[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
         THE PRESIDENT'S BUDGET SUBMISSION FOR FISCAL YEAR 2000

=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, FEBRUARY 3, 1999

                               __________

                            Serial No. 106-1

                               ----------

                     U.S. GOVERNMENT PRINTING OFFICE
54-578 cc                    WASHINGTON : 1999

           Printed for the use of the Committee on the Budget








                        COMMITTEE ON THE BUDGET

                     JOHN R. KASICH, Ohio, Chairman
SAXBY CHAMBLISS, Georgia,            JOHN M. SPRATT, Jr., South 
  Speaker's Designee                     Carolina,
CHRISTOPHER SHAYS, Connecticut         Ranking Minority Member
WALLY HERGER, California             JIM McDERMOTT, Washington,
BOB FRANKS, New Jersey                 Leadership Designee
NICK SMITH, Michigan                 LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa                     BENNIE G. THOMPSON, Mississippi
PETER HOEKSTRA, Michigan             DAVID MINGE, Minnesota
GEORGE P. RADANOVICH, California     KEN BENTSEN, Texas
CHARLES F. BASS, New Hampshire       JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota             ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee              EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire        DAVID E. PRICE, North Carolina
JOSEPH PITTS, Pennsylvania           EDWARD J. MARKEY, Massachusetts
JOE KNOLLENBERG, Michigan            GERALD D. KLECZKA, Wisconsin
MAC THORNBERRY, Texas                BOB CLEMENT, Tennessee
JIM RYUN, Kansas                     JAMES P. MORAN, Virginia
MAC COLLINS, Georgia                 DARLENE HOOLEY, Oregon
ZACH WAMP, Tennessee                 KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                RUSH D. HOLT, New Jersey
ERNIE FLETCHER, Kentucky             JOSEPH M. HOEFFEL III, 
GARY MILLER, California                  Pennsylvania
PAUL RYAN, Wisconsin                 TAMMY BALDWIN, Wisconsin
PAT TOOMEY, Pennsylvania

                           Professional Staff

                    Wayne T. Struble, Staff Director
       Thomas S. Kahn, Minority Staff Director and Chief Counsel


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 3, 1999.................     1
Prepared statement of:
    Hon. Kenneth E. Bentsen, Jr., a Representative in Congress 
      from the State of Texas....................................     6
    Hon. Bob Clement, a Representative in Congress from the State 
      of Tennessee...............................................     7
    Hon. David E. Price, a Representative in Congress from the 
      State of North Carolina....................................     7
    Hon. George Radanovich, a Representative in Congress from the 
      State of California........................................     8
Jacob J. Lew, Director, Office of Management and Budget..........     8
    Charts:
        The Budget Is in Surplus After Years of Deficit..........     9
        Investing the Surplus for Our Future: Cutting the Debt By 
          More Than Two-Thirds...................................    11
        Framework for Social Security and Medicare Reform With 
          Long-Term Fiscal Discipline............................    12
        Sources of Unified Budget Surplus........................    13
        Investing the Surplus for Our Future.....................    14
        Interest as a Percent of Outlays in 2014.................    15
    Prepared statement of........................................    16
    Additional information supplied for Mr. Price................    47
    Additional information supplied for Mr. Holt.................    54


         THE PRESIDENT'S BUDGET SUBMISSION FOR FISCAL YEAR 2000

                              ----------                              


                      WEDNESDAY, FEBRUARY 3, 1999

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room 210, Cannon House Office Building, Hon. John Kasich 
(chairman of the committee) presiding.
    Present: Representatives Kasich, Chambliss, Shays, Herger, 
Franks, Smith, Nussle, Hoekstra, Bass, Gutknecht, Hilleary, 
Sununu, Pitts, Knollenberg, Thornberry, Ryun, Collins, Wamp, 
Green, Fletcher, Ryan, Toomey, Spratt, Rivers, Thompson, Minge, 
Bentsen, Davis, Weygand, Clayton, Price, Markey, Kleczka, 
Clement, Moran, Hooley, Lucas, Holt, Hoeffel, and Baldwin.
    Chairman Kasich [presiding]. The committee is going to come 
to order.
    What we are going to do first is the consideration of Mr. 
Crippen, and, as you know, June O'Neill is leaving the CBO, and 
Senator Domenici and I have met with a number of candidates 
along with Mr. Spratt and Senator Lautenberg, and, essentially, 
Senator Domenici and I have come up with a recommendation who 
is Dan Crippen.
    Probably the single best thing about Dan Crippen is that he 
has his Ph.D. from one of the finest universities in the world, 
Ohio State University, and he has his M.A. from Ohio State 
also, so he got it right there and his B.S. from the University 
of South Dakota. He also is a principal in the Duberstien 
Group. He was Assistant to the President for Domestic Affairs 
from 1988 to 1989 and Deputy Assistant to the President from 
1987 to 1988.
    We think he will be a good CBO Director. He is not the 
director that Mr. Spratt or Mr. Lautenberg would have wanted, 
but this ultimately gets down to a decision that does get made 
by the majority even though this man has to operate not as a 
servant to the majority, and I think it is pretty clear that 
Dr. O'Neill--she didn't. [Laughter.]
    So, anyway, we would just like to make a motion and get 
this approved. Mr. Spratt.
    Mr. Spratt. Mr. Lautenberg and I have met with Dr. Crippen 
twice. Dr. Crippen has assured us that he will maintain the 
independence and professionalism of the CBO and its 
professional staff.
    We met with Dr. Crippen not because we doubted his 
competence but because he is in a sense cut from a different 
pattern than his predecessors in his position. His background 
and experience are more distinctly partisan than anybody who 
has ever held this position before.
    Dr. Crippen has assured us that he will work with Democrats 
and Republicans alike on a nonpartisan basis, and, based on 
these assurances, I intend to support his selection.
    Mr. Chairman, I would just like to say that it has been 25 
years almost since Congress created the Congressional Budget 
Office. We created them to be neutral, nonpartisan, to give an 
independent, impartial estimate forecast. We haven't always 
agreed with their work, but I think we have respected their 
independence. They have earned the trust that they enjoy with 
most of us in Congress. And even if they haven't always been 
right, they have been basically honest and rigorous and 
professional in their work, and their virtues have served us 
well. The CBO has refused over the years to help us forecast 
the deficit away, and the discipline that they have held has 
helped us wipe out the budget deficit, and I simply hope and 
trust that Dr. Crippen will fight to maintain those independent 
goals.
    Chairman Kasich. I would like to recognize Mr. Chambliss, 
the gentleman from Georgia, for purposes of offering the 
necessary unanimous consent request.
    Mr. Chambliss. Mr. Chairman, I ask unanimous consent that 
pursuant to section 201(a)(2) of the Congressional Budget Act 
of 1974, the Committee on the Budget recommends to the Speaker 
and the President pro tempore that Dr. Dan Crippen be appointed 
as the Director of the Congressional Budget Office.
    Chairman Kasich. Without objection, so ordered.
    I want to, first of all, thank Mr. Spratt, his staff, and 
the Democrats for the way in which we have been able to proceed 
through the rules package, and, frankly, we put something in 
the rule that I think will serve the Democrats--or I shouldn't 
say the Democrats--whoever would be in the minority for a 
period of time, and I think it will serve them well. It will 
make sure that there is adequate protection for the minority. 
In terms of Mr. Crippen, you can have a big fight over these 
kind of things, but they don't really serve us well. We are 
going to have enough to--hopefully, we won't have to fight, but 
we may have enough to fight about without having to look for 
one, and it is always nice to be able to have some bipartisan 
agreements as we proceed through some of these which I think 
are kind of formalities.
    But let me welcome Jack Lew. I like that Jack's a guy who 
as Director of OMB he has made a heck of an accomplishment. I 
don't whether your mom--is your mom and dad still alive, Jack?
    Mr. Lew. My mother.
    Chairman Kasich. Your mom is? I mean, I don't know if she 
realizes that really through shear persistence and obviously 
talent Jack has been able to--it started with Leon isn't that 
right?
    Mr. Lew. It started with Speaker O'Neill.
    Chairman Kasich. Up here--well, OK, but then you got with 
Leon, isn't that right, and you became really his top 
assistant, and then when Mr. Panetta became the head of OMB, 
Jack went over and was involved in a lot of the negotiations, 
and the interesting story here is if you hang around long 
enough; if you have got talent and persistence, you can end up 
getting the top job. So, I think it is very exciting, and I am 
excited for you, and I hope your mom and your whole family--you 
know, a lot of times, they don't what the heck we are doing in 
this stuff, but I hope that sometime they will come to be able 
to truly realize what you have been able to accomplish being 
the Budget Director to the President of the United States. That 
is not bad, Jack; that is pretty darn good work.
    So, I want to welcome you here this morning, and point out 
that 5 years ago few of us would have conceded to the 
opportunity to talk about surpluses, because when we were back 
in those days of trying to negotiate the budget agreement over 
there in the Capitol offices, we were struggling for literally 
every penny that we could get. You know, the famous phrase 
there ``Brother, can you spare a dime?'' because we didn't know 
how we could make this all add up to balance in 2002, and, low 
and behold, within a very short period of time, here we are 
with surpluses which is really wonderful news, because I think 
it gives us an opportunity to really leverage this good news 
into more good news. Last week, the CBO of course projected 
that we could have almost a $2.6 trillion surplus over the next 
10 years. I suspect that maybe those numbers may even be low.
    I mean a $2.6 trillion surplus, that is just amazing, and, 
frankly, I think it comes about for three reasons: one is I 
think that the benefits of the business community becoming a 
lot more efficient has allowed them to have higher levels of 
productivity without inflation, with minimal amounts of 
inflation, and, at the same time, I think it also reflects the 
fact that a trade-oriented export policy is very beneficial to 
a country, and, at the same time, it was just like yesterday 
when Dr. Greenspan was here and said that if you can put 
together a credible plan to balance the budget, the interest 
rates can come down two points, and if there is anything we 
have learned it is that interest rates are the driving engine 
of what happens with the economy; the lower they are, the 
better we do; the higher they are the worse we do. And as a 
result of the hard work that everybody did in 1995 and in 1996 
and in 1997, we feel up here and working with the 
administration we were able to put together a plan that dropped 
those interest rates down and has given us the kind of economic 
growth that we would never have anticipated had any of us, Mr. 
Spratt or Jack or myself, been asked, ``Is it possible that in 
1999 we will be projecting a $2.6 trillion surplus?'' We would 
have said, ``There is something wrong with you.''
    CBO also tells us that lower projected Medicare spending 
will extend the life of the trust fund by possibly 3 years 
until 2010. We know we have a commission that is beginning to 
take a look at what we can do to extend it even further, but 
all this good news is the result in my judgment primarily of 
what we were able to do in 1997, and that meant at that point 
we had to work together.
    Now, I think we face three or four new challenges: first, 
the coming retirement of the baby boomers who will put enormous 
strains on Social Security. We all know that the Social 
Security system is a matter of demography. We have a lot of 
baby boomers paying for our mothers and fathers; they are 
secure. The question is will the baby boomers and their 
children, us--will we be secure along with our children as the 
coming retirement approaches and the demographics start to work 
against us?
    We all know we need to improve the quality of education in 
this country; that a trained workforce and smart kids are not 
only important to the economy but also, of course, those are 
the tools that give our kids a chance to grow up like Ed Markey 
did and become a Member of the United States Congress.
    And we know we need to do these things while we have a 
growing economy that provides jobs and opportunities for 
everybody, and I think we all know that the number one issue 
before us is what can we do to make sure that the economy 
continues to grow, because if the economy continues to remain 
strong, the news continues to be good, and we can take the good 
news and leverage it for even more good news.
    The President is looking at all these issues. Speaker 
Hastert has indicated that these issues are issues that 
Congress will be focusing on. We are looking forward in areas 
where we can get some things accomplished in a bipartisan 
fashion. Jack, I am interested in your USA accounts. As you 
know, I called for something along this line last year, and, in 
fact, I had suggested that we take the surplus and we begin to 
divide it up among all the people who paid payroll taxes, and I 
have with me today a passbook, and the passbook will be 
distributed to all the Members of the House to show them how 
much money they would have in a personal savings account that 
they would be able to direct like Federal employees and how 
that money could grow and what it can mean in terms of the 
concept of personal savings accounts. I happen to believe with 
Social Security people ought to have 2 percent of payroll in an 
account, and they ought to direct it, and I don't think we need 
any political appointees to tell us where that money ought to 
go. I think we can do it on our own, but until the day comes 
when we can get to the 2 percent or 3 percent of payroll, the 
notion that people ought to have these personal retirement 
accounts is one that I think is very positive. It would get 
Americans to understand the value of having personal retirement 
account and what that can do to enhance their retirement 
security. That is an area, Jack, maybe where we can reach some 
agreement in this year. I don't know, maybe we can do the whole 
deal, and we can get complete agreement, but, if not, it seems 
to me as though the retirement accounts are a good first step.
    But I am disappointed, naturally, in some of the things 
that I found in the budget. Based on the count that we have 
made, this 5 year budget has about a $108 billion in new taxes 
and fees and over--this is pretty amazing--over $200 billion in 
new domestic spending; almost 40 new mandatory programs and 
almost 80 new discretionary programs. I don't know that Bob 
Clement would like all those new Federal programs. He would 
probably like to get a little bit more money back to Opryland, 
I don't know, but that is an awful lot of new spending, and the 
taxpayers will pay over the next 10 years about $22 trillion in 
taxes to the Federal Government. I think people are paying too 
much in taxes, and over here I believe that we will push and 
would like to see a very significant tax cut. I don't like the 
idea that we want to have governmental appointees investing our 
payroll taxes in the market. We believe that people ought to 
have the power to do that.
    We also don't like the idea that we want to have control in 
Washington in terms of what we want to do with education, 
because we think that people will do better, our schools will 
do better, out children will do better if we can control 
education through our communities and our neighborhoods and our 
local school houses.
    However, we are approaching the end of the century. We have 
certain obligations and responsibilities as we approach the new 
century, and all of our actions should be based on some 
fundamental principles. We need to have a commitment to each 
other based on our shared values. This will allow us to restore 
our society and our American family, and we must maintain a 
commitment to individual freedom. I believe we have to trust in 
and believe in the creative genius of individual citizens. I 
think if we do these two things, if we reach out to one 
another, we can have a great next millennium. And, so I am 
excited that you are here, Jack. Maybe there are some things we 
can do. Hopefully, as we go through the debate this year, even 
if we don't agree we can still be the friends that we have been 
over the years, and I now with great pleasure yield the podium 
to Mr. Spratt.
    Mr. Spratt. Thank you, Mr. Chairman. I want to join you in 
welcoming Jack Lew back to our committee. As you noted, he is 
no stranger to this committee or to the House. He spent a good 
piece of his career working for the Speaker of the House. He 
went to OMB with Panetta; he stayed over as the Deputy Director 
with Frank Raines, and now he has taken the reins from Frank 
Raines--if I can mix a metaphor--without any break in stride.
    He has done a commendable job of carrying on, and today he 
comes to the Hill with a budget bound in black and white, the 
symbol of a new era. For the third year in a row, this budget 
is in surplus which is phenomenal. Mr. Chairman, that is a long 
way from 1992 when the deficit was $290 billion. In fact, if 
you look at the economic report President Bush sent over here 
in 1993, you will see that he projected a deficit this year 
over $300 billion if we had continued course. We didn't, so now 
we enjoy the fruits of our efforts. Because of the votes that 
we cast in 1990, 1993, and 1997, we have virtually wiped out 
the deficit in the unified budget, and we have come, as the 
President has expressed, to an historic juncture. The budget he 
is sending us rises to this occasion; it takes a high road into 
the next century. It commits the surpluses that we foresee 
coming to America's future. Sixty-two percent would go to make 
Social Security solvent for another 30 years; 15 percent would 
go to make Medicare solvent until 2020; 12 percent for an 
account, an idea that you yourself have proposed, Mr. Chairman, 
a Universal Savings Account so that every American can have a 
chance to save and invest and have a better retirement and so 
that we can increase the net national savings and boost the 
economy in the next century; and 11 percent, a modest 11 
percent, would go to defense and nondefense priorities, because 
this budget, in addition to being a disciplined budget, also 
has some heart and soul. It has got some programs in here for 
education and community policing that we think work and that we 
think the American people want.
    Before I conclude and turn the podium over to our witness, 
let me raise a word of caution. The surpluses that we foresee 
in the future stem from economists' predictions. If we have 
learned anything over the last 15 years, we have learned that 
economists sometimes make mistakes. Furthermore, the surplus 
they project this year, next year, and the following year, is a 
surplus in the unified budget. If we back out the surplus in 
the Social Security trust fund, there is, according to OMB, an 
on-budget deficit in 1999, in 00, and a mere surplus of $200 
million in 2001. Not until 2002, 3 years from now, will both 
OMB and CBO see significant surpluses appearing. So, I think we 
should bear that in mind as we take up the budget and talk of 
bold tax cuts or big spending commitments, either one. The 
watch words should be caution and restraint. Let us not blow 
what we have accomplished. Thank you, Mr. Chairman, and thank 
you, Mr. Lew. We look forward to your testimony.
    Chairman Kasich. I ask unanimous consent that all members 
who have opening statements, that those statements be permitted 
to be placed in the record. Without objection, so approved.
    [The statement of Kenneth E. Bentsen, Jr., follows:]
    Prepared Statement of the Honorable Kenneth E. Bentsen, Jr., a 
           Representative in Congress From the State of Texas
    Mr. Chairman, I would like to take a minute to praise President 
Clinton for submitting another balanced budget--the third one in a 
row--and dedicating most of the projected budget surplus to 
strengthening Social Security and Medicare by paying down the national 
debt. Reducing the $3.7 trillion national debt should be our number one 
priority. We should pay down that debt while continuing the fiscal 
discipline Congress showed up until last year. As members of the Budget 
Committee, we should carefully review proposals for spending increases 
and tax cuts to ensure that they are fully paid for under Congressional 
budget rules.
    Because of the strong economy and tough deficit reduction plans 
enacted in 1990, 1993, and 1997, the Federal budget will be in balance 
for 2 years in a row for the first time since 1957. The President has 
rightly proposed that we take advantage of this historic opportunity to 
buy down the huge national debt and strengthen Social Security and 
Medicare for the retirement of the Baby Boom generation.
    As we know all too well, the Federal debt held by the public 
quadrupled between 1981 and 1993; interest payments on the debt doubled 
as a share of the Federal budget from seven to 15 percent.
    Paying down the debt grows the economic pie and creates more wealth 
for all Americans. As this morning's Washington Post pointed out, there 
is a ``shadow cost'' to not paying down the debt. A tax cut or a 
spending increase, without offsetting spending cuts or tax increases, 
would add more debt, create future obligations, and create no assets 
new assets for the Trust Funds. A crushing Federal debt hinders gains 
in productivity, creates higher tax rates, and increases the cost of 
borrowing money. Unmanageable debt dampens economic growth.
    In fact, a tax cut or large spending increase that resulted in more 
debt would most likely result in rising interest rates. There would be 
less money to invest, the debt's value would decline, and there would 
be a greater squeeze placed on the Federal budget to come up with funds 
to pay for Social Security and Medicare. This would also depress the 
value of the dollar, reducing its purchasing power and increasing 
inflation.
    Finally, paying down debt will stop the government from eating up 
private savings. With less government bonds available for purchase, 
interest rates should decline and resources would shift to investments 
that are critical to improving productivity and raising our standard of 
living.
    Public and private entities use debt to expand capital, but 
excessive debt squeezes out productive uses of resources. Paying down 
the debt is a less sexy but more efficient way of shoring up Social 
Security and Medicare. This alone will not solve the long term solvency 
issues of Social Security or Medicare, but it will certainly help.
    The Administration's budget for the U.S. Army Corps of Engineers' 
Civil Works program calls for over $1 billion in new fees to be 
collected from our maritime industry through the a new proposal called 
the Harbor Services Fund (HSF).
    1. Does the Administration anticipate shippers who typically 
utilize waterborne transport to move their products shifting to long-
haul railroads in hopes ofoffsetting the increased transportation costs 
associated with the HSF?
    2. The Port of Houston, which is located in my Congressional 
district, has a very large bulk commodities handling facility. Will the 
HSF have any negative impacts on our bulk cargo trade and in particular 
grain or coal?
    3. What benefits does the Administration envision by abdicating its 
financial responsibility for dredging by including the entire Federal 
share of new construction projects under the HSF?
    4. What studies has the Administration conducted regarding the 
possibility that international shippers may now try to divert their 
cargo through either Mexico or Canada to avoid the HSF?
    5. Administrator Lew, Can you please describe for me the Clinton 
Administration's proposal to provide limited reimbursements for 
Medicare cancer clinical trials. As a the sponsor of legislation, H.R. 
61, to ensure Medicare reimbursement for all types of clinical trials, 
I am very interested in learning more about your proposal.
    6. Administrator Lew, As the representative for the Texas Medical 
Center, the largest medical center in the United States, I am very 
concerned about the Medicare reductions in the Fiscal Year 2000 budget. 
In a time when we are already asking our nation's hospitals to absorb 
more than $115 billion in Medicare reductions that were including the 
Balanced Budget Act of 1997, do you believe that these additional 
reductions are prudent and necessary?

    [The statement of Bob Clement follows:]
 Prepared Statement of the Honorable Bob Clement, a Representative in 
                  Congress From the State of Tennessee
    Mr. Chairman, we have an historic opportunity. Instead of facing 
the $357 billion deficit that CBO projected in 1992, we are faced with 
our first surplus in three decades. The question we must now decide is 
what to do with it. Who should benefit from this suplus? Where do we 
put our priorities? Should we dedicate part of this surplus to a tax 
cut? If so, how much? Or should we conserve our resources to make sure 
that we can meet our future responsibilities to the American people?
    I have asked my constituents where they think our priorities should 
be. Over and over again, they tell me that we in Congress should be 
working on paying down the national debt and on shoring up Social 
Security for the 21st century. This budget that the President has 
presented us allows us to do both. We can extend the life of the Social 
Security Trust Fund by 25 years and simultaneously lower the debt-to-
GDP ratio from its current level of 44% to 7.1% by 2014, its lowest 
level since 1917. Some have suggested an across-the-board tax cut. I am 
not opposed to tax cuts. In fact, I have supported tax cuts and tax 
credits in the past. However, take a moment to remember what happened 
in the early 80's when we cut taxes but failed to cut spending. Our 
deficit ballooned to all-time highs. Is this the course we want to 
take? I think not.
    I believe that the President's budget represents a strong framework 
for paying down the national debt and extending the life of the Social 
Security and Medicare Trust Funds. This budget is not a cure-all and it 
is not without its problems. There are still many tough decisions to be 
made in the future, but these reforms are an important first step.
    Finally, I would like to commend the President for the courage and 
leadership he has shown in putting these proposals before us. We live 
in a nation that was built on ideas, and while we may not enact all of 
his proposals, the President has taken significant steps toward 
ensuring this country's continued prosperity.

    [The statement of David E. Price follows:]
Prepared Statement of the Honorable David E. Price, a Representative in 
               Congress From the State of North Carolina
Proposed Analog Spectrum Fee
    I am concerned about a proposal in the President's budget to impose 
an ``analog spectrum lease fee'' of $200 million on television 
broadcasters. Television broadcasters already pay a number of Federal 
regulatory fees. In addition, there has always been an understanding 
among broadcasters that a ``contract'' exists between them and the 
Federal Government under which they provide statutorily required public 
service in exchange for use of the broadcast spectrum. What is the 
justification for this new fee, which according to the February 2, 1999 
edition of USA Today could cost an average station $164,000 per year?
    Is part of the justification for the fee to encourage stations to 
transition more quickly from analog to digital? Many of the smaller 
stations around the country already face a substantial financial 
challenge in meeting the deadline to convert to a digital signal. As 
the bigger stations convert more quickly to digital, will the smaller 
stations' share of the overall fee rise proportionately?

