Federal Reserve Chairman Alan Greenspan warned Congress and the Bush administration yesterday that Social Security benefits should be cut to avert serious economic problems from a ballooning budget deficit.
"The dimension of the challenge is enormous," Greenspan said on Capitol Hill to members of the House Committee on the Budget. "The resolution of this situation will require difficult choices, and ... the future performance of the economy will depend on those choices."
Greenspan indicated that he is in favor of making the Bush administration's sweeping tax cuts permanent despite the rising deficits because raising taxes could "pose significant risks to economic growth and the revenue base."
President Bush, who was meeting yesterday in the White House with Georgian President Mikhail Saakashvili, said in response to a reporter's question that Social Security benefits "should not be changed for people at or near retirement."
He added that "we ought to have personal savings accounts for younger workers that would make sure those younger workers receive benefits equal to or greater than that which is expected."
Many experts have warned that the Social Security system will face dire consequences if corrective action is not taken. But most agreed yesterday that the problem won't be addressed this year because of the presidential election.
"There will be a lot of rhetoric, but nobody can have a serious debate" on Social Security during an election year, said Alicia H. Munnell, director for the Center for Retirement Research at Boston College.
Greenspan said the mounting deficit will reach a more critical point when the baby boom generation begins to retire in four years, and the number of workers to support them declines, he said.
"This dramatic demographic change is certain to place enormous demands on our nation's resources, demands we almost surely will be unable to meet unless action is taken," he added.
He suggested that the normal retirement age to receive Social Security benefits should be raised because people are living longer.
Obligations to people who are in or near retirement should be honored, and changes should be made quickly so people nearing retirement have time to adjust, Greenspan said.
Greenspan said Congress also could consider replacing the current measure of the "cost of living" that is used to adjust Social Security benefits with one that better reflects rising prices.
Economists have argued for years that the Consumer Price Index overstates inflation. If a more accurate index had been used in the past decade, the federal deficit would have been reduced by about $200 billion, Greenspan testified.
He warned that federal outlays for Social Security and Medicare will increase, and stress the system. Today, they amount to less than 7 percent of gross domestic product, but in 26 years they will account for 12 percent of the goods and services produced in the U.S.
"The degree of uncertainty about whether future resources will be adequate to meet our current statutory obligations to the coming generations of retirees is daunting," Greenspan said.
The Bush administration has been criticized domestically and by overseas trading partners for the bulging budget deficit. It climbed to a record $375 billion in fiscal 2003, after four years of surpluses, and is expected to reach more than $500 billion in fiscal year 2005.
"If current policies remain in place, the budget will stay in deficit for some time," Greenspan said. "The resulting rise in the federal debt could drain funds away from private capital formation and thus over time slow the growth of living standards."
Greenspan blamed the rising deficit on the economic downturn in 2001, slow growth that followed, a significant increase in defense and homeland security spending, and tax cuts.
Economists and other experts agreed that steps must be taken to rein in the deficit and curb Social Security spending.
"If we are really going to fix [Social Security], we are going to have to make these programs a little less generous," said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, N.C.
Change in philosophy
"The system has really become a middle-aged and old-age retirement system relative to when the system was first established," said C. Eugene Steuerle, a senior fellow at the Urban Institute in Washington and a former U.S. Treasury official in the Reagan administration.
The system was established almost 70 years ago, and most of the early beneficiaries were men who retired at age 68, he said. "Today, they retire five years younger and live five years longer," said Steuerle.
Joel Naroff, president of Naroff Economic Advisors in Holland, Pa., said Greenspan wanted to let Congress know that bringing down the deficit and controlling Social Security and Medicare "is going to be tough enough to deal with if you had your financial house in order," he said.
But with a $500 billion deficit, "you run the potential of a financial disaster. The fact is, you can't wait for four years from now to say, 'Oh, jeez, it's a problem,'" Naroff said.
Munnell, the Center for Retirement Research director, took issue with Greenspan's comments on Social Security.
"Our retirement policy should not come from the Fed," Munnell said. "We as a nation have to make the decision of how much benefits to provide for ourselves."
Still, she acknowledged that the system is short of money.
"He's right that we have to do something," Munnell said. "There are more benefits promised than money there. That's a fair statement, and doing something about that earlier is better than later."
Clare Hushbeck, an economist with AARP, the Washington, D.C.-based advocacy group for people 50 and over, said any adjustment to the retirement age would have to address how to provide for workers who can no longer work because of poor health.
Some upbeat news
Although much of his testimony was sobering, Greenspan was upbeat about the economy and its prospects. He said the economy appears to be growing more vigorously, and the outlook in the short term is favorable because interest rates are at historic lows, many households and businesses are in strong financial shape and inflation is low.
"The most recent indicators suggest that the economy is off to a strong start in 2004, and prospects for sustaining the expansion in the period ahead are good," Greenspan said.
But he noted that job growth has been anemic, a fact that has haunted the Bush administration, which could live or die this November on the issue, experts say.
More than 2 million jobs have been lost since Bush became president in 2000. President Bush recently distanced himself from his economic team, which stated this month that 2.6 million new jobs could be created this year.
Vitner, the Wachovia economist, said he expects companies to start hiring soon, perhaps adding as many as 200,000 workers a month.
"I think the economy is incredibly key to Bush's re-election," Vitner said. "He is in pretty good shape."
Social Security facts
More than 45 million people receive benefits from Social Security.
The full retirement age this year is 65 years and four months. The average 65-year-old today will live another 17 1/2 years.
Social Security is the only income for one-third of the elderly.
Benefits owed will surpass taxes collected for the program in 2018.
The trust funds will be exhausted in 2042.
Source: Social Security Administration