Friday December 2, 9:31 am ET
By Martin Crutsinger, AP Economics Writer 

Greenspan Warns of Potential Severe Consequences Unless Budget Deficits Are Trimmed


WASHINGTON (AP) -- Federal Reserve Chairman Alan Greenspan warned Friday of possible severe consequences to the economy if policy-makers do not attack federal budget deficits projected to soar with baby boomer retirements.

Greenspan said it was likely that Congress will have to make "significant adjustments" in reducing benefits to future retirees. He said it appears the country has promised more than it can afford to deliver in Social Security and especially Medicare payments, given that health care costs have been exploding.

"So long as health care costs continue to grow faster than the economy as a whole, they will exert budget pressures that seem increasingly likely to make current fiscal policy unsustainable," Greenspan said in remarks taped for a conference sponsored by the Federal Reserve Bank of Philadelphia.

Greenspan used one of his final speeches of his long tenure as Fed chairman to return to themes he has been emphasizing with increased urgency over the past two years -- that the looming retirement of 78 million baby boomers will put severe strains on the country's finances and without changes could disrupt the economy by driving up interest rates from the increased government borrowing.

Greenspan urged Congress to act quickly so that the baby boomers will have time to adjust to potential benefit cuts.

Greenspan did not outline in Friday's speech what benefit cuts should be considered but in the past he has endorsed proposals such as raising the age at which retirees can draw full Social Security benefits.

"The likelihood of growing deficits in the unified budget is of especially great concern because the deficits would drain a correspondingly growing volume of real resources from private capital formation and cast an ever-larger shadow over the growth of living standards," Greenspan said.

"In the end," he warned, "the consequences for the U.S. economy of doing nothing could be severe."

Greenspan made no mention in his prepared remarks, which were distributed in Washington, of President Bush's stalled effort to overhaul Social Security by creating private accounts for younger workers.

Greenspan has, in the past, endorsed the proposal but has said that Congress will need to do much more to put the government's huge retirement programs on sound financial footing.

In a brief mention of current economic conditions, Greenspan said that the economy had delivered a "solid performance" so far in 2005. "And despite the disruptions of hurricanes Katrina, Rita and Wilma, economic activity appears to be expanding at a reasonably good pace as we head into 2006," he said.

However, he said the positive short-term outlook for the economy was occurring against a backdrop of concern about the government's long-term fiscal health.

"Our budget deficit will substantially worsen in the coming years unless major deficit-reduction actions are taken," Greenspan said, echoing comments he made most recently in an appearance on Nov. 3 before Congress' Joint Economic Committee.

He again called for Congress to reinstate budget rules that expired in 2002 that require any future increases in benefit payments or cuts in taxes to be paid for by cutting government spending in other areas or increasing taxes.

The Bush administration, which is trying to make the tax cuts of Bush's first term permanent, opposes covering those tax reductions by the so-called pay-go rules.

Greenspan said while both tax increases and spending cuts could be needed to deal with future budget deficits, he favored the use of spending reductions, especially in the area of the government's retirement programs because the current benefits did not seem to be sustainable.

He said the size of the tax increases that would be needed to cover the shortfall in the retirement programs would pose "significant risks" to future economic growth.