Banks could face a dramatically smaller market for deposits and loans early in the next century unless major changes are made in the nation's tax and health care policies.

The generation responsible for funding the retirement of the roughly 80 million baby boomers will be socked with tax rates roughly 80% higher than today's if current fiscal policies persist, warns Jagadeesh Gokhale, an economist with the Federal Reserve Bank of Cleveland.

That means when the generation born after 1964 reaches its prime earning years, taxes could consume more than 50% of its wages. Those taxes will be needed to provide benefits for the one-fifth of the population ages 65 and over by 2020.

Although that issue seems far too distant to worry about now, Mr. Gokhale, 34, is among a growing chorus of experts who say immediate action is needed to head off the problem.

Fewer Incentives to Save

And banks could find it in their own best interest to take heed: The considerable tax burden foreseen by Mr. Gokhale would translate into fewer incentives to work and save. In turn, banks would face a shrinking market deposits and loans.

"If we are not putting those taxes and savings toward long-term investments, we will have a stagnant economy," said James Chessen, chief economist at the American Bankers Association.

Since it is in the realm of fiscal policy, this issue is among the many that are vital to the banking industry but beyond its control. Lobbying and getting out the vote may seem rough tools, but Mr. Gokhale suggests there are powerful reasons to get started.

In a recent report published by the Cleveland Fed, "Has Someone Already Spent the Future?" Mr. Gokhale argues that the government should allocate tax burdens along demographic and generational lines.

|Generational Accounting'

This concept is known as "generational accounting." It was pioneered by Laurence Kotlikoff, who was a mentor to Mr. Gokhale while he was completing his doctorate at Boston University.

Unchecked, Mr. Gokhale says, spiraling health care costs, the decline in the national savings rate, and current federal spending and tax policies will deflate the American standard of living as the baby boom ages.

The issue already has found its way from the ivory tower to the ballot box.

An organization was recently founded in Washington by 20-year-olds concerned with a future clouded by a growing national debt and a graying population.

The group, "Lead or Leave," is collecting pledges from politicians to cut the deficit in half by 1996 or not seek re-election. So far, 70 candidates, including 10 incumbents, have signed the pledge.

"The older generation is taking out a credit card with our generation's name on it," says Jon Cowan, the 27-year-old co-founder of Lead or Leave.

Endorsement from Tsongas

The group was recently endorsed by Sen. Warren Rudman, R-N.H., and former Sen. Paul Tsongas, who trumpeted the issue in his unsuccessful bid for the Democratic presidential nomination.

Some economists despair because there are other types of government spending that also must be paid for by future generations.

"There is enough reason without all this to expect very low growth in economic performance this decade," said Philip Braverman, chief economist at DKB Securities Inc, a subsidiary of Dai-Ichi Kangyo Bank Ltd., Tokyo.

Mr. Gokhale points out that savings rates have fallen from a peak of 10% of net national product in the 1960s to a current low of less than 2%.

The Indian-born economist says the impetus for change will come not from the banking sector but from a worried electorate. However, it's hard to tell exactly where the candidates stand on this issue.

Political Considerations

Tinkering with entitlement programs like Social Security and Medicare has been likened to political suicide. And both President Bush and Arkansas Gov. Bill Clinton have tiptoed around the edges of the issue.

"There will have to be some redressing of that burden by a reduction of Social Security benefits," said Mr. Braverman of DKB Securities, uttering the politically unthinkable.

The President has called for an unspecified cap on entitlement spending, while Mr. Clinton recommends tax increases for those above a certain income receiving benefits.

The American Association of Retired Persons, the powerful lobbying force of the elderly, remains committed to preserving current Social Security benefits.

"The position of AARP is that to get these costs under control we really need to come to grips with health care reform," said a spokesman from the organization in Washington.

Different Solutions Offered

Both candidates agree that comprehensive health care reform is necessary. President Bush leans toward market solutions, while Gov. Clinton advocates national spending caps and managed-care networks.

The costs of health care are steadily rising at about 4.5%, or twice the rate of inflation.

Already health care spending accounts for over 12% of gross national product, compared with about 6% in 1965, according to the Health Care Financing Administration. The administration projects that number will rise to 16% by the year 2000.

"The growing nonworking segment of the population will have to be supported by output produced by a shrinking population of workers," said Mr. Gokhale.

A Glimmer of Hope

As awareness of the issue increases, however, some bankers see a glimmer of hope.

"Bankers have the opportunity to tailor products to individuals" concerned about having to provide for their futures, said Mr. Braverman. The baby boomers represent a lucrative market for products like pension management, IRAs, annuities, and trusts.

Though the aging of the bloated midsection of the American demographic body may spell opportunities in the short term, economists agree that something must be done for the sake of long-term growth.

"For the economy as a whole you can't put this issue off for another decade and expect it to get any better," said Mr. Chessen of the ABA.

Mr. Gokhale agrees: "If we don't provide for these contingencies now, then in the future we will not really have a choice with regard to how we are going to spend our money."

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