Greenspan - No 'free lunch' for shortfalls

WASHINGTON -- Huge federal budget deficits threaten the nation's long-term economic stability, Federal Reserve chairman Alan Greenspan said Thursday as he raised new concerns about impending financing problems in Social Security and Medicare.

A day of reckoning will come, Greenspan warned, because there is no "free lunch."

Greenspan used a speech to a banking conference in Chicago to make the case again that this year's president campaign should address reforms of those massive entitlement programs.

Both President Bush and Democratic challenger John Kerry have said they will deal with the shortfalls that will occur in both programs. Unlike Green-span, the candidates have avoided suggesting that benefit cuts are needed to cope with the financial demands from the retirement of 77 million baby boomers.

Speaking via satellite, Greenspan told the conference that he was more concerned about the economic impact of budget deficits than the soaring trade deficit or record levels of household debt.

Normal economic forces will come into play to handle the trade deficit and low savings rates, he said. "The yawning fiscal deficit" will require political action to bring under control, the Fed chief said.

"Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances," Greenspan said.

Greenspan warned against a false sense of security because these problems have yet to trouble financial markets with problems such as rising interest rates.

Posing the question of whether something has fundamentally changed that would allow the country to "disregard all the time-tested criteria of imbalance and economic danger," Greenspan said, "Regrettably, the answer is no. The free lunch has still to be invented."

Greenspan noted that the federal deficit, estimated by the Bush administration to reach a record $521 billion this year, will amount to 4.25 percent of the total economy. Just four years ago there was a record surplus.

Among his main concerns was that these deficits were coming right before the first wave of baby boomer retirements.

"We have legislated commitments to our senior citizens that, given the inevitable retirement of our huge baby boom generation, will create significant fiscal challenges in the years ahead," Greenspan said.

Greenspan did not offer specific solutions to the budget problem. But in a number of Capitol Hill appearances this year, he has spoken of an urgent need to address the issue before baby boomers start becoming eligible for Social Security benefits in 2008.

He has suggested raising the retirement age or scaling back the annual cost of living adjustments in Social Security.

Greenspan told lawmakers on April 21 it was imperative they act soon so baby boomers could have time to adjust their finances, rather than waiting until the retirement surge and saying, "Whoops, we miscalculated, we cannot give you what we promised."

The administration says it has a plan to cut the federal deficit in half over the next five years -- a period that critics say comes before the onset of serious shortfalls in Social Security and Medicare.

Greenspan did not comment Thursday on interest rate policies. Fed policy-makers met on Tuesday and left a key interest rate at a 46-year low of 1 percent but dropped a pledge to be "patient" before starting to raise rates.

Most economists think the Fed's first rate increases in more than four years will start this summer, probably in August, and will come in the form of one-quarter of a percentage point rises in the federal funds rate.

Noting that some economists have worried that the Fed's extended period of low interest rates has spawned a housing bubble of inflated home prices, Greenspan said any "misalignment" of home prices probably would be dealt with by "a softening in housing markets" as interest rates rise.