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Greenspan Backs Idea of Accounts for Retirement
By Edmund L. Andrews and Richard W. Stevenson,
New York Times
February 17, 2005
Steve Benson
Alan Greenspan, the Federal Reserve chairman, gave his blessing on Wednesday to the creation of individual investment accounts in Social Security but expressed unease that the change could lead to trillions of dollars in additional government borrowing in the next few decades.
Mr. Greenspan's cautiously hedged support for the core of President Bush's plan to overhaul the retirement system came as Mr. Bush, in newspaper interviews published Wednesday, left the door open to raising taxes on upper-income people to help deal with Social Security's projected financial problems.
In what appeared to be an effort to show Democrats that he is serious about bipartisan compromise, Mr. Bush, responding to questions from a group of regional newspaper reporters, did not rule out raising or eliminating the cap on earnings that are subject to the payroll tax that pays for Social Security benefits.
The tax is currently levied on wages up to $90,000. Until now, Mr. Bush has said he is against raising "payroll taxes" but has been vague about whether he was talking about the earnings cap as well as the payroll tax rate of 12.4 percent, which is split equally between workers and their employers.
"The one thing I'm not open-minded about is raising the payroll tax rate," Mr. Bush said in the interviews, which took place on Tuesday at the White House. "And all the other issues are on the table, and that's important for people to know."
Asked specifically if he was open to raising the earnings cap, he replied, "I've been asked this question a lot, and the answer is, I'm interested in good ideas."
Taken together, the developments reflected the continued wariness on all sides about the costs, ideological ramifications and political risks of trying to reshape Social Security and put it on a sounder financial footing as the American population ages.
Mr. Bush has put the issue at the top of his domestic agenda but has had little success pushing it ahead in Congress, where many members of his own party have qualms and Democrats are spoiling for a fight.
Some Democrats have suggested that raising the earnings cap is a more attractive alternative than cutting benefits, and if Mr. Bush's statement was an overture to them, it got a cold shoulder on Capitol Hill.
Senator Charles E. Schumer of New York said his fellow Democrats viewed it as "a bit of a ruse" that would probably end with the White House's disavowing any willingness to consider tax increases.
"Democrats are not going to be taken in by smoke signals," Mr. Schumer said. "The president says this is a crisis, so it's up to him to put a concrete, complete, comprehensive plan on the table."
Even before Mr. Schumer offered his analysis in an interview, the White House was playing down Mr. Bush's statements about the earnings cap. Trent Duffy, a spokesman for Mr. Bush, said the president believed it was important to keep all options for dealing with Social Security's solvency on the table, but "that doesn't mean he has embraced any one of them."
By taxing the earnings of those making more than $90,000 a year - a figure that is adjusted each year in line with inflation - the Social Security system could go some way toward restoring solvency over the next 75 years. That would ease the need for any benefit cuts to bring the pay-as-you-go system into balance between revenues and payments.
Mr. Greenspan's comments, in testimony to the Senate Banking Committee, gave Mr. Bush some support on the private accounts component of his approach to Social Security, but also gave ammunition to Democrats who have asserted that establishing investment accounts is, among other problems, unaffordable.
"I think the existing structure is not working," Mr. Greenspan told members of the committee, declaring that private accounts would be "a good thing to do" but urging lawmakers to "start out slowly" and be wary about the trillions of dollars in additional federal borrowing that might be necessary.
"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," he said.
The comments were reminiscent of those Mr. Greenspan made just over four years ago, when he endorsed Mr. Bush's goal of cutting taxes on the theory that the government should gradually reduce its budget surpluses.
On Wednesday, Democrats had been hoping that Mr. Greenspan, who has long advocated steps to bring down the federal budget deficit, would wave a red flag about the potentially huge borrowing that Mr. Bush's Social Security plan is likely to entail.
He avoided doing so. Mr. Greenspan said his warning about the risks of "large" additional borrowing applied to amounts of "more than $1 trillion" over 10 years.
White House officials have estimated that Mr. Bush's plan would require borrowing about $754 billion over the next decade. That figure, however, reflects Mr. Bush's strategy of delaying introduction of the accounts until 2009 and to phase them in over a number of years, a step he has said was intended in part to hold down the costs.
Vice President Dick Cheney has acknowledged that the costs would be in the trillions of dollars in subsequent decades once the program is fully up and running, and some outside experts estimate that total borrowing could exceed $4 trillion over the next several decades.
Mr. Greenspan agreed with Democratic lawmakers that private accounts would do nothing in themselves to solve Social Security's long-run financial shortfall or to increase national savings, which he said was the crucial underlying problem.
Mr. Greenspan also warned that financial markets might not agree with White House claims that borrowing to pay for "transition costs" of private accounts would have no effect on the United States' long-run indebtedness.
"We don't know how the markets respond to that," Mr. Greenspan said. "And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I would imagine."
Mr. Bush has yet to offer a detailed proposal on Social Security, but he is already barnstorming the nation with the message that today's system of guaranteed retirement benefits will soon be "bankrupt" and needs to be replaced, in part, with a system of "personal retirement accounts."
Thus far, White House officials have only outlined their plan for the individual accounts. Under the plan, workers under the age of 55 would be allowed to divert up to 4 percent of their earnings subject to the payroll tax into private accounts and invest the money in a limited array of stock and bond funds.
In the interview on Tuesday, Mr. Bush suggested that he foresees the plan to divert 4 percent of earnings into private accounts as a first step toward a longer range transformation of Social Security.
"The relevant question there is how best to afford the transition from one system to another," he told reporters from The Orange County Register, The New Haven Register, The Birmingham News, The Tennessean of Nashville and The South Florida Sun-Sentinel. "It's a feasible place to start to enable us to introduce a novel concept into a Social Security system that needs to be reformed."
Mr. Bush traveled on Wednesday to Portsmouth, N.H., to drum up support for the plan, saying he would make his case to the nation "over and over and over again" to overcome Democratic opposition and the queasiness within his own party.
The White House press secretary, Scott McClellan, said Mr. Bush still wanted to deal with the issue this year, a timetable that appears increasingly ambitious.
Mr. Bush has crisscrossed the country, hoping to generate grassroots pressure on Congress, especially the Senate. In traveling to Portsmouth, he was not targeting New Hampshire's two Republican senators, Judd Gregg and John E. Sununu, both of whom are with him on the issue, but their counterparts next door in Maine, Olympia J. Snowe and Susan Collins, both Republicans. Ms. Snowe has openly expressed doubts about Mr. Bush's approach, and Ms. Collins has been noncommittal.
Administration officials contend the extra borrowing for these transition costs would not increase the national debt because it would simply be replacing "implicit" debt in the form of unfunded future benefit obligations with regular treasury bonds.
But Mr. Greenspan was skeptical, noting that many investors may have never believed those benefits would be paid and may not believe that any savings envisioned by Congress today would actually materialize in the future.
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