WASHINGTON -- Federal Reserve Chairman Alan Greenspan warned on Thursday that delays in making necessary changes in Social Security and Medicare to handle the impending retirement of baby boomers could mean "abrupt and painful" adjustments later on.
Among possible changes, Greenspan said it made sense to switch to a different measurement of the Consumer Price Index that shows lower inflation rates. He said using this new method of determining the CPI would have reduced last year's $159 billion budget deficit by about $40 billion, with almost half of those savings coming from a lower cost-of-living increase for Social Security retirees.
Supporters of the elderly have raised strong objections to moving to a tighter inflation measurement, arguing that it would penalize the elderly living on fixed benefits and depending on the annual cost of living adjustments.
But Greenspan told the Senate Special Committee on Aging that the new experimental measurement developed by the Labor Department's Bureau of Labor Statistics really was a much more accurate gauge of inflation than the traditional Consumer Price Index, which Greenspan said had an upward bias that overstated inflation.
"The BLS chain-weighted price index is a far superior measure of the cost of living," Greenspan said.
Greenspan Warns of Social Security Delay
Democrats Showing Support for Greenspan
Greenspan, who chaired a blue ribbon panel in 1983 that recommended fixes to an earlier funding crisis in Social Security, told the Senate panel that he believed changes that would trim benefits and raise the retirement age should be considered before increasing the current payroll tax, which is paid by workers and their employers.
He said moving the payroll tax higher would have the effect of making it more expensive to hire new workers which would depress economic growth.
Greenspan told the panel that at some point policy-makers will have to face up the fact that as the baby boom generation begins to retire in 10 years, there will not be enough workers paying into the Social Security system to support the current level of benefits, warning that the country could not afford to delay addressing the issues.
"Early initiatives to address the economic effects of baby-boom retirements could smooth the transition to a new balance between workers and retirees," Greenspan said in his prepared testimony. "If we delay, the adjustments could be abrupt and painful."
Greenspan two weeks ago told Congress that he was not in favor of any further tax cuts that were not paid for, either by raising taxes in other areas or by cutting government spending. That declaration represented a major break from the Bush administration, which is seeking a new round of tax cuts totaling $1.46 trillion over the next 10 years, cuts that the administration would not offset, as Greenspan is urging.
Greenspan said at the time that the reason he believed these tax cuts did need to be paid for in advance was the impending retirement of the baby boom generation, a development that will greatly increase the demands on the government's big benefit programs.
Greenspan said in his testimony Thursday that any changes Congress decides to make in the retirement programs could end up having a profound impact on the overall economy.
"Reductions in benefits, through changes to the age for receiving the full retirement benefits or through reforms to slow the growth of Medicare spending or through other means can affect retirement, the labor force and saving behavior," Greenspan said.
As the head of a blue-ribbon commission that addressed an earlier funding crisis in Social Security in 1983, Greenspan supported gradually raising from 65 to 67 the retirement age to receive full Social Security benefits, boosting the payroll tax and making slight cuts in benefits.