Greenspan: Accounts good for economy

[notiCIas]

Greenspan: Accounts good for economy

The Fed chair argues that partially privatizing Soc. Sec. will be a plus economically and socially.

February 17, 2005: 4:57 PM EST
By Jeanne Sahadi, CNN/Money senior staff writer
SPECIAL REPORT

NEW YORK (CNN/Money) – When Federal Reserve Chairman Alan Greenspan says he favors adding individual investment accounts to Social Security, he's thinking big picture.

Such accounts could serve a macroeconomic and a social good, Greenspan told the House Committee on Financial Services on Thursday.

But, he noted for the second time in two days, adding the accounts to the system won't address Social Security's current solvency issues.

The increasing concentration of wealth among high earners isn't good for a democratic society, Greenspan said.

"These accounts, properly constructed and managed, will create ... a sense of increased wealth on the part of the middle- and lower-income classes of this society, who have had to struggle with very little capital.

"While they do have a claim against the Social Security system in the future, as best as I can judge, they don't feel as though it's personal wealth the way they would with personal accounts," he said. "And I think that's quite important."

The issue Greenspan kept returning to in his testimony, as he did speaking before the Senate Banking Committee on Wednesday, was national savings.

He argued that a system with accounts over the long-term has the potential to boost the national savings rate, which, in turn, can help spur economic growth.

"The central core of productivity increase is capital investment. And to have capital investment, you need to have savings," he said.

He also said he believes individual accounts offer future retirees a better chance of achieving the standard of living they will expect.

"We have been utterly unable in the pay-as-you-go system to create the necessary savings to finance the capital investment that we're going to need for the future to create the goods and services that retirees are going to need," he said.
So what about the deficit?

On Wednesday, Greenspan noted that anything that would add more than $1 trillion to the deficit over a 10-year period would seriously concern him.

On Thursday, he said, "As we look forward into the post-2008 era, we have to make major changes to avoid uncontrollable increases in the unified budget deficit."

The transition costs of switching to a partially privatized system under President Bush's proposal are estimated by the administration to cost less than $1 trillion over the next decade. But Democrats and others have estimated that over the next 20 years, the cost could reach $4 trillion to $5 trillion, Rep. Carolyn B. Maloney (D-NY) noted.

"Doesn't that cause a tremendous problem on top of the debt and deficits that we have already?" she asked.

"All I would say is that when you're getting out that far, there will be lots of adjustments," Greenspan replied.

He also noted during his testimony that under the Bush proposal, the accounts would eventually pay for themselves: "That's offset by the potential benefits to be paid at a later time. Then the debt doesn't change over the long run."
What about the potential for higher returns?

Many proponents of individual accounts have argued that the benefit to workers is the potential to earn higher returns on their money than they would have enjoyed if they just funneled it into the current system.

When Rep. Gregory W. Meeks (D-NY) asked, "allegedly you're supposed to get a better return on your money ... so that's supposed to help. Is that correct?" the Fed chairman did not express an opinion.

Said Greenspan, "I haven't stipulated increased rates of return are a significant issue in this debate."