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





 
               THE PRESIDENT'S SOCIAL SECURITY FRAMEWORK

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 23, 1999

                               __________

                             Serial 106-32

                               __________

         Printed for the use of the Committee on Ways and Means


                    U.S. GOVERNMENT PRINTING OFFICE
65-091CC                    WASHINGTON : 2000



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of February 16, 1999, announcing the hearing............     2

                               WITNESSES

Office of Management and Budget, Hon. Jacob J. Lew, Director.....     6
Social Security Administration, Hon. Kenneth S. Apfel, 
  Commissioner...................................................    16
U.S. General Accounting Office, Hon. David M. Walker, Comptroller 
  General........................................................    64
Congressional Budget Office:
    Dan L. Crippen, Director.....................................    83
    Barry B. Anderson, Deputy Director...........................    86

                                 ______

Committee for a Responsible Federal Budget, Hon. Bill Frenzel; 
  accompanied by Carol Cox Wait, Founder and President, Committee 
  for a Responsible Federal Budget...............................    93

                       SUBMISSIONS FOR THE RECORD

Blinder, Alan S., Princeton University, statement and attachments   113
Center on Budget and Policy Priorities, Peter Orszag and Robert 
  Greenstein, statement..........................................   118
Gramlich, Hon. Edward M., Board of Governors of the Federal 
  Reserve System, statement......................................   124


               THE PRESIDENT'S SOCIAL SECURITY FRAMEWORK

                              ----------                              


                       TUESDAY, FEBRUARY 23, 1999

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 3:04 p.m., in room 
1100, Longworth House Office Building, Hon. Bill Archer 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                 Contact (202) 225-1721
FOR IMMEDIATE RELEASE

February 16, 1999

No. FC-6

                      Archer Announces Hearing on

               the President's Social Security Framework

    Congressman Bill Archer (R-TX), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on an 
evaluation of the features and effects of the President's framework to 
reform Social Security. The hearing will take place on Tuesday, 
February 23, 1999, in the main Committee hearing room, 1100 Longworth 
House Office Building, beginning at 3:00 p.m.
      
    Oral testimony at this hearing will be from invited witnesses only. 
Witnesses will include representatives of the Congressional Budget 
Office, the General Accounting Office and other experts in Social 
Security and budget policy. However, any individual or organization not 
scheduled for an oral appearance may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    In his 1999 State of the Union address, President Clinton proposed 
using 62% of the projected Federal budget surpluses over the next 15 
years to shore up simultaneously the Social Security system and pay 
down the publicly-held debt. In addition, the President would allow the 
government to invest almost $600 billion of the trust funds in the 
private market for the first time ever. The President has estimated 
that his proposal would extend the life of the Social Security Trust 
Funds until 2055. The President's framework for reform fundamentally 
changes the self-financing nature of Social Security by using general 
revenues and private market investments to support the program. 
Historically, Social Security has been financed almost exclusively with 
dedicated payroll taxes.
      
    On February 4, 1999, Secretary of the Treasury Robert E. Rubin 
presented the President's budget proposals to the Committee, including 
the Social Security framework.
      
    In announcing the hearing, Chairman Archer stated: ``The President 
has presented the Nation with his Social Security framework. This 
hearing will help us better understand what the President's framework 
does and does not do. Only by clearly laying out the benefits and 
defects of the President's approach can we constructively move forward 
together, as we must, to save and strengthen Social Security for 
current and future generations.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on an evaluation of the features and effects 
of the President's framework to reform Social Security.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Tuesday, March 
9, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Committee office, room 1102 Longworth House Office 
Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://www.house.gov/ways__means/''.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                


    Chairman Archer. The Committee will come to order. Good 
afternoon.
    Today's hearing continues our series of meetings on how to 
save Social Security. We have with us today a group of experts 
who will review the President's proposal.
    I am pleased that the administration is here to answer any 
questions that Members might have about their approach.
    From what we have learned, many leading nonpartisan 
authorities have not been kind to the President's framework. We 
have been informed the White House plan represents a double 
count. It increases the debt, throws more IOUs into the trust 
fund, and doesn't do anything to save Social Security for the 
long-term. Those are allegations that have been made from 
various quarters that I have seen over the last month.
    All of this may be true. Perhaps the witnesses can explain 
that it is not true, but that is our opportunity today. Members 
from both sides of the aisle will benefit from a 
straightforward review of the White House framework.
    Today, however, I want to make clear that regardless of any 
flaws that may exist in the administration's proposal, I am 
personally determined to make every reasonable effort to save 
Social Security and to see that it is signed into law by the 
President during my remaining 2 years in the Congress. I will 
focus my efforts on the areas where we can make progress.
    I want to make clear that the President's framework 
contains one major element that can bring us together. For the 
first time, the President of the United States, a Democrat mind 
you, advocates investing in the stock market as a solution to 
Social Security's problems. This is a breakthrough, and it is 
without precedent.
    The White House and I may differ on who should own and 
control these investments. The White House calls for government 
control over people's investment choices. I believe if there is 
to be investment in the markets, it must be under the control 
of individuals, free to make up their own minds.
    But I do not intend to let this important difference stop 
us from making progress. I believe that the White House won't 
forever cling to this unpopular proposal. Indeed, the President 
has proposed individual ownership in the markets as a part of 
his add-on plan called the USA Plan.
    While the USA Plan doesn't in itself do anything to save 
Social Security, it represents another potential building block 
upon which we can possibly make progress.
    Finally, I believe it is appropriate to set aside 62 
percent of the projected surplus until Social Security is 
saved. We have the resources. The economy is strong, and the 
time is right. I intend to listen and learn from today's 
witnesses. Where there are flaws in the White House approach, 
let's fix them. Where there are good ideas, let's seize them.
    Now I am happy to yield to the gentleman from New York, the 
Ranking--oh, I'm sorry. Oh, the gentleman from New York is not 
here. In his stead, I yield to the gentleman from California, 
Mr. Matsui, for any comments he might like to make.
    Mr. Matsui. Thank you very much, Mr. Chairman. Mr. Rangel, 
the gentleman from New York, is not feeling well today. He has 
the flu. So he is up in New York. He should be here tomorrow.
    But thank you very much. I am going to be brief. Let me 
just say this. I appreciate the Chairman's remarks and the 
constructive approach that he has taken to this hearing today 
and his comments. Over the last month since the President has 
introduced his bill, the other side of the aisle has been 
spending most of its time criticizing the President's plan. I 
think this hopefully will be a first step in a new direction.
    I might just point out what the President's plan does. Very 
simply, it sets aside 62 percent of the budget surplus for 
Social Security, with a portion to be invested in equities, and 
the rest to buy down the debt. It also sets aside another 15 
percent for Medicare.
    The criticisms that have been raised on the President's 
plan as set forth by the Chairman, is that some of the proceeds 
of the surplus would be invested in private equities. I might 
just point out that the thrift savings plan, which every Member 
of this Committee and every Member of the House participates 
in, invests in the equity markets itself. If it is good enough 
for us, I should imagine it would be good enough for the 
American public as well.
    In terms of the double accounting, that has been used in 
scoring Federal budgets for decades. My understanding is that 
even plans that come from the other body, and perhaps plans 
that might come from this body will suffer the same kind of 
criticisms.
    So, I hope that if we criticize the President's plan for 
double accounting, we will also do the same for any subsequent 
plan, if in fact it should do that.
    There is also a confusing argument about the debt limit, 
and, if I might just say, the President's plan does not 
increase the public debt. What it does is decrease the public 
debt substantially from the current approximately 44 percent of 
gross domestic product, down to, by the year 2014, 15 years 
from now, 7 percent. I think that, in and of itself, will have 
a great deal of impact in terms of what the second panel will 
be talking about in terms of increasing economic growth in the 
United States. Alan Greenspan referred to that as well.
    I was very happy to hear and read in the New York Times 
last Thursday that Mr. Shaw is working on a Social Security 
plan himself. I think what we really need now, after 30 days of 
the President's plan being out there, is a comparison. I think 
once we see the comparisons between the various plans on both 
sides of the aisle, including Mr. Feldstein's plan, which 
doesn't have any cosponsors, or a sponsor yet, even though 
people keep talking about it, we will be in a better position 
to evaluate exactly what plan should be the retirement program 
for Americans in the future.
    But let me conclude by making another observation. It would 
piggyback onto what the Chairman has said. That is, we 
appreciate his cooperative attitude. We think the only way we 
are going to solve this problem is by working together. We 
think the President has come up with a strong framework for 
solving Social Security for the next 55 years, until 2055. We 
need obviously an additional 20 years to make it up to 2075. We 
want to work in a bipartisan fashion in order to try to achieve 
that.
    It is my hope that within the next 4, 5, 6 months, before 
the end of this year, before the next Presidential and 
congressional election, we are going to be able to come up with 
a solution to this very, very difficult problem.
    Thank you, Mr. Chairman.
    Chairman Archer. Without objection, each Member may insert 
written statements in the record at this point.
    [The opening statement of Mr. Ramstad follows:]

Statement of Hon. Jim Ramstad, a Representative in Congress from the 
State of Minnesota

    Mr. Chairman, thank you for calling this important hearing to 
review the President's Social Security framework.
    I am hopeful that we can discuss, in a bipartisan, pragmatic way, 
how to truly restructure the system to make it financially solvent for 
the future. That's why I applaud the President's attention to this 
issue, as it is important that the President help us engage the 
American public on how best to preserve, protect and strengthen their 
retirement safety net.
    Having said this, however, I must once again express my concern 
about the President's proposal and the fact that it does nothing to 
ensure the long-term solvency of the system. As my predecessor and 
friend, the Honorable Bill Frenzel will testify today, the President's 
framework consists of a curious budgetary scheme to make the Trust Fund 
accounts look safe.
    These budgetary transfers, however, do not create new resources. 
They do not affect debt held by the public. They would, however, 
increase gross debt and cause the debt to exceed the statutory debt 
limit ceiling.
    Mr. Chairman, my constituents expect more from us than budgetary 
magic. They want real improvements to be made so Social Security is 
operating as promised for current and future beneficiaries. They also 
do not want taxes raised or benefits cut. Most importantly, they 
believe financial soundness is paramount in the design of any new 
system.
    These are my guiding principles too, and I look forward to learning 
more today from our witnesses about those elements within the 
President's framework that support these important goals.
      

                                


    Chairman Archer. The Chair is pleased to have with us today 
Hon. Jacob Lew, who is the Director of OMB, and Hon. Kenneth 
Apfel, Commissioner of the Social Security Administration.
    Welcome, gentlemen.
    The Chair would like to recognize Mr. Lew to lead off. We 
would be pleased to receive your testimony.

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

    Mr. Lew. Thank you very much, Mr. Chairman, and Members of 
the Committee. It is a pleasure to appear here this afternoon 
to present the President's economic program.
    We really have to begin by looking at where we are in the 
economy. The results of the fiscal policy over the last 6 years 
are truly remarkable. When the President took office 6 years 
ago, we were looking at deficits that were projected to grow to 
$600 or $700 billion a year. Now we are looking at surpluses of 
hundreds of billions of dollars a year in the foreseeable 
future. It is a remarkable turnaround. It gives us a very 
special opportunity today to be discussing what to do with the 
surplus.
    It is important to remember that the threat was not turned 
back by accident. It took very difficult policy decisions in 
1993 and 1997 in order to get to where we are now in 1999. For 
the first time in 29 years, we have balanced the budget. We did 
it by making hard decisions. Now we have to be very careful in 
how we pave a way to the future, a world of surpluses.
    The economic benefits that go along with the deficit 
reduction have been profound. They are profound in terms of 
economic growth, and they are profound in terms of the well-
being of America's families, with unemployment at 30-year lows, 
and interest rates at 30-year lows. It is important to note 
that the economic well-being is reflected in what are for most 
families the lowest tax rates in decades.
    The 2000 budget is a defining moment. After two decades of 
talking about fiscal discipline, we now have fiscal discipline. 
Just as the surpluses are appearing, it is very important for 
us not to turn back to the old ways of spending and cutting 
taxes first, and asking later about the consequences. Our 
challenge is to use the surplus prudently.
    We are looking today at surpluses of $4.8 trillion over the 
next 15 years. The President's policy would devote more than 
three-fourths of the surpluses to reducing the Nation's 
publicly held debt, and transferring assets to Social Security 
and Medicare in order to extend the life of the Social Security 
Trust Funds. He would also put 12 percent of the surplus into 
USA Accounts, a tax cut that is designed to encourage savings 
for personal retirement.
    It is important for four reasons to have a policy that 
promotes national savings the way this policy does. First, when 
we increase the national savings rate, we are going to produce 
higher productivity and more economic growth. Second, as we 
reduce the publicly held debt, we reduce the interest on the 
publicly held debt. That means less interest payments going out 
of the government, more dollars within the government for 
purposes including financing Social Security benefits.
    Third, it puts the country in a better fiscal position, 
which means that if things don't go as well as expected, we are 
in a better position to respond. We have the ability to make 
decisions whether it is to reduce spending or in some cases to 
borrow without the burden of inherited debt weighing on our 
shoulders. Finally, it improves the retirement security of all 
Americans.
    The structure of the President's framework is very clear. 
It is consistent with the State of the Union last year and his 
budget and State of the Union this year. We need to save Social 
Security first. A statement of good intentions is not enough. I 
very much appreciate the Chairman's constructive comments 
opening this hearing. We look forward to working together to 
solve this problem. But it is important that we actually fix 
Social Security, and after we fix Social Security, move on to 
allocate the surplus in other ways.
    The President's policy calls for bipartisan Social Security 
reform this year. The President has committed 62 percent of our 
projected budget surpluses to Social Security. This, together 
with investing a portion of the surplus in equities, will 
extend the trust funds to 2055. We are gratified that many in 
Congress have accepted this principle. We need to work together 
on the other reforms that will be necessary to get to the 
traditional 75-year solvency, and also address other problems 
that the President identified in the State of the Union, 
including very high poverty rates amongst elderly widows, and 
the need to address the earnings limit. But that is not coming 
from an allocation of the surplus. Those would be as part of a 
bipartisan discussion of additional measures needed for Social 
Security reform.
    Only after we address Social Security reform do we move on 
to putting 15 percent of the surplus into Medicare, 12 percent 
into USA Accounts, and the remaining 11 percent for 
discretionary priorities, in particular, national defense and 
education.
    The President's framework will extend trust fund solvency. 
After the trust fund is credited for its own receipts, exactly 
as it is under current law, a substantial unified budget 
surplus will remain. As has been noted many times, that surplus 
can only be used once. It can be used for a tax cut. It can be 
used for spending. Or it can be used to make deposits into the 
trust fund. That is what the President has proposed, that we 
credit the trust fund in the form of Treasury securities for an 
additional amount that will extend the life of the trust fund 
under our projections to 2055.
    At the same time, the President's proposal will 
dramatically reduce publicly held debt. At the end of 1999, the 
current estimate of balances in the Old Age and Survivors, and 
Disability Insurance Trust Funds is about $850 billion. Through 
2014, we estimate that additional contributions to the trust 
funds under current law, including interest, will total $2.7 
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 approximately $3.5 trillion under current 
law. It is that additional deposit into the trust funds that 
will enable us to extend the life of the trust funds. We reduce 
the debt borrowed from the public, and deposit an equal amount 
in the trust funds. Interest payments will go to the trust 
funds as opposed to the holders of private debt. That means 
that the payments of interest will go to paying Social Security 
benefits, not just interest payments to banks, individuals, and 
others who own Treasury securities.
    The economic benefits of the President's plan we think are 
very clear. Rather than put it in our words, I would like to 
quote, if I could, from a report that Merrill Lynch recently 
put out to its investors. They said, ``Allocating a portion of 
budget surpluses to debt reduction, as the President proposes, 
is a conservative strategy that makes sense. Reduced debt will 
result in increased national savings, lower interest rates, and 
stronger long-term economic growth than would otherwise be the 
case.'' That really is the heart of the economic argument 
behind the President's plan.
    The President believes that we must put money aside to meet 
our current obligations before we incur any new obligations. 
The President's program does that by retiring debt and 
accumulating assets toward the Social Security commitments that 
we already have.
    Many have asked technical questions about the current 
Social Security financing system, and the effect of the 
President's framework on budget accounting. The President's 
proposals are new policies that are designed to address new 
circumstances and new public needs. But sound accounting 
principles explain these policies. The unified budget surplus 
provides the best standard for assessing the fiscal impact of 
general fund transfers to Social Security.
    As OMB, CBO, and others have long noted, the unified budget 
is really the most comprehensive and accurate measure of the 
government's burden or role in the economy. To quote from CBO's 
most recent economic outlook, ``Most economists, policymakers 
and participants in credit markets look at total budget 
figures, including Social Security when they seek to gage the 
government's role in the economy and its drain on credit 
resources.''
    The shortcomings of focusing on the on-budget results can 
be illustrated by contrasting the administration's proposed 
transfers to Social Security with proposals for tax cuts of the 
same magnitude. These policies may appear similar, but in fact, 
the tax cut would increase publicly held debt and reduce 
national savings, thereby hindering the Nation's ability to 
meet future fiscal challenges of Social Security and Medicare. 
In contrast, the President's proposal would reduce publicly 
held debt and extend trust fund solvency.
    There is a similar comparison in the discussions between 
debt held by the public and the Nation's gross debt, or the 
closely related subject of the debt subject to limit. Gross 
debt in the broadest terms includes debt held by the public, 
plus the debt held by government agencies. Such debt is owed by 
one part of the government to another, and financial market 
analysts have long believed that the economy is not affected by 
the amounts of agency-held debt. Such debt does not influence 
interest rates, future business investment, or future rates of 
economic growth.
    If gross debt increases because of policies that drive up 
the Nation's unified budget deficit and our publicly held debt, 
this would in fact signal an adverse impact on the economy. 
However, if as under the President's plan, gross debt increases 
while the debt held by the public decreases, the effect on the 
economy will be favorable and nonadverse.
    I would note that just this morning, Chairman Greenspan 
testifying at the Banking Committee reiterated that the measure 
that really indicates the impact of the trust funds on the 
economy is debt held by the public.
    Many of the comments that have been made about the 
accounting issues relating to the President's framework really 
relate to the basic question of whether or not one can advance 
fund Social Security. As we go through the discussion this 
afternoon, I hope we can note that the 1983 Social Security 
amendments that were written in this room really rely on the 
same principles of trust fund financing that the President's 
plan relies on. The President's plan says we should keep the 
commitments made in 1983, and make similar commitments with 
these transfers.
    I would like to, if I could conclude, perhaps put the 
President's plan in a framework that most families tend to 
think about when considering these kinds of financial matters. 
If we think about a family that has an 8-year-old child, and 
you are beginning to plan for college, you know it is going to 
be expensive. The first thing you do is try to put your 
family's financial house in order. You struggle and you put 
your house in order. But you still know that it is going to be 
tough to pay for college because it is going to exceed your 
income on a current basis, and you are going to need to save.
    You begin to prepare by reducing your debt, if you can. You 
pay down your credit card bills. You don't incur new debts. 
What does that do for you? It means that you won't have to make 
large payments on the debt that you owe, and you will have more 
cash available to pay those tuition bills.
    Second, you put some money aside. You put it into equities 
if you can. You put it into bonds, if you can. You try to have 
a prudent balanced package of investments so that you will have 
some savings to draw on.
    But the real goal, is to try to improve your ability to put 
as much of your income as possible into paying the bills when 
they come due for college. If instead of planning for college 
you were to take out a long-term loan to buy a boat that you 
have always wanted to have, you know that you are going to have 
bills to pay back that loan. You know you are going to have 
expenses to support that purchase. You know that it doesn't all 
add up.
    By analogy we are saying now is the time to buy down our 
debt. Now is the time to look ahead and make sure that our 
income, when we get out to the point when we have to pay back 
these bonds, can be sufficient to pay back the bonds that we 
owe to the Social Security Trust Funds now and the bonds that 
we are proposing to put into the trust funds.
    We know that based on our current forecast, there are 
surpluses for the foreseeable future. If we make the right 
fiscal policy decisions today, we know that we will put our 
house in order, just like the American family tries to put its 
house in order.
    Mr. Chairman, thank you very much. I appreciate the chance 
to go through this summary of the President's plan, and I would 
be delighted to answer any questions that you have.
    [The prepared statement follows:]

Statement of Hon. 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 President's 
budget for fiscal year 2000 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 five years of fiscal 
responsibility. After the best sustained growth of business investment 
since the 1960s, 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 in 
January, 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 six 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 income tax as a percentage of income than at any time 
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 six 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 from us as our legacy.
    The President's proposal will fully reverse the buildup of debt of 
the 1980s--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 seven 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 and accumulating 
assets 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 ten 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 
budget proposes a framework for allocating the surplus to meet national 
objectives if Social Security is reformed.
    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 ten 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''--a tax cut which 
would provide seed money plus matching contributions for individual 
accounts. The matching contributions will provide a substantial 
inducement for low-and moderate-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.

       The President's Framework Will Extend Trust Fund Solvency

    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. (This does not account for the anticipated 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 reduce the 
debt borrowed from the public, and deposit assets of an equal amount in 
the Social Security trust fund. 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 Federal Government 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. Furthermore, this amount will add to national 
savings, just as it would if it were used to buy down debt.
    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 six 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. In a recent report, Merrill Lynch noted:

         Allocating a portion of budget surpluses to debt reduction, as 
        the President proposes, is a conservative strategy that makes 
        sense. Reduced debt will result in increased national savings, 
        lower interest rates, and stronger long-term economic growth 
        than would otherwise be the case. (Merrill Lynch, Assessing the 
        Investment Climate: Focus on Washington, 10 February 1999.)

    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.

                      Accounting for Sound Policy

    There are some further, highly technical questions that one might 
ask about the effect of the President's framework on budget accounting, 
and on the presentation in the budget documents in the coming years. 
These questions are issues of detail, and have no bearing on the 
substance of the President's proposals, and on their effect on the 
economy and the nation broadly. The President's proposals are new 
policies that are designed to address new circumstances and new public 
needs, but sound accounting principles can explain these policies.
    The unified budget surplus provides the best and most meaningful 
standard for assessing the fiscal impact of general fund transfers to 
Social Security. The unified budget is a comprehensive measure of the 
fiscal activities of the Federal Government, and the surplus or deficit 
in the unified budget is the best indication of the Government's 
demands in the private credit market. As OMB, CBO, and others have long 
noted, the unified budget is a comprehensive measure of the fiscal 
activities of the Federal Government, and the surplus or deficit in the 
unified budget is the best indication of the Government's demands in 
the private credit market.

         . . .most economists, policymakers, and participants in credit 
        markets look at the total budget figures, including Social 
        Security, when they seek to gauge the government's role in the 
        economy and its drain on credit resources. (CBO, The Economic 
        and Budget Outlook: Fiscal Years 2000-2009, January 1999, p. 
        34.)

    The shortcomings of focusing on the on-budget results can be 
illustrated by contrasting the Administration's proposed transfers to 
Social Security with alternative proposals for tax cuts that would 
reduce receipts by the amount of the on-budget surplus. While a dollar 
of tax cuts and a dollar transferred to Social Security would seem 
numerically equivalent and equally fiscally responsible, the dollar of 
tax cuts would increase publicly held debt and reduce national saving, 
thereby hindering the nation's ability to meet the future fiscal 
challenges of Social Security and Medicare. In contrast, the dollar of 
transfers would allow the debt reduction to take place.
    There is a similar, and analogous, comparison between discussions 
of the debt held by the public, on the one hand, and the nation's gross 
debt (or the closely related debt subject to limit), on the other. 
Gross debt, in the broadest terms, includes debt held by the public 
plus debt owned by Government agencies (such as the Treasury securities 
held by the Social Security trust fund). Such debt is owed by one part 
of the Government to another. It does not therefore in any way reduce 
the Federal Government's ability to meet its obligations to actors in 
the economy at large. Financial market analysts have long believed that 
the economy is not affected by the amounts of agency-held debt; such 
debt does not influence interest rates, and thus does not influence the 
cost of capital to American businesses. Therefore, future business 
investment, and hence future rates of economic growth, will be driven 
by changes in debt held by the public, rather than in gross debt. 
Policies that reduce debt held by the public are thus far more 
important than changes in gross debt.
    Of course, a policy that increases debt held by the public will 
also, all else equal, increase gross debt dollar for dollar. 
Accordingly, changes in gross debt are not irrelevant, but it is 
essential to consider why gross debt changes. If gross debt increases 
because of policies that increase the nation's budget deficit and 
publicly held debt, then that change does signal an adverse impact on 
the economy. However, if, as under the President's Social Security 
framework, gross debt increases while debt held by the public declines, 
the effect on the economy will be favorable, not adverse. It may be 
worth noting that the President's framework, in buying down the 
publicly held debt and increasing the assets in the Social Security 
trust fund, would have exactly the same qualitative economic effects as 
the bipartisan and now universally hailed Social Security Act 
Amendments of 1983.

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 Archer. Thank you, Mr. Lew.
    We have just received notice that there are votes on the 
floor. There I understand will be more than one vote. The Chair 
would like the Committee to stand in recess until we have voted 
and returned as quickly as possible after the vote.
    I apologize to our witnesses, but we have no control.
    The Committee will stand in recess.
    [Recess.]
    Chairman Archer. The Committee will come to order, what 
there is of it.
    Commissioner Apfel, welcome to the Committee. The Chair 
would encourage you to limit your verbal comments to 5 minutes, 
if you will. Your entire written statement, without objection, 
will be printed in the record. We are glad to have you here. 
You may proceed.

   STATEMENT OF HON. KENNETH S. APFEL, COMMISSIONER, SOCIAL 
                    SECURITY ADMINISTRATION

    Mr. Apfel. Thank you, Mr. Chairman, and Member staffs, if 
there are no other Members present right now. [Laughter.]
    The challenging situation that we face right now is very 
major. It is going to dominate the debate over the course of 
the next year. I believe there is no greater need than 
addressing the long-range Social Security and Medicare issues 
that are now before this Committee.
    Over the course of the past year, Mr. Chairman, thousands 
of Americans in forums, in townhall meetings across the 
country, have made clear to me that they believe that this 
vital program is really irreplaceable. They understand just how 
important Social Security is for older Americans, for people 
with disabilities, for families who have lost a spouse and a 
parent. Since the creation of a Social Security program in 
1935, it has become part of the fabric of the American life. In 
my opinion, it is the most successful domestic program in our 
Nation's history, and our most important antipoverty program.
    Today, only 11 percent of older Americans have income below 
the poverty line. But without Social Security, about half of 
those beneficiaries would be living in poverty. Social Security 
is more than a retirement program, however. It is America's 
family protection program. About a third of our beneficiaries 
are not retirees. They are severely disabled workers and their 
families, or the surviving family members of workers. All of 
these people are able to live fuller and more independent lives 
than they could if Social Security were not there for them.
    But today, this critically important program faces serious 
long-range financing issues based on major demographic 
challenges that we face in the future. Since my written 
statement goes into this I am not going to spend the time to go 
through it here.
    If we take remedial action now when there is no crisis, we 
can prevent a crisis from ever occurring. I sincerely believe 
that we owe it to our children and our grandchildren to resolve 
these issues on our watch. If we were to delay action for a 
generation, the size of the financing problem would double. As 
you know, this is the first time in a generation when our 
fiscal position enables us to take action. Federal budget 
surpluses, which could not have been imagined at the beginning 
of this decade, are now projected for many years into the next 
century. We need to use this opportunity wisely.
    The President believes, and I wholeheartedly agree, that we 
should use the budget surpluses to advance fund more of the 
Nation's Social Security system. The government should set 
aside current resources to meet future obligations, and do this 
as our first priority. I believe that President Clinton's plan, 
consisting of the three actions outlined by Director Lew will 
do just that--the transfer of surpluses, the equity transfers, 
and, third, achieving bipartisan action on the hard choices 
that must be made to ensure long-range solvency.
    I strongly believe, Mr. Chairman, that we need all three 
parts of the President's framework to achieve long-term 
solvency and stability of the Social Security system. The 
President's first two proposals would resolve more than half of 
the long-range funding problem that Social Security now faces, 
and would extend program solvency through 2055. By paying down 
the publicly held debt, the President's plan will ensure that 
the country will have the resources to pay Social Security 
benefits until the middle of the next century. Lower interest 
costs and higher growth will make it possible for the Social 
Security Trust Funds to redeem bonds without creating pressure 
on other government programs. Indeed, OMB calculations indicate 
that the decline in government interest payments will provide 
sufficient resources so that the combined government 
expenditures on interest and Social Security benefits will be 
below current levels, as a share of the economy for many 
decades into the future.
    Bipartisan action can assure solvency for at least 75 
years, which I think is centrally important. The President has 
also said that a comprehensive reform package must include 
provisions to reduce poverty among elderly women. The poverty 
rates for elderly women who live alone are significantly higher 
than those of the general population. It is essential that we 
work together to ensure that they have the best protection that 
society can offer.
    I would also note here that the President has proposed 
eliminating the annual retirement earnings test, and he has 
called for the creation of Universal Savings Accounts (USA's) 
separate from Social Security. We have always told the American 
people that while Social Security is a solid and dependable 
foundation for retirement planning, they also need employer 
pensions and personal savings to enjoy a comfortable 
retirement. The USA Accounts can help every American worker 
build the wealth they need to finance longer lifespans.
    In conclusion, Mr. Chairman, I believe that as we discuss 
the critical macroeconomic issues involved in ensuring long-
range Social Security financing, we should remember that the 
American public has a different focus. Their concerns are with 
kitchen table economics, and the questions of providing for a 
family's own big ticket budget items, education, health care, 
and retirement.
    In each of these areas, the American people have looked to 
their government for help. That is why most Americans do not 
consider Social Security just another government program, or 
just another budget item. It is a financial foundation for 
American families.
    Today we have a remarkable window of opportunity to 
preserve and strengthen that foundation. Paying down the 
publicly held debt, transferring a portion of the projected 
budget surpluses to the trust funds, and equity investments, 
increase the likelihood of real reforms I believe these actions 
will prepare us for the long-term demographic challenges that 
we face.
    I look forward to working with this Committee in the future 
on this very important endeavor. Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Kenneth S. Apfel, Commissioner, Social Security 
Administration

    Good morning, Mr. Chairman and Members of the Committee. I 
appreciate the opportunity to appear before you today to 
discuss the President's plan to strengthen Social Security. I 
believe that assuring the future financing of Social Security 
and Medicare is the most important domestic issue that we face 
as a Nation and I am delighted to be a part of these ongoing 
discussions.
    In my testimony today I will briefly review for you the 
importance of Social Security as well as its long-range 
solvency situation, the Nation's changing demographics, and 
then discuss why I believe the President's framework for 
protecting Social Security is the right approach.

