Federal Reserve Chairman Alan Greenspan yesterday urged Congress to act soon to reduce future Social Security and Medicare benefits, warning that growing federal budget deficits threaten to cause economic "stagnation" in coming decades.
National policymakers are "overdue" in addressing the government's very serious looming fiscal problems, he said, testifying before the House Budget Committee.
Federal Reserve Chairman Alan Greenspan listens to an aide before yesterday's House Budget Committee hearing.
(Mark Wilson -- Getty Images)
Video: The Fed chairman warns of stagnation from growing deficits and urges Congress to move soon to reduce future retirement and Medicare benefits.
"Something's got to give," he said. "We have to find a better model."
Greenspan, as he did last week, endorsed the gradual creation of individual Social Security investment accounts, part of President Bush's push to restructure the public retirement system.
But Congress appeared to be in no rush. Greenspan appeared on Capitol Hill the day after the Senate's top Republican suggested that Bush's plan may have to wait until next year as national polls indicate that support for it is slipping.
Greenspan, in some of his most forceful language on the subject, said Congress should consider private accounts because the Social Security system is outdated. The nation has promised retirees more Social Security and Medicare benefits than it can deliver, he said.
Greenspan warned more explicitly than he has before that trying to meet those obligations would have "severe" economic consequences. The higher taxes or greater government borrowing required would eventually drive up interest rates, retard the rise in American living standards and slow the country's overall rate of economic growth, leading to "a state of stagnation," he said.
Greenspan called on Congress to act "sooner rather than later," noting that higher interest rates also would raise the cost of servicing the government's debt, possibly forcing it to borrow more, pushing rates higher and ultimately "destabilizing the system."
Under such a scenario, he predicted "very grave difficulties" by 2015 to 2025.
Greenspan was co-chairman of a 1983 bipartisan commission that agreed to strengthen Social Security's finances by raising payroll taxes and the retirement age. In the past year, Greenspan has suggested various ways to bolster the system's solvency by restraining the growth of future benefits -- such raising the retirement age again and using different indexes to determine initial benefits and cost-of-living adjustments.