Bernanke warns US Congress to face issue of ageing population
Gary Duncan, Economics Editor
The Times January 19, 2007
business.timesonline.co.uk
# Mass retirements threaten economy
# Huge increase in welfare costs
US policymakers have already waited too long to begin tackling budget stresses from America’s ageing population and must act soon if the impact is not seriously to undercut future economic prospects, the Federal Reserve’s Chairman warned the US Congress yesterday.
In his toughest warning yet over the fiscal and economic fallout from the impending retirement of 78 million American baby-boomers, the oldest of whom will start to retire next year, Ben Bernanke urged US political leaders to move swiftly to confront the issue.
“If early and meaningful action is not taken the US economy could be seriously weakened,” Mr Bernanke told the US Senate’s Budget Committee. “The longer we wait, the more severe, the more draconian, the more difficult, the objectives are going to be. I think the right time to start was about 10 years ago.”
The Fed chief acknowledged that recent official projections have shown that the US Government’s budget deficit should stabilise or shrink somewhat in the next few years. However he urged Congress not to be lulled into a false sense of complacency by what he said would prove a temporary improvement.
“We are experiencing what seems likely to be the calm before the storm,” he said. “Unfortunately, economic growth alone is unlikely to solve the impending fiscal problems.”
Without action by the Congress and the US Administration, the millions of newly-retiring Americans over coming years are set massively to increase the cost to US taxpayers of welfare and social security programmes, including the cost of state help with medical treatment for pensioners under the country’s Medicare scheme.
Mr Bernanke said that spending on state entitlements would climb rapidly from about 8.5 per cent of national income (GDP) last year to some 15 per cent by 2030.
“Dealing with the resulting fiscal strains will pose difficult choices for Congress, the Administration and the American people,” he said. “However, if early and meaningful action is not taken, the US economy could be seriously weakened, with future generations bearing much of the cost.”
Without policy changes to limit the costs, the Fed Chairman said rising deficit could propel US government debt to unprecedented levels, pushing up interest rates, and further increase debt as the cost of servicing it rose.
“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. Such a trend would “spark a fiscal crisis which could be addressed only by very sharp spending cuts or tax increases, or both”.
The 2006 US budget deficit fell to a four-year low of $248 billion (£126 billion). But the Congressional Budget Office expects this to rise this year to $286 billion, while the White House is forecasting a deficit of $339 billion.
Pressure rises
# US consumer prices rose 0.5 per cent in December, the sharpest increase for eight months, because of a rebound in energy costs
# The gain lifted the annual US inflation rate last month to 2.5 per cent, from 2 per cent in November
# Annual data showed that US inflation of 2.5 per cent in 2006 was the weakest since a 1.9 per cent rate during 2003 |
