The following is the full text of Federal Reserve Bank
Chairman Alan Greenspan's testimony Monday on ``General Revenue Transfers for Social
Security and Medicare'' before the Senate Special Committee on Aging:
"Mr. Chairman and other members of the committee, I am pleased to be here today as you
begin
your discussion of using general revenue transfers to shore up social security and Medicare. A
thorough consideration of the options available for placing these programs on a firmer fiscal
footing is essential given the pressures that loom in the not-too-distant future. I commend the
committee for your efforts to advance this important discussion.
As you are well aware, the dramatic increase in the
number of retirees relative to workers that is
set to begin in about ten years makes our pay-as-you-go social security and Medicare programs,
as currently constituted, unsustainable in the long run. Eventually, social security and Medicare
will have to undergo reform. The goal of this reform must be to increase the real resources
available to meet the needs and expectations of retirees, without blunting the growth in living
standards among our working population and, presumably, without necessitating sizable
reductions in other government spending programs.
The only measures that can accomplish this goal are
those aimed at increasing the total amount
of goods and services produced by our economy. As I have argued many times before, any
sustainable retirement system--private or public--requires that sufficient resources be set aside
over a lifetime of work to fund an adequate level of retirement consumption. At the most
rudimentary level, one could envision households saving by actually storing goods purchased
during their working years for consumption during retirement. Even better, the resources that
would have otherwise gone into the stored goods could be diverted to the production of new
capital assets, which would cumulatively produce an even greater quantity of goods and services
to be consumed in retirement.
From this perspective, it becomes clear that increasing our national saving is essential to any
successful reform of social security or Medicare. The impressive improvement in the budget
picture since the early 1990's has helped greatly in this regard. And it appears that both the
Administration and the Congress have wisely chosen to wall off the bulk of the unified budget
surpluses projected for the next several years and allow it to build. This course would boost
saving, raise the productive capital stock, and thus help provide the wherewithal to meet our
future obligations.
The idea that we should stop borrowing from the
social security trust fund to finance other
outlays has gained surprising--and welcome--traction. It has established, in effect, a new
budgetary framework that is centered on the on-budget surplus and the way it should be used.
The focus on the on-budget surplus measure is useful because it offers a clear objective that
should help to strengthen budgetary discipline. Moreover, it moves the budget process closer to
accrual accounting, the private-sector norm, and--I believe--a sensible direction for federal budget
accounting.
Under accrual accounting, benefits would be counted when they are earned by workers rather
than when they are paid out. 4 Under full
accrual accounting, the social security program would
have shown a substantial deficit last year. So would have the total federal budget. To the extent
that such accruals are not formally accounted for in the unified budget--as they generally are
not--we create contingent liabilities that, under most reasonable sets of assumptions, currently
amount to many trillions of dollars for social security benefits alone. The contingent liabilities
implicit in the Medicare program are much more difficult to calculate--but they are likely also in
the trillions of dollars. For the federal government as a whole, an accrual-based budget measure
would record noticeable unified budget deficits over the next few years and increasing, rather than
decreasing, implicit national indebtedness. 5
The expected slowdown in the growth of the labor
force, the direct result of the decrease in the birth rate following the baby boom, means that
financing our debt--whether explicit debt or the implicit debt represented by social security and
Medicare's contingent liabilities--will become increasingly difficult. I should add, parenthetically,
that the problem we face is much smaller than that confronting the more rapidly aging populations
of Europe and Japan. Nonetheless, pressures will mount, and I believe that the growth potential of
our economy is best served by maintaining the unified budget surpluses presently in train and
thereby reducing Treasury debt held by the public. The resulting boost to the pool of domestic
saving will help sustain the current boom in productivity-generating investment in the private
sector. 6 Indeed, if productivity growth
continues at its recent pace, our entitlement programs will
be in much better shape. Saving the surpluses--if politically feasible--is, in my judgment, the most
important fiscal measure we can take at this time to foster continued improvements in
productivity.
The vehicle through which we save our surpluses is less important than the fact that we save
them. 7 One method that has been proposed,
and that is the focus of today's hearing, is to transfer
general revenues from the on-budget accounts to the social security trust fund. These transfers in
themselves do nothing to the unified budget surplus. The on-budget surplus is reduced, but the
off-budget surplus increases commensurately. 8 The transfers have no effect on the debt held by
the public and, hence, no direct effect on national saving. But transferring monies from the
on-budget to the off-budget social security accounts could make it politically more likely that the
large projected unified surpluses will, in fact, materialize. Given that our record of sustaining
surpluses for extended periods of time is not good, any device that might accomplish this goal is
worth examining.
Using general revenues to fund social security is an idea that has been considered previously
but
rejected. 9 Indeed, the commission that I
chaired in 1983 was strongly opposed, for a variety of
reasons, to the notion of using general revenues to shore up social security. One argument was
that using general revenues would blur the distinction between the social security system, which
was viewed as a social insurance program, and other government spending programs.
