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[109 Senate Hearings]
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S. Hrg. 109-59
EXPLORING THE ECONOMICS OF RETIREMENT
=======================================================================
HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC
__________
MARCH 15, 2005
__________
Serial No. 109-4
Printed for the use of the Special Committee on Aging
______
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SPECIAL COMMITTEE ON AGING
GORDON SMITH, Oregon, Chairman
RICHARD SHELBY, Alabama HERB KOHL, Wisconsin
SUSAN COLLINS, Maine JAMES M. JEFFORDS, Vermont
JAMES M. TALENT, Missouri RUSSELL D. FEINGOLD, Wisconsin
ELIZABETH DOLE, North Carolina RON WYDEN, Oregon
MEL MARTINEZ, Florida BLANCHE L. LINCOLN, Arkansas
LARRY E. CRAIG, Idaho EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania THOMAS R. CARPER, Delaware
CONRAD BURNS, Montana BILL NELSON, Florida
LAMAR ALEXANDER, Tennessee HILLARY RODHAM CLINTON, New York
JIM DEMINT, South Carolina
Catherine Finley, Staff Director
Julie Cohen, Ranking Member Staff Director
(ii)
C O N T E N T S
----------
Page
Opening Statement of Senator Gordon Smith........................ 1
Opening Statement of Senator Herb Kohl........................... 2
Statement of Senator Ron Wyden................................... 4
Statement of Senator Larry Craig................................. 5
Statement of Senator James Talent................................ 6
Statement of Senator Susan Collins............................... 7
Statement of Senator Evan Bayh................................... 8
Statement of Senator Blanche Lincoln............................. 10
Statement of Senator Conrad Burns................................ 10
Statement of Senator Hillary Clinton............................. 10
Panel I
Hon. Alan Greenspan, Chairman, Federal Reserve Board............. 11
APPENDIX
Questions from Senator Blanche Lincoln for Chairman Greenspan.... 43
Questions from Senator James Talent for Chairman Greenspan....... 45
Questions from Senator Mel Martinez for Chairman Greenspan....... 47
(iii)
EXPLORING THE ECONOMICS OF RETIREMENT
----------
TUESDAY, MARCH 15, 2005
U.S. Senate,
Special Committee on Aging,
Washington, DC.
The committee met, pursuant to notice, at 10 a.m., in room
SD-562, Dirksen Senate Office Building, Hon. Gordon H. Smith
(chairman of the committee) presiding.
Present: Senators Smith, Collins, Talent, Craig, Burns,
Kohl, Wyden, Lincoln, Bayh, Carper, Clinton, and Jeffords.
OPENING STATEMENT OF SENATOR GORDON H. SMITH, CHAIRMAN
The Chairman. Good morning, ladies and gentlemen. We will
convene this hearing of the Senate Special Committee on Aging.
I know a number of our colleagues are en route, but in respect
of Chairman Greenspan's time, we are going to try and conduct
this hearing within a 2\1/2\ hour period or shorter, if
possible.
I know Senator Kohl has joined us and we welcome him as
well.
We are just barely starting, Senator.
We are fortunate to have Federal Reserve Board Chairman
Alan Greenspan here with us to help us explore the economics of
retirement. He has given these matters a great deal of thought
as well as having the ability to share with us his experience
in chairing the bipartisan Social Security panel that helped
forge the last rescue of the program in 1983.
As the witnesses in our hearing last month clearly
articulated, with the onslaught of baby boom retirees in the
coming decades, the expenditures of Social Security, Medicare,
Medicaid, and other public and private pension programs will
rise rapidly in the coming year. However, with the large exodus
of older workers from the labor force, the pool of working-age
Americans will rise only modestly, potentially depriving our
nation of what has been one of its major engines of economic
growth. Balancing the income and outgo of the Social Security
system may now be our principle focus, but as we will hear
today, a primary goal of any legislation should be to increase
national savings and stimulate the increased productivity
needed to achieve higher economic output.
Meeting the promises made to future retirees depends more
on the size of the economy than whether claims on future
resources are built into public or private retirement programs.
Raising future taxes for Social Security or accumulating stocks
and bonds in new personal accounts will mean little if the
economy has not expanded sufficiently to match the consumption
needs of an older nation. It is the economy's capacity to grow
over the next few decades that offers the greatest security to
our aging population.
Much of the recent debate considers Social Security in
isolation from the rest of the government, the economy, and
other means by which people strive for retirement security. If
balancing the system's, income and outgo were all that
mattered, the simplest fix would be to pass a law adding more
government bonds to the Social Security trust funds. However,
there is no excess money in the general fund, and because
Federal deficits are projected for as far as the eye can see,
none is expected in the future. That means there are two
recourses in the future for making good on those bonds: Raising
taxes or borrowing. Neither of those actions will increase the
size of the economy, and in all likelihood, they would impair
it.
Economic growth will not occur without sacrifices. People
can do two things with their money. They can buy things that
they consume immediately or they can invest their money to
enable them to consume in the future. Simply put, there is no
free lunch in achieving national savings. As we will hear
today, the same is true when making government policy.
So before we proceed to Chairman Greenspan, it is my
pleasure to turn the microphone to my colleague, the Ranking
Member, Senator Herb Kohl, who has remarks of his own to make.
OPENING STATEMENT OF SENATOR HERB KOHL
Senator Kohl. I thank you, Mr. Chairman, and we thank you,
Chairman Greenspan, for your appearance here today.
Chairman Greenspan, back in the 1980's, you served as
chairman of a commission to strengthen Social Security at a
time when Social Security could only pay full benefits through
the middle of 1983. Now, that was a real crisis, and such is
not the case today. Social Security can pay full benefits for
another 40 to 50 years, and after that, even if nothing is
done, as you know, Social Security could still pay 70 to 80
percent of its promised benefits. So what we are dealing with
here today is nothing close to a complete bankruptcy of the
program.
Of course, we do not believe that nothing should be done,
but it is clear that for those of us who are truly interested
in strengthening Social Security--and not dismantling it or
replacing it with something very different--the problem can be
fixed through relatively modest adjustments. But instead, the
President has proposed changing Social Security to a new,
untested, and very expensive system of private accounts.
Mr. Chairman, as you have said, private accounts will do
nothing to improve Social Security's solvency, and they would
not meet your goal, which I share, of increasing national
saving. On the contrary, they would add up to $5 trillion to
our national debt. So you can see why many of us are skeptical.
If we truly want to increase saving, our priority should be
reducing the Federal budget deficit, which you have said is the
best way to increase national saving.
That is what bothers many of us here about this debate. It
sidetracks us from the central issue that we should be
discussing: that our country faces growing budget deficits that
will take their toll not just on our ability to sustain
programs like Social Security, but also on other important
programs, like Medicare.
Medicare, like Social Security, faces a future in which
more and more seniors will be eligible for the program with
fewer and fewer workers paying taxes to support them; but
unlike Social Security, the dollar value of Medicare benefits
is not set by a formula. It is dependent instead on the
skyrocketing costs of health care. Every estimate shows
Medicare's share of the Federal budget increasing at a far
greater rate than Social Security's. The President has focused
only on Social Security, but I know you agree that we need to
think about all other programs that will put a strain on the
budget in the coming years.
It is clear that the biggest problem is not Social
Security. In fact, GAO estimates that Social Security accounts
for less than 10 percent of the government's long-term future
liabilities. If we are serious about dealing with all of our
fiscal challenges, then we should be spending our time and
effort looking at the entire Federal budget. That includes the
budget and tax policies that this Administration has chosen.
The President talks about fiscal restraint; however, CBO
estimates that the Administration's budget policies would
increase the budget deficit by $1.6 trillion over the next 10
years. The cost of making the tax cuts permanent would be $11
trillion over 75 years, which is three times the cost of fixing
Social Security. The cost of repealing the estate tax entirely
would be almost 25 percent of the cost of fixing Social
Security.
What we really face here are choices, and supporters of
private accounts and tax cuts have made their choice. I believe
it reveals that they are not serious enough about dealing with
our budget deficit or increasing national saving, and it calls
into question whether they are interested in strengthening the
long-term solvency of Social Security.
But we can choose differently. The American people expect
us to have a serious debate and come together to solve the
challenges facing Social Security. Unfortunately, the debate
today has become, as you know, so polarized that partisan
sniping and deadlock are the most likely outcomes. That is
unacceptable. Americans expect a more serious effort when it
comes to a program as important as Social Security. In 1983, as
you know, people from both sides came together under your
direction and were able to strengthen Social Security for
another 75 years, but this model has not been followed by this
President. He has not bothered to consult very much, if at all,
with Democrats, nor has he formed a truly bipartisan
commission, which is what the American people want and deserve,
and which was done in 1983 under President Reagan.
Everyone knows that you cannot achieve lasting change to
this highly popular program, or tackle the tough fiscal issues
we face across the board, without broad bipartisan support and
participation. Therefore, the goal should be real
bipartisanship, and not just trying to pick off a few Democrats
as bipartisan window dressing. Only then will we be able to
strengthen Social Security, which has protected millions from
poverty and provided a sense of security to all Americans.
We thank you for being here, and, Mr. Chairman, I turn it
back to you.
The Chairman. Thank you, Senator Kohl.
If there is no objection, I would propose that each member
have an opportunity for a brief opening statement on the basis
of their time of arrival. So we will turn first to Senator
Wyden and then Senator Craig.
OPENING STATEMENT OF SENATOR RON WYDEN
Senator Wyden. Thank you, Mr. Chairman. I commend you, Mr.
Chairman, and Senator Kohl, and I will be brief.
Chairman Greenspan, I don't see how you can explore the
economics of retirement, the topic of today's hearing, without
digging into the question of the weakening dollar. The
weakening dollar is particularly hard on older people. Suffice
it to say right now, we are talking about how we persuade
people to save more in America, and I think it is pretty
stunning when you lock at Newsweek Magazine this week, they say
in an article that Americans should consider savings accounts
and certificates of deposit in foreign currencies. They make
this argument on the basis of the weakening dollar. So I intend
to explore with you this morning this question of the weakening
dollar and how far we are really going to let this slip. That
will be the first area that I look at.
