Greenspan warns against delays in fixing Social Security system

WASHINGTON -- Federal Reserve chairman Alan Greenspan said Thursday that delays in shoring up the financially shaky Social Security and Medicare programs could require "abrupt and painful" adjustments when the baby boom generation begins retiring.

He suggested Congress consider switching to an inflation measurement that would trim billions of dollars from annual cost of living adjustments provided to the 46 million Social Security recipients.

Greenspan, chairman of a 1983 commission that developed a plan to deal with an earlier Social Security financing crisis, did not give the Senate's Special Committee on Aging a formal list of recommendations.

But he said lawmakers should consider trimming benefits, raising the retirement age or other ideas before raising the payroll tax paid by employers and employees because that tax increase would be a disincentive to hiring new workers.

Greenspan also debunked the idea advanced by some conservatives that faster economic growth alone will be able to deal with the shortfalls in the government's two biggest benefit programs.

He urged Congress to move as quickly as possible to fix the problems that will see Social Security paying out more in benefits than it collects in payroll taxes beginning in 2017.

Addressing effects

"Early initiatives to address the economic effects of baby boom retirements could smooth the transition to a new balance between workers and retirees. If we delay, the adjustments could be abrupt and painful," Greenspan told the committee.

Greenspan said Congress should consider switching the inflation gauge used to make the annual cost-of-living adjustments in Social Security checks. He favors a new price index that would trim payments by billions of dollars annually by showing lower inflation rates.

Using this method would have lowered last year's $159 billion budget deficit by around $40 billion, he said. Almost half of the savings would have come by making smaller cost of living adjustments in benefit checks, while higher tax collections would have accounted for the rest, he said.

Increased tax collections would occur because the CPI is also used by the Internal Revenue Service to adjust tax brackets so inflation does not push taxpayers into higher tax brackets.

In a major break with the Bush administration two weeks ago, Greenspan told Congress that he was not in favor of any further tax cuts or increases in government benefit programs that were not paid for because of the need to prepare for the coming crisis in Social Security and Medicare.

President Bush is asking Congress to approve tax cuts totaling $1.46 trillion over the next decade. Bush's tax cuts, however, are not offset by either tax increases in other areas or spending cuts.

Greenspan and other economists have long argued that the CPI overstates the actual rate of inflation. A commission in 1996 found the index overstated inflation by 1.1 percentage points annually. A 2000 study in 2000 said improvements put in place by the Bureau of Labor Statistics had trimmed the overstatement to 0.6 percentage points annually.

The new inflation measurement represents another effort by the bureau to address the problem. It began reporting the measurement, which adjusts for changed buying patterns rather than measuring a fixed market basket of goods, last year.

Greenspan on Thursday called it a "far superior measure of the cost of living."

Supporters of older people have raised strong objections to moving to a tighter inflation measurement, arguing it would penalize millions who live on fixed benefits and depend on the annual cost of living change. This year's cost of living increase was just 1.4 percent because inflation has been so low.

Greenspan said policy-makers must address the "daunting challenges" from impending population changes.

Over the next 20 years, the growth of America's working age population will slow from the current 1 percent a year to 0.5 percent; the percentage of those over 65 will jump from less than 13 percent of the population to 20 percent by 2030.

As a result, there will be fewer workers supporting more people on Social Security.

Republican Sen. Larry Craig of Idaho, the committee chairman, praised Greenspan for urging action.

Bush campaigned on a program to partially privatize Social Security by allowing younger workers to divert part of their Social Security taxes to private accounts holding stocks and other investments. Congress has been reluctant to take up that proposal in light of the steep decline in stock prices.