there was one on financing public and secondary education at the federal level. So three of the four years I was in high school, I spent a lot of my extracurricular time engaged in talking about issues that had a lot of economics in them. There was an economics course at my high school, but it was a pretty basic course. When I got to college and took a Principles of Economics course in my freshman year, it just kind of clicked. I realized this was something I really enjoyed. I often say to people, either you think like an economist or you don’t; there’s a way an economist thinks about certain problems. I also had the opportunity to work as a research assistant to some of the most important and influential economists of the last 50 years. Larry Summers was a graduate student at Harvard, and I got to work with him. Kim Clark, who went on to become the dean of the Harvard Business School, was a labor economist I worked for. I lived under a charmed star; I discovered economics early, as a freshman in college, and had the chance to really get involved in what turned out to be cutting edge research.
Sean: So you’d say you had a good experience at Harvard?
Dr. Poterba: Harvard had, and still has, a great economics department. The part where I was very fortunate was that I was lucky enough to be swept into some of the faculty research at a very early stage. The advice I give to aspiring economists is that you should try to find opportunities to work with your faculty on research projects. This is because doing research projects is where you really find out what economists do. You see some of it in class, but with research, you get to bring in tools and economic data to solve questions that we’re all wrestling with. The faculty are always engaged in something, and even as a freshman, it’s important to get involved. You shouldn’t think that the only people who should do research are the ones with PhD’s.
Sean: What provoked your interest in the economic implications of the aging population, specifically?
Dr. Poterba: I began my career working primarily on tax policy issues. I looked at the taxation of business income, corporate profits, dividends, interest payments, and things of that nature. One of the pretty important parts of the tax system is treatment of retirement savings, particularly in the United States. We use the tax system to provide incentives for retirement savings, through workplace pension plans and individual retirement funds. So I was drawn into thinking about retirement saving, and the growth of individual retirement accounts and 401k plans. My interest in the aging population grew out of my interest in the retirement savings system. Nearly 30 years ago, Larry Summers had an inspiration: that the aging population was going to be an important feature of the economic landscape going forward. That was at a time before most people were talking about population aging as an important issue. Larry inspired me to work on the demography of aging, which I’ve always found very interesting, and continue to work on to this day.
Sean: Do you believe the current Social Security program is a sustainable one, or is it in need of an overhaul?
Dr. Poterba: Social Security, as currently constructed, is strictly speaking not sustainable. The present discounted value of the liabilities is greater than the discounted value of the taxes we’re going to collect. However, overhaul is probably too extreme. The Social Security long-run-deficit is an eminently fixable problem, and there are many ways it could be fixed. My guess is that the political actors will be drawn kicking and screaming at some future time, to make the changes in Social Security that shore up the long-term finances. There are many dimensions on which we could tweak the system, and that would help bring it back into fiscal balance. In particular, we could raise the retirement age a bit; we could index benefits to lessen the inflation rate; we could make the system more progressive, and offer a somewhat lower payout on the top end of the distribution, as a way of trying to save money; or we could increase taxes on earnings. All of these are approaches that we could take. I would not particularly advocate for one of these options exclusively. Instead, I think that a combination of the long-term would produce the most desirable results. By comparison, I would just say that the long-term health insurance commitments of the federal government, Medicare and Medicaid, are a more challenging problem. This is because the real issue there is inflation. The question is, will the inflation rate for health care costs grow faster than the inflation rate for the general price level? Health insurance expenditures are growing, both because the population is getting older, and also simply because the cost of health care is rising.
Sean: Can you describe your experience with the College Retirement Equity Fund?
Dr. Poterba: I find it really interesting. My role is what’s called an independent trustee, for the College Retirement Equity Fund, and for TIAA-CREF’s mutual funds. TIAA is a large financial services firm that was founded in 1918 by Andrew Carnegie, with funds to provide pensions for university and college teachers. Carnegie, as he interacted with college faculty all over the country, discovered that in many cases, they did not have much of a retirement plan. He thought this was an outrage, and decided that what was needed was to create a plan that would do that. So TIAA was created with a large initial contribution from Carnegie to provide pensions for faculty. Over time, it began as a defined benefit pension plan, in which a pension annuity was paid to retired college faculty. And in the early 1950s, it added something called the College Retirement Equity Fund, or CREF. The nomenclature would be something called a variable annuity. What a variable annuity does is offer you a stream of income, like a pension program, except the payments in each year can be linked up with the returns. What CREF did was to have a large, diversified stock portfolio so that when the stock portfolio did well, the pension benefit would go up. My role at CREF is to serve as one of the representatives of the CREF shareholders, who are the beneficiaries of the CREF system. I represent their interests in overseeing the management company, which is TIAA, that provides investment and other services to those participants. I’ve been an academic all my life, so the chance to be involved in the financial services world has been absolutely fascinating.
Sean: Throughout your career, you’ve played a lot of roles—you’ve been a researcher, an editor, and an advisor, among many others. Which of these positions has been the most interesting?
Dr. Poterba: One of the wonderful things about being an academic researcher is the chance to be your own master. You decide what you want to work on, what to study, and within limits, you can take on some economic activities outside of the university. My experience with TIAA has been very interesting. I’ve loved working with my wonderful graduate and undergraduate students at MIT. Frankly, that’s been a very fulfilling part of my career. Many of my students become my lifelong friends. As I move to different stages of my career, I’ve now had some undergraduate students at MIT who were the children of past MIT graduates or undergraduates who I’d known as my own students, decades before. The colleagues I’ve had at MIT have been absolutely wonderful. The collaborators I’ve worked with on projects, the research I’ve been able to do about the aging population—it’s all been fun. The academic lifestyle opens a lot of different doors.
Sean: Which of your projects has been the most fulfilling?
Dr. Poterba: I think that the work on understanding retirement saving, and understanding how institutions in the tax system and elsewhere could help support this kind retirement saving for cohorts of workers who are approaching their retirement years. That’s the part of my work that has had the most direct application to the rank-and-file individuals of the economy. I’ve found that to be very fulfilling. Retirement saving is a heavy topic; it’s not something you’d necessarily want to bring up at a cocktail party as an icebreaker. However, when people hear that you’re working on that topic, they’ll often find you at the cocktail party and ask you in the corner, “what should I be doing differently to save? How should I be planning my retirement?” The discovery that so many people are thinking about this has been a really exciting revelation.
Sean: What would you want to say to a current undergraduate student pursuing a degree in economics?
Dr. Poterba: I would tell them two things. First, make sure that if you’re studying undergraduate economics, you’re also taking some undergraduate math courses. The leading PhD programs are very math-intensive. They’ve become much more mathematical, and much more formal. People who’ve taken a variety of high-level math classes tend to excel in these types of programs. Second, take economics courses on interesting topics that you find fascinating. The reason to think about becoming an economist is that you’re interested in some set of questions in economics, and you think they’re really important and you’d like to work more on them. That could be development economics, if you’re interested in improving a lot of people’s lives in third-world countries. It could be competitive policy, if you’re interested in antitrust laws and analyzing whether or not two companies should merge. These are all terrific questions, and they’re often confronted in specialized economics courses in topics like industrial organization or public finance. Before you decide to embark on a career as an economist, you should look into a lot of different fields within the discipline as a whole.