Feb. 18, 2005 12:00 AM
WASHINGTON - Federal Reserve Chairman Alan Greenspan said Thursday that Social Security is not in "crisis" as President Bush has declared but emphasized that Congress must quickly address future funding problems in the program and far larger shortfalls in Medicare.
In remarks to a House committee, the bank chief offered a sunny, short-term economic outlook with expanding business activity and low inflation. But he said the long-term picture is clouded by an aging population that will strain Social Security and Medicare and slow economic growth.
Greenspan said lawmakers must get a handle on the problems before baby boomers start retiring in 2008. To help control deficits, he said, any future tax cuts should be offset elsewhere in the budget.
"The first priority is to assure that deficits are under control," Greenspan said, warning that major changes are needed to restrain increases in budget deficits. The Congressional Budget Office estimates Social Security and Medicare could soak up 26 percent of the economy by 2050.
In his testimony, Greenspan also suggested Congress limit the growth of mortgage giants Fannie Mae and Freddie Mac. "(By) enabling these institutions to increase in size," he said, "we are placing the total financial system of the future at a substantial risk."
But the focus of the hearing was Social Security, which Greenspan said is not in crisis. "Crisis to me usually refers to something which is going to happen tomorrow or is on the edge of going into a very serious change," he said. "That is not going to happen."
Greenspan said private accounts funded with a portion of the 12.4 percent Social Security payroll tax would not address the program's solvency. But they could move the program to a pre-funded basis while providing a sense of ownership, and possibly transferable wealth, to individuals lower down the economic ladder "who have had to struggle with very little capital."
However, he reiterated that higher government borrowing to finance the move to private accounts poses a risk of higher deficits and interest rates.
Bush's plan would let workers under 55 divert a portion of Social Security taxes into voluntary accounts to invest in stocks and bonds. The White House has said the plan would cost $754 billion over the first 10 years, though other estimates are far higher.
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