WASHINGTON—Federal Reserve Chairman Alan Greenspan told lawmakers Thursday that large government deficits threaten the U.S. economy and called on Congress to return to the budget discipline of the 1990s.
Controlling government spending is an especially urgent matter, Greenspan told the Senate Budget Committee, because some 76 million baby boomers—Americans born between 1946 and 1964—will begin leaving the work force soon. Then there won't be enough tax revenue coming in for the federal government to meet retirement and health promises to boomers.
"Unless that trend is reversed," Greenspan warned, "at some point these deficits would cause the economy to stagnate or worse."
The federal deficit, which reached a record $412 billion last year, is projected to grow to $427 billion in the fiscal year that ends Sept. 30. Greenspan advocated a return to the Budget Enforcement Act of 1990, which forced lawmakers and the president to agree to spending caps and offset increases in spending with comparable cuts.
Government spending on Social Security and Medicare last year totaled about 8 percent of the nation's gross domestic product—the broadest measure of trade in goods and services. The number is expected to grow to 13 percent of the national economy as more boomers retire.
"At the end of the day, I do not see how we can avoid significant curtailment of benefits currently promised," said Greenspan, now 79 and in his last year leading the Federal Reserve. He called on Congress and President Bush to cut promised benefits now to give boomers more time to adjust their retirement plans.
Beyond slashing future Social Security and Medicare benefits, the Fed chief said lawmakers should create a catastrophic insurance program for the elderly and take special care to redesign retirement health programs to be relatively generous to the poor and stingy to the rich.
"At the end of the day, you are going to end up with numbers of people who are going to have very large co-payments and probably should," Greenspan said.
Greenspan repeated that the U.S. economy is expanding "at a reasonably good pace." He deflected questions about inflation that arose from a bracing 0.6 percent increase in consumer prices in March, but noted that the consumer price rise was a "mirror image" of rising crude oil prices. The implication: Apart from oil, he sees inflation as in check.
Sen. Lindsey Graham, R-S.C., who's pushing his own solution to Social Security's funding shortfalls, got Greenspan to pronounce himself in favor of indexing Social Security benefits to lifespan. To account for longer life spans, benefits would be progressively scaled so that the longer a worker lives, the higher benefits he or she gets. Currently, benefits are calculated based on a worker's wage history and remain the same until death except for inflation-related adjustments.
Greenspan repeated conceptual support for Bush's proposed personal retirement accounts, but he again cautioned against the high level of borrowing that would be needed to pay for the transition to a new system. He also expressed surprise that fixing Social Security's funding shortfalls is proving more controversial than those anticipated for Medicare, the government insurance program for the elderly.
"I thought it was a smaller problem, could be fixed now and could be fixed quickly. I was mistaken," he said of Social Security.
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(c) 2005, Knight Ridder/Tribune Information Services.
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