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Hearing of House Committee on the Budget - The Economic Outlook and Current Fiscal Issues

Location: Washington, DC



Mr. Wicker. Thank you, Mr. Chairman, and thank you, Chairman Greenspan, for your testimony.

You know, for the benefit of people watching on C-SPAN, I just want to remind our audience what a lengthy and distinguished record our witness has today: appointed, designated as Chairman of the Federal Reserve by President Reagan, by the first President Bush, by President Clinton, and by our current President. So I think it is fair to say that everyone realizes, Mr. Chairman, that you do not come here with a political agenda, and I appreciate that.

Your testimony is not surprising, but in my view, it is nonetheless profound. You say that there are imbalances, significant problematic imbalances between our resources as a Government and the commitments that we have taken on; that these imbalances very much need to be addressed. Yet you say that to address these with tax increases would be very worrisome, and I agree with that.

You also mention the fact that because of the demographics, this turning of the calendar that you mentioned to Mrs. Capps, Social Security needs to be fixed, and the sooner the better. But you also point out that it needs to be repaired in two respects. One, that we need to solve the problem of having enough money in the system to make the payments, but also it should be changed in a way that encourages national savings.

I appreciate you clearing up this sort of alarmist talk that has been going on around the city about the amount of American debt that is held by foreigners. Clearly, it is a concern, but as you pointed out, it is an indication that people all over the world view investing in the United States as a very sound investment. And to suggest rather simplistically that if the Chinese or Koreans decide that they no longer want our bonds, that somehow they could call them in and that would create a crisis, I think it is good that that has been debunked today. If they want to sell our debt, they could sell it to a willing buyer on the open market, or if they do not want our debt, they can refuse to purchase any more of our bonds. But I appreciate your testimony on the record in that regard.

And then I understand that you said, with regard to the national debt owned by foreigners, the greatest problem is that we are not buying it ourselves, that it is not Americans who are saving money and buying U.S. Treasury instruments, because we need to increase our national savings. So you say that must be part of our Social Security fix, and I appreciate that.

There are folks that say going to these individual investment accounts, even though it would increase investment, that it dismantles this great program of Social Security, this social contract that we have had for half a century or more, that we take care of the needy elderly, that it is too risky. I find it hard to believe that you would recommend a scheme that would be too risky for Americans, that you would recommend a scheme that would somehow violate the Social Security safety net.

So I would ask you to comment on that. Do you have a comfort level that we can move to individual accounts, gradually and cautiously, as you say, without harming this compact that we have had between the workers and the elderly and that we will not return to the elderly poor?

Mr. Greenspan. There are numbers of different ways of essentially guaranteeing a level of benefits in any of these programs, whether it is under Social Security, whether it is partial privatization, whether it is any particular form of retirement structure. As best I can judge, in every case where people have come up with very different alternatives to some mix of private and public accounts, there is always some component in there which is a guarantee against any extreme problem. And I think there should be.

So that is not where the issue lies. The issue has got to lie in two areas. One is a critical issue. We cannot have a pay-as-you-go system when the demographics that confront us lead us eventually to a position where there will be fewer than two workers per retiree. It just will not work. In 1935 and for the next 50 years, it worked exceptionally well because you had population growing at a sufficiently rapid pace so that there was always a large number of younger people coming up, as you increased the population, relative to the number of people who were retired. But when you get the population growth slowing down, and especially the extraordinary improvement in life expectancy after age 65, the arithmetic no longer works for pay-as-you-go, and what you need is a system which creates the savings that are invested in real assets to produce the real consumption in retirement. That is the first issue.

The second issue is that private accounts have one important element in them, in that instead of a guaranteed annuity for retirement, which is what Social Security is, you actually have a claim to wealth; even though that wealth is immobile until you retire, it is, nonetheless, yours. And the question of being able, after retirement, to have various alternatives, including bequeathing it to your children, is a value which I think is worthwhile developing in this country, because there is just too little wealth below the median-income level. And what private accounts will do is to create the building up of actual individual wealth, which I think is a value in and of itself.

Mr. Wicker. Thank you, Mr. Chairman. Let me just observe that I believe in our witness today we have truly a national treasure, and sometimes I have had to listen to him when I didn't particularly like the answer. I hope that the American people and American policymakers are listening to his testimony today. Thank you for your indulgence.


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