Federal Reserve Chair Warns About Medicare, Social Security Costs
Federal Reserve Chair Ben Bernanke on Thursday at a Senate Budget Committee hearing said that if "early and meaningful action is not taken" by Congress to address the rising costs of retirement and medical services for baby boomers, "the U.S. economy could be seriously weakened, with future generations bearing much of the cost," the AP/Bergen Record reports.
According to the AP/Record, Bernanke's statements "marked the Fed chief's most forceful warning to date on the potential problems facing the United States with the looming retirement of 78 million baby boomers, the oldest of whom will start retiring next year" (Aversa, AP/Bergen Record, 1/19).
His comments contribute to a debate leading up to President Bush's budget presentation on Feb. 5, which will include plans to balance the budget by 2012, according to Bloomberg/Boston Globe (Bloomberg/Boston Globe, 1/19).
Bernanke said that although figures show the federal deficit fell to $248 billion in fiscal year 2006 from $319 billion the previous year, "We are experiencing what seems likely to be the calm before the storm." He said that as more U.S. residents reach retirement age, combined spending on Social Security and Medicare is likely to increase from 7% of the U.S. economic output to nearly 13% by 2030 (Geewax, Cox/San Francisco Chronicle, 1/19).
According to Congressional Budget Office projections, the ratio of federal debt held by the public to gross domestic product -- which today is 37% -- will rise to about 100% in 2030 and "grow exponentially after that," Bernanke said. He added that rising debt would increase spending on interest payments. "Thus, a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits," he said (Bloomberg/Boston Globe, 1/19).
Bernanke said that when the trust funds for Social Security and Medicare run out -- projected to occur in 2018 for Medicare and 2040 for Social Security -- the government will have to cut benefits or use general revenues to make payments. "Unfortunately, economic growth alone is unlikely to solve the nation's impending fiscal problems," he said. Bernanke did not recommend specific reforms but cited experts' suggestions that include raising the retirement age, boosting payroll taxes or increasing the amount of income subject to payroll taxes.
"The longer we wait, the more severe, the more draconian, the more difficult" the reform process will be, he said (Cox/San Francisco Chronicle, 1/19).
Senate Budget Committee ranking member Judd Gregg (R-N.H.) called Bernanke's warning "right on, and a clarion call that I hope folks will listen to."
Committee Chair Kent Conrad (D-N.D) said, "We hope people are listening about the need for us to address these long-term imbalances, to take these challenges on, and the sooner we do so, the better" (AP/Bergen Record, 1/19).