    [The statement of George Radanovich follows:]
Prepared Statement of the Honorable George Radanovich, a Representative 
                in Congress From the State of California
    Mr. Chairman, thank you for scheduling this hearing today to allow 
us to review the President's FY 2000 budget. I am particularly 
concerned with issues relating to the Interior and natural resources. I 
would like for the administration to respond to the questions below. I 
appreciate the opportunity to submit this testimony.
Lands Legacy Initiative
    Under this proposal, you envision converting this funding to 
mandatory next year. Why do you want to do this? Will it not have the 
effect of reducing congressional oversight?
    Will not this proposal result in significantly increased 
maintenance costs and therefore add to your backlog?
    National Park Service testified last year that its backlog alone 
was an estimated $6.1 billion in 1997, up from $1.9 billion in 1987. In 
light of this, what will be the impact of such significant land 
acquisition on eliminating or greatly reducing current backlog at 
agencies like the Park Service?
PILT
    The Federal ownership of land is a huge drain on local resources, 
without comparable revenues as would occur with private ownership of 
land. One of the solutions is the PILT program. Why did you not 
increase Payments in Lieu of Taxes to the levels authorized under law 
in your budget?
Cal-Fed Project
    Mr. Lew, how many agencies at Interior and across the government 
are involved in working on the California Bay Delta project? What is 
the total spending requested by the Administration this year what is 
last year's enacted level?
    What are the expected future costs of water storage in the 
watershed?

    Mr. Collins. Mr. Chairman.
    Chairman Kasich. The gentleman from Georgia.
    Mr. Collins. Mr. Chairman, I agree with Mr. Spratt that we 
have come along way since 1992, but I would like to amend that 
we have come along since January 1, 1995 too, sir.
    Chairman Kasich. Well, we are off to a good start here. 
[Laughter.]
    OK, I now recognize the gentleman--where are you from, 
Jack?
    Mr. Lew. From New York.
    Chairman Kasich. The gentleman from New York is now 
recognized. Do you think the Knicks, anybody on that team is 
going to pass this year?
    Mr. Lew. I make predictions about the economy. I leave 
predictions about sports to others.
    Chairman Kasich. All right, Jack, you have got the mike.

 STATEMENT OF JACOB J. LEW, DIRECTOR, OFFICE OF MANAGEMENT AND 
                             BUDGET

    Mr. Lew. Thank you, Mr. Chairman, Congressman Spratt. I 
appreciate the very gracious and generous introduction. Coming 
back to this committee is in a way coming home. I spent many 
years in this room. I look around at the pictures on the walls, 
and I can't imagine how many years have gone by, and I don't 
want to add them up.
    If I might before going into my opening statement, make a 
comment on the first order of business, your vote on Dan 
Crippen as the head of the Congressional Budget Office. I have 
known Dan for the better part of 20 years. He was a very good 
and able adversary when I was in the Speaker's office and he 
was in the majority leader's office in the Senate. I look 
forward to working with him and congratulate him on his 
nomination today.
    I also understand that today his deputy was named--and 
actually his deputy, Barry Anderson, most recently the most 
senior civil servant at OMB. He is first rate, and we miss him. 
We wish him and Dan well at CBO.
    If I may, Mr. Chairman, I would like to submit for the 
record my formal statement and briefly summarize it in a few 
minutes. I would like to start, if I could, by taking a look at 
where we have come from and where we are going. This really is 
an historic opportunity, and I am proud to be here today to 
present the President's 2000 budget.
    It is a document that is more than 1 year's budget. It 
really is a document that will shape the debate for the next 
decade as we go into the 21st century. The historic 
accomplishment of having a surplus of $117 billion in fiscal 
year 2000 and projecting $4.8 trillion in surpluses over the 
next 15 years is really remarkable.
    When you remember where we started out in 1993 when 
President Clinton took office, we were looking at a sea of red 
ink. We were looking at deficits that would grow to $600 
billion, $700 billion, $800 billion in a single year. There was 
a lot of fear in the country, and it was legitimate fear. The 
question was how could we run a deficit of $600 billion in a 
single year and meet all of our obligations and pay our bills? 
It took tough action in 1993 and, yes, in 1997 when we worked 
on a bipartisan basis to finish the job. The outlook for the 
next 15 years is very strong because of the tough decisions 
that we made.


    It is important to remember this history as we embark on 
the decisions that we have to make now. If we repeat the errors 
that we have sometimes made in the past, we won't have this 
kind of projection in the future. But if we continue the 
prudent decisions that we have made over the last several 
years, we really could lay a foundation for long-term economic 
growth.
    Over this period it is important to note that the tax 
burden on American families has actually come down and not gone 
up. The success of balancing the budget has been by reducing 
the size of government. A typical family of four, a family that 
earns $55,000 a year, is now paying a lower share of its income 
in taxes than anytime in 23 years. A family of four with half 
the median income, roughly $27,000 a year, is paying the lowest 
share of income since 1965. Many, in fact most, are getting 
money back because of the earned income tax credit. Even a 
family of four with twice the median income, $110,000, is 
paying less than the combined income in payroll taxes than 
anytime since 1977.
    And government has gotten smaller. Every year that 
President Clinton has been in office, every budget he has 
submitted, the government has taken less of the economy than in 
the preceding year, less of the economy than in either of the 
two preceding administrations, and that is no exception this 
year. The size of the government will fall from 19.7 to 19.4 
percent of the economy.
    The key element of reducing government has been to reinvent 
government, and under the leadership of the Vice President, we 
have seen dramatic strides in having a smaller government that 
does more with less. The size of the Federal civilian workforce 
has declined by 365,000. As a percentage of the total 
workforce, the government is now the smallest it has been since 
1931, and many of our agencies are doing a much better job 
serving their customers better than at any other point.
    Before 1993, when we were looking at that red ink, the 
deficit was going to consume a larger and larger share of the 
economy. It was going to make it very difficult to have 
resources available for the Federal Government to do very many 
other things. What we have got now is the exact opposite with 
surpluses before us--and if I can change to the next chart, I 
think this tells the story of why.


    This picture shows how the debt as a percentage of the 
economy will fall if the President's plan is adopted. When the 
President took office, the debt had climbed to 50 percent of 
the economy. Under the President's plan over the next 15 years, 
the debt held by the public will fall to 7 percent of the 
economy. This will bring the publicly held debt to the lowest 
percentage of the economy, 7 percent; the lowest it has been 
since 1917 before the United States entered World War I. The 
President proposes to do this with a framework for Social 
Security reform and long-term fiscal discipline.
    I want to begin by underscoring that the President's 
commitment last year and his commitment this year is 
fundamentally that we must save Social Security first. A 
statement of good intentions is not enough. We need to take 
action. The framework the President has put forward lays out a 
plan so that after we save Social Security, the next steps are 
clear.


    And if you look at the green on this chart, the green shows 
both what the next step is and why that is a good step to take. 
After we have set aside 62 percent of the surplus for Social 
Security, the President has proposed that the next 15 percent 
of the surplus should go to Medicare. The reason it is green on 
that chart is that just as putting money into Social Security 
will reduce the debt, so will putting money into Medicare. And 
equally important, it will put the money aside to keep the 
promises that we have already made. The benefits are already 
due. It will put the money there to keep the promise to pay the 
benefits that are due in the next generation.
    After we fix Social Security and Medicare, the President 
proposes a tax cut, and, as Chairman Kasich noted, it is the 
Universal Savings Account which I hope we can reach a 
bipartisan consensus on. Our view is that tax relief is 
appropriate, and it should be designed to encourage savings. It 
should be designed toward building retirement savings so that 
individuals can supplement Social Security and pensions with 
their own personal savings. After we have put 12 percent into 
the tax cut plan, the Universal Savings Account, the President 
has proposed that we put 11 percent of the surplus into 
discretionary spending to meet our national defense and urgent 
domestic priorities. I think there is a lot of bipartisan 
consensus on many of those priorities. I think we agree on a 
bipartisan basis that there is a need for more resources for 
national defense. I think we agree on a bipartisan basis that 
there is a need for more resources for education. If we are 
going to put more resources into defense and if we are going to 
put more resources into education, we are going to need to set 
aside some of the surplus to meet those commitments.
    If we look at the next chart, I think it will help explain 
how the plan works.


    A lot of questions have been raised about the accounting of 
the President's plan, and a lot of the complexity really 
relates to how we fund Social Security today and how we 
determine the unified budget surplus today. Right now, the 
unified surplus comes from two sources: every dollar that goes 
into the Federal Government in excess of expenditure for 
general revenue goes into the surplus. But just the same, 
payroll tax dollars in excess of benefits go into Treasury 
bonds, and they go into the Treasury as part of the surplus. 
The real question is not where the unified surplus comes from. 
The real question is what do we do with it?
    Now, the President has proposed--and the next chart will 
make this clear--that we have three very real choices as to 
what to do with the unified surplus.


    We could give the surplus back as either a tax cut or 
additional spending, but that will have three effects, and I 
don't think they are good: it will create new obligations for 
the Federal Government whether it is tax cuts or spending; it 
will add to the public debt; and it won't do a thing to extend 
the life of the Social Security or the Medicare trust fund.
    There has been a lot of debate in the last several weeks 
about debt reduction, and we applaud everyone who endorses debt 
reduction. We are for debt reduction. But it is important to 
note several things about debt reduction: it is good because 
there are no new obligations; it is good because it reduces the 
public debt. But on its own, it doesn't do anything to extend 
the life of the trust fund. And, perhaps, something that we 
need to consider equally importantly, debt reduction has never 
been a very popular political strategy. It has never been 
something that has rarely prevailed when compared to tax cuts 
or spending increases.
    We have come up with a third option that we think is 
superior both in terms of its substantive detail and in terms 
of the likelihood of making the tough decisions and sticking to 
them. The President has proposed that we save Social Security 
and Medicare; we undertake no new obligations until we can pay 
for our old obligations; we reduce the public debt and get the 
benefits of a virtuous cycle instead of the vicious cycle that 
we have had for the last decade. We increase the trust fund 
assets, and put the money in the trust fund so that we can pay 
the benefits that people are now earning and that are due to 
them. We think that that is the best plan for using the 
surplus.
    There has been a lot of discussion about the many 
initiatives in the budget, and we are very proud of them. We 
are proud of the initiatives that we have pursued over the last 
6 years, and we think that they have made life better for the 
American people from Head Start to child care to education to 
the COPS Program. We have seen real effects in the investments 
we have made. We have a lower crime rate; we have a better set 
of health participants; we have better schools. We think that 
going forward we need to continue to make these investments, 
and, yes, we do need to make an additional investment in 
national defense. We need to make sure that going into the next 
century we continue to have the best fighting force in the 
world as we do today.
    Overall, the President's fiscal year 2000 budget provides 
for important priority initiatives by achieving savings in 
programs. Everything in the 2000 budget is fully paid for. The 
President has not allocated a penny of the surplus for 
discretionary spending until 2001 to give us time to take 
action on Social Security reform and to take action on a broad 
plan to allocate the surplus. It complies fully with the 
current law spending caps, and it complies fully with the 
current law pay-go rules.
    We have an historic opportunity for long-term prosperity if 
we rise to the occasion. By bringing down the deficit, 
balancing the budget, running the kinds of surpluses we are now 
projecting for the future, we have put our fiscal house in 
order. And if I might show you one more chart, I think it will 
show you--the benefits will be summarized very simply.


