Published on Wednesday, February 25, 2004 by the New York Times
Greenspan Urges Cuts to Social Security to Rein In Deficit
by Kenneth N Gilpin
he Federal Reserve Board chairman, Alan Greenspan, called on Congress today to rein in federal spending, including entitlement benefits like Social Security and Medicare, in order to cut budget deficits.
But Mr. Greenspan, who spent two hours on Capitol Hill this morning offering testimony and answering questions from members of the House Budget Committee, admitted that the size of the deficit made it unlikely that spending cuts alone would be sufficient to accomplish the task. And he said it was unlikely that the United States could "grow its way" out of its budget deficits solely with an expanding economy, a solution often promoted by conservatives.
Mr. Greenspan offered his views today as an individual, and was not speaking on behalf of the Federal Reserve, as he did two weeks ago, when he appeared before House and Senate committees to offer the central bank's view of the economy and its conduct of monetary policy.
In his testimony today, Mr. Greenspan expanded on some issues that he discussed in his last appearances on Capitol Hill and raised others anew. He said:
ÂThe economy appears to moving into a period of "vigorous expansion."
ÂIn addition to spending cuts, Congress should consider as a way of lowering deficits a different measure of the consumer price index used to calibrate increases in Social Security payments and other entitlement programs.
ÂIn order to deal with the daunting budget challenges posed by the coming retirement of the Baby Boom generation, Congress should consider trimming retirement benefits by pushing up the age at which beneficiaries could begin to receive Social Security and Medicare.
At the White House, responding to a reporter's question about Mr. Greenspan's suggestion to trim Social Security benefits,
"I need to see what he said," Mr. Bush said. "My position on Social Security benefits is just that those benefits should not be changed for people at or near retirement."
Mr. Bush made his remarks during an appearance with the president of the Republic of Georgia.
The presidential campaign of Senator John Edwards, Democrat of North Carolina, later issued a statement in which Mr. Edwards asserted that "there is a better way" than cutting benefits.
"Alan Greenspan is right to call attention to the record-shattering deficit under President George Bush," Senator Edwards said. "But it is an outrage for him to suggest that we should extend George Bush's tax cuts on unearned wealth while cutting Social Security benefits that working people earn.
"There is a better way. If we roll back these tax cuts for the wealthiest Americans, if we institute a new tax on the wealth of the top 1 percent, and if we take other steps to eliminate corporate subsidies and wasteful spending, we can reduce the deficit and extend the life of the Social Security trust fund."
In his testimony today, Mr. Greenspan noted that the first wave of Baby Boomers would be eligible for Social Security retirement benefits when they reached age 62 in 2008. Three years later, those people will be eligible for Medicare.
In his remarks, Mr. Greenspan also cited a Congressional Budget Office forecast that projected that under current law federal outlays for Social Security and Medicare would rise from a little less than 7 percent of gross domestic product today to 12 percent by 2030.
"We absolutely need to come to grips with the fundamental problems of our social welfare system," said David Resler, chief economist at Nomura Securities International. "I see a remarkable lack of courage on the part of any politician in recent years that seems willing to tackle this question. Nobody is talking about what has to be done, because they know that if they do, they will get pilloried by somebody."
To date, the issue of the fiscal challenges posed by the Baby Boomers to the nation's entitlements system have not surfaced as a political issue in the presidential campaign.
But if a Democrat is elected and serves two terms, at some point between 2005 and 2013 the problem will need to be addressed, analysts say, because the number of Baby Boomers who will reach retirement age starts to rise exponentially in 2010.
Today was not the first time that Mr. Greenspan has urged Congress to curtail spending, and it will likely not the be the last. Under questioning, he admitted that spending cuts alone were not likely to balance the government's books.
Representative John M. Spratt, Democrat of South Carolina, ran through a recent analysis by an economist at the Brookings Institution that outlined the steps that could well be needed in the future to bring the budget into balance.
Among those steps was an 80 percent cut in domestic discretionary spending.
"Do you think cuts of that magnitude are politically realistic?," the congressman asked Mr. Greenspan.
"I don't think they are," Mr. Greenspan replied. "But I still think that you have to start with the presumption that you're going to get as much as you can on that side."
"I'm just basically saying we are overcommitted at this stage," Mr. Greenspan added. "To the extent we try to resolve the overcommittment on the government side by raising taxes, we are risking lowering the rate of growth in the revenue base."
Discretionary spending during the Bush administration has increased at the fastest rates since 1966, when Lyndon B. Johnson was president.
Currently, the White House projects the deficit will rise to a record $521 billion in the current fiscal year. The Office of Management and Budget is forecasting that the deficit will be cut in half by 2009, at $237 billion.
The deficit for the 2003 fiscal year reached $373 billion, the second consecutive year of shortfall after four years of surpluses between 1998 and 2001.
Mr. Greenspan was not the only Fed official who was ringing alarm bells about the deficit today.
In London, Bloomberg News quoted a Fed governor, Edward Gramlich, as telling an audience at the Euromoney Bond Investors Congress that "continued budget deficits will steadily detract from the growth of the U.S. capital stock and may also trigger dislocating changes."
As did Mr. Greenspan, Mr. Gramlich said that faster economic growth should not be counted on to close the budget gap.
"If you're worried about budget deficits, what you have got to do is you've got to fix them," he said. "There is no economic effect that is necessarily going to come along to save the day."
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