WASHINGTON – Federal Reserve Chairman Alan Greenspan (search) urged Congress on Wednesday to take a go-slow approach in setting up the private Social Security accounts favored by President Bush.
Greenspan lent a respected economic voice to the political debate, saying Congress would be wise to take a cautious approach to setting up personal accounts. He said increased government borrowing would be needed to cover Social Security (search) obligations to current retirees because a portion of the payroll tax would be diverted to the private accounts.
"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," Greenspan, 78, told the Senate Banking Committee, where he was delivering the Fed's semi-annual monetary report to Congress.
Bush is proposing allowing workers born after 1949 to covert up to 4 percentage points of their Social Security taxes to personal stock and bond investments. The administration has estimated that the transition costs for the next 10 years would be $754 billion.
But critics of the plan have said that vastly understates the true costs, which some estimate in the trillions of dollars.
Greenspan said the problem was determining whether the government's increased borrowing needs would push up interest rates, and for that reason he said any changes should proceed "slowly and test the waters."
The two sides in the Social Security debate saw different aspects of Greenspan's testimony before the Senate Banking Committee as supporting their approach.
Republicans noted that Greenspan said he had long been in favor of setting up private accounts as a way to address Social Security's long-run financing problems. But Democrats said his insistence on a go-slow approach represented a lukewarm endorsement at best for Bush's overhaul effort.
"There were lots of caveats," said Sen. Charles Schumer, D-N.Y. "This was not like the ringing endorsement of the tax cuts in 2001."
Because of the respect Greenspan commands on Wall Street, his endorsement of an economic proposal is sought by members of both parties.
Bush cleared a major hurdle in his drive to enact tax cuts in 2001 when Greenspan endorsed the idea of cutting taxes, arguing at the time that the government's projected budget surpluses were so large that tax cuts were a good idea. Those surpluses never materialized.
In his appearance Wednesday, Greenspan did endorse making a major switch in how benefits are calculated for workers when they reach retirement age.
Under one of the proposals put forward by Bush's Social Security advisory panel, the level of benefits would be tied to increases in inflation, rather than increases in wages. Currently, retiring workers get about 40 percent of their wages replaced by Social Security. However, switching to an inflation index could cut that amount roughly in half.
Greenspan, who in the past has said benefit cuts will have to be part of the solution to Social Security's problems, called the switch in indexing "one of the most effective ways to come to grips with closing the ... gap between expected revenues and expected benefits."
All last year, Greenspan used various appearances before Congress to push for action to deal with the impending retirement of 78 million baby boomers, saying the government had promised more than it could deliver not only in Social Security but also in Medicare (search), where the funding shortfall is even more severe.
In 1983, Greenspan chaired a Social Security commission that came up with a compromise plan that raised payroll taxes and trimmed benefits to deal with a funding shortfall the system faced at that time.
He said Wednesday that his commission had been successful because he and other panel members had worked closely with then-President Reagan and Democrats in Congress to make sure that whatever was adopted would be acceptable to both parties.