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Mr. Chairman and Members of the Committee, I am very glad to have the opportunity to appear before this Committee to discuss the long-term sustainability of budgetary policy into the next century. It is an issue that can easily be lost in the usual budget focus on the next year or even the next 10 years.

To summarize my remarks, if no changes were made in entitlement programs for the elderly, the large increase in the retired population over the next few decades would dramatically expand federal expenditures. Indeed, currently projected Social Security retirement benefits and federal medical benefits cannot be financed even for the next 25 years without either increasing the share of taxes in gross domestic product (GDP) or substantially reducing the rest of government spending. Financing the entire expected growth in spending on these entitlements through borrowing is not a long-term option because it would risk substantial damage to the economy.

Some change in policy is therefore inevitable-or put differently, current policy is simply unsustainable. Wide agreement exists on this conclusion, whether it comes from the Entitlement Commission's work, Alan Auerbach's and Laurence Kotlikoff's¹ generational accounting, the General Accounting Office's (GAO's) deficit projections, or the Congressional Budget Office's (CBO's) own work. Moreover, international organizations have also been warning of long-term imbalances in the budgets of several other countries.

Correcting those budgetary imbalances would be a substantial task if it was undertaken now but would only grow more daunting if delayed. Delay allows federal borrowing to crowd out private investment as well as to raise interest rates and federal interest payments, thus further expanding the size of the budget gap that policy changes must fill.

Though the entitlements for Social Security benefits and health care pose serious problems for the future, they have accomplished much in the past and continue to enhance the well-being of a large portion of the population. Over the past 25 years, the poverty rate of the elderly has fallen roughly by half-from about 25 percent to 13 percent-in a period when the overall poverty rate stayed in a range from about 11 percent to 15 percent. That improvement in the relative income of the elderly occurred despite a significant reduction in participation among older men in the labor force, and to a large extent it reflects the significant rise in real Social Security retirement benefits. The availability of medical care through Medicare and Medicaid have also improved the circumstances of many elderly and disabled people.

Policymakers will have to weigh the benefits that these entitlement programs confer against the need to make some policy change, if not in the entitlements, then in the rest of government spending or in the taxes needed to finance them.

1. See Alan J. Auerbach, Jagadeesh Gokhale, and Laurence J. Kotlikoff, "Restoring Generational Balance in U.S. Fiscal Policy: What Will it Take?" Federal Reserve Bank of Cleveland Review, vol. 31, no. 1 (First Quarter, 1996), pp 2-12.

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