[Senate Hearing 109-59]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 109-59

 
                 EXPLORING THE ECONOMICS OF RETIREMENT

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             MARCH 15, 2005

                               __________

                            Serial No. 109-4

         Printed for the use of the Special Committee on Aging

                                 ______

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                            WASHINGTON : 2005
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                       SPECIAL COMMITTEE ON AGING

                     GORDON SMITH, Oregon, Chairman
RICHARD SHELBY, Alabama              HERB KOHL, Wisconsin
SUSAN COLLINS, Maine                 JAMES M. JEFFORDS, Vermont
JAMES M. TALENT, Missouri            RUSSELL D. FEINGOLD, Wisconsin
ELIZABETH DOLE, North Carolina       RON WYDEN, Oregon
MEL MARTINEZ, Florida                BLANCHE L. LINCOLN, Arkansas
LARRY E. CRAIG, Idaho                EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
CONRAD BURNS, Montana                BILL NELSON, Florida
LAMAR ALEXANDER, Tennessee           HILLARY RODHAM CLINTON, New York
JIM DEMINT, South Carolina
                    Catherine Finley, Staff Director
               Julie Cohen, Ranking Member Staff Director

                                  (ii)



                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Gordon Smith........................     1
Opening Statement of Senator Herb Kohl...........................     2
Statement of Senator Ron Wyden...................................     4
Statement of Senator Larry Craig.................................     5
Statement of Senator James Talent................................     6
Statement of Senator Susan Collins...............................     7
Statement of Senator Evan Bayh...................................     8
Statement of Senator Blanche Lincoln.............................    10
Statement of Senator Conrad Burns................................    10
Statement of Senator Hillary Clinton.............................    10

                                Panel I

Hon. Alan Greenspan, Chairman, Federal Reserve Board.............    11

                                APPENDIX

Questions from Senator Blanche Lincoln for Chairman Greenspan....    43
Questions from Senator James Talent for Chairman Greenspan.......    45
Questions from Senator Mel Martinez for Chairman Greenspan.......    47

                                 (iii)




                 EXPLORING THE ECONOMICS OF RETIREMENT

                              ----------                              



                        TUESDAY, MARCH 15, 2005

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m., in room 
SD-562, Dirksen Senate Office Building, Hon. Gordon H. Smith 
(chairman of the committee) presiding.
    Present: Senators Smith, Collins, Talent, Craig, Burns, 
Kohl, Wyden, Lincoln, Bayh, Carper, Clinton, and Jeffords.

     OPENING STATEMENT OF SENATOR GORDON H. SMITH, CHAIRMAN

    The Chairman. Good morning, ladies and gentlemen. We will 
convene this hearing of the Senate Special Committee on Aging. 
I know a number of our colleagues are en route, but in respect 
of Chairman Greenspan's time, we are going to try and conduct 
this hearing within a 2\1/2\ hour period or shorter, if 
possible.
    I know Senator Kohl has joined us and we welcome him as 
well.
    We are just barely starting, Senator.
    We are fortunate to have Federal Reserve Board Chairman 
Alan Greenspan here with us to help us explore the economics of 
retirement. He has given these matters a great deal of thought 
as well as having the ability to share with us his experience 
in chairing the bipartisan Social Security panel that helped 
forge the last rescue of the program in 1983.
    As the witnesses in our hearing last month clearly 
articulated, with the onslaught of baby boom retirees in the 
coming decades, the expenditures of Social Security, Medicare, 
Medicaid, and other public and private pension programs will 
rise rapidly in the coming year. However, with the large exodus 
of older workers from the labor force, the pool of working-age 
Americans will rise only modestly, potentially depriving our 
nation of what has been one of its major engines of economic 
growth. Balancing the income and outgo of the Social Security 
system may now be our principle focus, but as we will hear 
today, a primary goal of any legislation should be to increase 
national savings and stimulate the increased productivity 
needed to achieve higher economic output.
    Meeting the promises made to future retirees depends more 
on the size of the economy than whether claims on future 
resources are built into public or private retirement programs. 
Raising future taxes for Social Security or accumulating stocks 
and bonds in new personal accounts will mean little if the 
economy has not expanded sufficiently to match the consumption 
needs of an older nation. It is the economy's capacity to grow 
over the next few decades that offers the greatest security to 
our aging population.
    Much of the recent debate considers Social Security in 
isolation from the rest of the government, the economy, and 
other means by which people strive for retirement security. If 
balancing the system's, income and outgo were all that 
mattered, the simplest fix would be to pass a law adding more 
government bonds to the Social Security trust funds. However, 
there is no excess money in the general fund, and because 
Federal deficits are projected for as far as the eye can see, 
none is expected in the future. That means there are two 
recourses in the future for making good on those bonds: Raising 
taxes or borrowing. Neither of those actions will increase the 
size of the economy, and in all likelihood, they would impair 
it.
    Economic growth will not occur without sacrifices. People 
can do two things with their money. They can buy things that 
they consume immediately or they can invest their money to 
enable them to consume in the future. Simply put, there is no 
free lunch in achieving national savings. As we will hear 
today, the same is true when making government policy.
    So before we proceed to Chairman Greenspan, it is my 
pleasure to turn the microphone to my colleague, the Ranking 
Member, Senator Herb Kohl, who has remarks of his own to make.

             OPENING STATEMENT OF SENATOR HERB KOHL

    Senator Kohl. I thank you, Mr. Chairman, and we thank you, 
Chairman Greenspan, for your appearance here today.
    Chairman Greenspan, back in the 1980's, you served as 
chairman of a commission to strengthen Social Security at a 
time when Social Security could only pay full benefits through 
the middle of 1983. Now, that was a real crisis, and such is 
not the case today. Social Security can pay full benefits for 
another 40 to 50 years, and after that, even if nothing is 
done, as you know, Social Security could still pay 70 to 80 
percent of its promised benefits. So what we are dealing with 
here today is nothing close to a complete bankruptcy of the 
program.
    Of course, we do not believe that nothing should be done, 
but it is clear that for those of us who are truly interested 
in strengthening Social Security--and not dismantling it or 
replacing it with something very different--the problem can be 
fixed through relatively modest adjustments. But instead, the 
President has proposed changing Social Security to a new, 
untested, and very expensive system of private accounts.
    Mr. Chairman, as you have said, private accounts will do 
nothing to improve Social Security's solvency, and they would 
not meet your goal, which I share, of increasing national 
saving. On the contrary, they would add up to $5 trillion to 
our national debt. So you can see why many of us are skeptical. 
If we truly want to increase saving, our priority should be 
reducing the Federal budget deficit, which you have said is the 
best way to increase national saving.
    That is what bothers many of us here about this debate. It 
sidetracks us from the central issue that we should be 
discussing: that our country faces growing budget deficits that 
will take their toll not just on our ability to sustain 
programs like Social Security, but also on other important 
programs, like Medicare.
    Medicare, like Social Security, faces a future in which 
more and more seniors will be eligible for the program with 
fewer and fewer workers paying taxes to support them; but 
unlike Social Security, the dollar value of Medicare benefits 
is not set by a formula. It is dependent instead on the 
skyrocketing costs of health care. Every estimate shows 
Medicare's share of the Federal budget increasing at a far 
greater rate than Social Security's. The President has focused 
only on Social Security, but I know you agree that we need to 
think about all other programs that will put a strain on the 
budget in the coming years.
    It is clear that the biggest problem is not Social 
Security. In fact, GAO estimates that Social Security accounts 
for less than 10 percent of the government's long-term future 
liabilities. If we are serious about dealing with all of our 
fiscal challenges, then we should be spending our time and 
effort looking at the entire Federal budget. That includes the 
budget and tax policies that this Administration has chosen.
    The President talks about fiscal restraint; however, CBO 
estimates that the Administration's budget policies would 
increase the budget deficit by $1.6 trillion over the next 10 
years. The cost of making the tax cuts permanent would be $11 
trillion over 75 years, which is three times the cost of fixing 
Social Security. The cost of repealing the estate tax entirely 
would be almost 25 percent of the cost of fixing Social 
Security.
    What we really face here are choices, and supporters of 
private accounts and tax cuts have made their choice. I believe 
it reveals that they are not serious enough about dealing with 
our budget deficit or increasing national saving, and it calls 
into question whether they are interested in strengthening the 
long-term solvency of Social Security.
    But we can choose differently. The American people expect 
us to have a serious debate and come together to solve the 
challenges facing Social Security. Unfortunately, the debate 
today has become, as you know, so polarized that partisan 
sniping and deadlock are the most likely outcomes. That is 
unacceptable. Americans expect a more serious effort when it 
comes to a program as important as Social Security. In 1983, as 
you know, people from both sides came together under your 
direction and were able to strengthen Social Security for 
another 75 years, but this model has not been followed by this 
President. He has not bothered to consult very much, if at all, 
with Democrats, nor has he formed a truly bipartisan 
commission, which is what the American people want and deserve, 
and which was done in 1983 under President Reagan.
    Everyone knows that you cannot achieve lasting change to 
this highly popular program, or tackle the tough fiscal issues 
we face across the board, without broad bipartisan support and 
participation. Therefore, the goal should be real 
bipartisanship, and not just trying to pick off a few Democrats 
as bipartisan window dressing. Only then will we be able to 
strengthen Social Security, which has protected millions from 
poverty and provided a sense of security to all Americans.
    We thank you for being here, and, Mr. Chairman, I turn it 
back to you.
    The Chairman. Thank you, Senator Kohl.
    If there is no objection, I would propose that each member 
have an opportunity for a brief opening statement on the basis 
of their time of arrival. So we will turn first to Senator 
Wyden and then Senator Craig.

