WASHINGTON—Federal Reserve Board Chairman Alan Greenspan gave his qualified blessing Wednesday to President Bush's call to create private investment accounts as part of an overhaul for Social Security, but he expressed concerns about high costs.
In testimony before the Senate Banking Committee, Greenspan said financial markets might blanch at the estimated trillions of dollars in transition costs proposed by Bush. He advised Congress to proceed with care.
"My caution here is based on not knowing, and not knowing how to know in advance, how markets will respond," Greenspan said.
The influential central banker also deflected criticism over the Fed's six consecutive short-term interest-rate hikes and signaled that with today's rates still "fairly low," more hikes are probably coming. He also downplayed doomsday scenarios about the weak dollar and warned that the greatest economic risk to the nation isn't borrowing or debt, but deficient elementary schools that will hurt future productivity.
As the chairman of an advisory commission that brokered the last overhaul of Social Security finances in 1983, Greenspan was asked far more about the retirement program than the economy. Nearly all the questions from senators focused on overhauling Social Security, as Democrats and Republicans tried to fish comments from the respected Fed chairman that would support their views.
Greenspan repeated that he's long favored the concept of personal accounts because they effectively would force lower- and middle-income Americans to save, and thus boost the nation's stock of capital available for investment, which fuels economic growth.
"I can conceive of these being extremely popular accounts," he said.
That sounded like a firm endorsement of Bush's proposal to allow workers age 50 and younger to take 4 percentage points of their salaries that now goes to Social Security and instead invest in a personal retirement account of stocks and bonds.
What sounded even more like an endorsement was Greenspan's view that the heavy deficit spending needed to move from Social Security to personal accounts could be seen as neutral in the nation's total debt picture.
"This is one of the very rare cases where you can increase the deficit and not decrease the national savings," he told lawmakers, because assets would remain in the savings pool, only now in private accounts rather than in the Social Security system.
But when grilled by Democrats, Greenspan quantified at what point he thinks borrowing to finance transition costs could reach levels that hurt the economy.
"Two trillion dollars is indisputable. A trillion dollars is right at the margin," he said, providing ammunition to Democrats who criticize the president's plan as too costly and risky.
The Bush administration estimates that his plan would require borrowing $754 billion through 2015, but the new private accounts wouldn't begin until 2009 and be fully operational until 2012. Democrats, citing think-tank estimates based on Social Security actuaries' reports, say it would cost $1.4 trillion over 10 years beginning in 2009 and $4.9 trillion over 20 years.
Anticipating that his words could be used for political gain, Greenspan also noted that once most baby boomers have retired by 2030, their drain on Social Security's trust fund assets will force the U.S. government into heavy borrowing.
"Doing nothing is risky, doing any solution is risky," he said. "The problem that we have is there is a huge transition cost. ... Any solution cannot get around the fact that there is a huge hole in the system and we have no choice but to fill it."
Greenspan called on lawmakers to act before the first wave of baby boomers begins retiring in 2008.
"We don't have a great deal of time to do it," he warned.
Borrowing to finance the transition to a new Social Security system could go smoothly or be disastrous. How it plays out, Greenspan said, depends on whether financial markets view the additional debt as weakening or strengthening U.S. economic fundamentals. What Wall Street players say now means nothing, he said; the test would come once the transition in under way.
"I do know that asking people in the marketplace is of no value at all," he said, pausing till laughter faded, "because they do not know. They will tell you they know, but I haven't found that a very useful forecast."
(c) 2005, Knight Ridder/Tribune Information Services.
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