In doing so, he may have set off a raw political chord in an election year as Democrats denounced his proposals while Republicans and President Bush sought to distance themselves from his stance.
Greenspan told the House Budget Committee that Social Security benefits would have to be trimmed to control soaring budget deficits which, according to him, threatened a "very debilitating" rise in interest rates in the near future. Federal interest rates are currently at their lowest in four decades.
At the same time, Greenspan recommended that President Bush's tax cuts be made permanent to boost economic growth and that the cuts, worth about $1 trillion, should be paid for with spending cuts to offset further deficits. Current deficits are projected at $521 billion.
As for specifics on trimming Social Security, he reportedly said that that one possibility would be to switch to an alternative measure of inflation for annual cost-of-living adjustments. Instead of relying on the Consumer Price Index, he suggested switching to a new chain-weighted CPI that gives lower inflation readings and thus would mean smaller payment increases.
Greenspan, who turns 78 next week, also suggested tying the retirement age for full benefits to longer lifespans with the age continuing to rise. The 65-year age for retiring at full benefits started increasing last year and now stands at 65 years and four months. It will increase to 67 over the next two decades and then stop rising.
Democrats were quick to reject his suggestions, with Sen John Kerry, the frontrunner in the primaries for November's presidential elections, saying the deficit should be reduced by rolling
Sen. John Edwards, D-N.C., called it "an outrage" for Greenspan to call for cuts in Social Security while at the same time endorsing making Bush's tax cuts permanent.
President Bush said Social Security benefits "should not be changed for people at or near retirement."
In his testimony before the Budget Committee, Greenspan said the current deficit situation will worsen dramatically once the 77 million members of the baby boom generation start becoming eligible for Social Security benefits in just four years.
"This dramatic demographic change is certain to place enormous demands on our nation's resources demands we will almost surely be unable to meet unless action is taken," Greenspan said. "For a variety of reasons, that action is better taken as soon as possible."
Greenspan said at some point the country needed to face the fact that the government has promised more in entitlement benefits than it can afford to pay. He said the problem was even worse for Medicare because it was impossible to estimate what types of costly medical advances will be available in coming years.
"I am just basically saying that we are overcommitted at this stage," Greenspan said in response to committee questions. "It is important that we tell people who are about to retire what it is they will have." He warned that the government should not "promise more than we are able to deliver."
While the country is currently enjoying the lowest interest rates in more than four decades, Greenspan warned that financial markets will begin pushing long-term rates higher if investors do not see progress in dealing with the projected huge deficits that will occur once baby boomers begin retiring.