             OPENING STATEMENT OF SENATOR RON WYDEN

    Senator Wyden. Thank you, Mr. Chairman. I commend you, Mr. 
Chairman, and Senator Kohl, and I will be brief.
    Chairman Greenspan, I don't see how you can explore the 
economics of retirement, the topic of today's hearing, without 
digging into the question of the weakening dollar. The 
weakening dollar is particularly hard on older people. Suffice 
it to say right now, we are talking about how we persuade 
people to save more in America, and I think it is pretty 
stunning when you lock at Newsweek Magazine this week, they say 
in an article that Americans should consider savings accounts 
and certificates of deposit in foreign currencies. They make 
this argument on the basis of the weakening dollar. So I intend 
to explore with you this morning this question of the weakening 
dollar and how far we are really going to let this slip. That 
will be the first area that I look at.
    The second that leaves me puzzled is why you give short-
shrift to the issue of health care. Health care in your 
statement today gets one sentence and a footnote. As far as I 
can tell, you essentially say nobody really understands the 
ramifications of health care technology, so we really cannot 
get into this now. I would respectfully disagree. Senator Hatch 
and I have authored a bipartisan law that is now being 
implemented that is going to look at some of the tradeoffs 
necessary to address this health care issue, and I want to 
explore that with you this morning, because like my view with 
respect to the weakening dollar, I just don't think this 
country can duck this issue of health care any longer, and that 
is the point of the bipartisan law that I have authored with 
Senator Hatch.
    So, as always, we welcome you and look forward to 
discussing these important issues, and especially to my friend 
from Oregon, Senator Smith, I thank him for scheduling this.
    The Chairman. Thank you, Senator Wyden.
    Senator Craig.

            OPENING STATEMENT OF SENATOR LARRY CRAIG

    Senator Craig. Mr. Chairman, thank you very much.
    Chairman Greenspan, welcome again before the Aging 
Committee.
    I had the opportunity about a year and a half ago to 
explore with you the dynamics of the Social Security system 
juxtaposed to Medicare and prescription drug reform, and I 
remember at that time, and, Ron, it may assist you a little bit 
in why the chairman is saying what he is saying today. I 
remember asking you the question which is the easier of the two 
to fix, and I have used your comments since that time, because 
I thought they were very profound. In essence, you say said 
Social Security is by far the easier to fix because we know the 
numbers. We can adjust accordingly. We can determine cash-flow. 
It is a relatively fixed model.
    Health care is dynamic, constantly changing and constantly 
improving and very expensive, and how do with we fit that into 
a model and be able to predict accurately the outcome and the 
cost? I mean, I am paraphrasing you, Mr. Chairman. I would 
certainly not put words in your mouth, but generally that is 
what I gained from your comment.
    I am probably one of the few on this panel besides possibly 
Senator Jeffords who was in the Congress in 1980, 1981, 1982, 
and 1983, and I must tell you, Senator Kohl, I was there for 
the wrestling match between the two Irishmen, Tip O'Neill and 
Ronald Reagan on the issue of Social Security reform. I will 
tell you who won the wrestling match in the first go around. 
The Democrats did. The reason they did was because Claude 
Pepper and company went out to the land and said Republicans 
are going to destroy the Social Security system and only 
Democrats can save it, and that resulted in the unelection of a 
variety of my colleagues that were in the class of 1980. 
Republicans saw in part the reality of the politics of the 
issue of that time, and Ronald Reagan, wise man that he was, 
along with Tip O'Neill agreed to put together a group that you 
chaired.
    The reform, and you will again correct me if I am wrong, 
was not unlike the model we had used in the past for Social 
Security. It was a relatively simple model. It is, in fact, a 
model that many are asking for today. How do you fix it? You 
simply raise taxes and cut benefits, raise taxes and cut 
benefits, raise taxes and cut benefits.
    I have a granddaughter who is 7 years old. I have done the 
numbers for her. If we raise taxes and cut benefits, my guess 
is that my granddaughter when she hits 22 or 23 is going to be 
paying around 18 percent of her gross so that grand-daddy can 
live well. I am phenomenally fearful not for the this grand-
daddy, but for a lot of the grand-daddies out there that might 
be told by their grandchildren in the future, you know, you are 
too darned expensive for us anymore; we simply can't afford to 
put our kids in college, buy our homes, buy our cars, and pay 
for your retirement, Social Security/supplemental income 
because it is taking too big a chunk of our hard earned pay.
    Now, that juxtaposed against the demographics and the work 
force out there and all of that kind of thing, Chairman 
Greenspan and I while I chaired this committee did something 
else. We looked at the demographics of aging. We looked at the 
dynamics of a country growing older than younger and a 
diminishing work force against technology and therefore fewer 
paying into the system, and I must say our President is very 
wise to challenge us to think beyond the traditional box of 
reforming Social Security, of raising taxes, cutting benefits, 
raising taxes, cutting benefits.
    I don't mind less benefits, but I do worry greatly about my 
concern that my grandchildren are going to be asked to pay a 
prohibitive tax against a program in which they will receive 
very little in return compared to what my parents, their great 
grandparents, and I will receive. It is a challenge for us all 
of us. It is not something to be demagogued. In the past it has 
been. Two wish Irishmen finally came together, formed a study 
group, came out with a change, but I do remember a change that 
I believe I voted for, and it was the largest tax increase on 
the working men and women of this country ever perpetrated by 
Congress. Did it fix and sustain Social Security in the out 
years? You bet it did, and it will for those who are in the 
system now and receiving, but the work force of America pays 
more and in general the retiree gets less. That, in my opinion, 
is not necessarily a good model.
    But I do thank you for being here today. It is a phenomenal 
challenge for us that I hope we can stand together on as we 
have in the past.
    Thank you Mr. Chairman.
    The Chairman. Thank you, and by order of arrival, we will 
next go to Senator Talent, Senator Collins, Senator Jeffords, 
and Senator Bayh.

           OPENING STATEMENT OF SENATOR JAMES TALENT

    Senator Talent. Mr. Chairman, I came primarily to hear 
Chairman Greenspan. I appreciated Senator Craig's comments, and 
I know you want the hearing to be about more than Social 
Security. I have some questions prepared, for example, with 
regard to health care, what we might be able to gain for the 
system if we can recall fully implement information technology 
in health care as we have in other sectors of the economy, and 
the potential productivity gains I think are huge, and if I can 
be here when it is my turn to ask questions, Mr. Chairman, I 
will do that.
    But I do want to echo Senator Craig's comments that, we 
have heard so much about investments. The nature of finances 
and personal finances has changed so much in the last 
generation, I would hope that we could look at whether we can 
use some of those gains and some of what we have learned to 
help us to protect Social Security for the future without 
having to face the Hobson's choice that Senator Craig mentioned 
of another big tax increase or big benefit cut, and I hope we 
can all get together and try to do that.
    I am going to reserve the rest of my opening statement, Mr. 
Chairman, maybe make a comment or two when it is my turn to ask 
questions.
    Thank you.
    The Chairman. Thank you, Senator Talent.
    Senator Collins.

           OPENING STATEMENT OF SENATOR SUSAN COLLINS

    Senator Collins. Thank you, Mr. Chairman, and thank you for 
calling this very important hearing.
    I want to begin my comments today by thanking our 
distinguished witness for his public service. He has made so 
many sacrifices over the years in order to serve the American 
people, and I want to thank him for his extraordinary public 
service and also for giving us the benefit of his wisdom today.
    Senator Craig mentioned that he was in Congress back in the 
early 1980's when what was known as the Greenspan Commission 
did the fundamental recommendations on reforming and saving 
Social Security. Well, I was not in public office at that time, 
but I was a Senate staffer at that time, working for Senator 
Bill Cohen. So remember that well. I was going to describe 
myself as a young Senate staffer at that time when I realized 
how many years ago, indeed, it was. But that commission was 
able to produce bipartisan recommendations really non-partisan 
recommendations, is a tribute to the leadership of our witness 
today, and it makes me wonder whether that is a model for our 
proceeding to face the very big challenges that we see today.
    Social Security has been a huge success. It is our nation's 
largest and most poplar government program. More than 47 
million Americans rely on Social Security, and for two-thirds 
of them, it is their major source of income. I think as we look 
at how to preserve and modernize the system, we always need to 
remember that for many Americans, Social Security is the safety 
net that makes the difference between poverty and an adequate 
standard of living during their retirement years.
    We also should remember that Social Security is not just a 
retirement program. It is also a disability insurance program 
and a life insurance program that provides families of active 
workers with protection worth more than $12 trillion. That is 
more than all the private life insurance currently in force.
    Unfortunately, as successful as Social Security has been, 
we know that the system faces serious long-term financing 
problems and is simply not sustainable in its current form. 
While the system is sound today, it will not be able to meet 
its obligations to future retirees unless it is modernized.
    Our Social Security cash surplus begins to decline in 2008. 
That is just three years from now. Generally when you have 
heard discussion about Social Security, the focus has been on 
either 2018 or 2042, but, in fact, in just three years, the 
cash surplus begins to decline, and that is because that is 
when the first of the baby boomers reaches age 62, the earliest 
age at which Social Security benefits can be drawn and the age 
at which about half of those eligible to claim benefits have 
done so in recent years.
    In recent weeks, there has been a lot of debate about 
whether Social Security is facing, quote, a crisis or just 
facing, quote, serious problems. Whether the system is facing a 
crisis or serious problems is really just a matter of 
semantics, and I think it is a disservice for the American 
people for us to be spending time in the Senate debating 
whether or not this reaches the level of a crisis when clearly 
all the projections show that Social Security is not 
sustainable in the long run for our children and our 
grandchildren, and that is why I believe that we should start 
dealing with Social Security's financing problems, because then 
the solution will be less disruptive.
    But given the universal importance of this program, it is 
absolutely critical that we get this right. Any changes that 
are implemented must be carefully thought out, thoroughly 
understood, and have solid basis of bipartisan support that 
cuts across all age and income groups. As I look at the various 
proposals for Social Security reform, I want to make certain 
that we preserve and, indeed, strengthen that safety net. I 
think we should look, for example, at increasing the minimum 
benefit and having a guaranteed benefit, because the principle 
that we ought to endorse is that if you work your whole life, 
you should not retire in poverty. That means looking at the 
adequacy of the minimum benefit as well as securing the 
solvency of the system.
    So, Mr. Chairman, thank you again. This is an extraordinary 
important hearing, and I appreciate your leadership.
    The Chairman. Thank you, Senator Collins.
    Senator Jeffords.
    Senator Jeffords. I will pass.
    The Chairman. Senator Bayh.

