South-Western College Publishing - Economics  
Greenspan's Long Term Solution to the Deficit Includes Social Security and Medicare Cuts
Subject Long Term Economic Activity
Topic Taxes Spending and Deficits
Key Words

Budget Deficit, Social Security, Medicare, Taxes, and Benefit Cuts

News Story

Federal Reserve chairman Greenspan gave heartburn to Republicans and provoked criticism from Democrats with his recent stance on Social Security and Medicare program cuts. Greenspan suggested that Congress should bring a halt to the growing federal deficit by reducing spending, including cuts in entitlement programs like Social Security, rather than through raising taxes.

Greenspan's view is a long-term one, suggesting that any changes in the law should take place years in advance of any changes in the actual benefits. "The crucial issue here is the rate of growth of productivity and the rate of growth of the economy and what history does tell us is that keeping tax rates down will tend to maximize that," Mr. Greenspan told members of the House Budget Committee.

Greenspan's comments echoed the views of many analysts who view the real fiscal problem not as this year's deficit, but the growing entitlement costs that will accompany the retirement of the baby boom generation. "I believe that a thorough review of our spending commitments--and at least some adjustment in those commitments--is necessary for prudent policy," Greenspan said.

The front-runner in the Democratic Party for the presidential nomination, John Kerry responded to the comments by suggesting, "the wrong way to cut the deficit is to cut Social Security benefits." Kerry's rival in the Democratic nomination race, Mr. John Edwards, declared that Mr. Greenspan's comments were "an outrage."

President Bush, when ask about Greenspan's remarks, said, "I need to see exactly what he said." Mr. Bush continued, "My position on Social Security benefits is this: Those benefits should not be changed for people at or near retirement."

Although the final outcome remains unknown, the political likelihood is that any legislation coming out of Congress will include some combination of both spending cuts and tax increases.

(Updated April, 2004)


How is the Social Security system set up? Can you suggest any ways to change the Social Security program that would result in lower costs?

2. Given the growth of the federal deficit, do you believe the recent Bush tax cuts should be rescinded?
3. If congress decided to leave spending programs in place, they would then have the option of financing the deficit by borrowing (selling interest-bearing bonds), or by creating new money. What effects would either of these steps have on the U.S. and world economies as a whole?
Source Edmund Andrews, "To Trim Deficit, Greenspan Urges Social Security and Medicate Cuts," New York Times Online, February 26, 2004.

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