                     Importance of Social Security

    In the course of the past year, thousands of Americans, in forums 
and town hall meetings across this country, have made it clear that 
they believe that Social Security is important and it is worth 
protecting. I personally have spoken to women, minorities, people with 
disabilities, older Americans, baby boomers, college students, to 
business and labor leaders, to academicians and policy makers. And what 
I have learned from my year-long dialogue with the American people, is 
that they understand just how important Social Security is for retirees 
and their families, for people with disabilities, for children who have 
lost a parent, for young widows and widowers struggling to raise 
children alone. They know what Social Security means to those millions 
of Americans for whom those monthly benefit checks make the difference 
between dignity and devastation.
    Today, Social Security provides benefits to 44 million men, women 
and children. In 1998, an estimated 150 million people worked in jobs 
covered by the Social Security program and paid contributions on their 
earnings, giving them peace of mind that comes from knowing that they 
and their families will be protected when they retire or if they should 
become disabled or die. Nearly 1 in 6 Americans receives Social 
Security benefits and 95 percent of Americans have the benefit 
protection provided by our programs.
    Social Security is the most effective anti-poverty program in 
history. It is the major source of income for two-third of 
beneficiaries age 65 and older, and contributes 90 percent or more of 
income for about one-third percent. Today, only about 11 percent of 
older Americans are poor. Without Social Security, about half of all 
older Americans would be living in poverty. This is a program that has 
worked. It has worked extraordinarily well for the American people--
young and old--for over a half of a century. We should be very careful 
to protect the guaranteed benefit that Americans--both those who are 
now recipients and those who have been promised benefits--will need.
    The program also provides a financial floor of protection for 
millions of working-age Americans. About a third of our beneficiaries 
are not retirees, but are severely disabled workers, their children, or 
the surviving family members of workers who have died untimely deaths. 
This protection is extremely important, especially for young families 
struggling to afford adequate private insurance policies. For a young 
married average worker with two children, Social Security is the 
equivalent of a $300,000 disability insurance policy and a $300,000 
life insurance policy. About one in six of today's twenty year olds 
will die before retirement, and nearly thirty percent will become 
disabled.
    For all of these reasons, the program is irreplaceable, and I am 
delighted to have an opportunity to talk to you today about the 
President's framework for making Social Security strong for the 21st 
century.

                          Trustees' Estimates

    As you know, under the 1998 Trustees Report intermediate 
assumptions, the annual combined tax income of the OASDI program is 
projected to exceed annual expenditures from the funds until 2013. 
After that, because of interest income, total income is projected to 
continue to exceed expenditures until 2021. The funds would begin to 
decline in 2021 and would be exhausted in 2032. In 2032, when the trust 
funds are projected to become exhausted, the Social Security system 
will have enough income to cover only about three-fourths of benefit 
obligations.

                              Demographics

    We are all familiar with our Nation's demographics--and it can be 
summed up this way: we are living longer lives, but it is not just the 
number of years we are living, it is also the number of people who are 
living longer. This is good news. More of us are living to retirement 
age, and life expectancy at age 65 is increasing:
     In the U.S. in 1995, the elderly population (aged 65 and 
over) was about 34 million, making up about 12 percent of the 
population. In contrast, there were about 9 million aged people in the 
U.S. in 1940, and then they accounted for less than 7 percent of the 
population.
     The elderly population growth rate is expected to be 
modest from now through 2010, but it will increase dramatically between 
2010 and 2030 as the baby-boom generation ages into the 65-or-older age 
group. By 2030 our elderly population will have doubled from 34 
million, about 12 percent of the population, in 1995 to 68 million, 
about 20 percent of the population.
     When benefits were first paid in 1940, a 65-year old on 
average lived about 12\1/2\ more years. Today, a 65-year old can expect 
to live about 17\1/2\ more years. By 2070, life expectancy at age 65 is 
projected to be 20\1/2\ years.

                        Acting Now is Important

    These millions of people, retired and working, rely on Social 
Security for their retirement security, and protection for their 
families against loss of earnings due to severe disability and death. 
Clearly, we must preserve and protect Social Security; millions are 
counting on us for strong and decisive action. The time to act is now. 
Not because Social Security is in crisis, but because delay will 
greatly increase the cost of achieving solvency. At the present time, 
our financing is sound. We can have modest changes now, or much more 
drastic changes later. The size of the financing gap will double if we 
delay for a generation, and young Americans could lose faith in our 
system. We face serious but manageable challenges with early action. We 
can prevent a crisis from ever occurring with responsible action in the 
near term.

                         Window of Opportunity

    I strongly support the Administration's decision to try to use the 
window of opportunity presented by the budget surpluses to advance fund 
more of the nation's Social Security system. This is the first time in 
a generation our fiscal position enables us to take such action. 
Through advance funding, we can prepare for the inevitable challenges 
of the retirement of the baby boomers and succeeding generations.

                         President's Framework

    I'd like to talk about how the President's framework would impact 
the Social Security program. The President proposed the following three 
distinct actions to solve the Social Security program financing 
problem:
     The framework provides for transferring amounts equal to 
62 percent of projected federal budget surpluses over the next 15 
years--about $2.8 trillion--to the Social Security system. Except for a 
small investment in corporate equities, the framework uses this 
transfer to pay down the publicly held debt, strengthening our economy 
for the future.
     The framework calls for investing a small portion of the 
transferred amounts in the private sector to achieve higher returns for 
Social Security. The amount of the Trust Funds invested in the private 
sector would be about 15 percent, representing, on average, no more 
than about 4 percent of the stock market. Funds would be invested in 
broad market indexes by private managers, not the government.
     The President's framework calls for a bipartisan effort to 
take further action to ensure the system's solvency until at least 
2075. There are hard choices that we must face. To assure confidence in 
Social Security it is important to bring the program into 75-year 
actuarial balance.
    The first two steps will keep Social Security solvent until 2055, 
and bipartisan agreement on the hard choices could extend that solvency 
at least through 2075.

                    Benefits of the President's Plan

    By paying down publicly held debt, the President's plan will ensure 
that the country will have the resources necessary to pay Social 
Security until the middle of the next century. Merrill Lynch recently 
released a report that concluded:

         Allocating a portion of budget surpluses to debt reduction, as 
        the President proposes, is a conservative strategy that makes 
        sense. Reducing the debt will result in increased national 
        savings, lower interest rates, and stronger long-term economic 
        growth than would otherwise be the case.

    The lower interest costs and higher growth will make it possible 
for the Social Security Trust Fund to redeem its bonds without creating 
pressure on other government programs. Indeed, OMB calculations 
indicate that the decline in government interest payments will provide 
sufficient resources so that the combined government expenditures on 
interest and Social Security benefits will be below current levels as a 
share of the economy until 2050 and beyond.

                    Investment in the Private Sector

    The President's plan would require that transfers be made from the 
U.S. Treasury to the Social Security trust fund each year for 15 years. 
The amount transferred each year would be specified in law, so that by 
2015, about $2.8 trillion would have been transferred. A portion of 
these funds would be invested in the private sector each year, from 
2000 through 2014, until such time as 14.6 percent of the Trust Funds 
are in private investments. The remainder, 85.4 percent, would continue 
to be held in government securities. This allows the trust funds to 
achieve a higher rate of return without assuming undue risk.
    Stocks over time have returned about 7 percent annually after 
inflation, while Treasury bonds have yielded about half as much. 
Diversifying the trust fund investment to include stocks would produce 
more investment income and reduce the projected shortfall that needs to 
be made up through potential revenue and benefit changes.
    Under the proposal, total investment in the private sector would 
account, on average, for around 4 percent or less of the U.S. stock 
market over the next 30 to 40 years. This, by the way, is about the 
size of Fidelity's share of the stock market today. State and local 
pension funds now represent more than twice as much--about 10 percent--
of total stock market investments. If State and local pensions had not, 
years ago, gone in the direction of a diversified portfolio, then 
States and localities would have had to increase taxes or curtail 
pensions significantly. State and local government pension plans now 
hold roughly 60 percent of their total investment portfolios in the 
private sector.
    We must provide safeguards to avoid politicizing the investment 
process. Under the President's proposal, the Administration and 
Congress together would craft a plan that ensures independent 
management without political interference. I believe that this can be 
done, and that the Federal Reserve Board and the Federal Retirement 
Thrift Investment Board could serve as models. The Federal Reserve 
Board makes extremely important and sensitive economic decisions and no 
one doubts its independence. The Federal Retirement Thrift Investment 
Board oversees the investment of billions of dollars in the private 
sector and there has been no allegation of political interference in 
those investment decisions.

                              USA Accounts

    Social Security is one part of a ``three legged'' retirement 
system, which includes employer sponsored retirement plans and personal 
savings. I strongly support the President's program to create Universal 
Savings Accounts (USAs) by using part of the budget surpluses to help 
Americans build up wealth to finance their longer lifespans. Under the 
proposal, we will reserve 12 percent of the projected surpluses over 
the next 15 years--averaging about $36 billion per year.
    These accounts would be separate from Social Security, not a 
substitute for the guaranteed benefit. No resources for these accounts 
would be drained from the Social Security system.
    The President would extend this savings opportunity on a 
progressive basis to assure that those most in need of increased 
resources in retirement would benefit. The USA accounts will provide 
individuals with additional resources and individual choices in saving 
for retirement. Today the overwhelming preponderance of funds from 
pensions and savings go to the top half of the population by income, 
leaving only a tiny percentage for the bottom half by income. USA 
accounts, separate from Social Security, will mean hundreds of dollars 
in targeted tax cuts for working Americans who choose to save more for 
retirement, with more help for lower-income workers.

                          Program Improvements

    The President said a comprehensive reform package must include 
provisions to reduce poverty among elderly women. While the poverty 
rate for the elderly population is approximately 11 percent, for 
elderly widows it's 18 percent. Elderly women often are more dependent 
on Social Security because they are less likely to have pensions, and 
sometimes outlive their assets. Almost three-quarters of Social 
Security beneficiaries over age 85 are women--our mothers, grandmothers 
and great grandmothers. It is essential that we work together in a 
bipartisan effort to ensure that they have the best protection that 
society can provide.
    In addition, as part of the broader reform package, the President's 
proposal would eliminate the retirement earnings test. This provision 
of the law is a confusing and anachronistic hold-over from the earliest 
years of the program. Eliminating this work disincentive will allow 
people the freedom to choose to continue to work in their retirement.

                              Conclusion 

    Today we have a remarkable window of opportunity--a window created 
by the responsible fiscal policy of the last six years and the economy 
it helped to produce. The President's framework does much more than 
protect Social Security and Medicare. President Clinton's approach 
would pay down the publicly held debt, thereby increasing national 
savings and promoting economic growth which will reduce burdens on 
future generations.
    This is a moment we could not have foreseen just a few years ago. 
It is a moment in which we can begin to deal with the future. It is the 
moment to address long-term generational challenges. The President's 
framework for Social Security solvency gives a solid foundation on 
which to preserve our social insurance program for the 21st century. 
The Administration and the Congress worked together successfully to 
achieve a robust economy. We now must focus on strengthening and 
protecting the Social Security system for future generations of 
Americans.
      

                                


    Chairman Archer. Thank you, Commissioner Apfel.
    Mr. Crane will inquire.
    Mr. Crane. Thank you, Mr. Chairman.
    Mr. Lew, there has been a lot of criticism about 
transferring general revenues to the trust fund, and therefore, 
changing the self-financing nature of Social Security. How do 
you defend the use of general revenues to support the program?
    Mr. Lew. Congressman, the policy that we put forward is a 
change. I think it is important to discuss the merits of it.
    In the past, the principal means of financing Social 
Security has been the payroll tax. The only exceptions to that 
are when we pay interest on the debt and use tax revenues 
coming from the taxation of benefits to reinforce the trust 
funds. That has been general revenues.
    I think the important point to look at is where the 
obligation lies. Today the obligation is there to pay benefits 
based on current law. The obligation to pay benefits is not 
increased or decreased by anything in our plan. We asked the 
question, given that obligation, given the choices that we 
have: what would be the best way to meet the obligation? 
Preserving the structure of the traditional financing and 
benefit program was very important to us. We do not view this 
as being a radical deviation.
    But when looking at the choices, we think the President's 
framework for Social Security reform is the most desirable 
option. We have the fiscal ability because of the surpluses we 
are projecting into the future to meet those commitments to pay 
back the bonds out of general revenue. We know that the 
alternatives, benefit cuts or payroll tax increases would be 
very painful. So we think that it is the right balance. It 
preserves the structure of the current program, but does enable 
us to meet the commitments we have to pay the benefits today in 
the form that we think is most desirable.
    Mr. Crane. But you definitely wouldn't look favorably upon 
increasing the Social Security tax?
    Mr. Lew. We think that the payroll tax is a very 
substantial burden on working people, on employers.
    Mr. Crane. Except where is the money coming from, the same 
people.
    Mr. Lew. At the present time, the projected surpluses that 
we look at within the 5-year budget, as well as 15- and 20-year 
forecasts, assume that all of the payments to Social Security 
will be made. It is really a very important point, that the 
obligations are there as we project out the cost to the 
government.
    If we are showing a surplus in our long-term projection, 
then we don't have to go out and raise new revenues. Our 
current cash flow will support the transfer and the repayment 
that we are proposing.
    However, if we have tax cuts today or spending policies 
today that drive our revenues down or our outlays up, then we 
may or may not be able to pay the bills when they come due. We 
think the decisions really have to be made today to set aside 
the assets, and really to defer, as it were, the consumption to 
later. Not to spend the money on a tax cut or spending program 
today, but to be in a position so that we can pay these 
commitments when they come due.
    Mr. Crane. When would the debt limit have to be raised 
under current law?
    Mr. Lew. I would have to check, but it is several years 
from now.
    Mr. Crane. Well, according to CBO, no sooner than 2009.
    Mr. Lew. I can look it up, Congressman. I would be happy to 
check. It is several years from now.
    Mr. Crane. And how about under the President's proposal?
    Mr. Lew. Well, we would reach the debt limit sooner because 
the debt limit measures not just the debt held by the public, 
but the debt in all trust funds as well.
    I think that in my prepared remarks I tried to address 
this. I think there is a very important distinction to be made. 
We view the debt held by the public as the important indicator 
of the government's participation in private credit markets. 
The debt held by the public is what Chairman Greenspan 
suggested we should be looking at. It is what most economists 
suggest that we should look at.
    The debt subject to limit is a broader measure. It includes 
debt held by the trust funds, but they are not the same. If the 
debt subject to limit goes up because the trust fund is owed a 
dollar, it is not the same as if we owe a dollar in private 
treasuries. When we pay back the trust fund, we are paying 
Social Security benefits. When we pay back private bond 
holders, we are not.
    For a number of reasons that I would love to go through in 
more detail if we have the time, as a matter of economics, it 
is very different to have the debt subject to limit going up 
because the debt held by the public is going up, which is not 
the case under the President's plan, as opposed to the debt 
held by the trust funds. We view the debt in the trust funds as 
an asset. That is how we set aside funds for the future.
    In order to put bonds in the trust funds, those bonds are 
counted as debt. This is a case where debt is good. The debt is 
saying that instead of spending the money today, we will pay it 
later for Social Security benefits.
    Mr. Crane. Thank you, Mr. Chairman.
    Chairman Archer. Mr. Shaw?
    Mr. Shaw. I would like to follow up on that just a minute. 
You just said that we don't view the bonds in the trust fund as 
public debt. Don't you view that as being owed to future Social 
Security recipients?
    Mr. Lew. Congressman Shaw, the debt in the trust funds is 
not debt held by the public. It is debt held by the trust 
funds. So as a technical matter and as an economic matter, it 
is not public debt.
    Mr. Shaw. No. Would you answer my question, please? Don't 
you view this as money owed to people that are paying into 
Social Security for when they retire?
    Mr. Lew. Yes, Congressman, it is money that is owed. The 
benefits are owed today. This is really just putting the 
commitment to pay the bond with the benefit that is already 
owed. So it is not increasing the obligation. The obligation is 
already there.
    Mr. Shaw. Let me ask you a couple more questions regarding 
the 62-percent surplus. If you were to take the trust fund out 
of the unified budget, there wouldn't be any surplus. So the 
surplus that you are putting through the Social Security Trust 
Fund, couldn't it certainly be argued that is has already been 
through there once?
    Mr. Lew. Well, the unified budget, as you know, is composed 
of all of the net receipts in excess of outlays.
    Mr. Shaw. I know that. I only have 5 minutes. Please answer 
my question without explaining the system to me, because I 
think all of us up here know how it works. The simple question 
is, in that this money may very well be those same dollars, in 
fact, it is those same dollars that have already gone through 
the Social Security Trust Fund. Isn't that right?
    Mr. Lew. We have not taken any dollars from the trust fund. 
The trust fund holds bonds. The trust fund does not hold 
dollars.
    Mr. Shaw. It goes through.
    Mr. Lew. That is the current system that we have today.
    Mr. Shaw. The money, the surplus, the tax dollars go 
through. The FICA taxes go through the trust fund and come out 
the other end. Treasury bills go into the trust fund, which is 
nothing but IOUs or calls on future taxpayers. Then that goes 
into the unified budget to make it look like we have a big 
surplus. The President commits 62 percent of that surplus to 
run it through the Social Security Trust Fund again.
    Based upon that, let me ask you another question. Why 
couldn't you run it through 2 or 3 more times? It is the same 
money. It is the same money.
    Mr. Lew. Congressman, the proposal the President has made 
is that we should treat these deposits, these transfers into 
the Social Security and Medicare trust funds, as we would treat 
outlays, and not run it through any more times.
    Mr. Shaw. It has already been through. You run it through 
twice.
    Mr. Lew. That is the way we have been budgeting for years 
and years. That is nothing that is new about this program. We 
are ending the practice of----
    Mr. Shaw. I know that. I don't want to appear to be 
discourteous. There are some things that the President put out 
that I do like. But I think that this is smoke and mirrors with 
regard to setting aside 62 percent of the surplus. He says we 
are going to put it in, and we are going to retire the public 
debt and put it into debt, into the Social Security Trust Fund. 
The moneys that are in there, the IOUs that are backed by the 
full faith and credit of the Federal Government, are backed by 
the taxpayers of tomorrow. That is what concerns me. Once that 
trust fund starts depleting, some taxpayers, either through 
FICA taxes or general income taxes, are going to have to step 
up to the plate and put that money in there. It means more and 
higher taxes.
    As a matter of fact, with the plan that the President has, 
I believe that it is dependent upon the new taxes that he sets 
forth in his budget. Isn't that true?
    Mr. Lew. Congressman, if you are asking about the other 
parts of the budget, I would be happy to discuss them. But 
nothing in this plan is dependent on other parts of the budget.
    Mr. Shaw. But is it all interrelated?
    Mr. Lew. No. The proposal for the framework is not related.
    Mr. Shaw. Doesn't the President make surplus assumptions 
based upon his total budget? In order to come up with those 
exact assumptions, isn't it true that we would have to buy the 
whole deal?
    Mr. Lew. I would be happy to respond to the question. It is 
going to take me more than 30 seconds though.
    Mr. Shaw. Go right ahead. I will give you the rest of my 
time to answer it.
    Mr. Lew. The President's budget is----
    Chairman Archer. The director has 1 minute.
    Mr. Lew. Thank you very much, Mr. Chairman. The President's 
budget has to be viewed in its entirety. In its entirety, the 
budget projects surpluses that go quite far into the future, 40 
or 50 years. There are no substantial changes on long-term tax 
policy in this budget. Receipts do rise because incomes rise. 
That is not tax policy. That is a matter of the economy working 
and the tax system that we have working.
    The decision that we make today, this year, will really 
determine whether the surpluses materialize or not. We could 
decide to have a tax cut. If we decide to have a tax cut, there 
will be smaller surpluses. We could decide to spend that 
surplus. If so, we will have smaller surpluses. But if we have 
the surplus we are projecting, which we think is a conservative 
economic projection, then when we get to the point where these 
bonds are redeemed, we will have the adequate resources to pay 
the bills.
    We need to have a fiscal policy today that doesn't consume 
the surpluses, either in the form of tax cuts or spending 
policy. Again, without meaning to be argumentative in response, 
I think one has to view the unified surplus the way it has been 
viewed really for all the 20 years that I have worked on the 
Federal budget. That is, that you have to make choices on the 
bottom line--what do you do with the dollars.
    If we view it as a choice between tax cuts, spending, or 
setting it aside for the trust funds, those are very different 
choices. Setting it aside for the trust funds could accomplish 
the macroeconomic policy without putting dollars back into the 
trust fund. I do not disagree with that. But that would not 
extend the life of the trust fund.
    We think it is appropriate to put the bonds in so that 
bills will be repaid in the future.
    Mr. Shaw. Yes, sir. With all due respect, I think the 
answer to my question was yes.
    Chairman Archer. The gentleman's time has expired.
    Mr. Matsui.
    Mr. Matsui. Thank you, Mr. Chairman.
    Jack, let me follow up on that because the President's 
program goes to the year 2055. The President has never said 
that that is the end of it. In fact, you have said, and I know 
that Mr. Apfel has said, and I know Mr. Rubin has said numerous 
times that you really have to have a 75-year projection because 
that is what the actuaries use. If 4 or 5 years go by with only 
up until 2055, we are going to be out of balance by the year 
2002, 2003. Is that correct?
    Mr. Lew. It is true. The traditional measure of Social 
Security solvency has been 75 years. The President was very 
careful in the State of the Union and in the budget not to 
deviate from the normal objective of 75-year actuarial balance.
    What he has tried to do in the framework for Social 
Security reform is to try and solve roughly half the problem, 
by transferring the surplus so that it is available in the 
future to pay back the trust funds and cover benefits that are 
currently due. It does not eliminate the need for further 
action. We think it does change the challenge, and it makes it 
an easier bar to pass, which we would hope would encourage both 
sides in Congress and the White House to work together on a 
bipartisan basis to solve the problem and to combine the 
transfers with the kind of programmatic changes that would be 
envisioned.
    Mr. Matsui. It's your sense that solving the additional 20 
years, from 2055 to 2075, would take probably some structural 
changes, although that depends upon what the Congress wants to 
do. I would imagine that is where it has to be on a bipartisan 
basis. Is that your----
    Mr. Lew. Well, those are certainly the tough choices. We 
think that the first step should be easy. But obviously we have 
a little work to do in order to agree on how to handle the use 
of 62 percent of the surplus.
    But it will be very tough, just like in 1983, when many of 
us worked together. They are tough choices that can only be 
done on a bipartisan basis.
    What the President did for the last year has been to try 
and encourage the kind of dialog that many in this Committee 
have participated in that leaves us in a position to address 
the problem together. By solving half the problem through the 
financing mechanism that's proposed in the framework for Social 
Security reform, we hope that is a big step forward to try and 
tackle a long-term problem, because tackling long-term problems 
is tough. We think it will be best to do it when we have a lot 
of time so that the steps would be as modest as possible.
    Mr. Matsui. Thank you.
    Mr. Apfel, would you like to comment?
    Mr. Apfel. Well, I just wanted to paraphrase what the head 
of the General Accounting Office has said, that the President's 
proposal has financing reforms. What he has said is that we 
still need structural reforms. I think we would say yes, we do. 
Clearly, there are some further steps that need to be taken. 
Some of those steps may be further financing reforms, but that 
we have to be able to move to long-term stability of the system 
over time.
    Mr. Matsui. Let me ask you, because structural reform is 
what the comptroller general and the second panel, will 
probably speak about. Does the Feldstein plan, which I know 
both of you have looked at and perhaps analyzed, and it's been 
a revolving, changing type approach, have structural reforms in 
it?
    Mr. Apfel. Well, there are two or three different 
variations. I am not sure exactly which one we would be talking 
about. The administration also proposes that outside of Social 
Security, some of the surpluses should be devoted to creating 
Universal Savings Accounts, which we think are very important. 
At the proposed size, we believe they can be fully 
accommodated.
    There are proposals like Mr. Feldstein's outside of Social 
Security that use much larger portions of the surplus. The 
effect would be to seriously reduce the ability to pay down 
publicly held debt in the short-term. There are also some 
serious issues about what happens to the Social Security 
foundation benefit over time with some of the proposals that 
are out there.
    There are certainly some potential structural changes 
there, but those are very, very dramatic. We would be looking 
at them very, very carefully before we would be comfortable 
moving in that direction.
    Mr. Matsui. Mr. Lew, can I ask you about the double 
accounting issue? What I understand is that since 1974, perhaps 
even before then, we have been using the Social Security 
surplus for general expenditures. Now, can you make the same 
case about double accounting there, as well as using it in the 
example that was just given?
    Mr. Apfel. I think it is certainly a complicated question 
what actually happens to these dollars. It sounds argumentative 
when we talk about it, but it is complicated and it really does 
have to be unraveled.
    There is no doubt that the unified surplus does comingle 
different surpluses and deficits to bring you to a bottom line. 
One could say that you are using the contribution to the 
surplus from Social Security for other purposes. But the 
commitment to Social Security remains in the form of a bond. So 
you are not taking any resources from Social Security, but you 
do have a projected unified surplus that is larger because 
Social Security runs a surplus.
    Interestingly, the issue of double counting never arose in 
the past when there were proposals for tax cuts out of a 
unified surplus or proposals for spending for other kinds of 
programs out of unified surplus. We don't think that there is 
any additional double counting issue by putting a dollar into 
the trust fund, than by using it for any of these other 
purposes. One has to work through the complexities, but it 
really is the same. We think it is a tradeoff between the 
choices. We think the choice of putting the dollars into the 
trust fund is far and away the best choice.
    Chairman Archer. The congressman's time has expired, but 
would the gentleman like the indulgence of the Chair for how 
much additional time?
    Mr. Matsui. Actually, I just wanted to ask one more 
question.
    Chairman Archer. All right. The gentleman has an additional 
30 seconds.
    Mr. Matsui. Thank you, Mr. Chairman. What I wanted to ask 
in follow-up to that is about the analysis that you are using 
now or that was used perhaps by Mr. Shaw in terms of double 
accounting. Would you say a significant tax cut would be 
potentially double accounting too?
    Mr. Lew. Well, I don't think it is double counting. But it 
would have a very much more negative effect, which would be 
that it would not reduce the debt held by the public; a tax cut 
would have the effect of leaving us in the position where the 
debt held by the public would be that much higher.
    Mr. Matsui. Thank you, Mr. Chairman.
    Chairman Archer. Mr. Thomas.
    Mr. Thomas. Thank you, Mr. Chairman. Actually, I think the 
argument over Social Security and Chairman Greenspan indicated 
I think in front of this Committee that whether it is in the 
surplus or whether it is in the Social Security Trust Fund, it 
buys down the debt, and that is a positive. When you begin to 
use it for other programmatic uses, then there is some concern. 
I think I understand that part of the President's program.
    What I would like to have you, Jack, explain to me for just 
a minute or two is the Medicare part of that. I am not clear 
whether we are going to do 62 percent and then utilize those 
other funds, or we are going to save Social Security for 75 
years and only when that is done are we able to use those other 
funds. But I don't want to go down that trail in the short time 
that we have.
    What I want to ask you is in the agreement in 1997, we were 
able to secure another 6 to 8 years solvency on the Part A fund 
because in essence, we transferred programs, the Home Health 
Care Program from Part A to Part B. The President has now 
proposed to extend the ``solvency'' of Part A to 2020, by 
transferring money which is surplus or general fund or on the 
other side of the ledger to Part A. Part A is the hospital 
fund. Part B is where. And in that same State of the Union 
speech, the President said he wanted prescription drugs 
available for our seniors on Medicare.
    I looked in the budget and I could not find a provision for 
prescription drugs. Since the $700 billion was a transfer to 
extend Part A. Frankly, I think the question of Part A solvency 
is really moot since we either do programmatic changes, as you 
did in 1997, or you transfer dollars, I think the real question 
is the exposure to the general fund of general fund money, 
whether surplus or general fund to pay for Medicare. But that 
is another discussion.
    Where are you proposing to get the money to support the 
President's prescription drug program for Medicare if the $700 
billion is to extend the solvency of Part A by pumping general 
fund money over into the payroll tax?
    Mr. Lew. Congressman Thomas, the President very carefully 
in the State of the Union tried to make exactly the point that 
you observed, which is the transfer of 15 percent of the 
surplus is for the purpose of extending trust fund solvency.
    In order to----
    Mr. Thomas. But I just have to underscore that solvency of 
the trust fund is meaningless now if we transfer programs or we 
transfer surplus funds to the payroll tax fund. It really 
doesn't have a lot of relevance.
    Mr. Lew. What the President proposes in the budget and what 
he proposed in the State of the Union was to transfer these 
bonds into the Medicare trust fund. It does create the need for 
general funds to repay those bonds after 2008.
    Mr. Thomas. We could transfer the hospital functions of 
Part A over to the general fund as we did the home health care 
function, and we could create an infinitely solvent Part A.
    Mr. Lew. I would like to address two issues if I could, in 
response to your question. In 1997, as you know, there were 
many real policy reductions in Medicare. They were the largest 
savings in Medicare that we have ever done. The industry, the 
health economy is very much feeling the pinch of the policies 
that were put into effect in 1997.
    The reason that it is so important to transfer 15 percent 
of the surplus in order to extend the trust fund solvency is 
that we know the alternative is very deep provider reductions 
or payroll tax increases.
    As far as the prescription drug benefit goes, we understand 
there is a need for further programmatic reforms. The President 
invited debate on those programmatic reforms, and he said that 
the prescription drug benefit should be part of the discussion 
of those programmatic reforms. So there would need to be 
additional savings in order to finance the prescription drug 
benefit.
    Mr. Thomas. OK. Indeed, in his budget he proposes 
reductions to hospitals and to providers beyond the BBA 1997 
reductions. Are those to go for prescription drugs?
    Mr. Lew. No, Congressman. But that I think underscores----
    Mr. Thomas. Yes or no?
    Mr. Lew. No. They are not.
    Mr. Thomas. So although you described the 1997 changes as a 
pinch, you are advocating even additional reductions to pinch 
it even more. Although programmatic changes are necessary to 
fund prescription drugs, that additional pinch, those 
additional dollars, are not to be applied to prescription 
drugs. What are they applied to then?
    If you are taking money out of Medicare, where are you 
spending it?
    Mr. Lew. The amount of savings that are in the President's 
budget in Medicare would come nowhere near funding the 
prescription drug benefit.
    Mr. Thomas. Yes. But if you are taking it out of the 
program and sending it some place else, that is not the right 
message to send. Is it?
    Mr. Lew. As a practical matter, they do increase trust fund 
solvency very modestly. But they are not large enough to give 
you very much additional trust fund solvency.
    Mr. Thomas. Where do the reductions in hospital and 
provider payments go in the President's budget? Into Medicare?
    Mr. Lew. In terms of Medicare, reducing outlays for 
Medicare will have some modest effect on trust fund solvency. 
So the reduction itself will have a modest effect on trust fund 
solvency.
    Mr. Thomas. Is that the purpose of the reductions to 
hospitals and providers?
    Mr. Lew. I wouldn't argue it's the purpose because the 
savings are small enough and the effect is modest enough that 
it doesn't really constitute a Medicare reform proposal. But I 
think it does illustrate how difficult Medicare reform is.
    Mr. Thomas. I would have felt much better if your answer 
was in all honesty, given the caps on discretionary domestic 
spending, you have some programs you want to cover and you have 
to move dollars in that category. That is how you chose to do 
it. That kind of an honest response would have been much more 
appreciated.
    Chairman Archer. The gentleman's time has expired.
    Mrs. Johnson.
    Mrs. Johnson of Connecticut. I thank you. I want to just 
first clear up an implication of your testimony, Mr. Lew, that 
comes through to me, at least loud and clear.
    You described this as a defining moment. I believe it is. 
Now within your budget you in a number of places allude to the 
fact that the budget has to be taken as a policy document as a 
whole, and that only if all of the things in it happened will 
it work. Would you agree?
    Mr. Lew. The budget does have to be taken as a whole. The 
forecasts in the budget assume that the budget will be enacted. 
But the driving force behind the long-term projections are the 
actions already taken in 1993 and 1997. It is the virtuous 
cycle of reducing debt that reduces net interest costs that 
drives the deficit down, and then the surpluses up.
    Mrs. Johnson of Connecticut. Would you agree with Mr. Rubin 
when he testified before this Committee that any spending 
increases, given your stress on fiscal discipline and a 
balanced budget, have to be funded? You have funded them within 
the budget.
    Mr. Lew. For the Fiscal 2000 portion of the budget, all of 
the spending initiatives are funded. The only aspects of the 
budget that are funded out of the allocation of the surplus are 
the pieces that we have specifically noted, the USA Accounts 
and the----
    Mrs. Johnson of Connecticut. Yes. I thank you. I just want 
to move on with my other question.
    I just want to put on the record that while your spending 
increases are funded for education, for a long list of other 
initiatives, that at least 70 percent of the revenue raisers to 
fund those initiatives are things this Committee has rejected 
on a bipartisan basis year after year. The cuts that you 
recommend in Medicare are cuts that we will reject, we must 
reject, because particularly our rural hospitals will simply go 
under if we are not more honest about reimbursement rates.
    So I just want to remind us all that while your budget may 
work on paper, you have included in it many proposals that 
Members on both sides of the aisle do not agree with. So we are 
not going to be able to proceed in exactly the way you would 
like. I just want to put that on the record because promises 
are being made out there on the assumption that because this is 
a balanced budget, there is the money to fund them. When all of 
those fees are simply people paying more money for things that 
taxes already now provide them with. The tax increases 
particularly, is a category in which most of your recommended 
increases have been rejected by this Committee.
    But I want to get to my real question, Mr. Apfel, although 
both of you are free to answer it. You have said over and over 
again, that you recommend some changes in how Social Security 
is financed, and that will take care of half of the problem. I 
have no doubt but that we are going to find a way, for 
instance, to get the high returns of the private market into 
the Social Security system to some extent and be able to help 
better finance our system through that mechanism.
    But the half that requires structural changes, I know you 
do not want to take a stand on specific structural changes, but 
you have taken a stand against increasing taxes, reducing 
benefits, or raising the age. So if you would just enumerate 
the other say 20 options that we have that are the kinds of 
things that we ought to be thinking about and where we are 
going to come together, that would be very helpful.
    Mr. Apfel. Mrs. Johnson, I think that the Administration 
has correctly expressed very strong reservations about a 
payroll tax rate increase and broad-based privatization of the 
Social Security system.
    Mrs. Johnson of Connecticut. And I would agree with them on 
both of those things. So I want to hear the suggestions of the 
things that we could choose from.
    Mr. Apfel. But we have kept open, without condemnation, 
virtually every other option that is under consideration. We 
have not taken an active----
    Mrs. Johnson of Connecticut. But what are some of those 
options? I need to know what are your stars?
    Mr. Apfel. I can provide for the record a whole list of 
different options that the advisory board and others have 
explored. There are things such as raising the wage cap on the 
taxation side, extending coverage to State and local workers, 
raising the retirement age, bend points, and increasing the 
computation years from 35 to 38 years.
    [The following was subsequently received:]

