Public pension liabilities are regarded as the single greatest domestic problem confronting developed nations. Technically, fiscally, morally or politically - whatever way you look at it - pensions reform seems close to impossible. Just recently in Japan, for example, lawmakers scuffled like hamsters on the Diet floor when the time came to vote on painful pension reductions for the elderly. And as Jacques Chirac, the French president, is learning, voters do not exactly appreciate manly efforts to impose realistic changes. Even in the US, political groups on both left and right tend to deploy scary terms - "demographic disaster" for example - when they speak of public pensions. Small wonder that President George W. Bush's blithe post-election announcement that he already had a "good blueprint" for reforming Social Security sounded like a boast.

It was not. For unlike European nations or Japan, the US does not have a pensions crisis. It has an enormous future shortfall that is eminently rectifiable. Collectivists find the crisis mode convenient because they want to use Social Security reform as an excuse for a more general redistribution of wealth. Free marketeers want a crisis because they think it might help them force through privatisation of Franklin Roosevelt's grand programme. But such political motives do not make the crisis a reality.

Indeed, there is not just one good blueprint for fixing Social Security - there are many. What's more, the best of these do not require raising tax rates for workers. This even though the US public pension tax - 12.4 per cent shared by employer and employee - seems achingly low to outsiders.

The first such blueprint involves benefit formulas. Under the current system, retiree benefits are indexed to prices. But they are also linked to the average wage in America during the years that the retiree worked. And in the past half-century, the average national wage has increased 1 per cent a year more than prices.

All this means that a younger brother who follows the same career path as his big sister will get a larger pension than the sister, even after adjusting for inflation. This system, known as wage indexing, constitutes a social pledge perpetually to increase the standard of living for retirees down the generations.

Such a promise might be hard to break if most Americans knew about it. But few have even heard of wage indexing. As for younger workers, their expectation is not that they will get a larger pension than someone else but rather that they will get none at all. As surveys have revealed, more young Americans believe in UFOs than believe Social Security will provide for their retirement. Altering the system so that successive cohorts get the same amount after inflation should be possible.

But here is the best bit: the simple step of ending wage indexing would wipe out nearly all of America's multi-trillion-dollar unfunded pensions liability. I'll type the phrase again, just because it sounds so unlikely: ending wage indexing would wipe out most of the liability.

What's more, as the economists John Shoven, Sylvester Schieber and Robert Pozen point out, there is enough fiscal room to tinker a bit by allowing lower earners to continue on the wage indexing system even as higher earners move into a price-index regime.* That more expensive plan would still eliminate 71 per cent of the unfunded liability. So much for inevitability.

Higher earners should be eager to accept this compromise, since it obviates future tax increases. What terrorises them is the prospect of a Robin Hood fix that raises taxes progressively.

But there is of course another possible reform - privatisation. Instead of paying all his 6-plus per cent to the government, the worker might allocate some of those percentage points to stock or bond funds. After all, over the decades market returns are better than the returns of a government programme, even when you factor in the recent bumps and drops. And those higher returns would in the end make it possible to reduce government payments. This plan doesn't need a "crisis" to be valid; it stands on its own.

But perhaps we should step back and ask what makes the US pensions dilemma so solvable. Demography is the most visible answer - the American workforce is a bit younger, and so counts more workers per retiree. Free market policy that has generated strong growth is also a factor, for the federal revenues that growth generates postpone insolvency. Third, there is the shareholder culture, which, although bruised, remains strong. It is America's great good luck that its shareholder culture is maturing before its retirement money begins to run out.

Without action, however, this sunny moment will pass for good. In pensions terms the US is now where Japan was in 1991 and where Italy was in 1970. What would those countries not give to win back that time? No wonder Mr Bush is acting bold. When it comes to the painless reform blueprint, the rule is clear: use it or lose it.

* Improving Social Security's Progressivity and Solvency with Hybrid Indexing, Stanford Institute for Economic Policy Research

© Copyright 2004 Financial Times