- The Washington Times - Thursday, February 17, 2005

Appearing before the Senate Banking Committee on Wednesday, Federal Reserve Chairman Alan Greenspan offered his views on Social Security for the first time since the reform of that program became the chief domestic priority during the second Bush administration. Mr. Greenspan bluntly told the committee: “We’ve got a problem in that the existing pay-as-you-go system is not working, and we’ve got to change it.” His recommended solution was simple: “I’ve always supported moves to full funding in the context of a private account.”

The key for Mr. Greenspan is “full funding.” In order to be able to fully fund Social Security, the federal government and its citizens must dramatically increase national savings over the long term.

The arithmetic is simple: Even after consideration is given to the $1.5 trillion currently in the Social Security Trust Fund, the present value of the retirement system’s long-term unfunded obligations still exceeds $10 trillion. Mr. Greenspan instructed the senators that “the way real resources are made available in such a context is for savings to be put aside to be invested in capital assets, and those capital assets, by increasing relative to the labor force, tend to create increased output per hour.” He warned that “unless we develop the savings to invest,” then the nation will not “be able to create the capital assets to create the goods that are required.”

In its purest form, the current pay-as-you-go system “creates no savings” because it merely transfers resources from current taxpayers to current beneficiaries. Even when there are residual savings, as in the form of today’s trust fund, they are immeasurably unequal to the long-term task. “We can guarantee cash benefits as far out and at whatever size you like,” Mr. Greenspan said, “but we cannot guarantee their purchasing power. And this is why the issue ultimately has to be resolved in terms of [this question]: Do we have the material goods and services that people will need?”

That’s the primary issue. But news accounts of Mr. Greenspan’s testimony emphasized the “financing” of personal retirement accounts because he recommended that they be implemented “in a cautious, gradual way.” Mr. Greenspan, however, insisted that “financing is a secondary issue” because “it’s the means to create the real wealth, not an end in itself.” Increasing savings is the necessary, indispensable condition for creating real wealth. He acknowledged that any increase in spending that is funded by marketable securities increases the deficit and typically lowers national savings. But Mr. Greenspan said borrowing to fund personal retirement accounts “is one of the very rare cases in which you can increase the deficit but not decrease national savings.”



As Mr. Greenspan said, “[I]f you begin to move significant parts of the existing social insurance system into accounts which begin to create full funding ” whereas left where they are, they won’t ” then you do increase national savings over time.” By doing so, America begins providing the resources required to fund the capital investments that will be necessary to generate the real goods that retirees will demand, not the inflation-producing, debt-financed income payments the current system promises.

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