The second that leaves me puzzled is why you give short-
shrift to the issue of health care. Health care in your
statement today gets one sentence and a footnote. As far as I
can tell, you essentially say nobody really understands the
ramifications of health care technology, so we really cannot
get into this now. I would respectfully disagree. Senator Hatch
and I have authored a bipartisan law that is now being
implemented that is going to look at some of the tradeoffs
necessary to address this health care issue, and I want to
explore that with you this morning, because like my view with
respect to the weakening dollar, I just don't think this
country can duck this issue of health care any longer, and that
is the point of the bipartisan law that I have authored with
Senator Hatch.
So, as always, we welcome you and look forward to
discussing these important issues, and especially to my friend
from Oregon, Senator Smith, I thank him for scheduling this.
The Chairman. Thank you, Senator Wyden.
Senator Craig.
OPENING STATEMENT OF SENATOR LARRY CRAIG
Senator Craig. Mr. Chairman, thank you very much.
Chairman Greenspan, welcome again before the Aging
Committee.
I had the opportunity about a year and a half ago to
explore with you the dynamics of the Social Security system
juxtaposed to Medicare and prescription drug reform, and I
remember at that time, and, Ron, it may assist you a little bit
in why the chairman is saying what he is saying today. I
remember asking you the question which is the easier of the two
to fix, and I have used your comments since that time, because
I thought they were very profound. In essence, you say said
Social Security is by far the easier to fix because we know the
numbers. We can adjust accordingly. We can determine cash-flow.
It is a relatively fixed model.
Health care is dynamic, constantly changing and constantly
improving and very expensive, and how do with we fit that into
a model and be able to predict accurately the outcome and the
cost? I mean, I am paraphrasing you, Mr. Chairman. I would
certainly not put words in your mouth, but generally that is
what I gained from your comment.
I am probably one of the few on this panel besides possibly
Senator Jeffords who was in the Congress in 1980, 1981, 1982,
and 1983, and I must tell you, Senator Kohl, I was there for
the wrestling match between the two Irishmen, Tip O'Neill and
Ronald Reagan on the issue of Social Security reform. I will
tell you who won the wrestling match in the first go around.
The Democrats did. The reason they did was because Claude
Pepper and company went out to the land and said Republicans
are going to destroy the Social Security system and only
Democrats can save it, and that resulted in the unelection of a
variety of my colleagues that were in the class of 1980.
Republicans saw in part the reality of the politics of the
issue of that time, and Ronald Reagan, wise man that he was,
along with Tip O'Neill agreed to put together a group that you
chaired.
The reform, and you will again correct me if I am wrong,
was not unlike the model we had used in the past for Social
Security. It was a relatively simple model. It is, in fact, a
model that many are asking for today. How do you fix it? You
simply raise taxes and cut benefits, raise taxes and cut
benefits, raise taxes and cut benefits.
I have a granddaughter who is 7 years old. I have done the
numbers for her. If we raise taxes and cut benefits, my guess
is that my granddaughter when she hits 22 or 23 is going to be
paying around 18 percent of her gross so that grand-daddy can
live well. I am phenomenally fearful not for the this grand-
daddy, but for a lot of the grand-daddies out there that might
be told by their grandchildren in the future, you know, you are
too darned expensive for us anymore; we simply can't afford to
put our kids in college, buy our homes, buy our cars, and pay
for your retirement, Social Security/supplemental income
because it is taking too big a chunk of our hard earned pay.
Now, that juxtaposed against the demographics and the work
force out there and all of that kind of thing, Chairman
Greenspan and I while I chaired this committee did something
else. We looked at the demographics of aging. We looked at the
dynamics of a country growing older than younger and a
diminishing work force against technology and therefore fewer
paying into the system, and I must say our President is very
wise to challenge us to think beyond the traditional box of
reforming Social Security, of raising taxes, cutting benefits,
raising taxes, cutting benefits.
I don't mind less benefits, but I do worry greatly about my
concern that my grandchildren are going to be asked to pay a
prohibitive tax against a program in which they will receive
very little in return compared to what my parents, their great
grandparents, and I will receive. It is a challenge for us all
of us. It is not something to be demagogued. In the past it has
been. Two wish Irishmen finally came together, formed a study
group, came out with a change, but I do remember a change that
I believe I voted for, and it was the largest tax increase on
the working men and women of this country ever perpetrated by
Congress. Did it fix and sustain Social Security in the out
years? You bet it did, and it will for those who are in the
system now and receiving, but the work force of America pays
more and in general the retiree gets less. That, in my opinion,
is not necessarily a good model.
But I do thank you for being here today. It is a phenomenal
challenge for us that I hope we can stand together on as we
have in the past.
Thank you Mr. Chairman.
The Chairman. Thank you, and by order of arrival, we will
next go to Senator Talent, Senator Collins, Senator Jeffords,
and Senator Bayh.
OPENING STATEMENT OF SENATOR JAMES TALENT
Senator Talent. Mr. Chairman, I came primarily to hear
Chairman Greenspan. I appreciated Senator Craig's comments, and
I know you want the hearing to be about more than Social
Security. I have some questions prepared, for example, with
regard to health care, what we might be able to gain for the
system if we can recall fully implement information technology
in health care as we have in other sectors of the economy, and
the potential productivity gains I think are huge, and if I can
be here when it is my turn to ask questions, Mr. Chairman, I
will do that.
But I do want to echo Senator Craig's comments that, we
have heard so much about investments. The nature of finances
and personal finances has changed so much in the last
generation, I would hope that we could look at whether we can
use some of those gains and some of what we have learned to
help us to protect Social Security for the future without
having to face the Hobson's choice that Senator Craig mentioned
of another big tax increase or big benefit cut, and I hope we
can all get together and try to do that.
I am going to reserve the rest of my opening statement, Mr.
Chairman, maybe make a comment or two when it is my turn to ask
questions.
Thank you.
The Chairman. Thank you, Senator Talent.
Senator Collins.
OPENING STATEMENT OF SENATOR SUSAN COLLINS
Senator Collins. Thank you, Mr. Chairman, and thank you for
calling this very important hearing.
I want to begin my comments today by thanking our
distinguished witness for his public service. He has made so
many sacrifices over the years in order to serve the American
people, and I want to thank him for his extraordinary public
service and also for giving us the benefit of his wisdom today.
Senator Craig mentioned that he was in Congress back in the
early 1980's when what was known as the Greenspan Commission
did the fundamental recommendations on reforming and saving
Social Security. Well, I was not in public office at that time,
but I was a Senate staffer at that time, working for Senator
Bill Cohen. So remember that well. I was going to describe
myself as a young Senate staffer at that time when I realized
how many years ago, indeed, it was. But that commission was
able to produce bipartisan recommendations really non-partisan
recommendations, is a tribute to the leadership of our witness
today, and it makes me wonder whether that is a model for our
proceeding to face the very big challenges that we see today.
Social Security has been a huge success. It is our nation's
largest and most poplar government program. More than 47
million Americans rely on Social Security, and for two-thirds
of them, it is their major source of income. I think as we look
at how to preserve and modernize the system, we always need to
remember that for many Americans, Social Security is the safety
net that makes the difference between poverty and an adequate
standard of living during their retirement years.
We also should remember that Social Security is not just a
retirement program. It is also a disability insurance program
and a life insurance program that provides families of active
workers with protection worth more than $12 trillion. That is
more than all the private life insurance currently in force.
Unfortunately, as successful as Social Security has been,
we know that the system faces serious long-term financing
problems and is simply not sustainable in its current form.
While the system is sound today, it will not be able to meet
its obligations to future retirees unless it is modernized.
Our Social Security cash surplus begins to decline in 2008.
That is just three years from now. Generally when you have
heard discussion about Social Security, the focus has been on
either 2018 or 2042, but, in fact, in just three years, the
cash surplus begins to decline, and that is because that is
when the first of the baby boomers reaches age 62, the earliest
age at which Social Security benefits can be drawn and the age
at which about half of those eligible to claim benefits have
done so in recent years.
In recent weeks, there has been a lot of debate about
whether Social Security is facing, quote, a crisis or just
facing, quote, serious problems. Whether the system is facing a
crisis or serious problems is really just a matter of
semantics, and I think it is a disservice for the American
people for us to be spending time in the Senate debating
whether or not this reaches the level of a crisis when clearly
all the projections show that Social Security is not
sustainable in the long run for our children and our
grandchildren, and that is why I believe that we should start
dealing with Social Security's financing problems, because then
the solution will be less disruptive.
But given the universal importance of this program, it is
absolutely critical that we get this right. Any changes that
are implemented must be carefully thought out, thoroughly
understood, and have solid basis of bipartisan support that
cuts across all age and income groups. As I look at the various
proposals for Social Security reform, I want to make certain
that we preserve and, indeed, strengthen that safety net. I
think we should look, for example, at increasing the minimum
benefit and having a guaranteed benefit, because the principle
that we ought to endorse is that if you work your whole life,
you should not retire in poverty. That means looking at the
adequacy of the minimum benefit as well as securing the
solvency of the system.
So, Mr. Chairman, thank you again. This is an extraordinary
important hearing, and I appreciate your leadership.
The Chairman. Thank you, Senator Collins.
Senator Jeffords.
Senator Jeffords. I will pass.
The Chairman. Senator Bayh.
OPENING STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Thank you, Chairman Smith.
Chairman Greenspan, welcome.
From our time together on the Banking Committee, you know
it is my practice to forego opening statements. I regret that
the problem in Congress arises today that I am expected to be
in simultaneous places or several places simultaneously. So I
am going to make just a couple of opening comments today, and I
hope you will bear with me.
I was struck by something that Senator Craig mentioned, and
I want to agree with him about the need for bipartisanship and
for neither side to demagogue these important issues. Senator,
I was particularly struck by your concern for your
grandchildren. It is something I think about with regard to my
own young sons, and I think is fundamentally immoral of us to
pass on our obligations to future generations when we should be
meeting them ourselves. This is particularly so when we are
increasingly in debt to foreign nations, and I hate to think of
our children or your grandchildren someday paying with interest
our obligations to other countries.
