In an era when Washington policymakers have been splurging on Social Security surpluses while increasingly resorting to blue smoke and mirrors in their budget accounting, Federal Reserve Chairman Alan Greenspan offered a brief lesson in reality-based arithmetic when he testified Wednesday before the House Budget Committee.
Mr. Greenspan was asked to enumerate the consequences for interest rates and the economy if the deficit-generating budget impasse that has characterized policymaking for the past three or four years were allowed to continue. “If you merely project what the actuaries are [projecting] — how the actuaries interpret current law into future spending and tax obligations — [then] you have an extraordinary rise in the unified budget deficit,” Mr. Greenspan responded. “[W]e’ll find, sooner rather than later, that the long-term interest rates begin to rise. And that when you begin to do the arithmetic of what the rising debt level implied by the deficits tells you, and you add interest costs to that ever-rising debt at ever-higher interest rates, the system becomes fiscally destabilizing. And what you end up with is probably a stagnant economic system. But unless we do something to ameliorate it in a very significant manner,” the Fed chairman warned, “we will be in a state of stagnation.”
Only a few moments earlier, before sounding the “stagnation” alarm at a decibel level to which he had not previously resorted, Mr. Greenspan characterized Social Security’s financial future as “an exceptionally serious problem.” And, as he has often noted, Social Security’s financial outlook pales compared to Medicare. In his prepared testimony, Mr. Greenspan noted that in 2004 Social Security, Medicare and Medicaid together comprised about 8 percent of gross domestic product (GDP). By 2030, according to projections by the Office of Management and Budget, those three programs will command 13 percent of GDP. Thus, over the next 25 years, the resulting budget deficits “would drain an inexorably growing volume of real resources away from private capital formation over time and cast an ever-large shadow over the growth of living standards.”
Mr. Greenspan delivered another lesson in the laws of arithmetic when he focused on Social Security’s pay-as-you-go financing system. Pay-as-you-go worked “exceptionally well” as long as “you increased the population, relative to the number of people who were retired. But when you get the population growth slowing down, and especially the extraordinary improvement in life expectancy after age 65,” Mr Greenspan matter-of-factly stated, “the arithmetic no longer works for pay-as-you-go; and what you need is a system which creates the savings that are invested in real assets to produce the real consumption in retirement.” That is why he endorses personal retirement accounts, which over the long term “create the possibility of building real savings in a manner better than the pay-as-you-go system does.” While the pay-as-you-go system does not have “a mechanism which creates a buildup of savings to create the real resources,” he argued that personal retirement accounts “at least have the capability of doing that.”
In his understated way, Mr. Greenspan observed in his prepared remarks: “I fear that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver.” Later, Democratic Rep. Jim Cooper cited the $8.1 trillion, 75-year unfunded liability Congress created in 2003 when it passed the Medicare prescription-drug plan. Referring to Social Security’s 75-year unfunded obligation of $3.7 trillion, Mr. Cooper asserted that “[the prescription-drug] bill alone is twice as large as the total Social Security problem we face.” The numerically astute Fed chairman concurred, saying, “I cannot dispute your arithmetic.”
Imploring the congressmen to take corrective action with great dispatch, Mr. Greenspan let the committee know what the likely results of business-as-usual U.S. budget policy would be. “Public policy should not be structured in a manner in which we cannot be assured that when we promise something to somebody who really depends [on it] — has to depend on it — that we come up late in the game and say, ‘Sorry, we made an arithmetical mistake.’ ” And he didn’t hide his contempt for such policymaking. “I think it is utterly inappropriate,” he declared. “I think this is unfair.”