As CBS Chief White House Correspondent John Roberts reports, Greenspan was looking ahead 4 years -- the date the nation's 77 million baby boomers start to retire. That's when the Social Security surplus, which has been used to offset government spending, begins to dwindle. And in 2017, disappears altogether.
At that point, the government will have to borrow not just for spending but also to pay for retirement benefits. The added burden will keep deficits high -- and could trigger what Greenspan called a "debilitating" rise in interest rates.
Democratic presidential candidates denounced his proposals, and President Bush and other Republicans sought to distance themselves from the Republican Greenspan.
The central bank chairman also repeated his view that Bush's tax cuts should be made permanent to bolster economic growth. He said the estimated $1 trillion cost should be paid for, preferably, with spending cuts so the deficit would not be worsened.
As for specifics on trimming Social Security, Greenspan told the House Budget Committee that one possibility would be to switch to an alternative measure of inflation for annual cost-of-living adjustments. Instead of relying on the Consumer Price Index, he suggested switching to a new chain-weighted CPI that gives lower inflation readings and thus would mean smaller payment increases.
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. It will increase to 67 over the next two decades and then stop rising.
Greenspan said his comments simply voiced views he has held since he chaired a blue-ribbon commission two decades ago. But the remarks set off a political storm.
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 Bush's tax cuts permanent. Rep. Dennis Kucinich, D-Ohio, went even further and called for Greenspan to resign as Fed chairman, saying his comments were "a disgrace."
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, especially in an election year, Republican House Speaker Dennis Hastert was asked to comment on the proposals and replied only, "He's a fine man."
In his testimony before the Budget Committee, Greenspan said the current deficit situation, with projected record red ink of $521 billion this year, will worsen dramatically once the 77 million members of the baby boom generation start becoming eligible for Social Security benefits in just four years.
He said projections show the country will go from having just over three workers supporting each retiree 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.
He did not mention that Congress late last year, at Bush's urging, adopted a new prescription drug benefit as part of a Medicare overhaul now estimated to cost $540 billion over the next decade.
"I am just basically saying that we are overcommitted at this stage," Greenspan said in response to committee questions. "It is important that we tell people who are about to retire what it is they will have." He warned that the government should not "promise more than we are able to deliver."
While the country is currently enjoying the lowest interest rates in more than four decades, Greenspan warned that financial markets will begin pushing long-term rates higher if investors do not see progress in dealing with the projected huge deficits that will occur once baby boomers begin retiring.
As he has in the past, Greenspan called on Congress to reinstitute rules that require any future tax cuts or spending increases to be paid for either by spending cuts in other areas or increases in other taxes. Bush has called for the rules to cover only spending increases, not tax cuts.