WASHINGTON – Alan Greenspan (search) and Sen. Hillary Rodham Clinton (search) clashed briefly Tuesday over rosy surplus forecasts the Federal Reserve (search) Chairman relied on to support President President Bush's 2001 tax cuts, estimates that turned out to be considerably off the mark.
"It turns out that we were all wrong," Greenspan conceded at a Senate hearing.
"Just for the record, we were not all wrong, but many people were wrong," Clinton, D-N.Y., quickly shot back.
Greenspan lent critical support for Bush's first-term tax cuts, saying they would stimulate the then-ailing economy. Clinton and many Democrats voted against the tax cuts, arguing that they would mainly benefit the wealthy and that federal deficits (search) would balloon.
In early 2001, "we were confronted at that time with an almost universal expectation amongst the experts that we were dealing with a very large surplus for which there seemed to be no end," Greenspan said.
The federal government did produce a budget surplus in 2001. But after that, it has been wracking up record amounts of red ink.
Greenspan, however, didn't take back his support for the 2001 tax cut.
"If confronted with the same evidence we had back then, I would recommend exactly what I recommended then," he said.
The hearing before the Senate Special Committee on Aging mostly dwelled on revamping Social Security.
On that front, Greenspan issued a fresh call to Congress 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."
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, he said.
"Unless the trend is reversed, at some point these deficits would cause the economy to stagnate or worse," Greenspan said.
The Fed chief again endorsed a key part of President Bush's Social Security overhaul -- to create private investment accounts -- and said officials must proceed slowly in setting them up. But Greenspan also said that Congress must move ahead quickly 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.
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 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.
Although recent polls show most Americans are opposed to personal accounts, Bush said he's heartened by figures that show most people recognize Social Security has financial problems. He said he is committed to finding a solution.
"I'm just getting started on this issue," Bush said from the Oval Office Tuesday.
The Fed chief said Tuesday that unless growth in the Social Security as well as the Medicare (search) 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.
Private accounts can be structured by Congress in different ways, Greenspan said. He urged lawmakers to fashion such accounts in a way that would generate savings.
That, he said, must be "at the top of the list of any solution." "Anything that we can do to raise personal savings is very much in the interest of this country," Greenspan said.
In setting up private investment accounts, Greenspan also called for lawmakers to start out "small"-- in an effort to test the waters and see how financial markets react to increased government borrowing needed to bring such accounts about.
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.
Get all the stories you need-to-know from the most powerful name in news delivered first thing every morning to your inbox