Cost Effects of Various Solvency Proposals

    A wide range of proposals to address Social Security's long-term 
financing problem has been advanced by Members of Congress as well as 
by research organizations and academicians.
    The advantages and disadvantages of each proposal for resolving the 
problems facing Social Security will have to be carefully examined. It 
is also important to recognize that the options need to be evaluated in 
terms of the total package agreed upon. That is, individual elements in 
a given package will interact. These interactions will also need to be 
fully understood.
    Attached is an excerpt from a report issued by the Social Security 
Advisory Board in 1998. The proposals listed illustrate the range of 
options that have been suggested to address the long-range deficit. 
Cost effect information is shown both as a percent of taxable payroll 
and as a percent of the long-range deficit that would be resolved by 
the change. (In evaluating the cost effect of a given change, it is 
useful to know that the benchmark used for this purpose was the long-
range OASDI actuarial deficit under the intermediate assumptions of the 
1998 OASDI Trustees Report--2.19 percent of taxable payroll.)
    Attachment

     Effect of Proposals to Address the Long-Range Solvency Problem
------------------------------------------------------------------------
                                                          % of Social
              Options                Savings as % of   Security  deficit
                                     taxable payroll        resolved
------------------------------------------------------------------------
Reduce the COLA by 0.5 percentage                0.73                 34
 point below CPI, beginning in
 2000.............................
Reduce the COLA by 1 percentage                  1.42                 65
 point below CPI, beginning in
 2000.............................
Increase the number of years used                0.25                 11
 to calculate benefits for
 retirees and survivors from 35 to
 38 (phased in 2000-2002).........
Increase the number of years used                0.42                 19
 to calculate benefits for
 retirees and survivors from 35 to
 40 (phased in 2000-2004).........
Reduce benefits across the board                 0.36                 16
 by 3 percent for those newly
 eligible for benefits, beginning
 in 2000..........................
Reduce benefits across the board                 0.59                 27
 by 5 percent for those newly
 eligible for benefits, beginning
 in 2000..........................
Speed up the phase-in of the                     0.11                  5
 currently scheduled increase in
 the normal retirement age to 67..
In addition to speeding up the                   0.39                 18
 increase to age 67, index the
 normal retirement age (by 1 month
 every 2 years) up to age 68......
In addition to speeding up the                   0.48                 22
 increase to age 67, index the
 normal retirement age (by 1 month
 every 2 years) up to age 70......
Reduce benefits by 10 percent                    1.65                 75
 beginning at family income of
 $40,000 annually and 10
 additional percent for each
 additional $ 10,000 (maximum
 reduction of 85 percent).........
Raise payroll tax rates (for                     2.20                100
 employees and employers combined)
 by 2.3 percentage points in 2000.
Raise payroll tax rates (for                     2.19                100
 employees and employers combined)
 by 2.9 percentage points in 2020
 and an additional 2.9 percentage
 points in 2050...................
Eliminate the special income                     0.35                 16
 thresholds for taxing Social
 Security benefits (and put
 revenue in the Trust Funds)......
Make all earnings subject to the                 1.99                 91
 payroll tax (but retain the cap
 for benefit calculations)
 beginning in 1999................
Make all earnings subject to the                 1.50                 68
 payroll tax and credit them for
 benefit purposes beginning in
 1999.............................
Make 90 percent of earnings                      0.55                 25
 subject to the payroll tax and
 credit them for benefit purposes
 (phased in 2001-2003)............
Cover all newly hired State and                  0.21                 10
 local government employees
 beginning in 2000................
Invest 40 percent of the Trust                   1.00                 46
 Funds in stocks (phased in 2000-
 2014)............................
Transfer money from general
 revenues to offset the Trust Fund
 deficit..........................   Impact on Trust Fund deficit would
                                        depend on amount transferred
Use a portion of the payroll tax
 (e.g., 2 or 5 percent) to provide
 mandatory individual investment
 accounts.........................       Trust Fund deficit would be
                                      increased unless revenue loss is
                                           offset by benefit cuts
Allow or require workers to
 contribute to individual
 investment accounts funded by
 additional amounts withheld from
 wages............................   No direct effect on the Trust Fund
                                        deficit. Benefits from these
                                      accounts would enhance retirement
                                                   income
Use the budget surplus to
 establish individual investment
 accounts.........................   No direct effect on the Trust Fund
                                    deficit Benefits from these accounts
                                       would enhance retirement income
Return to pay-as-you-go financing
 and allow workers to put money
 saved from temporary payroll tax
 reduction into individual
 investment accounts..............       Trust Fund deficit would be
                                     eliminated by raising payroll taxes
                                      as needed to meet future benefit
                                                 obligations
------------------------------------------------------------------------

