Federal Reserve Chairman Alan Greenspan (search) issued a fresh call to Congress Tuesday to move promptly to put Social Security on firm financial footing, warning that doing nothing would lead to massive budget deficits and cause the "economy to stagnate or worse."

Greenspan, in prepared remarks to the Senate Special Committee on Aging (search), said the looming retirement of 78 million baby boomers will put a huge strain on the Depression-era retirement program and aggravate the country's already bloated budget deficits.

"Unless the trend is reversed, at some point these deficits would cause the economy to stagnate or worse," Greenspan said.

Greenspan once again endorsed a key part of President Bush's Social Security (search) overhaul — to set up private investment accounts. But he said Congress needed to do other things to fix the retirement program's financing problems.

Congress will need to consider possible benefit cuts and higher tax rates before the baby boomers begin retiring, Greenspan suggested yet again.

But he cautioned that "closing the gap solely with rising tax rates would be problematic" because the high level of taxation that would be required could by itself "severely inhibit economic growth."

Because "benefit cuts will almost surely be at least part of the solution," Greenspan said it is imperative for Congress to let future retirees know as soon as possible that all currently promised benefits won't be forthcoming when they retire.

Greenspan again found himself in the middle of an issue that has raised partisan hackles on Capitol Hill. Bush has been traveling the country frequently to sell his Social Security overhaul plan, although various polls have shown a lukewarm reaction among the public to the idea of personal savings accounts for younger workers. Democrats have vehemently opposed his plan, although they have not offered a unified party counterproposal, and some Republicans who are up for re-election in 2006 are nervous about Bush's push for Social Security changes.

The Fed chief said Tuesday that unless growth in the Social Security as well as the Medicare programs is restrained, these programs will require more and more government resources. Spending on these programs will rise from about 8 percent of the total economy currently to about 13 percent by 2030, he said.

"These projections make clear that the federal budget is on an unsustainable path" in which large budget deficits will push up interest rates, Greenspan said. The government last year produced a deficit of $412 billion, a record in dollar terms.

The president's plan to revamp Social Security would allow workers to divert a chunk of their payroll taxes into personal investment accounts.

The accounts by themselves won't fix the solvency of the retirement program, but they raise the specter of increasing savings, which is extremely low.

Greenspan said that Congress must consider how to achieve solvency as well as boost savings. Focusing solely on solvency, he said, would be a mistake.

"Thus, in addressing Social Security's imbalances, we need to ensure that measures taken now to finance future benefit commitments represent real additions to national savings," Greenspan said. Boosting savings, he said, is a necessary ingredient to the economy's long-term health.

Still, Greenspan pointed out that private accounts can be structured by Congress in different ways. He urged lawmakers to fashion such accounts in a way that would generate savings.

Greenspan also suggested resurrecting the notion of sealing off Social Security revenues from other uses. Last year Social Security tax revenues plus interest exceeded benefits by about $150 billion, he said.

"We need, in effect, to make the phantom `lock-boxes' around the trust fund real," he said.