Borrow Cautiously, Greenspan Advises

Greenspan said individual Social Security accounts should be introduced "in a cautious, gradual way." (Lucian Perkins -- The Washington Post)

Greenspan suggested that phasing the accounts in slowly would allow policymakers to see whether such additional borrowing caused financial markets to boost interest rates, to the detriment of the overall economy.

Greenspan did not comment on Bush's plan directly, but said, "I'm glad that if we're going to move in that direction, we're going to move slowly and test the waters, because I think it's a good thing to do over the longer run."

Under the Bush proposal, workers would not begin diverting Social Security taxes into their accounts until 2009. And that year, only workers between ages 44 and 59 would be eligible. In 2010, eligibility would expand to workers age 32 through 60. And in 2011, any worker born in 1950 or later could participate.

In the first year, diversions would be limited to 4 percent of wages subject to Social Security taxes, up to $1,000. But every year after, the contribution limit would be raised by $100, plus the percentage increase in wages that year, until all workers could deposit an amount equal to 4 percentage points of their share of the payroll tax.

"Obviously, the president is moving very carefully and deliberatively in a manner that will be sensitive to the markets," White House spokesman Trent Duffy said in response to Greenspan's comments. Bush "wants [Congress] to move now because it gives you the ability to transition gradually. If you wait longer, it will force a sharp shock to the system."

Greenspan's comments gave comfort both to Republicans who welcomed his support for personal accounts and to Democrats who embraced his various warnings and qualifications.

Moderate Republicans in the Senate responded quickly to Greenspan's testimony, saying it bolstered their contention that Congress must not be rushed into a legislative response to Bush's plan. At least four Senate Republicans -- Olympia J. Snowe and Susan Collins of Maine, George V. Voinovich of Ohio and Lincoln D. Chafee of Rhode Island -- have publicly adopted that "go-slow" approach, contending that Congress must explore alternative strategies, especially for financing.

Greenspan agreed with White House officials and Democrats that private accounts, by themselves, would do nothing to improve Social Security's long-term solvency. The president has not proposed any specific ways to reduce Social Security's future obligations.

A White House official said Bush purposely opened the door to what amounts to a tax increase for high-income workers to signal to Congress his willingness to compromise to win approval of private Social Security accounts. "Just because he said it was an option does not mean he embraced it," spokesman Duffy said.

Still, the White House had signaled previously that Bush was opposed to lifting the cap. Sen. Lindsey O. Graham (R-S.C.), a few other Republicans and many Democrats support lifting the cap to help shore up Social Security, which is projected to start paying out more in benefits than it takes in taxes at the end of the next decade.

But other lawmakers reject the idea. Rep. Paul Ryan (R-Wis.) said: "I think it's an unwise policy. I think we have to be really concerned about what it does to the self-employed" in particular. Ryan said congressional Republicans would be resistant to the idea of embracing a "a big tax hike."

Greenspan yesterday agreed with Banking Committee Chairman Richard C. Shelby (R-Ala.) that Congress should consider reducing benefits for future retirees by using a price index rather than a wage index, which rises faster, to determine an individual's initial Social Security benefit. The retiree's benefit payments would still rise over time to keep pace with inflation, but the starting point would be lower.

Greenspan was co-chairman of the 1983 commission on Social Security, whose recommendations led to raising the retirement age and the payroll tax rate.

Greenspan said yesterday that he supports broader changes now because "the existing structure is not working."

Yesterday, in Portsmouth, N.H., Bush told several hundred people gathered in an airplane hangar that Social Security was spiraling toward insolvency.

He said, "I'm going to talk to the American people over and over and over again until the members of Congress recognize we have a problem."

Staff writers Jonathan Weisman and Michael A. Fletcher contributed to this report.