Alan Greenspan and the Meaning of "Trust"

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Alan Greenspan and the Meaning of "Trust"

Greg Anrig, Jr.
The Century Foundation, 2/15/2005

When Federal Reserve chairman Alan Greenspan testifies before the Senate Banking Committee on Wednesday, it will be the first time he will comment publicly on President George W. Bush's proposal to privatize Social Security. Great weight will be given to his statements. But in light of Greenspan's long, tortured relationship with Social Security, his views should be treated with the same skepticism that Dr. Phil shows toward his guests.

Greenspan famously chaired a bipartisan commission that in 1983 issued recommendations for strengthening Social Security. Those reforms, which President Reagan signed into law in April of that year, made a promise to American workers: your payroll taxes will be increased in order to finance the build up of trust funds, which will secure Social Security benefits when you retire in the 21st Century. The Greenspan Commission's plan has worked even better than imagined, with projections today showing that promised benefits can be paid in full until 2052, according to the Congressional Budget Office.

When President Ronald Reagan signed the Greenspan Commission's reforms into law, he pronounced, "This Bill demonstrates for all time our nation's ironclad commitment to Social Security. It assures the elderly that America will always keep the promises made in troubled times a half a century ago. It assures those who are still working that they, too, have a pact with the future. From this day forward, they have our pledge that they will get their fair share of benefits when they retire."

But Greenspan himself, in an interview with the New York Times just weeks after the signing ceremony, said, "Do I like the present Social Security system? No. If you asked me whether it would be necessary in the ideal society, I'd say no. Our type of economy is far removed from where I would like to see it, but you have to be careful about moving from one type of society to another."

Over the past two decades, Greenspan has repeatedly argued that Reagan's "ironclad commitment" should be broken. Year after year, he has said that the benefits promised to future retirees are unaffordable, that the retirement age should be delayed further, and that other ways of reducing benefits should be considered. And yet in 2001, Greenspan endorsed the Bush tax cuts, which mainly benefited the highest income Americans. If made permanent, those tax cuts would amount to more than three times the size of Social Security's projected shortfall over the next 75 years, according to the Center on Budget and Policy Priorities. In Greenspan's view, the Social Security benefits that his own commission promised to future retirees are not affordable, but tax cuts for the wealthy are.

We will learn more on Wednesday about what Greenspan thinks of the president's proposal to allow workers to divert payroll taxes to private investment accounts, reducing the money available to finance currently promised benefits. In the past, in his ever-cryptic fashion, Greenspan has expressed an openness to privatization. In a December 1996 speech, for example, he said, "Perhaps the strongest argument for privatization is that replacing the current unfunded system, which apparently discourages saving, with a fully funded system, is that such a change could boost domestic saving.

But, in any event, we must remember it is because privatization plans might increase savings that makes them potentially viable, not their particular form of financing."

President Bush's proposal would raise the national debt by $4.5 trillion over its first 20 years—substantially more than the shortfall projected for Social Security over the next 75 years—because new money would be needed to pay for the accounts while continuing to pay current beneficiaries. On the surface of it, that added federal debt in and of itself should be anathema to a Federal Reserve chairman who has long preached the virtues of fiscal responsibility. But remember, Alan Greenspan "doesn't like the present Social Security system." We will soon find out how much he
dislikes it.

Greg Anrig, Jr., is vice president of programs at The Century Foundation.

For more on Social Security and the debate over its future, visit The Social Security Network http://www.socsec.org/