Federal Reserve

Chairman Alan Greenspan again raised the possibility Thursday that the mass retirement of baby boomers could cause debilitating federal budget deficits.

Greenspan, testifying before the Senate Budget Committee, stuck to his script with respect to the economy, touting steady growth. But the central banker said U.S. growth is playing out against a backdrop of burgeoning deficits that could cause the economy to "stagnate of worse" under the strains of coming demographic shifts.

"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," Greenspan said. "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."

The Fed chief proposed that Congress return to the rules prescribed by the Budget Enforcement Act of 1990 that limited discretionary government spending. The rules were frequently violated during a period when the Treasury was running a surplus at the turn of the century and were eventually allowed to expire in 2002. However, he acknowledged that rule changes alone are not enough to stop the looming fiscal crisis. Lawmakers need to "make difficult choices among budget priorities" in order to adequately reduce spending, he said.

The federal government ran a deficit equal to about 3.5% of gross domestic product in fiscal 2004, and federal debt held by the public has risen "noticeably" as a percent of GDP since it bottomed out in 2001, according to Greenspan. The situation is expected to be exacerbated when baby boomers begin to retire in 2008 and becomes eligible for Social Security benefits. In 2011, the oldest baby boomers will reach 65 and become eligible for Medicare benefits.

Greenspan said that while federal outlays for Social Security, Medicare and Medicaid totaled about 8% of GDP in 2004, the long-run projections from the Office of Management and Budget suggest that the share will rise to about 13% by 2030.

"Under existing tax rates and reasonable assumptions about other spending, these projections make clear that the federal budget is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years," he said.