    When the President took office in 1993, we were looking out 
to 2014--the 15th year of the plan that the President has put 
forward this year--and we were projecting that interest would 
consume 27 cents out of every dollar of the Federal budget. The 
current budget projects for the same year that interest will 
consume 2 cents out of every dollar in the Federal budget. Now, 
the difference is striking. The difference will give us the 
ability to pay our bills. It will give us the ability to pay 
Social Security, to pay Medicare, and, yes, to have some room 
for tax relief as the President has proposed.
    What we must remember is that this didn't happen by 
accident. It happened because we took tough action in 1993 and 
1997. We have fiscal discipline, and we have to maintain the 
fiscal discipline today in order to make sure that this 
projection becomes reality.
    We look forward to working on a bipartisan basis, to going 
forward with a long-term policy of both fiscal discipline and 
investment in our future. We think that this is a once in a 
lifetime opportunity to for us to put down a marker for fiscal 
discipline and for economic prosperity for generations, and we 
look forward to meeting the challenges.
    [The prepared statement of Jacob J. Lew follows:]
Prepared Statement of Jacob J. Lew, Director, Office of Management and 
                                 Budget
    One year ago, President Clinton set the course of the Nation's 
budget policy with his charge to ``Save Social Security First.'' The 
President recognized that we were entering a new era as we left behind 
the decades of large budget deficits. He was building the foundation 
for budgeting in this new era of surpluses.
Fiscal progress has produced a strong economy
    The year 1998 was one of the most extraordinary in modern U.S. 
economic history. We enjoyed the first budget surplus in 29 years the 
largest ever in dollar terms, the largest as a percentage of the 
economy in more than 40 years. And this budget surplus was not the 
result of a temporary wartime policy, as was the last surplus in 1969. 
We will have a budget surplus again in the ongoing fiscal year at an 
estimated $79 billion, larger than last year's which will mark the 
first back-to-back surpluses in more than 40 years. The budget I 
present to you today proposes a third consecutive surplus the first 
time that will have happened in half a century. And our 1998 budget 
surplus was the sixth consecutive year of improvement in the U.S. 
fiscal position the first time that has happened in American history.
    The private sector is the key to economic progress, but we have 
clearly seen in the decade immediately past that the Federal Government 
can either hinder or promote economic progress. If the Federal budget 
deficit is high, so that the cost of capital is driven up and the 
financial future is uncertain, the private sector cannot yield the 
progress of which it is otherwise capable. But if, instead, the Federal 
Government declares its intentions of responsible fiscal behavior, and 
lives by those intentions and if the Federal Government supplies the 
public investments that America needs then the economy is free to 
prosper. This is the path that this Administration has taken.
    In 1998, we reaped the fruits of 5 years of fiscal responsibility. 
After the best sustained growth of business investment since the 
1960's, the U.S. economy fueled that decades-absent budget surplus. And 
the economy itself defied the pundits, staying on a pace of solid, 
above-trend expansion, in the face of an international financial 
disruption that broke the stride of most other economies around the 
world. Unemployment and inflation both hit three-decade lows, with the 
lowest unemployment rates for African Americans and Hispanics in the 
history of those statistics; real wages continued to grow after more 
than a decade of stagnation, and a record percentage of adult Americans 
worked in those higher-paying jobs; the percentage of Americans on 
welfare fell to a 30-year low; the 10-year Treasury bond rate reached 
its lowest level in 30 years; and a higher percentage of Americans 
attained home ownership than at any time in our history.
    The President deserves a great deal of credit for the virtuous 
economic cycle that we now enjoy. The announcement of a firm intention 
of fiscal responsibility in 1993 was greeted by a continued reduction 
of interest rates, which helped to trigger the investment boom that has 
proved central to sustained strong, non-inflationary economic growth. 
The two other pillars of the President's policy investing in our people 
and our technology, and opening foreign markets to U.S. exports 
complete this winning economic strategy.
The 2000 Budget is a defining moment
    This extraordinary budget-and-economic performance with the budget 
setting historical standards and the resilience of the economy setting 
global standards tells us something. It tells us that we have developed 
a winning economic policy and that we must not turn back. We must not 
discard the economic philosophy that got us here, to this confluence of 
economic indicators that all sides now agree is the best in modern 
memory.
    So in one sense, our budget policy now clearly should be built on 
continuity. We have achieved a sustained fiscal improvement, and we 
should continue to sustain that improvement. We have an economy that 
achieved a record sustained peacetime expansion, and we should continue 
to sustain that expansion.
    But in another sense, we have stepped into a new world. Where our 
budget used to be written in red for so many years that people came to 
take it for granted now we are in the black. And this change has 
tempted some to throw away all of the policy principles that got us 
here.
    For two decades now, there has been much discussion about fiscal 
discipline, restraint, and deficit reduction. Since 1993, we have taken 
action; and far beyond the expectations of even the most optimistic, we 
now have budget surpluses as far as the eye can see. But now, as the 
first surpluses appear, it is important that we not revert to the 
practice of cutting taxes and raising spending first, and thinking 
about the fiscal consequences later.
    As the President suggested in his State of the Union address 2 
weeks ago, this is a moment that will do much to determine the 
character of our country at the end of the next century. We can build 
and strengthen the fiscal foundation that first arose in these last few 
years. Or we can sweep it away, before it is firm and strong, and set 
our economy to foundering again. The choice is clear and the President 
is determined to pursue a balanced program of fiscal discipline and 
prudent investment for the future. This budget charts that course into 
an era of surplus.
Fiscal policy since 1993 was pivotal to our current good fortune
    To see why fiscal responsibility matters, consider where this 
Administration started 6 years ago. In 1992, the budget deficit was 
$290 billion, the largest in the Nation's history. Between 1980 and 
1992, the debt held by the public, the sum of all past unified budget 
deficits, quadrupled; it doubled as a share of our Nation's production, 
or GDP from about 25 percent to about 50 percent.
    These adverse trends showed every sign of accelerating. Both CBO 
and OMB projected that, without changes of budget policy, growing 
deficits would add to the Nation's debt, and growing debt service costs 
would add, in turn, to the Nation's deficits. OMB forecast the 1998 
deficit, in the absence of policy change, at $390 billion, or 5.0 
percent of GDP; by 2003, we expected the deficit to be $639 billion, or 
6.6 percent of GDP. And there was nothing in the forecast to indicate 
that this exponential trend would stop.
    This threat was not turned back by accident. It required tough 
policy choices, which the Administration and the Congress took in 1993 
and 1997. The President's initial economic program cut spending and 
increased revenues in equal amounts. Since that time, deficit reduction 
(and ultimately surplus increase) has more than doubled the estimates 
for the President's plan instead of the projected cumulative $505 
billion, deficits have fallen by $1.2 trillion. That is $1.2 trillion 
less in debt that the American taxpayer must service forever.
    And this deficit reduction has come as much from lower spending as 
from higher revenues. Spending has declined to its smallest share of 
the GDP in a quarter of a century. And thanks to the strong economy, 
receipts have grown beyond expectations, even though the tax burden on 
individual families is lower than it has been for about a quarter 
century:
    The typical family of four with the median family income of $54,900 
will pay a lower share of its income in income and payroll taxes this 
year than at any time in 23 years. Its income tax payment considered 
alone will be the lowest share of income since 1966.
    A family with an income at one-half of the median level, $27,450, 
will pay the lowest share of its income in income and payroll taxes 
since 1965. Its income tax bill will be negative; it will receive money 
back because of the earned income tax credit. That was never the case 
before 1998.
    Even a family at twice the median income level, $109,800, will pay 
less in combined income and payroll taxes as a share of its income than 
in any year since 1977. Taken alone, its income tax as a percentage of 
income will be the lowest since 1973.
    Receipts have risen as a percentage of GDP not because of a heavier 
tax burden on typical individual families, but rather because of the 
extraordinary growth of incomes of comparatively affluent Americans 
(including capital gains and stock options that are not included in 
measured GDP); and because of the rapid growth of corporate profits.
    The historic bipartisan balanced budget agreement of 1997 has 
reinforced expectations of Federal fiscal responsibility. This has had 
a favorable effect on interest rates, and the economy at large.
    In the last 6 years, we have enjoyed an extraordinary economic 
performance because our fiscal policy was responsible and sound. If we 
want to continue to enjoy such strong economic performance, we must 
continue our sound fiscal policy. As the experience of the last 20 
years clearly shows, budget problems are very easy to begin, and very 
hard to end.
    Reducing debt burden is as important to the Nation as it would be 
to a family. The Nation must service its debt. If we gratify ourselves 
today by collecting taxes insufficient to cover our spending, and 
accumulate debt, our children and our grandchildren will have to 
service that debt. If, instead, we reduce our debt, our children and 
our grandchildren will be freed of the obligation to tax themselves 
more heavily in the future just to pay the interest on the debt they 
inherited.
    The President's proposal will fully reverse the buildup of debt of 
the 1980's and then go further. By 2014, the end of the 15-year horizon 
of the President's program, the combined effects of the President's 
commitments to Social Security and Medicare will reduce the Nation's 
debt burden to an estimated 7 percent of GDP. This will be the lowest 
ratio of debt to income that the Nation has enjoyed since before it 
entered World War I. And as most experts would tell us, this will be 
one of the greatest gifts that we could ever give our children, as we 
exercise our fiscal stewardship of these United States.
    The President's policy would devote more than three-fourths of 
future budget surpluses to reducing the Nation's debt through 
contributions to Social Security and Medicare; and would dedicate 
another 12 percent to household savings through Universal Savings 
Accounts. This is important to our economic performance for four basic 
reasons: First, it increases the Nation's savings rate, which is 
critical to productivity gains and economic growth. Second, it reduces 
the debt. Third, it improves the fiscal position of the country, and 
puts it on a stronger footing for whatever uncertainties might arise. 
And finally, it improves the retirement security of all Americans.
The current challenge is to use the surplus prudently
    In 1993, we faced the challenge of eliminating projected budget 
deficits of $4.3 trillion over 10 years. Today we face the enormous 
opportunity of projected surpluses of more than $4.8 trillion over the 
next 15 years. The challenge is to use this surplus prudently to 
maintain our strong economic and budgetary performance.
    We must save Social Security first. A statement of good intentions 
is not good enough for the millions of Americans, retired and working 
today, who rely on Social Security for their retirement security and 
for protection for their families against disability and premature 
death. From the beginning, this Administration has kept its eyes on the 
future, and taken policies that would benefit the Nation for 
generations to come. It has paid off. Saving Social Security first is 
precisely such a future-oriented policy.
    The President's FY 2000 budget symbolically, as well as 
financially, ``in the black'' continues firmly on that successful path. 
The budget maps a course for the Federal Government after Social 
Security is reformed and makes its own policy recommendations for the 
beginning of the bipartisan Social Security reform process that the 
President inaugurated last year. But the budget also draws a line that 
this Administration will not pass without Social Security reform.
    Thus, the FY 2000 budget is fully paid for within the existing 
budget law. Just as in every previous year, the President has specified 
his own priority initiatives, but has paid for all of them line by 
line, dime by dime with savings from elsewhere in the budget.
    The President's policy calls for a bipartisan Social Security 
reform, this year. The President has already committed 62 percent of 
our projected budget surpluses enough to extend Social Security's 
solvency almost an extra quarter century, to 2055. We hope that this 
will launch a bipartisan process to address long-term Social Security 
solvency. We are gratified that several leaders from the Congress have 
already accepted this principle and hope that both parties, the 
President and the Congress, can follow through on this commitment and 
achieve sufficient additional reforms to extend the solvency of the 
trust fund at least through the traditional 75-year actuarial horizon.
    If we achieve that objective, the budget makes further commitments 
of the surplus to priority National objectives in the future. The 
President proposes to dedicate 15 percent of the surplus to extending 
the solvency of the Medicare trust fund. This is a key element of the 
President's program, because the financial security of Medicare will be 
threatened even sooner than that of Social Security. In 1997, the 
President and the Congress, acting together, made Medicare financially 
sound through 2010. The President's 2000 budget would extend that 
lifetime 10 years further, to 2020. We see the commitment of the 
surplus as a vital step to facilitate an environment in which a 
bipartisan effort including the current Medicare Commission can go even 
farther; with the time horizon so short, even after the contribution of 
15 percent of the surplus, we cannot delay Medicare reform. As the 
President stated, he wants to consider, as a part of this reform 
process, expanding Medicare coverage to include prescription drugs.
    The President also proposes using 12 percent of the surplus to 
finance his new Universal Savings Accounts ``USAs.'' This proposal 
includes seed money for Federal contributions, plus additional funds 
for matching contributions if individual workers contribute their own 
money. The matching contributions will provide a larger percentage 
inducement for low-wage workers. The goal is for all Americans to see 
the rewards of saving building up in these USAs and with this 
introduction to the power of compound interest, to begin to save 
further on their own. The President believes that this program, with 
its Government seed contribution, has the potential to reach even those 
who have failed to respond to the generous subsidies in the current-law 
Individual Retirement Accounts (IRAs).
    The President wants a fiscally responsible tax cut. He believes 
that the USA is the right kind of tax cut targeted toward the future, 
and helping the many American families who have the most difficulty 
saving for their retirement. It strengthens perhaps the most neglected 
of the figurative three legs of the retirement stool personal saving, 
to stand alongside Social Security and employer pension plans--and for 
the many who have no employer plan, this initiative may be crucial. 
Most importantly, it is part of a plan that fixes Social Security 
first.
    Finally, the budget proposes that the remaining 11 percent of the 
surplus be dedicated to other important priorities including education, 
National security, and health care. In last October's negotiations on 
the Omnibus appropriations for fiscal year 1999, Congressional leaders 
argued that our National defense needs had outgrown the existing 
discretionary spending caps and, indeed, defense received the largest 
share of the additional emergency funds made available in that 
legislation. Likewise, the American people have recognized that the 
quality of their children's education will determine how they progress 
in life and also the strength of the future economy. The President's 
budget is a sound, disciplined way to provide the additional resources 
for these priorities that both sides recognize will be needed if our 
country is to survive and prosper in the next century.
The President's framework for Social Security reform and long-term 
        fiscal discipline works
    The President's contribution of the surplus to Social Security will 
use many of the existing financial management tools of the Federal 
Government. It will be in addition to the accumulation in the Social 
Security trust fund that would occur with no change in the current law.
    After the trust fund is credited for all of its own receipts, 
exactly as in current law, the Treasury will be left with the unified 
budget surplus. Each dollar of that unified surplus can be used only 
once for cutting taxes, increasing spending, or buying down the debt. 
The President has brought the debate right to the point: What should we 
do with that surplus? Or to put it another way: If we were to look back 
fifteen years from now, or at the end of the next century what would we 
want to be able to say that we had accomplished with this opportunity? 
The President wants to leave a legacy of building for the future: 
saving Social Security and Medicare; encouraging Americans to save for 
their own futures, build wealth, and prepare for retirement; investing 
in education; ensuring our National security; and making other key 
investments.
    So the President started by committing 62 percent of the surplus to 
save Social Security first. Most of the share committed by the 
President to Social Security will be used to buy down the publicly held 
Federal debt through the periodic debt refundings of the Treasury 
Department, in exactly the same way as debt was retired last year. That 
same amount will be credited to the Social Security Trust Fund, in the 
form of Treasury securities. This same procedure will be followed for 
the President's contribution to the Medicare trust fund.
    This commitment will significantly extend Social Security solvency. 
At the end of 1999, the currently estimated combined balances of the 
OASDI trust funds is about $850 billion. Through 2014, we estimate that 
additional contributions to the trust funds under the current law, 
including interest, will total about $2.7 trillion, leaving a total 
balance of about $3.5 trillion. The President's program would 
contribute an additional $2.8 trillion to the trust funds over the next 
15 years. Taking into account additional interest earnings, that would 
leave a balance in the trust funds of more than $7 trillion instead of 
the approximately $3.5 trillion under the current law. The President's 
program will more than double the balances in the trust funds over the 
next 15 years--without accounting for higher earnings on the portion of 
the surplus invested in corporate equities.
    Because the President's plan will reduce the public debt, the total 
obligations of the Federal Government will not increase. We are already 
committed to paying benefits beyond 2032, when the trust fund is now 
expected to be exhausted. The President's proposal would deposit assets 
in the Social Security trust fund to pay these obligations, and reduce 
by an equal amount the debt borrowed from the public. Interest payments 
will go to the trust fund, to cover future Social Security benefits, 
rather than to banks, individuals and other investors in Government 
bonds.
    A small portion of the President's commitment to Social Security 
(21 percent of the commitment) will take the form of holdings of 
corporate stock. Because the Social Security trust fund will need that 
amount of the cash surplus to purchase the shares, this contribution 
will not reduce the public debt. However, it will improve the Federal 
Government's implicit balance sheet to the same degree, but in a 
different way. While the reduction of debt will reduce the Federal 
Government's liabilities, the corporate shares will increase the 
Federal Government's assets. The salutary effect on the Government's 
balance sheet will be the same, but it will appear on the other side of 
the balance sheet.
    Thus, the President's policy in no way increases the total 
obligations of the Federal Government. In fact, by retiring part of the 
public debt, it strengthens our economy in exactly the same way that 
reducing the budget deficit, and avoiding the accumulation of debt, has 
helped the economy over the last 6 years. The President's program does 
shift the Federal Government's commitments to Social Security, however, 
and in that way improves Social Security's solvency for the next 
century. This will give Social Security a first call on the economic 
benefits associated with long-term reductions in publicly held debt.
    The President believes that budgeting in an era of surpluses 
requires a focus firmly on the future. We must put money aside against 
our current obligations before we incur any new obligations. The 
President's program does that, by retiring debt and accumulating assets 
against the Social Security commitments that we already have.
We must balance fiscal discipline with prudent investments for the 
        future
    In addressing these priorities, the FY 2000 budget builds upon the 
investments in our people and our technology that were set in motion by 
past budgets.
    Last year's budget implemented the Balanced Budget Act of 1997, 
maintained fiscal discipline reserving the surplus until we save Social 
Security first and provided a strategy of targeted investments to help 
sustain economic growth. For example, last year's budget provided 
resources for:
    The first year's investment to reduce class size by hiring 100,000 
new teachers. Smaller classes ensure that students receive more 
individual attention, a solid foundation in the basics, and greater 
discipline in the classroom. In this year's budget, the President 
proposes investments in this area, ultimately to reduce class size in 
the early grades to a national average of 18.
    Investments to protect our economic interests at home by responding 
to international economies in turmoil. The disruption in financial 
markets last year lead to economic dislocation in Asia, Latin America 
and the Soviet Union. This, in turn, hurt American exporters, farmers 
and ranchers, who found that markets overseas were beginning to dry up. 
With President Clinton's leadership, Congress approved nearly $18 
billion for the International Monetary Fund, a stabilizing force in the 
world economy.
    A guaranteed, record-level investment for the next 5 years in the 
Transportation Equity Act for the 21st Century to continue rebuilding 
America's highways and transit systems, which are essential to continue 
the growth of modern commerce. This legislation also funds programs for 
highway safety, transit and other surface transportation, while 
safeguarding air quality, and helping former welfare recipients get to 
their jobs.
    Over the past 6 years, the President also worked with the Congress 
to establish and build upon significant investments in education and 
training, the environment, law enforcement and other priorities to help 
raise the standard of living and quality of life for average Americans 
both now and in the future. For example, the President's commitment to 
fund key domestic investments has:
    Advanced cutting-edge research, putting the National Institutes of 
Health on a path to doubled funding for research including intensified 
work on diabetes, cancer, genetic medicine, and the development of an 
AIDS vaccine.
    Established the children's health care initiative, the largest 
investment in health care for kids since Medicaid was created. Last 
year, 47 states began programs designed to provide meaningful benefits 
to as many as five million uninsured children.
    Increased Head Start's ability to provide greater opportunities for 
disadvantaged children to participate in a program which prepares them 
for grade school. Last year, a boost in Head Start funding put 835,000 
children into the program, making further progress toward the 
President's goal of putting a million children in Head Start by 2002.
    Invested in public schools to help States and communities raise 
academic standards, strengthen accountability, connect classrooms and 
schools to the information superhighway, and promote public school 
choice by opening 900 charter schools.
    Protected and restored some of the Nation's most treasured lands, 
such as Yellowstone National Park, and the Everglades; provided the 
funds to conserve others; and accelerated toxic waste clean-ups.
    Built the COPS program to support community policing. This year 
COPS will reach the goal of putting 100,000 more police on the streets 
of America's communities. COPS has helped reduce violent crime for six 
straight years. The 21st Century Policing Initiative proposed in this 
budget will expand on the number of police and provide other law 
enforcement tools to the community.
    This year's budget builds on the President's efforts to invest in 
the skills of the American people. It continues his policy of helping 
working families with their basic needs raising their children, sending 
them to college, and expanding access to health care. It also invests 
in education and training, the environment, science and technology, law 
enforcement and other priorities, to help raise the standard of living 
and quality of life of Americans.
    Families and Children: For 6 years, the President has sought to 
help working families balance the demands of work and family. In this 
year's budget he proposes a major effort to make child care more 
affordable, accessible and safe by expanding tax credits for middle-
income families, and for businesses to expand their child care 
resources; by assisting parents who want to attend college meet their 
child care needs; and by increasing funds with which the Child Care and 
Development Block Grant can help more poor and near poor children. The 
budget proposes an Early Learning Fund, which would provide grants to 
communities for activities that improve early childhood education and 
the quality of childcare for those under age five.
    Education: The President has worked to enhance access to, and the 
quality of, education and training. The budget takes the next steps by 
continuing to help States and school districts reduce class size by 
recruiting and preparing thousands more teachers and building thousands 
more new classrooms. The President proposes improving school 
accountability by funding monetary awards to the highest performing 
schools that serve low-income students, providing resources to States 
to help them identify and change the least successful schools, and 
ending social promotion by funding additional education hours through 
programs like the 21st Century Learning Centers. The budget also 
proposes further increases in the maximum Pell Grant to help low-income 
undergraduates complete their college education, and more funding for 
universal reemployment services to help train or find jobs for all 
dislocated workers who need help.
    Environment: This Administration proposes a historic interagency 
Lands Legacy initiative to both preserve the Nation's Great Places, and 
advance preservation of open spaces in every community. This initiative 
will help address sprawl and air and water pollution, through land 
acquisition, preservation efforts, environmental protection and local 
growth management. The Administration also proposes a new financing 
mechanism, Better America Bonds, to further creation of open spaces in 
urban and suburban areas. The Better America Bonds initiative is an 
example of our use of targeted, paid-for tax cuts to achieve the 
Nation's priority goals. In addition, the budget would restore and 
rehabilitate national parks, forests, and public lands and facilities; 
expand efforts to restore and protect the water quality of rivers and 
lakes; continue efforts to double the pace of Superfund clean-ups; and 
better protect endangered species.
    Defense: The President is committed to maintaining world military 
leadership to provide for the safety of American citizens and the 
primacy of American Armed Forces. To ensure America's Armed Forces are 
fully prepared to meet the challenges of the next century, the 
President proposes a long-term, sustained increase in defense spending 
to enhance military readiness, improve recruitment and retention, and 
provide the most modern and effective weapons. In addition, these 
resources will reinforce the ability of the Defense Department to 
counter emerging threats such as terrorism, reduce threats from weapons 
of mass destruction, maintain the nation's nuclear deterrent, and 
provide humanitarian and disaster assistance.
    Health Care: The President has worked hard to expand health care 
coverage and improve the Nation's health. The budget gives new 
insurance options to hundreds of thousands of Americans aged 55 to 65, 
and it advocates bipartisan national legislation that would reduce 
tobacco use among the young. The President's budget proposes 
initiatives to help patients, families and care givers cope with the 
burdens of long-term care; and it helps reduce barriers to employment 
for individuals with disabilities. The budget also enables more 
Medicare recipients to receive promising cancer treatments by 
participating more easily in clinical trials. And it improves the 
fiscal soundness of Medicare and Medicaid through new management 
proposals, including programs to combat waste, fraud and abuse.
    Embassy Security: The bombings of U.S. embassies in Kenya and 
Tanzania highlight the dangers faced daily by Americans who work in 
U.S. facilities abroad. The budget proposes an increase to the State 
Department's operating budget to ensure protection of embassies and 
other facilities, and the valuable employees who work there. The budget 
also includes a request for $3 billion in advance appropriations for a 
multi-year security construction program.
The 2000 Budget saves the surplus until we fix Social Security first
    The President's FY 2000 budget is fully paid for, in compliance 
with the discretionary caps and the pay-as-you-go budget rules. The 
budget allows for appropriations for important domestic and national 
security priorities by limiting other discretionary spending and 
achieving mandatory savings. Offsets to discretionary spending include 
the President's tobacco policy (which would reimburse the Federal 
Government for tobacco-related discretionary health care costs), FAA 
user fees, health care savings, Superfund receipts, student loan 
savings and the recall of additional Federal fund reserves at lending 
guaranty agencies, and reform of the existing harbor maintenance excise 
tax. With the use of these offsets, in keeping with longstanding budget 
practice, the 2000 budget complies with the discretionary spending 
caps.
    The budget provides targeted tax reductions, financed by the 
elimination of tax loopholes, and inefficient or obsolete tax 
subsidies. Important tax cuts and incentives, in addition to the 
President's USA retirement savings program, include the tax credit for 
long-term care needs, the public school construction and modernization 
bonds, the expansion of the child and dependent care tax credit, the 
new Better America Bonds, extension of the R&E tax credit, the work 
opportunity tax credit, the welfare-to-work tax credit, and the tax 
incentives for reductions of carbon emissions that cause global 
warming. Important mandatory initiatives include child care, the 
Medicare buy-in, disability and cancer clinical trials programs, and 
extension of health-care programs to immigrants. Taking all of these 
policy steps together, the budget complies with the pay-as-you-go 
rules, and the tax cuts and mandatory initiatives are fully paid for.
We need adequate resources for a strong defense and critical domestic 
        priorities
    For future years, the budget includes the discretionary resources 
contemplated as a part of the plan for Social Security reform. While 
these funds will only be available if Social Security reform is 
enacted, the Administration's policy is categorically defined including 
those resources. Social Security reform is one of the President's 
highest priorities for this year and we must work on a bipartisan basis 
to accomplish this important goal. The comprehensive framework for 
allocating the surplus will also provide these critical discretionary 
resources.
    The President believes that his discretionary priorities are 
important to economic growth, and to the Nation's well being and 
quality of life. Some have disagreed, and have argued that Federal 
spending in general is too high. This debate requires some perspective.
    First, and perhaps most fundamentally, consider the record. Over 
the years 1980-98, Federal spending averaged 21.9 percent of GDP. But 
Federal receipts averaged only 18.5 percent of GDP. Thus, the Federal 
budget averaged a deficit of about 3.4 percent of GDP. When this 
Administration set out to cut the budget deficit that we inherited, our 
original plan called for roughly equal spending cuts and revenue 
increases (with spending cuts in fact slightly larger). While the 
results of this plan have been far beyond what we ourselves anticipated 
with the deficit falling by more than twice as much as our original 
estimates they did maintain the balance between spending cuts and 
revenue increases.
    In balancing the budget, this Administration has controlled Federal 
spending well beyond the record of its predecessors. As a percentage of 
GDP, spending in every year for which President Clinton submitted a 
budget has been lower than in any year of the two preceding 
Administrations. In every budget year from 1994 through 1998, Federal 
spending as a percentage of GDP fell. Spending as a percentage of GDP 
in 1998, at 19.7 percent, was the lowest in almost a quarter century.
    Some argue that ``Federal spending is still going up.'' In the 
simplest terms--total dollars with no discounting for inflation, no 
allowance for the growth of the economy, and no allowance for the 
growth of the population government serves--that is true. But even in 
this format, the analysis tells a great deal about the record of 
Federal spending under this Administration.
    From 1993 through 1998, 31 percent of the simple dollar increase in 
Federal outlays came because more elderly people retired on Social 
Security benefits, and prior retirees received cost-of-living 
increases; 26 percent arose because of additional beneficiaries and 
higher costs under Medicare; 18 percent arose because, even with a 
rapidly declining budget deficit and by 1998, a budget surplus there 
was more debt to service, and so net interest costs went up; and 10 
percent came from increased costs under Medicaid, more than two-thirds 
of which went for the expenses of the indigent elderly, blind, 
disabled, and mentally retarded, many of those in long-term care.
    Thus, there has been almost no spending growth in programs other 
than Social Security, Medicare, Medicaid, and net interest. Spending of 
the entire remainder of the Federal Government over 1993 to 1998 shrank 
by 5.4 percent in inflation-adjusted dollars, and fell from 11.5 
percent to 8.8 percent of the Nation's GDP.
    This shrinking of core government operations cannot go on forever 
if government is to accomplish the missions assigned to it. We all take 
for granted the obligation to maintain critical core functions like the 
FAA, the FBI, and the administration of Medicare. As we consider how to 
budget in this era of surpluses, we must consider carefully the 
resources available for these 1often-anonymous functions that the 
Nation has a right to expect its government to perform well.
    A key element in the Administration's ability to expand strategic 
investments, while balancing the budget, is the reinvention of 
government doing more with less. Efforts led by Vice President Gore's 
National Partnership for Reinvention have streamlined government, 
reduced its workforce, and focused on performance to improve operations 
and delivery of service. And these efforts, by reducing the cost of 
government operations, have improved the bottom line and contributed to 
our strong economy.
    Since 1993, the Administration, working with Congress, has 
evaluated and eliminated hundreds of unnecessary programs and projects. 
The Administration has cut the size of the Federal civilian work force 
by more than 365,000 people, creating the smallest work force in 35 
years and, as a share of total civilian employment, the smallest since 
1931.
    The Administration, however, is working to create not just a 
smaller Government, but a better one a Government that best provides 
services and benefits to its ultimate customers, the American people. 
It has not just cut the Federal work force, it has streamlined layers 
of bureaucracy. It has not just reorganized headquarters and field 
offices, it has ensured that those closest to the customers can best 
serve them.
    For 2000, this Administration once again is turning its efforts to 
the next stage of ``reinventing'' the Federal Government. It plans to 
dramatically overhaul 32 Federal agencies to improve performance in key 
services, such as expediting student loan processing and speeding aid 
to disaster victims. It also plans to tackle critical challenges, such 
as ensuring that Government computers can process the year 2000 date 
change, and making more Government services available electronically.
    Under the 1993 Government Performance and Results Act, Cabinet 
departments and agencies have prepared individual performance plans 
that they will send to Congress with the performance goals they plan to 
meet in 2000. These plans provided the basis for the second Government-
wide Performance Plan which is contained in this year's Budget. For the 
first time in 2000, agencies will submit to the President and Congress 
annual reports for 1999 that compare actual and target performance 
levels and explain any difference between them.
We have an historic opportunity for long-term prosperity if we rise to 
        the moment
    There is much to be proud of in America today. By balancing the 
budget, we have not just put our fiscal house in order; we have left 
behind an era in which the budget deficit, as the President said 
recently, ``came to symbolize what was amiss with the way we were 
dealing with changes in the world.'' Today we have risen to the 
challenge of change by preparing our people through education and 
training to compete in the global economy, by funding the research that 
will lead to the technological tools of the next generation, by helping 
working parents balance the twin demands of work and family, and by 
providing investment to our distressed communities to bridge the 
opportunity gap.
    If the deficit once loomed over us as a symbol of what was wrong, 
our balanced budget is proof that we can set things right. Not only do 
we have well-deserved confidence, we have hard-earned resources with 
which to enter the next century.
    As the President said, what we do now after having balanced the 
budget will shape the character of the next century. We can build upon 
our newfound firm economic foundation; or we can squander it.
    The President has brought the debate right to the point: What 
should we do with the surplus? Or to put it another way: If we were to 
look back fifteen years from now, or at the end of the next century 
what would we want to be able to say that we had accomplished with this 
opportunity?
    The President wants to leave a legacy of building for the future: 
saving Social Security and Medicare; encouraging Americans to save for 
their own futures, build wealth, and prepare for retirement; investing 
in education; ensuring our National security; and making other key 
investments.
    There is no more pressing issue facing us as a nation than the need 
to guarantee that Social Security will be there for generations to 
come. And there is no better time to act than now while the system is 
still strong. This is truly an exceptional moment in America the 
economy is prosperous, the budget is in balance, and the President's 
commitment to national dialogue has created conditions for constructive 
action. We must seize this moment.

