Bernanke warns of fiscal straits

WASHINGTON — WASHINGTON -- The United States faces a "vicious cycle" of rising federal deficits and interest rates unless Congress quickly figures out how to pay for promised Social Security and Medicare benefits, Federal Reserve Chairman Ben S. Bernanke warned Congress yesterday.

"Unfortunately, economic growth alone is unlikely to solve the nation's impending fiscal problems," Bernanke told the Senate Budget Committee in his first Capitol Hill appearance since Democrats took control of the Capitol this month.


Although the federal deficit fell to $248 billion in fiscal 2006 from $319 billion the previous year, that improvement should not be taken as a sign of long-term fiscal fitness, Bernanke said.

"We are experiencing what seems likely to be the calm before the storm" when roughly 78 million baby boomers begin retiring next year, he said.


Once the generation born between 1946 and 1964 stops earning taxable paychecks and starts drawing government-guaranteed retirement benefits, the budget outlook will darken dramatically, he said.

Combined spending on Social Security and Medicare will shoot from 7 percent of U.S. economic output today to almost 13 percent by 2030, he said.

Without "meaningful action" to reduce benefits or increase funding for entitlement programs, "the U.S. economy could be seriously weakened, with future generations bearing much of the cost," he said.

His message was not new; last week, U.S. Comptroller General David Walker warned the committee about coming fiscal imbalances.

But Bernanke's tone was urgent. While Walker had said that "the time for action is now," Bernanke declared: "The right time to start was about 10 years ago."

A major reform of entitlements in 1983 raised Social Security and Medicare payroll taxes, replenishing both programs' trust funds. But Congress has borrowed the money in the funds to finance other programs and replaced it with IOUs.

When the trust funds are exhausted - currently projected to occur in 2018 for Medicare and 2040 for Social Security - the government will have to cut benefits or pay them out of general revenues.

"The longer we wait, the more severe, the more draconian, the more difficult" the reform process will be, Bernanke said.


Committee Chairman Sen. Kent Conrad, a North Dakota Democrat, agreed, saying lawmakers must "take these challenges on, and the sooner we do so, the better."

Recent attempts to deal with the politically potent issue have come to nothing, however.

President Bush has promoted a reform plan that incorporated private investment accounts. But his idea proved unpopular with many lawmakers, and the effort stalled.

Bernanke did not recommend specific reforms but recounted experts' suggestions, such as raising the retirement age, boosting payroll taxes or increasing the amount of income subject to payroll taxes.

Economists generally regard Medicare as an even bigger problem because health care costs are rising rapidly.

Bernanke did urge Congress to help keep entitlement programs solvent by encouraging baby boomers to delay retirement. Lawmakers should "make the labor market as accommodating as possible to older people who wish to continue working," he said.