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Thursday, Feb. 12, 2004

Greenspan said he favored reductions in government spending to pay for making the tax cuts permanent and suggested that one place to look should be in reducing the Social Security benefits paid to retirees.

Appearing before the Senate Banking Committee, Greenspan said he has been urging since the fall of 2002 that budget rules known as pay-go, which require any tax cuts or increases in government entitlement spending be paid for by either raising taxes in other areas or cutting government spending, be reinstated.

Those rules, which expired at the end of 2002, also require that increases in discretionary spending be limited to set amounts in any given year.

Greenspan's comments were at odds with statements made by President Bush, who has called for budgetary caps to be reinstated, but only on the spending side, not on the tax side. That position would avoid having to find savings to pay the estimated 10-year cost of $1 trillion to make Bush's tax cuts permanent.

Greenspan said he believed government budget controls to address the soaring deficit should cover spending and taxes, although he said for economic reasons he favored cutting government spending rather than raising taxes to deal with the deficit.

Touching the Third Rail

Greenspan, who was chairman of a Social Security commission during the Reagan administration, said he "strongly advocated" indexing the retirement age to measurements that would capture longer life spans, forcing workers to work longer before becoming eligible for Social Security benefits.

Greenspan said Congress should also consider getting a more accurate price index for adjusting Social Security benefits than the Consumer Price Index, which he and other economists have argued overstates inflation each year.

Congress should move as soon as possible to address the looming retirement of 77 million Americans who are part of the Baby Boom generation and who will begin becoming eligible for retirement within four years, he said.

"I think we have constructed a good deal of the benefits structure over the past quarter of a century without a real firm look at whether the resources are there to meet those benefits," Greenspan told the committee.

Greenspan acknowledged that a congressional effort to cut benefits in the government's biggest benefit program would generate huge political pressures, but he said the problems would have to be addressed for Congress to get control of the soaring budget deficit, projected to hit a record $521 billion this year.

Greenspan said he did not know how the political argument would play out. "I do know that the arithmetic doesn't work" to pay promised benefits with the payroll taxes in place.

He called for adjusting Social Security before the Baby Boomers begin to retire.

"The sooner we can address that ... the sooner we can assure that the benefits that are promised will indeed be forthcoming," Greenspan said.

Trigger

On another budget issue, Greenspan was questioned about a recent tell-all book written about former Treasury Secretary Paul O'Neill, whom Bush fired in December 2002. In the book, O'Neill said that he and Greenspan had a secret agreement that Greenspan would publicly call for a mechanism to be included in the 2001 tax cut that would tie the tax cuts in future years to continued budget surpluses. If the $5.6 trillion in projected surpluses did not materialize, then the trigger mechanism would roll back the tax cuts.

Greenspan said he believed that such a trigger mechanism, which O'Neill said he also advocated but was vetoed by Bush, needed to be part of Bush's first tax cut "because forecasts are so difficult, and we could not be certain that the surpluses were going to be in place."

Greenspan delivered the same prepared statement on the Fed's views on monetary policy on Thursday that he had given to the House Financial Services Committee on Wednesday.

In those comments, Greenspan said he believed the economy has picked up steam since the summer but that with inflation remaining low, the Fed could afford to be patient before beginning to raise interest rates.

Those views spurred a big rally on Wall Street on Wednesday with the Dow Jones industrial average rising by 123 points. At midday on Thursday, the Dow Jones industrial average was up by about an additional 25 points.

© 2003 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.

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