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Greenspan: Budget Woes Hinge on Health Costs

The U.S. economy is strong -- but faces a crisis if the growing deficit is not reined in, Federal Reserve Chairman Alan Greenspan says. Speaking at a policy forum in Philadelphia, Greenspan highlighted health care and defense spending as two main challenges to fiscal restraint.

The surpluses of the last decade helped undermine the restraints brought on by Budget Enforcement Act of 1990, Greenspan said, urging a return to the strictures of that act, which expired in 2002.

Read the entirety of Greenspan's remarks:

The U.S. economy has delivered a solid performance thus far in 2005. And, despite the disruptions of Hurricanes Katrina, Rita, and Wilma, economic activity appears to be expanding at a reasonably good pace as we head into 2006. However, the positive short-term economic outlook is playing out against a backdrop of concern about the prospects for the federal budget over the longer run. To be sure, the current pace of the ramp-up in spending on defense and homeland security is not expected to continue indefinitely. But, as the latest projections from the Administration and the Congressional Budget Office suggest, our budget position will substantially worsen in the coming years unless major deficit-reducing actions are taken.

As I recently testified, the necessary choices will be especially difficult to implement without the restoration of procedural restraints on the budget-making process. For about a decade, the rules laid out in the Budget Enforcement Act of 1990 and in the later modifications and extensions of the act helped the Congress establish a better fiscal balance. However, the brief emergence of surpluses in the late 1990s eroded the will to adhere to these rules of restraint. The rules were aimed specifically at promoting deficit reduction rather than at the broader goal of setting out an agreed-upon standard for determining whether the nation was living within its fiscal means. By the end of the decade, many of the rules that helped constrain budgetary decision-making earlier in the 1990s--in particular, the limits on discretionary spending and the PAYGO requirements--were being violated with increasing frequency; finally, in 2002, they were allowed to expire.

Reinstating a structure like the one formerly provided by the Budget Enforcement Act of 1990 would signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process. Such a step would be even more meaningful if it were coupled with the adoption of provisions for dealing with unanticipated budget outcomes. As you are well aware, budget outcomes have often deviated from projections--in some cases, significantly--and they will continue to do so. Accordingly, well-designed mechanisms that facilitate midcourse corrections would ease the task of bringing the budget back into line when it goes awry. In particular, the Congress might want to require that existing programs be assessed regularly to verify that they continue to meet their stated purposes and cost projections. Measures that automatically take effect when a particular spending program or tax provision exceeds a specified threshold may prove useful as well. The original design of the Budget Enforcement Act could also be enhanced by addressing how the strictures might evolve if and when reasonable fiscal balance came into view.

I do not mean to suggest that the nation's budget problems will be solved simply by adopting a new set of budgeting rules. The fundamental fiscal issue is the need to make difficult choices among budget priorities, and this need is becoming ever more pressing in light of the unprecedented number of individuals approaching retirement age. For example, future Congresses and Presidents will have to weigh the benefits of continued access, on current terms, to advances in medical technology against other fiscal initiatives.

Because the baby boomers have not yet started to retire in force, we have been in a demographic lull. But this period of relative stability will soon end. In 2008--just three years from now--the leading edge of the baby-boom generation will reach 62, the earliest age at which Social Security retirement benefits can be drawn. And in recent years, about half of those eligible to claim benefits at that age have been doing so. Just three years after that, in 2011, the oldest baby boomers will reach 65 and will thus be eligible for Medicare.

Currently, 3-1/4 workers contribute to the Social Security system for each beneficiary. Under the intermediate assumptions of the program's trustees, the number of beneficiaries will have roughly doubled by 2030, and the ratio of covered workers to beneficiaries will be down to about 2. The pressures on the budget from this dramatic demographic change will be exacerbated by the anticipated steep upward trend in spending per Medicare beneficiary.

The soaring cost of medical care for an aging population is certain to place enormous demands on our nation's resources and to exert pressure on the budget that economic growth alone is unlikely to eliminate. To be sure, favorable productivity developments would help to alleviate the impending budgetary strains. But unless productivity growth far outstrips that embodied in current budget forecasts, it is unlikely to represent more than part of the answer.

Higher productivity does, of course, buoy revenues. But because initial Social Security benefits are heavily influenced by economy-wide wages, faster productivity growth will, with a lag, also raise benefits under current law. Moreover, because the long-range budget assumptions already make a reasonable allowance for future productivity growth, one cannot rule out the chance that productivity growth will fall short of projected future averages.

