Federal Reserve Chairman Alan Greenspan does well to address, at the end of his career, problems that he did not have the guts to take on 21 years ago when he still was campaigning for a major federal appointment.
While many of the suggestions Greenspan made Wednesday now make sense — despite still likely being politically unpopular — one should know the chairman’s history on this issue, how he avoided the unpopular road 21 years ago, and how we’re paying for those decisions today.
Five years before his appointment to the Fed, Greenspan was head of the National Commission on Social Security Reform, also known as the “Greenspan Commission.”
That body’s task was to clean up the mess Congress and President Richard Nixon created in 1972, when in a game of meretricious one-upmanship, they increased Social Security benefits far beyond previous levels.
They then indexed benefits for inflation using a flawed formula that effectively corrected benefits twice. These irresponsible but politically popular acts gutted the program’s actuarial basis.
Only two remedies were possible: Increase taxes or cut benefits. Greenspan’s commission boldly chose to do both, with the mix heavily weighted toward rate increases in FICA (Federal Insurance Contributions Act). Rates went up almost immediately. The most significant benefit cut — raising the full retirement age from 65 to 67 — was to be phased in over a 44-year period, becoming fully effective in 2027.
Other changes brought federal employees into the system, cut survivors’ benefits to college students older than 18, gradually widened the benefit reduction for early retirement at age 62 and subjected the Social Security benefits of high-income recipients to federal income taxes.
When the changes were to be enacted, no one who was retired — or about to retire — felt any real pain. The higher taxes and the modest phased-in benefit reductions primarily hit those who would retire in 20 years or later. With administration claims that Social Security was “fixed” for 75 years, there was little opposition.
Two decades have passed, and people who retired between 1960 and 1990 have enjoyed levels of benefits relative to their own contributions far above that of any group that came before or will follow.
But the “fix” was not good for 75 years. One observer accurately, if inelegantly, described the measures thus: “It’s like when a kid gets sick on a school bus. If the driver doesn’t clean it up, he at least covers the mess with newspapers so it doesn’t bother the rest of the kids.”
Now, 21 years after helping spread newspapers, Greenspan is warning the nation about problems with Social Security. Well, thank you, Dr. Greenspan!
We have had 21 years of delay in which the number of retirees and their proportion of the total population have risen. That is 21 years in which recipients have become even more firmly convinced of their God-given right to every penny of benefits, and of the fact that they are only getting back a portion of the sums they contributed. Benefit cuts are even more politically difficult now than they would have been in 1982.
All that said, the chairman’s suggestions Wednesday are not bad. Modest benefit cuts now will avert much more painful measures 20 years from now.
His suggestion of changing the index to the “chain-weighted” consumer price index, which more accurately reflects effects of increased prices on households, is positive and relatively painless. As he testified, if this had been implemented a decade ago, the “trust fund” by now would be $200 billion fatter than it is.
Increasing the full retirement age beyond 67 — and implementing that earlier — also would help solvency. Such changes would only reflect ongoing improvements in good health and life expectancy.
The chairman is too cautious. We can do much more. There is no good reason why benefit increases need to be annual and exactly equal to the CPI. We have done this since 1972, but for three decades before that, benefits rose only when Congress examined all the effects and deemed an increase warranted. Indexing came about only because high inflation no longer exists.
If Congress does not have the guts to jettison automatic indexing, it could save tens of billions of dollars by delaying any increase until some trigger point — say, a cumulative 5 percent rise in the chained CPI — was reached.
Congress has just decided that Medicare participants deserve a drug benefit. The need is large for some, not for others. Moreover, the benefit is one never considered in actuarial calculations for FICA rates back when current retirees still worked. It seems a fair trade that this group, in return for new drug benefits, should accept a partial, ongoing reduction in regular benefits. Reducing future increases by one percentage point below the CPI change for each year through 2010 would inflict little pain on most households.
Such proposals, of course, will bring a firestorm of opposition. But with the articulate support of new converts like Fed Chairman Greenspan, we may yet allocate the burden of Social Security reform more justly between different generations.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.