I woke up the other morning to the screaming headlines, "Greenspan: Cut Social Security." Now, Alan Greenspan knows more about economics than Jack Kemp, but he was wrong to tell Congress that to make the nation's retirement program "solvent" and avoid raising taxes, Social Security benefits must be cut.
Making Social Security solvent is a contradiction in terms, and no amount of benefit cuts will ever make it solvent. Insolvency was sown into the very fabric of the tax-and-transfer Social Security program. No amount of tax increases or benefit cuts, or any combination of the two, can ever make Social Security solvent. Trying to do so will only damage the economy and reduce the retirement income of America's senior citizens, neither of which is acceptable.
The only way to ensure the solvency of America's retirement system and guarantee workers a higher standard of living when they retire is to make every worker an owner. Transform Social Security into a pre-funded private investment program and finance it by allowing workers to place at least half the current payroll taxes into personal accounts, to which they have full ownership rights. The chief actuary of the Social Security Administration, Stephen Goss, recently scored a plan published by the Institute for Policy Innovation that meets all of the above criteria - large personal accounts, no tax increases, no benefit cuts - and concluded that workers owning large personal accounts would receive nearly 60 percent more in retirement benefits than Social Security currently promises.
It is a fallacy to believe, however, as Greenspan and some other "fiscal conservatives" apparently do, that the current retirement system can be made solvent first, by cutting promised benefits or raising taxes before workers are permitted to save half of current payroll taxes in personal retirement accounts.
The only sensible way to restore solvency and cover the temporary added cost required to pay full benefits to current retirees while diverting half the payroll tax into personal retirement accounts is to slow government consumption and borrow prudently for a short period of time.
Greenspan suggests America's senior citizens pay for making Social Security solvent by lowering their standard of living. In fact, America's politicians should pay for the mess they have made of the nation's retirement system by slowing the government's consumption of the wealth America's workers create - cut other government spending, not Social Security benefits.
Contrary to Greenspan's assertions, we haven't promised workers too much retirement income; we've consigned them to too little. By preventing workers from investing the 12.4 percent of their wages that is forcibly extracted from their paychecks every week to fund the decrepit government retirement program, we simply perpetuate a cycle of dependency on government. At the same time, we dispatch workers and retirees alike to live in perpetual fear that some Washington insider will come along and cut their benefits to pay for profligate government spending on everything from paper clips to battleships, all in the name of fiscal prudence.
America's senior citizens and workers no longer believe what they hear from Washington where Social Security is concerned. Why should they? In his recent congressional appearance calling for cuts in future benefits, Greenspan also said that the Social Security benefits of those in or near retirement should not be cut, yet in the very next breath he called for stealth reductions in the benefits promised to current retirees by reducing annual cost-of-living adjustments. And where middle-aged workers are concerned, the chairman foreshadowed the magnitude of the cuts he envisions when he said that any changes to benefits (in which he included increasing the retirement age) "should be made quickly so that people have time to adjust." How very considerate of him.
There is no need to cut promised Social Security benefits or to raise taxes. It is possible to
allow all workers to devote half the current payroll tax (about 6 1/2 percent) into personal retirement accounts and cover all promised Social Security benefits with reasonable spending restraint, current Social Security surpluses, higher general revenue produced from increased labor-market efficiencies and prudent new borrowing. Everyone will be better off. The national debt will remain manageable, and the temporary new borrowing will be paid off entirely before midcentury.
The last time Greenspan was called upon to "fix" Social Security (in 1983, when he chaired the Greenspan Commission), taxes were raised and the hole only got deeper. Now he says taxes must be raised again unless we cut benefits. It's the same old root-canal economics that Ronald Reagan debunked two decades ago when he defied conventional wisdom and pushed through large tax rate reductions and ushered in the greatest economic boom of the 20th century. Now is the time for large personal retirement accounts and the promise of higher, not lower, retirement income for all America's workers and retirees.