Economist's View: Bernanke: In the Long-Run, We’re All on Social Security, Medicare

Economist's View: Bernanke: In the Long-Run, We’re All on Social Security, Medicare

Bernanke on Deficits: In Long Run, We’re All on Social Security, Medicare, RTE: This morning Jon Hilsenrath noted the Fed Chairman Ben Bernanke was likely to highlight the importance of deficit reduction in a series of speeches. The following is an excerpt on the issue from the chairman’s remarks in Dallas today:

The economist John Maynard Keynes said that in the long run, we are all dead. If he were around today he might say that, in the long run, we are all on Social Security and Medicare. That brings me to two interrelated economic challenges our nation faces: meeting the economic needs of an aging population and regaining fiscal sustainability. The U.S. population will change significantly in coming decades with the combined effect of the decline in fertility rates following the baby boom and increasing longevity. As our population ages, the ratio of working-age Americans to older Americans will fall, which could hold back the long-run prospects for living standards in our country. The aging of the population also will have a major impact on the federal budget, most dramatically on the Social Security and Medicare programs, particularly if the cost of health care continues to rise at its historical rate. Thus, we must begin now to prepare for this coming demographic transition.

The economist Herb Stein once famously said, “If something cannot go on forever, it will stop.” That adage certainly applies to our nation’s fiscal situation. Inevitably, addressing the fiscal challenges posed by an aging population will require a willingness to make difficult choices. The arithmetic is, unfortunately, quite clear. To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.

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The CBO has argued persuasively (scroll down) that demographics is not the main problem:

In addition, Social Security can be fixed relatively easy. It is health care costs rising independent of the aging of the population that must be addressed.

But there may be a solution:

Delayed retirement among Americans may bolster future of Social Security and Medicare, EurekAlert: An unprecedented upturn in the number of older Americans who delay retirement is likely to continue and even accelerate over the next two decades, a trend that should help ease the financial challenges facing both Social Security and Medicare, according to a new RAND Corporation study.

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