By JEANNINE AVERSA
The Associated Press
Wednesday, October 4, 2006; 7:34 PM
WASHINGTON -- Federal Reserve Chairman Ben Bernanke said Wednesday the burden from retiring baby boomers will strain the nation's budget and economy, unless Social Security and Medicare are revamped.
"Reform of our unsustainable entitlement programs" should be a priority, Bernanke told the Washington Economic Club. "The imperative to undertake reform earlier rather than later is great."
It was his strongest warning yet about the potential perils and tough decisions that will confront the United States with the looming retirement of 78 million baby boomers. Bernanke did not recommend any specific changes, however, that Congress and the Bush administration could make to entitlement programs.
President Bush once made his efforts to overhaul Social Security a centerpiece of his second-term agenda. But those efforts sputtered last year due to resistance from Republicans and Democrats alike.
Bernanke said that as the population ages, the United States will have to choose among higher taxes, fewer dollars for other programs, lower spending on entitlement programs, and a sharply higher budget deficit _ or some combination of all those.
Government spending for Social Security and Medicare alone will increase from about 7 percent of the U.S. economy to almost 13 percent by 2030, and to more than 15 percent by 2050, he said.
"The fiscal consequences of these trends are large and unavoidable," Bernanke said.
The government had a budget deficit of $319 billion last year, which the White House believes will fall to $296 billion this year.
Shoring up the finances of Social Security and Medicare will make for difficult choices, Bernanke said.
For instance, if the government tried to finance projected entitlement spending entirely by revenue increases, the taxes collected would have to rise from about 18 percent of the total size of the economy to about 24 percent in 2030, he said.
If the government attempted a fix through spending cuts, spending for programs other than Social Security and Medicare would need to fall sharply _ the equivalent of "a budget cut of approximately $700 billion in nonentitlement spending," he said.
With an aging population collecting Social Security and Medicare benefits, he said, it will "create severe fiscal challenges, as the cost of entitlement programs rises sharply."
Joel Prakken, chairman of Macroeconomic Advisers, said he welcomed the Fed chief's message, even if it's not new.
"I don't believe Bernanke is telling anybody in my profession something we don't know. The federal government has on the table essentially unsustainable promises to the aging population," Prakken said.
Bernanke did not discuss the future path that interest rates might take in his speech or his brief remarks afterward.
Fielding questions, Bernanke said a "substantial correction" was taking place in the housing market. He estimated the housing slowdown would trim about 1 percentage point off economic growth in the second half of this year.
But the fallout from the cooler housing market should be cushioned by other positive factors, including good job creation and income growth, Bernanke added.
The housing cooldown, after a five-year boom, holds important implications for consumer spending and overall economic activity. "How far will this correction go? It is very difficult to tell, is the honest answer," Bernanke said.
The Federal Reserve's next meeting is scheduled for Oct. 24-25. Many economists believe the policymakers will leave rates unchanged for the third meeting in a row.
With the economy slowing, the central bank in August decided to halt _ for the first time _ a two-year campaign to boost interest rates to fend off inflation. Policymakers suggested the cooling economy eventually would lessen inflation pressures.
Fed Vice Chairman Donald Kohn, in separate remarks Wednesday evening in New York, expressed hope that the economy would slow sufficiently to ease inflation but not so much as to fall into a recession. "I expect that the continuing adjustment will be relatively benign overall," he said.
There has been relief on the inflation front as once-surging energy prices settled down. Gasoline prices, which topped $3 a gallon in summer, slid and now average $2.31 a gallon, the Energy Department said.
Bernanke welcomed the recent drop in energy prices, but said that Fed policymakers will keep an eye on inflation, which "is still above what we would consider price stability."
Bernanke also said he and his colleagues would try to improve the central bank's communications to Wall Street and Main Street. Bernanke, a respected economist who spent much of his professional life in academia, took over the Fed from longtime chairman Alan Greenspan in February.
"It is a sobering experience," Bernanke said of his eight months on the job.
On the Net:
Federal Reserve: http://www.federalreserve.gov/