They also will be paying not only for imbalances in the
Social Security system, however, but for the underlying Federal
budget deficit, which if you look to the out years may, in
fact, equal or exceed the liabilities in the Social Security
system. So to this Senator's way of thinking, if we are going
to really get to a bipartisan consensus on doing right by our
children and grandchildren, we need to address both Social
Security and the budget deficit so that they won't be forced to
meet our obligations.
This raises in my mind, Mr. Chairman, a conundrum that I
posed the last time we were before the Banking Committee, which
is how we simultaneously argue that Social Security is in
crisis--that is not a word that you have used, but there is an
actuarial problem there that needs to be addressed--but at the
same time, we are some flush with cash that we can afford
further tax cuts.
This is a situation which needs some explanation, and so I
would suggest to my colleagues that if we really are going to
address the long-term fiscal solvency of our country, both
sides need to not demagogue these issues, but try and address
the underlying problems in a way that will do right by future
generations.
Mr. Chairman, if I have to leave before my question time,
here were the three that I would have posed to you. So perhaps
if you can address them at some point in your comments or maybe
your able staff could get back to me, that would be wonderful.
There has been some research about increasing private
savings that is noticed that in traditional 401(K) and private
savings plans, when the approach that we take today is followed
with the asking employees whether they wish to opt into these
savings programs, the participation rate is somewhere between
25 and 43 percent. If instead we shift the presumption and
require employees to opt out of those savings programs, the
experience seems to be that participation rates increase up to
80 or 90 percent. So my question to you is would changing that
presumption be a good thing? If so, it then creates what I
refer to is as a problem of success, and that is that some of
the business communities say, ``Well, if we are going to have
increasing participation in these plans, well, then we are
going to have to provide the match and that increases our
costs, and some in the private sector are resistant to doing
that.'' So is it a good idea, and if so, how do we address the
concerns that some in the private sector would express as a
result of the success of increased private savings through that
vehicle?
My second question relates to the estimates that the Social
Security system, the trustees have made about their long-term
projections for both growth and productivity over the next 30
or 40 years. I believe they estimate economic growth on average
at 1.9 percent and productive rates of growth at 1.6 percent,
which based upon our recent experience seems to me to be rather
modest, both of these estimates, which raises another
conundrum. If the estimates are, in fact, somewhat low, does
not that mean that the Social Security imbalance is somewhat
less than we are currently estimating.
Conversely, if the estimates are correct, and, in fact.
economic growth is projected to be at 1.9 percent for the
foreseeable future, does that not mean that market rates of
return on investments might correspondingly be somewhat low if
the economy is only growing at that rate of return? How do we
square? So are those estimates accurate? If not, how do we
square those to outcomes if they are not?
Finally, I have seen in your submitted testimony that you
raise the issue of the unified budget and the false sense of
security that gives to people on our side of the dias here
today when it comes to our assessment of the fiscal situation
of the country and the lamentable situation we have got in
actually using Social Security revenues for other things. Would
it be good in your opinion if we abandoned the unified budget
and, in fact, segregated Social Security funds for the purposes
of putting together the Federal budget?
Those are my questions, Mr. Chairman, and I thank you for
your presence.
Chairman Smith, I thank you for calling the hearing today.
The Chairman. Thank you, Senator Bayh, and we have been
joined by Senator Lincoln, Senator Burns and Senator Clinton.
Senator Lincoln, you are next.
OPENING STATEMENT OF SENATOR BLANCHE LINCOLN
Senator Lincoln. Thank you, Mr. Chairman. I will submit my
statement for the record, will welcome Chairman Greenspan to
the committee, and look forward to being able to have a
discussion and ask some questions on what I believe not just
Social Security to be a problem in terms of retirement, but the
fact that we are exploring the economics of retirement. I hope
that we will also talk about the other pieces of the puzzle
that exist in that, which would be Medicare, Medicaid, a lot of
the other components that really do have an impact on
retirement.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Lincoln.
Senator Burns.
OPENING STATEMENT OF SENATOR CONRAD BURNS
Senator Burns. Thank you, Mr. Chairman.
I have not served on this committee for a while, and I am
back under a new chairman. Chairman Smith, we welcome you and
under your leadership, and, Chairman Greenspan, it is nice to
see you again.
I have no opening statement, although we have some
concerns, and I will submit the questions and I would imagine,
probably, that everybody will have just about the same
question. The problem arises in time that not everybody gets to
ask theirs. So I shall listen very closely. I know there are
changes in the winds that we have a system that is in the
sustainable, and I think it is incumbent on us to work on the
reforms that will make it that way, taking advantage of a lot
of circumstances that we have in this country.
So I thank the leadership, and I have no opening statement.
Mr. Greenspan, welcome to the committee.
The Chairman. Senator Clinton.
OPENING STATEMENT OF SENATOR HILLARY CLINTON
Senator Clinton. Thank you very much, Mr. Chairman. I thank
the ranking member, both of you for the hearings you have been
holding in this committee which are addressing some very
important issues, and of course I appreciate your having Mr.
Greenspan here for us to ask questions. I do not have an
opening statement. I just will wait and hear the questions
myself.
The Chairman. Chairman Greenspan, thank you for your
patience in listening to all of us. I think in my eight years
in the U.S. Senate, I do not know of any single individual who
has been more quoted by both sides of the aisle than you, sir,
and I join the comments of several here to say how much we
honor your service to Presidents, both Republican and Democrat
and how much your counsel is listened to here. I think you know
that because we quote you equally on both sides. We appreciate
your time and especially appreciate the gravity of this most
important topic, which is the retirement of America.
So, sir, the microphone and the time is yours.
STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE
BOARD
Mr. Greenspan. Thank you very much.
Mr. Chairman, Senator Kohl, and members of the committee, I
am particularly pleased to be here today to discuss the issues
of population aging and retirement. In so doing, I would like
to emphasize that the views I will express are my own and do
not necessarily represent those of the Federal Reserve Board.
The economics of retirement are straightforward: Enough
resources must be set aside over a lifetime of work to fund
consumption during retirement. At the most rudimentary level,
one could envision households actually storing goods purchased
during their working years for use during retirement. Even
better, the resources that would have otherwise gone into
producing the stored goods could be diverted to the production
of new capital assets, which would produce an even greater
quantity of goods and services for later use. In the latter
case, we would be raising output per worker, our traditional
measure of productivity, including, of course the supplementary
measure of output per hour.
The bottom line in the success of all retirement programs
is the availability of real resources at retirement. The
financial systems associated with retirement plans facilitate
the allocation of resources that supply retirement consumption
of goods and services; they do not produce goods and services.
A useful test of a retirement system for a society is whether
it sets up realistic expectations as to the future availability
of real resources and, hence, the capacity to deliver post-work
consumption without overly burdening the standard of living of
the working-age population.
In 2008, the leading edge of what must surely be the
largest shift from work to retirement in our nation's history
will become evident as some baby boomers become eligible for
Social Security. According to the intermediate projections of
the Social Security trustees, the population 65 years of age
and older will be approximately 26 percent of the adult
population in 2030, compared with 17 percent today. This huge
change in the structure of our population will expose all our
financial retirement systems to severe stress and will require
adjustments for which there are no historical precedents.
Indeed, retirement, generally, is a relatively new phenomenon
in human history. Average American life expectancy a century
ago, for example, was only 47 years. Relatively few of our
citizens were able to enjoy many post-work years.
One consequence of the sizable baby boom cohort moving from
the work force to retirement is an inevitable slowing in the
growth of gross domestic product per capita relative to the
growth of output per worker. As the ratio of workers to
population declines, so too must the ratio of output to
population, assuming no change in the growth of productivity.
That result is simply a matter of arithmetic. The important
economic implications of that arithmetic is that with fewer
workers relative to dependents, each worker's output will have
to support a greater number of people. Under the intermediate
population projections of the Social Security trustees, for
example, the ratio of workers to the total population will
shrink about 7 percent by 2030. This shrinkage means that by
2030, total output per person will be 7 percent lower than it
would be if the current population structure were to persist.
The fact that a greater share of the dependents will be elderly
rather than children will put an additional burden on society's
resources, as the elderly consume a relatively large share of
the per capita resources, whereas children consume relatively
little.
This inevitable drop in the growth rate of per capita GDP
relative to the growth of productivity could be cushioned by an
increase in the labor force participation, which would boost
the ratio of workers to population. Increasing labor force
participation seems to be a natural response to population
aging as Americans not only are living longer, but are also
generally living healthier. Rates of disability for the elderly
have been declining, reflecting both improvements in health and
changes in technology that accommodate the physical impairments
that are associated with aging. In addition, work is becoming
less physically strenuous and more demanding intellectually,
continuing a century-long trend toward a more conceptual and
less physical economic output.
Despite the improving feasibility of work at older ages,
Americans have been retiring at younger and younger ages. For
example, in 1940, the median age of retirement for men was 69;
today, the median age is about 62. In recent years, labor force
participation among older Americans has picked up somewhat, but
it is far too early to determine the underlying causes of this
increase. Rising pressures on retirement incomes and a growing
scarcity of experienced labor could induce further increases in
the labor force participation of the elderly and near-elderly
in the future. In addition, policies that specifically
encourage greater labor force participation would also lessen
the necessary adjustments to consumption. Workers nearing
retirement have accumulated many years of valuable experience.
So extending labor force participation by just a few years
could have a sizable impact on economic output.
Another way to boost future standards of living is to
increase saving. We need the additional saving in the decades
ahead if we are to finance the construction of a capital stock
that will produce the additional real resources needed to
redeem the retirement claims of baby boomers without having to
severely raise the claims on tomorrow's workers.
However, by almost any measure, the required amount of
saving that would be necessary is sufficiently large to raise
serious questions about whether we will be able to meet the
retirement commitments already made. Much has been made of
shortfalls in our private defined-benefit plans, but the gross
underfunding currently at $450 billion, although significant as
a percentage of the $1.8 trillion in assets of private defined-
benefit plans, is modest compared with the underfunding of our
publicly administered pensions.