Both social security and, for that matter, Medicare
part A are loosely modeled on private
insurance systems, with benefits financed out of worker contributions. Like private insurance
systems, they are intended to be in long-term balance. But the standard adopted for social security
and Medicare part A--that taxes and other income are to be sufficient to pay benefits for 75
years--falls short of the in-perpetuity full funding standard of private pension plans, and, in many
years, social security and Medicare have not met even this less stringent standard.
Furthermore, the requirement that social security and Medicare be in long-term balance does
not
mean that each generation gets in benefits only what it contributed in taxes plus earnings.
11Indeed, most social security beneficiaries
to date have received far higher rates of return on their
contributions than that available, for example, on U.S. Treasury securities. But the reduction in
the birth rate following the baby boom and the continued 12increase in life expectancy beyond age
sixty-five mean that the social security system will no longer provide workers with such high
returns.
Although the analogy between social security and
private insurance has never been that tight,
the perception of social security as insurance has been widespread and quite powerful. Many
supporters of social security feared that breaking the link between payroll taxes and benefits by
moving to greater reliance on general revenue financing would transform social security into a
welfare program.
But now, when payroll taxes are no longer projected to be sufficient to pay even currently
legislated benefits, moving toward a system of general revenue finance raises the concern that the
fiscal discipline of the current social security system could be reduced. 14 Once the link between
payroll taxes and social security benefits is broken, the pressure to reform the social security
system may ease, particularly in this environment of budget surpluses. For example, Medicaid and
Medicare part B--both of which will face increasing demands as the population ages--are already
financed with general revenues, and, consequently, there has been much less pressure to date to
reform these programs. The availability of general revenue finance when the baby boom
generation begins to enter retirement and press on our overall fiscal resources could make it more
difficult to argue for program cuts, regardless of their broader merits. 15 As I have testified on
many previous occasions, there are a number of social security benefit reforms--15a such as
extending the age of full retirement benefit entitlement and 15b indexing it to longevity, 15c altering
the benefit calculation bend points, and 15d
adjusting annual cost-of-living escalation to a more
accurate measure--that should be given careful consideration. The potential for enhancing
efficiency by restructuring the Medicare program is probably even greater than in social security.
Relaxing fiscal discipline in the Medicare program by expanding the use of general revenues
before the underlying program has been tightened could take the steam out of efforts to improve
the way health services are delivered.
That said, I think it is important to note that most
government programs are funded through
general revenues, so allowing general revenues to finance some of social security or Medicare part
A is clearly an idea that would not necessarily eliminate all fiscal responsibility. It might be
feasible, for example, to legislate temporary general revenue transfers that would end long before
the baby boom generation starts to retire, without opening the possibility of completely
eliminating the need for program cuts in social security or changes to Medicare.
It is, of course, difficult to predict the political and economic environment that will be facing
policymakers fifteen or twenty years in the future. Legislation passed today that affects the
distribution of resources between future workers and retirees could easily be changed later. That
is why the most important decision facing policymakers today is not about the distribution of
future resources but about the level of future resources available for future workers and retirees.
The most effective means of raising the level of future resources, in my judgment, is to allow the
budget surpluses projected in the coming years to be used to pay down the nation's debt. The
Congress and the Administration will have to decide whether transferring general revenues to the
entitlement programs is the best way to preserve the surpluses, or whether better mechanisms
exist."
Greenspan, better than anyone else should know the
weighted average of workers to retirees has
not changed appreciably since 1937 when Social Security began. From its inception, it would
take approximately 35 years for equilibrium of workers to retirees to set in. This is the
fundamental problem Greenspan does not understand math nor social studies! When I was in
elementary school studying social studies, we read about developed industrial countries and
undeveloped countries. The difference back in the 1960's was as countries became developed,
their birth rates decreased. This was due to lower infant mortality rates as well as not requiring as
many children needed to help with the farm. Take a look at this graph
which shows the weighted
worker to retiree ratio from 1941 projected to 2048. The data was provided by the Social
Security Administration. In 1941 there was only one year of retirees which met the requirements
for retirement. Compare the weighted ratio with the actual ratio. Compare the increase in the
burden on the worker since 1941. Now Greenspan wishes to use the excuse the birth rate is
changing as the reason for Social Security's problems!
Greenspan talks about productivity growth. How does
Social Security benefit from productivity
growth? Can Social Security tax productivity? Social Security revenues comes from an applied
tax (FICA) upon wages of workers up to a set amount. This set amount is incremented each year.
Productivity may actually reduce the number of workers while producing the same number of
parts. The amount of overall wages should decrease with productivity improvements, which
means Social Security revenues will decrease or at best stay the same.
The 1983 Commission on Social Security, chaired by
Greenspan has now done an about face.
Back in 1983, the commission recommended large FICA tax increases to be set aside to fund
future baby boom retirees. Were the excess FICA taxes invested in the wrong instrument?
Where did Greenspan in 1983 think the excess FICA taxes would be invested?
Accounting is not one of Greenspan's strong points.
Here he states full accrual accounting "the
social security program would have shown a substantial deficit last year." I guess the 1983
commission did not bother to look at accounting. It went ahead with the largest FICA tax in the
history of Social Security to sustain its solvency for 75 years. 17 years later we find their
accounting and math were lacking. Using the full accrual accounting we determine Social Security
has always run a deficit since its inception!
