Federal Reserve Chairman Alan Greenspan urged Congress on Wednesday to deal with the country’s escalating budget deficit by cutting benefits for future Social Security retirees. Without action, he warned, long-term interest rates would rise, seriously harming the economy.
In testimony before the House Budget Committee, Greenspan said the current deficit situation, with a projected record red ink of $521 billion this year, will worsen dramatically once the baby boom generation starts becoming eligible for Social Security benefits in just four years.
He said the prospect of the retirement of 77 million baby boomers will radically change the mix of people working and paying into the Social Security retirement fund and those drawing benefits from the fund.
“This dramatic demographic change is certain to place enormous demands on our nation’s resources — demands we will almost surely be unable to meet unless action is taken,” Greenspan said. “For a variety of reasons, that action is better taken as soon as possible.”
President Bush said he had not seen Greenspan’s comments, nor spoken to him, and declined to respond directly to a reporter’s question about them.
Bush said that “my position on Social Security benefits is, those benefits should not be changed for people at or near retirement.”
He renewed his call for personal savings accounts for younger workers that he said “would make sure those younger workers receive benefits equal to or greater than that which is expected.” And Bush repeated his promise to cut the deficit in half over five years.
While Greenspan urged urgency, Congress is unlikely to take up the controversial issue of cutting Social Security benefits in an election year.
Greenspan, who turns 78 next week, said that the benefits now received by current retirees should not be touched but he suggested trimming benefits for future retirees and doing it soon enough so that they could begin making adjustments to their own finances to better prepare for retirement.
Greenspan did not rule out using tax increases to deal with the looming crisis in Social Security, but he said that tax hikes should only be considered after every effort had been made to trim benefits.
“I am just basically saying that we are overcommitted at this stage,” Greenspan said in response to committee questions. “It is important that we tell people who are about to retire what it is they will have.” He warned that the government should not “promise more than we are able to deliver.”
While the country is currently enjoying the lowest interest rates in more than four-decades, Greenspan warned that this situation will not last forever. He said financial markets will begin pushing long-term interest rates higher if investors do not see progress being made in dealing with the projected huge deficits that will occur once the baby boomers begin retiring.
“We are going to be confronted ... in a few years with an upward ratcheting of long-term interest rates which will be very debilitating for long-term growth,” Greenspan told the committee if the deficit problem is not addressed.
Greenspan suggested two ways that benefits could be trimmed. He said that the annual cost-of-living adjustments for those receiving benefits could be made using a new version of the Consumer Price Index called the chain-weighted index, which gives lower readings on inflation.
He also said that the age for retirement should be indexed in some way to take into account longer lifespans. He noted that presently the age for being able to get full Social Security benefits is rising from 65 to 67 as one of the changes Congress adopted in the mid-1980s, based on recommendations of a commission Greenspan chaired. In his testimony, Greenspan said Congress should go further and index the retirement age so that it will keep rising.
As he has in the past, Greenspan called on Congress to reinstitute rules that require any future tax cuts to be paid for either by spending cuts or increases in other taxes.
While that would erect a high hurdle to Bush’s call for making his 2001 and 2003 tax cuts permanent, estimated to cost at least $1 trillion over a decade, Greenspan again repeated his belief that spending cuts rather than tax increases were the best way to deal with the exploding deficit.
While not ruling out totally the use of tax increases to deal with at least part of the looming surge in spending on Social Security, Medicare and other entitlement programs, Greenspan urged caution in increasing taxes.
“Tax rate increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base,” Greenspan said. “The exact magnitude of such risks is very difficult to estimate, but they are of enough concern, in my judgment, to warrant aiming to close the fiscal gap primarily, if not wholly, from the outlay side.”