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Bernanke: Time to Make Tough Decisions

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The United States should act now to deal with the budget effects of the aging of the population or prepare to have a weaker, less stable economy.

Federal Reserve Board Chairman Ben Bernanke delivered that message Monday Bernankeduring the annual meeting of the Rhode Island Public Expenditure Council in Providence, R.I.

In the short run, U.S. governments at all levels are grappling with the near-term effects of a weak economy, and also “with the longer-run pressures that will be generated by the need to provide health care and retirement security to an aging population,” Bernanke said, according to a written version of his speech provided by the Federal Reserve Board.

“History makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability,” Bernanke said.

Premature fiscal tightening could hurt the economy, but letting deficits increase could household and business spending, by reducing confidence in the economy, putting limits on necessary government spending, and forcing the country to rely on non-U.S. lenders, Bernanke said.

Meanwhile, “two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health care costs,” Bernanke said.

Social Security will face severe pressure, and Medicare and other federal health pressure will face even more, Bernanke said.

“The same underlying trends affecting federal finances will

also put substantial pressures on state and local budgets,” Bernanke warned, noting that state governments have about $2 trillion in unfunded pension liabilities and about $600 billion in retiree health benefits liability.

The earlier the government acts, the gentler and more political feasible the solutions will be, Bernanke said.

“For example, the gradual step-up in the full retirement age for Social Security was enacted in 1983, but it did not begin to take effect until 2003 and will not be completed until 2027, thus giving future retirees ample time to adjust their plans for work, saving, and retirement,” Bernanke said.

Other countries have had similar problems with fiscal discipline, but Switzerland, Sweden, Finland, and the Netherlands all realized improvements in their fiscal situations after adopting rules that limit spending, Bernanke said.

The succeed, he said, fiscal discipline program rules must be transparent; must be sufficiently ambitious to address the underlying problem; must focus on variables that the legislature can control directly; and most supplement, rather than substitute for, political will.

“Public understanding of and support for the rules are critical,” Bernanke said. “For example, the fiscal rules that Switzerland adopted in 2001 had overwhelming popular support; the widespread support no doubt contributed to their success in helping to reduce that country’s ratio of public debt to national income.”


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