Federal Reserve Chairman Alan Greenspan yesterday called on Congress to restrain the growth of the federal budget deficit by adopting budget controls that would apply to new taxes as well as new spending. ... Greenspan offered several ways to curtail federal spending growth, including reducing Social Security and Medicare benefits. The Fed chairman again recommended raising the age at which retirees become eligible, to keep pace with the population's rising longevity. And he reminded lawmakers that they could link cost-of-living increases in benefits levels to a measure of inflation other than the consumer price index, a widely followed measure that some economists believe overstates the rise in overall prices. A measure that showed less inflation would cause benefit levels to rise more slowly. --Washington Post (Feb. 13, 2004)

Two weeks ago Federal Reserve Board Chairman Alan Greenspan testified before the Senate Budget Committee about the state of the economy. He expressed concern about the budget deficit and suggested that cuttng Social Security might be a good way to reduce the size of the deficit.

It is worth noting that Social Security is currently running a large surplus and is projected to continue to run annual surpluses for more than two decades into the future. The Social Security trustees projections show that the fund's trust will be able to support all scheduled benefit payments for nearly forty years into the future. If Social Security benefits are cut, without any corresponding reduction in the tax rate (which is exactly Mr. Greenspan's recommendation), then this would mean that Social Security taxes are being used to finance the general budget, not Social Security.

This point is especially important in this context since Mr. Greenspan had chaired the 1982 Commission that proposed a set of Social Security tax increases that were designed to build up a large surplus to help defray the costs of the baby boomers' retirement in later years. In other words, Mr. Greenspan's argument was that it was desirable to raise Social Security taxes above the levels needed to support the program in the eighties, nineties, and zeros, so that the tax rate would be somewhat lower than would otherwise be necessary in the twenties and thirties. If benefits are now cut below the levels that had been scheduled, then it breaks the link between Social Security taxes and Social Security benefits. Social Security taxes were simply used to finance the general budget.

The Social Security tax is highly regressive because it only applies to wage income and it is capped at approximately $85,000, so that wage income above this level is not subject to the tax. It is extremely unlikely Congress ever would have approved such a regressive tax to support the general budget. It would have been appropriate to note, in describing Mr. Greenspan's proposal, that the cumulative surplus in the trust fund is now approaching $2 trillion. This should give readers an idea of the extraordinary deception involved in proposing to cut Social Security benefits as a way of reducing the federal budget deficit.

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