US social security costs 'unaffordable' says Fed chairman

Federal Reserve chairman Alan Greenspan yesterday dropped an election year bombshell by calling for early cuts in social security benefits for future retirees. Otherwise, he warned, the US could face an unmanageable budget crunch when baby-boomers started to become eligible for social security benefits at the end of the decade.

Separately, in a speech at a London financial conference, Edward Gramlich, who sits on the Fed's seven-member governing board, warned that the country's spiralling budget and trade deficits could shake global financial stability if they were not quickly tackled.

Addressing the House Budget Committee, Mr Greenspan said belt-tightening was essential. If not, the impending retirement of some 70m baby-boomers in the decades ahead would place colossal demands on US resources - "demands we will almost surely be unable to meet", unless action was taken "as soon as possible".

The required changes, he said, could be achieved by trimming the annual cost-of-living adjustments, or by raising the age threshold for full benefits from 65 now to 67 or more.

The chances are remote that the Republican-controlled Congress will take such action in an election year. But they are bound to sharpen Democratic criticism of President George Bush's fiscal policies, which have seen a $290bn budget surplus bequeathed him in 2001 turn into a record projected deficit of $521bn.

Clearly taken aback by Mr Greenspan's words, Mr Bush yesterday declined comment, but insisted that his budget plans aimed to halve the deficit by the end of the decade. But economists have poured scorn on these forecasts, saying they are based on the repeal of recent tax cuts which Mr Bush has effectively ruled out.

"We are overcommitted", Mr Greenspan said. "The Government must not promise more than it can deliver."

Both he and Mr Gramlich warned that, because of the deficits, interest rates would have to rise. When that happened, the Fed chairman warned, the consequences for longer-term growth would be "very debilitating". Mr Gramlich said fiscal austerity was the "one tried-and-true approach" to dealing with trade and budget deficits simultaneously.