At present, the Social Security trustees estimate the
unfunded liability over the indefinite future to be $10.4
trillion. The shortfall in Medicare is calculated at several
multiples of the one in Social Security. These numbers suggest
that either very large tax increases will be required to meet
the shortfalls or benefits will have to be pared back.
Because benefit cuts will almost surely be at least part of
the resolution, it is incumbent on government to convey to
future retirees that the real resources currently promised to
be available on retirement will not be fully forthcoming. We
owe future retirees as much time as possible to adjust their
plans for work, saving, and retirement spending. They need to
ensure that their personal resources, along with what they
expect to receive from government, will be sufficient to meet
their retirement goals.
Conventional advice from personal-finance professionals is
that one should aim to accumulate sufficient resources to
provide an overall replacement rate of about 70 percent to 80
percent in retirement. Under current law, Social Security
promises a replacement rate of about 42 percent for workers who
earn the economy wide-average each and every year through their
careers and about 56 percent for low-wage workers who earn 45
percent of the economy wide-average. Assuming that taxes are
capped at the current 12.4 percent of payroll, revenues will be
sufficient to pay only about 70 percent of current-law benefits
by the middle of this century. Thus, for the average worker, a
replacement rate of only about 30 percent would be payable out
of contemporaneous revenues, assuming that benefit reductions
are applied proportionally across the board. For a low-wage
worker, the payable replacement rate would be about 40 percent.
Assuming that the goal is still to replace 70 percent to 80
percent of pre-retirement income, average workers by the middle
of this century should be aiming to replace about 45 percent of
their pre-retirement income, rather than today's 33 percent,
out of some combination of private employer pension benefits
and personal saving.
The required increases in private savings would be less to
the extent that Social Security tax increases are part of the
solution. However, to avoid any changes in replacement rates,
the Social Security tax rate would have to be increased from
the current 12.4 percent to about 18 percent at the middle of
the century.
Once we have determined the level of benefits that we can
reasonably promise, we must ensure that we will have the real
resources in the future to fulfill those promises. When we
evaluate our ability to meet those promises, focusing solely on
the solvency of the financial plan is, in my judgment, a
mistake. Focusing on solvency within the Social Security
system, without regard to the broader macroeconomic picture,
does not ensure that the real resources to fulfill our
commitments will be there. For example, if we buildup the
assets in the Social Security trust fund, thereby achieving
solvency, but offset those efforts by reducing saving
elsewhere, then the real resources required to meet future
benefits will not be forthcoming from our economy. In the end,
we will have accomplished little in preparing the economy to
meet future demands. Thus, in addressing Social Security's
imbalances, we need to ensure that measures taken now to
finance future benefit commitments represent real additions to
national saving.
We need, in effect, to make the phantom ``lock-boxes''
around the trust fund real. For a brief period in the late
1990's, a common commitment emerged to do just that. But,
regrettably, that commitment collapsed when it became apparent
that in light of a less favorable economic environment,
maintaining balance in the budget excluding Social Security
would require lower spending or higher taxes.
Last year, Social Security tax revenues plus interest
exceeded benefits by about $150 billion. If those funds had
been removed from the unified budget and ``locked-up'' had
Congress had not made any adjustments in the rest of the
budget, the unified budget deficit would have been $564
billion. A reasonable hypothesis is that the Congress would, in
fact, have responded by taking actions to pare the deficit. In
that case, the end result would have been lowered government
dissavings and correspondingly higher national savings. A
simple reshuffling from the unified accounts to the lock-boxes
would not have, in itself, added to government savings; but
higher taxes or lower spending would have accomplished that
important objective.
The major attraction of personal or private accounts is
that they can be constructed to be truly segregated from the
unified budget and, therefore, are more likely to induce the
Federal Government to take those actions that would reduce
public dissavings and raise national savings. But it is
important to recognize that many varieties of private accounts
exist with significantly different economic consequences. Some
types of accounts are virtually indistinguishable from the
current Social Security system, and the Congress would be
unlikely to view them as truly off-budget. Other types of
accounts actually do transfer funds into the private sector as
unencumbered private assets. The Congress is much more likely
to view the transfer of funds to these latter types of accounts
as raising the deficit and would then react by taking measures
to lower it.
Failure to address the imbalances between our promises to
future retirees and our ability to meet their promises would
have severe consequences for the economy. The most recent
projections by the Office of Management and Budget show that
spending on Social Security, Medicare, and Medicaid will rise
from about 8 percent of Gross Domestic Product today to about
13 percent by 2030. Under existing tax rates and reasonable
assumptions about other spending, these projections make clear
that the Federal budget is on an unsustainable path, in which
large deficits result in rising interest rates and ever-growing
interest payments that augment deficits in future years. But
most important, deficits as a percentage of GDP in these
simulations rise without limit. Unless the trend is reversed,
at some point these deficits would cause the economy to
stagnate or worse. Closing the gap solely with rising tax rates
would be problematic; higher tax rates rarely achieve a
comparable rise in tax receipts, and the level of required
taxation could in itself severely inhibit economic growth.
In light of these sobering projections, I believe that a
thorough review of our commitments and at least some adjustment
in those commitments is urgently needed. The necessary
adjustments will become ever more difficult and larger the
longer we delay. No changes will be easy. All programs in our
budget exist because a majority of the Congress and the
President considered them of value to our society. Adjustments
will thus involve making tradeoffs among valued alternatives.
The Congress must choose which alternatives are the most valued
in the context of limited resources. In so doing, you will need
to consider not only the distributional effects of policy
changes, but also the broader economic effects on labor supply,
retirement behavior, and the national saving. The benefits to
taking sound, timely action could extend many decades into the
future.
Thank you very much, Mr. Chairman. I look forward to your
questions.
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The Chairman. Thank you, Chairman Greenspan. Your insights
are always very helpful. The insight that I seek from you now
comes from your experience in leading the former Greenspan
Commission that saved Social Security the last time. As someone
who has tried to keep his powder dry, to listen to the
arguments for and against what the President has proposed and
then seeing the political temperature go up on both sides, I
for one am disappointed that there is not a more constructive
environment in which to consider all that you have just shared
with us.
I wonder if you see any parallels to your experience in the
early eighties and whether something like a Greenspan
Commission could be useful to us now. Can you also share with
us your experience in the early eighties and perhaps suggest to
us some process, that you found helpful and was to avoid things
that are hurtful to an ultimately good result in saving Social
Security?
Mr. Greenspan. I think the experiences we had in 1983 are
relevant today, and the reason I say that is that it was not
the usual Presidential or national commission which regrettably
too often ends up with a thick report which nobody reads. It
was constructed in a quite unusual way. We had, in effect, a
bipartisan commission, obviously, with many members of the
Senate and the House as well as the private citizens, and we
decided to construct the system in such a manner that rather
than have a commission which would deliberate, produce a
report, present it to the Congress and the President, we
decided to work interactively and we set it up in a manner in
which Bob Ball, who is a very, very well respected Social
Security analyst and commissioner of many decades back and is
still around, functioning as effectively as always, essentially
reported and kept in constant contact with Speaker O'Neill, and
I did the same for the President, President Reagan, and Jim
Baker, his then Chief of Staff, and we deliberated in a way
which was really quite fascinating Claude Pepper's name was
mentioned earlier. Claude Pepper actually set the commission on
a very important path, because I, frankly, had assumed that the
first meeting of the commission, which as you may recall
confronted a Social Security trust fund which was rapidly
declining which would have required benefit cuts, I thought it
would be the politically easiest thing to do to just merely
avert to general revenues, and I feared that that was what
would indeed happen.
Claude Pepper said no. He said let us keep this as a social
insurance system, let us keep this in the form in which it is,
and in so doing, he in a sense basically set the parameters of
the discussion, which was we have a problem; we have a deficit;
there are only two ways to resolve it. You raise taxes or you
reduce spending.
Now, you may think that once we came to that conclusion, it
became very easy, but we actually spent a good deal of time
trying to find ways to essentially repeal the laws of
arithmetic. Until we finally got to position that we had to do
various things, we were in common contact in bringing both the
Speaker and the President up to date and we must say locking in
the decisionmaking process. When we finally came to a
conclusion, it was a simultaneous conclusion, essentially,
between the Speaker and the President and the commission. When
we appeared before the Congress, Bob Ball and I decided that we
had to present the commission's findings as unamendable,
essentially, because it was a compromise, because if you
started to amend it, the whole thing would unravel.
So what we did is I said when Republicans ask you a
question, I will answer, and I trust you will do the same when
Democrats ask me a question. So we stood side by side with the
President and the Speaker and essentially eventually got an
agreement on the substance of what the particular
recommendations were. There were a whole series of potential
recommendations, and we could have chosen from a family of any
solutions, but we finally decided on one by a fairly large
majority. As a consequence of that, when presented to the
Senate and to the House, the types of amendments which were
applied were more operational rather than substantive, and the
process worked.
Do I think this is a possibility this time? I certainly
hope so. I do recognize that the degree of differences seem at
least on an audible level to be larger than they were back in
1983, but I suspect in principle not, because this is not a
hugely difficult problem to solve, certainly no more difficult
than in 1983. I guess what is missing is the fact that at this
stage, there has been a rather low interest in actually joining
together and finding out where some of the agreements are, and
I have a suspicion that if it occurs, that will happen.
The Chairman. I suspect it will also, because when you look
at the larger category of our topic today, not just Social
Security but also Medicare, I suspect it will be some time
within 10 years that these programs in combination will begin
consuming so much of the Federal budget that Republicans and
Democrats are going to have to come up with a process, perhaps
not unlike what you have experienced and shared with us this
morning, that will come to the rescue of our nation's economy;
but right now, I think there is a lot of politics playing out,
and frankly it is unfortunate we can't get to it sooner rather
than later. Hopefully, your presence here today will help us
get to it sooner.
Senator Kohl.
Senator Kohl. Thank you, Mr. Chairman. Senator Clinton has
to be departing shortly, and on our side, I would like to give
her an opportunity to make her comments, and ask her questions
at this time.
Senator Clinton. Thank you very much, Senator, and I
appreciate your kindness.
