Federal Reserve Board Chairman Alan Greenspan is calling for private retirement accounts and other measures to ensure the financial sustainability of the Social Security program.

Testifying before the Senate Special Committee on Aging today, Greenspan argued that private retirement accounts could serve as a “lock box” that would help Congress reduce the deficit and increase national savings.

He said that focusing only on the solvency of the Social Security program through tax hikes or other measures would be inadequate. As Baby Boomers begin to retire, the Social Security system is expected to be paying out more than it is taking in by 2018.

While the program could maintain promised benefit levels by tapping the Treasury bonds in the trust fund, however, by 2042, that fund would be exhausted, requiring an across-the-board cut in benefits to put the system back into balance.

Under the current system, surplus Social Security revenues are spent.

Last year, revenues exceeded outlays by around US$150 billion. Social Security’s annual surpluses are replaced with special-issue Treasury bonds. The entitlement program’s surpluses mask the true size of the federal deficit, Greenspan noted.

“We need, in effect, to make the phantom ‘lock boxes’ around the trust fund real,” Greenspan said.

If Congress were unable to access the funds in such a lock box, lawmakers would possibly feel more pressure to reduce the deficit, he argued.

Greenspan said the “major attraction” of private accounts is that they can be “constructed to be truly segregated from the unified budget and, therefore, are more likely to induce the federal government to take those actins that would reduce public dissaving and raising national saving.”

Greenspan noted, however, that there are several types of private accounts, some of which are “virtually indistinguishable” from the current Social Security system.

Greenspan said other types of accounts that “actually do transfer funds into the private sector as unencumbered private assets” are much more likely to be viewed by Congress as raising the deficit, forcing lawmakers to take action to reduce the gap.

President Bush has made the creation of private accounts the centerpiece of his domestic agenda. While the White House has offered few details, the plan’s central feature would allow workers currently 55 and under to divert up to 4% of annual wages, equal to nearly two-thirds of the workers’ share of the Social Security payroll tax, into private retirement accounts.

The proposal has met sharp opposition from Democrats and has caused discomfort among some Republicans, who note that the plan would require trillions of dollars in borrowing in coming decades to maintain guaranteed benefit levels to current and future Social Security beneficiaries.

Greenspan said that future benefit cuts will “almost surely be at least part of the resolution” of Social Security’s long-term funding woes.

As a result, the government needs to take quick action to give future retirees as much time as possible to adjust their plans for work, saving and retirement spending, he said.