Bernanke: Fiscal action needed as America ages

http://news.yahoo.com/s/nm/20070118/bs_ ... nanke_dc_2

By Mark Felsenthal Thu Jan 18

WASHINGTON (Reuters) -
Federal Reserve Chairman Ben Bernanke warned the U.S. Congress on Thursday that failure to take action soon to deal with the budgetary strains posed by an aging U.S. population could lead to serious economic harm.

"Unfortunately, economic growth alone is unlikely to solve the nation's impending fiscal problems," Bernanke told the Senate Budget Committee.

Bernanke acknowledged that official projections suggest the U.S. budget deficit could stabilize or shrink in the next few years, but cautioned: "We are experiencing what seems likely to be the calm before the storm."

Left unchecked, the costs of so-called entitlement programs, such as
Social Security and Medicare, are set to soar as increasing numbers of the baby boom generation retire.

"Dealing with the resulting fiscal strains will pose difficult choices for the Congress, the administration, and the American people," Bernanke said.

"However, if early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost," he added.

Bernanke cited projections by the
Congressional Budget Office that showed spending on entitlement program would reach about 15 percent of U.S. gross domestic product by 2030.

He said a worrisome implication of such projections would be the much larger national debt and related higher payments to bondholders.

"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," Bernanke said.

The Fed chief said that whatever decisions were taken to prepare for the budgetary pressures presented by an aging population, tax rates would need to achieve a balance between spending needs and necessary revenues.

Bernanke said advocates of lower taxes would have to accept lower spending on entitlement programs. Likewise, proponents of more-expansive government programs must recognize the need for higher taxes brought about by higher spending, he added.