Chairman Greenspan, I sat and listened to your testimony
and I obviously took great note of it and particularly your
statement on page 6 about the brief period in the late 1990's
when a common commitment emerged to make the fantom lock boxes
around the trust fund real. I remember serving on the budget
committee 4 years ago in the spring of 2001 when your testimony
helped blow the lid off the lock boxes when it came to the size
of the tax cuts, the extent of the tax cuts.
In addition to the tax cuts, without the real opportunity
to continue to pay down the debt and the deficit, we did away
with pay-go rules. So we essentially have been in a free fall
ever since and we are still in that free fall, and I think that
your testimony today is a little nostalgic for me, and I regret
that we are in the position we are in.
I want to ask you two questions. First, in your previous
testimony before Congress, you have stated before the Banking
Committee on February 16, that you would be very careful about
very large increasing debt, characterizing anything over a
trillion dollars as large. I guess we are now into multiple
zeroes when we think about what is large and what is not. The
President's plan in so far as we know it to privatize Social
Security will increase the debt by almost five trillion over 20
years.
Setting aside the fundamental debate over diverting money
out of Social Security, what do you think about establishing
private accounts without paying for them, but instead by
borrowing yet more money; and second, if we were to enact the
privatization proposal such as the one the President is
suggesting, what responsibility do you recommend the Federal
Government have for workers who retire in years when the stock
market is down and face a significant reduction in benefits?
What about the other pieces of the mission of Social Security,
namely the disability and survivor benefits? How do we ensure
that they are fair and adequate in a privatized system?
In fact, this is not a hypothetical question. If you look
at the fact that between March 2000 and April 2001, the S and P
500 fell by 424 points or 28 percent, if Social Security had
been privatized, the worker who had his or her individual
account invested in a fund that mirrored the S and P 500, which
in many respects is a preferred investment, and who retired in
April 2001 would have 28 percent less to live on for the rest
of his or her life.
So I would appreciate your response to both of those
questions.
Mr. Greenspan. Well, Senator, let me first comment that
with respect to the 2001 period, I actually went back and
reviewed the testimony that I gave in January of 2001, and we
were confronted at that time with an almost universal
expectation amongst experts that we were dealing with a very
large surplus for which there seemed to be no end, and that was
true of the best analysts in the Office of Management and
Budget and the Federal Reserve, and the question was what do we
do when we get in a very rapid decline and a level of debt
outstanding when we are about to approach zero and create some
significant distortions in the system how to allocate assets.
I argued back then that excessive on-budget surpluses
distorted the private system and we should try to eliminate
them. I did indicate that we should have a scheduled tax cut,
and the reason for that was in order to reduce the surplus. I
also indicated that there was the possibility--indeed, the
language is fairly strong in some cases--that we may be fooling
ourselves, that, in fact, deficits are coming back, and I
therefore recommended that we have some form of trigger to
readjust if, indeed, that happens. Subsequently, I have been a
very strong supporter of pay-go, and so in all tax cuts and all
expenditure increases, I have held the position that we have to
pay for them one way or another or we are creating serious
problems.
So I don't think that the issue is a question of taking a
wholly different view. I look back and I would say to you if
confronted with the same evidence we had back then, I would
recommend exactly what I recommended then. It turns out we were
all wrong. We were wrong largely because even though we had
pay-go in place, we underestimated how that would erode.
With respect to the particular issues that you raise,
specifically with respect to private accounts, I think pay-go
is applicable here as well. I think there are very tricky
questions which the Congressional Budget Office has raised
relative to how they would be scored, but they have to be under
the same rubric.
With respect to the question of people with private
accounts which are invested in equities at the time they
retire, that would be a very unfortunate mistake, and I think
any private account of which I am aware would restrict the
amount of highly volatile-priced securities in the last 10
years of work. So I don't think that issue is real. I do agree
with you that were it to happen, it would be very disabling,
but that is easy to cure.
On the issue of disability and survivors, I think that is
an issue that we have to handle. In other words, we don't
essentially eliminate those obligations. I think we address
them in many other ways, and I think that is perfectly feasible
to do, and I do believe you need a safety net under the system.
So private accounts are coming in all sizes and shapes. I
don't know exactly what the President is going to propose. I do
believe that whatever is proposed should be as small as
possible, because we do not know, as I have indicated in past
testimony, how the market will react to the increase in the
budget deficit that will be reported on a unified budget basis.
Until we know that, I think we are taking potential risks with
private accounts, and my testimony in the past is that we
should start very slowly and see whether, in fact, it is
disruptive. If it is, we had better very quickly reverse.
Senator Clinton. Thank you, Senator Kohl.
Just for the record, we were not all wrong.
The Chairman. If there is no objection, we will go back and
forth, again on time of arrival. So the next questioning goes
to Senator Craig and then Senator Wyden.
Senator Craig. Again, Mr. Chairman, we appreciate your
comments, your both broad view of where we are and our
responsibilities and your candid application of your experience
to that.
We have visited before about the demographics of aging and
its impact on economies and countries. We see this phenomenal
shift that is occurring out there, and you have talked about
the historic numbers of retirements that will occur and their
impact upon the economy. Some other nations, like Japan and
western Europe, are preceding us down that demographic road.
How instructive are any of the experiences they have had to us?
Mr. Greenspan. Well, Senator, as you know, there is a very
substantial variation in how retirement is handled around the
world. Obviously, the demographic problems in some European
nations are far worse than ours, and clearly that is also the
case in Japan. They are handling them in a number of different
ways. There are a lot of private accounts or a lot of mixed
accounts. There are many different ways of approaching the
issue, and I think we should endeavor to get to where we wish
to be in resolving these very broad questions.
We need to examine the experiences of other countries. We
have to remember, however, that our culture is different. There
are different views and different ways in which we handle
things, and so the actual experience of others is not
necessarily useful, but I do think it is worthwhile looking at
it because I think we will find types of things not to do as
well as what to do.
Senator Craig. Last, Mr. Chairman, in part, the 1983
reforms intended to make the system solvent for the long term
by increasing government savings. This was supposed to involve
large Social Security surpluses being used to buy down Federal
debt during the early 21st Century. Today's trend lines for
future generations show both declining Social Security solvency
and growing Federal debt. Does this imply that for the sake of
future retirement security, we would do to better to
incentivize personal savings than to pin our hopes on
government savings?
Mr. Greenspan. Well, Senator, as I pointed out in my
prepared remarks, 30 million Americans will turn 65 over the
next 25 years, we have the arithmetic that we cannot get around
and the demographics we cannot get around, that is very great
pressure on the replacement rate from Social Security to fall,
meaning the amount of income we get as benefits relative to the
amount of income we had in our last years of work.
This means that we have to look beyond Social Security into
other ways of creating retirement assets and sources of funds,
because we either raise Social Security taxes to an
extraordinarily high level, which remember is a tax on
individuals and businesses and there are competitive issues
here which we have to be aware of or we cut benefits. So I
think it is very important to recognize that we have to look
beyond Social Security for means of retirement income, and I
think here we have to be especially careful to make certain
that those who have inadequate resources essentially are held
harmless in the adjustment, which we can actually do.
But it is important that we, instead of trying to solve
just the Social Security problem, we look at the broader issues
of retirement income. I think having Social Security on the
table and resolved fairly quickly is where we ought to go for
exactly the reason you and I discussed a while back, not that
Medicare is not the far larger and far more difficult problem,
but rather is it probably sequentially better to get Social
Security out of the way, because it is essentially a defined
benefit program. We know its parameters. We know it has to be
resolved, and that can be done.
Medicare is going to turn out to be a far more difficult
issue, which will require more time than we thought, and I
believe probably more than one commission and more than one
effort to get there.
Senator Craig. Thank you.
Thank you, Mr. Chairman.
The Chairman. Senator Kohl, I believe is next.
Senator Kohl. Thank you, Mr. Chairman. Out of respect to
all my colleagues, I will just ask one question, and it relates
to your response to the previous question.
You know the most likely outcome with respect to this
Social Security issue today is probably a deadlock. There is so
much partisanship that has been injected into it that practical
realities dictate that at some point in the near future, in
order to just move on with all the problems that we face here
in Washington, we will just have to put it aside, and that
would be most unfortunate.
That would be an unacceptable outcome, because Social
Security, as you have said, is not the only the problem we
face. We need to talk about Medicare, Medicaid, tax policies,
and spending policies. When I talk to my constituents back home
and make the comment that what we need is a debate about how we
are going to raise money and spend money in a manner that will
enable us to move forward in a more constructive fashion in the
years to come, they all agree that we desperately need to have
this debate.
Don't you think that we need to have a debate at this time
not only about Social Security, but about these other issues,
even if that debate takes a year or two? In order to have that
debate, wouldn't you agree that we need to establish here in
Washington, starting with the Administration, a truly
bipartisan atmosphere that will elicit the cooperation and the
best ideas from members on both sides of the aisle, just as you
did in 1983? In order for this debate to happen--whether it be
on Social Security or on all these other issues--don't we have
to have a different kind of approach than the one that we are
pursuing with respect to Social Security at this time?
Mr. Greenspan. Senator, I think it is essential that
whatever solution we come up be bipartisan, because there is no
second alternative, and unless we do that, we won't resolve
these particular issues. I think that we have a deadline which
is early 2008, and that is when we begin to get the leading
edge of a fairly significant cohort of the baby boom generation
moving into retirement. Any agreements that are made will apply
to them, and I think it is important to get those in place
before the cohort of baby boomers starts to retire. I sense,
and I may be a little more optimistic that perhaps is
realistic, that there is a growing awareness of where the
differences are and where the general agreements are, and it
may well be that some mechanism such as that which we employed
in 1983 may be a useful mechanism to get groups together and
find out where there are agreements.
I think that what tends to happen in these debates is
nobody talks about what they agree about, but only about what
they differ about, and something has got to give soon because
we don't have the choice of not resolving these issues, because
with the inexorable turn of the calendar, we are going to be
running into the Year 2008, and there is a great deal to be
done, and I would hope we could get Social Security behind us
and begin to really address the medical issue, because I think
this is the crucial issue which will confront this Congress and
this President over the years immediately ahead.
