Greenspan told the Senate's Special Committee on Aging 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.
Greenspan said policy-makers face a range of options, such as raising the retirement age or cutting benefits to fix the funding problems for Social Security and Medicare. He said that early decisions on these choices would help prepare future retirees for changes in the system.
"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.
If Congress decides to make up the funding gap by increasing payroll taxes on workers, that could cause employees to decide to hire fewer workers because of the increased tax burden.
"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.
The Fed chairman did not, in his prepared remarks, make any specific recommendations on what should be done. However 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.