When Federal Reserve Chairman Alan Greenspan recently told Congress that Social Security cannot continue to pay the level of benefits it has promised, it served as proof yet again of the issue's hot-button status.

Greenspan suggested two changes in Social Security and Medicare -- restraining cost-of-living adjustments and raising the age of full retirement benefits.

Retirement is an important issue at UC Davis, where the average age of a UC Davis employee is 40 years; ladder-ranked faculty members average 55 years in age; and just over 28 percent of employees are age 50 or older. Though the UC system has employee retirement and investment plans, many individuals still count on Social Security to supplement these programs.

Campus scholars found Greenspan's remarks generally on the mark -- a few tweaks here and there, and Social Security will remain healthy over the long run, they said.

The problem, according to Greenspan and Social Security's trustees, is that the number of working Americans available to support a single retiree will continue to dwindle in the years ahead. People over age 65 are expected to reach 16 percent of the U.S. population in 2020.

Steven Sheffrin, dean of the Division of Social Sciences, says Social Security's long-term financing problems are relatively minor.

"They can be handled with modest benefit cuts that can be accomplished through further extensions of the normal retirement age or similar strategies," he said.

Ironically, Sheffrin said, the real long-term problem at the federal level stems from Medicare and Medicaid.

"Taxpayers would have to see very sharp increases in payroll taxes to finance the projected costs of these programs. This would require radical changes in our taxing environment and probably require a new tax, such as a federal value-added tax," Sheffrin noted.

The alternative, which he thinks is more likely, is a revision of the health care system that places an even greater burden on individuals.

Peter Lindert, an economics professor, says the welfare state and programs like Social Security can make "gentle" adjustments in the years ahead. He believes Greenspan's warning to Congress about pensions and the budget wasn't "completely wrong," to put it one way.

"He was wrong to finger social spending as a bigger culprit than tax cuts," Lindert says. "He was wrong to use the short-run Bush budget mess as an excuse for a Social Security scare. He overstated the imminence of the baby boom retirements. He was closer to the mark when calling for later retirement ages, but this can be done gradually and without nightmare."

Lindert believes that every industrialized country needs to worry about this, because "we're all getting older."

Still, we're not "graying" as quickly as some other nations. "The U.S. population is not aging dramatically by world standards. As a nation, we are not aging as fast as Japan or Italy, partly because we take in young immigrants. We also avoided Italy's mistake of subsidizing early retirement," Lindert says.

He says the Social Security system will benefit from raising the retirement age to 67. The normal age for retirement was raised in phases beginning in 1983 from 65 to 67 years.

"As the average person lives a couple of years longer, let the normal retirement age also advance by a couple of years," he explains. "We're already raising it to 67. It could go to 69 and get us through the social security crisis -- if the government doesn't mess up the rest of the budget."

He noted that currently the overall budget has veered into a deficit that is second only to Japan's deficits, even though the Social Security system is running surpluses right now.

Lindert describes the welfare state as a "free lunch" in his new book, Growing Public: Social Spending and Economic Growth Since the Eighteenth Century (2004). A welfare state is a nation in which the government undertakes large-scale action to ensure the provision of social goods and benefits. Some have dubbed it as a "free lunch."

As Lindert puts it, "It's a free lunch in the sense that the net national cost seems to be zero, either in terms of national income or in terms of national well-being. What it costs taxpayers is offset by the gains to others within the same country."

If the welfare state is a "free lunch," as Lindert submits, then how can this be when economic theory and common sense suggest that heavy taxes and benefits should hurt work and investment?

"Economic theory and common sense are telling us a good logical fiction," he says. "If the welfare states had made the mistake of heavily taxing capital and subsidizing lifelong leisure, it would indeed have been costly. Capital would have fled, and the lazy would have stayed, as in the classic nightmare."

That scenario has not arisen, Lindert points out. "Europe's welfare state democracies saw the problem and have designed policies that avoided most of it. They have been growing as fast as the low spenders, on the average."

He says the welfare states achieved this "free lunch" in three main ways. First, Lindert argues, the European welfare states devised tax systems that "a conservative free-market economist would dream of" in many aspects.

"They tax consumption and addiction goods -- alcohol, tobacco, gasoline -- heavily, instead of taxing capital or soaking the rich," he said. Lindert explains that in many cases they have even given the poorest a better incentive to work than in the United States -- he adds, "strange as that sounds."

Second, he says, some of the European nations' public spending, especially on universal health care and support for working parents, promotes growth more effectively than in this and other low-tax countries.

Finally, he says, even unemployment compensation and early retirement policies, which do indeed cut the amount of work, don't actually reduce total worker output. Lindert says that people who "work less were relatively unproductive" anyway. As he explains, such policies actually give employers "a freer hand in upgrading worker productivity."