Federal Reserve Chair Greenspan Warns Congress To Consider Reducing Future Medicare, Social Security Spending

Echoing previous statements, Federal Reserve Board Chair Alan Greenspan on Friday warned that the United States will face "abrupt and painful" choices in the future unless lawmakers act quickly to limit Medicare and Social Security benefits for baby boomers, the AP/Los Angeles Times reports. Speaking at the Reserve Board's annual economic symposium in Jackson Hole, Wyo., Greenspan said that even under the most optimistic projections on economic growth and productivity, government resources will be inadequate to provide baby boomers -- the oldest of whom are set to retire in the next few years -- with the same level of benefits that their parents received (Crutsinger, AP/Los Angeles Times, 8/29). As baby boomers retire, the birthrate declines and life expectancy increases, the percentage of the U.S. population that is older than age 65 will increase from about 12% in 2000 to 20% in 2035. As a result, spending on retirement programs in the United States is expected to increase to more than 6% of the economy in 2050, up from about 4% in 2000 (Kirchhoff, USA Today, 8/30). Moreover, because of the aging population, the United States cannot count on ongoing rises in productivity and economic growth to solve future financial problems, Greenspan warned, the New York Times reports.

Medicare Problems Worse, Greenspan Says
In his speech, Greenspan made an "implicit attack" on the new Medicare prescription drug benefit, according to the New York Times. Greenspan urged lawmakers to be "especially vigilant" to create new benefits only when the government has enough resources to afford them. Analysts say that the future financial shortfalls of Social Security are modest compared with the "problems confronting Medicare," which are "expected to be far more severe because costs have been rising rapidly per person at the same time that the population of retirees has been increasing," the Times reports (Andrews, New York Times, 8/28).

Solutions
Greenspan warned lawmakers not to try to address the situation by raising payroll taxes, AP/Long Island Newsday reports (Crutsinger, AP/Long Island Newsday, 8/28). He said that the raising the current 12.4% payroll tax -- which will cover existing benefits until about 2018 -- could hurt the economy (USA Today, 8/30). Greenspan urged lawmakers to consider reducing future Social Security and Medicare benefits, according to the Washington Post. He said, "If we have promised more than our economy has the ability to deliver to retirees, ... as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust" (Henderson, Washington Post, 8/28). The age for U.S. residents to receive full retirement benefits already is scheduled to rise to 67 (USA Today, 8/30). Greenspan suggested that because Americans are living longer and healthier lives, they could work longer. He also said that U.S. residents, who currently save less than 2% of their incomes, could increase their savings (Washington Post, 8/28). Greenspan also said that the annual cost-of-living adjustment given to retirees could be trimmed because the current Consumer Price Index overstates inflation (AP/Los Angeles Times, 8/29). He recommended taking action to reduce the federal budget deficit (Washington Post, 8/28).

Text of Greenspan's speech is available online.