minutes on the financial condition of the household sector. some commentators have expressed concern about the rapid growth in household debt in recent years. they fear that households have become overextended and will need to rein in their spending to keep their debt burdens under control. my view is considerably more sanguine. although there are pockets of financial stress among households, the sector as a whole appears to be in good shape. it is true that households have taken on quite a bit of debt over the past several years. according to the latest available data, total household debt grew at an annual rate of about 10 percent between the end of 1999 and the second quarter of 2004 ; in comparison, after - tax household income increased at a rate of about 5 percent. but looking below the aggregate data, we must understand that the rapid growth in household debt reflects largely a surge in mortgage borrowing, which has been fueled by historically low mortgage interest rates and strong growth in house prices. indeed, many homeowners have taken advantage of low interest rates to refinance their mortgages, some having done so several times over the past couple of years. survey data suggest that homeowners took out cash in more than one - half of these “ refis, ” often to pay down loans having higher interest rates. on net, the resulting drop in the average interest rate on household borrowings, combined with the lengthening maturity of their total debt, has damped the monthly payments made by homeowners on their growing stock of outstanding debt. the federal reserve publishes two data series that quantify the burden of household obligations. the first series, the debt - service ratio, measures the required payments on mortgage and consumer debt as a share of after - tax personal income. the second series, the financial - obligations ratio, is a broader version of the debt - service ratio that includes required household payments on rent, auto leases, homeowners insurance, and property taxes. both ratios rose during the 1990s, and both reached a peak in late 2001. since then, however, they have receded slightly on net, an indication that households, in the aggregate, have been keeping an eye on repayment burdens. moreover, delinquency rates for a wide range of household loans have continued to drift down this year and lie below recent highs in 2001. to be sure, mortgage rates and other consumer loan rates have come off the lows reached early this year, and concerns have been heightened about interest payment burden

provisional. these uncertainties - - especially our inability to identify the upper bound of future demands for medical care - - suggest significant prudence when considering spending initiatives. new programs, whether spending or tax benefits, quickly develop constituencies who tend to fiercely resist any curtailment. as a consequence, our ability to rein in deficit - expanding initiatives, should they later prove to have been excessive or misguided, is quite limited. programs can always be expanded in the future should the resources for them become available, but history has shown that they cannot be easily curtailed if resources later fall short of commitments. i fear that we may have already committed more physical resources to the baby - boom generation in its retirement years than our economy has the capacity to deliver. if existing promises need to be changed, those changes should be made sooner rather than later. we owe future retirees as much time as possible to adjust their plans for work, saving, and retirement spending. they need to ensure that their personal resources, along with what they expect to receive from the government, will be sufficient to meet their retirement goals. addressing the government's own imbalances will require scrutiny of both spending and taxes. however, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base. the exact magnitude of such risks is very difficult to estimate, but, in my judgment, they are sufficiently worrisome to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side. in the end, i suspect that, unless we attain unprecedented increases in productivity, we will have to make significant structural adjustments in the nation's major retirement and health programs. our current, largely pay - as - you - go social insurance system worked well given the demographics of the second half of the twentieth century. but as i have argued previously, the system is ill - suited to address the unprecedented shift of population from the workforce to retirement that will start in 2008. much attention has been focused on the forecasted exhaustion of the social security trust fund in 2041. but solving that problem will do little in itself to meet the imperative to boost our national saving. raising national saving is an essential step if we are to build a capital stock that by, say, 2030 will be sufficiently large to produce goods and services adequate to meet the needs of retirees without unduly curbing the standard of living of our working -