The decrease in the birth rate was fully known decades
ago. The birth rate was clearly dropping
each year since the 1850's during the Industrial Revolution. The drop in birth rates was caused
more by the introduction of the "Pill" in 1962 and more importantly "Roe Vs Wade" in 1973.
Greenspan headed the commission to save Social Security in 1983 a full 20 years after the slow
down in birth rates began. This further shows Greenspan does not understand math, history or
Social Security. It would be even worse had women not increased the number of workers. The
only draw back to more workers working now, is later on these same workers become retirees
applying for benefits. We trade a short term gain for a huge unfunded liability.
The worst part of this entire testimony before
Congress is his belief PRODUCTIVITY will help
the entitlement programs. Does this individual not understand the mathematics behind Social
Security. Why Economic Growth Can
Not Save Social Security!
Now Greenspan wants to transfer general revenue
taxes which come from sources which do not
get credited to an individuals wage history to help fund the divergent series. Why should people
help fund Social Security through general taxes if they do not get credit for them? Would it not
benefit society to reduce general taxes or use these for services which are open to the general
citizenry instead of just the elderly? The purpose behind Social Security's funding method was to
provide a direct link between the payment and the benefit. Social Security has been and still is a
welfare program unable to stand on its own merits. As such, Social Security should be means
tested immediately. If general revenues are used to shore up Social Security, then anyone of any
age should be able to apply for benefits.
One of the few things stated which is true.
Transferring monies to Social Security does nothing
to the overall debt. It just makes it more difficult for future generations of workers to change the
program. In other words transferring general revenues surpluses to Social Security in the form of
Special US treasuries is putting more shackles on our children. They will be less free to decide
what they want or need from the United States as far as services they pay for. Greenspan
recommends tying their hands a bit tighter so they can not rebel.
Yes, the 1983 commission did not support general
revenues to shore up Social Security. Had
they supported it, instead of placing tighter controls on workers wages, Social Security would
have had time to transform itself to what it needs to be. However, Greenspan and the 1983
commission have wasted 17 years.
Modeled after insurance plans? Is this guy nuts?
They are not even remotely similar to an
insurance plan. INSURANCE?
He now comes forward and states "But the standard adopted for
social security and Medicare part A--that taxes and other income are to be sufficient to pay
benefits for 75 years--falls short of the in-perpetuity full funding standard of private pension plans,
and, in many years, social security and Medicare have not met even this less stringent standard."
Social Security has never met the in-perpetuity full funding standard!
Another true statement, but it never gets much
attention. In fact, it was not even mentioned in
1983. Had they even considered this back in 1983, the program would be in much better shape.
It appears Greenspan wants to continue the ponzi scheme as long as possible.
Increase in life expectancy past 65 has not increased
as much as one would think. I doubt
seriously if Greenspan even knows how it is calculated or what it is. Had he known the actual
numbers or even the ball park numbers, why did he not present these in his testimony. It certainly
would have added some supporting back ground. However, had he stated the life expectancy at
age 65 was another 15 years and today it is 17 years, he could not very well argue the case
increased life expectancy is one of the problems! His words have no basis! What is Life
Expectancy?
The perception Social Security is insurance has been
promoted by the US Government. The
1983 Commission had within its power the ability to highly recommend a program to change and
correct the notion Social Security was insurance. How hard is it to notify the worker Social
Security is not insurance? Does he not believe the Government could not correct this perception?
It has been 17 years and Greenspan with so many supporters has not come forth very often to
correct this illusion.
The link between payroll taxes and Social Security
benefits will become invalid once general
revenues are used to shore up Social Security. It will open the eyes of millions of workers. The
perception Social Security as insurance will come tumbling down. The ponzi scheme will be
presented in all its glory as the greatest scam ever perpetuated. Its success which has been
publically stated for decades will be presented for what it actually is. THE MOST
UNSUCCESSFUL PROGRAM IN THE HISTORY OF THE UNITED STATES! If Social
Security is successful with a $10 Trillion unfunded
liability, what is an unsuccessful program?
These proposed changes to save Social Security are a
bit late. Why were these not
incorporated back in 1983 when they would have done some good? Why wait until now to
present them?
Yes most programs are funded by general revenues.
However, two programs (Medicare and
Social Security) consume 1/3 or more of the federal revenues. Rather a ridiculous statement, but
then coming from Federal Reserve Greenspan, it does not surprise me.
In summary Greenspan is incompetent. He had the resources back in 1983 to investigate the
problem and come up with options. He took the easy way out and did nothing. Now 17 years
later, Greenspan has once again come to congress to testify presenting options which should have
been proposed back in 1983. However, Greenspan was either ignorant of how Social Security
worked in 1983 or he wanted to perpetuate the fraud called Social Security. None of the options
he has presented in his testimony will do any good. His lack of insight into how Social Security is
affected by wage growth and productivity improvements is non existent. Greenspan should be
brought up on charges of gross negligence for his part in the 1983 Commission on Social
Security.
