March 3, 2004
Speaking before the House Budget Committee on Feb. 25, Federal Reserve Chairman Alan Greenspan made the undeniable point that under current law Social Security benefits will rise sharply as a share of the gross domestic product. This is mostly a function of demographics, especially the rapid aging of the Baby Boom generation, whose oldest member turns 62 in 2008 -- just four years from now, says Bruce Bartlett.
As Greenspan correctly noted, there are only two ways to pay for Social Security in the long run: either benefits must be reduced below what has currently been promised or taxes must rise. The amount of money necessary to pay all future benefits is so large --$10.5 trillion, according to economists Jagadeesh Gokhale and Kent Smetters -- there is just no way that it can be financed solely out of higher taxes. Tax increases of that magnitude would be too debilitating to the economy.
Greenspan argued that the funding gap be addressed largely on the spending side and suggested two options:
- First would be to fix the Consumer Price Index, which is used to adjust Social Security benefits for inflation; most economists believe that it overstates the true rate of inflation, thereby giving retirees an unjustified bonus increase in their benefits.
- Greenspan's second option is to further raise the retirement age, which is already scheduled to rise from 65 to 67 over the next several years; most Baby Boomers will, in fact, have to wait until age 66 to receive full benefits.
Raising the retirement age more is justified by increasing life spans and would have no impact on current retirees or those nearing retirement. But it would do a great deal to stabilize the Social Security system, especially if the qualifying age for Medicare is also raised, says Bartlett.
Source: Bruce Bartlett, "Greenspan's Gaffe," National Center for Policy Analysis, March 3, 2004.
Browse more articles on Tax and Spending Issues