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Greenspan Warns of Economic Stagnation

But yesterday he derided such efforts as merely "patching a system which is fundamentally inappropriate for the future of this country."

The system worked in the 20th century because of rapid population growth, he said. Social Security is what economists call a "pay-as-you-go" system, in which workers' contributions to the system are used to pay beneficiaries. As long as the workforce grew briskly there was plenty of money to pay promised benefits.

Federal Reserve Chairman Alan Greenspan listens to an aide before yesterday's House Budget Committee hearing. (Mark Wilson -- Getty Images)

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Bush Rejects Delay, Prepares Escalated Social Security Push (The Washington Post, Mar 3, 2005)
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Fourth-Quarter Productivity Revised Upward (Associated Press, Mar 3, 2005)
Retail Sales Exceed Expectations (Associated Press, Mar 3, 2005)
Video: The Fed chairman warns of stagnation from growing deficits and urges Congress to move soon to reduce future retirement and Medicare benefits.
_____On the Web_____
Testimony of Chairman Alan Greenspan (March 2, 2005)

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Graphic: Historical Changes in the Federal Funds Rate
In His Own Words: Greenspan comments and Fed actions since 2001.
Timeline: Interest rate changes since the recession of 1990.
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Federal Reserve Special Report
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Special Report: Full Coverage
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Social Security

But the population is now growing more slowly, the baby-boom generation is close to retirement and people are living much longer. Currently, there are 3.25 workers paying into the system for every beneficiary drawing a check, Greenspan said. By 2030, there will be about two workers per beneficiary.

Medicare expenses will also rise as the population ages. Last year, federal spending on Social Security, Medicare and Medicaid added up to 8 percent of the nation's total economic output, or gross domestic product. By 2030, the total will be about 13 percent, Greenspan said, citing Office of Management and Budget projections.

The resources needed for those programs as they are structured today seem "increasingly likely to make current fiscal policy unsustainable," Greenspan said.

Funding them would drain resources that otherwise would be invested in the private sector, in new technologies, plants and equipment, he said. That would "cast an ever-larger shadow over the growth of living standards."

A key goal of policy, Greenspan said, should be increasing the low rate of collective domestic saving, which is critical for financing the investments that raise living standards over time.

A big problem with the pay-as-you-go Social Security system, in Greenspan's view, is that it creates no savings.

Creating personal Social Security investment accounts would not, by itself, improve Social Security's finances or increase domestic saving, Greenspan and the White House agree. But he suggested that the individual accounts might boost saving over time.

The issue facing Congress, Greenspan said, is "a fundamental trade-off here between a sense of security and a standard of living," he said. "What type of society do we want? What part of it should be guaranteed by government? What part should be allowed free, competitive with the effects thereof?"

Democrats questioned his framing of the issue. "We're all for raising savings . . . but Social Security has raised living standards for the middle class," House Budget Committee member Rosa L. DeLauro (D-Conn.) said after the hearing. "Why would you want to jettison that?"

DeLauro defined the problem of looming federal budget deficits as "a serious revenue problem," which she attributed in part to tax cuts, which Greenspan supported and wants extended.

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