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March 15, 2005

Greenspan nails it!

Alan Greenspan gets it -- Social Security personal accounts are the lock box mechanism that can assure that retirement savings won't be spent by government. From his Senate testimony today:

We need, in effect, to make the phantom "lock-boxes" around the trust fund real. For a brief period in the late 1990s, a common commitment emerged to do just that. But, regrettably, that commitment collapsed when it became apparent that, in light of a less favorable economic environment, maintaining balance in the budget excluding Social Security would require lower spending or higher taxes.

Last year, Social Security tax revenues plus interest exceeded benefits by about $150 billion. If those funds had been removed from the unified budget and "locked up" and Congress had not made any adjustments in the rest of the budget, the unified budget deficit would have been $564 billion. A reasonable hypothesis is that the Congress would, in fact, have responded by taking actions to pare the deficit. In that case, the end result would have been lowered government dissaving and correspondingly higher national saving. A simple reshuffling from the unified accounts to the lock-boxes would not have, in itself, added to government savings; but higher taxes or lower spending would have accomplished that important objective.

The major attraction of personal or private accounts is that they can be constructed to be truly segregated from the unified budget and, therefore, are more likely to induce the federal government to take those actions that would reduce public dissaving and raise national saving. But it is important to recognize that many varieties of private accounts exist, with significantly different economic consequences. Some types of accounts are virtually indistinguishable from the current Social Security system, and the Congress would be unlikely to view them as truly off-budget. Other types of accounts actually do transfer funds into the private sector as unencumbered private assets. The Congress is much more likely to view the transfer of funds to these latter types of accounts as raising the deficit and would then react by taking measures to lower it.

Posted by Don Luskin at March 15, 2005 11:30 AM | Print

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