Greenspan Says Expanding Entitlements Will Squelch Economic Growth

Former Federal Reserve chief warns that huge obligations will crowd out needed capital spending.

It’s a long-festering worry, but Alan Greenspan has brought it to the fore again, warning about the US’s growing entitlements problem.

The former chair of the Federal Reserve told CNBC that burgeoning entitlement programs, like Social Security and Medicare, will stunt America’s economic growth.

 “I think the real problem is over the long run, we’ve got this significant continued drain coming from entitlements, which are basically draining capital investment dollar for dollar,” he said

If nothing is done to revamp their payout obligations, he said, the aging population will pump up the total benefits due to a level that eventually will ensure that economic growth “fades very dramatically.”

To be sure, short-term economic indicators are encouraging. The nation added a heady 190,000 jobs in March and unemployment claims just hit a 50-year low. And projections are rising for gross domestic product (GDP) expansion.

Greenspan, though, termed those seeming advances temporary phenomena created by the “stock market aura.” An S&P 500 increase of 10% corresponds to a 1% GDP rise, he said. The S&P 500 is up more than 15% this year.

Certainly, the latest estimate shows the combined Social Security trust funds depleting cash reserves by 2034. When Social Security was enacted in the 1930s, the system had 42 workers for every recipient, hence a lot of taxpayers to fund benefits for the elderly.

Now the ratio is 3 to 1, and in another 10 years, will be almost 2 to 1. A similar scary math governs Medicare. People are living longer, which means they will need more medical care. And health care prices are soaring, with no end in sight.

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