Greenspan Déjà Vu

January 7, 1997 • Commentary

One day after his infamous Washington speech suggesting the stock market was a bit pricey, Federal Reserve chairman Alan Greenspan was speaking again, to the Union League of Philadelphia. Rather than stock advice, this time the chairman was offering advice on what to do about the pending crisis in Social Security.

Those in the audience may have experienced a sense of déjà vu, because the last time Alan Greenspan offered advice on a Social Security crisis was back in 1983, when he headed the National Commission on Social Security Reform, better know as the Greenspan commission. His advice in 1983 was, essentially, raise taxes and cut benefits. Doing so, he told Congress, would secure the system for at least the next 75 years absent “a very adverse economic scenario.”

Given the widely recognized crisis in Social Security today and the strong economic performance since 1983, one might have expected Mr. Greenspan to assume a low profile on the issue. Instead, in his Philadelphia speech on December 6, he sounded much like he did 13 years ago, admonishing us that “if the Social Security system is to survive in its current form, either real benefits must be curtailed or real taxes increased.”

Mr. Greenspan backed up his analysis of what ails the system by confidently stating that, unlike many economic developments, “the Social Security system is largely forecastable.” No one in the Philadelphia audience thought to ask him why, if that were so, in 8 of the past 10 years the Social Security Administration actuaries have lowered the pending insolvency date for the system by a year? And what happened to that 75‐​year guarantee?

Indeed, the greatest myth that Mr. Greenspan continues to perpetuate is the idea that the Social Security “trust fund” will at least put off the day of reckoning. He explicitly endorsed that concept by referring in his speech to the system’s “staggering $3 trillion” unfunded liability. But the unfunded liability is at least $6 trillion, unless one believes the special Treasury notes the government leaves behind each time it pilfers Social Security taxes are actually assets.

When the cash flow of the Social Security system turns negative in 2012 (officially, but more likely in 2008), the federal government faces precisely the same options whether the Treasury notes are submitted for redemption or there was no pretense of a “trust fund.” The government can raise taxes, cut spending, or increase borrowing. Treasury notes are not assets in the sense of representing investment in tangible wealth creation. They are merely liabilities for American taxpayers.

Which is why privatization of Social Security is now a topic of intense discussion in Washington. By allowing individuals to invest their Social Security taxes (along with the employer’s share) in stock and bond mutual funds, real savings will be created and rates of return for future retirees will be three to six times what Social Security now promises but probably won’t be able to pay. Mr. Greenspan is curiously ambivalent about, if not hostile to, privatization of Social Security. Despite telling a national television audience in 1983 that his commission was “made up of a spectrum of individuals which come pretty much across the extremes of American politics from one end to the other,” privatization was not even considered as one of the options.

His one nod to privatization at the Union League talk was to suggest that should such a funded, as opposed to pay‐​as‐​you‐​go, system “boost domestic savings,” it might be a good idea. But there’s really no question about the superiority of a private, funded system. Harvard economist Martin Feldstein estimates that the present value of investing the future cash flow of Social Security taxes in stocks and bonds is $15 trillion, or five percent of GDP per year in perpetuity.

Ultimately, the real issue here — and one Alan Greenspan neglected to allude to in Philadelphia — is individual liberty. Why should all Americans be forced into a single pay‐​as‐​you go system with very low benefits? The higher rate of return from a privatized Social Security system is simply a happy consequence of allowing people choice and the dignity of providing for their own retirement.

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