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Fed Chief Urges Cuts in Retirement Benefits

Alan Greenspan says choices will be painful because the U.S. will be unable to provide levels received by parents of baby boomers.

August 29, 2004|Martin Crutsinger | Associated Press Writer

JACKSON, Wyo. — Federal Reserve Chairman Alan Greenspan said Friday that the country would face "abrupt and painful" choices unless Congress acted quickly to trim Social Security and Medicare benefits for the baby-boom generation. He said the government had promised more than it could deliver.

Returning to a politically explosive issue just before the Republican National Convention, Greenspan said the country must face up to "some tough policy choices."

Government resources, even under the most optimistic economic assumptions on growth and productivity, will be inadequate to provide baby boomers with the level of benefits their parents received, he said.

Speaking at a two-day conference sponsored by the Kansas City Federal Reserve on challenges posed by an aging population, Greenspan said policymakers must address the looming crisis in Social Security and Medicare before the first wave of 77 million U.S. baby boomers began retiring later this decade.

"We owe it to our retirees to promise only the benefits that can be delivered," he said. "If we have promised more than our economy has the ability to deliver ... as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels."

And he warned, "If we delay, the adjustments could be abrupt and painful.

"Curbing benefits once bestowed has proved difficult in the past," he noted, so the government must be careful about enacting any new benefits.

At President Bush's urging, Congress last year passed a new prescription drug benefit expected to cost more than $540 billion in the next 10 years.

Greenspan, 78, who was recently confirmed for a fifth term as Fed chairman, suggested that one possible fix would be to increase the retirement age to receive full benefits. It is already scheduled to rise from 65 to 67. He has suggested that the retirement age be continually adjusted to reflect ever-rising life expectancies.

He has also proposed trimming the annual cost-of-living adjustment that retirees receive because the current Consumer Price Index overstates inflation.

Greenspan has long been concerned about benefits programs for the elderly. In 1983, he chaired a commission that rescued Social Security during an earlier funding crisis.

And starting in February, he has delivered a series of warnings about the looming crisis in Social Security and Medicare, which along with soaring budget deficits are likely to be the biggest economic challenges in the next four years.

However, the government's two largest entitlement programs have received little attention in the presidential race because neither Bush nor his Democratic challenger, Sen. John F. Kerry, wants to dwell on financing problems that present painful choices.

Bush favors giving younger workers the option of putting part of their payroll tax into personal retirement accounts. Kerry opposes the plan for partial privatization.

In the firestorm that erupted over Greenspan's earlier comments about trimming benefits for baby boomers, Kerry rejected the idea of cutting benefits, while Bush said benefits "should not be changed for people who are at or near retirement."

In a statement, Kerry spokeswoman Allison Dobson said Friday that Greenspan's testimony "should be a wake-up call." She criticized Bush's economic policy, saying "it has driven up endless deficits and put Social Security in danger."

Other speakers at the conference echoed Greenspan's comments about the difficult choices that aging populations posed for government policymakers.

While the United States, Europe and Japan are seen as facing the biggest difficulty financing baby-boomer retirements, International Monetary Fund Deputy Managing Director Anne Krueger said developing countries would also face problems with aging populations.

She said countries such as India and Brazil must "take remedial action now to establish much sounder fiscal positions" to cope with rising pension costs.

James Poterba, a Massachusetts Institute of Technology economics professor, said his research showed that one dreaded fallout from the baby-boom generation's retirement was unlikely to occur -- an "asset market meltdown" as they sell their stocks to finance their retirement.

He said that should not happen because the wealthy, who would not need to sell, own such a large share of financial assets.

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