Federal Reserve Board Chairman Alan Greenspan on Thursday endorsed saving most of the federal budget surplus for Social Security instead of using it for tax cuts or new spending.
Testifying before the Senate Budget Committee, he said such an approach- a key pillar of President Clinton's Social Security reform plan-would strengthen the economy and boost the retirement nest eggs of all Americans.
"Increasing our national saving is critical," said Mr. Greenspan, noting that the number of workers supporting retirees will start to plummet after baby boomers begin retiring in 2011. "Simply put, enough resources must be put aside over a lifetime of work to fund retirement consumption."
Responding to questions, Mr. Greenspan told senators that the best use of the projected $4.4 trillion surplus over the next 15 years would be buying bonds to retire the federal debt now and using the interest on the bonds to help Social Security in the long term. As the national debt falls, long-term interest rates and mortgage rates would fall and the economy would grow. As a result, individuals could keep more of their income and companies could invest in more efficient technologies, he said.
"If we allow these surpluses to run, we are reducing the debt to the public, and that is a very important element of sustaining economic growth," he said. "The risks involved with running surpluses are very small and, indeed, the advantage is very large."
Mr. Greenspan repeated his criticism of another principal element of the Clinton plan: government investment of some Social Security funds in the stock market. He warned that politics could bias investment decisions.
"Investing a portion of the Social Security trust fund in equities ... would arguably put at risk the efficiency of our capital markets and thus our economy," Mr. Greenspan said. "Even with Herculean efforts, I doubt if it would be feasible to insulate, over the long term, the trust funds from political pressures-direct or indirect-to allocate capital to less than its most productive use."
Sen. Phil Gramm, R-Tex., said during the hearing that he and Sen. Pete V. Domenici, R-N.M., next week will offer a Social Security fix that would let workers invest their own funds with the help of money managers. Mr. Greenspan said their proposal might be better than the President's.
Under the lawmakers' plan, workers could keep 3% of their wages to invest through accounts that they would own. These accounts would be managed by certified funds, which would be regulated by the new Social Security Investment Board. Upon retirement, a worker would use the earnings from the account to buy an annuity. The government would provide a subsidy if the annuity generates less than 120% of the benefits promised under the current system.
Sen. Gramm is also spearheading financial reform legislation as chairman of the Senate Banking Committee. Social Security legislation is handled by the Finance Committee, of which he is also a member.
Under questioning by Sen. Frank R. Lautenberg, Mr. Greenspan said he needed more details before commenting on the President's proposal to devote $500 billion of the surplus to universal savings accounts, the so-called USA accounts.