Fed chief urges revamp of Medicare, Social Security

WASHINGTON — Federal Reserve Chairman Ben Bernanke called Wednesday for an urgent overhaul of Social Security and Medicare, warning that failure to do so soon could lead to dire economic consequences.

Speaking to the Economic Club of Washington, Bernanke said projected funding shortfalls for Social Security and Medicare threaten "large and unavoidable" consequences.

Absent action soon, he warned, the nation could be forced to raise taxes sharply, trim retiree benefits, cut deeply into other programs, and run up the national debt — or some combination of all.

Beginning in 2008, the first wave of baby boomers — 76 million Americans born between 1946 and 1964 — begin taking early retirement. Progressively, fewer active workers will be available to fund promised benefits to retirees.

To meet promises made under Social Security and Medicare, Bernanke said, taxes would have to increase by about 33 percent. That would take taxes from their current level, 18 percent of the nation's total output, to about 24 percent in 2030.

If politicians instead opted to spend less on other federal programs, they'd have to cut all other government spending in half, the Fed chairman said.

Citing an unpublished Fed research paper, Bernanke said that if today's savings rates remain constant, future generations would be forced to consume 14 percent less than they do now because they'll have to shift their money to pay for boomers' retirement benefits.

But if today's Americans cut current consumption by 4 percent and put that money into savings, that could stave off the 14 percent reduction in American consumption two decades from now.

"These numbers shouldn't be taken literally, but the basic lesson is surely right — that the decisions that we make over the next few decades will matter greatly for the living standards of our children and grandchildren," Bernanke said.

Bernanke also said a more liberal immigration policy would ease the burden of a shrinking work force. But, he cautioned, it would take annual flows close to 3.5 million immigrants, not today's 1 million, to replace retiring boomers.