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Greenspan warns against deficits
Moves that would cut Social Security benefits among recommendations made by Fed chief.
February 26, 2004: 10:28 AM EST
By Mark Gongloff, CNN/Money staff writer

NEW YORK (CNN/Money) - Fed Chairman Alan Greenspan warned Congress Wednesday to move quickly 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.

While the central bank chairman said Social Security benefits for people at or near retirement should be left alone -- and President Bush agreed -- Greenspan's remarks immediately stirred controversy in a presidential election season, particularly since he also suggested that recent tax cuts should be protected, even as spending is cut.

Greenspan, in remarks to the House Budget Committee, noted the recent surge in the deficit is particularly dangerous, coming less than a decade before Baby Boomers begin drawing on federal retirement benefits.

"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. "For a variety of reasons, that action is better taken as soon as possible."

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Some are slamming Federal Reserve Chairman Alan Greenspan for warning that future cuts in Social Security and Medicare spending will be necessary. CNN's John King reports.

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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 needed, 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 he was specifically suggesting Social Security cuts, 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 increases in benefits than the traditional CPI if recent trends continue.

No impact on current retirees?
What would be the best way to deal with the swelling federal budget deficit?
  Allow some recent tax cuts to expire
  Cut federal spending
  Change inflation gauge for Social Security
  Raise age for Social Security eligibility

   View results

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.

"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 November election.

"The wrong way to cut the deficit is to cut Social Security benefits," Sen. John Kerry, the Massachusetts Democrat likely to face Bush 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."

And the AARP, the nation's biggest lobbying group for retirees, also registered its disapproval.

"Social Security should not be a resource for negotiators over the federal budget deficit," AARP CEO William Novelli said in a statement. The group recently sided with the president in pushing for recent changes to Medicare that will cost about $535 billion over the next 10 years.

In his remarks, Greenspan said greater budget discipline was needed, and he bemoaned the recent expiration of Congressional rules that enforced it.

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He acknowledged that recent tax cuts had worsened the deficit, but also 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, 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.

Federal Budget Deficit
Social Security and Medicare
Federal Reserve
Alan Greenspan

"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 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.  Top of page

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