Hearing of House Committee on the Budget - The Economic Outlook and Current Fiscal Issues

HEARING OF HOUSE COMMITTEE ON THE BUDGET - THE ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES

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Mr. Bradley. Thank you very much, Mr. Chairman.

And, Mr. Chairman, thank you for your long and distinguished service to our Nation. I would like to follow up on my colleague's question from California, Mr. Lungren. When asked the questions about the looming funding problems, your answer is that we need to have reform of entitlement spending, Social Security and Medicare, starting now.

Would you care to discuss with us what happens if that reform is not in place, what kind of problems will our Nation face, the impact on short-term and long-term interest rates and the impact on our economy if we delay?

Mr. Greenspan. Congressman, let me start off by saying that there are certain things that we know with a reasonable degree of accuracy and others which we know only very generally. We do know the number of Social Security and Medicare retirees over the next 20 years with a reasonably tight degree of numerical tolerance, and we do know with some degree of accuracy what under existing law the stream of benefits out of the Social Security Trust Funds will be. What we know only very imprecisely is what Medicare per beneficiary is going to be over the next 20 years, and that is largely because the number of issues which will determine that are very large and the variance of each one of those determinants is itself large. And so it is remarkable how variant it could be, basically because of the fact that, once committed and once enacted, we have exhibited considerable difficulty in reversing policies. I think it is essential that we be quite prudent before extending policies, because we don't have very much leeway of unwinding them once they are enacted.

Since I believe that the range of probabilities are such that we can have exceptionally large Medicare bills, we must assure ourselves that we are sufficiently prudent to enact laws which essentially do not get us into a position that does grave damage to the economy. If we do and we effectively create very large unified budget deficits, and we are unable to bring them in in a reasonable period of time, we will find that we will very significantly destabilize the system, because, as I mentioned earlier, interest rates would rise as a consequence and we would have very grave difficulties in restoring balance to the American economy. And this is an issue which focuses on, say, 2015 to 2025, or something of that nature, but something which needs to be addressed sooner rather than later to avoid that happening.

Mr. Bradley. Thank you for that answer. I believe that when you testified in front of the Senate a couple of weeks ago, you indicated that moving to personal retirement accounts alone was not sufficient to help restore the solvency of Social Security. Would you care to expand upon that?

Mr. Greenspan. I think there are two ways of coming at this; namely, what is happening to the full funding and saving of accounts that are required to create the real resources, and what happens in strictly the financial system itself.

On the financial system itself, what, as I understand it, the President's accounts will do is to trade off claims to benefits in the far distant future for essentially funds now, the interest on which will create those benefits later on, and that in essence is a wash. It does not effectively close the $3.7 trillion, 75-year gap or the $10 trillion gap in perpetuity. In that regard, I was merely stipulating that from an accounting point of view, it does not address the particular gap. But what it does do, in my judgment, is create the possibility of building real savings in a manner better than the pay-as-you-go system does. But that is the real resource side, not the financing side. I was addressing the financing side.

Mr. Bradley. Thank you.

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