The U.S. must take steps such as raising the minimum age for full retirement benefits to save the social safety net from collapsing under the weight of an aging population, Federal Reserve Chairman Alan Greenspan said Friday.

Greenspan, speaking to a group of central bankers, academics, and economists at their annual gathering in the mountain retreat of Jackson Hole, Wyoming, warned that the U.S. economy won't meet its financial commitments to retirees under the current rules.

"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," he said.

Raising payroll taxes to fund the projected shortfalls in Social Security and Medicare ultimately would backfire, he said, since placing such a burden on workers would drag down the whole 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," he said.

Rather, he called for altering policy to encourage a longer working life for Americans. "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 argued.

Greenspan said the U.S. is in a better position than some other countries to accommodate the demands of an aging population, thanks to immigration. In Europe and Japan, where there is much less immigration, birth rates have "fallen far short of the replacement rate," or the rate needed to keep the population constant.

Nevertheless, Greenspan warned, the U.S. needs to act quickly: "If we delay, the adjustments could be abrupt and painful."

Sources:

• Federal Reserve
  • Text of Greenspan speech