Fed chief: Pay for tax cuts by trimming Social Security

WASHINGTON — Federal Reserve Chairman Alan Greenspan said yesterday that Congress should make President Bush's tax cuts permanent and cover the $1 trillion price by trimming future benefits in Social Security and other entitlement programs.

Greenspan told the Senate Banking Committee that Congress, "as a first order of business," should restore budget rules that cap discretionary government spending and require increases in entitlement benefits or cuts in taxes to be offset by other program cuts or other tax increases.

Greenspan was asked how he would come up with the decade-long cost of $1 trillion to pay for extending the 2001 and 2003 individual tax cuts. "I would argue strenuously that it should be taken out on the expenditure side," he answered.

Greenspan, chairman of a commission that recommended solutions to a Social Security funding crisis in 1983, said he has felt for a long time that the promised program benefits greatly outweighed the government's ability to pay for them.

He recommended two items for study in terms of trimming benefits: linking the retirement age to the population's longer life spans and tying annual cost-of-living benefits in Social Security to a less-generous inflation index than the Consumer Price Index.

Committee members questioned whether such proposals could pass Congress, especially because they would cut benefits for 77 million Americans in the baby boom generation who are nearing retirement age.

But Greenspan said it was precisely as a result of that looming wave of retirement that legislators need to update Social Security, Medicare and other entitlement programs.

"We have constructed a good deal of the benefit structure over the last quarter century without a real firm look at whether or not the real resources were there to meet those benefits," Greenspan said. "And I suggest that what we have to do, as difficult as it's going to be, is to relook at some of these commitments."

Greenspan said it would be far better to do that now than to discover later that the government does not have the resources to meet baby boomers' needs.

"My real concern is that when the time comes to start to pay these benefits, we're going to find that we are in very serious fiscal difficulty," Greenspan said. "I do think it's important for the people who are retiring to have a sense of security that what is being promised to them as they retire will indeed be there."

The budget rules that Greenspan favors reinstating expired in late 2002. He wants those "pay as you go" rules to apply to both spending and taxes so the deficit does not worsen; Bush is recommending they cover only spending.

If Bush had his way, he would not have to come up with the estimated $1 trillion needed to make the tax cuts permanent.

Greenspan came out in support of the administration on the permanent tax cuts, even in the face of deficits estimated to reach a record $521 billion this year.

At a critical point three years ago, the Fed chairman also endorsed the president's first tax cut, at a price of $1.35 trillion, as a good way to handle surpluses then projected to total $5.6 trillion over the next decade.

Also during the hearing, 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 he and Greenspan had a secret agreement that Greenspan publicly would call for a mechanism to be included in the 2001 tax cut that would tie cuts in future years to continued budget surpluses. If the $5.6 trillion in projected surpluses did not materialize, the trigger would roll back the cuts.

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