President Bush’s campaign to create personal Social Security accounts received a key endorsement Wednesday from Federal Reserve Board Chairman Alan Greenspan, who nevertheless warned that the credit markets could revolt if the accounts were introduced too robustly.
Greenspan said he liked the privatization plan because it would increase the odds that the coming throng of 76 million baby-boomer retirees would receive promised Social Security benefits. But he expressed repeated nervousness about how the markets might respond to massive new federal borrowing.
“If you’re going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way,” he told the Senate Banking, Housing and Urban Affairs Committee.
Meanwhile, President Bush signaled his willingness to consider higher payroll taxes for upper-income wage-earners in order to reach a Social Security deal. While insisting that the current 12.4 percent tax rate remain unchanged, the president told reporters he would not rule out raising the current $90,000 annual cap on wages subject to Social Security taxes.
Bush’s comments marked the first time he has hinted at how the projected shortfall in Social Security financing might be overcome, although the White House was quick to say the president wasn’t endorsing an idea hotly opposed by economic conservatives.
“Just because he said it was an option doesn’t mean he embraced it,” said spokesman Trent Duffy.
Greenspan’s support of Bush’s private accounts, while qualified, was still significant. Four years ago in a similar Senate appearance Greenspan backed Bush’s call for a major tax cut, and the president proceeded to slash taxes in three successive Congresses.
The Federal Reserve chairman, long one of the nation’s leading authorities on Social Security, agreed with Democratic members of the panel that the voluntary private accounts proposed by Bush would do nothing to solve the program’s long-term funding problems. According to current projections, Social Security will exhaust its reserves by 2042 and then be able to provide only about 75 percent of promised benefits.
In addition, he warned that bond markets might drive up interest rates if the government borrows too much money to cover the transition to private accounts.
Asked what amount might be considered to be too large, Greenspan said, “I would say over a trillion (dollars) is large.”
Social Security actuaries estimated it would cost $750 billion over the first 10 years to phase in private accounts for those born after 1949. Others say the longer-range cost would be much higher.
Despite his pleas for a go-slow approach, Greenspan left no doubt about whose side he favored on the contentious issue of private accounts, which Bush wants to offer younger workers beginning in 2009. Encouraged by Democrats to describe the proposal as risky, or of little value in solving Social Security’s overall financing problems, Greenspan repeatedly declined.
“Senator, it is risky doing nothing,” he told Sen. Charles Schumer, D-N.Y.
The blessing of the Federal Reserve Board chairman is routinely sought by presidents on their economic initiatives, but Greenspan’s views on Social Security are doubly valuable because he was architect of a 1983 Social Security overhaul that not only saved the system from imminent collapse but has remained the program’s financial blueprint.
Greenspan also reinforced the president’s call to act immediately, even though Social Security is expected to continue generating huge annual surpluses for the next decade. Democrats argue that it’s premature to mess with a system that’s expected to be self-sustaining until at least 2018, then be backed by enough reserves to last until 2042.
Greenspan disputed that theory, saying credit markets may soon react negatively if the government doesn’t begin to deal with a projected shortfall of $75 trillion in Social Security and Medicare accounts.
“The demographics are inexorable and call for action before the leading edge of baby boomer retirement becomes evidence in 2008,” Greenspan said.
Several Democrats disagreed.
“The president would have us believe that Social Security in 13 years is going to be bankrupt, even though we know that it’s not accurate,” said Sen. Debbie Stabenow, D-Mich.
In his testimony before the Senate committee, Greenspan gave an upbeat reading on the economy, saying inflation remained in check even as business and consumer spending was on the rise. His testimony seemed to be an affirmation of the reserve board’s current policy of gradual, quarter-point increases in short-term rates.
However, Greenspan was less sanguine about longer-term threats to the U.S. economy, including the trade and federal spending deficits, and the nation’s low savings rate. Action on all three fronts is imperative, he said.
“It’s just not credible that it could go on with no change,” Greenspan said, referring to the trade deficit.