Senator Kohl. Thank you, Mr. Chairman.
The Chairman. Thank you. Next, Senator Collins and then
Senator Wyden.
Senator Collins. Thank you Mr. Chairman. Dr. Greenspan,
your testimony provided an excellent overview of the
demographic changes in this country that compel us to act to
ensure the future solvency of the Social Security system. One
of the recommendations that came out of the 1983 Greenspan
Commission was an increase from the retirement age over a
gradual period of time from 65 to 67, and again this time, we
hear a lot of experts saying in light of the fact that people
are living longer, we should take a look at a further increase
in the retirement age to 68, 69, or even 70.
I personally have a lot of concerns about that because we
have a lot of individuals in this country who work in
physically demanding jobs, and I wonder it is practical or
realistic to expect them to continue working in their late
sixties. But I am wondering why there isn't more focus on the
early retirement age of 62. We know that half of those who are
eligible do begin receiving benefits at age 62.
Should we be taking a look at the early retirement age as
opposed to what seems to be an exclusive focus on raising the
age from 67 to some increased number?
Mr. Greenspan. Well, Senator, I think one of the advantages
of having a commission with a staff who are experts on a lot of
these issues is to actually array all of the alternatives that
are available. That is what they did for us in 1983. We had an
excellent staff. We now would presume that most of the people
who are involved in taking early retirement are those in
arduous jobs. I am not sure all of them are by any means, but I
am reasonably convinced that a significant amount of those
retiring from arduous jobs are probably getting more benefits
in the sense that they tend to be in the, say, lower three
quintiles of the distribution, and what you could do is very
simply to try to adjust, for example, for individuals who
choose to retire particularly early. You will find that their
benefits will tend on average to be higher, but one of the
things that will show up no matter what you do is every
particular fix on the problem we have is essentially
unacceptable; and therefore, as I indicated previously, what
you need is a recognition that these are all choices among
relatively unfavorable outcomes, and we don't have the choice
not to choose.
The problem is out there. What is forcing us is demography,
and we cannot get around the fact that a very large cohort of
the American population will retire, and when they do, it will
have very extraordinary effects on the finances of the system,
and therefore we must fix it, and every fix is unacceptable. So
you run into a contradiction which gets resolved only by
recognizing it is not a choice of what you would like to do,
but a whole set of choices of what you would least like to do.
Senator Collins. Thank you, Mr. Chairman.
The Chairman. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
Dr. Greenspan, you heard my comments about this weakening
dollar, and it seems to me it pounds the seniors and the near
seniors with a double whammy. First, they have always looked
for safety. They have always looked for instruments that are
safe, and now they are being advised to start looking at CDs
and savings accounts, foreign CDs and savings accounts.
Second, we are having this big debate, as we should, about
generating more savings for the future, and it seems to me the
weakening dollar debate doesn't make people feel very confident
about saving for retirement when they hear constantly about the
uncertainly triggered by our dollar policies. So my question to
you is have we reached the point out now with respect to the
dollar where seniors should go out and follow the
recommendation by a very authoritative person in Newsweek, go
out and buy foreign CDs? Have we reached this point?
Mr. Greenspan. Senator, such recommendations presume that
you can forecast the exchange rate of the dollar over an
intermediate period. We at the Federal Reserve have expended an
extraordinarily large amount of resources to try to forecast
the value of the dollar in foreign exchange markets, and we
have determined it is an exceptionally difficult thing to do,
and as I like to put, it, we have been no more successful than
the odds you get in tossing a coin.
So it is rank speculation for a senior or anybody else to
buy foreign CDs. You can certainly say that the dollar declined
since the end of 2002 and had one bought CDs back then and sold
them today, you would make a profit, but we are looking forward
and looking forward in my judgment does not tell us terribly
much about where we are going.
But you do raise, I think, a very important question, which
is the tie-in here of our current account deficit and the issue
of savings. One of the reasons not the sole reason, but one of
the reasons, why we have a very large trade deficit and
essentially a very large current account deficit, is that we
don't save enough in the United States and are required to
borrow funds from abroad, borrow savings from abroad, to
finance the capital investment we need to create the
productivity gains that we see. By focusing on increasing
national savings as part of the problem for retirement, we do
go a long way in creating balance in our international
accounts, and it would be a significant factor in the reduction
in our current account balance.
But I leave aside the issue of trying to forecast and
trying to anticipate how exchange rates will go, because it is
remarkable how many people are unequivocal in their forecasts,
and when we look at the actual performance of those forecasts
over time, they are no better than chance.
Senator Wyden. I just have seen that you have said that
dealing with this weakening dollar is somehow going to be
orderly, and I will tell you I see bedlam out there, and I
think it is going to be very hard to get people to save and to
cultivate the kind of savings ethic that you and I want to see
and that there is bipartisan support for until we get our arms
around a sensible dollar policy.
I want to ask about the health care issue also, because
people have differences of opinion. I understand that, but I
just for the life of me don't get the logic in your approach to
health care. You have told us that health care is more serious
and you have told us that it is going to hit more immediately,
but then you say, ``Gosh, let us do Social Security first.''
Well, Senator Hatch and I have authored a law that is now being
implemented as we speak to essentially walk the country through
the choices with respect to health care. It is going to be on
line. It is going to be available in senior centers and the
libraries and the like so that people can see where the health
care dollar goes and what the alternatives would be.
Wouldn't it be more sensible, given the fact that that is
going to hit in 2010 rather than 2040, for us to move with a
sense of urgency on the health care issue? I mean, we have got
a law that allows us to walk the country through the choices
and the tradeoffs. It is now being carried out. Wouldn't it be
smarter to do that first?
Mr. Greenspan. Well, Senator, first, I was somewhat taken
back when you at the very beginning had indicated that I had
said so little about Medicare in my prepared remarks, and of
course you are right. I didn't mean to do that. I think it is a
very serious issue; however, let me follow on to what you have
said. I think what we have a problem in Medicare or medical
systems generally in that we don't know as much about what is
going on as we need to know to resolve and reform a lot of the
difficulties with respect to respect to systems.
Because of the private physician-patient relationship,
there has been very little in the way of collection of data
about various different clinical practice. We do know that the
samples that have been taken would indicate that we have very
considerable differences in clinical practice across the
country with very significant differences in outcomes as well.
What we need to do sequentially to address the medical
problem generally, which is Medicare and Medicaid as well as
other aspects of medical professional issues, is to know what
is going on. Here, I think if we can get a major advance, as
now seems to be underway, in a bipartisan manner to improve the
information technology associated with the medical systems and
get bodies of individual biographies encrypted as we can now do
such that we know what is medical best practice that is an
important first step. I think that if we were to jump in and
reform the system overall before we know what the actual
structure of the medical practice is, I think we risk having to
backtrack, and what I am concerned about is we will put
solutions, in quotes, in place which are inappropriate.
I think I agree with you. I think the medical issue is
urgent and that we should be moving very quickly, as I believe
we will be and are, to get information technology very broadly
applied in medical practice, and when we do that, I do think we
will move fairly quickly to understand what medical best
practice is so that when we construct the proper Medicare
system, we are dealing with the facts at the time. I am worried
about putting in wrong practices which have to be reversed and
technologies which have become obsolete.
Senator Wyden. I would only say, Dr. Greenspan, and my time
is up, that I continue to disagree. The point about medical
technology is indisputable, but the Journal Health Affairs, for
example, says that we might perhaps save $98 billion to go
forward with the information that would come about as a result
of our knowing more about various parts of practice in the
health care system. It is a $1.8 trillion system, and so the
debate about issues of like end of life care, what to do about
administrative costs in health care, which many say are
something like a third of the $1.8 trillion, that can't afford
to wait.
So I respect your view with respect to the issue and
importance of health care technology, but I think we are dead
wrong, dead wrong, to say we are going to start now on a
problem that we have got to deal with 20, 30, years from now
when on New Year's Day 2008, something like 70 million baby
boomers start retiring, and those health care costs are going
to ramp in very fast. They are going to hit this country very
hard. I have enormous respect for you, but I do not think that
the sense of urgency about health care is being conveyed, and I
hope that we can talk further about that.
Mr. Greenspan. Well, Senator, let me just say that I think
there is much less a difference between your views and mine
than I think you have expressed. I don't really, in all
honesty, disagree with anything you have just said. It doesn't
contradict anything I believe I have said. If you can find a
way to move forward on this thing in a productive manner, I
think it would be terrific for this country.
The Chairman. Thanks, Senator Wyden.
Senator Burns and then Senator Jeffords.
Senator Burns. Thank you, Mr. Chairman.
Mr. Greenspan, you are looking at two guys that have
probably more time in information technology and the ability to
move it, building the infrastructure for telemedicine and
centralized records and all of these things. We have one
American failing: We talk about the demographics here and how
we are to preserve a system, and our feeling in American is
just like if I come out and told Mr. Greenspan that he is going
to have to re-roof his barn in 2015, would you sign the
contract today.
Mr. Greenspan. No.
Senator Burns. You wouldn't do that. That is one great
American failing. We do not do anything until we are in a
crisis, and the only thing that we will get done in this
particular issue is that I think there is enough grandfathers
and grandmothers who have another great American trait, and
that is to think more of the next generation than they think of
themselves, and that has always been a trait of America. We
live for our kids and our grand kids, and I think that is a
welcome sight among us who have started this debate. This
debate has to start.
But you are right. We do not have all the time in the
world. 2008 is sort of D-Day, and the events that that will
lead to are not too promising, as far as policymakers are
concerned, to do things now that we would soften that landing.
My questions have been asked by Senator Bayh and also
reinforced by our chairman, so I will not go over that ground
again, but I think we are going to depend on you, on what-ifs,
and do we go into a personal situation that is an add-on to our
retirement or is it a part of the system? I think when I heard
Senator Moynihan many years ago predict that we would come to
this point in our policy, that we will have to make those kind
of decisions, and I just want to add that to the record, that
we have the great American failing, but we also have a great
American trait that is going to enable us to do that. It will
take political courage, however, to do the things, and I agree
that we have to not look at the things that we have to do, and
there are options of things that we do not want to do, and that
makes the problem a good bit more difficult.
