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Fed chair Ben Bernanke issued a sharp warning yesterday that unless Social Security and Medicare are revamped, the economy could be severely weakened. The U.S. contains 78 million baby boomers, the oldest of whom will begin retiring in 2008. "The longer we wait, the more...Draconian...the adjustments are going to be," Bernanke told the Senate Budget Committee. Unless the government acts, the deficit will push federal debt to unprecedented levels, sending interest rates shooting upward. The ballooning national debt could set off a "fiscal crisis" that could be solved only by "sharp spending cuts or tax increases or both." Last year, the deficit reached a four-year low of $248 billion, but Bernanke calls that the "calm before the storm." Spending on Social Security, Medicare and Medicaid is forecast to reach 15% of GDP by 2030 versus 8.5% in 2006. Bernanke warned that economic growth alone will not be enough to stem the crisis, but refrained -- in keeping with his pledge to stay out of fiscal politics -- from offering specific solutions. President Bush will unveil the federal budget on February 5 as well as a plan to balance the budget by 2012. Treasury Secretary Henry Paulson has been assigned the task of overhauling Social Security.

• Sources: Bloomberg, MarketWatch, Business Week, Wall Street Journal (I, II [text])
• Related commentary: 'Era of Low Inflation'? Grandma Begs to Differ, Democrats Push for Medicare Part D Reform, Orthopedics: A (Baby) Booming Industry, 'Unmeasured Savings' and Other Marcoeconomic Myths, Dealing with Baby-Boom-Backlash -- For Boomers and Non-Boomers, Some Friendly Advice From the Tooth Fairy: Don't "Wait" To Buy Stocks, Use Common Sense To Decipher Fed Comments, Paulson's Optimism is Bewildering to Say the Least
• Potentially impacted ETFs: S&P 500 Index (NYSEARCA:SPY), NASDAQ 100 Trust Shares ETF (QQQQ), Diamonds Trust Series 1 ETF (NYSEARCA:DIA), iShares Russell 2000 Index ETF (NYSEARCA:IWM), iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY), iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF), iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT)

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Source: Bernanke: Impending "Fiscal Crisis" on SS and Medicare Costs?