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| Fed Chairman Alan Greenspan told Congress that without reform, Social Security costs could cause the economy to 'stagnate or worse.' |
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NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan told Congress that the mounting financial pressure of a wave of retiring baby boomers is so great that cuts in future government retirement benefits are all but inevitable.
The Fed chairman told the Senate Special Committee on Aging that the nation has about three years to work out a fix. "In 2008, the leading edge of what must surely be the largest shift from retirement in our nation's history will become evident as some baby boomers become eligible for Social Security," he said in his prepared remarks.
By that date, the population 65 years and older will be more than one-fourth of the adult U.S. population, Greenspan said, referring to forecasts by the Social Security trustees. That would be up from 17 percent currently.
"This huge change in the structure of our population will expose all our financial retirement systems to severe stress and will require adjustments for which there are no historical precedents," he said.
This huge demographic shift is the main reason why Social Security and Medicare are facing enormous financial obligations that he says cannot be met without some choices that most in government are loathe to make.
"At present, the Social Security trustees estimate that the unfunded liability over the indefinite future to be $10.4 trillion," Greenspan noted in his prepared remarks. "The shortfall in Medicare is calculated at several multiples of the one in Social Security."
"These numbers suggest that either very large tax increases will be required to meet the shortfalls or benefits will have to be pared back," he said.
Greenspan also stressed that rising spending on Social Security, Medicare and Medicaid is one more reason why the federal budget "is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years."
"Unless the trend is reversed, at some point these deficits would cause the economy to stagnate or worse," he said.
Senator Hillary Clinton challenged the Fed chairman on his support for tax cuts early in President Bush's first term. Many Democrats blame the tax cuts for helping turn the budget surplus that existed at the end of President Clinton's first term into record deficits, and lately more and more have accused Greenspan of favoring Bush policies, contrary to his official status as an independent chairman of the Federal Reserve.
Greenspan said most leading economists at the time had expected budget surpluses to stretch into the future, citing forecasts by the Office of Management and Budget as well as by the bipartisan Congressional Budget Office. And he said that he had also pushed for tight rules on Congressional spending and more fiscal discipline.
"I don't think that the issue is a question of taking a wholly different view... It turns out we were all wrong," he said, referring to the prevailing budget surplus forecasts. He also said that he would take the same position again if he was faced with the same circumstances.
Senator Clinton finished her questioning with a quick parting shot: "Just for the record, we were not all wrong, but many people were wrong."
Greenspan also repeated his support for some kind of private investment accounts. The main reason he gave is that putting part of people's retirement taxes in a private account would be like putting them in a "lock-box" so that the funds could not be diverted into spending on other government programs.
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