    Mrs. Johnson of Connecticut. What does that mean, 35 to 38 
years?
    Mr. Apfel. Pardon me. The number of years that would be 
counted in determining the benefit calculation.
    Mrs. Johnson of Connecticut. In other words, you would 
increase the number of quarters?
    Mr. Apfel. Not quarters. It's actually years for 
determining benefit calculations.
    Mrs. Johnson of Connecticut. So that would have the effect 
of lowering the benefit, because the more years you include, 
the more low earning years you include.
    Mr. Apfel. If you increase the number of years, you 
increase the number of low-earning years. This is again----
    Mrs. Johnson of Connecticut. Correct. And you effectively 
lower the benefit.
    Mr. Apfel. that is not an Administration proposal.
    Mrs. Johnson of Connecticut. I understand that. I 
understand that.
    Mr. Apfel. We have not ruled out a series of different 
options on both the revenue side and the spending side, and 
have tried to do everything that we could to keep discussions 
going forward so that we could have an open discussion about 
future changes on a bipartisan basis this year.
    Mrs. Johnson of Connecticut. Well, I certainly want to have 
that discussion on a bipartisan basis. I just think that the 
side that you have chosen to talk about is the easiest side. 
The other side really needs more.
    Mr. Apfel. Actually, Mrs. Johnson, I am not so sure it is 
so easy, or else the proposals wouldn't have generated so much 
heat.
    Chairman Archer. The gentlelady's time has expired.
    Mr. Apfel, I feel constrained to try to set a foundation 
for your testimony today, which I am now a little bit confused 
about.
    Do you speak for the administration, for the Clinton White 
House? Because you commented that you did a few minutes ago, 
and I just wondered if that was accurate.
    Mr. Apfel. At that point in time I was, yes, sir.
    Chairman Archer. You appear here today as a representative 
of the Clinton White House and their policies?
    Mr. Apfel. No not as a ``representative'' of the Clinton 
White House, but, as the Commissioner of Social Security, and 
therefore as a senior government official, yes sir.
    Chairman Archer. No, I do understand you are Commissioner. 
But I also understand that for many, many years I joined with 
Congressman Jake Pickle on this panel on a bipartisan basis to 
make Social Security an independent agency. We finally 
accomplished that and had it signed into law. Under the law, I 
believe that your purpose and your representation before this 
Committee should be as an independent agent that has no 
connection with the administration's policies. I am a little 
bit troubled by that.
    Is it not true that your agency is now independent under 
the law and not an instrument of the White House?
    Mr. Apfel. I believe that the Independent Agency 
legislation created the appropriate balance between 
independence and still an executive branch agency. I report 
directly to the President of the United States. I am appointed 
by the President and a member of his broader cabinet.
    At the same time, I believe the Independent Agency 
legislation created the appropriate balance of a term position 
through January 2001 to enable the appropriate balance as an 
executive branch agency, but also with a term appointment. I 
believe that is the appropriate balance.
    So when Mrs. Johnson asked about the administration, I can 
very, very comfortably articulate the administration's 
positions. On the President's proposal, Mr. Chairman, I 
strongly endorse all three components of the administration's 
bill. Personally as Commissioner and as a senior administration 
official.
    Chairman Archer. I picked that up from your testimony and I 
understand that. But, Mr. Apfel, you do give me some concern 
because I think that if Congressman Pickle were here, he would 
agree with me that the way you described your role is not at 
all what we intended when we made Social Security an 
independent agency.
    We wanted it to be completely removed from any political 
handout of the White House, completely. Perhaps we need to 
redesign the legislation if we missed in that regard in some 
way. We wanted it to be more like the Federal Reserve, whose 
Chairman also happens to be appointed by the President. The 
mere appointment by the President, in our view, was not to make 
it an arm of the White House.
    I hope that Commissioner Rossotti, now that we have also 
changed the IRS, will not come in here one day and say what you 
said as a description of his role.
    Mr. Levin.
    Mr. Levin. Thank you, Mr. Chairman. I don't want to enter 
into the discussion at length, but I do think that the Social 
Security Administration has been given added stature and 
standing and that it is not only an arm of the administration, 
and I think Mr. Apfel's administration of that agency has shown 
the wisdom of our action.
    Let me ask you, if I might, you are not going to be here 
for Mr. Crippen's testimony I guess, either of you. We kind of 
set these panels up seriatim. So there isn't a lot of back and 
forth among you, but mainly between each panel and us. 
Sometimes maybe that is not the most constructive way to 
proceed. It becomes adversarial among us instead of among you, 
with different points of view.
    So I would like to ask you to react to a few parts of Mr. 
Crippen's testimony. I will read it verbatim so I don't in any 
way misquote it.
    On page 6, he talks about several important questions about 
the structure of the program, and first asks, would breaking 
the link between payroll taxes and benefits eliminate an 
important mechanism of program discipline? Then he concludes 
the President essentially substitutes general funds solutions 
for programmatic solutions.
    Would either of you like to comment on that? Mr. Lew.
    Mr. Lew. Congressman Levin, we agree that there is a need 
for both financing and programmatic approaches. We would argue 
very strongly that the financing proposals that we put forward 
are very real, that the proposal to transfer bonds into the 
trust fund and to have that commitment be there so that in the 
future when we are running a surplus, the first call on the 
surplus is to pay back those bonds. That creates a very real 
source of funding for the current benefits which we already 
owe. The benefits we owe. The question is how we pay for them.
    The choice really is between how you use the unified 
surplus--whether you use it for spending, for a tax cut, or set 
it aside for the trust funds. So we would agree that there is a 
need for programmatic reform. The discussion we have had 
earlier in terms of getting from 50- to 75-year solvency very 
much underscores that. But the step that we are proposing in 
terms of financing is very real.
    A point that I think is very important for us to keep in 
mind is that many of us have thought through these questions 
analytically from the perspective of large and growing 
deficits. In the eighties and, the early nineties, when you 
looked at 2012, 2015, and you saw deficits growing from $600 
billion a year to $1 trillion a year, it was almost impossible 
to say how would we repay the bonds already in the trust funds.
    Now that we are looking at surpluses in those years, 
surpluses that are based on the assumption that we pay back the 
bonds that are already in the trust funds, we are in a very 
different world. Our point is that the fiscal policy choices 
that we make this year will very much affect how much 
flexibility we have to keep these commitments in the future. 
That is why it is so important to view it as a choice between 
tax cuts and spending today versus setting funds aside for 
tomorrow, and yes, to move on and make the programmatic changes 
to get to 75-year solvency.
    Mr. Levin. Thank you.
    Mr. Apfel, if you don't mind, maybe you would like to talk 
about this or Mr. Lew. And by the way, he says later on that 
point about the use of general funds. The recent past in the 
U.S. and the experience in other countries is not promising in 
this regard, that they will actually be used for those 
purposes. I will have to ask him that.
    Let me just ask you quickly. On page 12, he concludes, so 
the President's proposals lower the debt relative to where it 
is now, but increase it relative to no new action at all. Would 
either of you like to comment on that?
    Mr. Lew. Mr. Levin, I think the comparison is to a baseline 
that assumes no policy change, no tax cut, no spending.
    One of the very difficult problems that we face is that 
baselines are not law. Baselines are projections of current 
law. The laws are made in this Committee, in this Congress, and 
between the Congress and the President. It is very difficult to 
lock a baseline in. We think that what we put forward is the 
most effective way of locking in debt reduction by transferring 
bonds into the Social Security and Medicare trust funds. We 
think that creates a kind of lockbox, where we can get the 
benefits of the baseline. Certainly if you compare it to a tax 
cut or other uses of the baseline, it is highly preferable.
    Baseline is a kind of a theoretical construct, but we 
proposed a policy that would lock in what we think are many of 
the virtues in the baseline.
    Mr. Levin. Thank you. Thank you, Mr. Chairman.
    Chairman Archer. Mr. Houghton. Mr. McCrery.
    Mr. McCrery. Thank you, Mr. Chairman.
    Mr. Lew, I think you said that by depositing bonds into the 
Social Security Trust Fund you would be issuing debt to the 
trust fund instead of debt to the public. Did I hear you wrong 
or is that what you said? If so, would you explain that?
    Mr. Lew. Well, I think one has to sort of separate the 
different parts of the transaction. If we did nothing, we would 
reduce debt held by the public and we would not be issuing any 
debt to the trust fund.
    Mr. McCrery. You would be reducing debt to the public. Is 
that what you said?
    Mr. Lew. If we did nothing. But I believe in an earlier 
hearing in this Committee, the point was made in a rather 
pointed way that it is very difficult in this political system 
to do nothing; that the demand for tax cuts, the demand for 
spending increases is very great.
    We think that the best way to lock in the benefits of debt 
reduction is to have a transaction that puts the resources into 
the trust funds instead of putting it toward a tax cut or 
toward spending. That does create a new bond, which does 
increase total debt, but that is how we are extending the life 
of the trust fund. Those are the additional payments that will 
be made to the trust fund, that extend the life of the trust 
fund from 2032 to 2055.
    Mr. McCrery. But it's not true that if we didn't issue debt 
to the Social Security Trust Fund, we would be issuing debt to 
the public. In fact, there is nothing keeping us, even if we 
don't issue new debt with the unified budget surplus, to the 
Social Security Trust Fund, we could buy down the publicly held 
debt just as much as you plan to under your budget.
    Mr. Lew. You definitely could. One of the policy choices 
would be to buy down debt without the transfer. But that would 
not extend the trust funds. I think it also is a difficult 
policy that we have not in the past had much success sticking 
to.
    Mr. McCrery. Well, your policy, while you get some 
satisfaction from putting more bonds in the Social Security 
Trust Fund, you believe that that would make it more likely 
that policymakers would buy down the publicly held debt because 
somehow it is going to put us in a better position to pay off 
the internal debt 20 or 30 years down the road, I would submit 
is a giant leap of faith.
    I don't think there is any stronger inclination on the part 
of policymakers today to buy down the publicly held debt if 
there is more bonds in the Social Security Trust Fund that 
might come due 30 years from now as there is just to buy down 
the publicly held debt for the good, very sound economic 
reasons that you have stated.
    I agree that we should buy down the publicly held debt, and 
that will hit a large part of the surplus, but let's not try to 
create this link between putting more bonds into the Social 
Security Trust Fund and the will of policymakers to buy down 
the publicly held debt with the cash that is available to us 
today. I think that is a very tenuous relationship.
    Mr. Lew. The history of the last 20 years is exactly 
consistent, I think, with what I have predicted would happen in 
the future. If we would just go back to business as usual----
    Mr. McCrery. But, Mr. Lew, for the last 20 years, we have 
had bonds in the Social Security Trust Fund. It hasn't deterred 
us from deficit spending. So what makes you think just putting 
more bonds in the trust fund is going to give us any more 
conscience here?
    Mr. Lew. What we are proposing is that the budgetary 
treatment of these transfers should be treated as if we were 
outlaying the money and remove it from the unified surplus, so 
that the money would not be there to spend again. We think that 
would be the most responsible way to treat these transactions 
and it would then remove the ability to spend it again.
    Mr. McCrery. We can choose some other legislative mechanism 
if we so desire to mandate that we buy down the publicly held 
debt. So don't tell me that there is some magic connection 
here. There's not. Either we have the will to buy down the debt 
or we don't. That is all I am saying. Just be honest about it.
    Look, I think the proposal is a sound proposal. I am glad 
the President brought it forward. It doesn't solve the whole 
problem. It gets us to 2055. However, if I am not mistaken, 
these are all long-range numbers and they are going to be 
wrong. We all know that. But we have got to use them as best we 
can to solve this problem.
    If I am not mistaken, under your long-range projections, 
you only have a budget surplus, a unified budget surplus until 
about the year 2039. Is that correct?
    Mr. Lew. It is a little farther than that. It is in the 
mid-twenties or forties, I believe.
    Mr. McCrery. OK, 2042.
    Mr. Lew. It's after 2040.
    Mr. McCrery. But it doesn't get to 2055. So at some point, 
2039, 2042, 2043, you are going to have to come up with some 
more revenues, aren't you, just to get us to 2055 and not add 
to the deficit.
    Mr. Lew. At that point, we will have no debt held by the 
public and be in a very different fiscal posture.
    Mr. McCrery. No doubt about it. I agree with you. We will 
be in a much stronger financial position to go to the markets 
and borrow if we have to, but we don't want to do that, if we 
can help it.
    I think you have got some sound reasoning here. I wish you 
would be a little more up front though and not try to link 
these things as something magic that's not. Either we have the 
will to do it or we don't. Then I think we can get along and 
create something here.
    Mr. Apfel. Mr. Chairman, could I get 30 seconds?
    Chairman Archer. Sure.
    Mr. Apfel. Again, I think that is one of the reasons why 
the third part of this proposal is so important. We have got to 
get to long-term reform.
    If you look at the long-term surpluses and those 
projections and the depletion 30, 40, and 50 years from now, 
part of the long-term solution is going to be what we are going 
to do about Social Security reform in the very long term. So 
that is part of our long-term solution.
    Mr. McCrery. But, Commissioner, by virtue of dumping more 
money into the trust fund, which is what you are proposing to 
do by issuing these magic bonds in there, by doing that, you 
are forestalling the need to come up with structural reforms. 
You know that the earlier we do structural reforms, the better 
chance we have to make Social Security solvent for us, as far 
as the eye can see. So I think you are doing damage to the 
inclination of this body, this political body, to do something 
structural, to do something important to save Social Security 
for the long term by putting in this magic money.
    Chairman Archer. OK. The gentleman's time has expired, but 
I am going to give the Commissioner a chance to answer one 
question that relates to this. That is, what would be your 
number one priority for structural reform, forgetting about 
whether you have delayed it or hindered it or helped it or 
anything else? What would be your number one priority for 
structural reform as commissioner?
    Mr. Apfel. I believe that we need to engage in those on a 
bipartisan basis as the President has----
    Chairman Archer. But, Mr. Apfel, you are not a 
representative of the White House, even though you may think 
you are. I am asking you as Commissioner, a nonpolitical 
Commissioner of Social Security, with your knowledge and your 
understanding of the Social Security program, what would be 
your number one priority for structural reform? Certainly you 
can answer that.
    Mr. Apfel. Well, Mr. Chairman, I have spent the last year 
in public forums all throughout this country talking about the 
pros and the cons of every one of those options that are out 
there. I must say, Mr. Chairman----
    Chairman Archer. Mr. Commissioner, Mr. Commissioner, we 
have very limited time. Can you answer my question? At some 
other time I would like to talk to you privately at length at 
some time convenient to both of us and you can tell me about 
what you have done around the country and everything, but for 
right now, what would be your number one priority for 
structural reform? I am asking you as Commissioner to make a 
recommendation to us as to your number one priority for 
structural reform.
    Mr. Apfel. I believe it is premature until we work together 
on a bipartisan basis to discuss these. We must talk about them 
within the context of a bipartisan process.
    Chairman Archer. If we can't get, Mr. Commissioner, if we 
can't get a recommendation from you as the number one authority 
in the country on Social Security, responsible for running the 
program, for a top priority for structural reform, from whom 
can we get it?
    Mr. Apfel. I believe that what we will be doing is just 
that process in the next----
    Chairman Archer. No. I am just asking you, can you suggest 
someone else to me in the Social Security Administration that 
would give us a number one priority for structural reform?
    Mr. Apfel. I believe, Mr. Chairman, that I am your person.
    Chairman Archer. Then why won't you give it to me?
    Mr. Apfel. Because I believe we need to work on a 
bipartisan basis.
     Chairman Archer. You are, you are by the very nature of 
your job, nonpartisan. Your job is to run the Social Security 
system and to make recommendations to the Congress and to the 
administration as to what is an important priority. I am asking 
you simply. I don't know why you want to duck out on this. Why 
will you not simply give me a recommendation in the position 
that you hold for the number one priority for structural 
reform? You have examined all of them, I know.
    Mr. Apfel. I have examined them.
    Chairman Archer. OK. Give me a recommendation for the 
number one priority for structural reform.
    Mr. Apfel. I believe that it is inappropriate at this point 
in time until we engage in that bipartisan process to make that 
recommendation.
    Chairman Archer. Thank you very much.
    Ms. Dunn. Mr. English.
    Mr. English. Thank you, Mr. Chairman.
    Mr. Apfel, based on that last exchange, I must say I am 
deeply disappointed because the point of this hearing is to get 
objective information to inform the bipartisan discussions. I 
feel like I have just heard a set of talking points out of Dick 
Morris rather than a serious move to inform our policy 
discussion.
    You know, looking at the President's framework, and I use 
the term framework here to describe what he has proposed in 
Social Security because there is clearly not enough detail to 
call it a plan or to call it a blueprint. I have some questions 
that I would like to pursue that I think address some of the 
more promising aspects of it.
    First of all, I see that the President in his budget has 
set aside 62 percent of the surplus rather than 100 percent of 
the surplus, which is what he had proposed last year and had 
kind of drawn a line in the sand on.
    According to Mr. Frenzel's testimony, it is actually closer 
to 57 percent of the surplus. I wonder, under your budget 
proposal and the President's Social Security framework, would 
payroll tax revenues still be used for non-Social Security 
retirement purposes? Mr. Lew.
    Mr. Lew. Congressman, I believe I responded to that 
question. I am delighted to respond again. The way the Social 
Security Trust Funds work, the trust fund----
    Mr. English. I know how it works. It is a simple question, 
yes or no.
    Mr. Lew. Unfortunately it is not a simple question.
    Mr. English. Would payroll tax revenues be used for non-
Social Security retirement purposes?
    Mr. Lew. If I have to answer yes or no, the answer is no, 
but it is not a simple question that has a yes or no answer.
    Mr. English. It does not?
    Mr. Lew. No. It is not a simple question at all. Social 
Security financing is quite complicated. I think it is quite 
misunderstood, which is why I am trying to explain it. I would 
be happy to do so.
    Mr. English. Well, if it is any consolation, I used to be a 
city finance officer. I can don the green eyeshade. I believe I 
understand these things reasonably well. But I am puzzled how 
only 57 percent of the surplus being used under the President's 
framework for Social Security doesn't mean that we are using 
payroll tax revenues for purposes other than setting those 
aside as assets for Social Security retirement purposes. I do 
not understand.
    Mr. Lew. I would be delighted to respond.
    Mr. English. Then please do.
    Mr. Lew. The current financing of Social Security is really 
what we are mirroring in our proposal. The dollars that go into 
the trust fund in the form of bonds stay there. We don't take 
the bonds out. The bonds are----
    Mr. English. OK. I understand where you are headed with 
this, and I really think that is a dead end. I think most 
people realize that under the current system, surpluses in 
Social Security are used to prop up deficits that otherwise 
exist in the general fund.
    Let me ask this a different way. Does the President's 
proposal contain anything to retire the $700 billion in IOUs 
currently in this quote unquote, ``Social Security Trust 
Fund''? Are you going to be buying those down and converting 
them into real assets or are you going to leave them as IOUs?
    Mr. Lew. Well those bonds are very real assets. They are 
obligations of the Federal----
    Mr. English. They are non-negotiable Treasury bonds. They 
don't exist anywhere else on Earth.
    Mr. Lew. They are backed by the full faith and credit of 
the United States government. When they come due, they will be 
paid.
    Mr. English. How do you know that?
    Mr. Lew. I think the crux of why you think our answer 
perhaps is not a good one is that we perhaps have a different 
understanding of the current system. I apologize for going back 
to that, but if you view those----
    Mr. English. Let me reclaim my time.
    Mr. Lew. You can reclaim it.
    Mr. English. I appreciate it very much, but what you are 
saying is the President's proposal does nothing to put real 
assets into the Social Security Trust Fund to replace the IOUs 
that are there.
    Mr. Lew. No, sir.
    Mr. English. Let me ask you when is the President's 
proposal going to be offered in legislative language?
    Mr. Lew. I would really like to respond to the question 
because you attributed a position to me that is not my 
position.
    Mr. English. OK. Well that is my understanding of your 
position. Can you tell me when the President is going to offer 
his Social Security proposal in legislative language so we can 
see the details?
    Mr. Lew. The President has put forward the first full plan 
for using the surplus and for dealing with Social Security. It 
has engendered a very serious debate. We have said that we are 
working on the details. We will provide further details. I 
would be delighted to discuss further details----
    Mr. English. Mr. Lew, reclaiming my time. The devil is in 
the details. I would like to see the President's proposal in 
legislative language so we can see the actual details and 
assess them for ourselves. Some of the most important details 
are not in a broad budget outline. They are the specifics of 
how certain issues are handled, how certain investments might 
or might not be made.
    I am sorry I don't have more time to pursue this, Mr. 
Chairman. I don't feel that the answers we have received here 
are particularly informative today. Thank you.
    Chairman Archer. The gentleman's time has expired.
    Mr. Cardin.
    Mr. Cardin. Thank you, Mr. Chairman. As I listened to these 
last couple exchanges, it reminds me of whether we are really 
interested in getting a bipartisan result or whether we are 
interested in making partisan gains here.
    Mr. Apfel, I want to thank you for your response to the 
chairman's question. The Chairman asked a very serious question 
and well-intended. But if you would have given specifics on 
long-term reform, it would have been used by partisans, not by 
the Chairman, to make it more difficult for us to get a 
bipartisan agreement on Social Security.
    The President has come forward with a proposal that gives 
us the opportunity to work together as Members of Congress to 
fill in the details so that we can deal with the long-term 
solvency of Social Security.
    Mr. Chairman, I just want to put in the record that in 
every conversation and every opportunity I have had with Mr. 
Apfel, I think he is doing exactly what Congress intended in 
passing the Independent Social Security Act. The information 
that he has made available to me and his conversations have 
been exactly what I would like to see from an independent 
Commissioner.
    I just really want to compliment you on the manner in which 
you are performing your responsibilities. It is interesting 
that you keep on emphasizing a point that many Members of this 
Committee, indeed, many Members of Congress refuse to 
acknowledge. That is, you have put forward three parts to a 
Social Security solution. People will harp on one or the other, 
but not all three together, which are important in order to 
provide for the objectives of Social Security and long-term 
solvency.
    I would like to add a fourth though. That is, your 
universal savings accounts. I know they are not tied into the 
Social Security system directly, but it does deal with 
retirement security, building up the other two legs of the 
retirement security stool, not only Social Security, but 
private retirement and private savings. Your universal savings 
accounts give us an opportunity to improve private retirement 
for individuals. I want to compliment you on that.
    It is interesting that on your first part of your proposal, 
transferring 62 percent of the surplus into the trust fund, one 
point I would like to at least underscore, if I understand 
correctly, is that it does not increase any of the current 
obligations. You are transferring more assets into the Social 
Security Trust Fund, not changing the current responsibilities. 
So I am somewhat at a loss at those who criticize and say this 
does anything but a more conservative approach, transfer more 
assets into the Social Security Trust Fund without increasing 
any of the obligations within the Social Security Trust Fund, 
giving us a much better long-term financial outlook for meeting 
our obligations.
    Mr. Apfel. Obligations under the President's proposal 
remain the same as they are under current law.
    I want to thank you for what you said. I am doing 
everything in my power as Commissioner to try and move the ball 
forward. I commit to this Chair and to everyone here to do 
everything that I can, to do what I think are the best steps 
necessary, to move to Social Security reform, which I believe 
is centrally important for this country.
    Mr. Cardin. And there are many Members of this Committee 
that are working in a bipartisan way and we are going to work 
with you. I appreciated the comments of Mr. McCrery a little 
bit earlier. We are working, under very difficult circumstances 
to try to bring about a bipartisan result because it is so 
important to the future. That is why we are here--to legislate.
    Your second part, to get a better return. Private 
retirement plans, public retirement plans, all have diversified 
investment portfolios. Every one except for the Social Security 
trustees. It seems to make sense that we should be able to 
figure out some way for the sake of the beneficiaries, to get a 
better return on the assets that you have. There has got to be 
some way that we can do that and protect the Trust Funds. 
Legitimate concerns have been raised about the Social Security 
trustees investing in equities.
    Mr. Apfel. I believe there are legitimate concerns that 
need to be addressed in terms of protecting those equity 
investments from any interference at all. Clearly, if we look 
at the experience of State and local governments and the 
experience of Canada and other countries, we ought to be able 
to find ways to diversify our portfolio to increase rates of 
return in a very modest share of trust fund balances, which we 
think is prudent, cautious, and appropriate.
    Mr. Cardin. And third, working in a bipartisan way for the 
long-term structural changes. You have said, and I'll just 
repeat again for the record, there is a long list of eligible 
candidates that we could look at in a very collective way and 
come up with structural changes that would fit into the 
proposal that the President has brought forward.
    We don't need you to identify, or anyone to identify a 
specific, what is number one priority in that list. Let us sit 
together as Democrats and Republicans, as Members of Congress, 
and we can come up with a framework to deal with the 75-year 
solvency and protect Social Security in the future. That is 
exactly what the President brought forward. I really do thank 
you very much for your testimony.
    Chairman Archer. Mr. Watkins.
    Mr. Watkins. Thank you, Mr. Chairman.
    Mr. Apfel, it bothers me that you cannot give a straight 
answer. And I understand why.
    There are several variables that we have to deal with along 
the way, and some combination of those variables. Maybe another 
way to ask it is, could you advise the Committee what some of 
those adjustments would have to be or if you think that we 
should use some combination of variables to make sure Social 
Security is sound?
    Mr. Apfel. We could certainly provide some cost 
implications, as well as benefit implications, of various 
alternatives, to help in this decisionmaking process. I think 
we've been doing that and we will continue to provide that 
information to the Committee.
    Mr. Watkins. I think that would be helpful information. I 
think that some variables or a combination of variables needs 
to be presented to this Committee. This would be helpful in our 
decisionmaking process.
    My friend Jack, I was quite interested in your comment, 
about Merrill Lynch. You know, Saddam Hussein talked about 
Desert Storm being the mother of all wars. What alarms me about 
the President's proposal is this being the mother of all 
political slush funds. That political strings could be pulled 
for different social concerns or problems.
    It bothers me if the strategists, the person at Merrill 
Lynch says this is one of the most conservative strategies 
going. I don't know if I want him to handle my account.
    Mr. Lew. Congressman, I believe he was referring to the 
debt reduction strategy. I don't know what their views on 
equity investments are.
    Mr. Watkins. Well, I admit that there's going to be some 
debt restructuring here, but I think there is a lot of other 
things involved. I'm concerned about this. I----
    Mr. Lew. I believe it is a fair characterization.
    Mr. Watkins. Is Merrill Lynch a candidate in being an 
investor for the President's plan? Or are they--
    Mr. Lew. The way we would propose that these funds be 
invested is that a number of private fund managers would 
competitively bid so that there wouldn't be just one fund 
manager. They would be very much constrained so that they would 
be investing in the broadest market indexes available; not 
picking and choosing; not timing purchases; not subject to the 
influence of political decisions. So that it could not become 
the kind of slush fund that you're worried about.
    Mr. Watkins. Well, I just returned from my district work 
period in which I had a number of townhall meetings. Besides 
discussing the crisis in the oil patch, which your 
administration has not even dealt with, hasn't been willing to 
even discuss, I have been discussing Social Security with my 
constituents. I know in the steel industry there is a dumping 
issue, but there are more jobs being lost in oil patch right 
now. We're losing the domestic economy of that oil patch. I 
mean, we're losing infrastructure. We're not going to have one.
    On Independence Day, because of a lack of leadership, we're 
going to be more dependent on foreign oil than at any other 
time in the history of our country. Our small independent 
producers are gone. I just want to say we're not addressing 
that either, so I'm worried about some of these things.
    When we discuss Social Security, the one factor that's 
alarming the people across my district is the political strings 
that would be utilized with this proposal by the President. 
They would prefer to see individuals have control of their 
Social Security and to utilize and invest it. I think that's 
one thing that will have to be addressed. I think the Chairman 
is alluding to that also.
    Mr. Lew. Mr. Watkins, I have a couple of responses. First, 
if the transfer itself were just put in Treasury bonds, it 
would extend the trust fund until 2049. So a very significant 
part of the benefit would come with or without equity 
investment.
    We think that equity investment is a very prudent step to 
take if it's done carefully. I don't disagree at all that it 
has to be done very carefully. The criteria that we've put 
forward in terms of what it would entail to have a prudent 
investment plan I think are very responsive to the criticisms 
that you've heard.
    Our difference is we think those problems can be solved. We 
think that you could construct an independent investment 
mechanism, that would not be subject to the kind of political 
influence that you're concerned about.
    Frankly, if we can't insulate it, we would share many of 
the concerns. We don't think it would be an acceptable option 
to have a politically invested trust fund.
    Mr. Watkins. Jac, when do we start solving those?
    Mr. Lew. Pardon me?
    Mr. Watkins. When do we start solving those?
    Mr. Lew. Well, we think this hearing today is a good place 
to discuss some of these issues, and we're ready to work.
    Mr. Watkins. Well, that's why----
    Mr. Lew. We're ready to work.
    Mr. Watkins [continuing]. I'm disappointed Mr. Apfel didn't 
give us any suggestions on the variables to deal with in Social 
Security reform. We know the overall proposal that has been 
made by the President, but we haven't seen anything on the 
table. I'm interested in getting some of those issues on the 
table.
    Mr. Lew. We're interested in making some progress, too. We 
are very interested in making progress, too.
    Chairman Archer. Mr. Weller?
    Mr. Weller. Thank you, Mr. Chairman. And, of course, in the 
spirit of bipartisanship, and as a Member of the Social 
Security Subcommittee, I'd just like to refer to our new 
speaker's statement on his day he was sworn in as Speaker of 
the House. He said when it comes to bipartisanship, that means 
both parties need to make an effort to come part of the way to 
the other side. And, of course, he made the point that 
Democrats need to figure they need to come halfway, and 
Republicans need to figure we need to come halfway on the tough 
issues that are before us.
    And I just hope that the definition of bipartisanship 
doesn't become, before this is over with, that one side is 
supposed to adopt the other's ideas, and that's the way 
bipartisanship is defined.
    So in the spirit of bipartisanship, I do want to express 
some similar concern that other Members have expressed to the 
Commissioner. You know, I've sat in on numerous Social Security 
hearings, Mr. Commissioner, in which you've participated in, 
and, of course, we've been asking for ideas and solutions.
    And I'm disappointed, once again, that really no specifics 
are being offered. And if we're going to move in a bipartisan 
way, we need to hear some specifics in a bipartisan forum when 
everyone is in the room and open and out and in the public, so 
we can really have, I think, an open and honest discussion 
regarding our efforts to save Social Security.
    And right now just before us, of course, in the President's 
budget, it really appears there are really only two provisions 
in his budget that really deal with the issue of Social 
Security. One, is earmarking 62 percent of surplus tax revenues 
for the effort to save Social Security, and I think there's a 
lot of support for that concept on both sides of the aisle.
    The President also proposes government ownership of private 
business, kind of like France and Italy. And I sense that there 
is not a lot of support for that idea, but I know it will be 
discussed during this year.
    I do want to note that, while the President says 62 percent 
of surplus should go for Social Security, that this Committee 
and the House passed last fall a plan which was nicknamed ``The 
90/10 Plan'' that was crafted by Chairman Archer, which set 
aside 90 percent of the surplus for the effort to save Social 
Security and use the rest to bring some fairness to the Tax 
Code by eliminating the marriage tax penalty for the majority 
of those who suffer it.
    Now, Mr. Lew, one thing I find when I was back home over 
the district work period, during the President's Day recess, 
some folks said to me they always wonder when we talk about 
budgets whether or not we really read the fine print. And I 
find a lot of times the folks back home do in Illinois.
    And yesterday I was in Ottawa, Illinois, and I spent time 
with some of those who read the fine print--hospitals and 
doctors who shared with me the impact on La Salle County 
hospitals, the four hospitals, the local physicians that serve 
that area with the President's proposed cut by $9 billion in 
Medicare reimbursements and the new taxes on Medicare providers 
that the President proposes.
    A little later in the day I went to the Kiwanis Club in 
Ottawa, where I had a chance to meet with about 50 Kiwanians, 
and one of them asked a pretty tough question. Now there's 
someone else who actually read the fine print. And the taxpayer 
read the fine print of the President's budget, and he noticed 
that the President's budget double counts. He noted that the 
President's budget puts more IOUs in the Social Security Trust 
Fund.
    He particularly noted that the President's budget increases 
taxes by over $80 billion. It creates $150 billion in new debt, 
confiscates the States' share of the tobacco settlement, and 
cuts Medicare reimbursements for local hospitals, getting back 
to what I heard earlier in that day from some local doctors and 
administrators.
    And here is his question. He really wanted to better 
understand, considering that saving Social Security is the 
centerpiece of the President's budget concept that he has 
presented. He wonders why, in this time of a massive surplus of 
extra tax revenue, that the President proposes over $80 billion 
in new taxes in addition to his other provisions in the budget.
    Mr. Lew. Congressman, there were a number of questions. On 
the Medicare point, I think that illustrates how important it 
is to use 15 percent of the surplus for Medicare solvency. The 
$9 billion you referred to are relatively modest changes. And 
if they have the kind of consequences that you're hearing, we 
want to know that. They're not intended to have those kinds 
of----
    Mr. Weller. Well, Mr. Lew, if I could reclaim my time here, 
you say that, you know, using the 15 percent for Medicare--
well, if your budget does that, you're still cutting Medicare 
reimbursements for hospitals that serve Illinois----
    Mr. Lew. Mr. Congressman----
    Mr. Weller. And the impact on those four hospitals was 
$1\1/2\ million in Medicare cuttings impacting just four rural 
hospitals in one county.
    Mr. Lew. But I think that really puts into perspective how 
important it is to dedicate 15 percent of the surplus to 
Medicare. Our plan over 15 years would dedicate almost $700 
billion to Medicare.
    Mr. Weller. Right, Mr. Lew, but----
    Mr. Lew. Now, that has the effect of----
    Mr. Weller. Mr. Lew, reclaiming my time----
    Mr. Lew. I haven't----
    Mr. Weller. Still, while you're dedicating a portion of the 
surplus, you're increasing taxes by $80 billion, and your net 
cuts in Medicare reimbursements for hospitals in this one 
county total $1\1/2\ million as part of that $9 billion cut in 
Medicare reimbursement.
    Mr. Lew. Since I don't really have a chance to answer the 
question, maybe I'll just ask one. As an alternative to putting 
15 percent of the surplus in, we've not seen any other plan yet 
that would have the effect of extending the Medicare Trust Fund 
for another 12 years.
    I think that $686 billion of savings would be very 
difficult to achieve, and we think this is a very constructive 
step, and we would look forward to seeing anything you could 
suggest that would----
    Mr. Weller. Mr. Lew, in reclaiming my time, you still 
haven't answered my question why, in this time of surplus, we 
need $80 billion in new tax increases.
    Chairman Archer. Mr. Becerra.
    Mr. Becerra. Thank you, Mr. Chairman.
    Let me thank the two witnesses for being here and for 
engaging in a bipartisan discussion here. And what I might want 
to do is begin by perhaps giving you each a little bit of time, 
hopefully not too much, to respond to some of the questions 
that were posed that you didn't have a chance to answer.
    Mr. Lew or Mr. Apfel, I'll give you a chance to respond to 
anything you'd like. You don't have much time, but there have 
been a lot of questions posed without time to give answers.
    Mr. Lew. Well, I hate to use your time, but if I may 
respond just to two points. First, Congressman McCrery asked a 
question which I think was a very constructive question. I'd 
just like to answer that the transfers to the Social Security 
Trust Funds would get us to 2049. So it would leave the last 
several years of the period between 2049 and 2055 where we 
would need to either borrow or find other savings. But it does 
get us a full 50 years.
    In terms of the rest of the budget, we think it's a very 
good budget. We think it's a budget that puts our priorities 
forward. And, frankly, we think they're the priorities that 
reflect the needs of the American people. You need to look at 
what's inside the proposals. It's really the policy that has to 
be analyzed, not just the total numbers.
    The dispute over tobacco policy is a very serious policy 
question. We are not ashamed to be for increased tobacco 
revenues. We think those tobacco revenues reflect a policy of 
stopping youth smoking, which improves public health more than 
anything else we could do.
    So we would love to go through issue by issue and discuss 
the policies and not just let a quick review of the numbers 
confuse the issue.
    Mr. Becerra. Haven't the States also just reached an 
agreement with the tobacco companies where they themselves are 
going to be reaping the benefits of hundreds of billions of 
dollars in revenues?
    Mr. Lew. The States' settlement would, in fact, bring 
substantial revenues into the States. And what we propose is 
not to take the money from the States. What we've proposed is 
that we develop Federal legislation where we would waive the 
Federal right to recoupment, in exchange for having the States 
dedicate the funds to an agreed upon list of programs that are 
shared State-Federal priorities.
    We think that's the right way to resolve this, rather than 
have long litigation. It's not an attempt to take the money but 
to work together to address the common problems.
    Mr. Becerra. Mr. Apfel.
    Mr. Apfel. Nothing to add, sir.
    Mr. Becerra. OK. Let me ask a question, then. I guess most 
of the actuaries agree that by sometime around the mid teens of 
the next century, 2013 or so, we're going to run out of enough 
payroll tax coming in--the contributions by the employee and 
the employer combined the 12.4 percent coming in, to pay off 
the benefits to all of those who will be retired in the year 
2013 or so.
    At that point, we'll have to kick in the moneys from the 
trust fund, and then soon thereafter, about 10 years after 
that, in 2032, the trust fund dollars and interest on that will 
have expired, and then we'll have the crisis where we can only 
pay about three-quarters of all benefits.
    But focusing on 2013, if that's the date when we really 
find that our Social Security contributions coming in from 
employers and employees combined are not, by themselves, enough 
to meet the needs for those who are retired, right now we don't 
find ourselves in that case.
    But in 2013 when we find ourselves there, what happens if 
we should today or tomorrow or before 2013 come up with a 
proposal to resolve the Social Security issue? And that 
proposal would include removing part of that 12.4 percent 
that's currently collected and put into the Social Security 
system, and, instead, take some of that out and use it for an 
individual account, a private account. What would that do to 
the financing or to the payout that we would have to take--
would have to see occur, say, by 2013?
    Mr. Apfel. Well, a carve out would dig a deeper hole. It 
would also mean that the lines would not cross in 2013. The 
lines would probably cross as early as next year. In other 
words, the payroll tax income coming into the system would 
become less than the outgo, with a 2-percent carve out, for 
example, by next year.
    Mr. Becerra. So if we had a proposal for a 2-percent carve 
out, meaning taking 2-percent of the 12.4 percent so that we 
could create an individual private savings account for each 
person in the country who is putting money into Social 
Security, what does that do in terms of when our incoming money 
is insufficient to pay the outgoing benefits?
    Mr. Apfel. If the proposal were effective next year, the 
crossing point for those lines would move from 2013 to almost 
immediately.
    Mr. Becerra. And so what would we need to do to make up for 
that shortfall?
    Mr. Apfel. Well, the 2-percent carve out would mean that 
rather than a 25-percent hole 30 years from now, we'd be 
looking at somewhere in the vicinity of a 40-plus-percent hole. 
So it would mean almost definitely a lower benefit structure, 
compensated in part or in whole for individuals by this 
individual account. But the basic benefit structure potentially 
would be lower.
    Mr. Becerra. Thank you.
    Thank you, Mr. Chairman.
    Chairman Archer. Mr. Foley.
    Mr. Foley. Thank you very much, Mr. Chairman.
    I'm encouraged by the President's proposals in several 
areas. Clearly, I think we're in agreement on the surplus and 
attempting to put some more money into the Social Security 
Trust Fund. I'm intrigued by the personal savings account, and 
I think we've, on our side, talked about that as well.
    But can you tell me, if you will, based on your analysis, 
what is plan B if everything goes south financially? You have 
right now a fairly optimistic projection. Not just you, but I 
think the Nation is under the notion that we'll continue to 
have prosperity, budget surpluses, economic times, stock market 
gains, capital gains tax income. What happens if we are heavily 
impacted by the global economy?
    And what is our option, once we start these types of 
accounts, how do we then manage the midstream if there would 
become such a financial problem that we can't either fund the 
personal savings accounts, we can't contribute as much as we 
would have thought to Social Security, or, in fact, the 
downpayment of debt becomes impossible because you're now at 
the borrower's window again?
    Mr. Apfel. Well, I'd like to handle it from the trustees' 
perspective. The trustees' assumptions over the 75 years are, 
we believe, prudent and cautious in terms of long-term economic 
projections. There are some that argue that the assumptions may 
be too pessimistic, that basically growth could be potentially 
higher and, therefore, the problem would not be as large. There 
are others that argue the other way around, that, say, life 
expectancy would go up so that we'd have a larger long-term 
hole.
    From the trustees' perspective, the assumptions are, I 
believe, appropriately balanced in the intermediate 
assumptions, so that we take the action along the lines of the 
intermediate assumptions. If we find out over time that growth 
is significantly higher, I'm sure that the Congress, in the 
future, will be able to determine what to do with those added 
resources.
    If, instead, we find out that the situation is not as 
positive, not as optimistic, I believe we would have taken a 
significant action to resolve the long-term issue. So I think 
that the intermediate assumptions are the right balance between 
prudence and action.
    Now, the other side of it is your----
    Mr. Lew. I was going to say, from a macroeconomic and 
broader budget perspective, I think the President's framework 
is designed to be able to address that kind of question better 
than any alternative could be, because it's devoting most of 
the money--three-quarters--to debt reduction, and another 12 
percent to U.S.A. accounts to increasing national savings.
    So fully 89 percent of the allocation of the surplus is to 
increase savings and increase growth potential in our economy. 
It's only the remaining 11 percent for defense and other 
important discretionary priorities that is consumption in the 
conventional sense.
    The choices in terms of how we use the balance of the 
surplus has a lot of bearing on the question you asked. The 
more we spend or consume in either a tax cut or spending, the 
more risk there is that the long-term economic future will not 
be as bright as our forecast. So we control it to some extent 
through the macroeconomic and fiscal policies that we follow.
    Clearly, there are risks to any economic forecast. The 
world economy has many risks in it. But we don't think it's an 
accident that the United States economy has been very strong 
while other economies have been facing a lot of tumultuous 
times. Our good solid fiscal policy is part of it, and we're 
proposing to extend that, really, for another generation.
    It's not an absolute guarantee, but it's the best 
protection we have.
    Mr. Foley. You mentioned the economy, and you mentioned if 
we give a lot of tax cuts. Do you disagree that tax cuts can, 
in fact, spur the economy at a time when we may be suffering 
external problems?
    Mr. Lew. Well, certainly, if we were looking at a period of 
economic weakness, a stimulative fiscal policy would have an 
effect. We're looking at a forecast right now that isn't 
showing a weak economy. We're looking at an economy that's 
consuming quite a lot. our national savings rate being as low 
as it is, is an indication that consumption is not a short-term 
problem. There's a lot of consumption going on.
    We do have a problem in terms of national savings, and the 
President's program really is aimed at increasing national 
savings. And there are a lot of ways to do it, and we're not 
opposed to a tax cut. We have a tax cut proposal, our U.S.A. 
accounts, but what we've said is it should be designed to 
encourage savings, not consumption, which we think is an 
important difference. It's an issue that one could have a 
serious policy debate about, and we'd look forward to it.
    Mr. Foley. Let me ask one question on the U.S.A. accounts, 
the savings accounts. What happens to them at the age of 65? Do 
these convert into annuities, or do they remain as an IRA-type 
account that's transferrable to an heir?
    Mr. Lew. The U.S.A. account is actually a fairly 
complicated proposal that we're working through all the details 
on. This is one of the questions that we're going to have to 
address that obviously is an important question. The idea is 
that during a working life one would contribute to the U.S.A. 
accounts. In retirement, it would be available.
    There are questions that we will have to address, and I 
think it's a little premature for us to answer that. But we are 
very close to being able to answer that.
    Chairman Archer. Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman.
    Mr. Lew, we had a very interesting conversation the other 
day in the Budget Committee. Listening to you as you described 
the family with the child 8 years old, as you plan for college, 
and you talked about beginning to pay down the credit card 
debts and pay down other debts, and you don't increase debt as 
you make those preparations.
    But I find with interest that you don't consider the debt 
to the trust funds as debt. We talked about that the other day. 
But overall, you also stated that the national debt increases 
year after year, and we have to raise the debt ceiling earlier 
than 2009, as under the current projections.
    Now, which way is it? You don't increase debt as you 
prepare yourself to pay for future costs, which in this case 
future costs will be the benefits.
    Mr. Lew. Congressman----
    Mr. Collins [continuing]. But yet the national debt goes 
up, and the debt ceiling has to be increased, but we don't 
count the debt to the trust fund as debt.
    Mr. Lew. Just to carry the example that I used in my 
testimony, if one were to look at the Federal budget, the debt 
held by the public would be the equivalent of a private 
individual's mortgage or credit card debt. And paying that down 
would free up your cashflow.
    When you pay back a dollar of debt to the trust fund, you 
have to look at where the dollar goes. And I believe we had 
this conversation at the Budget Committee. If you were a family 
and you were at the receiving end of that dollar to the trust 
fund, you'd have a dollar for tuition, and we will have a 
dollar for Social Security. And there is the key point.
    Mr. Collins. I follow what you're saying. But then folks at 
home look at me and say, ``But, Mac, the national debt is going 
up. You are creating more debt. You didn't have enough money at 
the end of the year to pay your bills. You borrowed more 
money.'' So you've not only increased the national debt, but 
you didn't have a real surplus.
    Mr. Lew. Well----
    Mr. Collins [continuing]. If you had had a real surplus, 
that debt wouldn't have gone up.
    Mr. Lew. This gets back to the distinction between the on-
budget and off-budget surplus versus the unified surplus. The 
fact of the matter is that the debt held by the public measures 
the private sector borrowing. The total debt, or debt subject 
to limit, is not a concept that is comparable to a business or 
an individual's financing.
    The internal transactions within the government are, by 
their basic nature, a bit complicated. But I believe the answer 
I gave you showing where the stream of payments back to the 
trust fund go, really help explain why there's such a material 
difference. Net interest paid on debt held by the public is not 
available for Social Security.
    What we're proposing is to have payments be made into the 
trust funds so that benefits can be paid.
    Mr. Collins. I appreciate that. That's Potomac fever. You 
know, we don't have that fever in the Third District of 
Georgia. We have the Flint River and the Chattahoochee, but we 
don't have the Potomac to give us that fever.
    Mr. Apfel, you mentioned that the proposal that we do have, 
in general terms, by the President is financial reform. Is that 
not true? Is that what you said? It is financial reform?
    Mr. Apfel. There is financing reform in the proposal. 
That's correct.
    Mr. Collins. It's very creative financing reform, I must 
say, and I've done a lot of creative financing in my lifetime 
as a small business person. But it doesn't affect the current 
pay-as-you-go system structurally. Is that right? The pay-as-
you-go, where the current workers of payroll tax are paying the 
current beneficiary checks, the President's proposal, the 
financial proposal, doesn't affect that at all.
    Mr. Apfel. Right. The President called for the third step, 
which is coming together on a bipartisan basis.
    Mr. Collins. Well, I know----
    Mr. Apfel [continuing]. We must resolve the issue over the 
longer term, but that----
    Mr. Collins. That does not. To answer, it does not.
    Mr. Apfel. That is correct.
    Mr. Collins. And you said that we do need structural 
change. You do have some ideas, right?
    Mr. Apfel. There are a number of ideas that we've discussed 
over the course of the year.
    Mr. Collins. But you, as the Commissioner of Social 
Security, you do have some ideas. I'm not asking for your 
ideas. But you do have some ideas. You are going to be 
forthcoming with recommendations, is that true?
    Mr. Apfel. I have not come forward with recommendations.
    Mr. Collins. No, I know you haven't. You do have ideas. You 
will be forthcoming. And if you're a Democrat and I'm a 
Republican, we sit down and we've got us a bipartisan 
Committee, will you share those recommendations and ideas with 
me and who they focus on? That's about as bipartisan as you can 
get.
    Mr. Apfel. The desire is to talk about the tradeoffs to 
every one of those options and to come together to determine 
how best we can assure the long-term solvency of the system.
    Mr. Collins. I don't know what----
    Mr. Apfel. And I hope to work together to do that, sir.
    Mr. Collins. Good. I don't know if aspirin will cure your 
fever or not, but try it tonight and see. Thank you.
    Chairman Archer. You know, Mr. Lew, I've been trying to 
think through the budgetary aspects of this Social Security 
proposal, and I'm still trying to learn. It's a type of 
budgetary transfer that, in my experience in 28 plus years 
here, has never ever been done before. Is that your feeling, 
too?
    Mr. Lew. These are the first surpluses we've had in those 
28 years. This is a fairly new phenomenon.
    Chairman Archer. Well, I--no, I do understand that. And 
that's a fair answer. But surpluses are, at this point, simply 
projections on paper, are they not?
    Mr. Lew. Well, no, Last year there was a real surplus. The 
year we're in----
    Chairman Archer. I understand.
    Mr. Lew [continuing]. Will have a real surplus.
    Chairman Archer. I understand that, and we paid down the 
debt with all of that and I'm proud of it, because it was--
whatever was left at the end of the year, over and above our 
bills, we used to pay down the debt. And that was----
    Mr. Lew. That's correct.
    Chairman Archer [continuing]. A very solid achievement. It 
would have been more had the President not spent $20 billion 
out of the surplus. Of course, that was not called surplus 
because surplus is only what's left over after the spending 
occurs. But we would have had a greater surplus, would we not, 
if the President had not spent money in Bosnia?
    Mr. Lew. There would have been a larger surplus if any 
spending----
    Chairman Archer. OK. There would have been a larger surplus 
had he not spent money in Bosnia on the people of Bosnia.
    Mr. Lew. Mr. Chairman, I----
    Chairman Archer. No. OK. I've got a couple of other things 
that I want to get at as quickly as possible because I'm using 
up time and I apologize to the other Members. But I want to try 
to understand this.
    Traditionally, debt has been created by the Treasury when 
there has been a shortfall of money necessary to pay government 
bills, is that not correct?
    Mr. Lew. That's correct.
    Chairman Archer. OK. So this is a new twist. We are now 
creating money when we have excess money coming in, under your 
plan. Instead of creating debt when we need it to pay bills, 
we're now taking money in excess of what comes in and creating 
debt with it. And that's a total turnaround from previous 
circumstances. And I understand that that's what you're doing, 
and it's a new technique.
     Now, it is, as my friend from Georgia said, very creative. 
And I have to compliment you on that. It is exceedingly 
creative, so creative that nobody fully understands it, 
although you've done as good a job of explaining it as anybody 
that I've listened to. But I think that it opens the 
opportunity for us to achieve even more.
    We have a shortfall in the future in Medicare that is 
massive. And the elderly in this country want to be able to 
know that there will be Medicare funds there to pay their 
health bills through the next century, just as much as they 
want to know that their Social Security retirement benefits are 
going to be there through the year 2075.
    What we probably ought to do is to take more of this money 
that's coming in, create debt with it, put it into the Medicare 
trust fund, save Medicare, and take the money and pay down the 
public debt, and we will reduce the public debt even more. It 
is an incredibly creative answer, and there are many other 
programs where we have obligations that are unfunded.
    The Federal Retirement Program is unfunded in the amount of 
about a trillion dollars going into the next century. We should 
take this extra money coming in, create debt, put it into the 
Federal retirement fund, and then use that money to pay down 
the public debt, and we will have reduced the public debt even 
more, which economists will say will be a wonderful result.
    This is incredibly creative. It probably should be used 
over and over and over again, because what's owed into the 
trust funds is not debt. It's not considered. It's OK.
    You know, I want to applaud you. I think it is an 
incredible creative approach to solving all of the long-term 
problems that this country faces in the next century.
    And now I'm going to recognize Mrs. Thurman.
    Mr. Matsui. Mr. Chairman, could he respond? That sounds 
like----
    Chairman Archer. No. That doesn't require a response. I'm 
just making a suggestion. It doesn't not require a response. 
It's not a question. I'm just making a comment, so it does not 
require a response.
    Mrs. Thurman.
    Mrs. Thurman. Mr. Lew, however, I will give you an 
opportunity, if you would like to respond to that, and if you 
see what he said differently than maybe you can explain.
    Mr. Lew. Thank you, Mrs. Thurman.
    Mr. Chairman, I think that one can take a good idea and 
change it and it's no longer a good idea. And I think what 
you've described is not the same as the President's proposal.
    The President's proposal is a very careful and I think 
fiscally very conservative approach that says we have a unified 
surplus of a set amount. The way we have traditionally treated 
the unified surplus, the way past proposals coming out of many 
Members of this Committee have treated the unified surplus as 
money available to spend.
    And what the President has said is that rather than spend 
it, rather than give it away in a tax cut, no matter how 
virtuous either the spending or the tax cut might be, we should 
put it aside. Now, the way our accounting rules work, putting 
it aside does count as debt subject to limit, because it's an 
obligation to pay back the trust fund.
    But the obligation to pay the benefits already exists. 
We're not going and borrowing money from private individuals or 
banks. What we're saying is that the first call on the 
surpluses we've created should be to pay the bills for Social 
Security and Medicare that we already owe. We think that's 
fiscally conservative.
    One could carry it to an extreme. One could say that 
instead of treating it as an outlay, it should still be 
available to spend again, but that's not the President's 
proposal. The President has proposed that every dollar we 
transfer to the trust fund should be used to reduce the unified 
surplus so that it won't be available to spend again. It's a 
very important budgetary proposal.
    If one were to treat it as not being spent, then you could 
have a fairly ridiculous result, which is not the proposal. So 
we think it's a very conservative proposal, and we hope that 
all of the aspects of the proposal, including the budgetary 
treatment of the transfers, would be adopted.
    Mrs. Thurman. And being from Florida, the other issue, of 
course, is Medicare, which we're taking, what, 15 percent over. 
And if we don't do something with Medicare, with this 15 
percent, we're in a similar situation?
    Mr. Lew. Absolutely. And, you know, I've heard a number of 
questions today and in past hearings raising very serious 
concerns about the effects of the Medicare savings proposals in 
the President's budget. And I think that reflects how difficult 
it is to deal with Medicare solvency.
    If proposals to save $9 billion over 5 years have created 
an uproar in terms of the response from providers, what would 
be the response to a proposal to save $650 billion over 15 
years?
    In order to continue to pay Medicare benefits, we need to 
extend trust fund solvency. We need to increase the assets in 
the trust fund or reduce the payments. The only options we have 
are to cut benefits, reduce provider payments, or raise the 
payroll taxes, unless the President's proposal is adopted and 
we transfer some of the surplus to the Medicare trust fund and 
give Medicare the second call, after Social Security, on the 
fruits of our fiscal good fortune.
    Now, I think that that is a very conservative approach. 
It's saying, ``Don't make other commitments. Don't have 
commitments for a popular tax cut. Don't have commitments for 
popular spending programs until we make the financial resources 
available to meet the commitments we already have to the 
Medicare Program.''
    And we look forward to a debate on how to use the surplus. 
We think Medicare should come right after Social Security.
    Mrs. Thurman. I just want to tell both of you that we 
appreciate the time you've spent here today. I think all of us 
are looking forward to more of these kinds of conversations, 
and so I won't even let the green light change. Thank you for 
being here.
    Mr. Lew. Thank you.
    Chairman Archer. Mr. Ramstad.
    Mr. Ramstad. Thank you, Mr. Chairman. Out of respect for 
the next two panels, and also these witnesses, I'm going to 
yield back my time.
    But first, before I do that, I've just got to say this. As 
one who genuinely tries to work together on these policy issues 
in a bipartisan, pragmatic, common sense way, I hope that this 
doesn't set the tone for the rest of our work on Social 
Security. There's nothing more important to the people I 
represent back in Minnesota than saving Social Security.
    I just came from a meeting with Governor Ventura, where 
openness and plain speak prevailed, and it's like going from 
day to night when you can't even answer the Chairman's 
question, ``Give me one recommendation for restructuring Social 
Security.'' I hope we don't have to do this behind closed 
doors, making deals. Let's just be open and honest and candid 
and come forward with--on both sides--with proposals to shore 
up and to save Social Security. It's too important for politics 
as usual. It really is.
    And with that, Mr. Chairman, I yield back the balance of my 
time.
    Chairman Archer. Mr. Herger.
    Mr. Herger. Thank you, Mr. Chairman. And
    I just have to say amen to what the gentleman from 
Minnesota said. It's absolutely, I believe, a necessity that we 
work together. This is not a Democrat-Republican issue. It 
isn't liberal-conservative. It is something that I'm convinced 
that only by the administration, the Senate, the House, all of 
us working together, are we going to solve this.
    So I share the same concern that my colleague from 
Minnesota has. It would be nice if somehow we could have a 
little more give and take on what suggestions we might have.
    I do want to commend the President for at least putting out 
the fact of setting up a--I don't agree with how he's doing it, 
but at least he put it out--of doing, as Federal employees are 
able to do, at least have--invest into the market perhaps, 
where people have a chance, at least with part of their funds, 
to make something. So I want to commend you on that.
    However, there are some other areas that I do have some 
concerns, and I think it's important that we talk through these 
concerns if we're going to solve the problem. We've mentioned 
surpluses.
    Director Lew, we've talked about putting money aside, first 
call, making commitments. I believe this is your document, 
isn't it, a document that you put out, Mr. Lew? It's the 
President's budget, the one we went over in the Budget 
Committee here a couple of weeks ago, which you appeared before 
us. And we pointed out at that time--well, we've talked--you've 
mentioned surpluses.
    I have some concerns. I have some concerns that even in 
your budget--again, page 389--most of us--and I just came from 
a series of townhall meetings. When I talk to my constituents, 
and we talk about surpluses, we envision somehow that means we 
have more money at the end of the year than we had before. And 
yet, on page 389, again, the debt not only doesn't go down, it 
goes up, and it goes up by $1.3 trillion over 5 years.
    Now, I have a follow up to that question, and we talked 
about that in the Budget Committee here a couple of weeks ago. 
And this is specific to our hearing today on Social Security.
    And in the President's plan, he has indicated that he is 
going to be able to extend Social Security's solvency by 
increasing the trust funds or the IOUs which is all the trust 
is--balances. The President's own budget document--and I have 
another document. I believe this is your document as well, as 
Director of OMB, that you've put out. So this is what you have 
put out on behalf of the President.
    Again, turning to page 337 of this, ``Analytical 
Perspectives, Budget of the United States''--again, put out by 
the President. Quoting from there, so this is your quote, your 
book, ``These balances are available''--and we're referring to 
all of this money you're talking about putting in the Social 
Security Trust Fund. ``These balances are available to finance 
future benefit payments and other trust fund expenditures, but 
only in a bookkeeping sense.'' ``But only in a bookkeeping 
sense'', it says here.
    Continuing, ``These funds do not consist of real economic 
assets that can be drawn down in the future to fund benefits. 
Instead, they are claims on the Treasury.'' And you've 
mentioned that a number of times, by the first call. That 
they're not assets, they're only claims.
    Continuing, ``Claims on the Treasury that, when redeemed, 
will have to be financed by: 1) raising taxes, 2) borrowing 
from the public, or 3) reducing benefits or other expenditures. 
The existence of large trust fund balances, therefore, does 
not, by itself, have any impact on the government's ability to 
pay benefits.'' Now, this is your own document, not anything 
we've put out but your own document.
    My question is: Mr. Lew, if increasing these trust fund 
balances only helps Social Security in a bookkeeping sense, and 
large balances have no impact on the government's ability to 
pay benefits, then exactly how does the President plan to pay 
full benefits after 2012? And is this repayment explicitly 
defined in the President's plan?
    Mr. Lew. Mr. Chairman, may I respond to the question now 
that the time has expired?
    Chairman Archer. The gentleman certainly will have 30 to 60 
seconds, if he can do it, to respond.
    Mr. Lew. Congressman Herger, we've talked about this at the 
Budget Committee. I responded to this question at the Senate 
Budget Committee. The paragraph you read, frankly, should have 
been changed, because it was written at a time of deficits and, 
frankly, does not reflect the current situation fairly.
    For example, in a year when you're running a surplus, there 
is no need to borrow money to pay back the Social Security 
Trust Fund. There is no need to cut other benefits. The fiscal 
policy decisions we make this year will determine whether or 
not there are resources on a current basis to pay back the 
Social Security bonds.
    Now, regarding the question of whether they are assets or 
not--they are full faith and credit obligations of the United 
States government. They are no different than privately held 
bonds in that sense. They are not marketable. They are a 
different form of a bond. But I would submit that there is no 
full faith and credit obligation of the United States in our 
history that has ever not been paid, and these will not be an 
exception.
    The problem, I think, is that from 1983 to 1993, while we 
were running deficits projected to be in the hundreds of 
billions of dollars a year, it was very difficult to answer, 
how would we pay the bills from 2012 to 2032? That would really 
mean, how would we implement the 1983 Social Security reforms 
while we were running huge deficits?
    Well, we have a different fiscal policy now. We're running 
surpluses, and by running surpluses we can pay the bills that 
we promised to pay in 1983.
    Now, what we're suggesting is that we should use this 
moment when our fiscal policy projects surpluses far in excess 
of what's necessary to meet the obligations committed to in 
1983, that we add to the resources in the Social Security Trust 
Fund, and, yes, create a first call; say we are not going to 
make other new commitments either to spend the money or to 
reduce taxes. And that will enable us to pay the benefits that 
are due through 2049, as I answered to Mr. McCrery, without 
needing to borrow any money under our current projections.
    I wish that we had edited this paragraph 2 years ago. 
Frankly, it wasn't true last year or this year. But there are 
thousands of pages in the budget documents, and little by 
little they're all conforming to a world of surplus instead of 
a world of deficits.
    Mr. Herger. But, Mr. Lew, it still is in here written in 
that manner, and, yes, we have, at least at this time, 
surpluses. None of us know for sure whether these surpluses 
will go forever as this budget projects. Debt is debt is debt. 
The American public understands that. I really believe that we 
need to begin understanding that here within the Washington 
beltway. Thank you.
    Chairman Archer. Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. And I'm delighted 
that we're having these hearings, and I want to commend the 
Chairman for spending time as we begin the process of trying to 
put together, as Mr. Apfel has talked about a lot, a bipartisan 
solution to this Social Security problem we find ourselves in 
because of the demographic shift that the President articulates 
constantly.
    I'm going to get away from the debt issue, although I think 
it has not been fully resolved. And I do think that that is an 
important part of the overall bipartisan agreement we're going 
to have, is we have to be honest with the American people and 
deal with that and be sure that we are, indeed, not double 
counting and are not just adding, in the end, more debt 
internally, although we're paying off--the debt that is 
privately held, which is so-called public debt.
    But let me talk about the U.S.A. accounts for a second, if 
I might. And, Mr. Lew, I know that this was put together with 
Treasury, White House, OMB involvement, and so on, and we're 
all very eager to see some of the details. But I would have, 
really, three questions about the U.S.A. accounts.
    First is: what will their impact be on private savings? And 
by that I mean all of the savings that's out there in terms of 
401(k)s, IRAs, other retirement savings programs which are 
really private in nature where we are leveraging private 
dollars through a tax preference.
    The second question I would have is: how does it affect the 
solvency of Social Security, if at all? I think the answer is 
it doesn't.
    And the third question I would have is: are these funds 
that would accumulate in the U.S.A. accounts locked in for 
retirement only, or can they indeed be used, which is unclear 
to me in the documents we've seen, for other purposes--first-
time home, health care, education, and so on?
    Mr. Lew. Congressman Portman, the first question regarding 
the integration of the U.S.A.s and 401(k)s is a very 
complicated matter, technically, which we're working through 
because our goal is that it should encourage new savings. And 
we don't want to discourage employers who provide matched 
401(k) contributions or other forms of private pensions.
    And one of the reasons it's taking a little bit longer to 
design the policy is that we want to get that right. We want to 
make this an additional incentive to save.
    Regarding Social Security solvency, this is independent of 
Social Security. It would have nothing to do with Social 
Security, either in terms of taking any payroll tax dollars 
away or changing benefits. So it's really a separate element of 
retirement planning. You'd have Social Security, you would have 
private savings now, and you'd have private pensions.
    The third question regarding locking in the use of the 
U.S.A. accounts, the President, in the State of the Union, 
proposed it as a form of retirement savings. We've heard many 
questions raised since then, why only retirement? That's 
something we're going to need to talk through and work through.
    Clearly, if one uses the U.S.A. accounts for more than 
retirement, then it's less likely to be there as a retirement 
asset when people turn to it. On the other hand, there is a lot 
of interest in other forms of incentives for saving.
    I think that the core principle is that a savings incentive 
is a very different kind of a tax proposal than a consumption 
incentive, and that's something that we think is critically 
important. We are designing this as a retirement incentive, but 
I think that there will be a lot of discussions on the question 
of exactly how one might look at other possible uses. We are 
looking at it as a retirement plan, but we understand there's a 
lot of interest in other uses.
    Mr. Portman. If I could just briefly respond now to your 
three responses to the three questions. First, with regard to 
displacing private savings--in other words, 401(k), profit 
sharing, defined benefit plans--I don't know how you're going 
to avoid it.
    And although I commend you for focusing on personal 
savings, and I agree with you entirely in terms of your intent, 
I think it would be a grave mistake for the government to get 
into the business of providing a generous match, particularly 
for the lower income workers who you are targeting, because in 
the end I think you will find, particularly among smaller 
businesses, most of whom are not offering any kind of 
retirement plan right now, a further disincentive to do so.
    The government is going to take care of it. And, frankly, 
if you're an individual working in those companies, making 
$20,000, $30,000 a year, you're going to see this probably as 
more generous than most of the 401(k)s or ``simple'' plans out 
there.
    So I would respectfully suggest that instead we focus on 
making the retirement system work better. And you know there 
are some proposals to do that, to increase contributions, 
simplify to get more bang for the buck on the private side, to 
leverage, again, more of those private dollars. This, I think, 
as well intended as it is, goes exactly in the wrong way, and I 
know that the administration is very interested in expanding 
private retirement savings.
    Mr. Lew. As we have looked at the question of integration, 
there is such a low participation rate in 401(k)s and IRAs at 
the lower income levels that it actually appears to be of an 
issue in the middle income levels. The disincentives are great 
enough now that the participation rate is low, and our goal is 
to get more people into savings. And I think we agree on that.
    Mr. Portman. I would just say, don't look at the world as 
it is, but as it should be, and that would be allowing small 
businesses to offer more of these plans, making the plans more 
generous so workers will want to do so.
    And I would just make one further point, and it goes back 
to what Mr. Apfel said earlier, which is that long-term 
stability over time is the goal of Social Security. If, indeed, 
you could tie the U.S.A. accounts to Social Security, if, 
indeed, there could be some kind of individual accounts that 
buildup real assets for individuals, which would in the end get 
the advantage that you're trying to get to, having the 
government invest--that is, higher rates of return--you really 
begin to solve the Social Security solvency problem and the 
retirement problem in a much more direct way; at the same time 
doing other things on the private retirement side to leverage, 
again, those private dollars.
    So as I am totally in agreement with you in terms of your 
intent, I would just suggest that maybe there's a better way to 
do this by taking the U.S.A. account idea, folding it back into 
Social Security, with all kinds of government controls and 
regulations, and in the end, solving Mr. Apfel's problem, which 
is long-term solvency, but at the same time encouraging more 
private savings.
    Thank you, Mr. Chairman. Whatever time I have, I think I'm 
past----
    Mr. Apfel. Thirty seconds, Mr. Chairman?
    Chairman Archer. OK, Commissioner.
    Mr. Apfel. It's a pretty steep hill in terms of integrating 
within the Social Security system because it's shifting away 
from the defined benefit model to the defined contribution 
model. So we would be looking at it. That's why the 
administration proposed a separate U.S.A. account, separately 
entirely from the Social Security system, to strengthen 
retirement savings, which we believe is the absolute right way 
to go.
    Mr. Portman. Well, I just think it's not much of a shift. I 
mean, it depends how much you're talking--you'd still have a 
defined benefit plan. The only question is whether you would 
voluntarily permit people to go into some--
    Chairman Archer. Mr. Lewis.
    Mr. Lewis of Kentucky. Thank you, Mr. Chairman.
    I just want to follow up on Mr. Portman's question with the 
U.S.A. accounts.
    You talk about the U.S.A. accounts as being targeted tax 
cuts. But in the President's budget, it doesn't list U.S.A. 
accounts as tax cuts. Can you explain what you mean by----
    Mr. Lew. The President's budget distinguished between the 
tax proposals that were financed and the tax proposals that 
were proposed to come out of the surplus. Our view is that any 
tax cuts, until we've addressed Social Security, should be paid 
for. And it's only in the context of using the surplus to 
address the Social Security financing problem that we should 
reach the question of, should a portion of the surplus be used 
for a tax cut?
    In our framework for Social Security reform and long-term 
fiscal discipline, we do have a tax cut component, that is the 
U.S.A. account. It's in the budget in several places. I'd be 
happy to point you to it. It's not there integrated into the 
proposals for fiscal year 2000 in the same form as, say, the 
child care, the environmental bonds or the other tax provisions 
that we have, because it's not paid for.
    And the sequence is important. The sequence to us matters 
very much because we think that we should deal with Social 
Security and only then deal with allocating the rest of the 
surplus.
    The President never said 100 percent of the surplus should 
go to Social Security. He said we should save 100 percent of 
the surplus until we fix Social Security, and that's really why 
it is displayed separately. I think there's been a little 
confusion about that.
    There are several proposals that are not in the body of the 
budget, the U.S.A. accounts and the discretionary spending, 
because it's part of the framework which has to be part of 
allocating the surplus.
    Mr. Lewis of Kentucky. Do you have an idea of who would 
manage the U.S.A. account?
    Mr. Lew. Well, we think----
    Mr. Lewis of Kentucky. It's very important that it not be 
government-directed investment, that it be--that the U.S.A. 
accounts have to be set up so that individuals are making 
choices for themselves.
    Mr. Lew. Now, the question of how they make the choices is 
one that we're working through. If one were to have unlimited 
choice, and the way anyone with an IRA account would, there's a 
real risk to the administrative cost. It would grow to the 
point that they really would eat up accounts until they grew 
large.
    On the other hand, we know from our experience with the 
TSP, the Federal Thrift Savings Plan, the Federal Reserve 
Retirement Plan, a number of other retirement plans that we 
have a lot of familiarity with, that it's very possible to set 
up choices for individuals where they can pick either a bond 
fund or a stock fund.
    What we're trying to do is find the right balance between 
choice on the part of the individual and controlling the 
administrative costs. And it would not, in any case, be 
government-directed investments. It would be the individual 
choosing the form of investment.
    Mr. Lewis of Kentucky. When do you expect to have more 
specifics on the U.S.A. accounts, hard specifics?
    Mr. Lew. We are working on that now. To tell you the truth, 
we're ahead of schedule in terms of a normal budget cycle. 
Normally, those kinds of details don't come up until late 
spring, and we've made very good progress.
    Frankly, the U.S.A. accounts are very substantial tax 
policy, and they are very complicated, and we're trying to get 
it right. We will get a proposal put forward sooner rather than 
later. But I can't sit here today and say that it's finished.
    We have been going through, in a very systematic way, 
reviewing the interaction with other tax provisions like 
401(k)s, and how to design it so that it works. And we look 
forward to sending those details forward very shortly.
    Mr. Lewis of Kentucky. OK. Thank you.
    Mr. Shaw [presiding]. I have just a couple of quick 
questions that I wanted to ask this panel before you're 
released. You've certainly put in enough time today, and we 
certainly appreciate it.
    In doing your projections, you, as part of the surplus, 
invested directly from the trust fund into the private sector 
what figure?
    Mr. Apfel. It was 20 percent----
    Mr. Shaw. One-fifth, 20 percent.
    Mr. Apfel. Of the surplus, which would mean that equities 
would amount to about 15 percent of the Social Security Trust 
Fund.
    Mr. Shaw. All right. In doing that, I know you did some 
projections as to the growth of the trust fund because of 
adding private sector investments in it. Did you do some 
projections beyond the 15 or 20 percent? In other words, what 
would be the effect if you put a greater amount into private 
equities such as stocks and bonds in the private sector?
    Mr. Apfel. I have not seen projections on--if the 15 
percent, say, was 30 percent, is that what you're asking, if--
--
    Mr. Shaw. Obviously, the reason that you went into equities 
was because it certainly gives you a tremendously increased 
return on your investment from a historical standpoint. And in 
doing so, I would guess that you tapped into several scenarios 
before you arrived at one. I'm sure you just didn't start with 
a 20 percent. I'm sure you went at various steps.
    What was the result of those experiments? Did you find that 
the trust fund profited better by actually increasing the 
percentage of the investment of the surplus into equities?
    Mr. Apfel. Well, if the percentage was, say, 30 percent, as 
opposed to 15 percent, that would resolve probably another 0.4 
or 0.5 percent of payroll; in other words, another quarter or 
so of the long-term issue.
    If you would like, Mr. Chairman, I could ask the actuaries 
to run, say, 30 percent, if that's a----
    Mr. Shaw. I think it would be helpful to us because, 
obviously, I know that there is a great deal of controversy, 
particularly on the Democratic side, about getting involved at 
all in equities. And I think the President was very courageous 
in coming forward and putting a percentage of the trust fund 
into that, even though there's a great concern on my side of 
the aisle as to whether that should be done directly via the 
trust fund or be done in private savings accounts. Obviously, 
that's a line that we're going to have to discuss.
    But, obviously, the President didn't do that unless he 
thought that it was going to get a lot better return on the 
FICA taxes that were being paid in. And I think it would be 
helpful to this Committee if you would submit for the record 
what the results of those studies were, and it would be helpful 
to us in trying to craft legislation. And I would very much 
appreciate having that information.
    Mr. Apfel. To put some perspective on it, the surplus 
transfer would resolve about 1 percent of taxable payroll of 
the total 2 percent of taxable payroll deficit. The 15 percent 
in equities resolved about 0.4 percent of taxable payroll, 
about, again----
    Mr. Shaw. What did you use as the return on investment on 
equities as opposed to the 2 percent which you get on 
Treasury----
    Mr. Apfel. It's about a 4-percent increase, 6\3/4\ as 
opposed to 2.8. Both real.
    Mr. Shaw. So it better than doubles the return.
    Mr. Apfel. It doubles the real rate of return.
    Mr. Shaw. That's interesting. I think that gives us some 
help. So I guess it would only be logical to say that if you 
invested one-fifth of it in equities, and you doubled your 
return, that you could certainly do a lot better by investing 
half of the surplus or even more, that your return would 
actually increase.
    Mr. Apfel. Well, the----
    Mr. Shaw. I don't see any way you could think otherwise.
    Mr. Apfel. That's right. But I think that we appropriately 
set the balance at a very low level, at 15 percent, even though 
compared to State and local pensions, which now have gone from 
40 percent to really 60 percent over the last decade, the 
concern has to do with overall size of the stock market that 
potentially could be affected.
    The proposal assumes about four percent of the market would 
be held by the Social Security Trust Funds. If the percentage 
of trust fund investment in equities is up to 30 percent, or 40 
percent, or 50 percent, that share goes up. We thought it made 
sense to keep it modest for the sake of an appropriate balance. 
But we will get the actuarial projections for you, I would hope 
within a very short period of time, say, at 30 percent, what 
that revenue stream would be over the 75 years.
    Mr. Shaw. OK.
    Mrs. Johnson of Connecticut. Would the Chairman yield?
    Mr. Shaw. It would be very helpful.
    Yes, I would yield.
    [The following was subsequently received:]

