Greenspan on Social Security.

[ridgeway <riridgew@nyx.net>]

   In addition to the references of widely published experts on 
   SS I posted in this debate on 5/10/99, I'd like to enter into 
   the record of this debate some more analytical facts and 
   economic analysis on Social Security from yet another widely 
   recognized expert on the subject. These basic economic facts 
   should have been discussed first before any debate on reform, 
   values, etc..., was started.  Better late than never.  As 
   this particular expert is of special importance, I've 
   posted it in a separate thread.
          
   On March 3, 1999 Federal Reserve Chairman Greenspan gave 
   testimony on Social Security before a U.S. House subcommittee 
   --- I encourage you to get a copy of the entire text, here is
   an extended excerpt:

   -----------------------Start quote------------------------------------
      "Mr. Chairman and other members of the committee, preparing for the 
   retirement of the baby boom generation looms as one of our nation's 
   most difficult challenges, and I commend the serious efforts being made 
   here to address this important long-term problem. Before discussing my 
   views on the issue of investing the social security trust fund in 
   equities, I would like to examine the more fundamental issues that any
   retirement reform will have to address.

       The dramatic increase in the ratio of retirees to workers that
   seems inevitable, as the baby boom generation moves to retirement and
   enjoys ever greater longevity, makes our current pay-as-you-go social
   security system unsustainable. Furthermore, the broad support for
   social security appears destined to fade as the implications of its
   current form of financing become increasingly apparent. To date, with
   the ratio of retirees to workers having been relatively low, workers
   have not considered it a burden to share the goods and services they
   produce with retirees. The rising birth rate after World War II,
   which, in due course, contained the growth of the ratio of retirees to
   workers, helped make the social security program exceptionally
   popular, even among those paying the taxes to support it.

       Indeed, workers perceived it to be a good investment for their own
   retirement. For those born before World War II, the annuity value of
   benefits on retirement far exceeded the cumulative sum at the time of
   retirement of contributions by the worker and his or her employer,
   plus interest. For example, the implicit real rate of return on social
   security contributions was almost 10 percent for those born in 1905,
   and was about 6 percent for those born in 1920. The real interest rate
   on U.S. Treasury securities, by comparison, has generally been below 3
   percent.

       But, births flattened after the baby boom, and life expectancy
   beyond age sixty-five continued to rise. Consequently, the ratio of
   the number of workers contributing to social security to the number of
   beneficiaries has declined to the point that maintaining the annuity
   value of benefits on retirement at a level well in excess of
   accumulated contributions has become increasingly unlikely. Those born
   in 1960, for example, are currently calculated to receive a real rate
   of return, on average, of less than 2 percent on their cumulative
   contributions. Indeed, even these low rates of return for more recent
   cohorts likely are being overestimated, because they are based on
   current law taxes and benefits. In all likelihood, short of a
   substantial infusion of general revenues, social security taxes will
   have to be raised, or benefits cut, given that the system as a whole
   is still significantly underfunded, at least according to the
   intermediate projections of the Old-Age and Survivors Insurance (OASI)
   actuaries. For the present value of current law benefits over the next
   75 years to be fully funded through contributions, social security 
   taxes would have to be raised about 2.2 percent of taxable payroll; 
   to be fully funded in perpetuity, that is, to ensure that taxes and 
   interest income will always be sufficient to pay benefits, social 
   security taxes would have to be raised much more-- perhaps something 
   on the order of 4 to 5 percent of taxable payroll.

       This issue of funding underscores the critical elements in the
   forthcoming debate on social security reform, because it focuses on
   the core of any retirement system, private or public. Simply put,
   enough resources must be set aside over a lifetime of work to fund
   retirement consumption...."
   [snip]
   ------------------------------end quote--------------------------
   
   Greenspan goes on to explain why he does not like the idea of
   the government investing in the equity markets  --- the problem
   is politics would enter the process; better to let individuals
   control their own investments directly.  In any event, I thought
   initial remarks by Greenspan were yet another good objective 
   ecnomic analysis and summary from a professional on the SS system.
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