the gross domestic product ( gdp ), the deficit is projected to fall from its current level of about 9 percent of gdp to 5 percent of gdp by 2015, but then to rise to about 6 – 1 / 2 percent of gdp by the end of the decade. in subsequent years, the budget outlook is projected to deteriorate even more rapidly, as the aging of the population and continued growth in health spending boost federal outlays on entitlement programs. under this scenario, federal debt held by the public is projected to reach 185 percent of the gdp by 2035, up from about 60 percent at the end of fiscal year 2010. the cbo projections, by design, ignore the adverse effects that such high debt and deficits would likely have on our economy. but if government debt and deficits were actually to grow at the pace envisioned in this scenario, the economic and financial effects would be severe. diminishing confidence on the part of investors that deficits will be brought under control would likely lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. moreover, high rates of government borrowing would both drain funds away from private capital formation and increase our foreign indebtedness, with adverse long - run effects on u. s. output, incomes, and standards of living. it is widely understood that the federal government is on an unsustainable fiscal path. yet, as a nation, we have done little to address this critical threat to our economy. doing nothing will not be an option indefinitely ; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be. by contrast, the prompt adoption of a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near - term benefits in terms of lower long - term interest rates and increased consumer and business confidence. plans recently put forward by the president ’ s national commission on fiscal responsibility and reform and other prominent groups provide useful starting points for a much - needed national conversation about our medium - and long - term fiscal situation. although these various proposals differ on many details, each gives a sobering perspective on the size of the problem and offers some potential solutions. of course, economic growth is affected not only by the levels of taxes and spending, but also by their composition and structure. i hope that, in addressing our long - term fiscal challenges, the congress will seek

in the share of the overall population that is of working age and thus, presumably, in the share of the population that is employed. for any given level of output per worker that might be attained at some future date, this decline in the share of people working implies that the level of output per person must be lower than it otherwise would have been. in a sense, each worker ’ s output will have to be shared among more people. thus, all else being the same, the expected decline in labor force participation will reduce per capita real gdp and thus per capita consumption relative to what they would have been without population aging. these reductions in output and consumption per person represent an economic burden created by the demographic transition. although some adverse effect of population aging on future per capita output and consumption is probably inevitable, actions that we take today, in both the public and the private spheres, have the potential to mitigate those effects. one such action would be to find ways to increase our national saving rate. if the extra savings were used to increase the nation ’ s capital stock - the quantity of plant and equipment available for use by workers - then future workers would be more productive, ameliorating the anticipated effects on per capita output and consumption. alternatively, using extra saving to acquire financial assets abroad ( or to reduce foreign obligations ) would also increase the resources available in the future. by saving more today, we can reduce the future burden of demographic change. however, as any economist will tell you, there is no such thing as a free lunch. saving more requires that we consume less ( to free up the needed resources ) or work more ( to increase the amount of output available to dedicate to such activities ). either case entails some sacrifice on the part of the current generation. consequently, a tradeoff exists : we can mitigate the adverse effect of the aging population on future generations but only by foregoing consumption or leisure today. this analysis is simple, but it shows why the coming demographic transition has economic implications that go well beyond the effect of aging on the federal budget. in recent work, economists at the board of governors have used a stylized model to get a rough estimate of the magnitudes of the intergenerational tradeoffs that we face. 1 their analysis takes as a starting point a baseline scenario in which u. s. demographics remain ( hypothetically ) the same in the future as they are today. in this counterfactual scenario, the ratio of workers to