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Last Updated: Wednesday, 25 February, 2004, 17:31 GMT
Greenspan warns of budget crisis
Federal Reserve Chairman Alan Greenspan
Mr Greenspan says policy should remain "prudent"
The US Congress must take action to reduce the swollen US budget deficit, Federal Reserve chairman Alan Greenspan has said.

Mr Greenspan urged Congress to cut spending, particularly on the state pension scheme, social security, before the Baby Boomer generation starts to retire.

The deficit could balloon under extra demand for state pensions and Medicare, he warned.

But he was upbeat on the economy, saying 2004 got off to a strong start.

Grey area

The US budget deficit is targeted to reach a record $521bn (227bn) this year under spending plans put forward by President Bush, who has promised to cut it in half by 2009.

Democrat politicians have objected to the president's proposals for tax cuts and a 7% rise in military spending as fiscally irresponsible.

The post-war generation bulge means there will be many more pensioners. The first wave of them could be eligible for benefits in 2008, said Mr Greenspan.

In testimony to the House Budget Committee, Mr Greenspan said that the "favourable short-term outlook" for the US economy was "playing out against the backdrop of growing concern about the prospects for the federal budget".

"The degree of uncertainty about whether future resources will be adequate to meet our current statutory obligations to the coming generation of retirees is daunting," he said.

The social security system, which is based on a pay-as-you-go payroll tax, is currently running a surplus, but is expected to go into deficit by 2028.

Some estimates put the total unfunded liability for the system at $44 trillion.

President Bush has proposed funding part of social security by allowing younger workers to reduce their payroll taxes and put some of that money into a private pension scheme invested in stocks and bonds.

But the transition costs of that plan could amount to several trillion dollars.

Cutting benefits

The wave of Baby Boomer pensioners, who are already likely to live longer than previous generations, will benefit from medical advances which threaten to boost the bill for treatments to unmanageable levels, said Mr Greenspan.

But the cost of Medicare, the federal health insurance for senior citizens, is rising fast.

And Congress has recently decided to substantially expand its scope by introduing a prescription drug benefit that will cost some $535bn over the next six years.

Mr Greenspan urged Congress to trim entitlements before it is too late as government programmes can be "extraordinarily difficult to shut down once constituencies for them develop".

He urged a "thorough review of spending commitments" in order to maintain a "prudent" policy.

He said that if the budget deficit is not checked it could eventually "slow the growth of living standards" by luring funds away from uses which would boost economic growth.

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