             OPENING STATEMENT OF SENATOR EVAN BAYH

    Senator Bayh. Thank you, Chairman Smith.
    Chairman Greenspan, welcome.
    From our time together on the Banking Committee, you know 
it is my practice to forego opening statements. I regret that 
the problem in Congress arises today that I am expected to be 
in simultaneous places or several places simultaneously. So I 
am going to make just a couple of opening comments today, and I 
hope you will bear with me.
    I was struck by something that Senator Craig mentioned, and 
I want to agree with him about the need for bipartisanship and 
for neither side to demagogue these important issues. Senator, 
I was particularly struck by your concern for your 
grandchildren. It is something I think about with regard to my 
own young sons, and I think is fundamentally immoral of us to 
pass on our obligations to future generations when we should be 
meeting them ourselves. This is particularly so when we are 
increasingly in debt to foreign nations, and I hate to think of 
our children or your grandchildren someday paying with interest 
our obligations to other countries.
    They also will be paying not only for imbalances in the 
Social Security system, however, but for the underlying Federal 
budget deficit, which if you look to the out years may, in 
fact, equal or exceed the liabilities in the Social Security 
system. So to this Senator's way of thinking, if we are going 
to really get to a bipartisan consensus on doing right by our 
children and grandchildren, we need to address both Social 
Security and the budget deficit so that they won't be forced to 
meet our obligations.
    This raises in my mind, Mr. Chairman, a conundrum that I 
posed the last time we were before the Banking Committee, which 
is how we simultaneously argue that Social Security is in 
crisis--that is not a word that you have used, but there is an 
actuarial problem there that needs to be addressed--but at the 
same time, we are some flush with cash that we can afford 
further tax cuts.
    This is a situation which needs some explanation, and so I 
would suggest to my colleagues that if we really are going to 
address the long-term fiscal solvency of our country, both 
sides need to not demagogue these issues, but try and address 
the underlying problems in a way that will do right by future 
generations.
    Mr. Chairman, if I have to leave before my question time, 
here were the three that I would have posed to you. So perhaps 
if you can address them at some point in your comments or maybe 
your able staff could get back to me, that would be wonderful.
    There has been some research about increasing private 
savings that is noticed that in traditional 401(K) and private 
savings plans, when the approach that we take today is followed 
with the asking employees whether they wish to opt into these 
savings programs, the participation rate is somewhere between 
25 and 43 percent. If instead we shift the presumption and 
require employees to opt out of those savings programs, the 
experience seems to be that participation rates increase up to 
80 or 90 percent. So my question to you is would changing that 
presumption be a good thing? If so, it then creates what I 
refer to is as a problem of success, and that is that some of 
the business communities say, ``Well, if we are going to have 
increasing participation in these plans, well, then we are 
going to have to provide the match and that increases our 
costs, and some in the private sector are resistant to doing 
that.'' So is it a good idea, and if so, how do we address the 
concerns that some in the private sector would express as a 
result of the success of increased private savings through that 
vehicle?
    My second question relates to the estimates that the Social 
Security system, the trustees have made about their long-term 
projections for both growth and productivity over the next 30 
or 40 years. I believe they estimate economic growth on average 
at 1.9 percent and productive rates of growth at 1.6 percent, 
which based upon our recent experience seems to me to be rather 
modest, both of these estimates, which raises another 
conundrum. If the estimates are, in fact, somewhat low, does 
not that mean that the Social Security imbalance is somewhat 
less than we are currently estimating.
    Conversely, if the estimates are correct, and, in fact. 
economic growth is projected to be at 1.9 percent for the 
foreseeable future, does that not mean that market rates of 
return on investments might correspondingly be somewhat low if 
the economy is only growing at that rate of return? How do we 
square? So are those estimates accurate? If not, how do we 
square those to outcomes if they are not?
    Finally, I have seen in your submitted testimony that you 
raise the issue of the unified budget and the false sense of 
security that gives to people on our side of the dias here 
today when it comes to our assessment of the fiscal situation 
of the country and the lamentable situation we have got in 
actually using Social Security revenues for other things. Would 
it be good in your opinion if we abandoned the unified budget 
and, in fact, segregated Social Security funds for the purposes 
of putting together the Federal budget?
    Those are my questions, Mr. Chairman, and I thank you for 
your presence.
    Chairman Smith, I thank you for calling the hearing today.
    The Chairman. Thank you, Senator Bayh, and we have been 
joined by Senator Lincoln, Senator Burns and Senator Clinton.
    Senator Lincoln, you are next.

          OPENING STATEMENT OF SENATOR BLANCHE LINCOLN

    Senator Lincoln. Thank you, Mr. Chairman. I will submit my 
statement for the record, will welcome Chairman Greenspan to 
the committee, and look forward to being able to have a 
discussion and ask some questions on what I believe not just 
Social Security to be a problem in terms of retirement, but the 
fact that we are exploring the economics of retirement. I hope 
that we will also talk about the other pieces of the puzzle 
that exist in that, which would be Medicare, Medicaid, a lot of 
the other components that really do have an impact on 
retirement.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Lincoln.
    Senator Burns.

           OPENING STATEMENT OF SENATOR CONRAD BURNS

    Senator Burns. Thank you, Mr. Chairman.
    I have not served on this committee for a while, and I am 
back under a new chairman. Chairman Smith, we welcome you and 
under your leadership, and, Chairman Greenspan, it is nice to 
see you again.
    I have no opening statement, although we have some 
concerns, and I will submit the questions and I would imagine, 
probably, that everybody will have just about the same 
question. The problem arises in time that not everybody gets to 
ask theirs. So I shall listen very closely. I know there are 
changes in the winds that we have a system that is in the 
sustainable, and I think it is incumbent on us to work on the 
reforms that will make it that way, taking advantage of a lot 
of circumstances that we have in this country.
    So I thank the leadership, and I have no opening statement.
    Mr. Greenspan, welcome to the committee.
    The Chairman. Senator Clinton.

          OPENING STATEMENT OF SENATOR HILLARY CLINTON

    Senator Clinton. Thank you very much, Mr. Chairman. I thank 
the ranking member, both of you for the hearings you have been 
holding in this committee which are addressing some very 
important issues, and of course I appreciate your having Mr. 
Greenspan here for us to ask questions. I do not have an 
opening statement. I just will wait and hear the questions 
myself.
    The Chairman. Chairman Greenspan, thank you for your 
patience in listening to all of us. I think in my eight years 
in the U.S. Senate, I do not know of any single individual who 
has been more quoted by both sides of the aisle than you, sir, 
and I join the comments of several here to say how much we 
honor your service to Presidents, both Republican and Democrat 
and how much your counsel is listened to here. I think you know 
that because we quote you equally on both sides. We appreciate 
your time and especially appreciate the gravity of this most 
important topic, which is the retirement of America.
    So, sir, the microphone and the time is yours.

  STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE 
                             BOARD

