Fed Chief Sees Hard Choices to Preserve
By: Richard W. Stevenson
The New York Time, January
Alan Greenspan, the Federal Reserve chairman, warned Congress today not
to count on projected Government budget surpluses to solve Social
Security's problems, and he suggested that the two parties would still
have to cut benefits or raise taxes to insure the retirement system's
Appearing before the Senate Budget Committee, Mr. Greenspan was clearly
trying to interject a dose of hard reality into the debate over Social
Security, which for the last week has centered on President Clinton's
proposal to shore up the system with $2.7 trillion of the $4.4 trillion in
surpluses the White House anticipates over the next 15 years.
Relying on the surplus reduces the sacrifices that would be necessary
from today's workers and tomorrow's retirees, and for that reason
Republicans, too, have generally endorsed allocating a big portion of the
surplus to Social Security.
Mr. Clinton has alluded in general terms to the need for measures in
addition to using the surplus, but has avoided specifics, while
Republicans have been silent or called for solutions that require neither
tax increases nor benefit cuts.
Last week and again today, Mr. Greenspan criticized one element of the
White House's Social Security proposal, saying that its call for the
Government to invest $700 billion in the stock market would result in
political meddling in the free enterprise system. But Mr. Greenspan was
supportive again today of Mr. Clinton's call for a large portion of the
surplus to be used to bolster Social Security by paying down the national
Mr. Greenspan's main message today was that budget forecasts have been
notoriously unreliable in the past and are likely to remain so in the
future, making 15-year surplus projections a rickety structure on which to
base a solution to Social Security's long-term financial gap.
The country should be wary of assuming "extraordinarily large
projected surpluses as far as the eye can see," Mr. Greenspan said.
"I use that term advisedly, because it was originally used on the
deficit side, and it was obvious that as far as the eye could see wasn't
all that far. And I suspect that we may find the same characteristic of
nearsightedness re-exhibiting itself in the current period."
Mr. Greenspan noted that the Congressional Budget Office had predicted
in February 1997 that the Government would run a deficit in 1998 of $121
billion. The actual outcome was a surplus of $70 billion.
It is unclear how receptive Congress will be to Mr. Greenspan's
message. Just hours after he spoke, the Congressional Budget Office gave
Congressional leaders a new budget forecast showing a total surplus over
the next 11 years of nearly $2.7 trillion.
The budget office projections, which appeared to be roughly in line
with the $4.4 trillion, 15-year surplus projected by the White House, show
the overall surpluses mounting rapidly, from $107 billion in the current
fiscal year to $381 billion in 2009.
The projections include $794 billion in surpluses over the eight years
starting in 2001 that are beyond those that come from excess payroll taxes
nominally earmarked for Social Security - in other words, a true surplus
derived from annual spending being lower than annual revenues from general
tax collections. Republicans have been counting on the emergence of a true
surplus to finance their plans for an across-the-board reduction in income
Assuming that the overall surpluses materialize and are not used for
new spending programs, Mr. Greenspan said, Mr. Clinton's strategy of using
the surplus to bolster Social Security by paying down the national debt is
the soundest policy option available.
Reducing the debt held by the public would be the best way to
strengthen the economy in the long run, Mr. Greenspan said.
But given the risks that a downturn in the economy or the stock market
could cause the surpluses to evaporate, Mr. Greenspan said, Congress and
the Administration need to keep looking for ways to increase the amount of
money available for Social Security or to decrease benefit payments. Mr.
Greenspan led a commission in the early 1980's that pushed through both
tax increases and benefit cuts.
Raising taxes now or altering the Social Security system to require
increased savings and investment through private accounts might prove too
politically "burdensome," Mr. Greenspan said.
As a result, he added, the country would have to examine a long menu of
potential benefit cuts, in the form of changes like an older retirement
age, a reduction in cost-of-living increases or a less generous formula
for calculating lifetime earnings.
In his State of the Union address last week, Mr. Clinton said his plan,
which also called for the Government to invest a portion of Social
Security's reserves in the stock market, would keep the system afloat
until 2055, compared with 2032 if no changes are made.
Because of the huge numbers of baby boomers who will begin retiring
over the next several decades - 76 million in all - Social Security will
be able to pay only 75 percent of promised benefits starting in 2032,
unless changes are made.
But the benchmark for financial health in Social Security is solvency
for 75 years, and Mr. Clinton acknowledged that the two parties would have
"to make hard-headed but sensible and achievable choices" to
meet that goal.
But he did not lay out the possibilities, much less endorse any of
them, and most Republicans have avoided the subject altogether.
Asked about Mr. Greenspan's comments, Joe Lockhart, the White House
spokesman, said the Administration "could not agree with him
more" about the need for further bipartisan steps to insure the
A senior House Republican aide said the issue was a "crucial
question" facing both parties, and was part of a broader debate over
whether Congress and the Administration should settle for a partial
solution on Social Security and defer the hard choices for another day.
Before it became apparent that the budget surplus could ease much of
the pain of addressing Social Security's woes, the two parties had been
circling warily around a variety of options.
Mr. Clinton had ruled out increasing the 12.4 percent payroll tax rate
that finances Social Security. But liberal Democrats were advocating other
ways of increasing revenues, including an increase in the wage level
subject to the payroll tax, currently $72,000.
Republicans, however, have been adamant that they will not accept any
kind of tax increase. They have been more open to other options, including
an increase in the retirement age, which is already scheduled to rise
gradually to 67 over the next several decades. But organized labor has
promised a ferocious effort to block any further increase in the
Mr. Greenspan's testimony today came as Republicans continued to
question whether Mr. Clinton's plan to use the surplus for Social Security
was anything more than an accounting gimmick. And it came at a time when
members of both parties are increasingly pessimistic that there will be
enough bipartisan trust in the aftermath of the impeachment trial for
Congress and the Administration to reach a deal on Social Security.
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