To Trim Deficit, Greenspan Urges Social Security and Medicare Cuts

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To Trim Deficit, Greenspan Urges Social Security and Medicare Cuts

By Edmund L. Andrews, The New York Times

February 26, 2004

Alan Greenspan, the Federal Reserve chairman, told lawmakers on Wednesday that Congress should rein in the federal deficit through reductions in spending — including cuts in entitlement programs like Social Security — rather than through tax increases.

"The crucial issue out here is the rate of growth of productivity and the rate of growth of the economy, and what history does tell us is that keeping tax rates down will tend to maximize that," Mr. Greenspan told members of the House Budget Committee.

That was music to the ears of President Bush and many Republicans, who want to extend permanently more than $1.7 trillion worth of tax cuts even as they face a deficit that could exceed $500 billion this year.

But Mr. Greenspan touched off a furor by calling on Congress to trim Social Security and Medicare benefits in the future, provoking criticism from Democrats and causing heartburn among some Republicans.

Echoing the views of many budget experts, Mr. Greenspan warned that the real fiscal calamity is not this year's deficit but the soaring entitlement costs that will come when the baby boom generation begins to reach retirement age.

"I believe that a thorough review of our spending commitments — and at least some adjustment in those commitments — is necessary for prudent policy," Mr. Greenspan said.

Though President Bush has also called for a fundamental overhaul of Social Security and Medicare, Mr. Greenspan was far more explicit and called for raising the retirement age above 67 and slowing the rate at which benefits are adjusted for inflation.

Mr. Greenspan has voiced the same ideas before, as recently as two weeks ago, but with an election looming, his comments on Wednesday provoked a much more widespread reaction.

Senator John Kerry of Massachusetts, the front-runner for the Democratic presidential nomination, declared "the wrong way to cut the deficit is to cut Social Security benefits."

Senator John Edwards of North Carolina, Mr. Kerry's top rival, called Mr. Greenspan's remarks "an outrage."

President Bush, asked about Mr. Greenspan's testimony, responded cautiously.

"I need to see exactly what he said," Mr. Bush told reporters during a brief news conference with the new president of Georgia. "My position on Social Security benefits is this: those benefits should not be changed for people at or near retirement."

That was consistent with Mr. Greenspan, who emphasized that any changes in the law should take place years in advance of changes in benefits.

But Mr. Bush and other Republicans have refrained from any discussion about cutbacks in Social Security or Medicare benefits, a politically explosive topic for the growing number of elderly voters and never more so than in an election year.

"Those proposals are not the right answer," said Representative E. Clay Shaw Jr., Republican of Florida and chairman of a House subcommittee on Social Security. "There is a viable alternative that doesn't require tax increases or benefit cuts. Allow workers to save today through voluntary personal accounts that back Social Security with real assets."

Most budget analysts, Democrats and Republicans alike, agree that Medicare and Social Security costs are set to soar as soon as the baby boomers begin to reach retirement age at the end of this decade. The gap between those looming obligations and the money accumulating in trust funds to cover them has been widely estimated at tens of trillions of dollars over the next 75 years.

Mr. Greenspan was in many ways reflecting a widespread view that the only solution is to either cut benefits or raise taxes by huge amounts. But that is a conclusion that neither party in Congress has been ready to face thus far.

On the more imminent political battle over next year's budget and the outlook for President Bush's tax cuts, Mr. Greenspan displayed his penchant for offering something to almost everybody.

He staunchly defended Mr. Bush's tax cuts, even though the cost of making them permanent would increase the federal debt by about $1.5 trillion over the next 10 years.

But he once again parted ways with Mr. Bush on the question of how to pay for those tax cuts, calling for Congress to make the tax cuts permanent only if it also adopted rules that would require it to offset the loss in revenue with spending cuts or tax increases in other areas.

That approach contrasts sharply with Mr. Bush's proposal, which would require Congress to offset only new increases in spending with cuts in other programs.

The White House anticipates a shortfall of $521 billion this year, and the administration contends that it can reduce the deficit by half over the next five years by cutting back on nonmilitary domestic spending.

Many outside analysts say the administration's plan is unrealistic because it omits the costs of many of Mr. Bush's own priorities. For instance, making the tax cuts permanent would cost more than $1.5 trillion over the next 10 years, but most of the revenue losses would not show up until after 2009.
Senate leaders hope to start work next week on a budget resolution that will set the overall framework for both spending and tax legislation.