    Long-Range OASDI Financial Effects of Modifying the President's 
    Proposal to Invest 30 Percent of Trust Fund Assets in Stocks \1\

    Under the President's proposal, 21 percent of the amount 
transferred in each year 2000 through 2014 would be used to purchase 
stocks. All dividends would be reinvested in stocks until the market 
value of all stocks held by the OASDI Trust Funds reaches 14.6 percent 
of total OASDI Trust Fund assets. Thereafter, the percentage of total 
OASDI Trust Fund assets that is held in stocks would be maintained at 
14.6 percent. The average percentage of the total stock market value 
held by the OASDI Trust Fund over the period 2001-2040 is estimated as 
3.7 percent.
---------------------------------------------------------------------------
    \1\ All estimates are provided by the SSA Office of the Actuary, 
and are based on the intermediate assumptions of the 1998 OASDI 
Trustees Report.
---------------------------------------------------------------------------
    A higher percentage of the total stock market value would be held 
by the OASDI Trust Funds if the President's proposal were modified to 
allow:
     40 percent of the amount transferred in each year to be 
used to purchase stocks, and
     30 percent of total OASDI Trust Fund assets to be held in 
stocks.
    Under these modifications, the average percentage of the total 
stock market value held by the OASDI Trust Funds over the period 2001-
2040 is estimated as 8.4 percent.
    In addition, under these modifications of the President's proposal, 
the year in which the combined OASDI Trust Funds would become exhausted 
would be extended an additional 10 years from the year projected under 
the President's proposal, from 2055 to 2065. The long-range actuarial 
deficit would be reduced an additional 0.45 percent of taxable payroll. 
Thus, the long-range actuarial deficit estimated as 2.19 under present-
law is reduced to 0.75 under the President's proposal and is further 
reduced to 0.30 under these modifications of the President's proposal.
      

                                


    Mrs. Johnson of Connecticut. It would be helpful when you--
if you do those runs and give us some information about that. 
You know, of the 62 percent of the surplus that you want to set 
aside for Social Security, 82 percent of that 62 percent is 
FICA taxes. So they are literally already set aside.
    So what we're looking sort of is at that 18 percent of the 
62 percent that we have to fill in. So we need to know how much 
of that we can fill in, that what it would take--what would it 
take to fill in the hole, that hole wedge left through higher 
yields? It would be interesting to know that.
    What percentage would you need to get up to? Because 
that's--we're really talking about a rather precise and 
narrower number than we are talking about publicly. And I'd 
appreciate it if we'd do a run and find out what that----
    Mr. Apfel. What's that outer bound for----
    Mrs. Johnson of Connecticut. So what is the outer bound? If 
you're going to get to the 62 percent, recognizing that 82 
percent of that is already FICA taxes, so that's already Social 
Security money.
    Mr. Apfel. Actually about 70 percent is FICA taxes. In 
other words, if we look out 30 years from now----
    Mrs. Johnson of Connecticut. In the 5--right, in the first 
5-year window it's 82 percent, I think. But, so that if you 
look at, what do you have to do to get up to 62 percent? if you 
can get up to 62 percent through FICA tax earnings, then you're 
not putting any general revenue fund into it.
    And so we at least need to know what would it take to do 
that, because then you don't have to get into this issue of 
diverting general revenue funds, which effectively, for future 
generations, is a tax increase because it's diverting more of 
the tax dollars from the support programs for them to support 
programs for the other generation.
    Mr. Apfel. Mrs. Johnson, we can do a run that shows no 
surplus transfers and some equity investments. Those numbers 
shrink in terms of their implications, because with surplus 
transfer the trust fund is larger, and, therefore, the amount 
of the long-term----
    Mrs. Johnson of Connecticut. Well, I don't mind including 
the benefits of using surplus to buy down the debt. That's 
still a little different. But FICA taxes are a different status 
of revenue, and earnings on FICA taxes are also a little 
different status, and they have a little different command on 
our Federal budget. And it does avoid this issue of Social 
Security becoming dependent on FICA taxes and general revenues.
    So I'd just like to know, what would it take--what 
percentage of the surplus would--of all of the money that's 
going to come into Social Security, which you have to invest in 
the private market, not just the current Social Security, the 
money--the percentage of that surplus, which is already FICA 
taxes coming in--I think you get my meaning, even if I'm not 
very----
    Mr. Apfel. If I don't have it exactly right, we will reach 
out to you tomorrow to get the exact framework.
    [The following was subsequently received:]

Modificating the President's Proposal to Eliminate the OASDI Long-Range 
                         Actuarial Deficit \2\

    Under the President's proposal, 21 percent of the amount 
transferred in each year 2000 through 2014 would be used to 
purchase stocks. All dividends would be reinvested in stocks 
until the market value of all stocks held by the OASDI Trust 
Funds reaches 14.6 percent of total OASDI Trust Fund assets. 
Thereafter, the percentage of total OASDI Trust Fund assets 
that is held in stocks would be maintained at 14.6 percent. The 
average percentage of the total stock market value held by the 
OASDI Trust Funds over the period 2001-2040 is estimated as 3.7 
percent.
---------------------------------------------------------------------------
    \2\ All estimates are provided by the SSA Office of the Actuary, 
and are based on the intermediate assumptions of the 1998 OASDI 
Trustees Report.
---------------------------------------------------------------------------
    To eliminate the OASDI long-range actuarial deficit, the 
following modifications to the President's proposal are 
proposed:
     60 percent of the amount transferred in each year 
be used to purchase stocks, and
     40 percent of total OASDI Trust Fund assets be 
held in stocks.
    Under these modifications of the President's proposal, the 
long-range actuarial deficit would be eliminated. The combined 
OASDI Trust Funds would rise to a peak of 782 percent of annual 
cost for 2016, declining thereafter, and reaching a level of 
111 percent of annual cost at the end of the long-range period 
(end of 2072). The average percentage of the total stock market 
value held by the OASDI Trust Funds over the period 2001-2040 
is estimated as 12.6 percent.
      

                                


    Mr. Shaw. Perhaps it would be helpful--if as you raise the 
amount of investment in equities, to get that information as to 
what percentage of the surplus is necessary to accomplish the 
same result? Obviously, that's going to go down because the 
return on your investment is going to go up. So I think it 
would be very helpful to this Committee in drafting this 
legislation.
    I want to thank you both for staying with us. This panel 
has gone on far longer than any of us had expected, but I think 
it's been a very good use of our time.
    I thank both you gentlemen for being with us.
    We've lost a couple of witnesses because of the lateness of 
the hour, and we've lost a great deal of our Members because of 
the lateness of the hour. But I'd like to call the next two 
panels together.
    We've got the Honorable David Walker, who is Comptroller 
General of the United States General Accounting Office. We have 
Daniel Crippen, Director of the Congressional Budget Office; 
Barry Anderson, Deputy Director of the Congressional Budget 
Office. And a former Member and former Member of this 
Committee, Bill Frenzel, who cochairs the Committee for a 
Responsible Federal Budget.
    I believe both Mr. Gramlich and Mr. Blinder have both had 
to leave. If I'm incorrect about that, please come forward.
    And the people that cannot stay to testify are certainly--
we look forward to and will place their testimony in the 
record. And I'd like to tell all of the witnesses that we have 
your full testimony that will be made a part of the record, and 
you may summarize as you see fit.
    Mr. Shaw. Mr. Walker.

 STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL, U.S. 
                   GENERAL ACCOUNTING OFFICE

    Mr. Walker. Mr. Chairman.
    Mr. Shaw. Welcome to our Committee.
    Mr. Walker. Thank you, Mr. Chairman. It's a pleasure to be 
here, and to be able to speak to you about two important 
topics.
    First, what to do with the temporary budget surpluses that 
are projected; and, second, what to do about Social Security 
reform.
    Specifically, I've been asked to present the GAO's views of 
the President's proposals in connection therewith.
    And let me say at the outset, Mr. Chairman, just for the 
benefit of the Members that are here, in addition to being 
Comptroller General of the United States at the present point 
in time, I'm a former trustee of Social Security and Medicare 
for 5 years under both President Bush and President Clinton's 
administrations, as well as an Assistant Secretary of Labor for 
ERISA. So, therefore, retirement security is an issue that I've 
been involved with for many years and probably----
    Mr. Shaw. And also a former member of a very fine 
accounting firm, Arthur Andersen.
    Mr. Walker. Thank you very much, Mr. Chairman.
    If I can, let me start with the proverbial bottom line, 
because I realize Members have to come and go. With regard to 
the President's proposal, from our perspective, on the positive 
side the President takes a long-term view on what should be 
done with this temporary surplus, which is important given the 
tremendous demographic tidal wave that faces us and that will 
come.
    Second, the President proposes to reduce debt held by the 
public, and this will increase our future economic capacity to 
deal with future demands. That's on the plus side.
    However, the President proposes two fundamental changes in 
Social Security financing. First, an infusion of a significant 
amount of general fund commitments to back Social Security in 
the form of a grant of additional securities; and, second, a 
modest investment in equities in order to try to enhance long-
term returns associated with the defined benefit portion of the 
program.
    In addition, and probably most importantly, while the 
President is proposing Social Security financing reform, the 
President has not proposed any fundamental programmatic 
restructuring. Such programmatic restructuring is essential in 
order to ``save Social Security.''
    If I can proceed, Mr. Chairman, we have some flipcharts, 
and what I'll try to do is try to graphically display some of 
these important points for the Members of the Committee.
    Let me, if I can, start off with how Social Security and 
the unified budget works right now, because it is somewhat 
complex and sometimes a graph can say a thousand words. If you 
look at the circle around figure 1, you'll see that represents 
the unified budget.
    On the left-hand side you'll see the Social Security budget 
account. What happens in Social Security is you have primarily 
payroll taxes coming in, you have benefit payments and 
administrative expenses going out, and, to the extent that 
there is a surplus, a FICA surplus primarily, it is lent--a 
loan to the Treasury. Specifically, the excess cash is sent to 
the general fund, and the general fund gives notes back to the 
budget account, to the trust fund, special issue, nonmarketable 
U.S. Government securities, which represent a claim on future 
taxpayers for future revenues.
    Then you look at the general fund, of which, keep in mind, 
Social Security, from a budget standpoint, is a part of the 
overall unified budget. You look at the results of operations 
for the general fund, which includes both mandatory and 
discretionary spending. And, as we know, mandatory spending now 
represents about 70 percent of the budget. That's up from about 
30 percent when John F. Kennedy was President. And it's 
increasing every year.
    To the extent that there are excess cashflows on a 
consolidated basis, you have a unified surplus. And what 
happens if you have a unified surplus is debt held by the 
public is paid down. In fact, that's what happened in fiscal 
1998. We ran a unified surplus, and, as a result, debt held by 
the public was paid down by $50 billion.
    Figure 2 demonstrates what the President is proposing to 
do. What the President is proposing to do is the same thing 
that I just described with a couple of adjustments. He is 
proposing to transfer--a supplemental transfer to the trust 
fund. That supplemental transfer would be equal to 62 percent 
of the unified budget surplus projected over a 15-year period.
    That transfer would come in two forms, in effect. Number 
one, a purchase of equities that would accumulate over time, 
hopefully with enhanced returns. And, second, a grant, or, as 
the President has said, a gift of additional securities which 
represent future claims that have to be satisfied through 
either increased taxes, reduced spending, or increased 
borrowing from the public. That is what is being proposed.
    The President is proposing to reduce debt held by the 
public from 44 percent of GDP to 7 percent, over a 15-year 
period. That would be a significant accomplishment. We've 
testified before about how paying down publicly held debt 
lowers interest rates, leads to larger surpluses, leads to 
lower debt, and that's a virtuous economic circle which serves 
to enhance economic capacity.
    Lower debt levels will increase national saving, free up 
resources for private investment, increase productivity and 
economic growth, which will result in an enhanced standard of 
living for American workers.
    And figure 3 shows an example. If you look at an on-budget 
balance scenario--and, by the way, on page 10, I believe it is, 
of my written statement for the record, Mr. Chairman, footnote 
5 provides the details of what these three scenarios are. If 
you look at an on-budget balance scenario, a save-the-surplus 
scenario, or a spend-the-surplus scenario, you'll see that for 
the first two we have increasing per capita GDP. And, as a 
result, our standard of living continues to improve for 
American workers.
    If, on the other hand, the surplus is spent, then there 
will be a dramatic reduction in per capita GDP, based on 
constant dollars, such that there will ultimately be a 
declining standard of living.
    A lot has been talked about debt, and I think it's 
important that one recognizes that there are two types of debt 
that we've been talking about. There is debt held by--debt owed 
to--the public, which represents a current burden and which 
competes in current markets that affect interest rates. And 
then there's debt owed by one governmental account to another 
governmental account--or debt held by the trust funds--which 
represents a future claim on the general fund which must be 
satisfied at some point in time.
    Now, I'm going to show on the left-hand side the 
composition of debt. I'm going to first talk about debt held by 
the public on the left, and then, on the right, debt held by 
the trust funds. There are the two types of debt. The 
combination of these two equal total debt subject to the debt 
limit.
    If you can see, there is a reduction in debt held by the 
public under all three scenarios. But the biggest reduction 
comes under the status quo. If the Congress had the discipline 
not to spend the surplus, or otherwise cause it to evaporate, 
then the debt held by the public would actually go down further 
than is being proposed by the President. That is of what 
happened in fiscal 1998.
    On the other hand, the debt held by the trust fund will go 
up no matter whether the President's proposal is adopted or 
not, because under current law all surpluses in Social Security 
must be invested in government securities. And, therefore, to 
the extent that you have a positive cashflow for Social 
Security, which is part of that unified budget surplus, by 
definition trust fund debt will go up.
    Now, it is true that trust fund debt will go up more 
dramatically under the President's proposal because the 
President is proposing a grant--equal to a significant part of 
the unified budget surplus--in the form of additional Treasury 
securities that would be given to Social Security above and 
beyond what would be due under current law.
    The President, in effect, has seemed to merge two key 
policy questions. First, how much of the surplus should be 
devoted to reducing debt held by the public? And, second, how 
should the nation finance the Social Security system? They are 
not inherently linked.
    In particular, the issue of deciding to grant additional 
securities to the Social Security Trust Fund is separate and 
distinct from paying down publicly held debt, and they really 
have little to do with each other.
    Importantly, Mr. Chairman, and Members of the Committee, 
I've noted in our written statement that we're not the only 
democracy to face this challenge, meaning the challenge of 
temporary surpluses followed by demographic tsunami that--we 
will have to deal with at some point in time.
    There are other nations that have faced this, and they 
dealt with it in various ways. And I would commend to you in my 
statement some examples of what other countries have done in 
order to try to deal with a similar challenge. We believe it's 
instructive to look at them.
    If we can look at Social Security now, importantly, yes, 
the President proposes financing changes for Social Security 
through the modest stock market investment as well as the 
additional grants of additional Treasury securities. But he has 
not proposed underlying Social Security program reform. As a 
result, the structural imbalance and cashflows in Social 
Security has not been affected.
    Figure 7 represents the projected cashflows in the Social 
Security part of the budget and in the trust funds. The solid 
line represents the expenditures; the dotted line, the revenue. 
Today we have surpluses. In the year 2013, we will begin to 
have cashflow deficits. That is the key date--2013, not 2032, 
not 2049, not 2055, it's 2013.
    Now, I could put up another chart here that shows what the 
cashflows will be like after the President's proposal. However, 
I don't need to do that because they are the same with one 
modest footnote. The President is proposing to invest a portion 
of this unified surplus in equities, which should result in 
additional dividend income and some enhanced cashflows, which 
he proposes to use primarily in the outyears to extend solvency 
from 2049 to 2055.
    I think it's important to note that the cashflow picture 
does not change, that we face significant deficits in the 
future. Now I would like to demonstrate the need for structural 
change.
    There is no free lunch. Saving Social Security will require 
fundamental reform to the Social Security program in order to 
assure that the program is fiscally sound and sustainable. We 
must do that. Financing reform might be part of a solution, but 
it won't get the job done by itself.
    We need fundamental program reform, and we need it sooner 
rather than later, because the longer we wait, the tougher and 
more dramatic it will have to be. And, quite frankly, Social 
Security reform is easy lifting, believe it or not, when you 
compare it to some of our other challenges like Medicare 
reform.
    Figure 8 demonstrates the need. If we look on the right, 
you'll see under a scenario where we save all the projected 
surplus, that by year 2030, under our projections, which are 
generally similar to CBO's economic model as well, there is a 
significant hair cutting of discretionary spending in the year 
2030, and all discretionary spending is eliminated by the year 
2050. Now, that's if we save the surplus.
    Improtantly, discretionary spending includes such things as 
national defense, the judicial system, infrastructure, youth 
programs. On the other hand, if you look at figure 9, if we 
spend the surplus, then we reach a total crowding out of 
discretionary spending by the year 2030.
    Ladies and gentlemen, what we face here is temporary 
surpluses and a demographic tsunami--a tidal wave. This 
demonstrates that. We must be prudent today in order to take 
the actions necessary to provide ourselves more flexibility in 
future years.
    I have provided in my statement, Mr. Chairman, some 
principles of reform that the Congress may want to consider in 
moving forward in Social Security. I have also provided in my 
statement some questions that the Congress may wish to ask and 
seek to get answers to in connection therewith.
    In closing, let me end where I started. The President 
proposes to reduce debt held by the public, which is good. The 
President proposes to fundamentally change Social Security 
financing in a very dramatic manner, which deserves serious 
attention and considered debate. The President has not proposed 
Social Security program reform. He has proposed financing 
reform. Fundamental program reform will be essential in order 
to save Social Security, to make it financially secure and 
sustainable for future generations.
    Mr. Chairman, the GAO stands ready to help this Committee 
and the Congress address this and other challenges in a way 
that will make a positive and lasting difference for American 
citizens. Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. David M. Walker, Comptroller General, U.S. General 
Accounting Office

    Mr. Chairman and Members of the Committee:
    It is a pleasure to be here today to discuss the President's recent 
proposal for addressing Social Security and use of the budget surplus. 
These proposals address some of the most important issues facing the 
nation, both now and over the longer term. As you know, both GAO as an 
institution and I as an individual have a long-standing interest in 
these issues.
    The President's proposal is complex, which makes it all the more 
important for us to focus our attention on what it does--and what it 
does not do--for our long-term future. In summary, the President's 
proposal:
     Reduces debt held by the public from current levels, 
thereby also reducing net interest costs, raising national saving, and 
contributing to future economic growth.
     Fundamentally changes Social Security financing in two 
ways:

         It promises general funds in the future by, in effect, 
        trading publicly held debt for debt held by the Social Security 
        Trust Fund (SSTF).
         It invests some of the trust fund in equities with the 
        goal of capturing higher returns over the long term.

     Does not have any effect on the projected cash flow 
imbalance in the Social Security program's taxes and benefits which 
begins in 2013
     Does not represent a Social Security reform plan and does 
not come close to ``saving Social Security.''

                Context: Long-Term Outlook Is Important

    It is important to look at the President's proposal in the context 
of the fiscal situation in which we find ourselves. After nearly 30 
years of unified budget deficits, we look ahead to projections for 
``surpluses as far as the eye can see.'' At the same time, we know that 
we face a demographic tsunami in the future that poses significant 
challenges for the Social Security system, Medicare, and our economy as 
a whole. In this context, we should recognize that the President uses a 
longer-term framework for resource allocation than has been customary 
in federal budgeting.
    Although all projections are uncertain--and they get more uncertain 
the farther out they go--we have long held that a long-term perspective 
is important in formulating fiscal policy for the nation. Each 
generation is in part the custodian for the economy it hands the next 
and the nation's long-term economic future depends in large part on 
today's budget decisions. This perspective is particularly important 
because our model and that of the Congressional Budget Office (CBO) 
continue to show that absent a change in policy, the changing 
demographics to which I referred above will lead to renewed deficits. 
This longer-term problem provides the critical backdrop for making 
decisions about today's surpluses.
    Surpluses are the result of a good economy and difficult policy 
decisions. They also provide a unique opportunity to put our nation on 
a more sustainable path for the long term, both for fiscal policy and 
the Social Security program itself. Current decisions can help in 
several important respects: (1) current fiscal policy decisions can 
help expand the future capacity of our economy by increasing national 
savings and investment, (2) engaging in substantive reforms of 
retirement and health programs can reduce future claims, (3) by acting 
now, we have the opportunity of phasing in changes to Social Security 
and health programs over a sufficient period of time to enable our 
citizens to adjust, and (4) failure to achieve needed reforms in the 
Social Security and Medicare programs will drive future spending to 
unsustainable levels and eventually ``squeeze out'' most or all 
discretionary spending. If we let the achievement of a budget surplus 
lull us into complacency about the budget, then in the middle of the 
21st century, we could face daunting demographic challenges without 
having built the economic capacity or program/policy reforms to handle 
them.

                              The Proposal

    Before turning to the context for and analysis of the President's 
proposal, let me briefly describe it. The President proposes to use 
approximately two-thirds of the total projected unified budget 
surpluses over the next 15 years to reduce debt held by the public and 
to address Social Security's financing problem. His approach to this, 
however, is extremely complex and confusing. The President proposes to 
``transfer'' an amount equal to a portion of the projected surplus to 
the Social Security and Medicare trust funds.\1\ This transfer is 
projected to extend the solvency of Social Security from 2032 to 2049. 
His proposal to permit the trust fund to invest in equities is expected 
to further extend trust fund solvency to 2055. He calls on Congress to 
work with him on program changes to get to 2075.
---------------------------------------------------------------------------
    \1\ In this testimony, I will address only the Social Security 
portion of this transfer. The issues are similar but not identical for 
the Medicare trust fund transfer.
---------------------------------------------------------------------------
    To understand and evaluate this proposal it is important to 
understand the nature of the federal budget, how trust funds fit into 
that budget, and the challenges of ``saving'' within the federal 
budget.

           Can We Save for the Future in the Federal Budget?

    The federal budget is a vehicle for making choices about the 
allocation of scarce resources. It is different from state budgets in 
ways important to this discussion. Most states use ``fund budgeting'' 
in which pension funds that are separate and distinct legal entities, 
build up surpluses that are routinely invested in assets outside the 
government (e.g. readily marketable securities held in separate funds). 
In contrast, the federal government's unified budget shows all 
governmental transactions and all funds are available for current 
activities, including current-year activities of all trust funds. We 
cannot park our surplus in a cookie jar. The only way to save in the 
federal budget is to run a surplus or purchase a financial asset. When 
there is a cash surplus it is used to reduce debt held by the public. 
Therefore, to the extent that there is an actual cash surplus, debt 
held by the public falls.
    This presents a problem for any attempt to ``advance fund'' all or 
part of future Social Security benefits. Advance funding within the 
current program would mean increasing the flows to the SSTF. Although 
it is officially ``off budget,'' the fact remains that the SSTF is a 
governmental fund. In the federal budget, trust funds are not like 
private trust funds. They are simply budget accounts used to record 
receipts and expenditures earmarked for specific purposes. A private 
trust fund can set aside money for the future by increasing its assets. 
However, under current law, when the SSTF's receipts exceed costs, they 
are invested in Treasury securities and used to meet current cash needs 
of the government. These securities are an asset to the trust fund, but 
they are a claim on the Treasury. Any increase in assets to the SSTF is 
an equal increase in claims on the Treasury. One government fund is 
lending to another. The transactions net out on the government's books. 
Given this investment policy, any increase in the trust fund balances 
would only become an increase in saving if this increment were to add 
to the unified budget surplus (or decrease the unified budget deficit) 
and thereby reduce the debt held by the public. This is also the only 
way in which an increase in the SSTF balance could be a form of advance 
funding.
    How do these transactions affect the government's debt? Gross 
federal debt is the sum of debt held by the public and debt held by 
governmental accounts--largely trust funds. This means that increases 
in the trust fund surplus will increase gross debt unless debt held by 
the public declines by at least the same amount. Any reform of Social 
Security that increases the annual SSTF surplus would increase debt 
held by government accounts since, under current law, any excess of 
revenues over benefit payments is loaned to Treasury for current needs. 
As a result, total government debt would go up unless these surpluses 
were used to reduce debt held by the public by an equivalent amount.
    For most people, the different types of ``debt'' in the federal 
budget may be confusing--especially since what is ``good news'' for a 
trust fund may be ``bad news'' for total debt and vice versa. This is 
so because total debt (or gross debt) is the sum of two very different 
types of debt--debt owed to the public and debt owed by one part of the 
government (general fund) to another part of the government (trust 
funds). Therefore, if a trust fund surplus grows faster than debt held 
by the public falls, total debt grows--even if the trust fund surplus 
is created as an attempt to ``save'' or to ``pre-fund'' some of the 
future benefit payments. These contradictory movements emphasize the 
need to differentiate between different types of debt and what they 
mean. Both debt held by the public and debt held by trust funds are 
important--but for different reasons. Analytically, therefore, what is 
most important is not whether total debt increases but rather the 
reasons behind the increase--does it represent an attempt to ``advance 
fund'' through substantive reform or merely the promise of future 
resources?
    Debt held by the public and debt held by trust funds represent very 
different concepts. Debt held by the public approximates the federal 
government's competition with other sectors in the credit markets. This 
affects interest rates and private capital accumulation. Further, 
interest on debt held by the public is a current burden on taxpayers. 
Reducing this burden frees up capacity to meet future needs.
    In contrast, debt held by trust funds performs an accounting 
function and currently represents the cumulative annual surpluses of 
these funds (i.e., excess of receipts over disbursements plus accrued 
interest). Importantly, debt held by the SSTF does not represent the 
actuarial present value of expected future benefits for either current 
or future participants. Nor does this debt have any of the economic 
effects of borrowing from the public. It is not a current transaction 
of the government with the public; it does not compete with the private 
sector for available funds in the credit market. It reduces the need to 
borrow from the public and so may hold down interest rates. Unlike debt 
held by the public, debt held by trust funds does not represent an 
immediate burden on current taxpayers. Rather, it is a claim on future 
resources. The surplus is held in Treasury securities which give the 
SSTF a claim on the Treasury equal to the value of those securities. 
When the securities have to be redeemed, the Treasury must come up with 
the cash. At that time taxpayers will see some combination of a lower 
surplus, lower spending, higher taxes and/or greater borrowing from the 
public.
    If borrowing from the public is increased to cover this cash need, 
there could be upward pressure on interest rates. In addition, because 
debt held by the trust fund is not equal to future benefit payments--it 
is not a measure of the unfunded liability of the current system--it 
cannot be seen as a measure of this future burden. Nevertheless, it 
provides an important signal of the existence of this burden. Whether 
the debt constitutes a new economic burden for the future or merely 
recognizes an existing one depends on whether these currently-promised 
benefits would be paid even in the absence of the securities.

                How Does the President's Proposal Work?

    This information is important to understand the President's 
proposal because in large part he proposes a set of transactions that, 
in effect, trade debt held by the public for debt held by the SSTF.\2\ 
By running a cash surplus over the next 15 years, debt held by the 
public falls. To ``save'' this surplus, the President proposes to 
``transfer'' it to the trust fund in the form of increased Treasury 
securities. Under his proposal, debt held by the public falls, but debt 
held by the trust funds increases. Because he shows the transfer as a 
subtraction from the surplus--a new budgetary concept--he shows no 
surplus. As a result, he attempts to save some of the projected surplus 
by hiding it.
---------------------------------------------------------------------------
    \2\ Paying down publicly held debt and issuing new special 
securities to the SSTF are two different transactions. Nevertheless, 
the effect is as if the securities are exchanged.
---------------------------------------------------------------------------
    The mechanics of the proposed transfer of surpluses to the SSTF are 
complex and difficult to follow. Few details have been made available, 
and there is conflicting information on exactly how it would work. 
Figures 1 and 2 are flow charts representing our best understanding of 
the Social Security portion of this transfer. Since it is impossible to 
understand the changes proposed by the President without understanding 
the present system, figure 1 shows the flows under the current system. 
Under current law, annual cash flow surpluses (largely attributable to 
excess payroll taxes over benefits payments and program expenses) are 
invested in Treasury securities.\3\ This excess ``cash'' is commingled 
with other revenues and used to finance other governmental activities. 
In this way, SSTF surpluses have helped and continue to help finance 
the rest of the government. This year, the SSTF surplus is expected to 
exceed the general fund deficit so there is also a surplus in the 
unified budget. Over the entire 15-year period, more than half of the 
projected unified surplus is composed of Social Security surpluses. 
Absent any change in policy, these unified surpluses will be used to 
reduce the debt held by the public.
---------------------------------------------------------------------------
    \3\ This presentation is somewhat simplified. In reality, FICA 
taxes are collected with income and corporate taxes by the Treasury and 
then allocated by the Treasury to Social Security, Medicare, or the 
general fund. In addition, a portion of income taxes paid on Social 
Security benefits flow into the SSTF. The expenditure side of the SSTF 
transactions is also simplified since administrative expenses also flow 
from the trust fund. These elements are unchanged by the President's 
proposal and do not change the flows critical to understanding it.

---------------------------------------------------------------------------
Figure 1: Current Social Security Flows

[GRAPHIC] [TIFF OMITTED] T5091.001

    Source: GAO Analysis
    Under the President's proposal, this would continue. However, as 
shown in figure 2, at the point where total tax receipts are allocated 
to pay for government activities, a new financing step would be added 
to ``transfer'' a portion of the unified budget surpluses to the Social 
Security and Medicare trust funds. The unified budget would do this by 
providing a new set of securities for these trust funds. However, the 
excess cash would still be used to reduce the debt held by the public.
Figure 2: Social Security Flows Under President's Proposal

[GRAPHIC] [TIFF OMITTED] T5091.002

    In essence, this exchanges debt held by the public for debt held by 
the trust funds. While there are many benefits to reducing publicly 
held debt, it is important to recognize that under the current law 
baseline--i.e., with no changes in tax or spending policy--this would 
happen without crediting additional securities to the trust funds.
    The administration has defended this approach as a way of assuring 
both a reduction in debt held by the public and giving Social Security 
first claim on what they call the ``debt-reduction dividend'' to pay 
future benefits.
    However, issuing these additional securities to the SSTF is a 
discretionary act with major legal and economic consequences for the 
future. Some could view this as double counting--or double-crediting. 
Importantly, to the extent it appears that way to the public, it could 
undermine confidence in a system that is already difficult to explain. 
However, the debate over double counting focuses on the form of the 
proposal rather than its substance. Although form is important when it 
interferes with our ability to understand the substance--and I think 
this proposal falls into that trap--the important debate must be on the 
substance of the proposal.
    This proposal represents a fundamental shift in the way the Social 
Security program is financed. It moves it away from payroll financing 
toward a formal commitment of future general fund resources for the 
program. This is unprecedented. Later in my statement, I will discuss 
the implications of this proposal for overall fiscal policy and for the 
Social Security program.

                     Government Financing and Debt

    The President's proposals would have the effect of reducing debt 
held by the public from the current level of 44 percent of Gross 
Domestic Product to 7 percent over the 15-year period. The President 
notes that this would be the lowest level since 1917. Nearly two-thirds 
of the projected unified budget surplus would be used to reduce debt 
held by the public. Because the surplus is also to be used for other 
governmental activities, the amount of debt reduction achieved would be 
less than the baseline (i.e. a situation in which none of the surplus 
was used), but nonetheless the outcome would confer significant 
benefits to the budget and the economy.
    Our previous work on the long-term effects of federal fiscal policy 
has shown the substantial benefits of debt reduction.\4\ One is 
lowering the burden of interest payments in the budget. Today net 
interest represents the third-largest ``program'' in the budget, after 
Social Security and Defense. Interest payments, of course, are a 
function of both the amount of debt on which interest is charged and 
the interest rate. At any given interest rate, reducing publicly held 
debt reduces net interest payments within the budget. For example, CBO 
estimates that the difference between spending the surplus and saving 
the surplus is $123 billion in annual interest payments by 2009--or 
almost $500 billion cumulatively between now and then. Compared to 
spending the entire surplus, the President's proposal would also 
substantially reduce projected interest payments. Lower interest 
payments lead to larger surpluses; these in turn lead to lower debt 
which leads to lower interest payments and so on: the miracle of 
compound interest produces a ``virtuous circle.'' The result would be 
to provide increased budgetary flexibility for future decisionmakers 
who will be faced with enormous and growing spending pressures from the 
aging population.
---------------------------------------------------------------------------
    \4\ Budget Issues: Analysis of Long-Term Fiscal Outlook (GAO/AIMD/
OCE-98-19, October 22, 1997).
---------------------------------------------------------------------------
    For the economy, lowering debt levels increases national saving and 
frees up resources for private investment. This in turn leads to 
increased productivity and stronger economic growth over the long term. 
Over the last several years, we and CBO have both simulated the long-
term economic results from various fiscal policy paths. These 
projections consistently show that reducing debt held by the public 
increases national income over the next 50 years, thereby making it 
easier for the nation to meet future needs and commitments. Our latest 
simulations done for the Senate Budget Committee, as shown in figure 3, 
illustrate that any path that saving all or a significant share of the 
surplus in the near term would produce demonstrable gains in per capita 
GDP over the long run.\5\ This higher GDP in turn would increase the 
nation's economic capacity to handle all its commitments in the future.
---------------------------------------------------------------------------
    \5\ The ``On budget balance'' path assumes that any surplus in the 
non Social Security part of the budget is ``spent'' on either a tax cut 
or spending increases or some combination but assumes the current law 
path for the Social Security trust fund. Thus the surplus in the Social 
Security trust fund remains untouched until it disappears in 2013 after 
which the unified budget runs a deficit equal to the SSTF deficit. The 
``Save the Surplus'' path assumes no changes in current policies and 
that budget surpluses through 2024 are used to reduce debt held by the 
public. The ``No Surplus'' path assumes that permanent increases in 
discretionary spending and tax cuts deplete the surpluses but keep the 
budget in balance through 2009. Thereafter, deficits re-emerge as 
spending pressures grow.
[GRAPHIC] [TIFF OMITTED] T5091.003

    Under the President's proposal, debt held by trust funds goes up 
more rapidly than debt held by the public falls, largely due to these 
additional securities transferred to the trust funds. Gross debt, 
therefore, increases. It is gross debt--with minor exceptions--that is 
the measure that is subject to the debt limit. The current limit is 
$5.95 trillion. Under the President's plan, the limit would need to be 
raised sometime during 2001. Under either the CBO or the Office of 
Management and Budget baseline (i.e., save the entire surplus), the 
limit would not need to be raised during at least the next 10 years. 
Since other proposals to use the surplus would also bring forward the 
time when the debt limit would have to be raised, the impact of the 
President's proposal on debt is in part a ``compared to what?'' 
question. In figure 4 we show the debt subject to limit under the 
baseline, the President's proposal, and a hypothetical path we have 
labeled ``on-budget balance.'' \6\
---------------------------------------------------------------------------
    \6\ The baseline is the CBO baseline. It assumes that none of the 
surplus is used for tax cuts or spending increases. ``On budget 
balance'' assumes that any surplus in the non Social Security part of 
the budget is ``spent'' on either a tax cut or spending increases or 
some combination but that the surplus in the Social Security trust fund 
remains untouched. There is no ``on-budget'' surplus until 2001.
[GRAPHIC] [TIFF OMITTED] T5091.004

    Figures 5 and 6 below compare the composition of debt under the 
same three paths: the baseline (save the entire surplus), the 
President's proposal (including both the Social Security proposal and 
the other spending), and ``on-budget balance.'' Figure 5 shows debt 
held by the public under all three scenarios and Figure 6 shows debt 
held by governmental accounts.
    As figure 5 shows, debt held by the public falls under all three 
scenarios. Since the baseline assumes the entire surplus is devoted to 
reducing debt held by the public, it shows the greatest drop. Under the 
``on-budget balance'' path there are no tax cuts or spending increases 
until there is an on-budget balance in 2001 while under the President's 
proposal spending increases and tax cuts are front-loaded. As a result, 
the President's proposal is projected to reduce debt held by the public 
less than the ``on budget balance'' path during these 10 years.
[GRAPHIC] [TIFF OMITTED] T5091.005

    Figure 6 shows the impact of the President's proposal to transfer 
securities to the SSTF. The projections for debt held by government 
accounts are the same for the baseline and the ``on-budget balance'' 
paths since neither changes current law. Under the President's 
proposal, however, debt held by the SSTF increases as securities are 
transferred to it. This leads to the increase shown in figure 6.
    While reducing debt held by the public appears to be a centerpiece 
of the proposal--and has significant benefits--as I noted above, the 
transfer of unified surpluses to Social Security is a separate issue. 
The transfer is not technically necessary: whenever revenue exceeds 
outlays and the cash needs of the Treasury--whenever there is an actual 
surplus--debt held by the public falls. The President's proposal 
appears to be premised on the belief that the only the way to sustain 
surpluses is to tie them to Social Security. He has merged two separate 
questions: (1) how much of the surplus should be devoted to reducing 
debt held by the public; and, (2) how should the nation finance the 
Social Security program in the future.
    Let me turn now to the question of Social Security financing.
    [GRAPHIC] [TIFF OMITTED] T5091.006
    
                       Social Security Financing

    The President proposes two changes in the financing of Social 
Security: a pledge of general funds in the future and a modest amount 
of investment in equities. Both of these represent major shifts in 
approach to financing the program.

                         General Fund Financing

    By, in effect, trading debt held by the public for debt held by the 
trust funds, the President is committing future general revenues to the 
Social Security program. This is true because the newly transferred 
securities would be in addition to any buildup of payroll tax 
surpluses. Securities held by the SSTF have always represented annual 
cash flows in excess of benefits and expenses, plus interest.\7\ Under 
the President's proposal, this would no longer continue to be true. The 
value of the securities held by the SSTF would be greater than the 
amount by which annual revenues plus interest exceed annual benefits 
and expenditures.
---------------------------------------------------------------------------
    \7\ Cash flow into the SSTF is composed of payroll taxes and a 
portion of the income taxes paid on Social Security benefits. Income 
taxes make up a relatively small component of the surplus. Interest 
paid to Social Security is analogous to interest paid on publicly held 
debt. Both come from the general fund. Interest on publicly held debt 
is paid in cash while interest to the trust fund is credited in the 
form of additional Treasury securities.
---------------------------------------------------------------------------
    This means that for the first time there is an explicit general 
fund subsidy. This is a major change in the underlying theoretical 
design of this program. Whether you believe it is a major change in 
reality depends on what you assume about the likely future use of 
general revenues under the current circumstances. For example, current 
projections are that in 2032 the fund will lack sufficient resources to 
pay the full promised benefits. If you believe that this shortfall 
would--when the time came--be made up with general fund moneys, then 
the shift embedded in the President's proposal merely makes that 
explicit. If, however, you believe that there would be changes in the 
benefit or tax structure of the fund instead, then the President's 
proposal represents a very big change. In either case, the question of 
bringing significant general revenues into the financing of Social 
Security is a question that deserves full and open debate. The debate 
should not be overshadowed by the accounting complexity and budgetary 
confusion of the proposal.
    One disconcerting aspect of the President's proposal is that it 
appears that the transfers to the trust fund would be made regardless 
of whether the expected budget surpluses are actually realized. The 
amounts to be transferred to Social Security apparently would be 
written into law as either a fixed dollar amount or as a percent of 
taxable payroll rather than as a percent of the actual unified surplus 
in any given year. These transfers would have a claim on the general 
fund even if the actual surplus fell below the amount specified for 
transfer to Social Security--and that does present a risk.\8\ However, 
it is important to emphasize that any proposal to allocate surpluses is 
vulnerable to the risk that those projected surpluses may not 
materialize. Proposals making permanent changes to use the surplus over 
a long period of time are especially vulnerable to this risk.
---------------------------------------------------------------------------
    \8\ It is worth noting that something like this happens now. 
Treasury does not track how much of the revenues it collects are for 
Social Security and how much for income taxes. It credits the SSTF with 
funds equal to the appropriate tax rate applied to the taxable wage 
base--whether or not those FICA taxes were actually paid.
---------------------------------------------------------------------------
    The history of budget forecasts should remind us not to be 
complacent about the certainty of these large projected surpluses. In 
its most recent outlook book, CBO compared the actual deficits or 
surpluses for 1988-1998 with the first projection it produced five 
years before the start of each fiscal year. Excluding the estimated 
impact of legislation, CBO says its errors averaged about 13% of actual 
outlays. Such a shift in 2004 would mean a surplus $250 billion higher 
or lower; in 2009 the swing would be about $300 billion. Accordingly, 
we should consider carefully any permanent commitments that are 
dependent on the realization of a long-term forecast.

                         Investment in Equities

    Under current law, the SSTF is required to invest only in 
securities that are issued or backed by the Treasury. The President 
proposes changing current law to allow the SSTF to invest a portion of 
its assets in equities. His proposal calls for the fund to gradually 
invest 15 percent of its total assets in the equity market. According 
to the administration's estimates, the SSTF's equity holdings would 
represent only a small portion--about 4 percent--of the total equity 
market. To insulate investment decisions from political considerations, 
the administration proposes investing passively in a broad-based stock 
index and creating an independent board to oversee the portfolio.
    Last year, we reported on the implications of allowing the SSTF to 
invest in equities.\9\ In that report, we concluded that stock 
investing offers the prospect of higher returns in exchange for greater 
risk. We found that, by itself, stock investing was unlikely to solve 
Social Security's long-term financing imbalance but that it could 
reduce the size of other reforms needed to restore the program's 
solvency. We also concluded that investing in a broad-based index would 
help reduce, but not eliminate, the possibility of political influence 
over stock selections. However, the issue of how to handle stock voting 
rights could prove more difficult to resolve. If the government voted 
its shares, it would raise concerns about potential federal involvement 
in corporate affairs. If the government chose not to vote, it would 
affect corporate decision-making by enhancing the voting power of other 
shareholders or investment managers. The model applicable to passive 
private sector investment managers under the Employee Retirement Income 
Security Act may be relevant to the resolution of this issue.
---------------------------------------------------------------------------
    \9\ Social Security Financing: Implications of Government Stock 
Investing for the Trust Fund, the Federal Budget, and the Economy (GAO/
AIMD/HEHS-98-74, April 22, 1998).
---------------------------------------------------------------------------
    Stock investing would have approximately the same impact on 
national saving as using the same amount of money to reduce debt held 
by the public. Both approaches would add about the same amount of funds 
to private capital markets, meaning that national saving would 
essentially be unchanged. From a budget accounting standpoint, they are 
not the same. Under current scoring rules the purchase of equities 
would be counted as an outlay, even though it is a financial 
transaction, because it is a transfer of funds from a governmental 
entity to a nongovernmental entity. The proposal apparently would 
change that. The administration proposes to show the entire transfer to 
the SSTF as a reduction in the surplus and the equity purchases would 
be part of that. The purchase of equities has another financial impact: 
since part of the surplus would be used to purchase equities, debt held 
by the public would be reduced less in the near term than if that 
amount went to reduce publicly held debt. However, in the future, 
claims on the Treasury would be lower because the program would rely in 
part on stock sales to pay benefits.

