Fed Chief Grabs Third Rail

Federal Reserve Chairman Alan Greenspan smiles as he prepares to give testimony before the Senate Banking Committee on Capitol Hill Tuesday, July 16, 2002. Greenspan told the panel the economy is on the road to full recovery but will keep feeling the effects of last year's recession. Corporate executives should be held accountable to accurately state the financial condition of their companies, he said.(
Federal Reserve Chairman Alan Greenspan's latest call for benefit cuts in Social Security and Medicare for future retirees touched off a frenzy among politicians in both parties already hypersensitive about the November elections.

Greenspan told Congress on Wednesday that soaring budget deficits from out-of-control entitlement programs could lead to a "very debilitating" rise in interest rates and threaten the economy in coming years.

It was not a new position for the central bank chairman, who regularly reiterates the recommendations that are essentially the same ones made by a bipartisan commission on Social Security he headed two decades ago.

"I wasn't surprised at his view. I was surprised that he would say it publicly today, at the start of a presidential campaign," AARP policy director John Rother told CBS Radio News.

It was a warning that the White House did not want to hear in this election year, reports CBS News Correspondent Bill Plante.

His remarks touched an election-year nerve with members of the House Budget Committee already at odds over President Bush's economic program, particularly large tax cuts that the president wants to make permanent.

Democratic presidential candidates quickly denounced Greenspan's proposals while the president and other Republicans sought to distance themselves from his latest remarks.

Greenspan told the panel that one possibility would be to switch to an alternative measure of inflation for annual cost-of-living adjustments that would mean smaller annual increases in benefit payments.

Greenspan, who turns 78 next week, also suggested tying the retirement age for full benefits to longer lifespans with the age continuing to rise. The 65-year age for retiring at full benefits started increasing last year and now stands at 65 years and four months for people retiring this year. It gradually increases to 67 over the next two decades and then stops rising.

He emphasized that he was not talking about any cuts for people already retired or on the verge of retirement.

Democratic front-runner Sen. John Kerry said the way to address the deficit was to roll back tax cuts for the wealthy and "the wrong way to cut the deficit is to cut Social Security benefits. If I'm president, we're simply not going to do it."

Sen. John Edwards, D-N.C., called it "an outrage" for Greenspan to call for cuts in Social Security while at the same time endorsing making Mr. Bush's tax cuts permanent.

"The answer is not to cut Social Security benefits for those who need them and depend on them, the answer instead is to stop tax cuts for the wealthiest Americans," he said.

President Bush said Social Security benefits "should not be changed for people at or near retirement."

Underscoring the view that Congress is not about to touch Greenspan's suggestions in an election year, Rep. Clay Shaw, the Republican chairman of the Ways and Means subcommittee in charge of Social Security, said: "My message to seniors and those nearing retirement: You will receive nothing less than 100 percent of what you've been promised. Your benefits are safe and secure."

William D. Novelli, head of AARP, which represents retirees, said Greenspan's proposals to trim benefits for future retirees "would be unfair to boomers and younger workers, pulling the rug out from under their retirement security."

But the Alliance for Worker Retirement Security, a coalition of 40 employer groups, praised Greenspan for sounding the alarm again. "Social Security's pending crisis can no longer be pushed off to future generations," said Derrick Max, the group's executive director.

Greenspan noted that projections show the country will go from having just over three workers supporting each retiree on Social Security now to 2.25 workers for every retiree by 2025.

"This dramatic demographic change is certain to place enormous demands on our nation's resources — demands we will almost surely be unable to meet unless action is taken," Greenspan said. "For a variety of reasons, that action is better taken as soon as possible."

He said taking action now would mean that people still working would have time to adjust their retirement savings plans to deal with smaller Social Security benefits.

Greenspan said at some point the country needed to face the fact that the government has promised more in entitlement benefits than it can afford to pay. He said the problem was even worse for Medicare because it was impossible to estimate what types of costly medical advances will be available in coming years.