Published February 17, 2005
WASHINGTON – Federal Reserve (search) Chairman Alan Greenspan (search) embraced President Bush's vision of an "ownership society" Thursday, saying private Social Security accounts could foster feelings of wealth among poor Americans.
In a second straight day of congressional testimony, Greenspan again argued that individual investment accounts are a better alternative than the current pay-as-you-go system bthey could encourage workers to save.
While admitting private accounts would not solve the solvency problem facing the government retirement system, he said they would create "a sense of ownefluential Fed chief said during questions from the panel.
Greenspan went before the committee to discuss the U.S. central bank's semiannual report on the economy, but Bush's politically contentious proposal to create private Social Security accounts quickly became the focus of the hearing.
The president wants to let workers divert part of their Social Security (search) payroll taxes into individual accounts, saying this is an integral part of dealing with a looming crisis for the 70-year old system.
Democrats are united against Bush's plan, which they say would endanger workers' retirement security and entail trillions of dollars in government borrowing to cover benefit payments while taking in less in taxes.
If no changes are made, a retiring wave of baby boomers is expected to deplete the Social Security trust fund in 2042. Experts say promised benefits need to be scaled back, taxes raised or a combination of both to ensure solvency.
While embracing the concept of private accounts, Greenspan did not specifically endorse Bush's approach and steered clear of calling the funding problem a crisis, as Bush has done.
"I would not use the word crisis," he said. "Crisis to me usually refers to something which is going to happen tomorrow or is on the edge of going into a very serious change. That is not going to happen."
Greenspan did, however, reiterate he believed the existing system, in which incoming taxes pay current benefits, was not viable over the long-haul.
The Fed chief urged policy-makers to act before the first wave of retiring baby boomers begins to draw benefits in 2008.
"If we look forward into the post-2008 era, we have to make some very major changes to constrain uncontrollable increases in the unified budget deficit," he said. "The first priority is to assure that deficits are under control."
Greenspan said it was essential for the United States to boost national savings, saying the country needed a pool of wealth large enough to support the living standards of both workers and retirees.
In that respect, he said personal accounts could help pre-fund a system that, over an infinite horizon, is forecast to be short more than $10 trillion.
"Whatever type of structure we have for retirement, it has to be fully funded," Greenspan said.
"One of the reasons that I think we have to move towards a private individual account system is they, by their nature, tend to be significantly fully funded," he said. "Individuals know what they need for the future and they tend to put monies away adequately."
But Greenspan said the issue of private accounts went "beyond the economics" of simply fixing a creaky system to the larger issue of preserving a stable democracy.
"It's crucial to our stability that people all have a stake in this system," he said. "I don't perceive that Social Security is conceived that way and I think it is very important to people to have a sense of ownership."
Democrats, still smarting from Greenspan's backing of tax cuts during Bush's first term, which contributed to huge budget deficits, disagreed.
"I do have to express skepticism that telling workers losing their jobs ... 'Do not despair. Private accounts are coming' will be less a morale booster than I think you implied," said Rep. Barney Frank, a Massachussets Democrat.