Jewish World Review March 1, 2004 / 8 Adar, 5764
Greenspan view scary, but Dems in denial
Federal Reserve Chairman Alan Greenspan's views about Social Security and Medicare weren't a surprise.
What was a surprise was that he made them the central point of his testimony to the House Budget Committee on Wednesday.
Fed-watchers say Greenspan and other Fed officials didn't anticipate the stir the chairman's remarks created. But Greenspan is a cautious and skilled player in this game. The bet here is that he meant to put the issue of what he described as an overcommitment to senior benefits on the public policy agenda.
What's the rush? After all, Social Security taxes are projected to pay for retirement benefits until 2018. Medicare's hospitalization fund doesn't hit a deficit until 2013. The disability fund does run into a problem quicker, in 2008, but it's relatively small potatoes.
The reason for alarm is that everyone agrees that benefits for those currently retired or nearing retirement shouldn't be changed. The nearing retirement mark, is, of course, elastic, but by consensus would include those 55 or older, and some would go as young as 50.
That means that existing benefits are, by political consensus, pretty much locked in for a decade or a decade and a half. Which in turn means that actions to alleviate deficits that emerge in 2013 or 2018 have to be put in place right now.
The reactions of the two leading Democratic candidates for president were instructive, and revealing of the deep state of denial the Democrats are in.
John Kerry said the answer was to repeal President Bush's tax cuts for the rich, which Kerry defines as anyone making more than $200,000 a year.
But there is nothing about increasing taxes today that makes a dollar available to pay Medicare and Social benefits in the future. The only effect of raising taxes today is to reduce what the federal government currently borrows.
That arguably would increase the federal government's debt capacity in the future. But that is only relevant if Kerry proposes to borrow money to pay for Medicare and Social Security benefits once payroll taxes are insufficient.
These deficits begin small, and debt financing could cover them in the short run. But they grow exponentially, as the ratio of workers to retirees continues to deteriorate.
According to Greenspan, the cost of Social Security and Medicare will expand from 7 percent of GDP today to 12 percent in 2030. That represents a 25 percent increase in federal spending.
Simply put, the combination of debt and tax increases necessary to pay programmed future retiree benefits is economically unsustainable.
John Edwards reprised his populist economic themes, saying that it was an "outrage" for Greenspan "to suggest that we should extend George Bush's tax cuts on unearned wealth while cutting benefits that working people earn."
Edwards' view that investment income is "unearned" betrays a demagogic ignorance about, or hostility toward, the role of capital formation in economic progress. But let's play out his demagogic game.
Right now, low- and middle-income "working people" are being taxed to pay retirement and health care benefits for "wealthy" seniors. What's fair about that?
The same thing that Edwards proposes to do about it: Nothing.
What needs to be done is well known. Medicare needs to be changed from a system in which the federal government pays the medical bills of seniors, to a system in which the government provides subsidies based upon income for seniors to purchase private health insurance.
Social Security needs to be changed into a system of private retirement accounts, with some sort of debt instruments being used to finance the transition.
President Bush is theoretically in favor of movement in that direction on both scores. But he flinched from fighting for Medicare reform during the prescription-drug negotiations, and he's not moved beyond conceptual support for private retirement accounts.
Bush's reticence is understandable. The specifics of Medicare and Social Security reform involve hard and politically difficult choices.
But without specific engagement, Democrats are free to continue to deny reality.
And, as Greenspan's testimony underscored, time for a smooth rather than a wrenching transition is running out.
JWR contributor Robert Robb is a columnist for The Arizona Republic. Comment by clicking here.
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© 2004, The Arizona Republic