Bush Optimistic on Economy, Greenspan More Reserved

As he has in the past, Greenspan stressed that the government needs to come to grips now with the looming retirement of the baby-boom generation, whose oldest members will start drawing Social Security retirement benefits in 2008.

"The soaring cost of medical care for an aging population is certain to place enormous demands on our nation's resources and to exert pressure on the budget that economic growth alone is unlikely to eliminate," Greenspan said.

"So long as health-care costs continue to grow faster than the economy as a whole, they will exert budget pressures that seem increasingly likely to make current fiscal policy unsustainable," he added.

Greenspan said assuring Medicare benefits in the future presents an even tougher challenge than Social Security. The oldest of the nation's 78 million baby-boomers will reach age 65 starting in 2011 and will thus become eligible for Medicare, he said.

In a separate speech delivered in person in London today, Greenspan also expressed concern that the world economy could be adversely affected by a combination of "fiscal instability" in the United States and growing protectionism.

Addressing an economic conference while attending his final meeting of top finance officials of the world's seven largest economies, Greenspan said the United States has not had much trouble financing its growing trade deficit, which last year hit a record $668 billion.

"Most policy makers marvel at the seeming ease with which the United States continues to finance its current account deficit," he said, according to a text of his speech released by the Federal Reserve in Washington. He attributed this ability to the resilience and flexibility of the U.S. economy.

However, accumulating deficits, ever-increasing foreign debt and rising debt-service costs "cannot persist indefinitely," he said. "At some point, foreign investors will balk at a growing concentration of claims against U.S. residents, even if rates of return on investment in the United States remain competitively high, and will begin to alter their portfolios."

Greenspan warned, "If . . . the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalization, the adjustment process could be quite painful for the world economy."