Why Did You Change Your Mind, Mr. Greenspan?

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Dean Baker
Houston Chronicle, February 18, 2005

Federal Reserve Board Chairman Alan Greenspan endorsed President Bush's Social Security agenda this week. He told a congressional committee that the current system "is not working," and therefore President Bush's plan to shift to private accounts might be a good idea.

While this statement got lots of attention, the media missed the real story. When Greenspan told Congress that Social Security is not working, he was criticizing himself. He was chairman of the 1983 commission that designed the last major reform of Social Security. More than any other person in the country, Alan Greenspan is responsible for the current structure of the Social Security system. When he tells the nation that this system is not working, he is telling us that the system he designed 22 years ago is flawed.

Of course, there is nothing wrong with changing your mind. Reasonable people do that, especially when confronted with new evidence. But, it is also reasonable for Congress to ask Greenspan what he was wrong about back in 1983. Why does he now think that the reforms he put in place did not work?

For those of us who are not Alan Greenspan, it is difficult to see what he thinks is not working about Social Security. The fix put in place in 1983 was supposed to keep the system fully solvent for 75 years. According to the latest projections from the Congressional Budget Office, the system will be fully solvent until 2052 with no further changes. That means the 1983 Greenspan fix got us 69 of the targeted 75 years — not bad for an economic forecast.

The two main factors leading us to fall short of the target are slower than projected economic growth and an upward redistribution of wage income. The Greenspan commission had assumed that annual economic growth would be half a percentage point higher than has actually been the case over the last two decades. More rapid growth translates into more Social Security taxes. If the economy had grown as fast as Greenspan predicted, then the program would have been fully solvent past its 75-year target.

The upward redistribution of wage income posed a similar problem. The Greenspan commission set the cap on wages subject to Social Security taxes at a level that covered 90 percent of wage income. Since 1983, there has been such a sharp upward redistribution of wage income, that the cap now covers less than 85 percent of wage income. Had this shift in wage income not taken place, then Greenspan would have hit his 75-year target even with the growth slowdown.

We can argue over who is to blame for the growth slowdown and the upward redistribution of wage income. Many would put President Reagan's "supply-side" policies near the top of the list for both problems, with trade policy being an important factor in lowering wages for workers at the middle and the bottom.

But the big question here is not why the economy has fared badly; rather, the question is: Why does Alan Greenspan think that the Social Security reform he put in place in 1983 is not working in 2005?

Beyond benefiting from Greenspan's wisdom, there is a simple question of accountability. In January 2001, Greenspan testified that President Bush's tax cuts were a good idea, because he was worried that big surpluses would cause us to pay off the national debt too quickly. With huge deficits as far as we can see, presumably Greenspan is not still worried about paying off the debt too quickly.

Greenspan now claims that he was aware of the stock bubble through the late 1990s, but thought it best not to say anything at the time. The millions of older workers who lost much of their savings in the subsequent crash (many of whom have been forced to delay retirement) might question this judgment.

Given this record, it is reasonable for the tens of millions of workers who are counting on Social Security for much, or all, of their retirement income, to ask for a full explanation of Greenspan's change of mind, before taking his latest comments seriously.


Dean Baker is co-director of the Center for Economic and Policy Research.