Federal Reserve Board Chairman Alan Greenspan did the Democratic Party an enormous favor last week. He gave them an issue on which they can beat President Bush in November, regardless of who their nominee is. No wonder liberal columnist E.J. Dionne Jr. titled his column, "Grateful to Greenspan."
What Greenspan did that made liberals so happy is speak the truth about Social Security -- the very definition of a Washington gaffe -- by saying that benefits will have to be cut. Those that have been promised are simply too expensive for society to afford. Fortunately for Greenspan, he is in a job from which he cannot be fired.
Speaking before the House Budget Committee on Feb. 25, Greenspan made the undeniable point that under current law Social Security benefits will rise sharply as a share of the gross domestic product. This is mostly a function of demographics, especially the rapid aging of the baby boom generation, whose oldest member turns 62 in 2008 -- just four years from now.
If baby boomers choose early retirement at age 62 in the percentages that earlier generations have done so -- about half -- then we are going to see a bulge in Social Security spending very shortly indeed. Of course, to the extent that people retire at 62, rather than waiting until 65 or later, they are in a sense doing Social Security a favor. That is because they will get permanently lower benefits than if they waited. Benefits are much higher at age 65 and continue to rise until age 69, as long as benefits are delayed.
As Greenspan correctly noted, there are only two ways of paying for Social Security in the long run: either benefits must be reduced below what have currently been promised or taxes must rise. The amount of money necessary to pay all future benefits is so large -- $10.5 trillion, according to economists Jagadeesh Gokhale and Kent Smetters -- there is just no way that it can be financed solely out of higher taxes. Tax increases of that magnitude would be too debilitating to the economy.
Said Greenspan, "Tax rate increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base."
For this reason, Greenspan argued that the funding gap be addressed largely on the spending side. He suggested two options. First would be to fix the Consumer Price Index, which is used to adjust Social Security benefits for inflation. Most economists believe that it overstates the true rate of inflation, thereby giving retirees an unjustified bonus increase in their benefits.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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