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Fed chief warns of crisis over elderly entitlements

Federal Reserve chairman Ben S. Bernanke told Congress yesterday the US government needs to deal with the rising costs of Social Security, Medicare, and Medicaid programs. (Jay Carrier/Bloomberg News)

WASHINGTON -- Federal Reserve chairman Ben S. Bernanke said the U S government may face a "fiscal crisis" in the coming decades if it fails to deal with the rising costs of retirement and medical benefits for the aging population.

"If early and meaningful action is not taken, the U S economy could be seriously weakened, with future generations bearing much of the cost," Bernanke said yesterday at a Senate Budget Committee hearing.

His comments may help frame a debate leading up to President Bush's Feb. 5 budget, in which he will unveil a plan to balance the budget by 2012. Bernanke, unlike his predecessor Alan Greenspan, refused to endorse a strategy on taxes and spending. The projected budget shortfall results from spending on the Social Security, Medicare, and Medicaid programs.

While official forecasts may show a stable or narrower budget deficit over the next few years, "unfortunately, we are experiencing what seems likely to be the calm before the storm," Bernanke, 53, said in his first hearing on Capitol Hill since Democrats won control of Congress from the Republicans in November's elections.

Treasury Secretary Henry Paulson is leading an effort by the Bush administration to overhaul Social Security, committing to discussions that have all options on the table.

Bernanke told the committee that the economic growth spurring revenue today won't resolve the budget's long-term challenges.

Under Congressional Budget Office projections, the ratio of federal debt held by the public to gross domestic product will rise to about 100 percent in 2030 and "grow exponentially after that," from about 37 percent now, Bernanke said.

The "effects on the U S economy would be severe," Bernanke said. Rising debt would require increased spending on interest payments, he added. "Thus, a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits."