Greenspan warns against deficits
Moves that would cut Social Security benefits among recommendations made by Fed chief. February 25, 2004: 2:21 PM EST By Mark Gongloff, CNN/Money staff writer
NEW YORK (CNN/Money) - Fed Chairman Alan Greenspan warned Congress Wednesday to take quick action to fix the nation's swollen budget deficit -- including measures that could cut some future Social Security payments -- to avoid even bigger problems for the nation's economy down the road.
The central bank chairman also repeated his assertion that recent tax cuts should be made permanent and said cutting spending was a better way to fix the deficit than tax increases.
Greenspan, in remarks for delivery to the House Budget Committee, noted that the recent surge in the deficit is particularly dangerous, coming less than a decade before Baby Boomers begin drawing on federal retirement benefits, putting an ever bigger strain on government resources.
"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 said in his remarks. "For a variety of reasons, that action is better taken as soon as possible."
Greenspan said that, if the demographic shift is permanent -- and rising longevity makes that a realistic prediction -- then "significant structural adjustments" to Social Security and Medicare would be necessary, particularly since Medicare benefits could skyrocket as medical technology advances.
He proposed some solutions that would reduce future Social Security benefits to retirees, including raising the ages at which retirement benefits are paid and changing the inflation measure used to index the payments. He later denied that he was specifically suggesting that Social Security payments be cut, saying he was merely suggesting better "technical means" of setting benefits.
But the changes he suggested would cut benefits -- raising the retirement age would result in people drawing benefits for a shorter period of time, and his preferred index for cost-of-living increases, the chained consumer price index, would result in smaller benefit increases than the traditional CPI if recent trends continue. No impact on current retirees?
Greenspan said the government should pay the obligations it already owes to people at or near retirement, adding that any changes to future retirees' benefits should be decided as soon as possible so those people can adjust their retirement plans.
In separate remarks to reporters in Washington, President Bush echoed Greenspan's assertion that near-term Social Security obligations be met, leaving open the possibility that later benefits could be cut. Related stories Greenspan: economy strong Do deficits matter? The amazing disappearing budget
"My position on Social Security benefits is this: Those benefits should not be changed for people at or near retirement," Bush said, Reuters news agency reported.
Democrats on the House Budget Committee, in their comments to Greenspan, expressed dismay about the prospect of cutting Social Security benefits to make cutting taxes easier -- a hint the issue could heat up ahead of the presidential election.
"The wrong way to cut the deficit is to cut Social Security benefits," Sen. John Kerry, D-Mass., Bush's most likely Democratic opponent in November, said during a speech at the University of Toledo, according to Reuters. "If I'm president, we are simply not going to do it."
Greenspan also said greater budget discipline was needed, and he bemoaned the recent expiration of Congressional rules that enforced such discipline.
While acknowledging that recent tax cuts had helped worsen the budget picture, Greenspan said he favored cutting spending rather than raising taxes, suggesting tax hikes could hurt the economy.
"I am fully aware of the fact that it may not be possible to keep the tax rate down and still maintain some semblance of deficit control," Greenspan said in response to a lawmaker's question. "But ... I would strongly recommend that the priority of evaluations start with the expenditure side: what can be constrained, what can be reduced." $500 billion deficit seen
Earlier this month, President Bush unveiled a budget forecast that projected a deficit of more than $500 billion, which would be the biggest ever in dollar terms. As a percentage of gross domestic product (GDP), it seems likely to be the biggest since the mid-1980s. However, the forecast did not include hundreds of billions of dollars for other costs, such as military expenses in Iraq.
Greenspan said the deficit spending of recent years has helped the economy recover from the 2001 recession, and some economists don't think the deficit is a short-term problem for the economy.
But Greenspan and other economists have warned that, over time, persistent deficits and high government debt will push interest rates higher, hurting economic growth and the nation's living standards.
"If no action is taken at all ... we're going to be confronted within a few years with a marked upward ratcheting of long-term interest rates, which is very debilitating to long-term economic growth," Greenspan said in response to a lawmaker's question.
In the short term, Greenspan said, the economy seems to have gathered strength and that "prospects for sustaining the expansion" are good.
He said household and business balance sheets were stronger, the Fed's super-low interest-rate target was still "highly accommodative," and that fiscal stimulus would also help the economy this year, while productivity would keep inflation low.
Still, he was not particularly bullish about job growth, which has long been a glaring weak spot in an otherwise healthy economy.
"Overall, the economy has lately made impressive gains in output and real incomes, although progress in creating jobs has been limited," he said.
This view seemed unlikely to change market expectations that the central bank will keep its target for a key short-term interest rate, already at the lowest level in more than 40 years, unchanged at least until the summer.