WASHINGTON—Federal Reserve Chairman Alan Greenspan told Congress on Tuesday to consider raising the retirement age to help fix Social Security's funding problems, and he made it clear that benefit cuts should be part of any solution.
Greenspan also told the Senate Select Committee on Aging that lawmakers should give themselves a deadline of 2008 to fix the system. That's when the first wave of 76 million baby boomers will begin to retire.
Over the past two months, Greenspan has walked a fine line in testimony before several House of Representatives and Senate panels, offering advice but stopping short of specific recommendations. On Tuesday, the respected central bank chief offered more direction, such as saying it was logical to have older people work longer.
"Increasing labor-force participation seems a natural response to population aging, as Americans are not only living longer but are also generally living healthier," the Fed chief said.
Sen. Chuck Hagel, R-Neb., has introduced legislation that would increase the Social Security retirement age to 68 and index future benefits to life expectancy so that earlier retirees would get smaller initial benefits. Greenspan didn't support any specific bill, but indicated that there may be little choice but to encourage older Americans to stay in the work force.
"Rising pressures on retirement incomes and a growing scarcity of experienced labor could induce further increases in the labor-force participation of the elderly and near-elderly in the future," he said. "Extending labor-force participation by just a few years could have a sizable impact on economic output."
President Bush has called on Congress to revamp Social Security in light of the financial strains it will face with the retirement of the baby boom generation, those born from 1946 to 1964. The first boomers qualify for early retirement in 2008 and turn 65 in 2011. From that point on, more and more Americans will retire, until by 2030 more than a quarter of the U.S. population will be older than 65.
For Social Security, active workers pay wage taxes to pay for pension benefits for current retirees. As many as 16 workers supported a single retiree in the past, but today's ratio is about 3 to 1, and in decades ahead it will fall to 2 to 1.
While Social Security runs an annual cash surplus today, by 2018 the yearly cost of pension benefits will exceed annual revenues, and by midcentury revenues will cover only 73 percent of benefits. Unless changes are made, Social Security's funding gap eventually will worsen federal budget deficits and menace the U.S. economy, Greenspan warned.
Greenspan said Congress owed it to baby boomers to make changes to the system now, before they began retiring.
"Because benefit cuts will almost surely be at least part of the resolution, it is incumbent on government to convey to future retirees that the real resources currently promised to be available will not be fully forthcoming," he said.
Raising taxes could be part of the solution too, but Greenspan warned against relying too heavily on that. To fully fund current commitments in 2050, he said, Congress would have to raise the payroll tax to about 18 percent from the current 12.4 percent, split equally between workers and employers. Such a move could "severely inhibit economic growth," he said.
The Fed chairman again offered qualified support for Bush's proposal to allow younger workers to divert some of their payroll taxes to personal retirement accounts that invest in stocks and bonds. Such accounts could boost national savings, which would help finance investment and economic growth, he said.
Greenspan said, however, that borrowing trillions of dollars to finance the transition to a pension system as the president recommends is "too large a risk." He urged Congress to phase in such changes slowly to gauge how markets view the additional debt.
In 1983, Greenspan, a Republican, chaired a bipartisan commission that recommended a package of tax increases and benefit reductions to shore up Social Security's finances. Congress followed the panel's recommendations.
Today, he said, the debate is far more partisan. Earlier this month Senate Minority Leader Harry Reid of Nevada called Greenspan a "political hack." Tuesday, Sen. Hillary Rodham Clinton, D-N.Y., pounced on him harshly as well. She said his support of tax cuts in 2001 "helped blow the lid off" a government budget surplus and led to last year's record $412 billion deficit.
Greenspan countered that he warned in 2001 that tax reductions could lead to deficits and that a trigger was needed to force automatic spending cuts if deficits appeared. Congress didn't do that.
"It turns out we were all wrong," Greenspan said.
Clinton interrupted him.
"Just for the record," she said, "we were not all wrong, but many people were wrong."
(c) 2005, Knight Ridder/Tribune Information Services.
Need to map