    Mr. Greenspan. Thank you very much.
    Mr. Chairman, Senator Kohl, and members of the committee, I 
am particularly pleased to be here today to discuss the issues 
of population aging and retirement. In so doing, I would like 
to emphasize that the views I will express are my own and do 
not necessarily represent those of the Federal Reserve Board.
    The economics of retirement are straightforward: Enough 
resources must be set aside over a lifetime of work to fund 
consumption during retirement. At the most rudimentary level, 
one could envision households actually storing goods purchased 
during their working years for use during retirement. Even 
better, the resources that would have otherwise gone into 
producing the stored goods could be diverted to the production 
of new capital assets, which would produce an even greater 
quantity of goods and services for later use. In the latter 
case, we would be raising output per worker, our traditional 
measure of productivity, including, of course the supplementary 
measure of output per hour.
    The bottom line in the success of all retirement programs 
is the availability of real resources at retirement. The 
financial systems associated with retirement plans facilitate 
the allocation of resources that supply retirement consumption 
of goods and services; they do not produce goods and services. 
A useful test of a retirement system for a society is whether 
it sets up realistic expectations as to the future availability 
of real resources and, hence, the capacity to deliver post-work 
consumption without overly burdening the standard of living of 
the working-age population.
    In 2008, the leading edge of what must surely be the 
largest shift from work to retirement in our nation's history 
will become evident as some baby boomers become eligible for 
Social Security. According to the intermediate projections of 
the Social Security trustees, the population 65 years of age 
and older will be approximately 26 percent of the adult 
population in 2030, compared with 17 percent today. This huge 
change in the structure of our population will expose all our 
financial retirement systems to severe stress and will require 
adjustments for which there are no historical precedents. 
Indeed, retirement, generally, is a relatively new phenomenon 
in human history. Average American life expectancy a century 
ago, for example, was only 47 years. Relatively few of our 
citizens were able to enjoy many post-work years.
    One consequence of the sizable baby boom cohort moving from 
the work force to retirement is an inevitable slowing in the 
growth of gross domestic product per capita relative to the 
growth of output per worker. As the ratio of workers to 
population declines, so too must the ratio of output to 
population, assuming no change in the growth of productivity. 
That result is simply a matter of arithmetic. The important 
economic implications of that arithmetic is that with fewer 
workers relative to dependents, each worker's output will have 
to support a greater number of people. Under the intermediate 
population projections of the Social Security trustees, for 
example, the ratio of workers to the total population will 
shrink about 7 percent by 2030. This shrinkage means that by 
2030, total output per person will be 7 percent lower than it 
would be if the current population structure were to persist. 
The fact that a greater share of the dependents will be elderly 
rather than children will put an additional burden on society's 
resources, as the elderly consume a relatively large share of 
the per capita resources, whereas children consume relatively 
little.
    This inevitable drop in the growth rate of per capita GDP 
relative to the growth of productivity could be cushioned by an 
increase in the labor force participation, which would boost 
the ratio of workers to population. Increasing labor force 
participation seems to be a natural response to population 
aging as Americans not only are living longer, but are also 
generally living healthier. Rates of disability for the elderly 
have been declining, reflecting both improvements in health and 
changes in technology that accommodate the physical impairments 
that are associated with aging. In addition, work is becoming 
less physically strenuous and more demanding intellectually, 
continuing a century-long trend toward a more conceptual and 
less physical economic output.
    Despite the improving feasibility of work at older ages, 
Americans have been retiring at younger and younger ages. For 
example, in 1940, the median age of retirement for men was 69; 
today, the median age is about 62. In recent years, labor force 
participation among older Americans has picked up somewhat, but 
it is far too early to determine the underlying causes of this 
increase. Rising pressures on retirement incomes and a growing 
scarcity of experienced labor could induce further increases in 
the labor force participation of the elderly and near-elderly 
in the future. In addition, policies that specifically 
encourage greater labor force participation would also lessen 
the necessary adjustments to consumption. Workers nearing 
retirement have accumulated many years of valuable experience. 
So extending labor force participation by just a few years 
could have a sizable impact on economic output.
    Another way to boost future standards of living is to 
increase saving. We need the additional saving in the decades 
ahead if we are to finance the construction of a capital stock 
that will produce the additional real resources needed to 
redeem the retirement claims of baby boomers without having to 
severely raise the claims on tomorrow's workers.
    However, by almost any measure, the required amount of 
saving that would be necessary is sufficiently large to raise 
serious questions about whether we will be able to meet the 
retirement commitments already made. Much has been made of 
shortfalls in our private defined-benefit plans, but the gross 
underfunding currently at $450 billion, although significant as 
a percentage of the $1.8 trillion in assets of private defined-
benefit plans, is modest compared with the underfunding of our 
publicly administered pensions.
    At present, the Social Security trustees estimate the 
unfunded liability over the indefinite future to be $10.4 
trillion. The shortfall in Medicare is calculated at several 
multiples of the one in Social Security. These numbers suggest 
that either very large tax increases will be required to meet 
the shortfalls or benefits will have to be pared back.
    Because benefit cuts will almost surely be at least part of 
the resolution, it is incumbent on government to convey to 
future retirees that the real resources currently promised to 
be available on retirement will not be fully forthcoming. We 
owe future retirees as much time as possible to adjust their 
plans for work, saving, and retirement spending. They need to 
ensure that their personal resources, along with what they 
expect to receive from government, will be sufficient to meet 
their retirement goals.
    Conventional advice from personal-finance professionals is 
that one should aim to accumulate sufficient resources to 
provide an overall replacement rate of about 70 percent to 80 
percent in retirement. Under current law, Social Security 
promises a replacement rate of about 42 percent for workers who 
earn the economy wide-average each and every year through their 
careers and about 56 percent for low-wage workers who earn 45 
percent of the economy wide-average. Assuming that taxes are 
capped at the current 12.4 percent of payroll, revenues will be 
sufficient to pay only about 70 percent of current-law benefits 
by the middle of this century. Thus, for the average worker, a 
replacement rate of only about 30 percent would be payable out 
of contemporaneous revenues, assuming that benefit reductions 
are applied proportionally across the board. For a low-wage 
worker, the payable replacement rate would be about 40 percent. 
Assuming that the goal is still to replace 70 percent to 80 
percent of pre-retirement income, average workers by the middle 
of this century should be aiming to replace about 45 percent of 
their pre-retirement income, rather than today's 33 percent, 
out of some combination of private employer pension benefits 
and personal saving.
    The required increases in private savings would be less to 
the extent that Social Security tax increases are part of the 
solution. However, to avoid any changes in replacement rates, 
the Social Security tax rate would have to be increased from 
the current 12.4 percent to about 18 percent at the middle of 
the century.
    Once we have determined the level of benefits that we can 
reasonably promise, we must ensure that we will have the real 
resources in the future to fulfill those promises. When we 
evaluate our ability to meet those promises, focusing solely on 
the solvency of the financial plan is, in my judgment, a 
mistake. Focusing on solvency within the Social Security 
system, without regard to the broader macroeconomic picture, 
does not ensure that the real resources to fulfill our 
commitments will be there. For example, if we buildup the 
assets in the Social Security trust fund, thereby achieving 
solvency, but offset those efforts by reducing saving 
elsewhere, then the real resources required to meet future 
benefits will not be forthcoming from our economy. In the end, 
we will have accomplished little in preparing the economy to 
meet future demands. Thus, in addressing Social Security's 
imbalances, we need to ensure that measures taken now to 
finance future benefit commitments represent real additions to 
national saving.
    We need, in effect, to make the phantom ``lock-boxes'' 
around the trust fund real. For a brief period in the late 
1990's, 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'' had 
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 
dissavings and correspondingly higher national savings. 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 dissavings and raise national savings. 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.
    Failure to address the imbalances between our promises to 
future retirees and our ability to meet their promises would 
have severe consequences for the economy. The most recent 
projections by the Office of Management and Budget show that 
spending on Social Security, Medicare, and Medicaid will rise 
from about 8 percent of Gross Domestic Product today to about 
13 percent by 2030. Under existing tax rates and reasonable 
assumptions about other spending, these projections make clear 
that the Federal budget is on an unsustainable path, in which 
large deficits result in rising interest rates and ever-growing 
interest payments that augment deficits in future years. But 
most important, deficits as a percentage of GDP in these 
simulations rise without limit. Unless the trend is reversed, 
at some point these deficits would cause the economy to 
stagnate or worse. Closing the gap solely with rising tax rates 
would be problematic; higher tax rates rarely achieve a 
comparable rise in tax receipts, and the level of required 
taxation could in itself severely inhibit economic growth.
    In light of these sobering projections, I believe that a 
thorough review of our commitments and at least some adjustment 
in those commitments is urgently needed. The necessary 
adjustments will become ever more difficult and larger the 
longer we delay. No changes will be easy. All programs in our 
budget exist because a majority of the Congress and the 
President considered them of value to our society. Adjustments 
will thus involve making tradeoffs among valued alternatives. 
The Congress must choose which alternatives are the most valued 
in the context of limited resources. In so doing, you will need 
to consider not only the distributional effects of policy 
changes, but also the broader economic effects on labor supply, 
retirement behavior, and the national saving. The benefits to 
taking sound, timely action could extend many decades into the 
future.
    Thank you very much, Mr. Chairman. I look forward to your 
questions.
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    The Chairman. Thank you, Chairman Greenspan. Your insights 
are always very helpful. The insight that I seek from you now 
comes from your experience in leading the former Greenspan 
Commission that saved Social Security the last time. As someone 
who has tried to keep his powder dry, to listen to the 
arguments for and against what the President has proposed and 
then seeing the political temperature go up on both sides, I 
for one am disappointed that there is not a more constructive 
environment in which to consider all that you have just shared 
with us.
    I wonder if you see any parallels to your experience in the 
early eighties and whether something like a Greenspan 
Commission could be useful to us now. Can you also share with 
us your experience in the early eighties and perhaps suggest to 
us some process, that you found helpful and was to avoid things 
that are hurtful to an ultimately good result in saving Social 
Security?
    Mr. Greenspan. I think the experiences we had in 1983 are 
relevant today, and the reason I say that is that it was not 
the usual Presidential or national commission which regrettably 
too often ends up with a thick report which nobody reads. It 
was constructed in a quite unusual way. We had, in effect, a 
bipartisan commission, obviously, with many members of the 
Senate and the House as well as the private citizens, and we 
decided to construct the system in such a manner that rather 
than have a commission which would deliberate, produce a 
report, present it to the Congress and the President, we 
decided to work interactively and we set it up in a manner in 
which Bob Ball, who is a very, very well respected Social 
Security analyst and commissioner of many decades back and is 
still around, functioning as effectively as always, essentially 
reported and kept in constant contact with Speaker O'Neill, and 
I did the same for the President, President Reagan, and Jim 
Baker, his then Chief of Staff, and we deliberated in a way 
