Alan Greenspan is not just the Federal Reserve chairman. He’s become a Washington wise man whose influence extends far beyond monetary policy. So it took his congressional testimony at the end of February to remind all American politicians that social security urgently needs to be fixed. Up to that point, both Democratic candidates and the incumbent president had avoided mentioning any pension reform during the campaign. And still, it is not clear whether social security will become a campaign ‘hot issue’.
Actually, President George Bush in his January State of the Union address mentioned the problem towards the end of his speech. He expressed his hope that younger workers would “have the opportunity to build a nest egg by saving part of their social security taxes in a personal retirement account” and that the social security system would transform into a “source of ownership for the American people”. The very same idea of a partial privatisation of the system was one of his strong proposals during the 2000 campaign. But President Bush has done little to advance that idea: he appointed a reform panel that came out with three reform strategies, all recommending private accounts. At this time no public debate was ever opened on the subject, with war on terror and recession becoming the hottest problems. Approaching the 2004 elections, Bush does not look too eager to bring back pension reform to the central political stage.
Both Democratic candidates John Kerry and John Edwards have omitted any proposals for social security reform from their campaign issues. Kerry only says he’ll defend seniors’ rights. Edwards proposes “Matching savings accounts for retirement”, promising “he will match $1 in private savings with as much as a $1 refundable tax credit for savings, up to a limit of $1,000 (E808) per couple, for Americans with incomes up to $50,000”. His website explains: “A working family that saves and receives the maximum under this plan every year from age 25 to retirement will have a nest egg of $200,000, on top of other savings”. But in public debates this idea has never been discussed.
This lack of interest conflicts with non-partisan estimates that predict taxpayers will pay more than they will receive in retirement pay by the year 2018 and the entire system will be insolvent in the next 30 years.
Greenspan – who at 78 looks like he’ll never retire – rang the warning bell in front of the Congress. He said the current deficit situation, with a projected record red ink of $521bn this year, will worsen dramatically once the baby boom generation starts becoming eligible for social security benefits in just four years. He said the prospect of the retirement of 77m baby boomers would radically change the mix of people working and paying into the social security retirement fund and those drawing benefits from the fund. He suggested trimming benefits for future retirees.
“Greenspan’s comments are a great service to the country”, comments William Shipman, chairman of CarriageOaks Partners, Boston and co-chairman of the Cato Institute Project on social security choice. “An election year is the best time to discuss important issues like social security,” Shipman goes on. “But Greenspan’s solution to the pension crisis is wrong: reducing benefits does not solve the financing problem. The only way is to shift towards individual accounts invested in stocks and bonds”.
Shipman is a longtime proponent of a privatisation of social security and recently, together with a group of professionals, he studied the feasibility of introducing individual accounts with a system designed according to eight principles: assets owned by the account holder; reasonable costs; a low employer-administrative burden; opportunities for workers of all income levels to participate; a structure so that inexperienced investors would not suffer poor returns relative to experienced investors; investment choice and a solution for participants who make no investment choice; automatic adjustments to match technological innovations offered by the financial-services industry. The system would have three levels of investments, starting with a money market fund; the second level would be a default fund, invested 60% in stocks and 40% in bonds; and the third level would be more like the retail financial-services environment. Shipman explains: “The costs of this system through Level 2, including everything from asset management to a customer service centre, are estimated to be only about three tenths of 1% of accumulated assets”.
A plan like this could be welcomed by Bush’s fiscal conservative base, which is not very happy with his growing long-term federal deficits.
However, so far Bush looks more confident campaigning on tax cuts than revamping the discussion on social security.