    Chairman Kasich. Mr. Lew, let me--thank you for your 
testimony--let me just get in just two quick areas because 
there are members that have questions, and I don't want to--I 
had a chance to make a long opening statement. Alan Greenspan, 
when he was asked about the board that you want to create 
investing in the markets--first of all, the notion that we can 
use the capital markets to be able to solve a large portion of 
the problem for the baby boomers, I believe is right on target. 
The question is, of course, who gets to control it? Do we have 
a board of smart people or do we just let--you know, we call 
smart people--I know I could never get appointed to a board 
like that--or do we let individuals be able to manage their own 
retirement? I tend to think, Jack, that as much as I like you 
that you worry about your retirement a lot more than I worry 
about your retirement, number one, and so I think you ought to 
have the maximum control to invest your payroll taxes rather 
than I getting on a board and investing your money for your 
retirement, because I think you care about it more than I do. 
It is kind of like what Federal employees get to do. We don't 
have any smart persons board that invests the Federal 
employees' money; we invest it ourselves, and I think everyday 
Americans are just as smart as Federal employees when it comes 
to planning for their own retirement. But Greenspan said in the 
notion of having a political board investing in the market, he 
said, ``Even with Herculean efforts, right, I doubt it would be 
feasible to insulate over the long run the trust funds from 
political pressures, direct and indirect to allocate capital to 
less than its most productive use.'' In other words, this board 
would be subjected to political pressures, and so somebody 
would be making--some board would be making a political 
decision about our retirement when we don't get the return we 
ought to get because they are considering political pressures 
of political concerns. Wayne Angel, Bear-Stearns, warned that 
the proposal ``enlarges the role of government dictating to the 
private economy to a degree that many of us would find 
unacceptable.''
    Jack, what is wrong with the notion that individuals, you 
and me, should have control over our payroll taxes to be able 
to direct those payroll taxes into investment opportunities 
that provides for our retirement? Why do we need to give this 
opportunity to some board who get appointed by a President? 
What is the thinking there?
    Mr. Lew. Mr. Chairman, I hope we agree more than we 
disagree, and we begin with the notion that Social Security is 
the foundation for retirement and that individuals should be 
guaranteed benefits as they are today. They shouldn't be 
subject to the risks that if market were to somehow fall the 
day they retire that they would be penalized for the rest of 
their retirement, but there should be that foundation where we 
have a shared societal----
    Chairman Kasich. Everybody agrees on that.
    Mr. Lew [continuing]. Everyone agrees on that. We think 
that investing the Social Security fund to a very modest extent 
in equities is a good idea. We think it gives the Social 
Security fund the upside potential that all private pension 
plans and State and local government pension plans have today. 
What we have suggested--and we took very seriously the 
considerations that Chairman Greenspan discussed with you--is 
that it be a truly independent board that is insulated from 
political pressure.
    We suggested that it should not be picking and choosing. We 
do not want any branch of government picking and choosing what 
equities to invest in. We want to have a broad market basket of 
investments with a little bit of everything, where there is an 
independent board, private managers, the same people who manage 
money market funds, putting these assets into literally the 
entire stock market. That means that we will not be picking and 
choosing; we won't be making the kinds of markets decisions 
that we agree the government should not make.
    The risk that Chairman Greenspan has pointed out is one 
that I think we do have to take seriously. The plan we have put 
forward we believe meets the criteria that he set out. The 
question is would we stick to our guns 5 years, 10 years, 15 
years from now to resist the temptation to change the plan? I 
have confidence that the same way we have left the Federal 
Reserve Board as independent as it is because that is the right 
thing to do, we would leave this independent board independent 
for its entire life. That would be the right thing to do, and 
that is what we are proposing.
    As far as individual choice goes, the Universal Savings 
Accounts give individuals the ability to make decisions on 
their own retirement. We wouldn't be telling individuals how to 
invest that money. They would have choices. We need to work 
through the administrative detail, because there is a little 
bit of a tradeoff. Total free choice has very high 
administrative costs. In our Federal retirement plan, we have 
modified choice. We have limited options that dramatically 
reduce the administrative costs. What we hope to work through 
as we work on the Universal Savings Account is a way to give 
individuals choice with the lowest possible administrative 
costs.
    Chairman Kasich. Right, well, why wouldn't individuals be 
able to have the same limited choice, nevertheless choice, to 
direct their own money? Why should Federal employees have that 
right, but yet I don't have that right if I am not in the 
Federal Government?
    Mr. Lew. What we are proposing for the Universal Savings 
Accounts----
    Chairman Kasich. I am talking about--no, I am talking about 
for the payroll taxes.
    Mr. Lew [continuing]. Well, the problem with the payroll 
tax being handled that way is that markets go up and markets go 
down. They don't always do it at times that are convenient for 
an individual person's retirement. If it is a small part of the 
total Social Security trust fund, we can handle those kinds of 
fluctuations in a way that an individual could not handle it. 
Our concern is if you take out an annuity on a day when the 
stock market went down 10 percent, you are losing 10 percent of 
the value of your savings for the rest of your retirement. That 
is something where if you waited a month, if you waited a week, 
certainly, if you waited long enough it would rebound. And if 
we share those risks, then we are protecting individuals from 
having the bedrock of their retirement, their Social Security 
benefit, fluctuate.
    Chairman Kasich. But an investment made by a board is 
subjected to the same changes in the economy as if I am 
controlling it. In other words, a Federal employee has that 
option. They get to an invest in a series of risk managed 
accounts, and what you are saying is--and the other thing is, 
of course, we are not talking about people putting their money 
in an annuity tomorrow and taking it out the next day. We all 
know that the power of investing in the American economy is 
that over a significant period of time, over decades, the 
economy is going to return you about 6, 7, or 8 percent as 
compared to a government bond. So, we are not talking about in 
and out.
    But let me just ask you this, Jack, to get to the bottom 
line: Is there any way that this administration over the next 2 
years would permit the individual to be able to direct their--
you know, the 2 percent of payroll--the way that they see fit 
in a government-approved account without this board? Is there 
any way that we could reach agreement on that or do you think 
that that is impossible?
    Mr. Lew. Well, we have made very clear that keeping the 
current payroll tax to fund the current benefit system is key. 
We think that it would be risky to do anything other than that, 
but we have opened the discussion on giving the individuals the 
choice on how to invest for their own retirement with the 
Universal Savings Accounts.
    Chairman Kasich. Right, but, in other words, the notion 
that we take 2 percent of payroll and allow the everyday 
American to be able to direct it in some board-approved 
accounts like Federal employees do, we cannot reach agreement 
on that in this Congress, is that correct? This is a very 
important point.
    Mr. Lew. It is an important point, and what I want to be 
very clear about is that we are very committed to the current 
structure of a guaranteed benefit.
    Chairman Kasich. OK, the answer is no.
    Mr. Lew. And the guaranteed benefit sounds to me perhaps to 
be incompatible with what you are suggesting. I would like to 
look at a specific proposal before giving you a clear answer.
    Chairman Kasich. Well, you know specifically what we are 
talking about, the Feldstein proposal. I mean, any one of them, 
Domenici; any of them, I mean, where you get 2 percent of 
payroll, and you get to direct it. You would not want the 
individuals to be able to do that, is that correct?
    Mr. Lew. A lot of these proposals have had many lives, and 
the reason I am reluctant to give you a blanket answer is that 
I don't know exactly which one you are referring to. To the 
extent that some of these proposals spend the surplus to give 
these options and don't take the money out of the current 
payroll tax, it may be more like our Universal Savings Account 
and it may be a tax cut.
    Chairman Kasich. No, we are talking about taking it out of 
the current payroll.
    Mr. Lew. And I think you understand our view on that.
    Chairman Kasich. That is what I was afraid of, the answer 
would be no, so that all these people walking around saying, 
``I think we can get the administration to go along with an 
agreement that individuals ought to be directing some of their 
payroll taxes'' isn't going to happen, and I think we need to 
know that, because that then tells us how we are going to look 
at Social Security and how we are going to look at other parts 
of the surplus.
    Mr. Spratt. Mr. Chairman, they are proposing exactly what 
you yourself were proposing last year.
    Chairman Kasich. What you have to understand, Mr. Spratt, 
is that is a weigh station. What I suggested is if can't go to 
2 percent of payroll because there is paranoia about the fact 
that everyday Americans can't figure out how to invest their 
own payroll taxes, then what I would like to do instead of that 
is to give some of this surplus to individuals to put it in an 
account above and beyond Social Security so they can realize 
what gains they can make through market-oriented investments. 
But that isn't my solution. My solution is that 2 percent to 3 
percent of payroll was that we can direct in government-
approved accounts that can give us a growth of 7 or 8 percent 
that can get us out of this problem. So, I am just looking for 
an interim step, something that we can all agree upon that can 
use the magic of the American economy to be able to get us into 
a better position.
    One last question, Mr. Lew, I know that the President in 
his speech in Buffalo--the Washington Post, one of my favorite 
newspapers--and we have got one of their great reporters here 
today--has quoted the President as saying of the surplus ``we 
can give all back to you and hope you spend it right. The 
conclusion being that we can't take a chance on that; 
therefore, we have got to have all these targeted tax programs, 
because if we give it to you, you might not spend it the way we 
want you to spend it.'' Doesn't it make sense to give people 
broad-based tax cuts and allow them to direct it toward what 
their needs are rather than to have all the targeted tax cuts 
so that we force people to go through a maze in order to get 
their money once they come out the other side?
    Mr. Lew. Mr. Chairman, we think there is a very clear 
choice. We think that we have gotten a fair amount of 
bipartisan agreement that putting 62 percent of the surplus 
aside for Social Security is a good idea. We may have 
differences to what it means to put 62 percent of the surplus 
aside, but I think we have a general agreement that that is the 
first step.
    When you go beyond that, we think the next step is 
Medicare. We have current commitments to Medicare and over the 
next 10 years we will put $350 billion aside of the surplus to 
keep the commitments we already have. On the question of 
putting that money into a tax cut, I think one has to ask about 
the alternative. If there is an alternative plan that would 
extend the Medicare trust fund to 2020 that could reach 
bipartisan consensus, we would like to see it. We think that it 
is very difficult to cut benefits, it is very difficult to 
reduce payments to providers, and it is very difficult to come 
up with an alternative plan for Medicare that is attractive and 
meets with quick bipartisan approval.
    So, the choice is not just a choice between a tax cut and 
nothing, it is a choice between a tax cut and putting the money 
aside to meet our commitments to Medicare. We think that is the 
right choice. It is a debate that we understand we are going to 
be having, and it will be a heated debate. We look forward to 
the debate because we think that is the right kind of debate to 
have when we have a surplus. Our view is that we have to be 
able to pay the bills for the commitments that we have today 
before we undertake new commitments----
    Chairman Kasich. Yes, I am not talking about Medicare; I am 
talking about your targeted tax cuts as opposed to the notion 
that they ought to be broad-based and let people make their own 
choices.
    Mr. Lew [continuing]. As far as the choice between the 
Universal Savings Accounts and an across-the-board tax cut, I 
think that that is a debate that we should have. We think that 
the right way to get tax relief is to encourage savings, to 
help people build the important leg on the retirement stool--
personal savings. They now get Social Security. Some get a 
pension. They should also have savings. The alternative could 
be an across-the-board tax cut. We think that the distribution 
of a Universal Savings Account would help working people put 
money aside for their own retirement. We think that the 
benefits of an across-the-board tax cut would tend to go to 
higher income, wealthier people. This is the kind of debate 
that we could have reasonable disagreements on. We think those 
are choices that we should make. Our view is that Universal 
Savings Accounts are the right way to give tax relief, and we 
would welcome within the framework where 12 percent is 
allocated to a tax cut having that debate.
    Chairman Kasich. Thank you, Director. Mr. Spratt.
    Mr. Spratt. Jack, let me just read from the record what 
Alan Greenspan said: ``The President's approach to Social 
Security reform is a major step in the right direction, because 
it would ensure that the large surpluses projected over the 
next 15 years would be a positive contribution to national 
savings.'' I think it would be useful if you picked up where 
you left off in your testimony and took us step by step through 
how you propose to take the trust fund for Social Security from 
around $800 billion today to eventually over $6 trillion.
    Mr. Lew. I would be happy to, Mr. Spratt.
    Chairman Kasich. Even though the natural accumulation is 
probably half that amount. How do you do that and at the same 
time that you build up the assets in the trust fund how you 
would buy down the national debt from $3.7 trillion held by the 
public to $1.3 trillion?
    Mr. Lew. Mr. Spratt, I think that we have to begin by 
reminding ourselves what happens in the trust fund if we do 
nothing. If we do nothing over the next 15 years, the trust 
funds will accumulate $2.7 trillion in additional assets. Those 
assets sit in the trust fund in the form of Treasury bonds 
which have the full faith and credit backing of the Federal 
Government just like a series-E bond or a bond bought by a 
corporation or a bank does. What we are proposing is to put 
more assets into the trust fund and have the increase go from 
$2.7 trillion to $5.5 trillion, doubling the additional assets 
in the trust fund over the next 15 years. And, as you pointed 
out, there is already almost a trillion dollars of assets in 
the fund. It would bring the total to over $7 trillion.
    The question really is, what happens when those bonds come 
due? How do we pay the bills? When we came in in 1993, looking 
at the year 2012, when the Social Security Trust Fund was going 
to start to redeem the bonds to pay benefits, everyone was 
worried. They were worried because we were looking at a deficit 
in 2012, not at a surplus. The question was: if you can't pay 
your bills in 2012, how are you going to pay back the bonds? 
Well, we're not looking at a deficit in 2012 anymore; we're 
looking at a surplus. And because we have a surplus, if we lock 
in the surplus, we will be able to pay those bills in 2012 
through 2055. And the point I made earlier about interest--
perhaps a useful way to think about it is that a dollar of 
interest paid on a Treasury Bond that's held by a bank, or a 
private investor, is a dollar that goes from the Treasury 
outside. A dollar of interest paid to the Social Security Trust 
Fund is passed along in a benefit. So the dollar of interest 
has a very different end if you're paying off debt held by the 
public than if you're paying off debt held by the Social 
Security Trust Fund in the form of assets. We're saying that 
those dollars should be preserved so that we can pay our Social 
Security benefits without having to make drastic reductions in 
benefits, without needing a big tax increase.
    We think it's prudent. We think it's only common sense. 
Unfortunately, government accounting is complicated, so it does 
take a little while to explain and to understand. But we think 
it is the most prudent way to carry forward the fiscal policy 
that's brought us the remarkable results that we're now 
enjoying.
    Mr. Spratt. What happens today with payroll taxes received 
by the Treasury is that the Treasury ends up holding the cash 
and the Social Security Trustees end up holding a special 
government bond?
    Mr. Lew. That's correct.
    Mr. Spratt. What you're proposing is to take the cash that 
the Treasury holds and buy outstanding debt with it, and, in 
effect, transfer that debt in addition to the Treasury special 
bonds so that you will augment the Trust Fund twice?
    Mr. Lew. That's correct. And instead of having that money 
go out in the form of either spending or a tax cut, let it 
build up.
    Mr. Spratt. Then, we build up to nearly $7 trillion; that 
includes the earnings on the money invested in the market and 
the earnings booked to the Treasury Bonds, and around 2020 we 
need to start drawing down that debt. At that point in time, 
instead of having several trillion dollars in outstanding debt 
held by the public, the Treasury will owe maybe $1.3 trillion, 
according to your projections. Debt service will have fallen 
from 13 percent of our budget to 3 percent of our budget, and 
the Federal Government will be in far better fiscal condition 
to redeem these bonds so that the Social Security Trustees can 
meet the obligations of the beneficiary. Is that the scheme?
    Mr. Lew. That is exactly right. And the choice we make 
today in terms of writing down the public debt is the key. If 
we let the public debt go back up, then our interest payments 
will go back, and we will lose the benefits that we've now 
projected for the future. We need to lock in what we are 
calling a virtuous cycle; it gives us the compounding effect of 
reducing debt to replace the vicious cycle that was eating us 
alive from 1981 to 1993.
    Mr. Spratt. Now, these USA Accounts are not strictly 
related to Social Security. They are supplementary to Social 
Security. The would be paid for, at least in part, by voluntary 
contributions and by government inducements that particularly 
moderate income citizens would enjoy. You have not yet defined 
all of the details, but don't you anticipate allowing each 
individual holder of one of these accounts at least the choices 
that Federal employees now have--either put it in a bond fund 
or a government bond fund or a corporate bond fund or a stock 
market index fund?
    Mr. Lew. Yes, Mr. Spratt. First of all, it's independent 
from Social Security, and that's a point we really want to 
underscore. We don't think it should be mingled with Social 
Security.
    We're working on the details and we're very concerned that 
as we define the details, we have as many good consequences as 
possible. We want to encourage current pension plans to 
continue to provide pensions. We want to encourage individuals 
who are currently saving to add to their savings, not just 
replace their savings. And we want to give them options, but we 
want to make sure we balance unlimited options with the cost of 
unlimited options.
    One concern we have is that administrative costs can grow 
if there's unlimited option. The current Federal system gives 
us, all of us who are putting our retirement savings into it, a 
limited range of options, where we can put our retirement 
savings into a bond fund, into an equity fund, or into a 
government bond fund. We probably will want more options than 
that.
    One of the things we hope to work out as we go through this 
legislative process is thinking through the consequences and 
how to draw the line in the right place. I don't think it's 
magic. I don't thing three options is magic. Unlimited options 
equally is not magic. Somewhere in the middle is the right 
balance, and I think we need to work together to try to define 
it so that individuals get the benefit of having the maximum 
return on their dollar go to their retirement and not go toward 
administrative expenses.
    Mr. Spratt. Thank you very much. One last question for 
clarification on another subject. Some of the press coverage of 
the budget yesterday and some of the criticism made of it by 
our colleagues across the aisle has indicated that there are 
significant tax increases in this particular budget, which 
seems odd at a time when we are looking forward to significant 
surpluses down the road.
    As I look through the budget, I see a redistribution of tax 
benefits, from largely corporate taxpayers, who are enjoying 
what you call unwarranted tax benefits, over to individuals 
such as mothers and fathers who have children, with a dependent 
care day care credit; and mothers and fathers who have parents 
who are elderly and homebound--there will be a credit for them 
too--a thousand dollar credit for their long-term care 
requirements. It's a redistribution there of about $33 billion.
    The New York Times yesterday included the recoupment from 
the tobacco recovery--a recoupment of what the States will be 
getting--$19 billion as a tax increase, but that's not a tax 
increase. You've got the reinstatement of a Superfund tax, 
which is just the renewal of the tax. You do have a $5 billion 
item for recasting the way we charge for using the airlines and 
the airways and the airports. But other than that--and, of 
course, your tobacco tax, which may or may not be a starter. 
I've got my doubt that it will go anywhere, but in any event, 
other than the tobacco tax is there any significant tax 
increase in this particular budget?
    Mr. Lew. Mr. Spratt, I think you've got it exactly right. 
We have proposed a variety of revenue raising provisions to pay 
for a variety of tax cuts. We think that closing loopholes for 
sham transactions is something that we can agree is good 
policy. There are always people who benefit from those 
loopholes who oppose it, but that's the kind of normal battle 
we have to try to make the tax code work right.
    What we've proposed in the form of tax cuts, we think are 
very important benefits--whether it's for long-term care or for 
building schools in our inner cities, or for providing for 
environmental bonds to be issued. These are all important 
investments that we think warrant the difficult choices in 
terms of closing loopholes.
    Now with regard to the tobacco tax--we do have a tobacco 
policy in our budget. I know that it is a policy that not all 
of us agree on, but we feel very strongly that, first and 
foremost, it's good public health policy.
    Last year, the President put forward a tobacco policy that 
was designed to increase the price of smoking to reduce teen 
smoking. Every day, 3,000 kids start smoking. Half of them 
develop tobacco-related illness. Our goal is to raise the price 
so that we will reduce in half the number of kids who start 
smoking every day.
    And we are not imposing a burden in a vacuum here. Today, 
tobacco-related illness is imposing a burden on the Federal 
Government. We spend $8 billion a year in discretionary 
programs--the veterans' health program, the Department of 
Defense health programs, our own Federal employee health 
program, and a bunch of other smaller programs--to treat 
tobacco-related illness.
    We would get $8 billion in excise taxes from the tobacco 
proposal, and it would just pay us back. The tobacco companies 
would pay us back for what we're spending as a Federal 
Government on discretionary spending for tobacco-related 
illness. We think it's only fair that that burden should be 
borne through the tobacco tax and not by the general taxpayer; 
that it shouldn't go to corporate profits, and it shouldn't go 
toward the benefit of the companies that are selling 
cigarettes.
    The policy is controversial. We understand that, and we 
readily acknowledge in the budget that this makes it easier for 
us to fund other health priorities and other important 
programs. But what we're doing is we're getting back the money 
that we're now spending on tobacco-related illness, which we 
think is only fair.
    Mr. Spratt. Thank you very much.
    Mr. Chambliss. Mr. Lew, I thank you for being here this 
morning. As a new member of this committee, I look forward to 
working with you as we go through this process and hopefully 
reach an accord on this budget. I think it's interesting though 
that you say that there are no new taxes other than a tobacco 
tax when, in fact, as I look at your numbers, you are looking 
at increased fees for Coast Guard navigational services, $701 
million; fees on international travelers, $1.6 billion; 
Medicare processing fee, $495 million, which doctors will pay 
when they process a Medicare claim, which means our Medicare 
patients will pay; FAA user fees, $7.1 billion; Federal 
Railroad Administration, $440 million; FDIC, $458 million; FCC 
fee, $1 billion, and on and on and on. That's about $11 billion 
over 5 years. If that's not a new tax, I don't know what it is.
    I want to talk to you about a couple of different areas. On 
the first one, you know agriculture has always been the 
backbone of the economy of this country, and ag folks all 
across this country are in trouble right now. Nineteen ninety-
eight was truly a disastrous year.
    We need to make some solid, long-term changes in 
agriculture policy. The best way that we can do that, and 
certainly I think the President agrees with us based upon what 
he said in his State of Union Address, is to come up with a 
good, solid crop insurance program. In order to do that, we've 
got to basically throw out what we've got in place right now 
and start over with a new program.
    The President said in his State of the Union that he wanted 
real crop insurance reform this year. Unfortunately, when I 
looked at this budget, I see absolutely zero dollars in the 
President's budget to be applied to crop insurance reform. 
Would you address that question, and tell me exactly how you 
plan to reform crop insurance and not pay for it?
    Mr. Lew. Congressman, the budget, as the State of the Union 
does, acknowledges the very important need to revisit our crop 
insurance program and to reform crop insurance this year.
    As you noted in your question, changing the current system 
is part of what one will have to do to create a new crop 
insurance system. Our experience in looking at this is that it 
is necessary to engage in a bipartisan discussion. We propose 
to engage in that discussion over the year, to make some of 
those tough choices, which are tradeoffs within the agriculture 
community and between different priorities of the agriculture 
community. The budget is a tight one. The fees that you 
described are the kinds of fees that we've been proposing for 
several years now in order to enable us to make the important 
investments that we need to make in areas like agriculture. The 
fees we've proposed in agriculture haven't all been accepted, 
which does make it difficult to provide the resources for new 
programs. I think we need to work together. We need to look at 
what our options are, and we need to make some touch choices. 
It's clear, the President made very clear in the State of the 
Union, and we made very clear last year in our response to the 
agricultural crisis last year, that there was a need for 
action. But these are tough choices, and they are choices that 
I think really are better made in a process where we're working 
together than when we're just putting competing plans out.
    Mr. Chambliss. Well, I still don't understand why you're 
not willing to fund crop insurance reform, but, be that as it 
may, it's interesting that one of the user fees that you're 
talking about is a fee that's going to be put on livestock 
processors. Now, when Mr. Nussle's hog farmers take their 
livestock to market, what's going to happen is that his farmers 
are the ones who are going to wind up paying that livestock 
processing fee. So, instead of helping agriculture in that 
respect, you are going to be reducing income to farmers across 
this country by the increase in the livestock processing fee.
    The second area that I want to cover with you is in the 
area of national defense. I think we all agree that we've not 
been spending enough money in this area, and even the President 
in the State of the Union said that he wanted to spend 
additional monies in defense. He has come up with a figure of 
$12 billion, which, frankly, is a lot of smoke and mirrors--
about $8 billion of that I think you would agree is just a 
redirection of current funds and a change in projection for 
inflation. So, we're really talking around $4 billion.
    Of that $4 billion, if we're talking about a pay increase 
of 4.4 percent, we're looking at roughly two and a half billion 
dollars. If you pay for Iraq and Bosnia out of that, you're 
talking about another $3 billion, so you're already over that 
$4 billion in new money that the President is willing to put 
into defense.
    Now, when the service chiefs testified before the Armed 
Services Committee they said that in order to bring every 
service branch up to par, not put us where they'd like to be, 
but to bring us up to par, it would take seventeen and a half 
billion dollars this year, not including the two and half 
billion for the pay increase. Why in the world, if the 
President wants to make a real commitment to defense, doesn't 
he listen to his service chiefs, who say we need $20 billion 
just to bring our services up to par?
    Mr. Lew. Congressman, the President has listened to our 
service chiefs. We've been meeting regularly over the last 
year. From the moment that they identified a growing readiness 
problem, we took it very seriously. The President took it very 
seriously. He met with the service chiefs back in September and 
listened to what was really a very different kind of message 
than he had gotten before. It was a message that said things 
were changing. They were changing quickly. And it really 
required a response.
    We worked very hard from September until we put this budget 
out first to add resources in the appropriations bill last fall 
to get a head start, and then to put together a plan that would 
take care of the highest priorities and all of the immediate 
needs that they identified.
    Yesterday, Secretary Cohen testified at the Armed Services 
Committee at length on this issue, and I won't try to repeat 
all the details he went through. But I think it's fair to say 
that in his testimony and General Shelton's testimony, they 
agreed that what we've put forward in this budget is the 
program that we need to make sure that we take care of the 
immediate problems in terms of retention of personnel and in 
terms of readiness.
    With regard to the arithmetic on the increase, I would beg 
to differ with your analysis of it. The inflation savings are 
very real savings. In a normal year, when the Defense 
Department sees inflation coming down, the funds that they are 
going to use go down because they are not spending a total 
number of dollars. They are buying a certain mix of goods and 
services. And if the cost of buying a helicopter goes down, 
then that money would not stay in the Defense Department budget 
in an ordinary year. By leaving that money in the Defense 
Department budget, we are permitting them to buy more--to buy 
more helicopters, to give a bigger pay raise. It's very real 
money.
    In the out years, there is an element of projection here, 
and, as Secretary Cohen testified yesterday, we think the 
projection is a fair one, a reasonable one, and it reflects a 
commitment to policy. But we will follow it on a year-by-year 
basis. We're committing here to a program, a policy level, and 
if the inflation estimate for the future changes, we will have 
to reconsider the total resources required.
    As far as the composition of our increase goes, a quarter 
of the increase in 2000 goes to personnel. That's to pay raises 
and to retirement benefits for the most part. The rest of the 
75 percent really goes into readiness in the first year--spare 
parts, things like that. The procurement budget builds up as we 
go through the 5-year period. It's a very aggressive program. 
It's the largest defense increase in decades. We welcome the 
debate about the composition of it. We have gone through a 
process with the Pentagon and with the chiefs that has been a 
very, very important in terms of making sure that we give the 
best armed forces in the world the resources they need to 
remain the best armed forces in the world going into the next 
century.
    Chairman Kasich. In the order in which people come in is 
how we recognize them, and the gentleman from Nashville is 
recognized.
    Mr. Clement. Thank you, Mr. Chairman.
    Jack, good to have you here today, and I want to say to you 
on behalf of the American people, I think everyone appreciates 
very much the Clinton administration being bold and courageous 
in putting a lot of new ideas and new initiatives on the table. 
I just hope--and I really say this in all fairness to all the 
Republicans and the Democrats--I think we should give it every 
consideration--those ideas and new initiatives. And let us not 
have it dead on arrival simply because President Clinton 
proposed these new ideas, because people are concerned about 
the future of Social Security, the future of Medicare; about 
new incentives on savings, a stronger national defense, 
reducing the debt, education--all these are critically 
important.
    Now I had the opportunity last week to speak with Chairman 
Greenspan, and I asked him about the tax cuts. And I know there 
are many that want tax cuts, substantial tax cuts. And I've 
sure voted for them in the past, and I am sure I'll vote for 
them in the future.
    But I asked him about the tax cuts, about the timing of it, 
about right now. He responded to me, ``Congressman, I am a 
Republican. Republicans like tax cuts. But our forecasts 
haven't been real good in the past. As a matter of fact, we 
should be still running hundred billion plus deficits rather 
than surpluses. I think we should pile those surpluses up for 
the future.'' You respond?
    Mr. Lew. Congressman, when Chairman Greenspan testified, we 
actually were very heartened by his comments, because we viewed 
them as being really an endorsement of the basic approach that 
we've taken, which is, buy down the debt first. The best thing 
that we could do would be to buy down the debt and to be able 
to pay the bills for Social Security and Medicare that we're 
already going to owe for benefits that people have already 
earned.
    Now, I think when he was asked the question as between tax 
cuts and spending increases, he gave the kind of answer that 
you described. But he was very clear: the best thing to do 
would be to buy down the debt.
    By putting the money into Social Security and Medicare, we 
think that that's the best way to lock the surplus up, to lock 
it in for a good future, for an economic future and budget 
future, that we all will be proud in 15 years to look back and 
say we contributed to.
    Mr. Clement. Jack, last year we had some major wins for 
TVA, and our Chairman of the TVA Caucus, Zack Wamp, and Van 
Hilleary, who's on this budget committee, too--but the fact is 
we've been zeroed out, and a lot of us don't understand why 
because if you're on the Ohio river system, the Mississippi 
river system, Colorado river system, Missouri river system, you 
get taxpayer dollars for flood control and navigation. And, 
yet, here we're in the Tennessee Valley Area, and we're not 
going to get a penny. We rate payers are going to have to pay 
that.
    Now I know there's a misconception that other parts of the 
country are subsidizing our power rates, but nothing could be 
further from the truth. Why should we be zeroed out in the 
Tennessee Valley Area?
    Mr. Lew. Congressman, last year when we addressed the 
question of the Tennessee Valley Authority in the Omnibus 
Budget bill, there was a long-term policy decision made which 
we think gave lasting benefits to the Tennessee Valley 
Authority, which made it unnecessary to have a direct 
appropriation. There was a conversion of debt that the TVA owes 
to the Federal Government that permits the Tennessee Valley 
Authority to pay less interest because it rolled over loans 
that were at a higher interest rate to be repaid at a lower 
interest rate. If you look at the benefit over the period of 
time, it year by year replaces the appropriation. And, in a 
sense, it gave TVA benefit at least for the next 10 years, so 
that it wouldn't be subject to the year to year appropriations 
process. It was not actually meant to be zeroing out the TVA; 
it was more of a conversion of the form in which the assistance 
