The Return of the Social Security "Lock Box" Jude Wanniski March 15, 2005

If Fed Chairman Alan Greenspan keeps being invited to Capitol Hill as he has in recent weeks to expound on all manner of issues, eventually someone will ask a smart question and Greenspan may finally alter the course of discussion on the government`s financial problems. He showed up before the Senate Special Committee on Aging this morning to discuss Social Security's financial bind and with nobody asking smart questions he continued to confuse one and all with his repeated call for an increase in national "savings." In his prepared remarks, he even called for a return of the mythical "Social Security Lock Box" that was much discussed several years ago. In the Q&A session he had the inspired notion of applying it to a partially privatized Social Security system. I could almost see a light bulb flash over his head when a Senator again mentioned the Lock Box idea, in terms of privatized accounts, and Greenspan blurted out that something on the order of "Why yes, and individuals and households would have control of those boxes because their names would be on them! The government couldn`t take their payroll taxes and spend it on other things!!"

Are you listening Karl Rove? The President has been roaming the country trying to sell privatized accounts and getting blank stares. He`s not going to do better by turning up the volume, but here Greenspan has given him a picture worth a thousand words. Private accounts will do nothing to close the short-term financial problem bearing down on the system and the transition costs at least on paper will seem enormous. The unfunded liability is now up to $10.4 trillion, but workers only have the government`s word that the money will be there when they retire. If they would soon be seeing part of their payroll taxes going into a Lock Box with their name on it and given the only key to opening it on retirement, it`s a horse of a different color. Even if the worker chooses to put all the 12.4% combined payroll tax into government bonds, he would be doing the same thing the government is now doing with the "surplus." Greenspan wisely suggests going slow on the size of the privatized carve-out, not sure if the bond market will respond positively to the idea that the transition bonds are equal to the government pledges they replace and will not push up interest rates.

The difference is that with the individual Lock Boxes, the government could not spend the surplus on other stuff. If it wanted to go to war with China or boost welfare handouts, it would have to go to the bond markets and borrow the funds directly. My enthusiasm for partial privatization of the kind proposed by Sen. Bob Bennett of Utah is that it would make every worker attentive to his or her investment. They would read the financial pages more and, in the lowest income brackets, spend less gambling on lottery tickets or slot machines trying to increase their net worth.

Democrats who accuse Republicans of favoring tax cuts because they want to "Starve the Beast" of revenues they are using for social programs to attract votes are horrified that privatization might end their longtime agenda to "Feed the Beast." In today`s Wall Street Journal, pollster John Zogby reports that the investor class – already self-described by 46% of Americans -- last November voted for President Bush by 61% to 39%. Non-investors went for Senator Kerry by 57% to 43%, which suggests that if Kerry had finally cut loose from the Party`s "Tax the Rich" rhetoric, he would be President, having won more investors along with the anti-war vote. This political momentum indicates why Rove knows the President has nothing to lose by pushing in this direction. As Zogby notes, the President and GOP may lose on personal accounts this time around, but may well win the war over party realignment. He tells Democrats: "Ignore the `ownership society` at your own peril."

Where Greenspan still fails is with his "savings" mania. He has repeated it so often, several times insisting savings must be increased, that Edmund Andrews of The New York Times devoted an entire column to it: "The word that is really catching on in Washington is 'savings.' Democrats say that Mr. Bush has greatly depleted national savings with his tax cuts and soaring fiscal deficits. Mr. Bush invokes the need for savings to justify more tax incentives as well as his plan to overhaul Social Security."

"Savings" is not even a concept in classical, supply-side economics, which totally focuses on increasing "Production." In demand theory, Production = Consumption + Savings, and Keynesians ignore the left side of the equation, instead fiddling with the right side. Greenspan falls into that trap, which leads him to insist that only by raising taxes or lowering benefits can the health and pension deficits be eliminated. If economic policy can increase "Production," then consumption and savings can increase. In accordance with Say`s Law of Markets, supply creates its own demand. Individuals and households know how much they have to spend and how much they can save.

Greenspan is enough of a supply-sider, though, to know that merely changing tax- and benefit- components of the pension system will not necessarily solve the problem. There must also be a parallel increase in the economy`s ability to produce enough goods and services so there is enough at all times for workers and retirees. There is a "goods market" and a "bond market," Bob Mundell taught me almost 30 years ago in a telephone call I remember vividly. The goods market today sees that three workers support a senior and that number will shrink a bit every year until it will be two workers in 15 years.

I kept waiting for a Senator to ask if Greenspan would raise the capital-gains tax to lower the deficit and thereby increase "savings." That would have exposed the awkwardness in his formulation. High tax rates might make the bond market happy, but it would surely send the goods market in the other direction. Greenspan not only knows this, he`s the man who taught me almost 20 years ago, in an afternoon chat in his Fed office, that the correct tax on capital gains is zero, in full support of the goods market.

What`s going to happen next? More ideas all around, and as we noted in January, the tax and health and pension reforms will merge in July or so, and they may then come together in one big mosaic, under the deft leadership of Bill Thomas of House Ways & Means and Chuck Grassley of Senate Finance.