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.
Greenspan's second option is to further raise the retirement age, which is already scheduled to rise from 65 to 67 over the next several years. Most baby boomers will, in fact, have to wait until age 66 to receive full benefits. Raising the retirement age more is justified by increasing life spans and would have no impact on current retirees or those nearing retirement. But it would do a great deal to stabilize the Social Security system, especially if the qualifying age for Medicare is also raised.
Despite the modesty of these suggestions, Democrats were quick to denounce them. They are, no doubt, preparing advertisements targeted at the elderly, heavily emphasizing that Greenspan is a lifelong Republican. George W. Bush will be put in the difficult position of either repudiating Greenspan, whom he has already pledged to reappoint to the Federal Reserve Board, or allowing Democrats to frighten the elderly -- a potent voting bloc -- into thinking their benefits will be cut if Bush is re-elected. Sadly, such scare tactics have worked in the past.
Bush has often promised to shift Social Security toward a more voluntary system, by allowing younger workers to save a portion of their payroll taxes in private accounts, as many other countries now do. However, he has never put forward a plan to do this, and I doubt that he ever will. According to internal administration memoranda just released by journalist Ron Suskind, author of a recent book of about former Treasury Secretary Paul O'Neill, there is serious question as to whether Bush really understands what he has proposed or could defend it effectively in a debate. (The memos are available at www.ronsuskind.com.)
In short, Democrats have a golden opportunity to demagogue the Social Security issue, and I believe they will. I only hope Republicans don't immediately retreat on the need for reform or throw Greenspan to the wolves in their haste to avoid Democratic attacks. Better to use this as an opportunity to explain the truth to the American people and possibly win an electoral mandate for reform in the fall. As they say, the best defense is a good offense.