Alan Greenspan came in for a great deal of criticism following his remarks to Congress at the end of February about social security and deficits. Whether he deserves it or not depends largely on your political colours. But his testimony raises a fundamental issue about ageing populations – an issue that politicians, inside and outside the US, ought to be wrestling with now. In the US today, federal commitments to social security and Medicare programmes are less than 7% of GDP. This is predicted to rise to 12% by 2030. When spending on Medicaid is added in, this percentage will be even higher. These are large sums that will further strain a US budget already crashing back into deficit.
The start of this stress is just around the corner. The first baby boomers retire at the end of the decade. That is just two presidents away, possibly one if a Democrat wins this November. Yet nothing is being done, so it’s left to Greenspan, an unelected official, to confront the issue.
It’s his job to keep the economy on an even keel. So his suggestion in the question and answer session after his testimony that changing the rules for social security and Medicare might be preferable to raising taxes should be taken in that context: it’s his job to worry about the effect of tax increases. It also sends, or ought to send, a powerful signal to the politicians. It’s tax increases; or it’s radical, controversial overhaul; take your pick.
The problem is that both options are potential election losers. Social security remains the third rail of US politics: touch it, meddle with it, and it’s near certain political death.
As a result, it’s been looked at infrequently, and only then when the issue has seemed uncontroversial. That was the case in the 2000 election when the Bush camp promised to introduce a scheme which would allow individuals to invest a portion, say 20%, of their social security dues themselves in less risky securities.
This is the kind of option Greenspan was referring to. He’s been a proponent of the idea for some time.
He and George W Bush’s first treasury secretary, Paul O’Neill, discussed it at length at the start of Bush’s administration. Back then it was easier: there was a $5 trillion predicted budget surplus and much excitement over what could be done with it including paying down the federal government’s debt and tax cuts.
The idea was dropped as stock markets tanked in the wake of the internet bubble and corporate scandals. Investing in the stock markets lost its appeal when it became clear how rigged they were.
If it is to be revived, any such plan needs to be thought through much more carefully. Bush was floating the idea as much under the banner of “it’s your money” as he was as a good long-term fix for social security. There are few examples where handing investing power to individuals has worked.
Chile is the most often cited case study. It introduced a privatized scheme after the government scheme went bust in the 1980s. Argentina followed suit later, but its recent financial problems exposed the flaws. The government raised the cap for investing in Argentine government debt from 50% to 70%. With that debt now carrying a face value of around 30 cents, people’s pensions are worth roughly half. The lesson for US politicians, and others, is that there is no quick fix or longevity in politically or ideologically convenient changes.
Sadly social security reform is unlikely to be a big issue this November. Yet the country’s prosperity depends on crafting an intelligent solution to the problem. If nothing or little is done, taxes will have to rise, government borrowing will increase, or benefits will have to be cut – possibly all three. The effect on the economy of no action could be severe, impeding consumer spending, while more government debt could crowd out corporate capital raising.
The problem has been known for years. The longer nothing is done, the harder and harsher any remedy will be. Greenspan has tried to start the process. Politicians now need to find the courage to finish it.
