Wednesday, December 07, 2005
What Greenspan Really Said
So has Alan Greenspan become a tax-raiser in the autumn of his chairmanship of the Federal Reserve? That's what much of the coverage of his speech Friday would have you believe. But actually reading the speech leaves a very different impression.
Mr. Greenspan did focus on government deficits in his remarks to the Federal Reserve Bank of Philadelphia Policy Forum. But it was not the current $300 billion budget deficit he was mostly concerned about. It is the much larger problem of entitlements, specifically benefits promised under Social Security and Medicare. And that deficit is huge -- more than $30 trillion over the next 75 years.
The pain will start as soon as six years from now, when the first wave of Baby Boomers will become eligible to start collecting Social Security checks at 62. Although retirees can get higher benefits by waiting longer, about half currently choose to start collecting as soon as they can. You may recall from the debates earlier this year that the Social Security Trust Fund is projected to run a surplus through 2018 or so. But that surplus is given to Congress, which -- surprise! -- spends it and writes the Social Security fund an IOU.
In other words, money that could be saved to pay for future retirement benefits is instead spent today, creating a debt that one part of the government owes to another. That money will have to be paid back when the trust fund goes into deficit. As Mr. Greenspan noted Friday, that means either raising taxes (a lot) or cutting spending (a lot).
"However," he added, "tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base." Those risks are great enough "to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side." Translated from the Greenspan-ese: Cut spending.
Social Security, in his view, was the easier problem. According to the trustees, it is the smaller one too. But as Mr. Greenspan pointed out, advances in medical technology could very quickly drive up the costs of Medicare both by prolonging life and adding expensive new treatments to available medical options. That "risk" is very hard to quantify simply because we do not know what will be available to doctors and patients in two or three decades.
Mr. Greenspan was short on policy recommendations to fix the problems, properly saying this was something to be worked out by politicians. But he did note that Social Security is not now a "savings" program at all, and he suggested that maybe it would be better if it were. That means, as he pointed out, that the rest of government would have to cut spending or find other sources for the funds it currently "borrows" from Social Security. And he argued that changes in Social Security and Medicare were better made as soon as possible because, "We owe future retirees as much time as possible to adjust their plans for work, saving, and retirement spending."
In closing Mr. Greenspan added that "In the end, the consequences for the U.S. economy of doing nothing could be severe." This year, that was precisely the choice Congress made about Social Security reform, just as the Medicare prescription-drug benefit program was ultimately passed with much of the original Medicare reform stripped out.
Mr. Greenspan's language was typically measured, but his point was perfectly clear: Our government has made promises it cannot meet. Without changes in Congressional spending or entitlement reform -- or both -- those promises will eventually be broken. It's a vital point, if only the media had covered it.
Mr. Greenspan did focus on government deficits in his remarks to the Federal Reserve Bank of Philadelphia Policy Forum. But it was not the current $300 billion budget deficit he was mostly concerned about. It is the much larger problem of entitlements, specifically benefits promised under Social Security and Medicare. And that deficit is huge -- more than $30 trillion over the next 75 years.
The pain will start as soon as six years from now, when the first wave of Baby Boomers will become eligible to start collecting Social Security checks at 62. Although retirees can get higher benefits by waiting longer, about half currently choose to start collecting as soon as they can. You may recall from the debates earlier this year that the Social Security Trust Fund is projected to run a surplus through 2018 or so. But that surplus is given to Congress, which -- surprise! -- spends it and writes the Social Security fund an IOU.
In other words, money that could be saved to pay for future retirement benefits is instead spent today, creating a debt that one part of the government owes to another. That money will have to be paid back when the trust fund goes into deficit. As Mr. Greenspan noted Friday, that means either raising taxes (a lot) or cutting spending (a lot).
"However," he added, "tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base." Those risks are great enough "to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side." Translated from the Greenspan-ese: Cut spending.
Social Security, in his view, was the easier problem. According to the trustees, it is the smaller one too. But as Mr. Greenspan pointed out, advances in medical technology could very quickly drive up the costs of Medicare both by prolonging life and adding expensive new treatments to available medical options. That "risk" is very hard to quantify simply because we do not know what will be available to doctors and patients in two or three decades.
Mr. Greenspan was short on policy recommendations to fix the problems, properly saying this was something to be worked out by politicians. But he did note that Social Security is not now a "savings" program at all, and he suggested that maybe it would be better if it were. That means, as he pointed out, that the rest of government would have to cut spending or find other sources for the funds it currently "borrows" from Social Security. And he argued that changes in Social Security and Medicare were better made as soon as possible because, "We owe future retirees as much time as possible to adjust their plans for work, saving, and retirement spending."
In closing Mr. Greenspan added that "In the end, the consequences for the U.S. economy of doing nothing could be severe." This year, that was precisely the choice Congress made about Social Security reform, just as the Medicare prescription-drug benefit program was ultimately passed with much of the original Medicare reform stripped out.
Mr. Greenspan's language was typically measured, but his point was perfectly clear: Our government has made promises it cannot meet. Without changes in Congressional spending or entitlement reform -- or both -- those promises will eventually be broken. It's a vital point, if only the media had covered it.