to the TVA is delivered.
    Mr. Clement. My last question pertains to Medicare, and I 
know your proposal is transferring 15 percent of the unified 
surplus into the Medicare Trust Fund. In order to further 
extend the life of the Trust Fund, the budget includes 
additional cuts in Medicare payments amounting to $9.5 billion 
over 5 years. I don't know about the rest of the country, but 
in Tennessee, 38 of our 127 hospitals lost money in 1997. It 
appears that 45 hospitals will lose money in 1998. And the 
Balanced Budget Agreement of 1997 hasn't even been fully 
implemented yet. What is the reasoning behind these cuts? Are 
they really necessary?
    Mr. Lew. Congressman, the Medicare savings fall into two 
categories. A number of them are proposals that we've made in 
the past to deal with some problems that we tend to generally 
call fraud and abuse. They are to clamp down on overpayments 
and things like that. I don't think that's the portion of our 
savings that you are referring to. I think what you are 
referring to are the reductions in the provider payments, which 
are about half to two-thirds of our saving.
    Nationwide, hospital profit margins have been very high, 
even after the Balanced Budget Agreement. We understand that 
there are pockets in the country--some rural areas and others--
where that hasn't been the case. We need to look at what the 
impact of our proposals would be and to make sure that as we 
work through the policy, we don't have unintended consequences. 
It really was an attempt to put savings in the program so that 
we don't have Federal reimbursement resulting in higher profit 
margins than before the BBA, but at the same time, to put 
resources back into healthcare programs, to increase benefits 
so that people can buy into Medicare between age 62 and 65, to 
make sure that HCFA has the kind of reform and stable funding 
stream so that we can run a good Medicare program into the next 
century.
    We look forward to a debate on these issues. And I would 
underscore that it is separate from this proposal on the 15 
percent of the surplus. Regardless of what we do on the 
proposals for immediate change in Medicare, we think it's 
necessary to put the 15 percent of the surplus in because if 
this is an indication of how difficult it will be to make the 
program savings necessary to put $500 billion back into 
Medicare, it means we better save the surplus, and we better 
use the surplus to try and shore up the Trust Fund, because 
we're talking about the concerns raised with $9 billion of 
savings. Imagine what the concerns would be if we have $500 
billion of savings.
    Mr. Clement. Thank you, Mr. Chairman. Thank you, Jack.
    Mr. Lew. You're welcome.
    Chairman Kasich. Mr. Hoekstra.
    Mr. Hoekstra. Thank you, Mr. Chairman. Good morning. There 
are a couple of areas I'd like to ask some questions in. In the 
State of the Union speech, the President talked about the $15 
billion that the Federal Government invests in our public 
schools, and he also talked about the need to support what 
works and to stop supporting what's wasted.
    In your budget proposal, have you outlined specific areas 
where you believe we have been wasting Federal education 
dollars and how we would reallocate those funds?
    Mr. Lew. Congressman, the budget sets forth a general 
statement of policy. We will be sending forward an Elementary 
and Secondary Education Act legislative package that will be 
more detailed.
    What we have tried to do is put together a package that 
would encourage schools to end the process of social promotion. 
We put a lot of money into after school and summer programs. We 
need to create an alternative to the current cycle where 
there's no choice but to either leave the kid back or to have a 
social promotion, because they don't have an option that helps 
them catch up and stay in grade.
    We've tried to put incentives in for schools to encourage 
the kinds of performance and excellence that I think we all 
agree should be universal in the schools. Sometimes our Federal 
programs help move things in the right direction. Sometimes 
they don't. We've put a package forward, and, as you know, the 
ESEA proposals will come forward in much more detail very 
shortly.
    Mr. Hoekstra. And that will include an analysis of the 
programs and the types of approaches that have not worked in 
the past so that we can better learn from those programs and 
influence what we should be doing in the future?
    Mr. Lew. Well, I think I've noted one of the major concerns 
we have. We think social promotion has been a very big problem. 
We think that the job of the schools is to make sure that we 
promote kids and that they are able to perform at grade; and 
when they graduate, they are able to go into the workforce and 
take jobs. I don't think we disagree on the goal. We may 
disagree on the mechanisms and that's what we hope to work 
through in the process of ESEA reauthorization.
    Mr. Hoekstra. Well, that's what I am trying to get at. I am 
wondering if you've taken a look at the entire Federal role. 
One of the things that we are concerned about is the multitude 
of programs and the number of different agencies that are 
dealing with the area of education. I am wondering whether the 
administration has taken a look at whether creating a number of 
new programs with additional strings is the most effective way 
to improve education. At other times, the administration has 
talked about more flexibility for local schools and more 
discretion as to what they can do with Federal dollars. I am 
just wondering as to the administration--which way are you 
going to go--more programs with more strings or fewer programs 
with more dollars and more flexibility back at the local level?
    Mr. Lew. Congressman, this year is a little different than 
other years because of the reauthorization of the major 
education programs. And I think we will be proceeding both with 
the funding of the initiatives that we have worked very hard 
on, from charter schools to after school programs; and working 
on the basic programs, to make sure that the basic programs are 
reformed or changed in a way to make the education dollars that 
we've put out more effective.
    I think the question of either/or isn't the way we look at 
it. We have a number of goals. We have specific goals that we 
accomplish through these individual programs, and we have 
broader goals in terms of the very large dollars that we've put 
out through the basic education programs, which the school 
districts themselves mostly control. And we're going into that 
debate with the goal of preserving the independence of the 
local schools. This is a partnership. This is not a case where 
the Federal Government comes in and tells States, cities, and 
local school districts exactly how to run their schools.
    But it is fair, when so many billions of dollars of Federal 
money are going into the schools, for us to ask some tough 
questions, and for us to challenge the schools to do better in 
certain areas.
    We hope to do this in a cooperative way. We don't view this 
as the Federal Government coming in and taking over. It's a 
question of getting the balance right.
    Mr. Hoekstra. I think that is exactly right: getting the 
balance right. And our experience would say that there are many 
at the local level who believe we might be getting out of 
balance.
    On a different front, have you included a projection of the 
level of the gross Federal debt over the budget window in your 
budget proposal. I mean, is the debt, the gross debt going to 
increase or decrease?
    Mr. Lew. We do have projections of both debt held by the 
public and the gross debt. This gets into an area that is 
complicated, and I apologize for using language that's more 
technical than I like to. But the debt subject to limit is a 
larger number than the debt held by the public, because all of 
the dollars that are in the Social Security Trust Fund in the 
form of Treasury bonds are subject to limit. The existing 
accounting rules are confusing because we save money and we 
call it debt subject to limit.
    The important measure for the purpose of the economy is the 
debt held by the public. The question of whether or not the 
Federal Government is crowding out private investment really 
has to do with what's happening to the debt held by the public. 
We will be reducing the debt held by the public from 40 percent 
to 7 percent of GDP over the next 15 years, which means we're 
freeing up dollars for private investment and to lower interest 
rates. And we think that is a very good thing for the economy.
    Mr. Hoekstra. I am interested in the gross debt. I mean a 
debt owed to Social Security is not necessarily a lot different 
than a debt owed to the public. You and I may disagree on that, 
so the gross debt does go up?
    Mr. Lew. It does, but Congressman, the reason it is 
different is that the benefits that Social Security owes--
that's the real debt. We have that debt today. It's not debt 
subject to limit. But it's a moral debt. It's a promise that 
we've made, and I believe it's a promise we will keep.
    When we put assets in the Trust Fund and the debt subject 
to limit goes up, the only reason it's going up is that we're 
putting money behind the promise to pay the benefits that 
people are already entitled to.
    Mr. Hoekstra. But it's still debt?
    Mr. Lew. Yes, technically, those Treasury bonds are debt.
    Mr. Hoekstra. This budget still has gross debt increasing 
during the time frame of your budget proposal, is that correct?
    Mr. Lew. It's correct, but it's increasing for a good 
reason, because we're holding on to those assets.
    Mr. Hoekstra. Good.
    Mr. Smith. Will the gentleman yield?
    Mr. Hoekstra. Thank you. I'll yield for a minute, yes.
    Mr. Smith. Just noting that I noticed CBO in their estimate 
didn't have an increase in total debt.
    Chairman Kasich. A compassionate man like I am. The 
gentlelady from Oregon is recognized for 5 minutes.
    Ms. Hooley. Thank you, Mr. Chair.
    Chairman Kasich. For 5 minutes and 15 seconds.
    Ms. Hooley. Thank you, Mr. Lew, for your presentation.
    I want to go back to Medicare. We've talked a lot about 
Social Security. I mean, I've read a lot in the paper about it 
seems there's some agreement that we're going to put 62 percent 
into Social Security. Medicare is a much more immediate 
problem, and where we're going to run out of money much quick 
in Medicare. And I, too, am concerned about some of the cuts 
that are proposed in there. I mean, again, I was talking to 
some of our hospital people yesterday and some of the small 
hospitals because of the reduction they are already facing in a 
6-month period ended up being in serious trouble. So I am 
concerned about that.
    But I am also concerned about what do we do if we don't put 
this 15 percent into Medicare. What's our next step if that 
doesn't happen? Do we increase payroll taxes? Do we decrease 
benefits? What are some of the alternatives without that 15 
percent?
    Mr. Lew. Congresswoman, that is the important question, 
because what we're proposing today is a budget that has many 
choices in it. When we say put the surplus aside for Medicare, 
we're looking at the alternatives. The alternatives are very 
large increases in payroll taxes or very large reductions in 
benefits.
    Ms. Hooley. Tell me what you mean by large increases? What 
are we looking at?
    Mr. Lew. Just the Medicare portion of the payroll tax, 
which is currently 2.9 percent. It would have to be 3.4 percent 
starting in fiscal year 2000. That means raising payroll taxes 
by .5 percent just to provide the kind of additional resources 
that we're talking about here. That's an 18 percent increase. 
We would be doing a bad thing to the economy if we put that 
kind of a tax increase in place right now. No one has proposed 
it, but if we don't set the money aside from the surplus, we 
have to be honest with ourselves about the choices. The choices 
are those kinds of payroll tax increases or benefit cuts or 
reductions to providers.
    And, as I said to Congressman Clement, we understand that 
$9 billion of savings forces us to make tough decisions. It 
forces us to ask questions about whether your healthcare 
providers are being treated fairly or not, and we certainly do 
want to treat them fairly. To come up with $500 billion would 
require choices that are just enormously difficult. We saved 
$130 billion in the Balanced Budget Agreement. This is much 
bigger than that. And we think before we make any new 
commitments, whether it's to a tax cut or to large spending 
increases, we have to pay the bills that we owe. And that's why 
we put this plan forward.
    Ms. Hooley. Thank you.
    Chairman Kasich. But let me ask you a question. You can 
make no programmatic changes in Medicare, none, if you don't 
raise the payroll taxes. You don't reduce benefits. What you do 
is put a bunch of bonds in and say you've extended the live of 
Medicare, isn't that correct?
    Mr. Lew. Well, we have put more assets in the Trust Fund. 
There's only three ways to extend the life of the Trust Fund. 
You can raise taxes, you can cut benefits, or you put more 
money. And we are putting more money in. We think that's the 
right thing to do.
    Chairman Kasich. You can put more money, but you put more 
bonds in, which draws against the public. I mean you didn't put 
any money in there. You put the bonds in there. We have to 
honor Social Security. But we didn't put any money in there. 
That's a bookkeeping entry.
    Mr. Lew. What we're saying is that those bonds have first 
call on Federal revenues, and that's the right thing to do. 
It's the right thing.
    Chairman Kasich. Right. But you've made absolutely no 
programmatic changes in Medicare at all that would control any 
of the spending. You just say we're going to have more bonds in 
here, and so that can be drawn down on our kids. I mean----
    Mr. Lew. Mr. Chairman, we agree that there's a need for 
serious programmatic reform. What the President said in the 
State of the Union and what he will be saying today again is we 
need to start by putting 15 percent of the surplus aside. We 
then need to go through the process that the Breaux Commission 
is going through. We will need to go through together to make 
the kinds of tough choices. And as we make those tough choices, 
we need to find savings. We also need to look at some real 
problems in terms of the benefit package. We need to have that 
kind of a discussion. But this will only make it easier. Any 
alternative has the burden of coming forward and answering the 
question, how would you extend it for 10 years if you don't 
save 15 percent of the surplus.
    Chairman Kasich [continuing]. Right. But my only point is 
you presume that there is an infinite drawing down on our 
paychecks. And you have done nothing to make one single change 
in the Medicare program. You're just saying I am going to put 
bonds in here that our kids are going to pay, and we're going 
to pay. And we got all these bonds in there on Social Security 
that we're going to pay and we're going to draw down on. I 
don't know if the Democrats understand this, but there is no 
guarantee we're going to have enough money to pay all these 
things down.
    Mr. Lew. Mr. Chairman.
    Chairman Kasich. But to say we're going to put more IOUs in 
an account, and that extends the life of the program. I mean 
that's what we're talking about. We're not talking about one 
single choice that changes one crossed T or dotted I in the 
program. We're just saying there's more obligations to 
Medicare. And I agree with you, Jack, we're going to have to 
get the point where this commission's going to have to come 
through. But to say that we got more bonds in this fund, that 
should make us more all feel better is--I don't think that's 
leveling with folks.
    Mr. Lew. Mr. Chairman, the real choice is what we do with 
the projected surpluses. If we, for example, have a large tax 
cut, that large tax cut will reduce revenue in the future. 
We're saying that rather than reduce----
    Chairman Kasich. Of course, now that's a matter of opinion.
    Mr. Lew [continuing]. Well, that's what most economic 
analysis shows: when you give a tax cut, you have less revenue.
    Chairman Kasich. Well, that's not what is shown on capital 
gains. It's actually generated a heck of a lot more revenue. In 
fact, that's one of the reasons why we've had the big spurt in 
Treasury collections.
    Mr. Lew. The choice that we're suggesting is that rather 
than have the revenue first be given back to a tax cut, we 
should put the money aside so that the first call on the 
surplus is to pay these bills.
    Chairman Kasich. Right. Right.
    Mr. Lew. And that is a choice. We understand there's a 
choice. It's the kind of debate we should be having.
    Chairman Kasich. It's a first call, but it's not the money. 
Show me the money. I'll recognize the gentleman from New 
Hampshire, Mr. Sununu.
    Mr. Sununu. Thank you very much, Mr. Chairman. Thank you 
for being here, Mr. Lew. I appreciate your taking the time. I 
know it's not easy. You follow in distinguished footsteps. Mr. 
Raines, I think always was very willing to enjoy the give and 
take and be forthcoming with information, and I think you've 
done the same.
    You were very candid about the user fees and the tax 
increases that are part of this budget proposal. And you talked 
a little bit about some of its targeted tax relief, the very 
narrow targeted tax relief. The summary that I've seen--the 
total is for those taxes that are increased--it's about $82 
billion in tax increases; about $26 billion in user fees over 5 
years. I think the tobacco tax increase is one of the bigger of 
the tax increases. What is the 5-year total of the tobacco tax 
increase?
    Mr. Lew. The 5-year total on the tobacco increase is about 
$33 billion.
    Mr. Sununu. OK. So, $33 billion in tobacco----
    Mr. Lew. Excuse me, $34.5 billion.
    Mr. Sununu [continuing]. Thirty-five billion in tobacco tax 
increases is obviously a big chunk of the total tax increase. 
And the ranking member of this committee doesn't think that tax 
increase is going to go anywhere. Now, I am sure the 
administration feels very good about its ability to change 
minds, but I submit that when the ranking member of the Budget 
Committee doesn't think that the biggest part of your tax 
increase proposal is going to go anywhere, then you might have 
problem moving this budget package forward. What's your 
reaction to that?
    Mr. Lew. My reaction to that is really to go back to what 
the purpose of the tobacco policy is. We feel very, very 
strongly that the tobacco policy is the right policy for the 
country. If we want to reduce smoking, if we want to improve 
public health, we know that the most effective way to do it is 
to raise the price. We also know that the tobacco companies 
have been raising prices on their own and increasing their 
profits, and that that's wrong. We shouldn't be raising the 
price for the benefit of the producers of cigarettes. We 
understand it's a debate that is going to be tough, but we're 
anxious to get into that debate. We think it is the right 
debate to have. And we think the American people will be well 
served if we prevail.
    Mr. Sununu. You think you're going to win. You think you're 
going to be able to increase tobacco taxes this year.
    Mr. Lew. We're going to try hard.
    Mr. Sununu. You also included some money from the tobacco 
settlement with the States. I take it, you've run that idea 
past the States' governors?
    Mr. Lew. Well, we were very careful with regard to the 
States to try and lay out a framework for working together with 
the Congress and with the States. There's nothing in the fiscal 
year 2000 budget that presumes an agreement on our proposal for 
using the Federal portion of the States' settlement. What we've 
said is we want to work with the States and with the Congress 
to identify a list of common Federal and State priorities so 
that we will identify Federal costs that the States would pick 
up as part of the settlement. Now, obviously, that would reduce 
the burden on the Federal Government, and it would free up 
resources for other purposes. We think that that's only fair. 
Medicaid is a Federal Program. Half of the Medicaid dollars are 
Federal dollars. The tobacco settlement gave all those dollars 
back to the States. We understand it's going to be tough, but 
we think it's the right thing to do.
    Mr. Sununu. Once again, I think you're going to have a very 
tough time getting the support of the Nation's governors who I 
think have taken the lead on this issue; but, moreover, 
probably feel very strongly about keeping those funds to spend 
or to invest locally. And certainly, we've seen that a lot of 
local governments, States, municipalities tend to be more 
efficient than the Federal Government in whatever kinds of 
investments they make.
    Mr. Lew. I should point out, though----
    Mr. Sununu. I don't have much time. It's just a comment. 
That's not a question. And I would like to talk about the user 
fees, because you've got a few, quite a few.
    And Mr. Chambliss began to read through the list, but I 
think it bears repeating because it is a lengthy list. There 
was a suggestion earlier that the tax increases in this budget 
represent a redistribution of wealth. And I think that's 
accurate. I suppose the assumption is it's a redistribution of 
wealth from the good taxpayers to the bad taxpayers; or, from 
the bad taxpayers to the good taxpayers. And that suggests I 
guess that some people, Americans, wouldn't be affected by the 
tax and fee increases. And I'd like to read through those user 
fee increases that are in your budget proposal: food safety 
inspection fees; animal-plant health inspection fees; grain 
inspection fees; Forest Service fees; navigational fees; 
fisheries management fees; patent and trademark fees; trade 
promotion fees; healthcare financing fees; Food and Drug 
Administration increased user fees; physician fees; managed 
care fees; provider certification fees; claim submission fees--
all of these are user fees of the Medicare program--bankruptcy 
filing fees; alien certification fees; Coast Guard fees; 
hazardous material transportation safety fee--we're all for 
safety; customs air and passenger fees; customs access fees; 
commercial accident investigation fees; rail safety inspection 
fees; pesticide registration fee; analog spectrum fee; Social 
Security claimant fee; Federal Aviation fee. This is an 
interesting one. We changed the harbor fee to a harbor tax; or, 
rather a harbor tax to a harbor fee. I am not sure what the 
impact there is. We have bank exam fees, and finally Medicare 
premiums.
    Have we left anyone out? It seems there can't possibly be 
anyone in America that's not impacted in one way or another 
from an increase in a user fee on an activity that they might 
rely on weekly, monthly, or everyday of their life.
    Mr. Lew [continuing]. Let me, if I can, distinguish between 
three different categories. There are certain loophole closers 
which--I don't want to use ther terms ``good'' and ``bad''--are 
closing down loopholes that shouldn't be there. I don't think 
that we would have a disagreement if we identified a sham----
    Mr. Sununu. These aren't loopholes.
    Mr. Lew [continuing]. No, no, I understand.
    Mr. Sununu. These are all user fees to be clear.
    Mr. Lew. I am just trying to identify the different 
categories. I don't think any of us would want a tax incentive 
for a sham transaction. We do have the tobacco tax----
    Mr. Sununu. I didn't mention the tobacco tax, either. These 
are all user fees.
    Mr. Lew [continuing]. I am trying to separate----
    Mr. Sununu [continuing]. These are not taxes.
    Mr. Lew. I am trying to separate the categories.
    Mr. Sununu. They are not loopholes.
    Mr. Lew. The user fees--which I think you have sort of 
merged with these other proposals in terms of the total numbers 
you've used--are really different in kind. And we believe that 
when the Federal Government provides a service, whether it's at 
a port of entry or at a food inspection station, that the 
industry that gets the benefit of the service should pay for 
it.
    You use the example of the harbor fee. I realize that no 
one who represents a port city will be grateful that there's a 
harbor service fee proposal. But the Supreme Court struck down 
the former harbor fee that Congress passed because it was 
technically flawed. What we've put forward is a proposal that 
is technically not flawed, which reflects the policy that was 
already there. They are not all new fees. That's one of the 
larger ones. Many of the ones you used as an example are very, 
very small. That one is quite large. User fees are not popular 
by the users. Users would like to get services for free. 
Industries would like to get corporate subsidies. Chairman 
Kasich has taken the lead in identifying the need to close 
corporate loopholes and to do all that we can to make the 
government not provide unwarranted benefits.
    The user fees mostly fall into that category. And, when you 
take them one by one, I think we probably could agree on more 
of the policy than we could the politics.
    Mr. Sununu. Well, I appreciate your answer very much. I've 
tried to be clear, and the user fees there represent $26 
billion. And you are right to distinguish that from the tax 
increases that are separate and above that $26 billion. Thank 
you very much. Thank you for your patience, Mr. Chairman.
    Chairman Kasich. You're very welcome. The gentleman from 
Pennsylvania is recognized for 5 minutes. Mr. Hoeffel, yes. 
That would be you.
    Mr. Hoeffel. Thank you, Mr. Chairman.
    Chairman Kasich. Where are you from in Pennsylvania?
    Mr. Hoeffel. I am from the suburbs of Philadelphia, which 
is what I want to ask my question about. Many of us from the 
suburbs are interested in the livability proposal that the 
administration has come forward with. Some say that the 
proposed spending would be helping social planners save or get 
involved with buying up open space. And the critics of the 
program seem to think that it's not an effective way of 
managing resources, controlling growth, or actually improving 
economic opportunities. Could you address some remarks to how 
the funding mechanism, which seems to be a Federal tax credit 
for investors in local and State bond issues that would 
generate the funding, would be used for open space and growth 
management programs. Could you address how that's going to 
actually improve the quality of life in the suburbs and improve 
the economic growth in the suburbs?
    Mr. Lew. Congressman, we have a number of initiatives in 
the area of lands, what we call the Lands Legacy and the 
Livability Agenda. The green bonds that you are referring to 
are one component which would provide additional access to 
capital at a lower rate for environmentally sensitive 
investments, both in preserving open spaces and in improving 
the use of existing spaces that are not open spaces. We think 
that if you look at the combination of the initiatives in terms 
of preserving large public spaces, the Lands Legacy, 
encouraging the process of local planning to preserve open 
spaces, and providing access to capital so that the 
preservation of open spaces and the cleaning up of spaces that 
are currently used really answers a need that many Americans 
feel strongly about as we enter the new century.
    Around the country, there is a growing concern that we're 
living in pretty good times right now. We have an obligation to 
take a view that's a little bit longer, and ask what are we 
going to do to leave behind cleaner waters, more open spaces, 
cleaner air. And we've tried to put together a program that's 
not big government; that doesn't say we're going to come in and 
tell local communities what to do. We're not going to come in 
and tell industry what to do. But we're going to give 
mechanisms, broad mechanisms, so that the grassroots movement, 
which is very strong--this is us responding to the American 
people, not the American people responding to us--has the tools 
to do more of what they are doing already.
    And we're hopeful that this is an agenda that will have 
bipartisan support. It does seem to me to respond not just to 
the interest of suburban Americans, but urban and rural 
Americans as well.
    Mr. Hoeffel. You seem to be addressing the problems of 
sprawl, of unregulated growth that sort of leapfrogs out from 
the urban centers and replicates new infrastructure and new 
schools and new highways. And we keep building and building 
further and further out without reinvesting in the already 
populated areas, and, in the process, we use up a lot of open 
space and farmland and spend a lot of time in traffic gridlock.
    This has never before been viewed as a Federal problem, and 
I applaud the administration for recognizing the role that the 
Federal Government can play in promoting some funding 
mechanisms but also elevating the problem to a national level.
    Mr. Lew. You've actually pointed out one element that I 
left out, which is using our transportation programs to 
encourage the kind of planning that really is important. We 
have to be able to get to and from the places we need to do 
business and live without encroaching on our remaining open 
spaces.
    Mr. Hoeffel. On another subject, just quickly. You 
mentioned Chairman Kasich's proposal for corporate welfare 
reform in the last Congress. And I recognize the administration 
has identified unwarranted tax benefits in this budget 
proposal. I used a number of the Chairman's proposals in my 
campaign. I thought they were right on target. Have you 
reviewed what he called for, and is there some common ground 
there?
    Mr. Lew. Well, we've had more ability of reaching agreement 
on the concept than on the details. [Laughter.]
    There are some items on that list that I think we do agree 
on. There are other items where I think we consider it 
important investments in technology, where he would put it on 
the list as a corporate subsidy. There are important questions 
to ask. If you look at our user fees, if you look at the 
loophole closers, I think there's a shared objective of trying 
to make sure that we don't squander government resources with 
subsidies for private interests that don't need them. The devil 
is in the detail.
    Mr. Hoeffel. Right. OK. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Kasich. Just for the information of the committee, 
we do intend to have a hearing on corporate welfare before we 
do anything with the budget. It will be coming up, and it 
should be interesting. I don't know who all will be there, but 
I know that Mr. Nader will be there, so it should be 
interesting. And I'll bet we will have a few press people in 
attendance for that one. Jack, you can come, too, if you want.
    Mr. Lew. I'd be delighted.
    Chairman Kasich. OK. Anyway, my--I think one of my heroes, 
Jim Ryun, is recognized for 5 minutes.
    Mr. Ryun. Thank you, Mr. Chairman. I want to go back to a 
subject that was discussed a little bit earlier, but I'd like 
to get into it in a little more detail with regard to national 
security. I appreciate the President's interest in increasing 
pay as well as the benefits. And yet, I want to read a quote 
from the House Armed Services Committee regarding the military 
personnel and their concerns. Two top reasons that they are 
leaving: number one, I am tired of working extended shifts due 
to lack of help; and I am tired of being away from my family. 
Now, while we recognize that there's a need for pay increases--
just this morning General Reimer recognized that he needs as 
much as $5 billion, but he's going to do well to have $2.4 
billion. And part of the reason he needs that money is that a 
lot of these people have left; a lot of his NCOs have left, and 
it's weakened our military forces. In part, I want to send a 
message to the President to urge him to consider increasing the 
amount of money that is being set aside now for military, 
especially recruitment, because we are at a point where 
retention is very, very difficult.
    But part of my question is going to go back to base 
closures. Robert Bell said earlier this year that he felt that 
there could be billions of dollars saved as a result of base 
closures, and yet the DOD has indicated that it would actually 
be a net cost of roughly $2.4 billion. Does this administration 
really think that they can save money through base closures 
that would contribute to the budget in some way?
    Mr. Lew. We very much believe that base closures do 
contribute to long-term savings. The problem in terms of 
bringing the budget and the policy together are that in the 
short term base closures cost you money. In the long term, they 
save you money.
    If we start with the premise that when the military 
identifies resources they don't need--bases that are not 
serving a useful purpose--we all worry about the dislocation, 
and whether we will need those resources in the future. We need 
to go through a careful process to balance these 
considerations. But once the decision has been made--once a 
BRAC-like process has concluded that a facility is no longer 
needed--if we spend the money to do it right in a short term, 
10 years from now, the savings will be very substantial. 
Defense is not a 1-year kind of budget. The defense budget is 
done over 6-year periods of time. They take very seriously the 
year to year and multi-year impact of the decisions. There are 
only about three or four places in the government where multi-
year planning is so important. I think because of that, looking 
at BRAC not as a contributor to savings this year or next year 
but perhaps as a cost and as a contributor to savings for the 
next decade for the first decade of the next century is really 
the right way to do it. By 2008 or 2010 the savings are very 
real.
    Mr. Ryun. I am not totally convinced of that because if we 
are already in a spot, in a real problem with the number of 
people that we're sending out, we're deploying so often our 
troops are weary--if we're going to reduce the number of bases, 
and I am still not convinced it's going to be savings. I would 
just like to simply express my concern over that and ask the 
President to reconsider that. Mr. Chairman.
    Chairman Kasich. Well, I want to thank you, Mr. Ryun. I 
wanted to let you know, I want to congratulate you on being the 
second American to break the 4-minute mile. I was actually the 
first one. I did it in a school-yard behind my house. Mine 
wasn't ``finalated.'' I just didn't tell anybody, Jim. 
[Laughter.]
    OK. Oh, Mr. Price from North Carolina is now recognized for 
5 minutes.
    Mr. Price. Thank you, Mr. Chairman. Mr. Lew, let me add my 
welcome and ask you to elaborate on a couple of aspects of your 
testimony.
    In some ways, this first question picks up on the line of 
questioning Mr. Hoekstra was pursuing. It has to do with the 
debt reduction, which I think most people agree is one of the 
strongest features of your proposal--the great strides that 
you're proposing to make in paying down the publicly held debt, 
from $3.7 trillion to $1.2 trillion, or from 42 percent of GDP 
to 7 percent by 2015, under current assumptions.
    Why have you chosen the mechanism that you have of 
transferring 77 percent of the surplus over the next 15 years 
to these trust funds--to the Social Security and Medicare Trust 
Funds--in order to accomplish this purpose? Why do you choose 
that? I understand that part of the reason is the political 
appeal, of course, of addressing the long-term trust fund 
shortfalls, but I think we do need some elaboration on exactly 
how this is going to work, because you are essentially moving 
that debt into the trust funds. As you said, the debt subject 
to limit is going to remain, but I also understand you to say, 
and now your--the last chart you showed a moment ago about the 
implications, those two kinds of debt have very different 
implications for annual interest outlays and thus for our 
capacity in the future to meet those obligations to those trust 
funds when those bonds come due. So could you elaborate on 
that, because I do think there's some confusion on the point of 
exactly what this debt reduction entails.
    Mr. Lew. Congressman, I would be happy to elaborate. 
Usually I start with the substance, and then I go to the 
politics. But I think in this case, it may make sense to start 
with the politics.
    It's very important that we actually accomplish the debt 
reduction. The notion of reducing the public debt is a 
difficult concept, but a very important one. And in the past, 
when the choice has been presented to pay down the debt held by 
the public or spend money on a tax cut or on other popular 
programs, it has been very hard, very, very hard, to sell debt 
reduction as a policy against a tax cut or a spending increase. 
So the politics is very much connected to the substance. To get 
to the debt reduction, I think we need more than just a passive 
debt reduction. We need to have a reason to do it.
    The substance is very important as well. Debt reduction 
doesn't really do anything to extend the life of the trust 
fund. Yes, it means that we can pay the trust funds what they 
are currently due, and that's very important because it really 
is the first part of our plan--to make good the promises we've 
already made, the Treasury bonds that are in the trust fund now 
will be paid more easily just by simple debt reduction. But we 
want to increase the assets in the trust fund. We want to say 
that come 2020, there should be more Treasury bonds in the 
trust fund, and there should be more dollars being committed to 
Social Security rather than losing those dollars to a tax cut 
or spending increases. That is a substantive difference of 
great importance. That's why our plan goes from 2032 to 2055 in 
terms of trust fund solvency. The Social Security actuaries 
have looked at it. They've written a letter, which I would be 
happy to submit for the record; that it has that effect; that 
our plan would extend solvency to 2055. And that would not be 
true of simple debt reduction. Debt reduction is not bad, but 
we think that what we propose is better.
    [The letter referred to follows:]