In fiscal year 2005, federal outlays for Social Security, Medicare, and Medicaid totaled about 8 percent of gross domestic product. The long-run projections from the Office of Management and Budget suggest that the share will rise to 9-1/2 percent by 2015 and to about 13 percent by 2030. So long as health-care costs continue to grow faster than the economy as a whole, they will exert budget pressures that seem increasingly likely to make current fiscal policy unsustainable. The likelihood of growing deficits in the unified budget is of especially great concern because the deficits would drain a correspondingly growing volume of real resources from private capital formation and cast an ever-larger shadow over the growth of living standards.

The broad contours of the challenges ahead are clear. But considerable uncertainty remains about the precise dimensions of the problem and about the extent to which future resources will fall short of our current statutory obligations to the coming generations of retirees. We already know a good deal about the size of the adult population in, say, 2030. Almost all who will be in that population have already been born. Thus, forecasting the number of Social Security and Medicare beneficiaries is fairly straightforward. So, too, is projecting future Social Security benefits, which are tied to the wage histories of retirees.

However, the uncertainty about future medical spending is daunting. We know very little about how rapidly medical technology will continue to advance and how those innovations will translate into future spending. Consequently, the range of possible outcomes for spending per Medicare beneficiary expands dramatically as we move into the next decade and beyond. Technological innovations can greatly improve the quality of medical care and can, in some instances, reduce the costs of existing treatments. But because technology expands treatment possibilities, it also has the potential to add to overall spending--in some cases, by a great deal.

Other sources of uncertainty--for example, the extent to which longer life expectancies among the elderly will affect medical spending--may also turn out to be important. As a result, the range of future possible outlays per recipient is extremely wide. The actuaries' projections of Medicare costs are, perforce, highly provisional. These uncertainties--especially our inability to identify the upper bound of future demands for medical care--suggest significant prudence when considering spending initiatives.

New programs, whether spending or tax benefits, quickly develop constituencies who tend to fiercely resist any curtailment. As a consequence, our ability to rein in deficit-expanding initiatives, should they later prove to have been excessive or misguided, is quite limited. Programs can always be expanded in the future should the resources for them become available, but history has shown that they cannot be easily curtailed if resources later fall short of commitments.

I fear that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver. If existing promises need to be changed, those changes should be made sooner rather than later. We owe future retirees as much time as possible to adjust their plans for work, saving, and retirement spending. They need to ensure that their personal resources, along with what they expect to receive from the government, will be sufficient to meet their retirement goals.

Addressing the government's own imbalances will require scrutiny of both spending and taxes. However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base. The exact magnitude of such risks is very difficult to estimate, but, in my judgment, they are sufficiently worrisome to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side. In the end, I suspect that, unless we attain unprecedented increases in productivity, we will have to make significant structural adjustments in the nation's major retirement and health programs.

Our current, largely pay-as-you-go social insurance system worked well given the demographics of the second half of the twentieth century. But as I have argued previously, the system is ill suited to address the unprecedented shift of population from the workforce to retirement that will start in 2008. Much attention has been focused on the forecasted exhaustion of the Social Security trust fund in 2041. But solving that problem will do little in itself to meet the imperative to boost our national saving. Raising national saving is an essential step if we are to build a capital stock that by, say, 2030 will be sufficiently large to produce goods and services adequate to meet the needs of retirees without unduly curbing the standard of living of our working-age population.

Unfortunately, the current Social Security system has not proven a reliable vehicle for such saving. Indeed, although the trust funds have been running annual surpluses since the mid-1980s, one can credibly argue that they have served primarily to facilitate larger deficits in the rest of the budget and therefore have added little or nothing to national saving.

The challenge of Medicare is far more problematic than that associated with Social Security, mainly because of the large variance of possible outcomes mentioned earlier and the inadequacy of the current medical information base. Some important efforts are under way to use information technology to improve the health-care system. If supported and promoted, these efforts could provide key insights into clinical best practices and substantially reduce administrative costs. And, with time, we should also gain valuable knowledge about the best approaches to restraining the growth of overall health-care spending.

Crafting a budget strategy that meets the nation's longer-run needs will become more difficult the more we delay. The one certainty is that the resolution of the nation's unprecedented demographic challenge will require hard choices that will determine the future performance of the economy. No changes will be easy, as they all will involve setting priorities and, in the main, lowering claims on resources.

It falls to our elected representatives to determine how best to address the competing claims on our limited resources. In doing so, they will need to consider not only the distributional effects of policy changes but also the broader economic effects on labor supply, retirement behavior, and private saving. In the end, the consequences for the U.S. economy of doing nothing could be severe. But the benefits of taking sound, timely action could extend many decades into the future.

Copyright 2022 NPR. To see more, visit https://www.npr.org.

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