which was really quite fascinating Claude Pepper's name was 
mentioned earlier. Claude Pepper actually set the commission on 
a very important path, because I, frankly, had assumed that the 
first meeting of the commission, which as you may recall 
confronted a Social Security trust fund which was rapidly 
declining which would have required benefit cuts, I thought it 
would be the politically easiest thing to do to just merely 
avert to general revenues, and I feared that that was what 
would indeed happen.
    Claude Pepper said no. He said let us keep this as a social 
insurance system, let us keep this in the form in which it is, 
and in so doing, he in a sense basically set the parameters of 
the discussion, which was we have a problem; we have a deficit; 
there are only two ways to resolve it. You raise taxes or you 
reduce spending.
    Now, you may think that once we came to that conclusion, it 
became very easy, but we actually spent a good deal of time 
trying to find ways to essentially repeal the laws of 
arithmetic. Until we finally got to position that we had to do 
various things, we were in common contact in bringing both the 
Speaker and the President up to date and we must say locking in 
the decisionmaking process. When we finally came to a 
conclusion, it was a simultaneous conclusion, essentially, 
between the Speaker and the President and the commission. When 
we appeared before the Congress, Bob Ball and I decided that we 
had to present the commission's findings as unamendable, 
essentially, because it was a compromise, because if you 
started to amend it, the whole thing would unravel.
    So what we did is I said when Republicans ask you a 
question, I will answer, and I trust you will do the same when 
Democrats ask me a question. So we stood side by side with the 
President and the Speaker and essentially eventually got an 
agreement on the substance of what the particular 
recommendations were. There were a whole series of potential 
recommendations, and we could have chosen from a family of any 
solutions, but we finally decided on one by a fairly large 
majority. As a consequence of that, when presented to the 
Senate and to the House, the types of amendments which were 
applied were more operational rather than substantive, and the 
process worked.
    Do I think this is a possibility this time? I certainly 
hope so. I do recognize that the degree of differences seem at 
least on an audible level to be larger than they were back in 
1983, but I suspect in principle not, because this is not a 
hugely difficult problem to solve, certainly no more difficult 
than in 1983. I guess what is missing is the fact that at this 
stage, there has been a rather low interest in actually joining 
together and finding out where some of the agreements are, and 
I have a suspicion that if it occurs, that will happen.
    The Chairman. I suspect it will also, because when you look 
at the larger category of our topic today, not just Social 
Security but also Medicare, I suspect it will be some time 
within 10 years that these programs in combination will begin 
consuming so much of the Federal budget that Republicans and 
Democrats are going to have to come up with a process, perhaps 
not unlike what you have experienced and shared with us this 
morning, that will come to the rescue of our nation's economy; 
but right now, I think there is a lot of politics playing out, 
and frankly it is unfortunate we can't get to it sooner rather 
than later. Hopefully, your presence here today will help us 
get to it sooner.
    Senator Kohl.
    Senator Kohl. Thank you, Mr. Chairman. Senator Clinton has 
to be departing shortly, and on our side, I would like to give 
her an opportunity to make her comments, and ask her questions 
at this time.
    Senator Clinton. Thank you very much, Senator, and I 
appreciate your kindness.
    Chairman Greenspan, I sat and listened to your testimony 
and I obviously took great note of it and particularly your 
statement on page 6 about the brief period in the late 1990's 
when a common commitment emerged to make the fantom lock boxes 
around the trust fund real. I remember serving on the budget 
committee 4 years ago in the spring of 2001 when your testimony 
helped blow the lid off the lock boxes when it came to the size 
of the tax cuts, the extent of the tax cuts.
    In addition to the tax cuts, without the real opportunity 
to continue to pay down the debt and the deficit, we did away 
with pay-go rules. So we essentially have been in a free fall 
ever since and we are still in that free fall, and I think that 
your testimony today is a little nostalgic for me, and I regret 
that we are in the position we are in.
    I want to ask you two questions. First, in your previous 
testimony before Congress, you have stated before the Banking 
Committee on February 16, that you would be very careful about 
very large increasing debt, characterizing anything over a 
trillion dollars as large. I guess we are now into multiple 
zeroes when we think about what is large and what is not. The 
President's plan in so far as we know it to privatize Social 
Security will increase the debt by almost five trillion over 20 
years.
    Setting aside the fundamental debate over diverting money 
out of Social Security, what do you think about establishing 
private accounts without paying for them, but instead by 
borrowing yet more money; and second, if we were to enact the 
privatization proposal such as the one the President is 
suggesting, what responsibility do you recommend the Federal 
Government have for workers who retire in years when the stock 
market is down and face a significant reduction in benefits? 
What about the other pieces of the mission of Social Security, 
namely the disability and survivor benefits? How do we ensure 
that they are fair and adequate in a privatized system?
    In fact, this is not a hypothetical question. If you look 
at the fact that between March 2000 and April 2001, the S and P 
500 fell by 424 points or 28 percent, if Social Security had 
been privatized, the worker who had his or her individual 
account invested in a fund that mirrored the S and P 500, which 
in many respects is a preferred investment, and who retired in 
April 2001 would have 28 percent less to live on for the rest 
of his or her life.
    So I would appreciate your response to both of those 
questions.
    Mr. Greenspan. Well, Senator, let me first comment that 
with respect to the 2001 period, I actually went back and 
reviewed the testimony that I gave in January of 2001, and we 
were confronted at that time with an almost universal 
expectation amongst experts that we were dealing with a very 
large surplus for which there seemed to be no end, and that was 
true of the best analysts in the Office of Management and 
Budget and the Federal Reserve, and the question was what do we 
do when we get in a very rapid decline and a level of debt 
outstanding when we are about to approach zero and create some 
significant distortions in the system how to allocate assets.
    I argued back then that excessive on-budget surpluses 
distorted the private system and we should try to eliminate 
them. I did indicate that we should have a scheduled tax cut, 
and the reason for that was in order to reduce the surplus. I 
also indicated that there was the possibility--indeed, the 
language is fairly strong in some cases--that we may be fooling 
ourselves, that, in fact, deficits are coming back, and I 
therefore recommended that we have some form of trigger to 
readjust if, indeed, that happens. Subsequently, I have been a 
very strong supporter of pay-go, and so in all tax cuts and all 
expenditure increases, I have held the position that we have to 
pay for them one way or another or we are creating serious 
problems.
    So I don't think that the issue is a question of taking a 
wholly different view. I look back and I would say to you if 
confronted with the same evidence we had back then, I would 
recommend exactly what I recommended then. It turns out we were 
all wrong. We were wrong largely because even though we had 
pay-go in place, we underestimated how that would erode.
    With respect to the particular issues that you raise, 
specifically with respect to private accounts, I think pay-go 
is applicable here as well. I think there are very tricky 
questions which the Congressional Budget Office has raised 
relative to how they would be scored, but they have to be under 
the same rubric.
    With respect to the question of people with private 
accounts which are invested in equities at the time they 
retire, that would be a very unfortunate mistake, and I think 
any private account of which I am aware would restrict the 
amount of highly volatile-priced securities in the last 10 
years of work. So I don't think that issue is real. I do agree 
with you that were it to happen, it would be very disabling, 
but that is easy to cure.
    On the issue of disability and survivors, I think that is 
an issue that we have to handle. In other words, we don't 
essentially eliminate those obligations. I think we address 
them in many other ways, and I think that is perfectly feasible 
to do, and I do believe you need a safety net under the system.
    So private accounts are coming in all sizes and shapes. I 
don't know exactly what the President is going to propose. I do 
believe that whatever is proposed should be as small as 
possible, because we do not know, as I have indicated in past 
testimony, how the market will react to the increase in the 
budget deficit that will be reported on a unified budget basis. 
Until we know that, I think we are taking potential risks with 
private accounts, and my testimony in the past is that we 
should start very slowly and see whether, in fact, it is 
disruptive. If it is, we had better very quickly reverse.
    Senator Clinton. Thank you, Senator Kohl.
    Just for the record, we were not all wrong.
    The Chairman. If there is no objection, we will go back and 
forth, again on time of arrival. So the next questioning goes 
to Senator Craig and then Senator Wyden.
    Senator Craig. Again, Mr. Chairman, we appreciate your 
comments, your both broad view of where we are and our 
responsibilities and your candid application of your experience 
to that.
    We have visited before about the demographics of aging and 
its impact on economies and countries. We see this phenomenal 
shift that is occurring out there, and you have talked about 
the historic numbers of retirements that will occur and their 
impact upon the economy. Some other nations, like Japan and 
western Europe, are preceding us down that demographic road. 
How instructive are any of the experiences they have had to us?
    Mr. Greenspan. Well, Senator, as you know, there is a very 
substantial variation in how retirement is handled around the 
world. Obviously, the demographic problems in some European 
nations are far worse than ours, and clearly that is also the 
case in Japan. They are handling them in a number of different 
ways. There are a lot of private accounts or a lot of mixed 
accounts. There are many different ways of approaching the 
issue, and I think we should endeavor to get to where we wish 
to be in resolving these very broad questions.
    We need to examine the experiences of other countries. We 
have to remember, however, that our culture is different. There 
are different views and different ways in which we handle 
things, and so the actual experience of others is not 
necessarily useful, but I do think it is worthwhile looking at 
it because I think we will find types of things not to do as 
well as what to do.
    Senator Craig. Last, Mr. Chairman, in part, the 1983 
reforms intended to make the system solvent for the long term 
by increasing government savings. This was supposed to involve 
large Social Security surpluses being used to buy down Federal 
debt during the early 21st Century. Today's trend lines for 
future generations show both declining Social Security solvency 
and growing Federal debt. Does this imply that for the sake of 
future retirement security, we would do to better to 
incentivize personal savings than to pin our hopes on 
government savings?
    Mr. Greenspan. Well, Senator, as I pointed out in my 
prepared remarks, 30 million Americans will turn 65 over the 
next 25 years, we have the arithmetic that we cannot get around 
and the demographics we cannot get around, that is very great 
pressure on the replacement rate from Social Security to fall, 
meaning the amount of income we get as benefits relative to the 
amount of income we had in our last years of work.
    This means that we have to look beyond Social Security into 
other ways of creating retirement assets and sources of funds, 
because we either raise Social Security taxes to an 
extraordinarily high level, which remember is a tax on 
individuals and businesses and there are competitive issues 
here which we have to be aware of or we cut benefits. So I 
think it is very important to recognize that we have to look 
beyond Social Security for means of retirement income, and I 
think here we have to be especially careful to make certain 
that those who have inadequate resources essentially are held 
harmless in the adjustment, which we can actually do.
    But it is important that we, instead of trying to solve 
just the Social Security problem, we look at the broader issues 
of retirement income. I think having Social Security on the 
table and resolved fairly quickly is where we ought to go for 
exactly the reason you and I discussed a while back, not that 
Medicare is not the far larger and far more difficult problem, 
but rather is it probably sequentially better to get Social 
Security out of the way, because it is essentially a defined 
benefit program. We know its parameters. We know it has to be 
resolved, and that can be done.
    Medicare is going to turn out to be a far more difficult 
issue, which will require more time than we thought, and I 
believe probably more than one commission and more than one 
effort to get there.
    Senator Craig. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Senator Kohl, I believe is next.
    Senator Kohl. Thank you, Mr. Chairman. Out of respect to 