                Office of the Deputy Chief Actuary,
                            Social Security Administration,
                                    Woodlawn, MD, January 26, 1999.
Harry C. Ballantyne,
Chief Actuary

  Long-Range OASDI Financial Effects of the President's Proposal for 
               Strengthening Social Security--Information

    The President's proposal, presented in the State of the 
Union address on January 19, would require that transfers be 
made from the General Fund of the Treasury of the United States 
to the Old-Age, Survivors, and Disability Insurance (OASDI) 
trust funds for each year 2000 through 2014. The amount of 
transfer for each year would be specified in law as a 
percentage of the OASDI effective taxable payroll. In each year 
2000 through 2014, 21 percent of the transfer would be used to 
purchase stock and 79 percent would be used to purchase special 
interest-bearing obligations of the Treasury. All dividends 
would be reinvested in stock until the market value of all 
stock held by the OASDI trust funds reached 14.6 percent of 
total OASDI trust fund assets. Thereafter, the percentage of 
total trust fund assets that is held in stocks would be 
maintained at 14.6 percent.
    The proposal would extend the estimated year in which the 
combined OASDI trust funds would become exhausted by 23 years, 
from 2032 to 2055. It would reduce the size of the estimated 
long-range OASDI actuarial deficit by over one half, from 2.19 
to 0.76 percent of taxable payroll. (Due to interaction among 
provisions, a complete elimination of the actuarial deficit 
will require additional OASDI changes that would reduce the 
present law deficit by up to 1.0 percent of taxable payroll.) 
These estimates are based on the intermediate assumptions of 
the 1998 Trustees Report and other assumptions described below.
    If transfers were invested only in government bonds, the 
estimated year of trust fund exhaustion would be extended by 17 
years, from 2032 to 2049. The estimated long-range OASDI 
actuarial deficit would be reduced from 2.19 to 1.20 percent of 
taxable payroll. This result also provides an indication of the 
sensitivity of the estimates to variation in the expected yield 
on stock. If, for example, the actual yield on stock over the 
next 50 years is no greater than the expected yield on 
government bonds, the estimated year of trust fund exhaustion 
would be extended from 2032 to 2049, rather than to 2055 with 
expected stock yield.
    Stock investments would be managed by several brokerage 
firms, selected by competitive bid. Stock investments would be 
required to reflect the composition of all publicly-traded 
stock in the United States (for example, the composition of the 
Wilshire 5000 index).
    Transfers from the General Fund of the Treasury would be 
made each year 2000 through 2014. The estimated amount of 
transfer for each year is shown below, based on the 
intermediate assumptions of the 1998 Trustees Report.

                          Estimated Amounts To Be Transferred to the OASDI Trust Funds
                                           Billions of Current Dollars 

----------------------------------------------------------------------------------------------------------------
2000................................    $81.4  2005...................    117.4  2010..................    256.4
2001................................     67.2  2006...................    148.6  2011..................    280.0
2002................................     88.3  2007...................    174.8  2012..................    300.0
2003................................     87.2  2008...................    203.2  2013..................    316.0
2004................................    105.6  2009...................    232.5  2014..................    324.4

    Amounts transferred would indirectly reflect values for 
years 2000 through 2014 that are about 62 percent of the 
expected unified budget surplus estimated by the Office of 
Management and Budget for the President's Fiscal Year 2000 
Budget. Actual transfers for each year would be specified as 
the product of (a) the values computed under these budget 
projections, expressed as a percentage of OASDI effective 
taxable payroll, and (b) the then-current estimated taxable 
payroll at the beginning of each year of transfer. Revisions in 
amounts transferred each year would be made as estimates of 
taxable payroll for the year are finalized.

                    OASDI Trust Fund Assets in Stock

    The 1994-96 Advisory Council on Social Security requested 
estimates assuming that the total annual real yield on stock 
investments would ultimately average about 7 percent, 
approximately the average (geometric mean) yield on stocks so 
far this century. (Total yield includes dividends as well as 
capital growth.) Estimates for this proposal are based on a 
more conservative assumption for the average ultimate total 
annual real yield of stock at 6.75 percent. The nearly four-
percentage-point difference between this assumed ultimate real 
stock yield and the Trustees' 2.8-percent assumed ultimate real 
yield on government bonds held by the trust funds is assumed to 
be maintained throughout the 75-year projection period.
    The table below provides the estimated percentage of OASDI 
trust fund assets that would be held in stock at the end of 
each year 2000-14. The stock holdings are estimated to reach 
the level of 14.6 percent of total trust fund assets at the end 
of 2014, after which point this percentage would be maintained 
under the proposal.

                            Percent of OASDI Trust Fund Assets in Stock, End of year


----------------------------------------------------------------------------------------------------------------
2000................................     1.7%  2005...................     6.6%  2010..................    11.2%
2001................................     2.8%  2006...................     7.6%  2011..................    12.1%
2002................................     3.9%  2007...................     8.5%  2012..................    12.9%
2003................................     4.8%  2008...................     9.4%  2013..................    13.7%
2004................................     5.7%  2009...................    10.3%  2014..................    14.6%

    If the average yield on stocks is greater or less than 
assumed over the period 2000-14, the year in which the 
specified level of 14.6 percent of assets in stock is reached 
would be sooner or later than the end of 2014.
    The portion of the total value of publicly-traded stock in 
the United States that is held by the OASDI trust funds will 
depend not only on the yield achieved in the market, but also 
on the rate of growth in the total market value of all stock. 
The total value of stock represented in the Wilshire 5000 index 
(a fair representation of all publicly-traded stock in the 
United States) was $9.3 trillion at the beginning of 1998. 
Assuming that the total market value of publicly-traded stock 
will rise generally by the rate of growth in GDP after 1998, 
the trust funds would hold less than 4 percent of the total 
market value, on average, over the next 40 years.

      Average Percentage of Total Stock Market Value Held by OASDI


------------------------------------------------------------------------
2001-14........................................................     1.9%
2001-20........................................................     2.9%
2001-30........................................................     3.7%
2001-40........................................................     3.7%
2001-50........................................................     3.4%


                                           Stephen C. Goss,
                                              Deputy Chief Actuary.

