Those sighs of relief you heard emanating from the White House two weeks ago were from President Bush and his top staff, relieved to hear Federal Reserve Chairman Alan Greenspan deliver a much-anticipated endorsement of the President's framework to reform the troubled Social Security program.

"The existing [Social Security] system is not working," Greenspan explained to two key congressional committees. "The pay-as-you-go system, in my judgment, is going to be very difficult to manage" and eventually "we are going to need an alternative." For the normally circumspect chairman, this is the equivalent of shouting "fire" in a crowded theater.

That "alternative" of which Greenspan speaks includes two key policy reforms:

• Raise Social Security benefits at the annual inflation rate and abandon the practice adopted in 1977 of increasing benefits at the rate of wage increases. He described this fix as "one of the most effective ways to come to grips with closing the . . . gap between expected revenues and expected benefits."
• 
  Allow younger workers to invest a portion of their payroll taxes in safe, personal accounts. Greenspan, however, urged the congressmen to "do it in a cautious, gradual way" and "over the longer run."

Democrats who oppose the President's effort seized on the lukewarm nature of Greenspan's comments and his insistence that the transition to personal accounts be a slow one, characterizing it as a setback for Republicans. Most major media outlets downplayed Greenspan's endorsement of private accounts by emphasizing the caveats he raised--that financing the transition to personal accounts through increased government borrowing might negatively affect financial markets.

But is it possible that Greenspan privately favors an approach to Social Security reform that would amount to the most radical option ever taken seriously at the highest reaches of government?

In last year's controversial book on former Treasury Secretary Paul O'Neill, The Price of Loyalty, former Wall Street Journal reporter Ron Suskind recounted a fascinating series of private breakfast meetings between Greenspan and O'Neill during which they discussed the best way to reform Social Security. Assuming the availability of $1 trillion to finance the transition to private accounts, these senior government officials tasked the economists in their respective agencies to determine the age below which workers could walk away free and clear from the current pay-as-you-go system and invest all of their payroll taxes--more than 10% of income up to $90,000--in personal accounts.

Suskind described their thinking: "O'Neill and Greenspan . . . believed in a clean break. Those who remained in the old Social Security system would see no change; those in the new plan would be fully invested in large, indexed private equity or bond funds. Only thus could the latter group fully benefit from what Warren Buffett calls the 'miracle of compounding returns.'"

Interestingly, in a city where economists rarely agree on the weather, the economists from Treasury and their counterparts at the Federal Reserve independently concluded that the break-point age below which workers could enjoy complete liberation from the "old" Social Security system was 37.

The Greenspan-O'Neill approach may be cautious in that it would liberate fewer workers than the plans currently under discussion, which would offer the personal account option to workers up to age 55. But, cautious though it may be, the complete liberation it would offer to the 37-and-under crowd is breathtaking in its scope.

A couple of caveats are necessary. First, Suskind's account, which appears to come directly from O'Neill, appears to be the only evidence that Greenspan has toyed with the "clean break" approach. Second, these discussions took place four years ago and, were these calculations to be run again today, the break-point age may have changed somewhat from 2001.

Nevertheless, the lesson here is that behind Greenspan's stoic demeanor lies the heart of an ambitious reformer. That a Washington institution such as Greenspan is willing to entertain such a robust route toward reform suggests that the current debate is far from over.

Return to Fiscal Sanity?

Hats off to House Majority Leader Tom DeLay (R.-Tex.) and House Appropriations Chairman Jerry Lewis (R.-Calif.). Upon receiving the President's request for $81.9 billion in supplemental spending to fund operations in Iraq, DeLay raised a serious concern: "We have found some items in foreign aid that probably do not qualify as immediate emergencies."

The supplemental has come to include $5.6 billion in requests for the sort of activities typically handled in the regular appropriations process, including requests to provide relief to the tsunami victims in Asia, fight poppy production in Afghanistan, build a fortified embassy in Baghdad, stabilize the governments in Jordan, Palestine and Ukraine, secure the Pakistani border, and underwrite UN peacekeeping missions around the world.

Lewis pledged to "particularly scrub" these requests and deny them the coveted designation as "emergency" spending. That would require the President and congressional appropriators to make a hard, but necessary choice: Either identify up to $5.6 billion in spending cuts to offset this amount or move the entire foreign aid request into the appropriations process for fiscal 2006, where it would have to compete against thousands of other spending priorities. 
 
Mr. Franc, who has held a number of positions on Capitol Hill, is vice president of Government Relations at The Heritage Foundation.