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Mr. Greenspan publicly and correctly told members of Congress that it would be necessary to cut spending in order to reduce the deficits. In between those lines is the fact that economic growth is not sufficient to reduce our deficits, much less pay off our debt. Even when we were running surpluses, the overall public debt magically continued to grow. More on that in a minute.

Where I became confused is when he targeted Social Security as the linchpin to the strategy. In reality, no one of middle age really expects to get anything out of Social Security anyway, so despite the ranting and raving this comment produced, it probably will be accepted as inevitable. The thing that confused me is the fact that I don't think cutting Social Security benefits will have any effect on the deficit.

Social Security is currently "theoretically" in surplus and is thus only because it is a self-contained system: the government deducts money from people's income directly to fund Social Security where no general government revenues (taxes) are used. Of course, this has not prevented the government (courtesy of the Clinton administration) from "borrowing" from the fund and spending the money on various programs, leaving the fund full of IOU's and not cash. This is why even though the Clinton administration ran "surpluses" the actual debt "magically" never decreased: the surpluses were not real they were only "theoretical" thanks to government accounting chicanery.

The problem with Social Security is that as more people retire in the future it will go into deficit, a "real" deficit. But don't get confused (the key word here, as that seems to be the government's strategy), that future deficit has nothing to do with the current one the government is running of around $500 billion a year. The current federal deficit is merely the shortfall per year between what the government takes in and what it spends and adds to the current total debt of around $7 trillion.

This future deficit of Social Security is a contingent liability of the federal government. An independent think tank, whose numbers are being accepted now by most economists, estimate that the total future contingent liabilities of the federal government, predominately from Social Security and Medicare, are around $44 trillion. Since Social Security is a self contained system, cutting future benefits will reduce this huge contingent liability, but it will do nothing to reduce the actual yearly deficits.

Mr. Greenspan certainly knows the difference. We can only guess as to why he emphasized cutting Social Security as a way to reduce deficits. Perhaps because the public is already psychologically prepared to sacrifice these benefits it is easier for the public to accept than if other programs were cut, which they will have to be if any progress is to be made on the actual deficits. Can you imagine the uproar if instead Mr. Greenspan had singled out Medicare for cutbacks, a system that is not self contained and would have a marginal effect on the actual deficits?

By the way, Mr. Greenspan made no mention of private debt, which consists of consumer and corporate debt. If we add public and private debt to get total U.S. debt $30 trillion. This represents 300% of GDP, an all time high by a lot.

Perhaps we will find out the truth after the elections. Until then, prepare to be confused.

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