Among the targets of President Bush’s campaign to promote Social Security restructuring is a potentially critical constituency of one: Federal Reserve Chairman Alan Greenspan.
White House officials have met with Greenspan in recent weeks to discuss their restructuring initiative. Some advisors say his seal of approval would reassure lawmakers concerned about the borrowing needed to finance Bush’s plan to let younger workers create personal investment accounts.
“The White House feels it is imperative that whatever plan they come out with has Alan Greenspan’s endorsement,” said one prominent Republican who is close to the current policy debate. “They’re nervous that Wall Street will rebel against the proposal unless they have Greenspan’s blessing.”
Some lawmakers hope that Greenspan will tip his hand when he testifies before the Senate Banking, Housing and Urban Affairs Committee on Wednesday and the House Financial Services Committee on Thursday. Although the official purpose of his appearance before each committee is to discuss monetary policy, several members have said they intend to question him about Social Security.
Although Greenspan has no official role in the current debate, his leadership of the National Commission on Social Security Reform in the 1980s and his overall expertise in economic policy make him a key player in the process, according to members of Congress and Bush administration advisors.
“His input is important,” said Sen. Richard C. Shelby (R-Ala.), chairman of the Senate Banking Committee. “With someone of Chairman Greenspan’s stature, everyone would rather have him on their side than against them.”
White House and Federal Reserve officials declined to discuss Greenspan’s involvement in the restructuring discussions.
“The president and his economic team have had an ongoing dialogue with the chairman of the Federal Reserve, but those are private conversations,” said White House spokesman Trent Duffy. “Obviously the chairman’s views on major policies that affect the economy are important.”
Greenspan has urged Congress to take steps to reduce Social Security’s long-term financial shortfall. But he has not commented publicly on the restructuring initiative formulated by the White House after Bush’s reelection in November.
Bush’s still-evolving plan would require the government to borrow trillions of dollars over several decades to replace payroll tax revenue diverted into private accounts. Over time, the additional debt would be offset by lower benefit payouts.
Greenspan’s comments carry considerable weight on Capitol Hill. Four years ago, he helped overcome opposition to Bush’s first big tax cut by assuring lawmakers that it was an appropriate use of the big surpluses Washington was expecting at the time.
If Greenspan signals his support this week for Bush’s private account plan, or voices no objections to the initial borrowing it would entail, it could improve the president’s prospects in what is shaping up as the biggest legislative battle of Bush’s second term, according to congressional insiders and independent analysts.
“It would certainly help their case,” said Susan Hering, senior economist for the Wall Street investment firm UBS. “He’s looked to as an authority.”
Similarly, if Greenspan insists that future benefit reductions must be part of any Social Security restructuring package, it could undermine efforts by some Republicans to let workers create private investment accounts but leave the current benefit structure untouched.
“We should all be paying close attention to what Chairman Greenspan has to say about the future of the Social Security system,” said Rep. Clay E. Shaw Jr. (R-Fla.), who has introduced legislation to create private investment accounts.
The issue puts Greenspan in a potentially awkward position, as lawmakers on both sides of the issue try to solicit responses designed to advance their positions on restructuring.
Sen. Jack Reed (D-R.I.), a member of the Senate Banking Committee, said he intended to press Greenspan to address the additional government debt that would be incurred under Bush’s restructuring proposal.
“I hope he will point out the significant borrowing that has to take place to fund these private accounts,” Reed said. “I would hope his conclusion would be that this is going to further worsen the deficit situation.”
More than two decades ago, before he became Fed chairman, Greenspan headed a bipartisan commission that recommended changes in Social Security to avert an imminent funding shortfall. Congress adopted many of the commission’s proposals in 1983, including a payroll tax hike and a gradual increase in the retirement age to 67.
Greenspan has not commented on Bush’s restructuring initiative. But according to a book published last year, former Treasury Secretary Paul H. O’Neill described the Fed chairman as an ardent advocate of replacing traditional Social Security benefits with private investment accounts.
When Bush took office four years ago, the government was expected to accumulate budget surpluses of more than $5 trillion over 10 years. In the book, O’Neill said that he and Greenspan devised a plan to set aside about $1 trillion of the expected windfall to finance the transition to private accounts.
“OK, all you have to do now is take $1 trillion and lock it in a safe,” Greenspan told the Treasury secretary, according to “The Price of Loyalty,” which chronicled the events leading up to O’Neill’s dismissal in late 2002.
Their plan, which Greenspan never discussed publicly, differed in some respects from the proposal the White House is now pushing. It would have replaced traditional Social Security benefits entirely for all workers below the age of 38 -- a “clean break,” in O’Neill’s words. Bush’s plan would give all workers under age 55 the option to open private accounts, but the accounts would only replace a portion of traditional benefits.
More importantly, O’Neill and Greenspan were collaborating to create private accounts at a time when the Treasury was anticipating that it could pay off the entire national debt within a decade.
Some economists, including Greenspan, were expressing concern about the potentially destabilizing effects of such large surpluses.
The surpluses have since been replaced by growing deficits -- a dramatic reversal caused by the effects of the stock market collapse, a 2001 recession, the Sept. 11 terrorist attacks, the wars in Afghanistan and Iraq, and the series of big tax cuts approved by Congress during Bush’s first term.
In previous congressional testimony and public remarks, Greenspan has warned that the 1983 changes to Social Security have proven insufficient to eliminate the long-term funding shortfall, which the program’s trustees estimate will total $3.7 trillion over 75 years.
Greenspan has urged Congress to consider further increases in the retirement age or other forms of benefit reductions before raising the Social Security payroll taxes, currently 12.4%, half paid by workers and half by employers.
“As a nation, we owe it to our retirees to promise only the benefits that can be delivered,” Greenspan said last September.
“If we have promised more than our economy has the ability to deliver to retirees, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels,” he said.
Although some lawmakers hope to put Greenspan on the spot this week, the Fed chairman is known for his ability to cloak his statements on politically sensitive subjects in almost impenetrable ambiguity.
“Sometimes Chairman Greenspan has been known to say things so profound that we’re not sure exactly what he meant,” said Bob Pozen, chairman of MFS Investment Management and a member of a Social Security commission convened by Bush in 2001.
Times staff writer Richard Simon contributed to this report.