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Social Security Cuts Necessary, Greenspan Says

Action is needed 'as soon as possible' to address deficits and demographic changes, the Fed chief tells Congress. His remarks revive a volatile issue.

February 26, 2004|Edwin Chen | Times Staff Writer

WASHINGTON — Federal Reserve Chairman Alan Greenspan told Congress on Wednesday that it needed to reduce Social Security benefits "as soon as possible" if the program was to withstand the waves of baby boomers rapidly approaching retirement.

Greenspan also suggested that the eligibility age for full Social Security benefits -- now 65 years and four months -- may need to be raised. Under a 1983 law, that age is gradually increasing and will reach 67 for those born in 1960 or later.

The influential central banker's controversial recommendations came during congressional testimony that also focused on the nation's soaring budget deficit, now projected to reach $521 billion.

Greenspan warned members of the House Budget Committee that the record deficit would worsen once the estimated 76 million boomers -- born between 1946 and 1964 -- start to become eligible in 2011 for Social Security and Medicare 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," Greenspan said. "I am just basically saying that we are overcommitted at this stage."

Despite that fear, Greenspan reiterated that he favored making permanent the Bush administration's tax cuts, which cost about $1.24 trillion over 10 years, and said he preferred spending cuts to offset any increase in the deficit. Raising taxes, he said, could "pose significant risks to economic growth and the revenue base."

Shortly after Greenspan's committee appearance, President Bush said he opposed any change in benefits "for people at or near retirement."

In a short session with reporters after meeting President Mikheil Saakashvili of Georgia, Bush added that "we ought to have personal savings accounts for younger workers that would make sure those younger workers receive benefits equal to or greater than that which is expected." He said he had not spoken with Greenspan or been briefed on the chairman's comments.

The statements from Greenspan, who in the early 1980s led a commission on the solvency of Social Security, introduced into the presidential campaign a new and volatile issue -- one that traditionally has favored Democrats.

The two leading contenders for the Democratic presidential nomination quickly rejected any cuts in Social Security benefits even as they cited Greenspan's testimony in renewing their demand for a repeal of the Bush tax cuts.

"No matter what was said in Washington just this morning, the wrong way to cut the deficit is to cut Social Security benefits," Sen. John F. Kerry of Massachusetts said in Toledo, Ohio, as he blamed Bush's across-the-board tax cuts for the deficit.

Sen. John Edwards of North Carolina offered "a better way" to cut the deficit. "If we roll back these tax cuts for the wealthiest Americans, if we institute a new tax on the wealth of the top 1%, and if we take other steps to eliminate corporate subsidies and wasteful spending, we can reduce the deficit and extend the life of the Social Security trust fund," he said in a statement released by his campaign.

Although Greenspan and others have issued such warnings and recommendations before, the timing of his words surprised Washington officials as well as political observers of the presidential campaign.

"This is a huge political football, something that the White House and Republicans don't want to touch," said Stuart Rothenberg, an independent political analyst.

"Social Security has always been the third rail of politics," said Leon Panetta, former White House budget director and chief of staff in the Clinton administration. Panetta, also a former California congressman, equated Greenspan's testimony with "throwing gasoline on the bonfire."

For Bush, the issue is particularly tricky.

He campaigned four years ago as "a reformer with results" and regularly identifies himself as someone who did not take office to "pass on problems" to future generations or future presidents.

Social Security, created in 1935, is paying out $470 billion in retirement benefits to more than 46 million elderly and disabled Americans this year.

Without intervention, however, the program is headed for insolvency. Initially, about 40 workers paid Social Security taxes for every one retiree receiving benefits. Today, because of America's aging population, that ratio is down to three workers per retiree.

To compensate, the Social Security tax has risen from 2% to more than 12%. At the current rate, by 2018 Social Security would begin paying out more in benefits than it collects in taxes, and it would be insolvent by 2042.

William Novelli, head of AARP, the nation's largest advocacy group for Americans 50 and older, called Greenspan's recommendation of cutting benefits "irresponsible" and said Social Security should not be used "as a resource for negotiators over the federal budget deficit."

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