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Greenspan Wants Budget, Retirement Cuts Now
Highlights medical care and Social Security for
seniors as looming threats
 March 2, 2005 The high cost of providing medical
care and Social Security for Americas seniors was the focus of a
presentation today by Federal Reserve Chairman Alan Greenspan, who said
the economy is growing at a reasonable rate but not fast enough to cure
the budget deficits that should be fixed by spending cuts.
The Bush fiscal 2006
budget proposal says the deficit would swell to a record $427 billion
but would decline over the next five years to $207 billion in 2010. But
this budget has no funding for Iraq, Afghanistan, the cost of making the
Bush tax cuts permanents nor the trillions of dollars in borrowing that
would be needed to finance the transition to private accounts in Social
Security.
In fiscal year 2004, federal outlays for Social
Security, Medicare, and Medicaid totaled about 8 percent of GDP. The
long-run projections from the Office of Management and Budget suggest
that the share will rise to 9-1/2 percent by 2015 and will be in the
neighborhood of 13 percent by 2030, he pointed out to the House Budget
Committee.
The combination of an aging population and the
soaring costs of its medical care is certain to place enormous demands
on our nation's resources and to exert pressure on the budget that
economic growth alone is unlikely to eliminate, he said.
In 2008--just three years from now--the leading
edge of the baby-boom generation will reach 62, the earliest age at
which Social Security retirement benefits can be drawn and the age at
which about half of those eligible to claim benefits have been doing so
in recent years.
Just three years after that, in 2011, the oldest
baby boomers will reach 65 and will thus be eligible for Medicare.
Currently, 3-1/4 workers contribute to the Social Security system for
each beneficiary. Under the intermediate assumptions of the program's
trustees, the number of beneficiaries will have roughly doubled by 2030,
and the ratio of covered workers to beneficiaries will be down to about
2.
The pressures on the budget from this dramatic demographic change will
be exacerbated by those stemming from the anticipated steep upward trend
in spending per Medicare beneficiary.
"So long as health-care
costs continue to grow faster than the economy as a whole, the
additional resources needed for such programs will exert pressure on the
federal budget that seems increasingly likely to make current fiscal
policy unsustainable," Greenspan said.
As he has before, he
suggested cutting benefits for future retires. I fear that we
may have already committed more physical resources to the baby-boom
generation in its retirement years than our economy has the capacity to
deliver. If existing promises need to be changed, those changes should
be made sooner rather than later. We owe future retirees as much time as
possible to adjust their plans for work, saving, and retirement
spending. They need to ensure that their personal resources, along with
what they expect to receive from the government, will be sufficient to
meet their retirement goals.
Greenspan again
supported the notion of restructuring the Social Security system to
include private investment accounts, but added that concern that the
government could get involved in financial markets gave him certain
pause He also suggested it would help take spending money away from the
government.
In my view, a retirement system with a significant
personal accounts component would provide a more credible means of
ensuring that the program actually adds to overall saving and, in turn,
boosts the nation's capital stock. The reason is that money allocated to
the personal accounts would no longer be available to fund other
government activities and--barring an offsetting reduction in private
saving outside the new accounts--would, in effect, be reserved for
future consumption needs, he said..
Medicare, he says, is a bigger problem than Social
Security because of the rapidly increasing costs of healthcare. Some
important efforts are under way to use the capabilities of information
technology to improve the health-care system. If supported and promoted,
these efforts could provide key insights into clinical best practices
and substantially reduce administrative costs. And, with time, we should
also gain valuable knowledge about the best approaches to restraining
the growth of overall health-care spending, Greenspan said.
The rules laid out in the Budget Enforcement Act of
1990 provided a framework that helped the Congress establish a better
fiscal balance, he said. The brief emergence of surpluses in the late
1990s eroded the will to adhere to these rules, which were aimed
specifically at promoting deficit reduction. In 2002 the Act was allowed
to expire.
Reinstating a structure like the one provided by
the Budget Enforcement Act would signal a renewed commitment to fiscal
restraint and help restore discipline to the annual budgeting process,
Greenspan said.
Many doubt the
administration can trim the budget, saying that the Republican Party
that controls Congress has never vetoed a spending bill.
"Addressing the
government's own imbalances will require scrutiny of both spending and
taxes. However, tax increases of sufficient dimension to deal with our
looming fiscal problems arguably pose significant risks to economic
growth and the revenue base," he said.
Crafting a budget strategy that meets the nation's
longer-run needs will become ever more difficult the more we delay. The
one certainty is that the resolution of the nation's unprecedented
demographic challenge will require hard choices and that the future
performance of the economy will depend on those choices, he concluded.
Full text of Greenspan presentation - Click
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Greenspan - Click
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