[Mb-civic] NYTimes.com Article: Warning Anew About Retiree Expectations

Sat Aug 28 12:13:10 PDT 2004

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Warning Anew About Retiree Expectations

August 28, 2004
 By EDMUND L. ANDREWS 

JACKSON HOLE, Wyo., Aug. 27 - The chairman of the Federal
Reserve Board, Alan Greenspan, warned on Friday that the
federal government might have to scale back promises to the
elderly in programs like Social Security and Medicare. 

"As a nation, we owe it to our retirees to promise only the
benefits that can be delivered," Mr. Greenspan told a
conference here sponsored by the Federal Reserve Bank of
Kansas City. 

"If we have promised more than our economy has the ability
to deliver to retirees without unduly diminishing real
income gains of workers, as I fear we may have, we must
recalibrate our programs," he said. 

Mr. Greenspan has expressed similar views many times in the
past, but he went further on Friday by warning political
leaders that they cannot count on continued rapid rises in
productivity and faster economic growth to solve the
problems ahead. 

Economists have warned for years that retirement and health
care costs will soar as the baby boom generation reaches
retirement age and as the number of workers shrinks as a
share of total population. 

Mr. Greenspan's message was almost equally uncomfortable
for Democrats as Republicans. 

By implicitly calling for reductions in future benefits to
the elderly, Mr. Greenspan attacked a basic tenet of
Democratic vows to protect benefits come what may. 

But Mr. Greenspan conspicuously avoided any mention of the
solution eagerly proposed by President Bush and many other
Republicans: to partly privatize the Social Security system
by letting people divert some of their payroll taxes to
individual savings accounts that they would control. 

Noting that the share of the American population older than
65 will climb from 12 percent to 20 percent by 2035, the
Fed chairman said the United States needed to increase
savings, increase spending on education and maintain the
pace of productivity growth. 

Heightened productivity growth of workers "offers the
greatest potential" for allowing the country to support its
aging population without lowering the overall standard of
living, he said. 

But higher productivity will require continued investment,
and the United States' savings rate remains very low.
Federal deficits, which have hit records under President
Bush, have also depressed the national savings rate and
increased the nation's need to borrow money from abroad. 

"The decade-long acceleration in productivity and economic
growth has seemingly muted the necessity of making such
choices" between reduced benefits or higher taxes, Mr.
Greenspan said. But, he warned that "history discourages
the notion that the pace of growth will continue to
increase." 

If the population over 65 years of age doubles by 2035, he
continued, federal deficits will substantially increase. 

"But how these deficit trends are addressed can have
profound economic effects," Mr. Greenspan said. Increasing
payroll tax contributions could make the problem worse, by
possibly reducing the incentives for workers to continue
working. 

Without going into details, the Fed chairman said that
benefit formulas could be adjusted so that entitlements to
retirees in the future climb more slowly than they would
under current law. 

"Early initiatives to address the economic effects of the
baby boom retirements could smooth the transition to a new
balance between workers and retirees," he said. 

In an implicit attack on the new expansion of Medicare to
provide some prescription drug benefits, which is expected
to cost more than $530 billion over the next 10 years, Mr.
Greenspan said policy makers "must be especially vigilant"
to create benefits only when they can truly be afforded. 

Mr. Greenspan made his comments at the start of the Federal
Reserve Board's annual economic symposium, which is devoted
this year to the economic impact of global demographic
changes. 

But the issue is also a backdrop to the presidential
election campaign. President Bush and many Republicans are
promoting the idea of replacing part of the traditional
Social Security system with private savings accounts. 

The Democratic nominee, Senator John F. Kerry, has opposed
such plans and has vowed to ensure that benefits are not
reduced in the future. 

Neither candidate has addressed the long-term challenges in
any detail. Most analysts say that the looming financial
shortfalls of Social Security are relatively modest and can
be addressed by incremental changes to benefit formulas and
a gradual delay in retirement ages. 

The problems confronting Medicare are expected to be far
more severe, because costs have been rising rapidly per
person at the same time that the population of retirees has
been increasing. 

http://www.nytimes.com/2004/08/28/business/28fed.html?ex=1094720390&ei=1&en=a75d46d29e977af2

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