The Washington Post

August 17, 2001, Friday, Final Edition

SECTION: FINANCIAL; Pg. E01

Decisions on Social Security Loom; Greenspan Warnings on Need to Boost Savings May Carry Weight

by John M. Berry, Washington Post Staff Writer

President Bush's commission on Social Security is charged with putting together a plan that would change the retirement system by creating private investment accounts. But commission members, who hold their next public meeting on Wednesday, have yet to decide how best to finance them.

In particular, they have not decided whether the money for the accounts would come from diverting some portion of the payroll taxes that fund the existing system or by using other personal or government money to create a new savings vehicle in addition to Social Security.

Many in the Bush administration favor the first approach, called a "carve-out" of the old system, which would allow individuals to invest some of their payroll taxes in private assets such as corporate stocks and bonds. But little attention has been paid to recent warnings by Federal Reserve Chairman Alan Greenspan that this alone will not solve Social Security's long-term funding gap.

A review of Greenspan's public statements shows that the influential economist -- whose testimony earlier this year provided politically potent support for Bush's tax cut -- has maintained for years that the key to ensuring Social Security's long-term viability is more national saving, regardless of how the system's funds are invested. Privatization alone, without adding to the total amount saved "does not create miracles," Greenspan once told a Senate Budget Committee task force on Social Security. "It doesn't create something out of nothing. Unless you save, invest and increase the total amount of real resources in the 21st century -- I don't care what type of financial systems you devise, I don't care who owns it -- all you're doing is shuffling paper; you're not producing real goods. And it is real goods that is what retirees require, not pieces of paper."

Greenspan's views on the issue could carry significant weight as the president pushes forward on his plan to overhaul Social Security. Greenspan headed a commission in 1983 that devised a plan that put a virtually bankrupt Social Security system on a much sounder footing.

President Bill Clinton was leaning toward an "add-on" plan, one that would create private accounts in addition to the existing system, before his efforts were derailed by the Monica Lewinsky scandal. A number of key Democrats have signaled that they might be willing to accept an add-on plan as a compromise. (Isn't this amazing? I tell you folks, I've been following this subject for years and Clinton had no such plan. But if that's what it takes to ally the Demos. then it's just too bad we have to resort to subterfuge. This sounds exactly like what we are proposing to do with SS.)

But Bush has ruled out any new taxes to finance Social Security reform, while his tax cut is projected to slice government revenue significantly in the next decade. This makes it much more difficult to finance any reform but the "carve-out" approach. (Setting up a trust fund in the private sector would actually cost next to nothing.)

During his presidential campaign, Bush proposed that a portion of the 12.4 percent payroll tax be used to fund voluntary private accounts.

Greenspan, without commenting on Bush's proposal specifically, has said such a diversion alone would not be the type of action that would increase national saving and therefore would not address the key issue of how to pay retirement benefits in an aging society.(Bull. It's projected at $3.5 trillion over the next 10 years. That's not chicken feed to invest properly.)

"The issue with Social Security should be, are we building the level of capital assets that will be required to produce the real goods and services . . . to accommodate both retirees and workers in the future," Greenspan told the Senate Banking Committee last month. "And in order to do that, are we accumulating the amount of savings that we need to finance the investments [in new plants and equipment] which will produce the goods and services?

"The finance that's involved to do that is utterly a secondary question," he said.

Bush's Social Security commission provoked a political uproar last month by releasing a draft interim report saying Social Security is "financially unsustainable" and that promises to future retirees cannot be made "without eventual resort of benefit cuts, tax increases or massive borrowing."

One "general finding" of the commission was "To support tomorrow's retirees, we must save and invest more" -- exactly Greenspan's point.

Currently, the payroll-tax money paid into Social Security either is used to pay recipients' benefits or is invested in U.S. Treasury securities. Some members of Bush's commission and other proponents of private accounts argue that investing some payroll taxes in private assets, such as stocks or corporate bonds, would yield higher rates of return. That would ultimately mean higher benefits for retirees and plug a long-term hole in the system's finances, the proponents argue.