    Mr. Price. Now, you are paying interest on the debt held by 
the trust funds as well as on the debt held by the public.
    Mr. Lew. That's correct.
    Mr. Price. But as I understand it, the interest payments 
have vastly different implications for year-to-year outlays. 
Can you explain that?
    Mr. Lew. In the Federal budget, we usually look at net 
interest. That is, the interest paid to the public. And if you 
look at the path of a dollar, I think it is crystal clear what 
the difference is. If a bank owns a Treasury bond and cashes it 
in, then the Federal Government will pay the bank interest on 
the Treasury bond. If the Social Security Trust Fund owns the 
Treasury bond, then the Federal Government will pay the Social 
Security Trust Fund the interest on the bond.
    Now, I think the difference between a dollar of interest 
for the private holder of a bond and a dollar interest for the 
Social Security Trust Fund is the difference between night and 
day. The Social Security Trust Fund will take that dollar and 
pay a benefit that is currently owed. We're not increasing 
benefits. All we're saying is make sure the dollars are there 
to pay the benefits that we've already promised. I think if we 
have a choice to look back 15, 20 years from now and ask 
ourselves, are we paying more debt to private holders of 
government bonds, or are we paying more debt to pay Social 
Security benefits? We will feel a lot better if the dollars are 
there to pay the Social Security benefits and we don't have to 
make the cuts in benefits, and we don't have to increase taxes. 
That's a choice. It's a choice which I think is made crystal 
clear when you look at the alternative of what you do with the 
unified surplus. A tax cut or large spending increases lead you 
one way. Paying down the debt and putting the money into the 
trust funds lead you a very different way.
    Mr. Price. Thank you. My time is about to expire. Let me 
ask you one further, quick question about the tax cuts that are 
contained in your proposal. I understand that there are a 
number of tax cuts. I think we all think, one way or another, 
when we're in surplus we should take advantage of that to 
return money to the American people. There is significant 
disagreement about exactly how we do that. But you're talking 
about childcare tax credits for stay-at-home parents. You're 
talking about incentives for employers to provide childcare on 
site. You're also talking about school construction. A lot of 
people don't understand it. That is a tax provision--the school 
construction. The long-term care tax credit. And then finally 
these USA accounts.
    Since we are about out of time, perhaps the two you could 
focus on would be the school construction and the USA accounts, 
because I don't think it's generally understood that those are, 
in fact, tax incentives. How would they work?
    Mr. Lew. Well, they are very different. The tax provision 
for the school construction program would make the investment 
in bonds that would finance school construction treated 
preferentially for tax purposes so that the interest wouldn't 
be subject to tax. It would make it easier to raise capital and 
would leverage the Federal investment, so that every dollar 
that we put into the tax expenditure for a school construction 
bond would bring many more dollars into school construction. 
It's a very efficient way to bring a lot of dollars into school 
construction that we probably couldn't do in a direct Federal 
appropriation.
    It's fully paid for. We have offsets of $33 billion in our 
budget, of loopholes closers and other unwarranted benefits. 
That would be a paid-for proposal that we could go forward on 
today before we deal with Social Security.
    The USA account is part of our framework for Social 
Security and the surplus. And we very much believe the USA 
accounts are the right way to give tax relief, but first we 
have to fix Social Security. So, first we have to put 62 
percent aside for Social Security. Second, we want to put 15 
percent aside for Medicare. And we think it does come first: 
keeping our obligation to Medicare comes first, even before the 
USA account.
    Then, after we've done that, after we've taken 77 percent 
of the surplus and dedicated it to paying the bills for Social 
Security and Medicare, we think there should be a tax cut. And 
the USA accounts would be an incentive for individuals to save 
for their own retirement. Moderate- and low-income individuals 
would get a Federal tax credit, which would start them off in 
savings. Any dollar above that amount would be matched. Middle-
income taxpayers, higher-income taxpayers would get less of a 
credit and more of a match. It would be very progressive. It 
would be a way to bring everyone into retirement saving so that 
it's not just something that the few have, but it becomes a 
basic, standard part of planning for the future.
    It has several very important effects. It would increase 
national savings, whereas many tax cuts would not. It would 
help individuals get into the habit of saving and hopefully 
save more than the amount that we help them save through the 
USA accounts. And most importantly, it would give the kind of 
tax relief that I think there is a broad consensus that we need 
to think about in a very targeted way that would benefit the 
economy and benefit working Americans, as opposed to 
squandering it or spreading it in a way that might be less 
fair.
    Mr. Price. Thank you, Mr. Chairman.
    Mr. Chambliss [presiding]. We want to give as many members 
as possible an opportunity to ask questions. So, if you will, 
let's abide by the 5-minute rule. And, Mr. Lew, when you see 
the red light come on if you would please speed up your answer. 
The gentleman from New Hampshire, Mr. Bass.
    Mr. Bass. Thank you. I am sort of in the never-never land 
between microphones. Thank you very much, Mr. Lew, for 
appearing here today. And I want to make a general comment that 
I think I personally believe that the President has moved 
forward, especially in the area of Social Security, to begin a 
bipartisan dialogue toward dealing with the issues of both 
solvency as well as structural reform of the system that does 
give Americans the--a little more say over their retirement 
plans. And we do have some major disagreements. But I think 
it's a major start--or a significant start.
    I share Mr. Sununu's concern about the issue of user fees, 
not only the idea that the user fees on aviation will have a 
significant impact, in my opinion, on aviation safety, but also 
on another area: on the concept that taking it--trying to loop 
what is, in effect, a settlement for tobacco--damages that 
occurred between States Attorneys General and the tobacco 
companies and the Federal Government somehow would try to grab 
a portion of that for its own damages, I think is wrong.
    I guess my question--I've been a long-time advocate of 
special education. And reading in the budget here, you have a 
significant decrease in special ed. Now, I understand that you 
advance fund in the fiscal year 2001. I was just wondering if 
you could explain to me why you cut special ed funding from 
$5.1 billion to $3.1 billion, and then advance fund it back in 
fiscal year 2001, $1.9 billion, calling that the academic year. 
Is it not true that ultimately what you're really doing is 
taking money in the year 2001, in the very beginning and 
putting back into the year 2000 in order to make it look like 
you're staying within the budget caps, and, in effect, what 
you've really done is cut special education by $2 billion.
    Mr. Lew. Congressman, what we've done in special education 
mirrors what the appropriators did last year with Title I. Last 
year, I believe it was a total of $6 billion of advanced 
appropriations, and we've said in the area of special 
education, in order to make room for the kinds of increases 
that we think are necessary in 2000, we should do the same 
thing. It doesn't do what I think you suggested in the question 
which is cut special education. Just as we're providing the 
full dollar of program benefits in the Title I program, we 
would be providing the full dollar of program benefits in the 
special education program. It's an accounting issue as to what 
year you attribute it to, and by attributing it to the portion 
of the fiscal year that matches up with the school year, it 
does give us the ability to spread it over 2 years, and then 
continue that going forward.
    Mr. Bass. But the academic year begins in September, not 
October. I am going to quibble with you on a month there. And 
what you're really going to have to do--I understand that this 
is an accounting gimmick. But why don't you just put the money 
in the proper fiscal year, which begins on September 1 and 
admit the fact that what you're really trying to do is to 
redirect priorities to your other spending programs at the 
expense of special education and use a--I--sometime the 
chickens are going to come--I hate using cliches--they are 
going to come back to roost here. And then the next fiscal 
year, you're going to have another advance. You're going to do 
the whole budget with advanced--I am not going to support or 
give credit to advance appropriations. I don't agree with it in 
Title I, either. But the reality of it is why not just put the 
money in special ed and not cut it by $3 billion, $2 billion?
    Mr. Lew. As I said, Congressman, we're not cutting it. What 
we're doing is we're financing it in a different way. So it's 
not a cut.
    As far as the advanced appropriation question goes, it's a 
fair question to ask. And there have to be limits on how much 
of it we do, and I agree with you that it can't be done 
infinitely.
    Last year, the House Appropriations Committee faced 
spending limits that were very difficult in the area of Labor-
HHS. The House never passed a Labor-HHS appropriation bill. 
What the House committee did, I believe, was eliminate 
programs. I believe it eliminated the Low-Income Home Energy 
Assistance Program. It eliminated the Summer Jobs Program. And 
that was something that we had a pretty heated political debate 
about.
    The Senate took a different tack. The Senate did put these 
advanced appropriations in, and it was a way to accommodate a 
broader set of priorities within the budget rules. It's not a 
perfect solution to tight caps. But it is a solution that works 
under the budget rules as long as we do it in a careful way.
    I would argue, as with many of the choices we're discussing 
in terms of the surplus, it's compared to what. And we think 
that the advanced appropriation has no programmatic effect. I 
wouldn't reduce a penny of benefits in the year that they are 
needed. And that is the important programmatic issue.
    As far as budgeting goes, I agree that we have to be very 
careful. And we are being very careful.
    Mr. Bass. I appreciate. We will not only say that I believe 
that special education--that an increase in funding for special 
education should be a priority before we start discussing the 
new spending bills, the new spending proposals which, not only 
in new programs but in existing programs, equal well over--all 
right, I'll make it up--$1.5 to $2 billion in the next fiscal 
year. And I yield back, Mr. Chairman.
    Mr. Chambliss. Thank you. The gentleman from New Jersey, 
Mr. Holt.
    Mr. Holt. Thank you, Mr. Chairman. And it's good to see you 
here this morning. Thank you.
    Mr. Lew. Thank you.
    Mr. Holt. What particularly pleases me about the budget 
you're proposing is the emphasis on the long term. And you, I 
would say, have resisted the temptation for immediate 
gratification in order to invest in things that will be with us 
for a longer period of time, or so that they can be with us for 
a longer period of time--Social Security, environmental 
protection, and so forth.
    I'd like to look for a moment, though, at what we need in 
order to maintain our long-term productivity growth, and that 
would be education and research and development. And I am 
particularly pleased to see that you're talking about employer 
provided educational assistance as well as workplace literacy 
and that sort of thing.
    I wanted to get a sense of how many people will be affected 
by these programs? What long-term effect this will have on the 
quality of our workforce?
    Mr. Lew. It's difficult for me to give an exact number of 
the people affected, but the goal behind our literacy 
initiative is twofold: first, there is a big problem that we 
have a lot of people who have graduated high school and come 
into the workforce without the basic skills that they need. And 
that's not fair to them. It's not fair to society. We need to 
address that. We need to address it in terms of adult 
education. We need to make sure our schools produce results so 
that we don't have that problem in the future.
    We also have an awful lot of immigrants who are here as 
legal immigrants, who deserve the same chance that many of our 
parents and grandparents got to learn English and to get into 
the workforce and make the contributions that we've always 
relied on immigrants to make in this country. And we've been 
very, very fortunate. Generation after generation has. Our 
adult literacy initiative really deals with both of those 
challenges. I'd be happy to get back to you with the exact 
numbers.
    [The numbers referred to follow:]

    According to the Department of Education, 5.712 million 
adults would be served under the adult literacy program if it 
were funded at the fiscal year 2000 budget request level. This 
is an increase of 1.249 million over the fiscal year 1999 
appropriation.

