Knight Ridder NewspapersWASHINGTONFederal Reserve Chairman Alan Greenspan weighed in Wednesday on the contentious debate over the future of Social Security and Medicare by suggesting that Congress scale back future benefits, saying America can’t afford the programs. The impending retirement of the baby boom generation, those born from 1946 to 1964, will swell the ranks of retirees. If unconstrained, the resulting growth in Social Security and Medicare costs could require tax hikes so large they would undermine the economy, he said. “We are overcommitted at this stage,” Greenspan told the House Budget Committee. “We have been making commitments without focusing on our capability of meeting them.” Greenspan’s warning raises a hot-button issue during an election year, after a long period in which repeated attempts by lawmakers have failed to make significant headway in overhauling Social Security and Medicare. In fact, they added to Medicare’s burden last year by creating a prescription-drug benefit that will cost an estimated $534 billion over the next decade. Both Democrats and Republicans agree there’s a problem. What to do about the programs is likely to become issue in the presidential campaign but unlikely to be on the agenda for action until next year. “I think it is terribly important to make certain that we communicate to the people who are about to retire what it is they’re going to have to live with. And if we promise more than we can actually deliver, I think it will be a major blot on our whole fiscal process,” Greenspan said. The looming Social Security and Medicare crisis makes it all the more important to get today’s growing federal budget deficit under control, Greenspan said. He described today’s situation as “probably one of the most difficult fiscal situations we’ve ever faced.” Right now, the Medicare and Social Security programs take in more in taxes than they spend on benefits for recipients. But Medicare is projected to go into the red in 2013 and Social Security in 2018. Currently, surpluses are lent to the federal government and used to help fund the budget deficit. In 2002 the Social Security surplus was $146 billion, while Medicare ran a surplus of $26.1 billion. When those programs go into the red, the government in theory would have to repay them from general tax revenues or borrowing that’s already insufficient to pay for current expenditures. The looming shortfalls could affect financial markets and the economy long before they arrive. Looking at today’s budget deficits together with future Social Security and Medicare liabilities, investors may lose faith in the government’s ability to avoid ever-increasing deficits. At some point, that probably would push up interest rates, threatening economic growth, Greenspan said. He made two specific proposals for Social Security and Medicare:
n Raise the retirement age at which benefits kick in, beyond the increase in the age from 65 to 67 that already is being phased in.
n Reduce the annual increase in Social Security benefits for inflation. That hike currently is tied to the consumer price index, which economists say overstates inflation. Greenspan recommended switching to a new measure known as the chained consumer price index, which he said more accurately measured the cost of living.