So I thank you for your testimony today and I thank for the
insight of my friends across the aisle, because I think as we
take this to the American public on an issue that the American
public has decided this is a part of our social fabric. It is a
very desirable program, and how they understand it and how they
perceive it will be up to us, and, of course, you know when you
go out on the road, it is just like any salesman would say. We
don't buy cars; we buy benefits. We can get to A and B on
anything, but we buy the benefits of air conditioning and those
type of things, and I think that is another one of our great
challenges.
Thank you for coming today. Your statement was insightful.
I don't know of a Senator in this body that is not taking this
very, very seriously, and somewhere in there comes an answer,
and so I think you have further defined the focus and narrowed
it to where I believe that this Congress, not discounting it,
can muster the leadership to make those necessary changes.
Thank you very much, Mr. Chairman.
The Chairman. Senator Jeffords.
Senator Jeffords. It is good to see you again and to chat
with you. In addition to focusing on replacement rates,
personal finance professionals will also discuss
diversification of assets and income streams for those
contemplating retirement. Given the troubles you mentioned in
the defined benefit pension system, I suspect that the ever
growing share of retirees will have Social Security as their
only defined benefit where they are not bearing the investment
risk.
We certainly need to promote savings in any event, but from
the retirees' perspective, shouldn't we maintain Social
Security's defined benefit as strong as possible rather than
swapping some portion of it for what essentially is a defined
contribution plan?
Mr. Greenspan. Senator, the reason I think we have to look
at a broad spectrum of possibilities before you come to final
conclusions is the fact that we are confronted with a very
unusual situation. This is unprecedented in my recollection of
retirement financing in this country.
I think if you put together all of the various
alternatives, it is up to Congress to make the types of
judgments on issues that you are raising, and I think the
crucial question, as I said in my prepared remarks, is which
set of policies will create the national savings which will
assure that the physical resources are there. It may well be
that we can do it in the context of some changes in Social
Security in the direction which you are suggesting. It may be
that we need to move in other directions as well. But the
underlying crucial issue and I would say, the main point that I
am trying to make this morning is, let us not lose sight of the
fact that finance is only a technical means to allocate
resources. It presupposes we have them, and I think that is not
self-evident given the nature of what is about to occur in this
country with so large a segment of our work force retiring. I
think we have to realize it creates very major pressures on
real resources being produced.
The one thing that has got to be at the top of the list in
any solution, whether it is more less Social Security, more or
less 401(K)s or other means of financing, does it increase
national savings, because that is really the only thing we can
do which can counter the demographics over which we have no
control.
Senator Jeffords. Do I have another shot?
The Chairman. You still have time.
Senator Jeffords. The New York times reported on Sunday
that the Federal Reserve estimated that personal savings for
any purpose amounted to a hundred billion last year while OMB
put the tax expenditures for retirement at 112 billion for the
same year. I don't know if this is an apples to oranges
comparison, but it certainly raises some good questions.
Mr. Greenspan. What was the hundred billion? I missed it.
Senator Jeffords. A hundred billion from OMB. I mean the
Federal Reserve estimated that personal savings were a hundred
billion.
Mr. Greenspan. I see. That is right. I saw that.
Senator Jeffords. Well, President Bush singled out
maintaining favorable treatment for charitable contributions
and mortgage interest in the context of tax reform, but he
omitted retirement savings as a preferred category. How should
we balance our desire for simplicity against our need to
promote retirement savings, and do you have any thoughts on our
current tax incentives for retirement savings?
Mr. Greenspan. Well, the problem is we have a great number
of elements in the tax code which have created incentives for
401(K)s, IRAs, and a number of other different elements within
the tax code which are supposed to enhance savings, but as you
point out, our actual net household or personal savings last
year was de minis, and the question is what is causing that,
and that is a very considerable debate amongst economists and
financial experts as to whether or not and to what extent these
various tax incentives are creating savings.
We have, for example, situations around the world where are
there negative savings. Australia, for example, has had
negative savings for quite a while. It is a very tricky
question, because we have increased market value of assets
which people in retirement do not distinguish from what
economists call savings, which is the difference between income
and consumption, but we need to know a great deal more of how
successful various incentives for increased savings, such as
401(K)s and IRAs, are. There is fairly significant dispute
within the economics profession as to how important they are,
and there are people on both sides of the question.
But I think you are raising an interesting issue. In one
sense, it may be apples and oranges, but it is a very important
question.
Senator Jeffords. Thank you very, very much for all you do
for us.
Mr. Greenspan. Thank you.
The Chairman. Senator Bayh.
Senator Bayh. Thank you, Mr. Chairman. I would like to,
having juggled my other meetings, pick up where I left off with
my questions from my opening statement, beginning with the
estimates for economic growth and productivity from the
trustees and the apparent conundrum that it presents where
their estimate for economic growth was 1.9 percent and for
productivity, 1.6 percent over a long time horizon. If, in
fact, they are accurate, that might suggest that market returns
for private accounts would be correspondingly modest. If they
are inaccurate and, in fact, the estimates should be higher,
than perhaps the magnitude of the problem that we are
addressing is not what it is currently estimated to be.
First of all, are they accurate in your opinion?
Mr. Greenspan. You mean are the numbers you quoted? I
believe they are.
Senator Bayh. Those are the trustees estimates?
Mr. Greenspan. Yes.
Senator Bayh. The question is in your opinion whether they
are unduly modest or do they reflect your own feelings for what
may happen over the term?
Mr. Greenspan. When you project out 25 years, you are
dealing with extraordinary uncertainty not with respect to the
labor force, but with respect to productivity growth, and we
have experienced obviously significant productivity growth in
recent years, way beyond our normal expectations. History
suggests that over very protracted periods, a country such as
ours which is at the cutting edge of technology has difficulty
increasing productivity say, more than 2\1/2\ or 3 percent a
year.
Could the number be higher than what we are looking at? Of
course, it could. It could also be lower. The critical question
that must be answered, however, is how much in making changes
would it affect the longer term. Remember that effectively
leaving lags out, we are not promising nominal benefits for
Social Security. We are promising real benefits. So if the
economy is growing faster, not only are revenues rising, but so
are the benefits. So you come out with questionable resolution.
There is some evidence that Medicare, for example, with the
demand for Medicare services is a function of the real income
in the society, so that if you get stronger growth, which is a
perfectly credible forecast, you can't say that, therefore,
growth solve the problem. I think it does in part. In other
words, there is a lag between----
Senator Bayh. It helps some.
Mr. Greenspan. It helps some, but there is a tendency to
exaggerate what the effect is.
Senator Bayh. The gist of my question was, and you have
addressed it, is we have to pick some set of numbers, so best
to give it their best shot and best, I suppose, to err on the
side of caution rather than being too exuberant. So if they are
accurate, these are fairly modest numbers, and it might suggest
lower rates of market returns for those who advocate private
accounts, and I suggest they should reflect that in their
estimates of the returns.
Mr. Greenspan. Well, I think there are several questions
there as well. Obviously, it is not a big issue with respect to
bonds. The real interest rate will be affected, but not by a
great deal, and while it is the case if you have a slower
economy that profits will grow at a slower rate, but remember a
very significant part as far as equities is concerned is the
price-earnings ratio, and it is ambiguous, as to what that will
do over time, and I wish we could forecast that better, but we
don't seem to do all that well.
Senator Bayh. Well, that is true. Forecasting markets is
inherently ambiguous, as you point out, but the P-E ratio has
expanded over the last 10 years or so.
Mr. Greenspan. Yes, it has, and I will grant you that most
analysts will say it is somewhat above normal or at normal or
something like that. So you don't have the capability of
starting at a very low P-E ratio and then expect significant
rise.
But there are more people who forecast the stock market
than forecast it accurately.
Senator Bayh. My two additional questions, Mr. Chairman,
one deals with a couple of options, one of which I mentioned,
for increasing the amount of savings. The first that I did
discuss was moving from the presumption that workers would have
to opt out of their savings program as opposed to being
required to opt in, and that, apparently, according to
research, would dramatically expand participation rates, but
then you run into the problem that I suggested that those in
the private sector have a problem with the success because it
does require them to match the contributions and so forth.
I would be interested in your opinion about shifting the
presumption, and if so, how do we address the ramifications of
that for the business sector.
Second, there is something I didn't mention in my opening
statement, and that is some have suggested for smaller
businesses who find the cost of offering savings programs to be
somewhat onerous, the cost of setting them up, that perhaps the
employees of smaller businesses be allowed to participate in
the thrift savings program offered by the Federal Government.
There would not be a match, but they could make their own
voluntary contributions in that. The small businesses wouldn't
incur the cost of having to set up the program.
That might be one way to address the lack of savings or a
lack of a vehicle for employees of small business, and I see
the red light is now on, Mr. Chairman. So your reaction to
those two ideas to increase private savings. The final question
would be I would be interested if you had any reaction to
Warren Buffet's observation that rather than an ownership
society, if the current account imbalance continues on the way
it is, we, in fact, may be creating in his words a sharecropper
society. I would be interested to know if you had any reaction
to his comments.
Mr. Greenspan. Warren is a good friend, and I sometimes
agree. Sometimes I disagree, and I won't comment in this
particular case on which it is.
Senator Bayh. In a private setting, I would be delighted to
get your reaction.
Mr. Greenspan. Let me just say that we are having so much
difficulty with creating private savings that any venture that
we perceive can possibly add to it is worth looking at. I fear
that the issue of the opt in and opt out is mainly a measure of
the inattention of a number of people, and it is quite likely
that you could start with they have to opt out, and you would
find that it may be 90 percent, but within two years, is it
down to 40.
I think it is interesting issue and I think it is certainly
worthwhile looking at amongst other things, but anything that
we can do to raise personal savings is very much in the
interest of this country.
The Chairman. Senator Lincoln.
Senator Lincoln. Thank you, Chairman Greenspan, for being
here to visit with us here today. We hope it will be a
continuing conversation.