    Mr. Holt. But just to get a sense, I would appreciate 
further information on how much of our workforce this could be 
expected to help.
    And on the question of research and development, what do 
you see the effect of your budget having on our overall 
research and development effort.
    Mr. Lew. Yes, we've had a very aggressive funding 
commitment to research and development for a number of years, 
and we've reached the point where, in some areas, we have 
gotten ahead of the schedule that we set out. We're now ahead 
of the schedule to double NIH.
    We've tried in this year's budget to have a balanced 
approach, to make sure that basic science gets the funding 
increases in areas like NSF, and the Department of Energy, 
where some of the core theoretical science is done. There are 
slightly larger increases in those areas than in NIH, not 
because we don't support NIH, but because it was time to have a 
little bit of catch up on that kind of basic science. NIH 
benefits greatly from the basic science research done at NSF. 
And I think the percentage increase is about 7 percent in NSF, 
and we've kept NIH equal with inflation. That is ahead of 
schedule to getting to the doubling of NIH that we proposed 
over the last few years. We think it's a very important 
commitment and it is an investment in the future.
    It's very difficult in the area of science to predict very 
accurately what you're going to get for each dollar you put in. 
We've worked very hard with the departments and the agencies 
that do science research to focus their dollars well, but to 
leave them the room through the process of peer review panels 
that they use to choose the best recipients for research 
dollars, not to micromanage and think that we know what 
breakthroughs they are going to find. We haven't been 
disappointed. The pace of scientific discovery only increases, 
and we're proud that our investments have been part of that.
    Mr. Bass. Thank you, Mr. Lew. I yield back the balance of 
my time. Thank you, Mr. Chairman.
    Mr. Chambliss. Thank you. The gentleman from California, 
Mr. Herger.
    Mr. Herger. Thank you very much, Mr. Chairman. And thank 
you, Mr. Lew, for being with us.
    I'd like to take just a little bit different tack. One is 
to compliment the administration on at least what in general 
we're hearing that would at least on the surface give the 
impression that we're not spending wildly; that we are being 
responsible; that, to use the terminology of the previous 
inquirer, that we're not seeking immediate gratification.
    But my concern is when we look at the fine print of 
President Clinton's budget. And I am reminded of an editorial 
that was in one of our city newspapers here just a couple of 
days ago, which shares my concern. It had tax and spend, tax 
and spend, tax and spend. Now that's very, very different than 
the spin than we seem to be hearing. We're talking about these 
large surpluses that we have. But yet, under these large 
surpluses, looking at your document that you've put, put out by 
the Executive Office of the President on Management and Budget. 
And we look at even with these projected surpluses, we look at 
what happens to the national debt. And I notice that you try to 
differentiate between government and public debt as though 
somehow there's something different there, but most of us out 
in--at least where I come from--a debt is a debt is a debt--and 
it's something that someone someday will have to pay for--
probably our children or grandchildren. But just looking at 
your numbers on page 389 of his document, where it shows what 
our debt will be. For 1998, $5.4 trillion, to 1999, $5.5 
trillion; 2000, $5.7 trillion. I could continue reading for 
each of the next 5 years, not only with our projected surplus; 
not only does this debt not come down, it goes up. And it's 
increasing each and every year by your own document, despite 
what you may be saying, to the tune of $1.3 trillion increased 
debt over the next 5 years.
    Now, I am concerned about that. When I go to my town hall 
meetings, the people I represent in northern California are 
concerned about this. And I notice that you have attempted in 
the last couple days--over in the Senate and here as well--to 
somehow make a different--to differentiate between the debt we 
owe out to the public and what the government owes; that 
somehow that differs.
    And I'd like to have you explain to me how it's different? 
Is it not true that this debt is something that future 
taxpayers, i.e., our children and our grandchildren, at some 
point down the line will have to pay for? And isn't it very 
disingenuous to be talking about how we're really taking care 
of things when, in essence, we are increasing the debt on the 
heads of our children each and every year over the next 5 years 
by a total of $1.3 trillion?
    Mr. Lew. Congressman, I have been trying to distinguish 
between debt held by the public and the debt subject to limit, 
because I think it's a distinction that really does make a big 
difference. A dollar of interest paid on debt held by the 
public is a dollar that is going to an investor in a bond, and 
that's fine. It's a good thing to pay investors----
    Mr. Herger. A taxpayer out--they are receiving some money 
for that?
    Mr. Lew [continuing]. Yes, a bank, a corporation, an 
individual. I don't mean it as a pejorative. It's going to 
someone who's invested in a Treasury bond and we're paying it. 
But the dollar is gone as far as the Federal Government is 
concerned.
    Mr. Herger. Into the hands of a real, live person.
    Mr. Lew. A dollar paid to the Social Security Trust fund is 
going to pay a dollar of benefits that's already owed. When we 
calculate the debt, we don't add into that calculation all of 
the Social Security benefits that are going to have to be paid 
that aren't already funded.
    We're not increasing the moral debt of the country by a 
dollar when we put a dollar in to the trust fund and say that 
we're going to pay that dollar of benefits that we already owe. 
And because of government accounting, the debt subject to limit 
does go up when we put those assets aside. But our moral 
commitment is there.
    The fact that we put a bond in the trust fund is the second 
step. The first step is we've made a promise, generation to 
generation, and unless we plan to break that promise, we're 
going to need the dollars in the future to keep it. What we've 
said is you can't keep that promise if you also spend the money 
today, on either a tax cut or a spending increase. And yes, it 
does commit future dollars. It says the first call goes to 
Social Security. The second call goes to Medicare. Those are 
promises we've already made. Before you make any new 
commitments, let's keep the promises we've already made.
    Mr. Herger. OK, in other words what you're saying--let's 
follow your reasoning through. Right now, I think about two-
thirds of our Federal budget is going to some type of 
entitlement. People are entitled to this. It's already by law 
spoken for. So, in essence, what you're saying is that we're 
just going to increase that percentage so that our children 
some day, who are the only ones who are going to pay for this--
I mean, this isn't funny money. It doesn't somehow come out of 
thin air. Someone is going to pay for it, and the real 
difference is, as I hear you explaining this in real world 
terms, is that the difference is that rather than give somebody 
this interest today, some real world individuals out here, what 
we're going to do is indebting our children and grandchildren; 
and yes, it would first call, but still we are an indebting--a 
debt is a debt is a debt--we're indebting somebody to pay this 
taxpayer somewhere down the line. Isn't that--well, let me just 
make a statement. In my mind, that is immoral what you are 
doing. That is basically lying to the American public at a time 
when we have surpluses and leading them to believe that 
everything is OK. We're taking care of your problem. When, in 
reality, just exactly the opposite is true.
    Mr. Lew. If I could just respond briefly, Congressman. We 
think exactly the opposite. We've already made a promise. We've 
made a promise, and all of our projections in terms of the 
share of the Federal Government that goes to Social Security 
and Medicare assume that we're going to keep the promise. We're 
just putting the money behind the promise and saying let's not 
make new promises until we put the money aside----
    Mr. Herger. As long--you're--a debt you're putting behind 
it. You not putting money. You're putting something that will 
be paid by some future taxpayers, is that correct?
    Mr. Lew [continuing]. Well, if we don't spend----
    Mr. Herger [continuing]. Isn't that what it is. Isn't that 
what a bond is?
    Mr. Lew. If we don't spend the money on a tax cut or a 
spending program today, those dollars will be there in the 
future.
    Mr. Herger. A piece of paper written up in West Virginia 
will be there. OK, thank you. I think the point's made.
    Mr. Chambliss. I want to recognize my friend from 
Massachusetts for his questioning. And let me just say that 
we've still got a number of members here. We've got three 
votes. So it's probably going to take us 25 minutes for these 
votes. If you all want to come back and ask questions of Mr. 
Lew, if you're available, we'd like to have that option if 
members want to come back. Or, we can submit written questions. 
What's the preference of the committee?
    OK, we got some that would like to come back. Can you stick 
around?
    Mr. Lew. I would be delighted to stay if members would like 
to come back.
    Mr. Chambliss. OK. Great. I recognize the gentleman from 
Massachusetts, Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Mr. Lew, as we look at your pie chart over here, 62 percent 
of the pie chart is dedicated to Social Security?
    Mr. Lew. That's correct.
    Mr. Markey. Now the way that I understand it is that the 
Republican 10 percent across the board tax cut would consume an 
additional 38 percent, is that correct?
    Mr. Lew. That's my understanding.
    Mr. Markey. Now, the way I've heard it on television in the 
last couple of days, Mr. Archer and Mr. Domenici have both said 
that the 62 percent now up for Social Security makes some sense 
to them. I think that I've heard that. If that's the case, that 
means that the Republican 10 percent across the board tax cut 
consumes all of the money that would be expended for Medicare, 
all of the money for the universal savings accounts, all of the 
money for defense, all of the money for education, all of the 
money that's left on that pie chart. So the 10 percent tax cut, 
obviously, is something that threatens every other program, 
except to the extent to which I guess I would say that I am not 
worried that the money will be found by the majority for the 
defense budget. I think they are finding that one. But that 
puts even more pressure on Medicare, even more pressure on 
education, even more pressure on the universal savings account.
    And here's the problem that I have. In 1997, as part of the 
last budget deal, there was a $115 billion cut in Medicare, 
which almost exactly matched the huge tax cut--huge, however, 
only in 1997 terms, not huge when compared to a 10 percent or a 
9 percent or an 8 percent across the board tax cut in 
perpetuity.
    So here's my problem: there was a $17 billion cut out of 
Medicare for home health services in 1997. We have 4,000,000 
people with Alzheimer's in America. We have millions more with 
Parkinson's and other neurological diseases, cancer, diabetes. 
They are at home. And husbands are caring for wives, and wives 
are caring for husbands. Then we cut that program by $17 
billion. All they got was a daily visit from a visiting nurse 
to give them a break. This just gave them a couple of hours 
where they could take a nap.
    Now, these people are the biggest heroes in our society. 
Twenty-four hours a day with their wife or their husband in a 
condition that is almost impossible for anyone in our age group 
to even consider. But they do it. And they are the real heroes. 
But heroes need help. And the way this debate is now 
structured, following on what happened in 1997, is that we're 
guaranteeing that that generation of people who built this 
country are going to be left with a smaller and smaller and 
smaller share of the help which they need to be heroes. And I 
think that if this tax cut debate continues as it has, that 
we're going to wind up with a tremendous confrontation in this 
country--between the legitimate needs of this older generation 
that can only be served if the revenues are there. And they are 
there. And by the way, I think when we did that tax cut in 
1997, if that has produced this surplus, we cut home health 
care in order to do the tax cut. Now, we've got the surplus, 
let's give back the money to the program.
    Now, Mr. Lew, can you help me with this. I know you've made 
an effort to increase somewhat the program for home health care 
in your legislation, but it still is far short of the money 
that was cut out in 1997, or of this growing need which has 
been identified in our society.
    Mr. Lew. Congressman, the choice that you've put forward is 
a very real one. If 38 percent of the surplus is dedicated to a 
tax cut, I believe that that will mean cuts in Medicare in the 
future, and I believe that those are going to be very, very 
difficult and painful decisions. We have to deal with Medicare. 
We have to go beyond this 15 percent and make the kinds of 
long-term reforms that require tough choices. The President, in 
the State of the Union, said that that would give us the 
opportunity to make some tough changes and also perhaps expand 
some benefits like the prescription drug benefit so that the 
program meets more of the needs of people. But if we don't 
start by putting 15 percent of the surplus aside, we are 
setting the bar very high. And we are probably going to have 
difficulty reaching bipartisan consensus. And we're going to be 
faced in a very short period of time with very difficult 
choices. We think the most prudent thing to do is to take the 
good fortune we have, that we've gotten because we made tough 
decisions on Medicare, we made tough decisions to reduce the 
deficit. We now have a surplus. We should put some of it back. 
That 15 percent would really be putting money where we should 
put it, to keep the promise we've made to pay benefits.
    Mr. Markey. Thank you, Mr. Lew. Thank you, Mr. Chairman.
    Mr. Chambliss. We will stand in recess until 12:45 p.m.
    Mr. Lew. Thank you.
    [Whereupon, at 11:57 a.m., the committee recessed, to 
reconvene at 12:45 p.m., the same day.]
    Mr. Chambliss [presiding]. All right, why don't we resume, 
and we will take members as they come back in the order that 
they are on the list, and if we have to skip somebody, we will 
try to get back to them. But the gentleman from Pennsylvania, 
Mr. Toomey, is recognized for 5 minutes.
    Mr. Toomey. Thank you, Mr. Chairman, and thank you, Mr. 
Lew.
    Just a couple of questions for clarification purposes. The 
courts have clearly stated, I believe, that workers have no 
ownership per se, no property rights to the payroll taxes that 
they pay into the Social Security system, and that implies and 
really means that all future benefits are, therefore, entirely 
subject to the whims of politicians. Is it true, is it fair to 
say that the President's proposal does nothing to substantively 
change that feature?
    Mr. Lew. I think that it is true that individuals don't 
have a right to their contributions. But I think that it is not 
correct to say that they don't have a right to the benefits. It 
would require a change of law to take the benefits away from 
them.
    Mr. Toomey. Exactly, which could happen by a majority vote 
of Congress----
    Mr. Lew [continuing]. Yes, it could.
    Mr. Toomey [continuing]. And passage by the President at 
any time.
    Mr. Lew. It has not been an easy thing to do in the past, 
but, yes, theoretically it could happen.
    Mr. Toomey. Right.
    In your opening comments, I believe, if I understood you 
correctly, you suggested that one of the important features 
that the President feels must be retained in Social Security is 
that the benefits are guaranteed, there be a guaranteed 
defined-benefit program. But, in light of the previous 
question, isn't it really impossible under the current 
structure to guarantee them because the political process could 
always reverse that guarantee?
    Mr. Lew. Well, I would say that the history since 1935 has 
been expanding, not contracting, benefits. In 1983, there was a 
bipartisan effort to deal with the Social Security financing 
problem. Tough decisions were made. It was very, very difficult 
to get agreement on any benefit reductions. And I would suggest 
that benefit reductions will be very hard to make for good 
reason. People work their lives and plan on receiving the 
benefits, and they do have a right to them.
    Mr. Toomey. Right, but we also are in a situation now as 
the system has matured and there are no longer ever-increasing 
numbers of workers paying for an increasing number of retirees, 
it is going to be much harder to make those payments. So, I 
would suggest that the ability to honor those payments under 
the current system is increasingly in jeopardy.
    Mr. Lew. And we agree that we need to work together to get 
75-year actuarial solvency, which would require some of those 
tough decisions. We think that this is a good first step.
    Mr. Toomey. OK.
    Second question is, in a system in which workers were free 
to direct and actually own, actually have property rights to a 
portion of their payroll tax, invested as they see fit, perhaps 
with restrictions and guidelines, if such a system included an 
explicit government-minimum guarantee in it, would that not 
fulfill that objective, and would the President, therefore, be 
willing to consider such a system?
    Mr. Lew. We have said for the last year that we would look 
at alternatives, specific alternatives, as they are proposed. I 
am a little reluctant to respond to a hypothetical. The 
principles that the President laid out through the past year of 
discussion about Social Security reform have been very clear 
about guaranteeing the benefits, about making sure that there 
is progressivity in the system, making sure that we don't 
somehow do something that undermines the benefits available for 
someone when they become disabled, for a survivor.
    In order to answer a question about a specific plan, one 
really has to look at it in its entirety. We think that 
preserving the core benefit as we have it today is the safest 
way. But we will look at alternatives. We have said in recent 
weeks, and I have said this morning, that our view is that the 
entire payroll tax should remain dedicated to the traditional 
Social Security benefit.
    Mr. Toomey. OK. Let me try to ask it a different way.
    Would it be fair for me to conclude, then, that if the 
design of the system met certain conditions that you feel are 
important, then there would be a possibility that the President 
would agree to a system in which workers would own and control 
a portion of that payroll tax?
    Mr. Lew. I think that I have indicated very clearly what 
our view is. You are asking me to draw hard lines about it, not 
even having a discussion. We have tried very hard, on an issue 
where it is difficult to keep lines of communication open, to 
keep lines of communications open. So, I am trying not to draw 
the kinds of arbitrary hard lines. But at the same time, I am 
trying to be very clear about what our view is and what our 
position is. And we are not wavering from that. I am not 
wavering from that today.
    If there is a specific plan that you would like us to look 
at, I would be delighted to look at it. I would be delighted to 
have our Social Security team look at it. And I think that the 
five principles that the President outlined over the past year 
speak for themselves, and that is what will guide our view of 
any proposal. Our view is that the Social Security payroll tax 
should remain dedicated to the traditional benefits.
    Mr. Toomey. OK. Thank you Mr. Lew.
    I will yield the balance of my time, Mr. Chairman.
    Mr. Chambliss. Thank you.
    Mr. Minge.
    Mr. Minge. Thank you, Mr. Chairman.
    Mr. Lew, as I understand it, in fiscal year 1999, to talk 
about a surplus requires that we focus everything on the 
unified budget, and if we were to simply look at the Federal 
budget without Social Security--as I believe the budget 
legislation requires us to do on the congressional side--we 
would have a deficit of $38 billion. Does that square roughly 
with the numbers that you have been working with?
    Mr. Lew. Yes, it does.
    Mr. Minge. And, as I understand it, that would mean that if 
we were to have a tax cut this year, we would be borrowing 
money, essentially, from the Social Security Trust Fund in 
order to fund that tax deduction, and similarly, if we were to 
expand programs this year, we would be expanding them by 
borrowing that money from the Social Security Trust Fund.
    Mr. Lew. Technically, we are leaving the assets to the 
Social Security Trust Fund, but the entire surplus this year is 
attributable to the contribution of Social Security through the 
off-budget calculation to the surplus.
    Mr. Minge. Now, I would like to take this one step further 
and look at the 15-year proposal which you have outlined, which 
I think is admirable because it really challenges Congress and 
the country to plan in the long term.
    If we were to simply insist that as long as we must rely on 
the Social Security Trust Fund to balance the budget that we 
would devote all of the surplus, so to speak, which is really 
all of the Social Security Trust Fund money, to the Trust Fund 
and not have any program expansion or tax reduction that was 
not otherwise offset within the budget, wouldn't we be doing 
better by the Social Security Program by such an insistence, at 
least during the next couple of years until we have a surplus 
in the nonunified budget?
    Mr. Lew. Well, I think that we would have to look at the 
Social Security Trust Fund, and the question of the unified 
budget a little bit more broadly, looking at a longer term. The 
Social Security Trust Fund will build up assets from now until 
2012. Until 2012, Social Security revenues will be equal to or 
greater than the benefits paid. After 2012, the Social Security 
Trust Fund will start getting drawn down, and under current law 
it will expire in 2032, and we have proposed to extend it until 
2055.
    The question of the unified budget, as much as what do we 
do today, is what condition will we be in in 2012 through 2055? 
And at that point we will need a non-Social Security surplus of 
substantial magnitude to pay back these bills to Social 
Security.
    So, the discussion of ``on budget-off budget'' becomes a 
very different one once those lines cross and Social Security 
starts needing to have its bonds paid back as opposed to paying 
them in. And we----
    Mr. Minge. But for the next couple of years the lines 
haven't crossed----
    Mr. Lew [continuing]. Correct.
    Mr. Minge [continuing]. And we are dealing with truly a 
deficit in the nonunified budget, and what we are trying to do, 
as I understand the President's proposal, is to look at this 
15-year period of time and saying, ``If we can maintain the 
course for 15 years and devote 62 percent of the unified 
surplus to Social Security, we are going to be ahead.'' Do you 
have any estimate as to how much we would be ahead by doing 
that as compared to simply insisting that all of the Social 
Security Trust Fund cash flow surplus be reserved for Social 
Security purposes?
    Mr. Lew. Well, roughly speaking, if you looked over the 
next 15 years, the 62 percent that we are putting in over 15 
years is roughly equal to the off-budget Social Security 
surplus. If you look at the Medicare component, that is all 
additional debt reduction. That is all additional savings for 
the future. And it is a rough proxy. It is really when you get 
beyond the 62 percent that the question starts to come in.
    On a year-to-year basis, our proposal would not be exactly 
as what you have described, but over 15 years, it would be a 
little bit more.
    Mr. Minge. It would be a little more, but it would be 
roughly the same. It is when you look at Medicare that you are 
really making a dramatic improvement in savings.
    Mr. Lew. That is right.
    Mr. Minge. Now, to take this one step further, it troubles 
me that here, at least for the next 2 years, we would be only 
using 62 percent of that Social Security Trust Fund surplus 
that is being generated each of these 2 years for the Social 
Security Program and we would be counting on future Congresses 
and future administrations that show the self-restraint and the 
discipline to stay the course on that 62 percent thereafter, 
when, of course, it will be a future Congress and a future 
administration.
    Is there anything that you see that we can do during this 
year and next year that would truly commit future Congresses 
and the future administrations to this course, or is it 
somewhat like what we faced back in 1994 or 1993 when we 
adopted a 5-year budget plan, but when the next year rolled 
around and the next Congress rolled around, that budget plan 
was just gathering dust? That was history. And people again 
wanted to plan and look to the future.
    Mr. Lew. I think that there is a very big difference 
between a budget plan and a promise to make certain 
contributions to the Social Security Trust Fund. I would hazard 
the political guess that, if we put into law scheduled 
contributions into the Social Security Trust Fund, that we will 
keep those promises and that it will be very difficult for 
future Congresses to change that. It is not impossible. Our 
constitutional system does give future Congresses the right to 
change the law, but I think that it is highly probative how 
difficult it has been to cut Social Security, and I think 
correctly so. I think that it is very unlikely that we would 
see a substantial backing off of commitments that we make this 
year to put money into the Trust Fund.
    Mr. Minge. Thank you.
    Mr. Chambliss. My good friend and colleague from Georgia, 
Mr. Collins, is recognized for 5 minutes.
    Mr. Collins. Thank you, Mr. Chairman.
    Mr. Lew, I want to go back to a comment by Mr. Minge, when 
he referred to tax relief as having an effect on Social 
Security.
    Under current budget law, tax relief would not affect 
Social Security unless the benefit structure of Social Security 
was changed. Is that not true?
    Mr. Lew. I am not sure that I understand the question.
    Mr. Collins. You do nothing to Social Security, and you 
give tax relief, it has no effect on Social Security.
    Mr. Lew. Well, it wouldn't reduce the benefit that we owe.
    Mr. Collins. It would not even affect it.
    Mr. Lew. But, it would reduce our ability to pay the 
benefit.
    Mr. Collins. The question, though, it would not affect--tax 
relief would not affect Social Security unless you change the 
benefit structure to match the tax relief also?
    Mr. Lew. But we have no way now to show how----
    Mr. Collins. Yes or no to that?
    Mr. Lew [continuing]. I don't think that it is a simple 
yes-or-no question.
    Mr. Collins. Sir?
    Mr. Lew. I don't think that it is a simple yes-or-no 
answer, Congressman.
    Mr. Collins. Yes, it is.
    Mr. Lew. Then the answer is, yes, it would affect Social 
Security.
    Mr. Collins. It would not affect Social Security at all.
    Mr. Lew. Yes, it would.
    Mr. Collins. I only have limited time. You seem to want to 
skate around the answer there. Let's don't do that on some of 
the others.
    Lots has been said about Mr. Greenspan and some of his 
comments. When he testified before the Ways and Means Committee 
the other day, he had several recommendations. One, he said, 
run the surpluses. I am very reluctant to use the word 
``surplus''; I like to use the words ``positive cash flow'' 
because it is all over in the Trust Funds today, the positive 
cash flow. And I understand, too, by running those positive 
cash flows into the Trust Funds and having public debt offset 
by government bonds will help in the area of interest rates.
    Second thing, though, he said, is if you do look at tax 
reduction, look at marginal rates, and also look at capital 
gains tax relief. We know that some of the changes that have 
taken place in the last 4 years have been through the 
cooperation of the Congress and the administration in a year of 
taxation, and one of those was capital gains tax relief.
    But what he did caution about was no new spending, no 
increase in spending. Now, he did not say no new programs, and 
no one else will say no new programs. But if you are going to 
look at new programs, you look at them within the structure of 
your existing budget where you make your move around your 
budget caps.
    Another thing that he cautioned us about, and it is in an 
area of Social Security, and that is in the pay-as-you-go 
system--in other words, current workers are paying current 
beneficiaries' checks--but what I see that the President has 
offered is not an end to the pay-as-you-go system but an 
extension of it from some 30 to possibly 50 or 75 years. Is 
that not true?
    Mr. Lew. Well, it is a change in the sense that it is 
committing resources in a different form. Pay-as-you-go refers 
to the payroll tax, and this is a bit different.
    Mr. Collins. But it doesn't change the pay-as-you-go system 
from that of social income insurance to that as vested interest 
retirement.
    Mr. Lew. That's correct.
    Mr. Collins. And a debt is a debt. And as you have said, 
each year the national debt increases. Now I understand your 
difference between the public sector portion of it versus the 
government portion of it, but it does increase. And at some 
point in the future--I don't see the chart there now--you 
estimated that the interest portion of the budget would be 2 to 
3 percent?
    Mr. Lew. That was 2014, that projection.
    Mr. Collins. Now, using that 2 percent or 3 percent--and I 
believe that you answered this when Mr. Price was questioning 
you--that does not include the interest accrued of interest 
owed that particular year to the Trust Fund. Is that not true?
    Mr. Lew. That was net interest, correct.
    Mr. Collins. That's right. So, that is true; it does not 
include it. If you use the word ``debt interest,'' that means 
that you have excluded that portion.
    Mr. Lew. That's correct.
    Mr. Collins. OK.
    Once we get to the point of having to redeem those 
government-held securities, how do you plan to do that? You 
said that you have to have discipline in the budget and have 
resources beyond the unified budget.
    Mr. Lew. Our current forecast shows surpluses--I forget if 
it is through 2045 or 2046; it is way, way out into the next 
century. If we are running surpluses in the non-Social Security 
budget, we will be able to pay those bills back, and that is 
exactly the point in terms of fiscal discipline. If we are not 
running those kinds of surpluses in the non-Social Security 
budget--we already have the debt. The Social Security benefit 
is a promise. If I were to promise you that I was going to give 
you $100, that is a promise. If I then write up a note, that 
doesn't make it more or less of a promise. That records it. 
When you record it, it shows up as increasing the debt subject 
to limit. But the promise is every bit as much there today 
without that note.
    Mr. Collins. But it you are increasing the debt year after 
year based on new spending, that is not very good fiscal 
discipline, is it not?
    Mr. Lew. I actually think that it is very good fiscal 
discipline, and most of the comments that Alan Greenspan----
    Mr. Collins. An increased spending and increased debt year 
after year?
    Mr. Lew [continuing]. Alan Greenspan, when he testified 
before the Congress, made a number of points. He said that the 
President's approach to Social Security reform is a major step 
in the right direction and that it would ensure that the 
current rise in government's positive contribution to the 
national savings is sustained. The reason that he said that is 
that we reduce the debt held by the public.
    Mr. Collins. That's right.
    Mr. Lew. And that is the reason that we have the virtuous 
cycle which reduces the net interest cost. I would argue that 
there is a very big difference between a dollar of interest 
that is being used to pay a current commitment for Social 
Security benefits and a dollar of interest used to pay a 
privately held bond. A dollar is not a dollar in this case. One 
dollar is keeping a promise to Social Security; the other is 
not.
    Mr. Collins. In the area of accounting you use the same 
dollar twice the way you are using it. And that----
    Mr. Lew. No, we actually haven't used the same dollar 
twice.
    Mr. Collins [continuing]. Yes, you are. And also--I am 
going to close with this because my time is up--I think that 
the greatest threat to this Nation is the national debt. At one 
point in time--at some point in time in the future it will 
bankrupt this country if we don't get this thing under control 
and keep it under control.
    Thank you, Mr. Chairman.
    Mr. Chambliss. The gentleman from Minnesota, Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman, and I appreciate 
this opportunity to visit with you, Mr. Lew, and I appreciate a 
lot of the things that you have said today. In fact, I 
probably, at least on this side, am going to be more 
congratulatory perhaps than some of my colleagues, because it 
seems to me that there are three questions that this committee 
and ultimately the Congress has to answer. The first question 
is, how much do we want to spend? The second question is, how 
much surplus will that create? And the third, and perhaps the 
biggest, question that we are going to have to resolve is, what 
is the highest, best use of that surplus?
    Now we can argue--and I have found, and I will let my 
colleague pass here--I have found in my townhall meetings, and 
when I meet with my constituents, one of the most difficult 
questions to really respond to and to define is this whole 
Social Security system because it seems to me that it is a 
hybrid between a defined-benefit plan with a Trust Fund and a 
pay-as-you-go system. And that is how we sort of wind up 
speaking out of both sides of our mouths about the unified 
budget, and it does get very difficult. And I don't have a 
perfect answer for it either.
    But let me come back to the central question: how much do 
we want to spend? And that is where I really want to give the 
administration a tremendous amount of credit because, as I read 
through the budget, as my staff looked at it and as I looked at 
the numbers, and so forth, the first thing that really did 
strike me is that you are talking about a total spending 
increase for the next fiscal year of only $39 billion. Now am I 
correct in that?
    Mr. Lew. I don't remember the exact number, but it is very 
close, if that is not right.
    Mr. Gutknecht. And if I remember correctly, and I have been 
one who has felt very strongly that it is important for this 
Congress, for a whole variety of reasons, to keep faith with 
the spending caps which have been set in the past, and with at 
least the spirit of the balanced budget agreement that the 
President signed a couple of years ago, and many of us went 
down to the Rose Garden to join in the signing. And as I read 
your budget request, you are actually talking about exceeding 
those spending caps by only $17 billion.
    Now, I think that within that framework there is at least 
an opportunity for us to agree--the Senate, the House, 
Republicans, Democrats, Independents, and people in the 
administration--to agree to some kind of a spending cap that is 
somewhere at least within the spirit. And starting with your 
budget document, I must say that the average family, to the 
best of my knowledge, the average family budget today in 
America will probably increase about 2.5 percent. So, to your 
credit, for the first time in my memory, we are talking about 
increasing the Federal budget at a slower rate than the family 
budget, and you deserve a tremendous amount of credit for that.
    That is the good news. The bad news, it seems to me, is 
that we look through the document and begin to sift through 
it--Mr. Chambliss has raised the issue of the agriculture 
budget and crop insurance. Others have talked about veterans' 
benefits. Mr. Bass talked about special education. I am 
extremely concerned about what ultimately this means for 
Medicare reimbursements, particularly in rural America. The NIH 
budget, it seems to me that there is a good deal of shifting, 
or however we want to describe it. And then there is the big 
issue of the defense budget. Where it strikes me that in some 
respects the administration is saying, OK, we're going to hold 
the limit at a lid at 2.3 percent, but in a way we're going to 
do a little jostling so we can fund our new programs.
    Let me just ask you this question: Does the President's 
budget reflect the requirements that the administration and the 
Defense Department and others are going to need in terms of our 
commitment to Bosnia, to Iraq, and perhaps even to Kosovo? Are 
those reflected at all? Are those within the budget? In other 
words, the real question is this: Do you anticipate coming back 
to this Congress sometime before we adjourn or go home this 
fall with some kind of an emergency supplemental to fund those 
requirements?
    Mr. Lew. Congressman, the answer is in some cases 
different, so let me go through the items.
    In the case of Bosnia, we did include funding in our 
budget, in the body of our budget----
    Mr. Gutknecht. So, you will not be coming back to Congress 
for more money for Bosnia?
    Mr. Lew [continuing]. That is certainly my expectation. I 
would just caution that we are talking about situations that 
are inherently fluid. But this budget is for the full year, 
correct.
    Mr. Gutknecht. Assuming that nothing changes, you will not 
be back for more money?
    Mr. Lew. Right.
    Mr. Gutknecht. OK.
    Mr. Lew. With regard to Iraq, we are working with the 
Defense Department on whether or not there is a need for a 
supplemental, and we haven't reached that determination yet. 
The one supplemental that we do know that we are going to be 
presenting is for Central America, and we hope to do that very 
shortly. With regard to Kosovo, I can't answer that question 
until policy decisions are made.
    The budget includes an allowance of $3.25 billion in 
anticipation of, at a minimum, the Central America supplemental 
and the possibility that there may be others. We put in a 
number that was consistent with last year's budget. It was not 
consistent with last year's final action. And I think that we 
share the concern that many here share that it got a little too 
large last year. We think that the emergency authority remains 
an important one. If things happen between budgets, as a 
country, we have to be able to respond, but a real emergency is 
different than other circumstances that may test the 
definition.
    We hope to work with the Congress to make sure that the 
emergency authority remains available, but we don't currently 
have any immediate expectations except for the Central America 
supplemental.
    Mr. Gutknecht. Well, the fear of this Member is that there 
is the temptation already to say, well, you know, Congress is 
probably going to plus-up the crop insurance program. Congress 
is probably going to do something with veterans' benefits. We 
certainly need to do something to change the special education 
formula and live up to our commitments there. Medicare, you 
know, I don't know what is going to happen with Medicare. NIH, 
Defense, all of that--the danger I see happening is that we 
start off with this number 2.3 percent, but by the time it is 
over, the deal at the end of the day could be significantly 
larger than that.
    Mr. Lew. Congressman----
    Mr. Gutknecht. And it seems to me that it is the 
responsibility of this committee to set the overall spending 
limits and to do what we can to make certain that we enforce 
them, and that is where we need your help.
    Mr. Lew [continuing]. Well, we certainly hope that we reach 
agreement on a broad basis, so that we move beyond the 
discussion of 2000 to the multi-year context.
    In the case of 2000, we have a number of offsets in there, 
and if they are not adopted, we understand that it is going to 
be a difficult process working through the year.
    Last year, when we got to the end, the President's class 
size initiative, which was a very important priority, was 
included in the final Omnibus with an offset. It was an offset 
that we worked through with the two Budget Committees to make 
sure that it scored. And we hope that we can work together both 
on a multiyear basis to have a resolution to the question of 
the surplus, because we do believe that there is a need for 
more discretionary resources going into the out years, but 
after we do Social Security first. Hopefully we will get to the 
point where we do Social Security and this gets a little bit 
easier.
    But I agree with you, there is a need for discipline. There 
is a need for caps. There is a need for pay-as-you-go rules. We 
know where we go when we don't have any rules. We know that it 
is a lot easier to spend money and to give tax cuts and then 
afterwards see the result. We need to use the opportunity of 
the surplus to make some very wise decisions now and then have 
discipline going forward.
    Mr. Gutknecht. Thank you, Mr. Chairman. My time has 
expired.
    Mr. Chambliss. That was a very good question, Mr. 
Gutknecht, and being a little bit more definitive, Mr. Lew.
    And now with respect to Bosnia, the administration has 
Bosnia funded in the fiscal year 2000 budget, fully funded 
there. You have only got 6 months budgeted in the fiscal year 
2001, so I am assuming that you are planning that we are out of 
there in 2001; otherwise we have got no money in there for 
Bosnia; we've got no money in there for Kosovo. So, we need to 
be--everybody needs to thoroughly understand that as we move 
into this.
    Mr. Wamp.
    Mr. Wamp. Thank you, Mr. Chairman, and thank you, Mr. Lew, 
for the relationship that you have with our chairman, and just 
carrying forward in a positive way. I want to say that I think 
Congressman Clement is onto something that this budget, from 
our side of the aisle, should represent a good starting point. 
I think that it raises the right questions, and I think that it 
does include some good ideas, and I would think that my friend 
from Minnesota is correct there.
    A couple of points that I would like to make because I have 
learned--this is my fifth year--that you have to clear things 
up. You talked about the NIH funding being ahead of schedule, 
and let's be candid, the Republican Congress has really carried 
a lot of that weight over the last 4 years to increase NIH 
funding. As a member of the Appropriations Committee, I just 
want to point that out.
    Also, earlier, when Chairman Kasich questioned you on the 2 
percent payroll tax, I have also found that out there are 
across the country regular people who think that that means 
somehow that money would be turned back over to the 
beneficiary. But it needs to be pointed out every time that we 
talk about it, so they will understand, that the government 
will still control that money. The beneficiary will just direct 
that money. And I hope that somehow we can come to an agreement 
much like Chairman Kasich said, like the Thrift Savings Account 
for Federal employees, where you can direct where it is 
invested, but the government keeps the money. The government 
controls the money. That money doesn't go back to the 
beneficiary. It stays in a fund, but it can continue to grow.
    There is another thing that I am a little dismayed about. I 
am one of the Republicans that for the last 4 years has said 
let's be more broad-based in our approach to tax relief, so 
that they can't say that we're trying to help the wealthier 
Americans. I am a little frustrated that, after carrying that 
mantra for the last 4 years and for us to propose more broad-
based tax relief and then you still say that it benefits more 
wealthy Americans. The only way that you can really take that 
position is that you think everybody with a job, or everybody 
that is working, or everybody that is doing OK out there 
represents wealthier Americans. At some point we need to come 
together on broad-based tax relief. And I concur that the more 
broad it can be, the more it can affect every working American, 
the better off it is.
    But my one question is this: On education funding, will 
there--and this kind of presses you, like Chairman Kasich 
pressed you about ever agreeing to a 2-percent payroll tax that 
is self-directed by beneficiaries--is there any way that the 
President can agree to block grant the education dollars? 
Because, during the Great Society the intent was to eliminate 
poverty. It didn't work. We created Federal program after 
Federal program after Federal program, and ultimately the 
Governors have cried long enough and loud enough for us to 
start block granting those same dollars, and that is working. 
And I just wonder if we've got to go back throughout this 
entire exercise over a generation of creating programs--in 
terms of trying to improve education, that motive and intent is 
all the same. We all agree that we need to improve education. 
But do we have to go through this same cycle again, or can't we 
just go ahead and block grant the money right back to State and 
local governments and let them spend it in a more efficient 
way. And is there any way that you will agree with us on that 
approach over the next few months?
    Mr. Lew. I think that over the last several years we have 
made very clear how strongly we, the administration, the 
President oppose block granting all of the education funds. We 
have worked with the Congress to provide greater flexibility in 
many areas.
    When it comes right down to it, the argument comes down to 
what do you want the Federal education policy to be? Do we want 
to be promoting the kinds of standards that the President has 
spoken to? Do we want to be promoting policies that are aimed 
at specific objectives like reducing the social promotions? 
This is an important part of our policy.
    The question to block grant or not to block grant sounds 
like it is an accounting issue, but it is not. It is really a 
policy issue, and the President has very strong convictions in 
a lot of these areas. So, I think that you can expect that our 
opposition will be consistent with our past position.
    Mr. Wamp. Let me just say one thing: If you go to a PTA 
meeting, you get on talk radio, you go out there where parents 
are involved today, they will say, please, no more mandates; 
please, don't create any more education programs that tie our 
hands--we've got people doing paperwork instead of delivering 
education because of the Federal programs we have created in 
education.
    I would just submit to you, please try to work with us on 
this, so we can have fewer programs but more money flowing back 
to the schools to let them spend it as they see fit without all 
these mandates that seem to flow every time we come up with a 
new education bureaucracy in Washington.
    Mr. Lew. Hopefully, we will be able to work through the 
Elementary and Secondary Education Act amendments to achieve 
some of our common goals and to reduce the paperwork. Our goal 
is not to be paying for administrators and paperwork. Our goal 
is to improve the quality of education. And on that, I think 
that we can agree.
    Mr. Wamp. I think, Director Lew, the glass is half full and 
not half empty. So we have got a good starting point.
    Thank you, Mr. Chairman.
    Mr. Chambliss. Jack, let me thank you again for being here, 
and I particularly thank you for having patience with us and 
hanging around to give everybody an opportunity to ask 
questions.
    I hope that everybody that wanted to ask questions has come 
back to do so. But let me just say that if there are any 
members who have additional questions, we would like to submit 
them to you in writing, and I assume you will answer them 
within about 30 days or so.
    Mr. Lew. It would be my pleasure.
    Mr. Chambliss. And we, obviously, have a lot of things that 
we agree on. There are a lot of things that we have a 
disagreement about with respect to particular issues and 
philosophically, but we look forward to working with you and my 
friend John will be in touch and dialoguing, and, hopefully, we 
will come up with something that is beneficial to the American 
people here in short order.
    Mr. Lew. Thank you.
    Mr. Chambliss. Thank you very much.
    [Whereupon, at 2:50 p.m., the committee was adjourned.]

                                
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