Federal Reserve Chairman Alan Greenspan urged Congress Wednesday to move quickly to fix the financing problems in Social Security and Medicare, arguing that delay will only make the country’s budgetary problems more severe.
Greenspan again endorsed the key part of President Bush’s Social Security overhaul to set up private accounts, but he stressed that much more needed to be done to put the giant retirement program and Medicare, which he said faced even more severe financial strains, on a more sound footing.
While saying that Congress should move quickly to consider possible benefit cuts for Social Security and Medicare before the baby boomers begin retiring, Greenspan, as he did a month ago, urged a go-slow approach to setting up Bush’s proposed private accounts.
The administration estimates those accounts will require about $745 billion in new borrowing over the next decade. Greenspan said it is difficult to judge what impact that increased borrowing will have on financial markets and for that reason, the government should move cautiously to keep from triggering higher interest rates.
“I think it is very important that you move gradually and see what the response is,” Greenspan said.
He said it is entirely possible that the impact on interest rates will be “zero,” but he said since that can’t be forecast with total confidence “cautious and gradual” was the best approach.
Bolstering the administration’s drive to get a Social Security reform bill enacted this year, Greenspan warned that every year of delay would make fixing the problem harder, especially after the baby boomers begin retiring.
Bush’s proposal for private accounts has proved to be a hard sell.
“This is the mother of all issues,” House Majority Leader Tom DeLay said Tuesday, as Republican congressional leaders conceded that they may not be able to win congressional approval of it this year.
Senate Majority Leader Bill Frist said Bush will have to take a lead in building support for private accounts, especially “when a lot of political figures want to run and hide and when you have a lot of people who say there’s no problem.”
In his testimony Wednesday, Greenspan repeated a warning he first made a year ago, saying he believed the government had promised more than it could deliver to the 78 million baby boomers now approaching retirement and saying that cuts in benefits would have to be considered.
“If existing promises need to be changed, those changes should be made sooner rather than later,” he told the House Budget Committee.
Making promises of retirement benefits that cannot be delivered, Greenspan said, was “utterly inappropriate. It is unfair.”
Greenspan reiterated that he supports President Bush’s push for setting up personal retirement accounts by diverting up to 4 percentage points of payroll taxes into the new accounts.
Diverting the payroll taxes into the Social Security trust fund, he said, had merely allowed the government to run larger budget deficits. Greenspan said that switching to the private accounts would be a way to bolster the nation’s low savings rate.
In his prepared testimony, Greenspan did not repeat the cautionary message he sent last month: Creation of the accounts should be done slowly to gauge the impact the increased borrowing that will be needed will have on financial markets.
“The one certainty is that the resolution of the nation’s unprecedented demographic challenge will require hard choices and that the future performance of the economy will depend on those choices,” Greenspan said.
The Fed chief said that unless growth in the huge benefit programs is restrained, these programs will require more and more government resources, rising from about 8 percent of the total economy currently to 13 percent by 2030.
“In the end, the consequences for the U.S. economy of doing nothing could be severe,” he said.