- The Washington Times - Wednesday, February 16, 2005

Federal Reserve Chairman Alan Greenspan yesterday endorsed President Bush’s idea of private Social Security accounts, saying the current system isn’t set up to handle the approaching retirement of baby boomers.

But he also urged Congress to take a cautious approach and warned against moving too fast or borrowing too much money to finance the accounts because he is not sure how the markets will react to them.

“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,” Mr. Greenspan told members of the Senate Banking, Housing and Urban Affairs Committee, most of whom questioned him repeatedly on Social Security.

“I’ve always supported moves to full funding in the context of a private account,” Mr. Greenspan said. “We’ve got a problem in that the existing pay-as-you-go system is not working, and we’ve got to change it.”

The powerful Fed chief visited the panel to deliver his semiannual monetary report, but both sides of the aisle, looking for political ammunition, were eager to get his views on Social Security. His endorsement of the private-account concept is expected to help Mr. Bush and fellow Republicans as they push to let workers 55 or younger invest part of their Social Security contributions.

Panel Democrats seized on Mr. Greenspan’s call for a cautious approach.

“It seems to me that what you’re saying here is that moving to the system that’s outlined, that the president may propose, is risky,” said Sen. Charles E. Schumer, New York Democrat. “It’s risky because we don’t know what the markets … will do if they see it, and at the same time, it does not increase overall net savings in and of itself.”

Ranking panel Democrat Sen. Paul S. Sarbanes of Maryland said the chief “admitted there are very big problems” associated with borrowing trillions of dollars to finance private accounts.

Mr. Greenspan said by themselves, private accounts will not solve the long-term financial problems of Social Security, because they will not add to or subtract from national savings. And he said he is not sure how the markets will react to the new debt that will be needed to finance the accounts. Spending up to $1 trillion on the accounts is acceptable, but spending $2 trillion is too much, the chairman said.

Sen. Jon Corzine, New Jersey Democrat, said Mr. Greenspan’s comments, “on balance, set this thing back,” referring to Mr. Bush’s efforts.

But Mr. Greenspan said even with the risk involved, creating private accounts will be a better move in the long run than the status quo.

He said the existing Social Security system, which relies on current workers to fund the benefits of current retirees, worked fine when the ratio of workers to retirees was high and life expectancy was lower. But now, life expectancy is increasing and the ratio of 3.3 workers per retiree will continue falling as baby boomers start to retire ” changes he said the present system is “ill-suited” to handle. He estimated the unfunded liability of the system, projected out to infinity, at more than $10 trillion.

He said personal accounts have a good chance of providing young workers with the retirement amount they would have received if the system were financially sound.

“Personal accounts have far greater probability … of being fully funded. And the simple form of pay-as-you-go by construction saves nothing,” he said.

The Republican National Committee thought the chairman’s statements helped their cause and immediately put out a press release touting his insistence that there is a problem with the current system and that private accounts are a good idea.

Republicans said the chairman essentially agreed with their views on private accounts.

“He basically said, ‘Yes, they would be good, but they wouldn’t solve all the problems,’ and we who favor them think that’s absolutely true,” said Sen. Jim Bunning, Kentucky Republican and banking committee member.

But Mr. Bunning also added, “Both sides will use what he said,” to further their own goals.

Mr. Greenspan also spoke about the economy as a whole, saying, “Economic fundamentals have steadied.”

He listed factors to watch for their effect on inflation, including “the extent and persistence of any slowdown in productivity” and “the exchange value of the dollar and oil prices.”

But on the whole, he seemed optimistic.

“All told, the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well anchored,” he said.

Looking toward future challenges, Mr. Greenspan urged Congress to act in the near future to shore up Social Security and Medicare for the baby boomers, though he didn’t cite specific solutions.

“Real progress on these issues will unavoidably entail many difficult choices. But the demographics are inexorable and call for action before the leading edge of baby boomer retirement becomes evident in 2008,” he said.

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