Excessive fiscal spending tends to boost output in the short run but eventually adds risks to our economy and restricts the effectiveness of monetary policy. The fundamental issues of how to deal with Social Security and rising retiree health care costs only serve to complicate our challenges with fiscal policy.

A permanent correction to the spending imbalances must involve the restoration of fiscal discipline and long-run solutions to the financing problems of Social Security, Medicare, and Medicaid.

Considerable uncertainty remains about the precise dimensions of the problem and about the extent to which future resources will fall short of our current statutory obligations ot the coming generations of retirees.

I fear that we may have already committed more physical resources to the baby-boom generation in its retirement years that our economy has the capacity to deliver.  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.

Demographic movements of this magnitude will require significant policy changes. The public costs of retirement systems will rise markedly unless countries raise their age of eligibility for retirement program benefits or cut these benefits. Moreover, small tax increases or benefit cuts will not do the job--the implicit actuarial deficits of these programs are so large that halfway measures will not be adequate.

The United States [Social Security system] is in relatively good shape by international standards.

While the present situation of the United States may not be alarming, the outlook comes closer to being so. Outlays are projected to rise slightly more than program revenues for Social Security and much more than program revenues for Medicare. The recent annual report of the trustees of Social Security and Medicare projected rapid deterioration in the trust funds financing both programs, with the Medicare fund being exhausted in fifteen years.

Disaster [in Social Security] is not imminent, but it seems pretty clear that in the not too distant future the United States...will have to confront some distinctly unpleasant policy choices.

Among very unpleasant alternatives, raising the retirement age seems to be one of the fairest approaches across generations.

The U.S. fiscal deficit, although a problem, is a problem of manageable dimensions for the medium term, provided we deliver modest changes to the paths of expenditures and revenues. The more daunting problems we face of bringing our healthcare and social security commitments and resources into balance come later and are less acute than those facing most other large mature economies.

Workers near retirement have accumulated many years of valuable experience, so extending labor force participation by just a few years could have a sizable impact on economic output.

To avoid any changes in replacement rates, the Social Security tax rate would have to be increased from the current 12.4 percent to about 18 percent at the middle of the century.

I believe that a thorough review of our commitments [in the federal budget]--and at least some adjustments in those commitments--is urgently needed.  The necessary adjustments will become ever more difficult and larger the longer we delay.  No changes will be easy.

I believe that, as the baby boom generation begins to retire in a few years, it will become increasingly important for the nation to boost resources available in the future through greater national saving and enhanced incentives for participation in the labor force. The tax system has the potential to contribute importantly to those goals, and, at a minimum, tax reform should not hinder the achievement of those objectives.

Because the baby boomers have not yet started to retire in force, we have been in a demographic lull. But this state of relative stability will soon end. In 2008--just three years from now--the leading edge of the baby-boom generation will reach 62, the earliest age at which Social Security retirement benefits can be drawn and the age at which about half of those eligible to claim benefits have been doing so in recent years.