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Fed chief foretells dire effect on economy if action delayed

WASHINGTON - Federal Reserve Chairman Ben Bernanke warned on Thursday that the economy could be gravely hurt if Social Security and Medicare aren't revamped, and he urged lawmakers to tackle the nation's thorny fiscal issues sooner rather than later.

"If early and meaningful action is not taken, the U.S. economy could be seriously weakened," Bernanke told the Senate Budget Committee. Future generations, he said, will bear much of the cost.

It marked the Fed chief's most forceful warning to date on the potential problems facing the United States with the looming retirement of 78 million baby boomers, the oldest of whom will start retiring next year.

This huge wave of retirees will hit the U.S. budget as well as the economy, Bernanke said.

"The longer we wait, the more severe, the more Draconian, the more difficult the objective - the adjustments are going to be. I think the right time to start is about 10 years ago," he told lawmakers when questioned about the urgency of the situation.

Absent policy changes by Congress and the White House, rising budget deficits are likely in the years ahead to increase the amount of federal debt outstanding to unprecedented levels, Bernanke said.

That could propel interest rates for consumers and businesses upward, which would be a worrisome development, he said.

"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," he said. Ultimately, a big expansion of the nation's debt "would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases or both," Bernanke warned.

After a bitter election season, both Democrats and Republicans on the Senate panel have promised to try to deal with the spiraling costs of federal entitlement programs.

Sen. Judd Gregg of New Hampshire, the committee's top-ranking Republican, called Bernanke's warning "right on, and a clarion call that I hope folks will listen to."

Senate Budget Committee Chairman Kent Conrad, D-N.D., said: "We hope people are listening about the need for us to address these long-term imbalances, to take these challenges on, and the sooner we do so, the better."

The budget deficit last year totaled $248 billion, a four-year low. Bernanke noted the improvement but likened it to a "calm before the storm."

Spending on entitlement programs will begin to climb quickly during the next decade, he said. Federal spending for Social Security, Medicare and Medicaid will total about 15 percent of the gross domestic product by 2030, compared with roughly 80 percent of GDP in 2006, he said.

Forecasts call for the deficit to worsen for the 2007 budget year.

On the Web

Senate Budget Committee: budget.senate.gov

Federal Reserve: www.federalreserve.gov

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