US Federal Reserve Chairman Alan Greenspan said on Thursday an aging US population presents "daunting challenges" for the future that potentially imperil the country's Social Security safety net.
He said the government "will inevitably need to make a number of changes to its retirement programs" and there will be "significant effects" on government finances.
In testimony before the Senate's special aging panel that was short on specific recommendations, Greenspan said the levels of promised Social Security and Medicare benefits were high relative "to the capacity of the economy to essentially support them" -- effectively suggesting benefits might need to be cut at some point.
PHOTO: REUTERS
"We have to make judgments as to whether or not we are capable of ratcheting up the growth rate to ... say we can afford it and if not -- and I must say to you I expect not -- we have to review what the nature of those commitments are and make them far more capable of being fit into the capacity of this economy to service them," the Fed chief said.
In his remarks, Greenspan said Europe and Japan faced more formidable problems because of faster aging rates.
"The changes projected for the United States are not so severe as those projected for Europe and Japan, but nonetheless present daunting challenges," Greenspan said.
Greenspan has warned for years that an impending wave of retiring "baby boomers" -- born between 1946 and the mid-1960s -- will put a heavy strain on the government's legal obligation to pay retirement and health care benefits after about 2010.
While he offered few solutions, the Fed chief spoke bluntly about the potential implications and the wrenching adjustment that Con-gress and the country might face to deal with it.
"In particular, it makes our Social Security and Medicare programs unsustainable in the long run, short of a major increase in immigration rates, a dramatic acceleration in productivity growth well beyond historical experience, a significant increase in the age of eligibility for benefits or the use of general revenues to fund benefits," he said.
Greenspan said it was vital to "put everything we can do to improve economic growth." Other-wise, "I don't think there's a solution here, period, in what we're dealing with.
"But if we can get, first, maximum economic growth, and then make certain types of adjustments as we phase in the marked increase in the commitments that occur after 2010, then I think this is a solvable situation," Greenspan said.
There is a risk future flows of capital to the US could be pinched as more swiftly aging populations in Europe and Japan trim investments in US assets, he said.
If overseas savings rates fell, "global capital flows to the United States that have contributed significantly in recent years to financing domestic investment are likely to decline," Greenspan said.
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