An aging U.S. population will strain public finances and hurt the economy without swift fixes to the social safety net, such as raising the age for full retirement benefits, Federal Reserve Chairman Alan Greenspan (search) said Friday.
"If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels," Greenspan said at an annual symposium at a mountain retreat in Wyoming.
"If we delay, the adjustments could be abrupt and painful."
The Fed chief said raising payroll taxes to fund shortfalls in Social Security and Medicare might only worsen the situation by imposing an extra burden on workers. He said altering policy to encourage a longer working life for Americans would help.
Greenspan, who at 78 is an example of an American who chose to work longer, said failing to recognize the looming problems would only aggravate them.
Medicare faces a bleaker future than Social Security, both because of the changing composition of the population and rising medical costs.
Social Security (search) trustees earlier this year estimated the program's trust fund assets would be exhausted in 2042 and said benefit payments would start outstripping income in 2018.
Medicare payments are expected to outpace income into the hospital insurance trust fund this year, with the fund being tapped out in 2019.
Greenspan made no mention of current economic conditions or interest-rate policy in his address to the group of central bankers, academics and economists.
This year's topic for the annual Jackson Hole symposium is the impact of demographics — specifically aging populations — on the global economy.
Greenspan said the United States, which has been relatively open to immigration, is better-placed to cope with demographic stresses than some other countries, particularly if American policy-makers and politicians face the need to reform entitlement programs.
"Though the challenges of prospective increasingly stark choices for the United States seem great, the necessary adjustments will likely be smaller than those required in most other developed nations," the Fed chief said.
A potential doubling of the over-65 U.S. population by 2035 will put substantial pressure on budget deficits and it is important to consider how to deal with the issue to protect the overall economy.
"Financing expected future shortfalls in entitlement trust funds solely through increased payroll taxes would likely exacerbate the problem of reductions in labor supply by diminishing returns to work," Greenspan warned. He said it would be preferable for Americans to work longer.
"Changes to the age for receiving full retirement benefits or initiatives to slow the growth of Medicare spending could affect retirement decisions, the size of the labor force and saving behavior," he said, leaving no doubt that was his preferred option.
Greenspan said rising rates of productivity — or hourly output per worker — offer one of the best routes to boosting national output so future retirees can maintain living standards without overburdening those still working.
But productivity has been growing exceptionally fast for years and it is hard to keep increasing it through capital additions alone, he said.
"One policy that could enhance the odds of sustaining high levels of productivity growth is to engage in a long overdue upgrading of primary and secondary school education in the United States," he added, saying this would give a new generation of workers the skills they need to be competitive.