Washington Federal Reserve Chairman Ben Bernanke said Wednesday the burden from retiring baby boomers will strain the nation's 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 Social Security reform a centerpiece of his second-term agenda. But 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."