              Have Other Countries Tackled These Problems?

    Although the dilemma we are facing of whether and how to save for 
the future is a very difficult one, it is not unique. A look at other 
democracies shows that surpluses are difficult to sustain. However, 
several nations have succeeded in sustaining surpluses. In those 
nations, political leaders were able to articulate a compelling 
rationale to justify the need to set aside current resources for future 
needs.
    For example, those countries that have come to the conclusion that 
the debt burden matters make it an explicit part of their fiscal 
decision making process. Australia, New Zealand, and the United Kingdom 
all attempt to define prudent debt levels as a national goal to strive 
for. These debt goals can prove important in times of surplus. New 
Zealand, for example, used its debt goals as justification for 
maintaining spending restraint and attempting to run sustained 
surpluses. They promised that once they met their initial debt target 
they would give a tax cut. Importantly, when they hit that specified 
debt target, they delivered on their promise of tax cuts.
    Other countries have saved for the future by separating their 
pension or Social Security-related assets from the rest of the 
government's budget. For example, the Canadian Pension Plan is 
completely separate from both federal and provincial budgets. When the 
fund earns surplus cash, it is invested in provincial debt securities 
and, starting this year, in the stock market. Sweden also maintains a 
pension fund outside the government's budget and invests assets in 
stocks and bonds.
    Norway may be the most dramatic example of setting aside current 
surpluses to address long-term fiscal and economic concerns. Norway 
faces the two-edged problem of a rapidly aging population and declining 
oil revenues--a significant source of current government revenue. To 
address these long-term concerns, Norway started setting aside year-end 
budget surpluses in 1996 to be invested in foreign stocks and bonds. 
Their express intention is to draw down these assets to pay for the 
retirement costs for their baby boomers.
    It should be noted that other nations that have attempted to 
directly address their debt and pension problems have usually done so 
during or shortly after a fiscal or economic crisis. Fortunately, we do 
not have that problem. Instead, we have a unique opportunity to use our 
current good fortune to meet the challenges of the future.

                 Social Security Reform Is Still Needed

    Finally, it is important to note that the President's proposal does 
not alter the projected payroll tax and benefit imbalances in the 
Social Security program. In addition, it does not come close to 
``saving Social Security.'' Benefit costs and revenues currently 
associated with the program will not be affected by even 1 cent. Figure 
7, which shows Social Security's payroll tax receipts and benefit 
payments, illustrates this point. Without the President's proposal, 
payroll tax receipts will fall short of benefit payments in 2013; \10\ 
with the President's proposal, payroll tax receipts also fall short of 
benefit payments in 2013--the graph doesn't change at all. Under the 
President's proposal, expected stock market returns would be used to 
fill part of this gap, but from 2013 on the trust funds will need cash 
from redeemed Treasury securities, whether or not the President's 
proposal is adopted.
---------------------------------------------------------------------------
    \10\ Cash inflows actually consist of payroll taxes plus the income 
taxes paid on Social Security benefits. Cash outflows are almost 
entirely made up of benefit payments, but they also include the fund's 
administrative expenses.
[GRAPHIC] [TIFF OMITTED] T5091.007

    What does this mean? In 2013, inflows to the SSTF from payroll 
taxes and income taxes on Social Security benefits will no longer 
exceed outflows for benefits and administrative expenses. As a result, 
the year 2013 is the key date from a government financing perspective. 
At this point, the SSTF will have to begin drawing on its other income 
sources--the transfers from the general fund proposed by the President 
and the returns on its existing assets. Beginning in 2015, the SSTF 
will obtain some of the additional cash it needs from its equity 
holdings. However, most of the cash needed in the years that follow 
would come from tapping the SSTF's Treasury securities. When the SSTF 
begins drawing on the Treasury, it means that the rest of the 
government will have to come up with the cash. If there is a unified 
budget surplus, it will shrink. If, however, there is no surplus, there 
are only three choices: cut spending, raise taxes, and/or increase 
borrowing from the public. The amount needed from the rest of the 
government to help cover the SSTF's cash deficit will escalate rapidly, 
exceeding $100 billion annually by 2019. This has already happened to 
Medicare's Hospital Insurance Trust Fund--it has been drawing on its 
special treasuries for several years.
    Under the President's proposal, the changes to the Social Security 
program will be more perceived than real: although the trust funds will 
appear to have more resources as a result of the proposal, in reality, 
nothing about the program has changed. The proposal does not represent 
Social Security program reform, but rather a different means to finance 
the current program. Although the President has called for bipartisan 
cooperation to make programmatic changes, one of the risks of his 
proposal is that the additional years of financing it provides could 
very well diminish the urgency to achieve meaningful changes in the 
program. This would not be in the overall best interests of the nation.
    To achieve long-term solvency and sustainability, the Social 
Security program itself must be reformed. The demographic trends that 
are driving the program's financial problems affect the program well 
into the future. The impending retirement of the baby boom generation 
is the best known of these trends, but is not the only challenge the 
system faces. If this were so, perhaps a one-time financing strategy 
could be sufficient. But people are retiring earlier, birth rates have 
fallen, and life expectancies are increasing--all these factors suggest 
that Social Security's financial problems will outlive the baby boom 
generation and continue far into the future. These problems cannot be 
addressed without changes to the Social Security program itself.
    Changes to the Social Security system should be made sooner rather 
than later. The longer meaningful action is delayed, the more severe 
such actions will have to be in the future. Changes made today would be 
relatively minor compared to what could be necessary years from now, 
with less time for the fiscal effects of those changes to build. 
Moreover, acting now would allow any benefit changes to be phased in 
gradually so that participants would have time to adjust their saving 
or retirement goals accordingly. It would be tragic indeed if this 
proposal, through its budgetary accounting complexity, masked the 
urgency of the Social Security solvency problem and served to delay 
much-needed action.
    There is another reason to take action on Social Security now. 
Social Security is not the only entitlement program needing urgent 
attention. In fact, the issues surrounding the Medicare program are 
much more urgent and complex. Furthermore, the many variables 
associated with health care consumption and Medicare costs and the 
personal emotions associated with health decisions make reform in this 
program particularly difficult.
    To move into the future without changes in Social Security or 
health programs is to envision a very different role for the federal 
government. Assuming no financing or benefit changes, our long-term 
model (and that of CBO) shows a world in 2050 in which Social Security 
and health care absorb an increasing share of the federal budget. (See 
figure 8) Budgetary flexibility declines drastically and there is 
increasingly less room for programs for national defense, the young, 
infrastructure, and law enforcement--i.e., essentially no discretionary 
programs at all. Eventually, again assuming no program or financing 
changes, Social Security, health and interest take nearly all the 
revenue the federal government takes in by 2050. This is true even if 
we assume that the entire surplus is saved and these continued 
surpluses reduce interest from current levels. As shown in figure 9, 
the picture below is even more dramatic if we assume the entire surplus 
is used.\11\ In that scenario lower GDP and higher interest payments 
lead to a world in which revenues cover only Social Security, health 
and interest in 2030. And in 2050 revnues don't even cover Social 
Security and health!
---------------------------------------------------------------------------
    \11\ Our ``No Surplus'' simulation is not a forecast but rather an 
illustration of the implications of enacting permanent tax cuts and/or 
spending increases that eliminate projected surpluses and the fiscal 
pressures posed by the aging of the baby boom generation. This 
simulation shows ever-increasing deficits that result in declining 
investment, a diminishing capital stock, and a collapsing economy. In 
reality these economic consequences would inevitably force policy 
changes to avert such a catastrophic outcome. 
[GRAPHIC] [TIFF OMITTED] T5091.008

    Although views about the role of government differ, it seems 
unlikely that many would advocate a government devoted solely to 
sending checks and health care reimbursements to the elderly.
    Let us address Social Security for the long term today so that the 
nation can turn its attention to these other more pressing and 
difficult issues early in the new millenium. Look again at figures 8 
and 9: Social Security is not the fastest growing portion of those 
bars--health grows faster.
    Much remains to be done in reforming entitlement programs, and 
engaging in meaningful Social Security reform would represent an 
important and significant first step. The Congress and the 
administration, working together, can find a comprehensive and 
sustainable solution to this important challenge.
    I recognize, though, that restoring Social Security solvency is not 
easy. However, it is easy lifting compared to what faces us in 
connection with the Medicare program. Ultimately, any reforms to Social 
Security will address not only the relatively narrow question of how to 
restore solvency and assure sustainability but will also go to the 
larger question of what role Social Security and the federal government 
should play in providing retirement income. There are many proposals 
being made to address these questions; choosing among them will involve 
difficult and complex choices, choices that will be critically 
important to nearly every American's retirement income.
    In my view, progress is likely to be greatest if we see these 
choices not as ``either/or'' decisions but rather as an array of 
possibilities along a continuum. Combining elements of different 
approaches may offer the best chance to produce a package that 
addresses the problem comprehensively for the long term in a way that 
is meaningful and acceptable to the American people. For example, such 
a continuum may identify individual accounts that could serve as a 
voluntary or mandatory supplement to a financially sound and 
sustainable base defined benefit structure. In addition, master trust 
principles can be used to provide for collective investment of base 
defined benefit and individual account funds in ways that would serve 
to prevent political manipulation of investments.
    In order to help structure these choices, I would suggest five 
criteria for evaluating possible Social Security proposals.
    Sustainable solvency: a proposal should eliminate the gap between 
trust fund resources and expenditures over 75 years, and have the 
ability to sustain a stable system beyond that time period.
    Equity: a proposal should create no ``big winners'' or ``big 
losers.'' Those who are most reliant on Social Security for retirement 
and disability income should continue to receive adequate support; 
those who contribute the most would also benefit from participation in 
the system, and intergenerational equity would improve.
    Adequacy: Consistent with Social Security's social insurance 
feature, a proposal should provide for a certain and secure defined 
benefit promise that is geared to providing higher replacement rates 
for lower-income workers and reasonable minimum benefits to minimize 
poverty among the elderly.
    Feasibility: a proposal should be structured so that it could be 
implemented within a reasonable time period, it could be readily 
administered, and the administrative costs associated with it would be 
reasonable.
    Transparency: a proposal should be readily understandable to the 
general public and, as a result, generate broad support.
    Applying such criteria will require a detailed understanding of the 
possible outcomes and issues associated with the various elements of 
proposals. We are working to provide the data, information, and 
analysis needed to help policymakers evaluate the relative merits of 
various proposals and move toward a greement on a comprehensive Social 
Security reform proposal.

                              Conclusions

    Budget surpluses provide a valuable opportunity to capture 
significant long-term gains to both improve the nation's capacity to 
address the looming fiscal challenges arising from demographic change 
and aid in the transition to a more sustainable Social Security 
program. The President's proposal offers may prompt a discussion and 
decision on both how much of our current resources we want to save for 
the future and how we can best do so. The President's proposal is both 
wide ranging and complex, and it behooves us to clarify the 
consequences for both our national economy and the Social Security 
program.
    A substantial share of the surpluses would be used to reduce 
publicly held debt, providing demonstrable gains for our economic 
capacity to afford our future commitments. In this way, the proposal 
would help us, in effect, prefund these commitments by using today's 
wealth earned by current workers to enhance the resources for the next 
generations.
    Saving a good portion of today's surpluses can help future 
generations of workers better afford the billowing costs of these 
commitments, but this is only one side of the equation. We must also 
reform the programs themselves to make these commitments more 
affordable. Even if we save the entire surplus over the next 50 years 
Social Security and health programs will double as a share of the 
economy and consume nearly all federal revenues--essentially crowding 
out all other spending programs. Thus, it is vital that any proposal to 
expand economic growth be accompanied by real entitlement reform.
    The transfer of surplus resources to the trust fund, which the 
administration argues is necessary to lock in surpluses for the future, 
would nonetheless constitute a major shift in financing for the Social 
Security program, but it would not constitute real Social Security 
reform because it does not modify the program's underlying commitments 
for the future. Moreover, the proposed transfer may very well make it 
more difficult for the public to understand and support the savings 
goals articulated. Several other nations have shown how debt reduction 
itself can be made to be publicly compelling, but only you can decide 
whether such an approach will work here.
    I am very concerned that enhancing the financial condition of the 
trust fund alone without any comprehensive and substantive program 
reforms may in fact undermine the case for fundamental program changes. 
In addition, explicitly pledging federal general revenues to Social 
Security will limit the options for dealing with other national issues.
    The time has come for meaningful Social Security reform. Delay will 
only serve to make the necessary changes more painful down the road. We 
must be straight with the American people, achieving the goal of 
``saving Social Security'' will require real options to increase 
program revenues and/or decrease program expenses. There is no ``free 
lunch.'' After all, we have much larger and more complex challenges to 
tackle like the Medicare program.
    As you consider various proposals, you should consider the 
following questions.
     How much of the unified budget surplus should go to debt 
reduction versus other priorities?
     If we are to use some portion of the surplus to reduce 
publicly held debt, is the President's proposed approach the way to do 
this?
     Should Social Security be financed in part by general 
revenues?
     Should the SSTF invest in the stock market?
     How can we best assure the solvency, sustainability, 
equity, and integrity of the Social Security program for current and 
future generations of Americans?
     How can we best increase real savings for our future?
     How can we best assure the public's understanding of and 
support for any comprehensive Social Security reform proposal?
    We at GAO stand ready to help you address both Social Security 
reform and other critical national challenges. Working together, we can 
make a positive and lasting difference for our country and the American 
people.
      

                                


    Mr. Shaw. Thank you, Mr. Walker.
    Mr. Crippen.

  STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET 
                             OFFICE

    Mr. Crippen. Thank you, Mr. Chairman. I'm going to, 
obviously, in the interest of the hour, forgo making very many 
remarks. But I did want to say a couple of things.
    One, the Congressional Budget Office, I think it's 
important to remember, was spawned from the 1974 Congressional 
Budget and Impoundment Control Act. Most of you are too young 
to remember that. Unfortunately, I'm not.
    The impoundment control piece of it was because of 
President Nixon's impoundments of appropriations of 1972, and 
the Congress responded. The Congressional Budget Office (CBO) 
is designed to try and give the Congress an alternative 
analysis of, in many cases, executive action; in this case, as 
you've asked us today, the President's budget. So it's in that 
spirit that my colleague and I appear today.
    I hope--I'm new to this, and may be rough around the edges 
in some regards that we will be able to provide you with an 
analysis of what the budget does in a way that is both fair and 
evenhanded.
    I take some comfort, however, Mr. Chairman in my newness in 
that most of my colleagues like those sitting at the table 
today, and many outside of this room whom you have read or 
heard from, share the concerns that the Congressional Budget 
Office has of how the President's budget accounts for some of 
these things.
    I wanted to tell you, too, as I did last week when Chairman 
Archer was chairing, that because I am new I am certainly 
willing to say I don't know all of the answers. But there is 
probably somebody at CBO who does. And one of the reasons I 
have invited Barry here today to share this testimony is that 
Barry knows more about budgetary accounting than anyone I know. 
And he served at the Office of Management and Budget (OMB) for 
18 years and has been at this a very long time, so I asked him 
to join me in this testimony.
    But in the spirit of analyzing the President's budget, Mr. 
Chairman, let me say there are a number of things that are very 
critical that we agree on, particularly with Director Lew's 
testimony this afternoon. First, there are three things you can 
do with the surplus. You can save it, you can spend it, you can 
cut taxes. And that is essentially one of the things the 
Director said.
    We agree, as the Comptroller just testified and Mr. Lew 
said, that saving the surplus is a good idea--that, in effect, 
as an economist, I will tell you, as the Comptroller's charts 
suggest, saving the surplus should allow the economy to grow 
faster than it would otherwise, making everything a lot easier. 
I'll have a couple more things to say about that in a minute.
    It is critically important--and, again, we agree with the 
Director of OMB--that debt held by the public is what you want 
to keep your eye on. That tells us how much the saving of the 
U.S. Government is changing, and whether we're dissaving, 
whether we're saving, and how much. So we have to keep our eye 
on that number--debt held by the public.
    And one further thing, and certainly the Director--these 
are my words, and wouldn't be Jack's--but if you look at OMB's 
budget, lest you have the impression that the President chooses 
to save it all, his own numbers suggest that's not the case. If 
you look at 2014, for example, his baseline and ours would say 
that by then debt held by the public would be zero. But in the 
President's budget, debt held by the public is still $1.168 
trillion. So somewhere along the line that amount of money 
didn't get saved.
    We have under way--and will have a preliminary analysis for 
you next week--a look at the President's budget. There are a 
lot of details we don't have. We don't have 15-year numbers. As 
the Director told you, they don't have detail on USA accounts, 
so there are lots of very important details that we don't have.
    But from the gross numbers the President supplied to you in 
his budget, it's clear he doesn't save it all either--he does 
not save the totality of the Social Security Trust Fund 
surplus.
    If he did, by his own budget, the debt held by the public 
would be $961 billion in 2014. Rather, again, it's $1.168 
trillion. So, some money disappeared in here. We don't know 
where yet, and we're searching for it diligently. But the point 
simply is that you should not have the impression--no one 
should--that the President saves it all or proposes to save it 
all. And I'm not arguing that he ought to, but I do want to 
make it clear that he doesn't save it all.
    The thing that the Director and Barry and I probably 
disagree about the most is what you can do with trust fund 
accounting. It is not designed to do, in many ways, what the 
administration in the President's proposal would like it to do. 
As the Comptroller said, the important date here is 2013, not 
2032, 2049, 2055.
    So it doesn't matter when we think the trust fund on paper 
runs out of money, in a macroeconomic sense. And by infusing 
general fund revenues, or apparently doing that, and extending 
the life of the trust fund--again it has very little real 
effect, certainly not on the macroeconomy, and not much, as the 
Comptroller said, on the program itself.
    Let me say just a couple of quick things before I turn it 
over to Barry in a little more formal way. The President 
proposes to change the budgetary accounting rules and extend 
our time horizons in order to facilitate his policy objectives. 
In the modern history of the budget, that's not new. Previous 
Presidents and Congresses have proposed or enacted changes 
similar to this. What is new is the magnitude of the changes, 
the implications for policy, and the diminishing of trust funds 
as accounting mechanisms.
    It is not that the trust fund accounting is useless; rather 
it's that it is often misused. Traditional trust fund 
accounting makes clear that if obligations exceed earmarked 
revenues over a long period of time, the program is not 
sustainable under current policies.
    Massive infusions of general funds, as proposed in the 
President's budget, will defeat the original purpose of 
establishing the trust. However, the Committee may well decide 
to change accounting for this and other trust funds. It's been 
done before.
    There is a unique nexus between taxes and the benefits of 
these programs. Perhaps more important, the accounting up to 
now has allowed the impression that there are assets in those 
trust funds--assets that could be sold to meet the obligations 
of paying benefits--but that accounting ignores what is 
happening in the rest of the budget.
    On net we have debt, not assets. The trust fund accounting 
is imperfect in protecting the surpluses of the system. It is 
even less appropriate for assessing the impact of reforms. 
Judging the desirability of reform depends on several 
principles, several related questions.
    There's only one, Mr. Chairman, that I want to propose to 
spend any time on today, and it's very similar to what Mr. 
Walker just said. That is that we need to keep our eye on net 
national savings and its effect on economic growth. What is 
critical here is economic growth and the size of the economy.
    It's the size of the economy that ultimately determines the 
Nation's ability to support a growing elderly population with 
fewer workers. In the macro sense, which mechanism is used to 
transfer resources from the working population to retirees 
matters little. What matters most is how much the working 
population creates, how big the pie is relative to the piece 
devoted to retirees. What that means in the context of Social 
Security reform is what the Comptroller already said.
    If we increase national savings, we will increase economic 
growth and therefore increase the size of the economy. That's 
the most important thing. Few generalities apply to the answers 
here.
    We know that paying down the debt will help increase 
economic growth. That should be the standard by which we judge 
other alternatives. Having said that, the details of each 
alternative matter, as does the current state of the U.S. and 
international economies. There may be governmental programs or 
tax reductions that increase growth more than debt reduction. 
Elements of our economy such as interest rates are affected 
greatly by other countries.
    Mr. Chairman, we cannot reach these important issues if we 
bog down in a debate over accounting and scoring. Obscuring the 
issue should not win the day. In the end, there are only three 
things you can do with the surplus: save it, spend it, or cut 
taxes.
    The President's proposal is not necessary to save the 
surplus. Current law will actually do a better job of that. The 
President's proposal does not change the realities of Social 
Security. Starting in 2013, possibly sooner with the 
President's expansions, the Federal Government will need to 
infuse general funds. The President's proposal does change the 
locus of the adjustments required, not the size or the timing, 
moving the locus to the rest of the budget outside of Social 
Security.
    Now I'd like to turn it over to Barry, who will go through 
a few of the numbers in the budget and do a better job than I 
have of making those points probably.
    Mr. Shaw. Thank you, Mr. Crippen.
    Mr. Anderson.

STATEMENT OF BARRY B. ANDERSON, DEPUTY DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Anderson. I'd like to just spend a few moments going 
through the proposals for Social Security in the 2000 budget. 
Both the administration and CBO project that under current laws 
and policies, the Federal budget will record a total surplus of 
more than $100 billion in fiscal year 2000 and more than $200 
billion in 2004.
    Excluding the framework for Social Security, the proposals 
in the President's budget are intended to leave the surplus 
unaffected. That is, the cost of the proposals to increase 
spending or lower taxes is said to be fully offset by spending 
cuts or tax increases elsewhere in the budget.
    As Dan has just said, we will have more to say about this 
next week after we finish reestimating the President's budget. 
But right now, by using only the data available in the budget 
and including the Social Security framework, the surplus is 
smaller in all years than it would have been in the absence of 
the President's proposal.
    I'd like to demonstrate the impact of the President's 
budget proposals through the use of four tables included in the 
prepared statement.
    Table 1 shows that the President's proposals clearly lower 
the debt held by the public by $380 billion in fiscal year 2004 
and by more than $2.5 trillion in 2014 relative to where the 
debt is expected to be at the end of 1999, as Table 1 shows.
    But under the administration's own current-services 
baseline projections, debt held by the public would drop $3,670 
billion at the end of 1999 to $2,927 billion at the end of 2004 
and would be totally paid off by about 2014.
    That is, as Table 2 shows, debt held by the public under 
the administration's policies would be $3,290 billion in 2004, 
or $362 billion higher than if the budget policies for fiscal 
year 2000, including the proposed Social Security framework, 
were not implemented. So the President's budget lowers the debt 
relative to where it is now--but increases it relative to no 
new action at all. This statement--this sentence in my 
statement was raised earlier today, and I'd just like to 
elaborate a little bit on it.
    The President's proposal does not lock in the baseline, as 
was said before. Quite the contrary, it does not produce the 
reduction in the debt that the baseline would do. It increases 
the debt, as this table indicates.
    However, as Table 3 shows, relative to saving Social 
Security surpluses over the period, the President's proposal 
increases the debt held by the public. That is, some of the 
Social Security surpluses are used for non-Social Security 
spending. In this case, specifically, $43 billion in 2000 and 
increasing amounts thereafter. Again, if the goal is to save 
the Social Security surplus, the President's budget does not do 
it when using the measure of debt held by the public.
    Another element of the administration's framework consists 
of general resume payments from the Treasury to the Social 
Security and Medicare Hospital Insurance Trust Funds. From 2000 
through 2004, the administration would credit an additional 
$445 billion to Social Security and $124 billion to Hospital 
Insurance above and beyond the payroll taxes, interest, and 
other income that would be credited under current law.
    Although the administration describes the proposed general 
resume payments as a use of the budget surplus, those payments 
would not alter the total surplus as traditionally measured. In 
fact, they would not affect the surplus no matter how large or 
small the payments were.
    The Administration further proposes treating general 
revenue payments as a reduction in the total budget surplus, 
although not as a net outlay to the public. That approach can 
be viewed as attempting to protect the surplus by making it 
seem to disappear, but it is not consistent with the principles 
of Federal budgeting that were set forth by the President's 
Commission on Budget Concepts, and those principles have been 
followed for more than 30 years.
    A similar approach was proposed, however, in the context of 
the fiscal year 1991 budget. President Bush asked for a similar 
change for similar reasons: to ``save'' the ``surplus'' of a 
trust fund.
    Although the fiscal year 1991 budget did not artificially 
inflate the trust fund through transfers to the general fund, 
the Congress did not approve it anyway, and the change to 
budget accounting was criticized by Members of Congress from 
both parties.
    Some observers have worried that the proposed general 
revenue payments plus interest would substantially increase 
gross Federal debt and debt subject to statutory limit. As 
Table 4 points out, however, that concern is somewhat 
misplaced. The increase in the amount of debt held by the 
Social Security Trust Funds would be merely a bookkeeping 
transaction and would not represent an increase in the net 
liabilities of the Federal Government. The government's 
liability for Social Security and Medicare is the obligation to 
pay future benefits, and, as we've stated previously, those 
benefits, and therefore the government's liability, would be 
unaffected by the proposed payments of general revenues and 
unaffected by any ``balance'' in the trust fund.
    That concludes our statement. We will be happy to provide 
additional details and analysis of the administration's 
proposal as more details become available.
    [The prepared statement follows:]

Statement of Dan L. Crippen, Director, Congressional Budget Office, and 
Barry B. Anderson, Deputy Director, Congressional Budget Office

    Mr. Chairman and Members of the Committee, we are pleased to be 
here today to discuss the framework for Social Security in the 
President's budget.
    The President's budget is, and has always been, a policy document. 
Budget folklore holds that President Lyndon Johnson created the 
President's Commission on Budget Concepts in part to mask the costs of 
the Vietnam War. Creating the unified budget moved the Social Security 
trust funds and their surpluses on-budget. The most recent President's 
budget continues this long-standing, bipartisan tradition--observed by 
the executive branch and the Congress alike--of using trust fund 
accounting to facilitate policy and political objectives that are often 
unrelated to the trust funds or the programs with which they are 
associated. In the process, clarity and ease of understanding are often 
sacrificed.
    Our presentation today is based solely on the President's budget. 
The Congressional Budget Office (CBO) is now working on a reestimate of 
the President's budget, the results of which should be available in a 
few weeks. Our reestimate will change the numbers somewhat, but it will 
not change much of what we say today.
    The President's budget does not contain details on a number of 
relevant and potentially significant policy proposals that the 
President or members of his Cabinet have announced or endorsed. For 
example, the changes in Social Security benefits that the President 
mentioned in his State of the Union address are included in the text of 
the budget but are not incorporated into any of the numerical 
presentations.
    Those changes, if made without offsetting reductions in benefits, 
would result in expenditures from the Social Security trust funds that 
are greater than current law--that is, greater than the baseline CBO 
presented to you last month. The same is true of the proposal to add a 
pharmaceutical benefit to Medicare. A recently announced regulatory 
change in the Disability Insurance program will also add costs. The 
Administration has not indicated how the additional obligations would 
be financed.
    The President's budget also lacks details on the full 15-year 
estimates included in many of the tables. We expect that some of those 
details will be forthcoming. Today we will take you through the 
accounting as presented in the budget, discuss some of the history 
behind those conventions, and offer selected comparisons with current 
scoring practices and the baseline.
    After you have thought about it for a while, you may well conclude, 
as the President has, that you should change the accounting for this 
and other trust funds. The connection between taxes and benefits is 
unique to those programs. Perhaps more important, ``accounting'' up to 
now has allowed the impression that there are assets in those trust 
funds--assets that can be subsequently sold to help defray the cost of 
benefits. But that accounting ignores what has happened in the rest of 
budget. On net, we have debt, not assets.

                         Principles for Reform

    Trust fund accounting is an imperfect means of assessing the 
viability of a program. It is even less appropriate for assessing the 
impact of reforms. For a more complete view of the President's proposal 
and its effects on the real economy, it is necessary to step back and 
look at a broader range of issues. I will suggest several questions 
that might guide our analysis of the President's proposal as well as 
others. Other experts, such as the Comptroller General, have made 
similar suggestions.
    Judging the desirability of reform depends critically on several 
related questions:
     Can the reform help economic growth?
     Does the reform improve the long-term fiscal balance of 
the program?
     Does the reform enhance equity or fairness?
     Can the reform reasonably be expected to work?
    The first question is critical. It is the size of the economy that 
ultimately determines the nation's ability to support a growing elderly 
population with fewer workers. In the macro sense, which mechanism is 
used to transfer resources from the working population to retirees 
matters little. What matters most is how much the working population 
creates--how big the pie is relative to the piece devoted to retirees.
    What does that mean in the context of Social Security reform? A 
point of agreement among many economists involved in the Social 
Security debate is that increasing national saving raises productivity 
and increases economic growth. Given the broad agreement among 
economists that paying down the debt has a positive impact on saving 
and economic growth, perhaps that should be the standard against which 
all other proposals are measured. That is, do proposals to increase 
federal spending, reduce taxes, or purchase equities raise production 
and economic growth more than paying down the debt?
    Few generalities apply, and not all alternatives are equal. The 
impact of any alternative to paying down the debt would have to be 
carefully examined. The details matter, as does the current state of 
the U.S. and international economies. Some programs that appear on the 
spending side of the federal budget might help productivity, as might a 
number of tax measures. The analysis must be based on interest rates, 
for example, that are determined in world markets.
    Second, what is the reform's impact on the long-term outlook for 
the program? The Social Security and Medicare programs face long-term 
pressures from demographic changes and rising health care costs, 
although the buoyant outlook over the near term will help delay the 
onset of serious fiscal problems. The large and rising surpluses 
projected for the next 10 years will be replaced with mounting 
pressures as the baby-boom generation begins to draw benefits from 
Social Security and Medicare, the average life span increases, and the 
costs per beneficiary of federal health care programs continue to rise. 
Put another way, does the President's proposal for Social Security 
actually contain reforms--changes to the program's structure so that it 
is on sound fiscal footing?
    Third, what are the implications of reform for the perceived equity 
of the program? Admittedly, many concepts and measures could be used to 
assess fairness. One that is commonly understood in this context is the 
relationship between what people pay in payroll taxes and what they 
receive in benefits.
    Addressing the fourth question--whether reform can be expected to 
work--includes considering practicality, ease and cost of 
administration, protection against severe losses, and the extent of 
regulation. Is the program feasible? Does the government have the 
wherewithal to administer it? Will it be subject to increased fraud? 
Will it involve more invasion of privacy? Can it be insulated from 
political influence, as Chairman Greenspan noted?

