February 17, 2005 10:42 AM
Greenspan Sees Medicare Crunch
Excerpt: Federal Reserve Chairman Alan Greenspan told lawmakers that the funding shortfall in Medicare is of a much greater magnitude than the problems facing the Social Security system, and that Congress should offset tax cuts by cutting spending.
Federal Reserve Chairman Alan Greenspan told lawmakers that the funding shortfall in Medicare is of a much greater magnitude than the problems facing the Social Security system, and that Congress should offset tax cuts by cutting spending.
Mr. Greenspan delivered a second day of testimony on the state of the U.S. economy to the House Committee on Financial Services Thursday, a day after testifying to the Senate Banking Committee, where he faced extensive questioning from lawmakers about the hot-button issue of Social Security.
Again fielding questions from legislators about the U.S. government's long-term liabilities from entitlement programs Thursday, Mr. Greenspan, the past chairman of a 1983 bipartisan commission that last addressed Social Security's solvency, said the funding shortfall for Medicare is "several multiples of what we confront with Social Security."
The Fed chairman said he favors the establishment of personal retirement accounts to head off the problem, claiming they are a better way to pre-fund future promises of benefits. "These accounts, properly constructed and managed, will create a sense of increased wealth on the middle and lower income classes in this society who have had to struggle with very little capital," Mr. Greenspan said.
On Wednesday, Mr. Greenspan offered a cautious endorsement of President Bush's proposal to carve private accounts from Social Security payroll taxes, bolstering the idea on Capitol Hill at a time when public support for it has slipped. But Mr. Greenspan said he was concerned about the expense of transition costs, which the Bush administration has estimated at $754 billion over the next 10 years.
Mr. Greenspan told the Banking Committee that linking initial retirement benefits to prices rather than wages, as is done today, could, in fact, wipe out Social Security's entire long-term shortfall of $10 trillion. That's because wages are rising faster than prices, and thus increasing the real value of Social Security benefits over time. But he also noted that the obvious drawback of the idea for retirees would be that their initial benefits would represent a much smaller proportion of their average wages while working.
The Fed chief acknowledged, to a question from New York Sen. Charles Schumer, a Democratic foe of carving private accounts from Social Security, that the accounts wouldn't address Social Security's long-term financial woes. "In and of itself," he said, "it surely doesn't alleviate the current problem." That would require tax increases and benefit reductions, he said, though he didn't endorse any particular proposals.
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