Chairman Greenspan
in the lion's den

WASHINGTON - Squaring off against Democratic critics of President Bush’s proposal to allow younger workers to put some of their Social Security tax payments into private retirement accounts, Federal Reserve Chairman Alan Greenspan gave his cautious but emphatic endorsement to private accounts Wednesday.

He called personal accounts within Social Security “a good thing to do over the longer run.”

What was striking about Greenspan’s three hours of testimony to the Senate Banking Committee was not his caution — that, after all, is the temperament of the Fed chairman — but his tenacity.

Repeatedly, he made the case that the current pay-as-you-go Social Security system does not work, due to what he called “inexorable” demographic changes, an “unprecedented potential increase in the number of people leaving the work force” by retiring.

“The existing structure is not working,” he told Sen. Jack Reed, D-R.I., who, like almost all congressional Democrats, opposes the private accounts idea.

The pay-as-you-go structure of Social Security, in which current workers pay for the benefits of current retirees, only works, Greenspan said, “if the population is growing sufficiently quickly, and longevity is growing only modestly.”

Essentially, he told the committee, America soon will have too few workers and too many retirees, with ever-increasing life spans.

No savings created
“Pay-as-you-go creates no savings,” he said. It “basically moves cash around.”

And he contended that private accounts within Social Security, which he described as a “forced savings” plan, would allow the U.S. economy to set aside savings to create capital investments which will pay for retirees’ living standards in future decades.

The crucial issue, he told Reed, is whether “we have the material goods and services that people will need to consume” in future decades.

Greenspan acknowledged that it is unclear how financial markets would react if the federal government borrowed the full cost of transitioning to a private accounts system. As a rough approximation, Greenspan used the figure of $1 trillion over 10 years for transition costs. He described the uncertainty of gauging market reaction as a matter of “not knowing and not knowing how to know.”

But he also suggested that in determining interest rates and bond yields, the financial markets may already have accounted for the $16 trillion in unfunded liabilities of the Social Security and Medicare programs.

The normally placid Greenspan rose almost to the threshold of passion as he made a class-based argument by contending that private accounts would allow low-income people to become mini-capitalists — in his view, a very good thing.

“When you have assets which you own, which you can bequeath to your children, (assets) which have your name on them, I think it is highly desirable thing, because you give wealth to people in lower- and middle-income groups who have not had it before,” he told a clearly skeptical Sen. Charles Schumer, D-N.Y.

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