all my colleagues, I will just ask one question, and it relates 
to your response to the previous question.
    You know the most likely outcome with respect to this 
Social Security issue today is probably a deadlock. There is so 
much partisanship that has been injected into it that practical 
realities dictate that at some point in the near future, in 
order to just move on with all the problems that we face here 
in Washington, we will just have to put it aside, and that 
would be most unfortunate.
    That would be an unacceptable outcome, because Social 
Security, as you have said, is not the only the problem we 
face. We need to talk about Medicare, Medicaid, tax policies, 
and spending policies. When I talk to my constituents back home 
and make the comment that what we need is a debate about how we 
are going to raise money and spend money in a manner that will 
enable us to move forward in a more constructive fashion in the 
years to come, they all agree that we desperately need to have 
this debate.
    Don't you think that we need to have a debate at this time 
not only about Social Security, but about these other issues, 
even if that debate takes a year or two? In order to have that 
debate, wouldn't you agree that we need to establish here in 
Washington, starting with the Administration, a truly 
bipartisan atmosphere that will elicit the cooperation and the 
best ideas from members on both sides of the aisle, just as you 
did in 1983? In order for this debate to happen--whether it be 
on Social Security or on all these other issues--don't we have 
to have a different kind of approach than the one that we are 
pursuing with respect to Social Security at this time?
    Mr. Greenspan. Senator, I think it is essential that 
whatever solution we come up be bipartisan, because there is no 
second alternative, and unless we do that, we won't resolve 
these particular issues. I think that we have a deadline which 
is early 2008, and that is when we begin to get the leading 
edge of a fairly significant cohort of the baby boom generation 
moving into retirement. Any agreements that are made will apply 
to them, and I think it is important to get those in place 
before the cohort of baby boomers starts to retire. I sense, 
and I may be a little more optimistic that perhaps is 
realistic, that there is a growing awareness of where the 
differences are and where the general agreements are, and it 
may well be that some mechanism such as that which we employed 
in 1983 may be a useful mechanism to get groups together and 
find out where there are agreements.
    I think that what tends to happen in these debates is 
nobody talks about what they agree about, but only about what 
they differ about, and something has got to give soon because 
we don't have the choice of not resolving these issues, because 
with the inexorable turn of the calendar, we are going to be 
running into the Year 2008, and there is a great deal to be 
done, and I would hope we could get Social Security behind us 
and begin to really address the medical issue, because I think 
this is the crucial issue which will confront this Congress and 
this President over the years immediately ahead.
    Senator Kohl. Thank you, Mr. Chairman.
    The Chairman. Thank you. Next, Senator Collins and then 
Senator Wyden.
    Senator Collins. Thank you Mr. Chairman. Dr. Greenspan, 
your testimony provided an excellent overview of the 
demographic changes in this country that compel us to act to 
ensure the future solvency of the Social Security system. One 
of the recommendations that came out of the 1983 Greenspan 
Commission was an increase from the retirement age over a 
gradual period of time from 65 to 67, and again this time, we 
hear a lot of experts saying in light of the fact that people 
are living longer, we should take a look at a further increase 
in the retirement age to 68, 69, or even 70.
    I personally have a lot of concerns about that because we 
have a lot of individuals in this country who work in 
physically demanding jobs, and I wonder it is practical or 
realistic to expect them to continue working in their late 
sixties. But I am wondering why there isn't more focus on the 
early retirement age of 62. We know that half of those who are 
eligible do begin receiving benefits at age 62.
    Should we be taking a look at the early retirement age as 
opposed to what seems to be an exclusive focus on raising the 
age from 67 to some increased number?
    Mr. Greenspan. Well, Senator, I think one of the advantages 
of having a commission with a staff who are experts on a lot of 
these issues is to actually array all of the alternatives that 
are available. That is what they did for us in 1983. We had an 
excellent staff. We now would presume that most of the people 
who are involved in taking early retirement are those in 
arduous jobs. I am not sure all of them are by any means, but I 
am reasonably convinced that a significant amount of those 
retiring from arduous jobs are probably getting more benefits 
in the sense that they tend to be in the, say, lower three 
quintiles of the distribution, and what you could do is very 
simply to try to adjust, for example, for individuals who 
choose to retire particularly early. You will find that their 
benefits will tend on average to be higher, but one of the 
things that will show up no matter what you do is every 
particular fix on the problem we have is essentially 
unacceptable; and therefore, as I indicated previously, what 
you need is a recognition that these are all choices among 
relatively unfavorable outcomes, and we don't have the choice 
not to choose.
    The problem is out there. What is forcing us is demography, 
and we cannot get around the fact that a very large cohort of 
the American population will retire, and when they do, it will 
have very extraordinary effects on the finances of the system, 
and therefore we must fix it, and every fix is unacceptable. So 
you run into a contradiction which gets resolved only by 
recognizing it is not a choice of what you would like to do, 
but a whole set of choices of what you would least like to do.
    Senator Collins. Thank you, Mr. Chairman.
    The Chairman. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Dr. Greenspan, you heard my comments about this weakening 
dollar, and it seems to me it pounds the seniors and the near 
seniors with a double whammy. First, they have always looked 
for safety. They have always looked for instruments that are 
safe, and now they are being advised to start looking at CDs 
and savings accounts, foreign CDs and savings accounts.
    Second, we are having this big debate, as we should, about 
generating more savings for the future, and it seems to me the 
weakening dollar debate doesn't make people feel very confident 
about saving for retirement when they hear constantly about the 
uncertainly triggered by our dollar policies. So my question to 
you is have we reached the point out now with respect to the 
dollar where seniors should go out and follow the 
recommendation by a very authoritative person in Newsweek, go 
out and buy foreign CDs? Have we reached this point?
    Mr. Greenspan. Senator, such recommendations presume that 
you can forecast the exchange rate of the dollar over an 
intermediate period. We at the Federal Reserve have expended an 
extraordinarily large amount of resources to try to forecast 
the value of the dollar in foreign exchange markets, and we 
have determined it is an exceptionally difficult thing to do, 
and as I like to put, it, we have been no more successful than 
the odds you get in tossing a coin.
    So it is rank speculation for a senior or anybody else to 
buy foreign CDs. You can certainly say that the dollar declined 
since the end of 2002 and had one bought CDs back then and sold 
them today, you would make a profit, but we are looking forward 
and looking forward in my judgment does not tell us terribly 
much about where we are going.
    But you do raise, I think, a very important question, which 
is the tie-in here of our current account deficit and the issue 
of savings. One of the reasons not the sole reason, but one of 
the reasons, why we have a very large trade deficit and 
essentially a very large current account deficit, is that we 
don't save enough in the United States and are required to 
borrow funds from abroad, borrow savings from abroad, to 
finance the capital investment we need to create the 
productivity gains that we see. By focusing on increasing 
national savings as part of the problem for retirement, we do 
go a long way in creating balance in our international 
accounts, and it would be a significant factor in the reduction 
in our current account balance.
    But I leave aside the issue of trying to forecast and 
trying to anticipate how exchange rates will go, because it is 
remarkable how many people are unequivocal in their forecasts, 
and when we look at the actual performance of those forecasts 
over time, they are no better than chance.
    Senator Wyden. I just have seen that you have said that 
dealing with this weakening dollar is somehow going to be 
orderly, and I will tell you I see bedlam out there, and I 
think it is going to be very hard to get people to save and to 
cultivate the kind of savings ethic that you and I want to see 
and that there is bipartisan support for until we get our arms 
around a sensible dollar policy.
    I want to ask about the health care issue also, because 
people have differences of opinion. I understand that, but I 
just for the life of me don't get the logic in your approach to 
health care. You have told us that health care is more serious 
and you have told us that it is going to hit more immediately, 
but then you say, ``Gosh, let us do Social Security first.'' 
Well, Senator Hatch and I have authored a law that is now being 
implemented as we speak to essentially walk the country through 
the choices with respect to health care. It is going to be on 
line. It is going to be available in senior centers and the 
libraries and the like so that people can see where the health 
care dollar goes and what the alternatives would be.
    Wouldn't it be more sensible, given the fact that that is 
going to hit in 2010 rather than 2040, for us to move with a 
sense of urgency on the health care issue? I mean, we have got 
a law that allows us to walk the country through the choices 
and the tradeoffs. It is now being carried out. Wouldn't it be 
smarter to do that first?
    Mr. Greenspan. Well, Senator, first, I was somewhat taken 
back when you at the very beginning had indicated that I had 
said so little about Medicare in my prepared remarks, and of 
course you are right. I didn't mean to do that. I think it is a 
very serious issue; however, let me follow on to what you have 
said. I think what we have a problem in Medicare or medical 
systems generally in that we don't know as much about what is 
going on as we need to know to resolve and reform a lot of the 
difficulties with respect to respect to systems.
    Because of the private physician-patient relationship, 
there has been very little in the way of collection of data 
about various different clinical practice. We do know that the 
samples that have been taken would indicate that we have very 
considerable differences in clinical practice across the 
country with very significant differences in outcomes as well.
    What we need to do sequentially to address the medical 
problem generally, which is Medicare and Medicaid as well as 
other aspects of medical professional issues, is to know what 
is going on. Here, I think if we can get a major advance, as 
now seems to be underway, in a bipartisan manner to improve the 
information technology associated with the medical systems and 
get bodies of individual biographies encrypted as we can now do 
such that we know what is medical best practice that is an 
important first step. I think that if we were to jump in and 
reform the system overall before we know what the actual 
structure of the medical practice is, I think we risk having to 
backtrack, and what I am concerned about is we will put 
solutions, in quotes, in place which are inappropriate.
    I think I agree with you. I think the medical issue is 
urgent and that we should be moving very quickly, as I believe 
we will be and are, to get information technology very broadly 
applied in medical practice, and when we do that, I do think we 
will move fairly quickly to understand what medical best 
practice is so that when we construct the proper Medicare 
system, we are dealing with the facts at the time. I am worried 
about putting in wrong practices which have to be reversed and 
technologies which have become obsolete.
    Senator Wyden. I would only say, Dr. Greenspan, and my time 
is up, that I continue to disagree. The point about medical 
technology is indisputable, but the Journal Health Affairs, for 
example, says that we might perhaps save $98 billion to go 
forward with the information that would come about as a result 
of our knowing more about various parts of practice in the 
health care system. It is a $1.8 trillion system, and so the 
debate about issues of like end of life care, what to do about 
administrative costs in health care, which many say are 
something like a third of the $1.8 trillion, that can't afford 
to wait.
    So I respect your view with respect to the issue and 
importance of health care technology, but I think we are dead 
wrong, dead wrong, to say we are going to start now on a 
problem that we have got to deal with 20, 30, years from now 
when on New Year's Day 2008, something like 70 million baby 
boomers start retiring, and those health care costs are going 
to ramp in very fast. They are going to hit this country very 
hard. I have enormous respect for you, but I do not think that 
the sense of urgency about health care is being conveyed, and I 
hope that we can talk further about that.
    Mr. Greenspan. Well, Senator, let me just say that I think 
there is much less a difference between your views and mine 
than I think you have expressed. I don't really, in all 
honesty, disagree with anything you have just said. It doesn't 
contradict anything I believe I have said. If you can find a 
way to move forward on this thing in a productive manner, I 
