The political difficulty with Social Security reform is related to two facts: No government program directly touches as many Americans as does Social Security, and none is more misunderstood. The term Social Security trust fund surely was designed to confuse -- to obscure the fact that the money paid in Social Security taxes does not prefund the future benefits of the particular taxpayers. That is, the Social Security trust fund is a financial obligation, not a financial asset. What Americans pay in payroll taxes -- roughly 80 percent of taxpayers pay more payroll taxes than income taxes -- provides benefits for current retirees, and the surplus of yearly outlays ($64.4 billion this year, but probably gone by 2018) buys Treasury bonds that will be redeemed when needed.
But payees do not build up a Social Security equity that they can leave to beneficiaries. Neither do they own their entitlements, which can be changed by a future Congress facing the need to sharply raise taxes or run huge deficits to fund the entitlements. Concerning possible future exigencies, two years ago two former senators, Democrat Bob Kerrey of Nebraska and Republican Warren Rudman of New Hampshire, proposed a thought experiment:
``Suppose that a member of Congress introduced legislation called 'the Social Security Do Nothing Act.' Under this bill, promised retirement benefits would be cut by 16 percent for today's 30-year-olds, by 29 percent for today's 20-year-olds and by 35 percent for today's newborns. Alternatively, payroll taxes would go up by roughly 40 percent in 2041. How many politicians would rush to endorse this bill? And yet these are the choices under the Do Nothing Plan.''
The president probably will propose a plan that will permit individuals to invest a portion of their Social Security taxes in broadly diversified and conservatively managed funds. This would provide a higher return on Social Security taxes. And it would narrow the nation's wealth gap by giving individuals of modest incomes ownership of bequeathable estates.
The plan will be attacked primarily on two grounds: Investments are risky. And transition costs might approach $2 trillion dollars as young workers pay less into the system while older workers continue to receive full benefits.
Greenspan has the standing, with Congress and the public, to contrast the risks of the market with the risks of doing nothing, and to reiterate what Kerrey and Rudman emphasized: Because any reform involves problems, no reform looks desirable when compared with the false hypothetical of the existing system being forever solvent.
Having been in Washington most of the 30 years since he became chairman of President Gerald Ford's Council of Economic Advisers, Greenspan understands political possibilities. Having served from 1981 to 1983 as chairman of the National Commission on Social Security Reform, he knows the issue. The man and the moment have met.