Alan's Angst

Alan Greenspan was not nearly as enthusiastic about President Bush's Social Security privatization plan yesterday as many media reports have indicated. In fact, in his own guarded and measured way, he was sounding an alarm.

Like good scientists, good journalists know that the key to what one learns lies with asking the right questions. The same holds for good lawmakers.

Yesterday during Federal Reserve chief Greenspan’s testimony before the Senate Banking Committee, it was Sen. Chuck Schumer (D-NY) who drew out of Greenspan his genuine misgivings for President Bush's sweeping Social Security reform push. It’s a bad idea in the form Bush is pushing it because it involves so much risk, Greenspan conceded, and that's why it should be approached in a far more cautious and measured manner than the President has in mind.

In fact, Greenspan mumbled over his reply, but said that he actually agreed with Schumer that something akin to the notion of a “Social Security Plus” approach could be a better way to proceed.

Under that plan, Social Security in its present form remains intact and fully funded, while added instruments to allow and incentivize citizens to increase their savings for retirement are provided.

Such an instrument already exists in the form of the “401K” program, and providing more of this, Greenspan nodded in reply to Schumer, is arguably preferable over what Bush wants, both because of the risks involved in Bush approach and because that approach does not increase the net amount of savings as a proportion of the national economy.

Some of the major concerns Greenspan expressed about moving too fast to reform Social Security related to the impossibility of gauging the level of either public response, since decisions by individuals to switch to private accounts will be voluntary, and market investor response in a larger environment of a deepening federal deficit and looming higher interest rates.

Clearly, the ballooning budget deficit is among the greatest of indeterminate factors. At what point does it begin to erode both public and investor confidence? This is one of those big things troubling our Fed chief.

Don't forget there was a time during his first term that President Bush disowned the very Social Security privatization plan he's now championing so aggressively. That was following the burst of the dot-com bubble and the accompanying market tailspin.

While a big part of his first campaign for the presidency, Bush hushed up completely on Social Security privatization when the market went south. It’s only been lately that he's started talking it up again, and he feels his time is short before another hiccup, or worse, in the market shows up again the dangers of his plan.

(By the way, the White House announced yesterday that it wanted to correct the verbiage associated with its Social Security reform package. It issued a statement saying it wanted it referred to as “creating private accounts” rather than “privatization.” It was noteworthy that most of the media immediately obliged in television commentaries through the remainder of the day).

While Greenspan underscored the need to bring the federal budget deficit under control yesterday, he also conceded that he was responsible for it because he'd spoken in support of the Bush tax cuts that turned a $6 trillion surplus into a $4 trillion deficit in record time. Greenspan did not disagree when Sen. Paul Sarbanes (D-Md.) yesterday said that his support for a tax cut back a few years when the budget enjoyed a projected $6 trillion surplus “let the lid off the punch bowl.”

With that surplus, there were plenty of resources to ensure the solvency of the Social Security and Medicare systems indefinitely, Sarbanes pointed out. Only after Bush's tax giveaways to the rich, which were supported by Greenspan at the time, has the solvency of the programs reached levels where extraordinary action is required, he added. Greenspan concurred.

Assessing carefully what was being said at the Senate hearing yesterday, it is evident that President Bush has put the nation's Social Security and Medicare programs at grave risk and that the harder he pushes his reforms now, the more consumer confidence will be undermined and the markets will begin to unravel.

Right now, the President is stampeding his plan to beat the next serious market downturn to the punch. But by so doing, he’ generating the very instability he’s struggling to outrun. Greenspan knows this, but it’s not up to him to sound alarms. That's why it’s particularly important to take his carefully measured words, especially those in reply to Sen. Schumer yesterday, very seriously.

Nicholas Benton may be emailed at nfbenton@fcnp.com