think it would be terrific for this country.
    The Chairman. Thanks, Senator Wyden.
    Senator Burns and then Senator Jeffords.
    Senator Burns. Thank you, Mr. Chairman.
    Mr. Greenspan, you are looking at two guys that have 
probably more time in information technology and the ability to 
move it, building the infrastructure for telemedicine and 
centralized records and all of these things. We have one 
American failing: We talk about the demographics here and how 
we are to preserve a system, and our feeling in American is 
just like if I come out and told Mr. Greenspan that he is going 
to have to re-roof his barn in 2015, would you sign the 
contract today.
    Mr. Greenspan. No.
    Senator Burns. You wouldn't do that. That is one great 
American failing. We do not do anything until we are in a 
crisis, and the only thing that we will get done in this 
particular issue is that I think there is enough grandfathers 
and grandmothers who have another great American trait, and 
that is to think more of the next generation than they think of 
themselves, and that has always been a trait of America. We 
live for our kids and our grand kids, and I think that is a 
welcome sight among us who have started this debate. This 
debate has to start.
    But you are right. We do not have all the time in the 
world. 2008 is sort of D-Day, and the events that that will 
lead to are not too promising, as far as policymakers are 
concerned, to do things now that we would soften that landing.
    My questions have been asked by Senator Bayh and also 
reinforced by our chairman, so I will not go over that ground 
again, but I think we are going to depend on you, on what-ifs, 
and do we go into a personal situation that is an add-on to our 
retirement or is it a part of the system? I think when I heard 
Senator Moynihan many years ago predict that we would come to 
this point in our policy, that we will have to make those kind 
of decisions, and I just want to add that to the record, that 
we have the great American failing, but we also have a great 
American trait that is going to enable us to do that. It will 
take political courage, however, to do the things, and I agree 
that we have to not look at the things that we have to do, and 
there are options of things that we do not want to do, and that 
makes the problem a good bit more difficult.
    So I thank you for your testimony today and I thank for the 
insight of my friends across the aisle, because I think as we 
take this to the American public on an issue that the American 
public has decided this is a part of our social fabric. It is a 
very desirable program, and how they understand it and how they 
perceive it will be up to us, and, of course, you know when you 
go out on the road, it is just like any salesman would say. We 
don't buy cars; we buy benefits. We can get to A and B on 
anything, but we buy the benefits of air conditioning and those 
type of things, and I think that is another one of our great 
challenges.
    Thank you for coming today. Your statement was insightful. 
I don't know of a Senator in this body that is not taking this 
very, very seriously, and somewhere in there comes an answer, 
and so I think you have further defined the focus and narrowed 
it to where I believe that this Congress, not discounting it, 
can muster the leadership to make those necessary changes.
    Thank you very much, Mr. Chairman.
    The Chairman. Senator Jeffords.
    Senator Jeffords. It is good to see you again and to chat 
with you. In addition to focusing on replacement rates, 
personal finance professionals will also discuss 
diversification of assets and income streams for those 
contemplating retirement. Given the troubles you mentioned in 
the defined benefit pension system, I suspect that the ever 
growing share of retirees will have Social Security as their 
only defined benefit where they are not bearing the investment 
risk.
    We certainly need to promote savings in any event, but from 
the retirees' perspective, shouldn't we maintain Social 
Security's defined benefit as strong as possible rather than 
swapping some portion of it for what essentially is a defined 
contribution plan?
    Mr. Greenspan. Senator, the reason I think we have to look 
at a broad spectrum of possibilities before you come to final 
conclusions is the fact that we are confronted with a very 
unusual situation. This is unprecedented in my recollection of 
retirement financing in this country.
    I think if you put together all of the various 
alternatives, it is up to Congress to make the types of 
judgments on issues that you are raising, and I think the 
crucial question, as I said in my prepared remarks, is which 
set of policies will create the national savings which will 
assure that the physical resources are there. It may well be 
that we can do it in the context of some changes in Social 
Security in the direction which you are suggesting. It may be 
that we need to move in other directions as well. But the 
underlying crucial issue and I would say, the main point that I 
am trying to make this morning is, let us not lose sight of the 
fact that finance is only a technical means to allocate 
resources. It presupposes we have them, and I think that is not 
self-evident given the nature of what is about to occur in this 
country with so large a segment of our work force retiring. I 
think we have to realize it creates very major pressures on 
real resources being produced.
    The one thing that has got to be at the top of the list in 
any solution, whether it is more less Social Security, more or 
less 401(K)s or other means of financing, does it increase 
national savings, because that is really the only thing we can 
do which can counter the demographics over which we have no 
control.
    Senator Jeffords. Do I have another shot?
    The Chairman. You still have time.
    Senator Jeffords. The New York times reported on Sunday 
that the Federal Reserve estimated that personal savings for 
any purpose amounted to a hundred billion last year while OMB 
put the tax expenditures for retirement at 112 billion for the 
same year. I don't know if this is an apples to oranges 
comparison, but it certainly raises some good questions.
    Mr. Greenspan. What was the hundred billion? I missed it.
    Senator Jeffords. A hundred billion from OMB. I mean the 
Federal Reserve estimated that personal savings were a hundred 
billion.
    Mr. Greenspan. I see. That is right. I saw that.
    Senator Jeffords. Well, President Bush singled out 
maintaining favorable treatment for charitable contributions 
and mortgage interest in the context of tax reform, but he 
omitted retirement savings as a preferred category. How should 
we balance our desire for simplicity against our need to 
promote retirement savings, and do you have any thoughts on our 
current tax incentives for retirement savings?
    Mr. Greenspan. Well, the problem is we have a great number 
of elements in the tax code which have created incentives for 
401(K)s, IRAs, and a number of other different elements within 
the tax code which are supposed to enhance savings, but as you 
point out, our actual net household or personal savings last 
year was de minis, and the question is what is causing that, 
and that is a very considerable debate amongst economists and 
financial experts as to whether or not and to what extent these 
various tax incentives are creating savings.
    We have, for example, situations around the world where are 
there negative savings. Australia, for example, has had 
negative savings for quite a while. It is a very tricky 
question, because we have increased market value of assets 
which people in retirement do not distinguish from what 
economists call savings, which is the difference between income 
and consumption, but we need to know a great deal more of how 
successful various incentives for increased savings, such as 
401(K)s and IRAs, are. There is fairly significant dispute 
within the economics profession as to how important they are, 
and there are people on both sides of the question.
    But I think you are raising an interesting issue. In one 
sense, it may be apples and oranges, but it is a very important 
question.
    Senator Jeffords. Thank you very, very much for all you do 
for us.
    Mr. Greenspan. Thank you.
    The Chairman. Senator Bayh.
    Senator Bayh. Thank you, Mr. Chairman. I would like to, 
having juggled my other meetings, pick up where I left off with 
my questions from my opening statement, beginning with the 
estimates for economic growth and productivity from the 
trustees and the apparent conundrum that it presents where 
their estimate for economic growth was 1.9 percent and for 
productivity, 1.6 percent over a long time horizon. If, in 
fact, they are accurate, that might suggest that market returns 
for private accounts would be correspondingly modest. If they 
are inaccurate and, in fact, the estimates should be higher, 
than perhaps the magnitude of the problem that we are 
addressing is not what it is currently estimated to be.
    First of all, are they accurate in your opinion?
    Mr. Greenspan. You mean are the numbers you quoted? I 
believe they are.
    Senator Bayh. Those are the trustees estimates?
    Mr. Greenspan. Yes.
    Senator Bayh. The question is in your opinion whether they 
are unduly modest or do they reflect your own feelings for what 
may happen over the term?
    Mr. Greenspan. When you project out 25 years, you are 
dealing with extraordinary uncertainty not with respect to the 
labor force, but with respect to productivity growth, and we 
have experienced obviously significant productivity growth in 
recent years, way beyond our normal expectations. History 
suggests that over very protracted periods, a country such as 
ours which is at the cutting edge of technology has difficulty 
increasing productivity say, more than 2\1/2\ or 3 percent a 
year.
    Could the number be higher than what we are looking at? Of 
course, it could. It could also be lower. The critical question 
that must be answered, however, is how much in making changes 
would it affect the longer term. Remember that effectively 
leaving lags out, we are not promising nominal benefits for 
Social Security. We are promising real benefits. So if the 
economy is growing faster, not only are revenues rising, but so 
are the benefits. So you come out with questionable resolution.
    There is some evidence that Medicare, for example, with the 
demand for Medicare services is a function of the real income 
in the society, so that if you get stronger growth, which is a 
perfectly credible forecast, you can't say that, therefore, 
growth solve the problem. I think it does in part. In other 
words, there is a lag between----
    Senator Bayh. It helps some.
    Mr. Greenspan. It helps some, but there is a tendency to 
exaggerate what the effect is.
    Senator Bayh. The gist of my question was, and you have 
addressed it, is we have to pick some set of numbers, so best 
to give it their best shot and best, I suppose, to err on the 
side of caution rather than being too exuberant. So if they are 
accurate, these are fairly modest numbers, and it might suggest 
lower rates of market returns for those who advocate private 
accounts, and I suggest they should reflect that in their 
estimates of the returns.
    Mr. Greenspan. Well, I think there are several questions 
there as well. Obviously, it is not a big issue with respect to 
bonds. The real interest rate will be affected, but not by a 
great deal, and while it is the case if you have a slower 
economy that profits will grow at a slower rate, but remember a 
very significant part as far as equities is concerned is the 
price-earnings ratio, and it is ambiguous, as to what that will 
do over time, and I wish we could forecast that better, but we 
don't seem to do all that well.
    Senator Bayh. Well, that is true. Forecasting markets is 
inherently ambiguous, as you point out, but the P-E ratio has 
expanded over the last 10 years or so.
    Mr. Greenspan. Yes, it has, and I will grant you that most 
analysts will say it is somewhat above normal or at normal or 
something like that. So you don't have the capability of 
starting at a very low P-E ratio and then expect significant 
rise.
    But there are more people who forecast the stock market 
than forecast it accurately.
    Senator Bayh. My two additional questions, Mr. Chairman, 
one deals with a couple of options, one of which I mentioned, 
for increasing the amount of savings. The first that I did 
discuss was moving from the presumption that workers would have 
to opt out of their savings program as opposed to being 
required to opt in, and that, apparently, according to 
research, would dramatically expand participation rates, but 
then you run into the problem that I suggested that those in 
the private sector have a problem with the success because it 
does require them to match the contributions and so forth.
    I would be interested in your opinion about shifting the 
presumption, and if so, how do we address the ramifications of 
that for the business sector.
    Second, there is something I didn't mention in my opening 
statement, and that is some have suggested for smaller 
businesses who find the cost of offering savings programs to be 
somewhat onerous, the cost of setting them up, that perhaps the 
employees of smaller businesses be allowed to participate in 
the thrift savings program offered by the Federal Government. 
There would not be a match, but they could make their own 
voluntary contributions in that. The small businesses wouldn't 
incur the cost of having to set up the program.
    That might be one way to address the lack of savings or a 
lack of a vehicle for employees of small business, and I see 
the red light is now on, Mr. Chairman. So your reaction to 
those two ideas to increase private savings. The final question 
would be I would be interested if you had any reaction to 
Warren Buffet's observation that rather than an ownership 
society, if the current account imbalance continues on the way 
it is, we, in fact, may be creating in his words a sharecropper 
society. I would be interested to know if you had any reaction 
to his comments.