I am the last of four children. So I am used to being last
in line, and I am usually the youngest around here, so I am
usually the last, but I also have to say that it gives me an
added interest in this topic, because in 20 years, I still will
not have reached retirement age. So am I am very interested in
all aspects of what we are dealing with here.
I want to say a very special thanks to our chairman,
Chairman Smith, for holding this hearing and broadening the
conversation, the context of how we are dealing with this in
terms of exploring the economics of retirement, and as I
mentioned earlier, I do think that we have to think of our
nation's retirement as an entire puzzle and Social Security is
just but one of those pieces of that puzzle.
I compliment my colleague, Senator Wyden, in bringing up
the incredible part of this puzzle that is made up by health
care cost, Medicare, Medicaid, personal savings as you have
mentioned, but also long-term care with well over 75 percent of
our long-term care in Arkansas, for our seniors there, is paid
by Medicaid. So when you talk about the kind of cuts we are
looking at in these programs as you talk about Medicare and how
we look for best management practices and ways to hopefully
bring down some of those costs in Medicare, prescription drugs
as a preventive measure is an incredible piece. We have got to
look at a way that we can do better in terms of providing
prescription drugs at a lower cost to everyone, to all the tax
payers, and I hope that that will be a part of this debate,
certainly as we move forward and look at all of the different
pieces of this puzzle, and we look forward to having your input
there.
The couple of questions I had, Mr. Chairman, in 1983,
Congress did follow your recommendations, of the commission,
and raised the taxes to sure up Social Security, but as you
know, Congress used at least a large part of the money that was
raised from that tax increase to pay for general government
expenditures, and what Social Security has been given in
exchange for that $1.5 trillion worth of obligation or IOUs is
just simply an IOU.
I guess first off, just to make sure I understand, would
you agree or disagree that the 1983 tax increase has been used
not for Social Security, but for the general government
spending? I guess as we look forward into that, as you know,
our progressive tax code, which is our income tax, is dedicated
to funding the general fund. In terms of the progressivity of
the tax system, what would be the impact on wage earners if
Congress did not use progressive general fund taxes to pay
Social Security back what it owed? If we don't honor the trust
fund or more specifically that obligation or IOUs that exist
held by the trust fund, are we shifting the tax burden from the
rich to the poor?
Mr. Greenspan. If you have a significant so-called on-
budget deficit, which we have experienced now for quite a long
period of time, is it essentially saying that the addition to
the Social Security trust fund is effectively being employed to
finance other elements of the Federal Government and we are not
creating any savings in the process.
Senator Lincoln. So you are agreeing that the 1983 tax
increase has not----
Mr. Greenspan. Regrettably, I do, yes. It is unfortunate,
but it is a fact, and I thought what was sort of interesting,
which I mentioned in my prepared remarks and Senator Clinton
was mentioning, that there was a recognition that we ought to
view Social Security as a lock-box program in which we somehow
insist that the on-budget is employed as the unified budget and
that, as I indicated in another hearing, it would not be a bad
idea to move the whole Social Security operation to the west
coast, get it out of Washington, maybe even rename it so that
nobody would discover where it was so that they could get at
it.
But, regrettably, that has not been the fact, and I think
that the since the ultimate test of a program is whether it is
going to be adding to national savings, which in my judgment is
the ultimate criterion, the ultimate test is whether government
savings goes up or down, and unless you increase taxes or
decrease spending, you will not get a decrease in government
dissavings.
Senator Lincoln. But we know we could eliminate all non-
defense discretionary spending and still not be able to deal
with the deficit spending that exists. So I guess, again, if we
do honor the trust fund and the obligation, the IOU that exists
there that is held by that trust fund, if we do it with
anything other than the progressive dollars of our tax system,
are we not shifting that tax burden again from the rich to the
poor? Because the poor or the working poor are going to be
those who end up paying back the very debt or the obligation
that has is owed to them.
Mr. Greenspan. Well, actually, there is a commitment in
law, as you know, to pay Social Security benefits where the
only caveat is if the trust fund goes to zero. My own
impression is that should that happen, something else will
occur.
The question, however, is more an issue of taxation
generally, and the Congress has the capacity if it perceives
the incidence of taxation to be falling in the wrong places--
and in the case that you are giving it is hard to tell exactly
what is happening--then you have the obligation to make what
changes you see fit.
Senator Lincoln. Well, Mr. Chairman, if you will just
indulge me for a second, we all have people out there in our
lives who for whatever reason always want to borrow a little
money from us, and many of us are sucker enough to loan it to
them, and then, you know, all of a sudden when it comes time
for them to pay that back that debt, there is a crisis, they
have had an accident or the dog ate it or whatever, and they
create this crisis that they are not willing to pay back the
debt that they owe us for whatever the situation was. Then all
of a sudden, we look down the street, and they are at the
corner bar buying rounds for everybody, all their friends.
You know, whether it is making permanent tax cuts to the
ultra wealth think or what have you, but it is very difficult
then for those of us that continue to loan and to see those
loans being made and then realize that simultaneously there is
promises being made of drinks for everybody down the road.
So you are right. There are some difficult decisions to be
made there and lots of concerns. I would like to associate
myself with the comments from my colleague from Maine, Senator
Collins, about the early retirement, because we do see that 20
percent of the beneficiaries between the ages of 62 and 64 do
have health problems, and it is unfortunate we find that the
early retirement program almost functions as an unofficial
disability program.
So I would hope that we would definitely take that into
consideration when we talk about extending that retirement, the
benefits in the retirement age, because for States like us,
small rule States where predominantly much our workers are in
physical, highly physical, jobs that do tend to present more
disability percentage-wise in our population, that becomes a
real issue.
Thank you, Mr. Chairman. We look forward to continuing our
conversation.
Mr. Greenspan. Thank you very much, Senator.
The Chairman. Chairman Greenspan, just one other question
and comment by myself.
I have heard you in the past speak about Social Security as
we have it now and as you helped to reform it, you compared it
to a 1957 Chevrolet in Havana, Cuba that keeps getting repaired
and keeps running, but I think your point is there may be a
better Chevrolet out there if we have enough foresight to go
out and acquire it. That is a metaphor that you painted in my
mind that sticks with me. You have described in your process as
chairing the Greenspan Commission that you really couldn't get
around the arithmetic. You kept coming back to the fact that
you have to cut some benefits and you have to raise some taxes,
which is essentially what happened.
But as I understand your recent comments and as someone who
is trying to evaluate the merits and demerits of personal
accounts as part of Social Security, I think I hear you giving
qualified support for it.
Mr. Greenspan. That is correct. A pay-as-you-go system by
its nature is essentially a system which is structured to have
current workers pay the benefits of current retirees. That
system worked exceptionally well for 50 years in the sense that
with the population growing and longevity less than it is
today, you had a very large base of workers to finance the
number of retirees. But when you get to the demographics which
we are confronted with today, that system, as I have indicated
elsewhere, is ill-suited to adjust to the future. It can
adjust. In other words, you can make a number of adjustments to
keep it going and sustaining it, but what is very difficult to
do is to create the savings that have to be associated with
that process.
The Chairman. Do you see personal accounts as adding to
national savings?
Mr. Greenspan. Provided that moving from government savings
to private savings, that there are adjustments in government
savings. In other words, you need to, whether you are dealing
with a lock box for Social Security or private accounts, an
adjustment in the on-budget deficit downward, and to the extent
that that occurs, you do add to national savings.
The point I have been trying to make in my remarks is that
it strikes me that private accounts have a higher probability
of achieving that end than the existing Social Security system
unless we can find a lock box which works.
The Chairman. Aren't personal accounts essentially another
form of a lock box? I mean, it creates the lock box.
Mr. Greenspan. That is another way of looking at it,
Senator. In fact, we used to sort of be amused at the notion of
a lock box because there is no such obvious vehicle, but it
actually was a very thoughtful insight as to what the real
problem is, and I think resurrecting the notion is something
which will facilitate our evaluation not only of private
accounts versus Social Security, but all aspects of how one
deals with what is going on in the unified budget.
The Chairman. So if there were one vehicle to create a lock
box and it increases national savings, does it also have the
benefit of giving to the needy what the rich have, and that is
something that grows, compounding interest? In other words,
there is a third option to cutting benefits and raising taxes.
You can make the money work harder, lock it up, and watch
people enjoy the benefit of earnings.
Mr. Greenspan. Outside the sheer economics of it, I think
there is a value to having individuals who don't have
significant wealth at this stage recognize that they have
annuities which are really quite valuable. There are
differences. Their name isn't put on it. It is not in a lock
box, because remember, one of the aspects of the lock box is it
has your name on it, and in Chile when they went to this
system, they found that a number of people were extraordinarily
moved by the fact that they realized that they had far more
wealth than they had any notion existed, and I think that is
very important in this society, since, as I have commented in a
different context, we are confronted with an ever-increasing
concentration of income and wealth, and I don't think a
democratic society can function well under those conditions.
Anything which creates a greater commitment to the society like
homeownership or increased wealth, I think is something we
should endeavor to move in the direction of, to seek to
achieve, and this type of buildup of personal wealth in
retirement accounts, even though it is not available for
current spending, I do think has real value for society.
The Chairman. Was the effect in Chile the broadening of the
middle class, the shrinking of the gap between rich and poor
through personal accounts?
Mr. Greenspan. I believe that is the case, but I cautioned
earlier that we have to be a little careful about taking
examples from other countries which have different
circumstances and merely assuming that they are directly
applicable to America.
The Chairman. But they did have to replace a defined
benefit system with these personal accounts, I assume.
Mr. Greenspan. The general view of the Chilean system is
that it has worked well and, indeed, helped finance economic
growth in that country.
The Chairman. The gap between rich and poor has shrunk?
Mr. Greenspan. I believe that is correct, but I don't know
that is a fact.
The Chairman. Mr. Chairman, you have been very generous
with your time, and you asked us to keep this under 2\1/2\
hours, and we have succeeded by 20 minutes. We thank you for
not just your time, but your wisdom, and again thank you for
your your long service to our country. This hearing is
concluded.
[Whereupon, at 12:09 p.m., the committee adjourned.]
A P P E N D I X
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