Federal Reserve Chairman Alan Greenspan lobbed a useful, if unintended, grenade into the Presidential campaign when he abruptly urged Congress to cut Social Security benefits. Until Greenspan's testimony, President George W. Bush had been insisting that we could have permanent revenue losses from his massive tax cuts without any harm to important social benefits. Even as Greenspan's testimony was reverberating in the country, Bush was out campaigning to make the tax cuts permanent. Greenspan's little explosion may have been aimed at social entitlements, but politically it will do far more damage to the Bush campaign by lighting up realities that Bush would prefer to keep hidden.
CONSERVATIVE REPUBLICAN FOES of Social Security have been telling Americans for years that the country won't be able to afford the huge entitlements the government has promised them. This message serves the political purpose of shaking voters' faith in the Social Security system, especially younger voters, who start wondering if Social Security will be there for them. They are prompted to ask: If Social Security is going bankrupt and I'm not going to benefit anyway, why not shift my payroll taxes to private accounts now? This then plays into the political hands of Social Security's would-be privatizers.
But let's pause a moment for some facts from the 2003 Social Security Trustees' Report. It turns out that the fiscal crisis of Social Security is grossly exaggerated by its political enemies. The trustees project Social Security balances forward for 75 years. Their report uses pessimistic annual growth assumptions of just 1.6%. Even so, the 75-year shortfall is projected at just $3.8 trillion, or just 0.73% of gross domestic product over this time. By contrast, the Bush tax cuts equal $8.7 trillion, or 1.68% of GDP over 75 years, according to Peter Orszag of the Brookings Institution, and new proposed tax cuts would push the cost to over $12 trillion.
If the Bush tax cuts are pared back by less than half, the money can be used to replenish Social Security, and the vaunted "crisis" disappears. Whether to cut Social Security benefits for the 96% of Americans in the system or reduce tax cuts for the top 2% is, of course, a political choice. But it's one that the Bush Administration would rather not squarely face and one that Senators John Kerry and John Edwards will keep center stage in their campaigns.
Higher growth rates could also solve the problem. In their 1997 report, the trustees projected that the trust funds would need supplements by 2029. Thanks to higher growth, last year's report extended that horizon to 2042. With productivity and the economy growing at a faster rate than assumed by the trustees, the year of Social Security insolvency could be pushed out even further to 2050, 2060, or maybe never.
When the President's Committee on Economic Security reported to President Franklin D. Roosevelt in 1935, the committee recommended that once the system matured and more Americans were benefiting, payroll tax receipts should be supplemented by contributions from general revenues. Were it not for the wildly irresponsible permanent tax cuts, which blow a structural hole in the revenue system, this would be the time to add that revenue stream, and there would be ample funds to plug a manageable gap.
All of the conservative proposals for restoring the Social Security system's health are different forms of cuts in benefits. Raising the retirement age is a reduction in benefits. So is fiddling with the cost-of-living formula. Partial privatization is the most costly and intellectually dishonest fix of all. Not only would it reduce the guaranteed part of the retire- ment package, but it would require the government to borrow $2 trillion to $4 trillion to keep paying benefits to current retirees while payroll taxes of younger Americans were diverted to new personal accounts. The President has insisted that, in the new privatized system, everyone would get benefits at least as good as those under Social Security. But that would require a government guarantee for the performance of everyone's financial portfolio. (Talk about moral hazard!)
Greenspan, a conservative Republican, is at least more honest than the Administration. He made clear that he prefers tax cuts to social entitlements. In so doing, he has helpfully sharpened the focus of a stark political choice -- cut Social Security benefits for nearly every American or restore the tax rates of 2001 on the top 2%. If I were running for President, I know which side of that debate I'd want to be on. By Robert Kuttner