But Greenspan, in comments made to a Senate Budget Committee task force on Social Security several years ago, said that alone would not increase the nation's total amount of saving.

"Merely allowing Social Security to be funded with private securities, whether it's a private fund or private securities held in the public Social Security trust accounts, really is a partial illusion for solving the long-term retirement benefits of the system because you're playing a zero-sum game. If you get a higher rate of return in Social Security, you're going to get a lower rate of return in other private systems," he said. (especially banking.)

Official projections show that by 2016, payroll taxes will fall below the annual cost of paying benefits and that after 2038, when the trust fund would be exhausted, the system's income will cover only about 75 percent of promised benefits. But both dates have been pushed further into the future as underlying figures were updated.

The Fed chairman has said that the current level of payroll taxes paid by workers is high enough to finance workers' eventual retirement benefits, while also continuing the system's survivors' and disability benefits. According to Greenspan, the problem is that most of the payroll taxes are not being saved, but rather are being used to pay benefits to current retirees.

Only if the private accounts were funded in a way that increased national saving, such as through higher taxes -- which he said would have "negative consequences for growth" -- would they address Social Security's long-term problems. At the same time, benefit reductions, such as raising the retirement age, would improve the system's financial footing even if national saving were not boosted, he has said.

When President Ronald Reagan asked Greenspan to head his Social Security commission 18 years ago, the system was so broke that it had to borrow money from the Medicare trust fund to keep paying benefits. (This is a flat-out lie. See chart) As chairman, Greenspan's emphasis then as now was on not just finding a way to make the system solvent again, but to increase national saving in the process. In the short run, the answer then was higher payroll taxes; in the long run, a reduction in benefits tied to a gradual increase in the age at which full benefits are paid.

The Bush administration is not open to a similar solution today. Earlier this month, White House spokesman Ari Fleischer, responding to a question about a proposal by two House members that would set up private accounts but also increase payroll taxes and reduce future benefits, said, "A tax hike is a tax hike is a tax hike, and the president opposes tax hikes."

Part of the 1983 plan called for building up a huge surplus in the trust fund, which would be invested in federal government securities and earn interest. When the baby-boom generation retires, and there are fewer workers paying taxes per retiree, the trust fund's balance could be drawn down. Today, that trust fund has assets approaching $ 1.2 trillion and is projected to peak more than two decades from now with about $ 6.5 trillion.

Greenspan, however, viewed creation of that surplus not just as a way to finance Social Security but as a way to increase the total level of saving in the United States. When the government has a surplus in its unified budget, which includes both Social Security and all other government programs, that money can be used to pay off part of the national debt owned by the public. This process of debt repayment adds to total national saving, making more money available to the private sector to finance investments -- usually at lower interest rates, the Fed chairman has explained. (The debt laundering at a return of six to seven cents with every dollar we give them. The most heinous crime.)

For the fiscal year that ends next month, for example, the federal budget, excluding Social Security, will be roughly in balance. But the trust fund's expected surplus of around $ 160 billion means that the government is augmenting private saving by close to that amount. (The numbers are not quite the same because the government also borrows money to finance some lending to the public, such as direct student loans.)

A few weeks ago, Treasury Secretary Paul H. O'Neill, arguing in favor of private accounts that would hold assets such as stocks and corporate bonds, said the U.S. Treasury securities in the Social Security trust fund, are not "real" assets. Instead, he said, they are only a promise by the government to pay benefits in the future.

Asked at the Senate Banking Committee hearing about whether the trust fund assets are "real" or merely an accounting device, Greenspan said, "It's wholly irrelevant whether in fact you have U.S. treasuries, corporate bonds, corporate stocks." He added: "The crucial question: Are they ultimate claims on real resources? And the answer is yes." (They are claims on future income taxes.)