    Mr. Greenspan. Warren is a good friend, and I sometimes 
agree. Sometimes I disagree, and I won't comment in this 
particular case on which it is.
    Senator Bayh. In a private setting, I would be delighted to 
get your reaction.
    Mr. Greenspan. Let me just say that we are having so much 
difficulty with creating private savings that any venture that 
we perceive can possibly add to it is worth looking at. I fear 
that the issue of the opt in and opt out is mainly a measure of 
the inattention of a number of people, and it is quite likely 
that you could start with they have to opt out, and you would 
find that it may be 90 percent, but within two years, is it 
down to 40.
    I think it is interesting issue and I think it is certainly 
worthwhile looking at amongst other things, but anything that 
we can do to raise personal savings is very much in the 
interest of this country.
    The Chairman. Senator Lincoln.
    Senator Lincoln. Thank you, Chairman Greenspan, for being 
here to visit with us here today. We hope it will be a 
continuing conversation.
    I am the last of four children. So I am used to being last 
in line, and I am usually the youngest around here, so I am 
usually the last, but I also have to say that it gives me an 
added interest in this topic, because in 20 years, I still will 
not have reached retirement age. So am I am very interested in 
all aspects of what we are dealing with here.
    I want to say a very special thanks to our chairman, 
Chairman Smith, for holding this hearing and broadening the 
conversation, the context of how we are dealing with this in 
terms of exploring the economics of retirement, and as I 
mentioned earlier, I do think that we have to think of our 
nation's retirement as an entire puzzle and Social Security is 
just but one of those pieces of that puzzle.
    I compliment my colleague, Senator Wyden, in bringing up 
the incredible part of this puzzle that is made up by health 
care cost, Medicare, Medicaid, personal savings as you have 
mentioned, but also long-term care with well over 75 percent of 
our long-term care in Arkansas, for our seniors there, is paid 
by Medicaid. So when you talk about the kind of cuts we are 
looking at in these programs as you talk about Medicare and how 
we look for best management practices and ways to hopefully 
bring down some of those costs in Medicare, prescription drugs 
as a preventive measure is an incredible piece. We have got to 
look at a way that we can do better in terms of providing 
prescription drugs at a lower cost to everyone, to all the tax 
payers, and I hope that that will be a part of this debate, 
certainly as we move forward and look at all of the different 
pieces of this puzzle, and we look forward to having your input 
there.
    The couple of questions I had, Mr. Chairman, in 1983, 
Congress did follow your recommendations, of the commission, 
and raised the taxes to sure up Social Security, but as you 
know, Congress used at least a large part of the money that was 
raised from that tax increase to pay for general government 
expenditures, and what Social Security has been given in 
exchange for that $1.5 trillion worth of obligation or IOUs is 
just simply an IOU.
    I guess first off, just to make sure I understand, would 
you agree or disagree that the 1983 tax increase has been used 
not for Social Security, but for the general government 
spending? I guess as we look forward into that, as you know, 
our progressive tax code, which is our income tax, is dedicated 
to funding the general fund. In terms of the progressivity of 
the tax system, what would be the impact on wage earners if 
Congress did not use progressive general fund taxes to pay 
Social Security back what it owed? If we don't honor the trust 
fund or more specifically that obligation or IOUs that exist 
held by the trust fund, are we shifting the tax burden from the 
rich to the poor?
    Mr. Greenspan. If you have a significant so-called on-
budget deficit, which we have experienced now for quite a long 
period of time, is it essentially saying that the addition to 
the Social Security trust fund is effectively being employed to 
finance other elements of the Federal Government and we are not 
creating any savings in the process.
    Senator Lincoln. So you are agreeing that the 1983 tax 
increase has not----
    Mr. Greenspan. Regrettably, I do, yes. It is unfortunate, 
but it is a fact, and I thought what was sort of interesting, 
which I mentioned in my prepared remarks and Senator Clinton 
was mentioning, that there was a recognition that we ought to 
view Social Security as a lock-box program in which we somehow 
insist that the on-budget is employed as the unified budget and 
that, as I indicated in another hearing, it would not be a bad 
idea to move the whole Social Security operation to the west 
coast, get it out of Washington, maybe even rename it so that 
nobody would discover where it was so that they could get at 
it.
    But, regrettably, that has not been the fact, and I think 
that the since the ultimate test of a program is whether it is 
going to be adding to national savings, which in my judgment is 
the ultimate criterion, the ultimate test is whether government 
savings goes up or down, and unless you increase taxes or 
decrease spending, you will not get a decrease in government 
dissavings.
    Senator Lincoln. But we know we could eliminate all non-
defense discretionary spending and still not be able to deal 
with the deficit spending that exists. So I guess, again, if we 
do honor the trust fund and the obligation, the IOU that exists 
there that is held by that trust fund, if we do it with 
anything other than the progressive dollars of our tax system, 
are we not shifting that tax burden again from the rich to the 
poor? Because the poor or the working poor are going to be 
those who end up paying back the very debt or the obligation 
that has is owed to them.
    Mr. Greenspan. Well, actually, there is a commitment in 
law, as you know, to pay Social Security benefits where the 
only caveat is if the trust fund goes to zero. My own 
impression is that should that happen, something else will 
occur.
    The question, however, is more an issue of taxation 
generally, and the Congress has the capacity if it perceives 
the incidence of taxation to be falling in the wrong places--
and in the case that you are giving it is hard to tell exactly 
what is happening--then you have the obligation to make what 
changes you see fit.
    Senator Lincoln. Well, Mr. Chairman, if you will just 
indulge me for a second, we all have people out there in our 
lives who for whatever reason always want to borrow a little 
money from us, and many of us are sucker enough to loan it to 
them, and then, you know, all of a sudden when it comes time 
for them to pay that back that debt, there is a crisis, they 
have had an accident or the dog ate it or whatever, and they 
create this crisis that they are not willing to pay back the 
debt that they owe us for whatever the situation was. Then all 
of a sudden, we look down the street, and they are at the 
corner bar buying rounds for everybody, all their friends.
    You know, whether it is making permanent tax cuts to the 
ultra wealth think or what have you, but it is very difficult 
then for those of us that continue to loan and to see those 
loans being made and then realize that simultaneously there is 
promises being made of drinks for everybody down the road.
    So you are right. There are some difficult decisions to be 
made there and lots of concerns. I would like to associate 
myself with the comments from my colleague from Maine, Senator 
Collins, about the early retirement, because we do see that 20 
percent of the beneficiaries between the ages of 62 and 64 do 
have health problems, and it is unfortunate we find that the 
early retirement program almost functions as an unofficial 
disability program.
    So I would hope that we would definitely take that into 
consideration when we talk about extending that retirement, the 
benefits in the retirement age, because for States like us, 
small rule States where predominantly much our workers are in 
physical, highly physical, jobs that do tend to present more 
disability percentage-wise in our population, that becomes a 
real issue.
    Thank you, Mr. Chairman. We look forward to continuing our 
conversation.
    Mr. Greenspan. Thank you very much, Senator.
    The Chairman. Chairman Greenspan, just one other question 
and comment by myself.
    I have heard you in the past speak about Social Security as 
we have it now and as you helped to reform it, you compared it 
to a 1957 Chevrolet in Havana, Cuba that keeps getting repaired 
and keeps running, but I think your point is there may be a 
better Chevrolet out there if we have enough foresight to go 
out and acquire it. That is a metaphor that you painted in my 
mind that sticks with me. You have described in your process as 
chairing the Greenspan Commission that you really couldn't get 
around the arithmetic. You kept coming back to the fact that 
you have to cut some benefits and you have to raise some taxes, 
which is essentially what happened.
    But as I understand your recent comments and as someone who 
is trying to evaluate the merits and demerits of personal 
accounts as part of Social Security, I think I hear you giving 
qualified support for it.
    Mr. Greenspan. That is correct. A pay-as-you-go system by 
its nature is essentially a system which is structured to have 
current workers pay the benefits of current retirees. That 
system worked exceptionally well for 50 years in the sense that 
with the population growing and longevity less than it is 
today, you had a very large base of workers to finance the 
number of retirees. But when you get to the demographics which 
we are confronted with today, that system, as I have indicated 
elsewhere, is ill-suited to adjust to the future. It can 
adjust. In other words, you can make a number of adjustments to 
keep it going and sustaining it, but what is very difficult to 
do is to create the savings that have to be associated with 
that process.
    The Chairman. Do you see personal accounts as adding to 
national savings?
    Mr. Greenspan. Provided that moving from government savings 
to private savings, that there are adjustments in government 
savings. In other words, you need to, whether you are dealing 
with a lock box for Social Security or private accounts, an 
adjustment in the on-budget deficit downward, and to the extent 
that that occurs, you do add to national savings.
    The point I have been trying to make in my remarks is that 
it strikes me that private accounts have a higher probability 
of achieving that end than the existing Social Security system 
unless we can find a lock box which works.
    The Chairman. Aren't personal accounts essentially another 
form of a lock box? I mean, it creates the lock box.
    Mr. Greenspan. That is another way of looking at it, 
Senator. In fact, we used to sort of be amused at the notion of 
a lock box because there is no such obvious vehicle, but it 
actually was a very thoughtful insight as to what the real 
problem is, and I think resurrecting the notion is something 
which will facilitate our evaluation not only of private 
accounts versus Social Security, but all aspects of how one 
deals with what is going on in the unified budget.
    The Chairman. So if there were one vehicle to create a lock 
box and it increases national savings, does it also have the 
benefit of giving to the needy what the rich have, and that is 
something that grows, compounding interest? In other words, 
there is a third option to cutting benefits and raising taxes. 
You can make the money work harder, lock it up, and watch 
people enjoy the benefit of earnings.
    Mr. Greenspan. Outside the sheer economics of it, I think 
there is a value to having individuals who don't have 
significant wealth at this stage recognize that they have 
annuities which are really quite valuable. There are 
differences. Their name isn't put on it. It is not in a lock 
box, because remember, one of the aspects of the lock box is it 
has your name on it, and in Chile when they went to this 
system, they found that a number of people were extraordinarily 
moved by the fact that they realized that they had far more 
wealth than they had any notion existed, and I think that is 
very important in this society, since, as I have commented in a 
different context, we are confronted with an ever-increasing 
concentration of income and wealth, and I don't think a 
democratic society can function well under those conditions. 
Anything which creates a greater commitment to the society like 
homeownership or increased wealth, I think is something we 
should endeavor to move in the direction of, to seek to 
achieve, and this type of buildup of personal wealth in 
retirement accounts, even though it is not available for 
current spending, I do think has real value for society.
    The Chairman. Was the effect in Chile the broadening of the 
middle class, the shrinking of the gap between rich and poor 
through personal accounts?
    Mr. Greenspan. I believe that is the case, but I cautioned 
earlier that we have to be a little careful about taking 
examples from other countries which have different 
circumstances and merely assuming that they are directly 
applicable to America.
    The Chairman. But they did have to replace a defined 
benefit system with these personal accounts, I assume.
    Mr. Greenspan. The general view of the Chilean system is 
that it has worked well and, indeed, helped finance economic 
growth in that country.
    The Chairman. The gap between rich and poor has shrunk?
    Mr. Greenspan. I believe that is correct, but I don't know 
that is a fact.
    The Chairman. Mr. Chairman, you have been very generous 
with your time, and you asked us to keep this under 2\1/2\ 
hours, and we have succeeded by 20 minutes. We thank you for 
not just your time, but your wisdom, and again thank you for 
your your long service to our country. This hearing is 
concluded.
    [Whereupon, at 12:09 p.m., the committee adjourned.]

                            A P P E N D I X

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