Returning to a politically explosive issue that he has addressed a number of times this year, Greenspan said that it was wrong for the government to hold out the promise of more retirement benefits than it is capable of providing.
He said this issue was particularly critical given the impending retirement of 77 million baby boomers born in the two decades after World War II.
"As a nation, we owe it to our retirees to promise only the benefits that can be delivered," Greenspan said in opening remarks to a two-day conference sponsored by the Federal Reserve Bank of Kansas City on the challenges posed by aging populations.
"If we have promised more than our economy has the ability to deliver, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels," Greenspan said. "If we delay, the adjustments could be abrupt and painful."
Greenspan, as he has done previously, suggested that possible changes would be raising the retirement age to receive full Social Security benefits, which currently is gradually increasing from 65 to 67.
For decades Social Security has been collecting more in payroll taxes than it has paid out in benefits. The surplus has been collected in a trust fund, which has been lent to the federal government.
When the baby boom generation starts to retire, they will go from paying into the trust fund to drawing it down. Eventually, Social Security payments will eat into the trust fund and gradually deplete it.
The Congressional Budget Office predicts that the program will go bust in 2052. Medicare, which is funded by a similar system, could be insolvent by 2019.
President Bush has proposed converting the money in the Social Security trust fund into private accounts that workers could invest on their own. Supporters of that proposal believe workers could get a better return on their savings that way.
But opponents say private accounts would expose workers to the risk of losing their savings. Democratic presidential nominee John Kerry has pledged he will not privatize Social Security, cut benefits or raise the retirement age.
In his remarks, Greenspan said that the projected doubling of the U.S. population over the age of 65 by 2035 would add to the government's budget deficit woes.
But he said it was important to be careful in how those deficits were addressed. He said that relying entirely on an increase in the payroll tax on workers to deal with the funding shortfall in Social Security and Medicare would make it more costly for employers to hire workers.
Greenspan said policymakers must consider all the economic impacts that changes in the government's two biggest benefit programs would entail such as the effect on retirement decisions, the size of the labor force and the saving behavior of Americans.
Greenspan acknowledged that any decisions to trim benefits or boost payroll taxes could be difficult politically, but he said those decisions must be made and made quickly to give baby boomers time to adjust.
"Though the challenges of prospective increasingly stark choices for the United States seem great, the necessary adjustments will likely be smaller than those required in most other developing countries," he said, noting that Europe and Japan will have a much higher proportion of retirees to current workers in coming years.
Greenspan has repeatedly this year addressed the looming crisis in Social Security and Medicare, a development that the presidential candidates have chosen to virtually ignore given the painful choices that will likely be presented to the next president.