                          Programmatic Issues

    The Administration's framework for Social Security also raises 
several important questions about the structure of the Social Security 
program and the federal budget.
    First, would breaking the link between payroll taxes and benefits 
eliminate an important mechanism of program discipline? In the past, 
the projected depletion of trust fund balances has often provided the 
impetus for taking painful steps to increase taxes or scale back 
scheduled benefits. The imminent exhaustion of the Social Security 
trust funds spurred action in 1983, and shortfalls in the Hospital 
Insurance Trust Fund served a similar function in 1997. Although such 
deadlines may be artificial from an economic point of view, they can 
have real consequences. The President essentially substitutes general 
fund solutions for programmatic solutions. I understand that the 
Comptroller General will have more to say about that.
    Second, would a massive infusion of nonpayroll taxes in Social 
Security significantly change the way the program is viewed? 
Heretofore, using payroll taxes has been considered integral to 
maintaining Social Security as a social insurance program. The program 
is financed by a nearly universal tax on earnings, and a person's 
benefits depend on the earnings on which taxes were paid. The use of 
general revenues could potentially undercut one or more elements of 
that carefully balanced system.
    Third, is accumulating balances in the Social Security trust funds 
a potentially effective way of encouraging more saving by the 
government? Put another way, will these changes in accounting prevent 
the funds from being used for other purposes? Whether this approach 
would work for long is open to question. The recent past in the United 
States and the experience in other countries is not promising in this 
regard.
    Last, is the direct purchase of equities by the federal government 
appropriate?

                         Trust Fund Accounting

    However valid the reasons may have been to establish the accounting 
conventions the federal government currently uses for trust funds, 
those conventions confuse almost everyone: the Congress, the media, 
government officials, and most of all, the public.
    I believe the main source of that confusion is the fact that the 
federal government's trust funds are not trust funds in the traditional 
sense; that is, they do not set aside current income for future use. 
Excess income over outgo for any given trust fund is invested, in a 
certain sense, in special Treasury securities, which are as safe and 
secure as all other Treasury debt. But the Treasury securities held by 
federal trust funds are nothing more than the government's IOUs to 
itself. Look at it this way: if the government had truly invested trust 
fund net income for future use, the Treasury would currently be holding 
hundreds of billions of dollars of real assets that could be liquidated 
in the future to pay for future obligations. But the Treasury does not 
hold any net assets; in fact, all that remains from the so-called 
investment of trust fund surpluses is net debt to the public of $3.7 
trillion.
    Although there is no money in the Treasury to pay for future 
obligations, the obligations to people eligible for Social Security 
benefits are real. And most important, those obligations are a direct 
result of federal law, not a consequence of whatever may or may not be 
credited to the trust funds. In particular, the size of the balances in 
the Social Security trust funds--be it $2 trillion, $10 trillion, or 
zero--does not affect the obligations that the federal government has 
to the program's beneficiaries. Nor does it affect the government's 
ability to pay those benefits.
    This fact is explicitly recognized in the President's budget for 
fiscal year 2000 in the same words used in previous budgets. To quote 
page 337 of the Analytical Perspectives volume: ``The existence of 
large trust fund balances, therefore, does not, by itself, have any 
impact on the government's ability to pay benefits.'' The fact that 
trust fund balances are unrelated to the government's obligation or 
ability to pay benefits needs to be recognized before any proposals to 
address the Social Security and Medicare trust funds can be analyzed. 
In other words, look first to the impact of proposals on increasing 
national saving and raising real growth and then to the impact on 
paying down the debt held by the public.
    Let me apply those principles to the Social Security trust funds. 
In their most recent report, the Social Security trustees estimate that 
the trust funds will not be exhausted until 2032. However, the report 
also includes the fact that starting in 2013, Social Security taxes 
will not be sufficient to meet obligations. If the Social Security 
trust funds were trust funds in the traditional sense, their assets 
could be sold to cover the shortfall. However, as stated above, the 
surpluses in the trust funds have been loaned to the federal 
government, and although special bonds have been issued to indemnify 
the funds, the bonds are nothing more than the federal government's 
IOUs to itself. Starting in 2013, the program's expenditures will 
exceed payroll taxes, and the government will eventually have to go 
further in debt, raise taxes, cut spending, or infuse more general 
revenues to be able to send out Social Security checks. We must look 
beyond the balances in the trust funds to be able to properly evaluate 
any proposal.

            Major Elements of the Administration's Proposals

    Both the Administration and the Congressional Budget Office project 
that under current laws and policies, the federal budget will record a 
total surplus of more than $100 billion in fiscal year 2000 and more 
than $200 billion in 2004. Excluding the framework for Social Security, 
the proposals in the President's budget are intended to leave the 
surplus unaffected. That is, the cost of proposals to increase spending 
or lower taxes is said to be fully offset by spending cuts or tax 
increases elsewhere in the budget. Although we will have more to say 
about that after we have finished reestimating the President's budget, 
by using only the data available in that budget and including the 
Social Security framework, the surplus is smaller in all years.

Proposed Budget Surpluses and Reduction of Debt Held by the Public

    A primary feature of the Administration's Social Security framework 
is that it attempts (under scoring by the Office of Management and 
Budget) to keep the total federal budget in surplus under the 
traditional accounting. Excluding its Social Security framework, the 
Administration projects cumulative total budget surpluses of $828 
billion over the 2000-2004 period. That is, the federal government will 
collect a total of $828 billion more from the public than it will spend 
in transactions with the public. That figure comprises Social Security 
surpluses of $719 billion, a Postal Service deficit of $5 billion, and 
on-budget surpluses of $114 billion (see Table 1).
    In its Social Security framework, the Administration proposes to 
use $258 billion, or 31 percent, of the projected total surpluses over 
the next five years for new spending on goods and services ($138 
billion), financial assets ($96 billion for the new Universal Savings 
Accounts), and additional debt-service costs ($24 billion). Taking 
those items into account, the remaining surplus would total $569 
billion. Table 1 shows that the President's proposals clearly lower the 
debt held by the public by $380 billion in fiscal year 2004 and by more 
than $2.5 trillion in 2014 relative to where the debt was expected to 
be at the end of 1999.
    But under the Administration's current-services baseline 
projections, debt held by the public would drop from $3,670 billion at 
the end of 1999 to $2,927 billion at the end of 2004 and would be 
totally paid off by about 2014. Under that computation, as Table 2 
shows, debt held by the public under the Administration's policies 
would be $3,290 billion in 2004, or $362 billion higher than it would 
be if the policies in the budget for fiscal year 2000, including the 
proposed Social Security framework, were not implemented. So the 
President's proposals lower the debt relative to where it is now but 
increase it relative to no new action at all. In addition, as Table 3 
shows, relative to saving the Social Security surpluses over the 
period, the President's proposals increase the debt held by the 
public--that is, some of the Social Security surpluses are used for 
non-Social Security spending--by $334 billion in 2004.

General Revenue Payments

    The second major element of the Administration's framework consists 
of general revenue payments from the Treasury to the Social Security 
and Medicare Hospital Insurance trust funds. Over the 2000-2004 period, 
the Administration would credit an additional $445 billion to Social 
Security and $124 billion to Hospital Insurance, above and beyond the 
payroll taxes, interest, and other income that would be credited under 
current law. Social Security currently receives hardly any general 
revenues; income taxes on Social Security benefits represent less than 
2 percent of the program's income. Medicare's Supplementary Medical 
Insurance Trust Fund, however, gets three-quarters of its income from 
general revenues. Even if general revenue payments were made in an 
amount sufficient to make the Social Security trust funds actuarially 
sound for everyone over 15 years old today--$8.4 trillion--those 
payments would have no effect on the surplus or deficit in any year.
    Although the Administration describes the proposed general revenue 
payments as a use of the budget surplus, those payments would not alter 
the total surplus as traditionally measured. In fact, they would not 
affect the surplus no matter how large or small they were. General 
revenue payments are purely intragovernmental--a transaction between 
one government account and another. The general revenue payments to 
Social Security would move the government's on-budget accounts from 
surplus into deficit over the 2000-2004 period, but they and the 
payments to Medicare would not affect federal transactions with the 
public and would therefore have no effect on the economy.
    The Administration's proposal further confuses the situation by 
treating the general revenue payments as a reduction in the total 
budget surplus, although not as a net outlay to the public. That 
approach can be viewed as an attempt to protect the surplus by making 
it seem to disappear, but it is not consistent with the principles of 
federal budgeting that were set forth by the President's Commission on 
Budget Concepts and that have been followed for the past 30 years.
    That approach has, however, been proposed before. In the context of 
the fiscal year 1991 budget, President Bush asked for a similar change 
for a similar reason--to ``save'' the ``surplus'' of a trust fund. The 
Congress did not approve the request; the change to budget accounting 
was criticized by Members of both parties at that time.
    Some observers have worried that the proposed general revenue 
payments, plus interest, would substantially increase gross federal 
debt and debt subject to statutory limit (see Table 4). That concern, 
however, is misplaced. The increase in the amount of debt held by the 
Social Security trust funds would be merely a bookkeeping transaction 
and would not represent an increase in the net liabilities of the 
federal government. The government's liability for Social Security and 
Medicare is the obligation to pay future benefits, and, as stated 
above, those benefits--and therefore the government's liability--would 
be unaffected by the proposed payments of general revenues and 
unaffected by any ``balance'' in the trust fund.

Purchase of Equities

    As a third element of its framework, the Administration proposes 
that one-fifth of the general revenues credited to Social Security be 
used to purchase corporate equities or other private financial 
instruments. Like the proposed general revenue contributions, this 
element of the Administration's framework is designed to increase the 
balances in the Social Security trust funds, but it, too, would have 
little economic effect. For each dollar to be invested in equities, the 
federal government would have to borrow an additional dollar from the 
public. After the transaction, the private sector would hold fewer 
equities and more debt, but total national wealth and national saving 
would not be appreciably affected. Moreover, the technical problems 
cited by Chairman Greenspan might turn the President's economically 
neutral proposal into one that could harm the economy.
    The CBO staff and I will be happy to provide additional analysis of 
the Administration's proposal, Mr. Chairman, as more details become 
available.

                Table 1.--Debt Held by the Public Under The President's Budget and Current Levels
                                      [End of year, in billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                  1999         2000         2004         2014
----------------------------------------------------------------------------------------------------------------
President's Budget..........................................       53,670        3,604        3,290        1,168
Current Levels..............................................        3,670        3,670        3,670        3,670
                                                             ---------------------------------------------------
    Change..................................................            0          -66         -380       -2,502
----------------------------------------------------------------------------------------------------------------


               Table 2.--Debt Held by the Public Under the President's Budget and Current Services
                                      [End of year, in billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                  1999         2000         2004         2014
----------------------------------------------------------------------------------------------------------------
President's Budget..........................................        3,670        3,604        3,290        1,168
Current Services............................................        3,670        3,573       32,927            0
                                                             ---------------------------------------------------
    Change..................................................            0           32          362        1,168
----------------------------------------------------------------------------------------------------------------


   Table 3.--Debt Held by the Public Under the President's Budget and Saving the Full Social Security Surplus
                                      [End of year, in billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                  1999         2000         2004         2014
----------------------------------------------------------------------------------------------------------------
President's Budget..........................................        3,670        3,604        3,290        1,168
Save Full Social Security Surplus...........................        3,670        3,561        2,956          961
                                                             ---------------------------------------------------
    Change..................................................            0           43          334          207
----------------------------------------------------------------------------------------------------------------


                      Table 4.--Total Federal Debt
                  [End of year, in billions of dollars]
------------------------------------------------------------------------
                                       1999         2000         2004
------------------------------------------------------------------------
Relative to Current Levels               5,615        5,831        6,776
 President's budget..............
Current services.................        5,615        5,615       35,615
                                  --------------------------------------
    Change.......................            0          216        1,161
Relative to Current Services             5,615        5,831        6,776
 President's budget..............
Current services.................        5,615        5,711        5,874
                                  --------------------------------------
    Change.......................            0          120         902
------------------------------------------------------------------------
NOTE: The statutory debt limit is $5,950 billion.

    [Attachments are being retained in the Committee files.]
      

                                


    Mr. Shaw. Thank you, Mr. Anderson.
    Mr. Frenzel.

   STATEMENT OF HON. BILL FRENZEL, CO-CHAIR, COMMITTEE FOR A 
  RESPONSIBLE FEDERAL BUDGET; AND FORMER MEMBER OF CONGRESS; 
ACCOMPANIED BY CAROL COX WAIT, FOUNDER AND PRESIDENT, COMMITTEE 
                    FOR A RESPONSIBLE BUDGET

    Mr. Frenzel. Thank you, Mr. Chairman.
    I am here representing the Committee for a Responsible 
Federal Budget, an oxymoronic group. The cochairman is former 
Congressman Tim Penny. I am accompanied by Carol Cox Wait, 
founder and president of the organization.
    She will not make a presentation unless I make some 
conspicuous error here.
    First of all, I think the testimony that you've heard has 
been very revealing. I challenge nothing that has been said by 
the three previous speakers. I feel the same way. The President 
has done us a favor of sorts in emphasizing Social Security and 
spotlighting the need for reform.
    The President suggests that he wants to pay down debt held 
by the public and create some kind of a framework that will 
spawn reform, and he pleads with you to cooperate in helping 
with that reform. As you saw today, his administration does not 
have a lot of great ideas about how to do it. Nothing has been 
put forward.
    There are problems with this budget, and specifically with 
the Social Security part of the budget. In the first place, it 
diverts tax receipts from Social Security taxes to non-Social 
Security programs. You've heard that from each of the other 
witnesses. I'm not going to elaborate further.
    You've also heard that it reduces the debt less than 
current law, and that's the point I want to make and to stress. 
In the words of the Director of OMB, it extends the solvency of 
the trust fund, but that doesn't mean anything.
    It doesn't increase resources available to pay when those 
claims are demanded by the annuitant--or the potential 
annuitant beneficiaries, nor does it reduce any of the benefits 
to which they may be eligible. It creates the illusion that 
over $800 billion of surpluses in the next 5 years covers $1.5 
billion in new commitments in this budget.
    And that's the reason for all this tortured shell game that 
you're being subjected to, the double speak of where the money 
is going, who's moving what in which direction.
    The net of it is that when the benefits exceed the tax 
receipts in the year 2013 or thereabouts, you're going to be 
left with the same choices that you have today: you're going to 
have to raise taxes, you're going to have to cut spending, or 
you're going to have to borrow or print the money.
    And the sooner you do it, the better. This budget doesn't 
tell you anything about how you might make those changes. What 
it does do is make reform more difficult because it creates the 
illusion that we can keep the program solvent and avoid hard 
choices.
    And everybody knows we're going to have to make those hard 
choices.
    Our Committee believes that reducing the public debt is an 
efficient way to increase net national savings and the right 
way to deal with some of the problems that are before you. We 
believe that the Ways and Means Committee should be very 
careful about temptations for new spending and even new tax 
cuts. And I have seldom met a tax cut I didn't like.
    We recommend that you use all of the surplus to pay down 
the public debt. Every nickel's worth. Anything you can find. 
If you cannot resist temptation entirely, use at least the 
total Social Security surplus to pay down the public debt.
    We don't recommend the President's plan. It doesn't go 
anywhere near far enough. Every year that you wait on changing 
the Social Security program is going to make it more difficult 
for you in the future. You've seen some of the numbers on that, 
and I don't want to belabor them.
    The Ways and Means Committee also has something to do with 
the management of the Treasury, which is going to be the equity 
investor if the President's plan, as proposed, goes through. 
Our Committee believes Allan Greenspan had the issue of 
government owning equities dead right: ``It isn't the 
bureaucracy we fear, we fear the Congress. Just as the State of 
California and the State of Texas meddle in their ownership of 
private interests, so would you.''
    We believe that the USA accounts, which will be another 
matter before this Committee, are not a wise idea. We held our 
conferences on making hard choices around the country, and we 
found that three-quarters of the people that attended those 
conferences want some kind of individual accounts.
    But they didn't ask for a government subsidy, and they 
didn't ask for a new Federal entitlement, another little EITC 
is what it is now being called. That is not a worthwhile 
program for your Committee to get into.
    We believe that eventually you're going to have some kind 
of individual accounts. And there are lots of good ideas 
around. But when you do them, deposits to individual accounts 
ought to be proportional to the contributions from the people 
in the system. Individual accounts ought not to become another 
statutory entitlement in disguise.
    They ought to provide for personal choice by the person in 
whose name they are being invested. And you need to find a way 
to pay for them, and that is going to be the toughest job of 
all.
    There are also other increased benefits in the President's 
budget for widows. And I suppose if I want a bad name, I need 
to come out against those, so we will. You don't have any way 
to pay for them. You haven't figured out how to pay for the 
benefits already on the books over the next couple of decades 
and certainly not over the next half century.
    How can you possibly go ahead and invent new benefits? I 
say the same thing for the increased Medicare benefits. Until 
you can pay for them, forget them. We are suggesting that you 
pay down as much of the debt as possible. Devote at least the 
Social Security surplus to debt reduction, preferably the whole 
surplus.
    Don't use Social Security receipts for non-Social Security 
benefits. And don't use general revenues for Social Security 
benefits. Once you sever that link between the payroll tax and 
Social Security benefits, it's going to be ``Nelly bar the 
door'' on those benefits or at least the demands made against 
them.
    Isolate Social Security from the operating budget. We 
realize that Congress has been trying to do that for a lot of 
years unsuccessfully. That's not very easy.
    And we further believe that if you subscribe to this 
budget, you are growing government. If you grow government, 
particularly as the mandatory programs for the elderly and 
Medicare grow, you may not have to raise taxes, but your 
successors will surely have to do so.
    Good luck. And may I inquire how you drew the short straw 
to get to be Committee Chair?
    [Laughter.]
    [The prepared statement follows. Attachments are being 
retained in the Committee files.]

Statement of Hon. Bill Frenzel Co-Chair, Committee for a Responsible 
Federal Budget, and former Member of Congress

    Mr. Chairman, Mr. Rangel, Members of the Committee, I am 
delighted to appear before you on behalf of the Committee for a 
Responsible Federal Budget. I am Republican Co-Chairman of the 
Committee. Tim-Penny, my Democratic counterpart, cannot be 
here; but he and the other members of our Board join me in 
thanking your for the opportunity to share our views with you, 
our former colleagues and friends. My testimony addresses the 
President's proposed framework for Social Security reform.
    The President's framework for Social Security reform 
proposes to:
    1. Transfer 57 percent of cumulative projected 15-year 
budget surpluses \1\ to the Social Security Trust Fund.
---------------------------------------------------------------------------
    \1\ 62% when surpluses used for additional interest costs are not 
counted, but 57% of $4.9 billion total projected 15-year budget 
surpluses.
---------------------------------------------------------------------------
    2. Invest 20 percent of the amounts transferred in private 
equities (in the hope that increased earnings will extend the 
``solvency'' of the Social Security Trust Fund.)
    3. Add new tax credits to subsidize individual savings 
accounts (Universal Savings Accounts or USAs) intended to 
supplement Social Security benefits in retirement.
    4. Acknowledge the need for program changes to be developed 
through bipartisan cooperation.
    Over the next few decades, our nation faces dramatic 
demographic and economic change. The President is to be 
commended for emphasizing the need for Social Security (and to 
a lesser extent Medicare) reform. Today's projected surpluses, 
a growing economy and favorable demographics create the best 
possible conditions to focus on making those popular programs 
more affordable for future generations.
    One important element of the President's proposed framework 
for Social Security reform--buying down debt held by the 
public--could help address issues the country will face in the 
future. But the President's proposals would neither reform 
Social Security nor reduce projected burdens that this program 
will impose on future taxpayers.

                   What the President's Proposal Does

    First and foremost the proposals contained in this year's 
President's budget continue to focus attention on the need for 
long-term reforms. The President has helped to heighten public 
awareness and intensified the pressure on all politicians to 
work toward building a national consensus around approaches to 
reform.
    Reducing public debt, is by far the most important element 
of the President's proposed Social Security reforms. Reducing 
debt would provide significant benefits to the economy and the 
budget.
    Under current laws and policies, publicly-held debt would 
go down more rapidly than under the President's proposals. The 
Administration, however, argues that absent their proposals, 
Congress would divert budget surpluses to offset the cost of 
tax cuts instead of reducing the debt.

Is it possible to hide Social Security Surpluses?

    The President's budget engages in a complicated and 
confusing set of transactions that we and other budget experts 
criticize as gimmickry. The Administration defends the 
gimmickry as a necessary means to a worthy end.
    We find this budget gimmick objectionable from several 
perspectives. (See Figure 1, next page. There is a more 
detailed description of the gimmick in the attachment a the end 
of this testimony.)
     It creates the illusion that you have more 
resources available for new priority spending and tax cuts than 
in fact exist.
     It artificially inflates balances in the Social 
Security and Medicare Trust Funds. This could produce three 
very unfortunate results:
        1. It could reduce pressure for Social Security and Medicare 
        reform.
        2. It well may encourage proponents of new and expanded 
        benefits, especially in Medicare, to use the money transferred 
        to Trust funds for those purposes rather than retire debt.
        3. Proposing to spend some Social Security resources for non-
        Social Security purposes, the Administration may actually 
        encourage the very behavior they designed this gimmick to 
        preclude, i.e., Republicans in Congress may be tempted to 
        imitate the Administration approach to ``pay for'' large 
        popular tax cuts.
    The Committee for a Responsible Federal Budget understands 
that nothing can guarantee that the President and Congress--
much less future political leaders--will use large budget 
surpluses to buy down debt held by the public. We are 
convinced, however, that goal best is served if you separate 
Social Security from the rest of the budget.
    History proves how difficult it is to fence off, or 
``save,'' Social Security surpluses. Congresses and Presidents 
have tried twelve ways from Sunday to insulate Social Security 
from other budget pressures. Seven laws enacted since 1983 
attempt to protect the program in many ways.\2\
---------------------------------------------------------------------------
    \2\ The Social Security Act Amendments of 1983, The Emergency 
Deficit Reduction and Balanced budget Act of 1985, The Balanced Budget 
and Emergency Deficit Control Act of 1985, The Balanced Budget and 
Emergency Deficit control Act of 1987, The Budget Enforcement Act of 
1990, the Omnibus Budget Reconciliation Act of 1993, and the Balanced 
Budget Act of 1997.
[GRAPHIC] [TIFF OMITTED] T5091.009

     Move Social Security Trust Fund receipts and 
outlays off-budget;
     Take OASDI trust funds out of budget enforcement 
calculations;
     Create points of order against changes to trust 
fund programs as part of reconciliation legislation;
     Prohibit passage of legislation that would reduce 
Trust Fund Balances; and
     Require super-majority votes to overturn such 
points of order in the Senate, and otherwise seek to protect 
the program
    All of those efforts failed spectacularly! The President's 
FY 2000 budget continues to show consolidated receipts, outlays 
and deficits, which receive far more attention than the on-
budget totals required by law. Congressional Budget Resolutions 
comply with the letter of the law; but almost all discussion is 
around the consolidated budget totals.
    The proof of the pudding is in the eating; and we would not 
be discussing the disposition of budget surpluses today if 
efforts to take Social Security off budget had succeeded. The 
fact is, there are no on-budget surpluses this year; OMB 
projects there will be no on-budget surpluses for two more 
years; CBO forecasts a $6 billion on-budget surplus in 2001, 
growing in the ``out years''.
    The Administration believes their proposed Social Security 
gimmick will succeed where statutory provisions have failed. 
The trouble is that Congress is smart enough to figure out the 
gimmick does more than reduce publicly-held debt. It also 
allows the President to use Social Security surpluses to help 
fund Administration priorities well beyond the five-year period 
covered by the budget. (The budget proposes to use $145 billion 
in Social Security surpluses to fund non-Social Security 
programs and initiatives between FY 2000 and FY 2004.) If the 
President can do that, why shouldn't Congressional Republicans 
use the same gimmick to pay for their priorities?
    The President's proposal also would sever the link between 
work (payroll tax contributions) and benefits. Although 
individual Social Security benefits are not tied directly to 
payroll tax contributions, the benefits reflect work history. 
The proposed transfers of unified budget surpluses would 
subsidize Social Security with non-payroll tax revenues. This 
may or may not be entirely appropriate, but it would alter 
fundamentally a basic program feature--the notion that benefits 
are ``earned'' through payroll tax contributions.

               What the President's Proposal Does Not Do

    The President's proposed framework does not change the 
projected cost of future Social Security benefits. The budget 
seeks to focus on financing mechanisms rather than program 
design or affordability. The principal focus is to extend the 
actuarial solvency of the Social Security Trust Fund.
    The proposal makes it look like Social Security is more 
affordable, but the budget itself recognizes that trust fund 
balances are available to finance future benefit payments--
``only in a bookkeeping sense''.\3\ Henry Aaron points out that 
the Administration could have filled the trust fund with 
sufficient U.S. Treasury paper to ensure solvency indefinitely. 
But trust fund balances will not finance benefits. Cash is 
needed to meet benefit commitments. You can free up cash by 
cutting Social Security or other programs. You can tax or 
borrow. There are no other options. Trust fund balances are 
irrelevant in any real economic sense.
---------------------------------------------------------------------------
    \3\ Budget of the United States Government Fiscal Year 2000, 
Analytical Perspectives, p.337.
---------------------------------------------------------------------------
    Extending Social Security and Medicare trust fund solvency 
also has a perverse effect. It reduces pressure to enact 
program reforms-exactly the opposite of the President's stated 
objectives. Additional resources could be used to secure 
larger, fundamental program changes. But the President's 
proposal is sure to ruin the country's appetite for substantive 
reform. The Chairman of the Senate Budget Committee has 
suggested in recent hearings that the Administration's proposed 
transfers to Medicare are unlikely to reduce costs. Instead, 
Senator Domenici argues those amounts almost certainly would be 
used to pay for new or expanded benefits (e.g., pharmaceutical 
coverage and buy-in for people under the age of 65). This would 
make Medicare reform more difficult by increasing the cost of 
benefits in future years.
    CBO estimates the cost of current law benefits will 
increase by amounts equal to 2 percent of GDP between now and 
2030. In today's terms, that is about $175 billion per year. 
CBO also predicts Medicare and Medicaid benefits, under current 
laws and policies, will triple as a percent of GDP, over the 
same period. The President's proposal would not change these 
projections at all. Future taxpayers will be faced with those 
bills unless Congress and the Administration act to cut 
promised benefits.

No free lunch

    In 2013, Social Security outlays are projected to exceed 
trust fund receipts. The President's Budget does not address 
that problem. Government could use non-payroll tax revenues or 
borrow to close the gap. But, as Federal Reserve Chairman Alan 
Greenspan warned Congress, Social Security reform requires 
benefit reduction and/or tax increases. A return to deficit 
finance could delay the day of reckoning, but nothing can alter 
that stark reality.

The next five years are crucial

    Few here today will be in Congress in 2030. But you don't 
need to look out forty years to see the handwriting on the 
wall--and a progressive narrowing of options available to you 
with the passage of time. CBO projects that the ``big three'' 
\4\ entitlement programs will grow by 3 percent of GDP over the 
next decade--to consume 55 percent of total federal outlays in 
2010. Given current pressures to increase defense, education 
and other discretionary programs, is it realistic to suggest 
Congresses and Presidents will cut other spending to 
sufficiently offset the growth in big entitlement elderly 
entitlement programs?
---------------------------------------------------------------------------
    \4\ Social Security, Medicare and Medicaid
---------------------------------------------------------------------------
    Given twenty-five years' history of deficit reduction 
efforts, surely it is clear that nobody can accomplish massive 
changes in Federal fiscal policy from one year to the next. If 
we want to reduce the growth in popular programs ten years from 
now, and/or reduce other spending to accommodate that growth, 
it is imperative for Congress and the Administration to act 
soon. Small changes today can produce savings on that order of 
magnitude over the next decade; but the odds against changing 
fiscal policy to cut total Federal outlays (or shift 
priorities) by amounts equal to 3 percent of GDP, without 
considerable lead time are somewhere between slim and none.

           Projected budget Surpluses are merely projections

    OMB and CBO project large and growing surpluses well into 
the next century. As recently as May 1996, CBO projected 
deficits rising nearly to $400 billion within 10 years. Today, 
the country faces similarly large surpluses. For politicians, 
projected budget surpluses may be more fun, but no less 
difficult to address than escalating budget deficits.

                                                  Table 1.--Baseline Budget Deficits (-) /Surpluses (+)
                                                                      [$ Billions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   1999    2000    2001    2002    2003    2004    2005    2006    2007    2008    2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
CBO
    Off-budget..................................................     127     138     145     153     161     171     183     193     204     212     217
    On-budget...................................................     -19      -7       6      55      48      63      72     113     130     143     164
        Unified Total...........................................     107     131     151     209     209     234     256     306     333     355     381
OMB
    Off-budget..................................................     121     129     134     142     151     158     173     180     190     198     205
    On-budget...................................................     -41     -12       0      45      31      50      58     103     130     156     188
        Unified Total...........................................      80     117     134     187     182     208     231     283     320     354     393
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CBO Economic and Budget Outlook: Fiscal Years 2000-2009. OMB, President's FY 2000 Budget.

    The Committee for a Responsible Federal Budget, like most 
economists and other experts \5\, cautions against irrational 
exuberance--to borrow a phase from Alan Greenspan.
---------------------------------------------------------------------------
    \5\ See ``Uncertainty in Budget Projections,'' The Economic and 
Budget Outlook: Fiscal Years 2000-2009, Congressional Budget Office, 
Washington DC, January 1999, pages 81-90.
---------------------------------------------------------------------------
    We believe that the outlook generally is rosy for the U.S. 
economy and the budget. But minor changes in the economic 
environment can have major budget impacts. The only thing we 
know for certain about economic forecasts is that they will be 
wrong. The further out in time--the greater the potential for 
error.
    It would be very arrogant for this Congress and this 
President to assume you can anticipate every need the country 
will face over the next fifteen years. Even assuming somebody 
could tell you exactly what resources government will have, 
over such a long period of time, our Committee thinks you 
should leave something on the table for future politicians 
whose priorities will be different as conditions surely will 
change.
    In short, we think the goal of today's policies should be 
to free up resources for the future--not to increase the 
mortgage on future economic output, and the burden on future 
taxpayers, represented by existing Federal programs and 
policies. Elderly entitlements, and the baby boom generation's 
pending retirement, cause most of the concern about future 
fiscal policy. We therefore recommend very strongly that this 
Congress and this President focus on ways to control growth in 
those programs--or pay for current law benefits. Use the 
respite current surpluses can provide to enhance our future. 
Control the urge for instant gratification in the form of 
spending increases or tax cuts--whether to meet Presidential 
priorities or your own.
    If Congress approved the President's proposed transfers to 
Medicare, and those amounts were used as Senator Domenici has 
suggested, economic benefits the Administration projects their 
proposal would produce would be diminished substantially.

                               Conclusion

    The Committee for a Responsible Federal Budget supports 
using budget surpluses to buy down debt. That would make Social 
Security and Medicare reform easier. That is the surest 
approach to increase saving, productivity and economic growth, 
and better position the country to meet the challenges we will 
face when the baby boom generation retires.
    Realistically, the Committee realizes that Congress and the 
President almost certainly will use some surpluses to assuage 
current constituent demands. That being the case, we commend to 
the Committee, Congress and the Administration an approach we 
call ``surplus lite''.

Surplus Lite

    We recommend, in the strongest possible terms, that 
Congress and the President agree to use 100% of Social Security 
Trust Fund surpluses to buy down debt held by the public. That 
is the way to save Social Security Trust Fund surpluses; and 
that strategy can help to make real Social Security reform more 
manageable.
    Surplus lite has both economic and political advantages.
     It would produce greater real economic benefits 
than any alternative except using 100% of consolidated budget 
surpluses to retire debt.
     Politically, it would draw a line in the sand that 
just might be sustainable. Fencing off Social Security 
surpluses proved to be impossible in an era of record high 
deficits. Given projected surpluses, however, it just might be 
possible to ``save'' Social Security taxes for Social Security.
    We do not mean to argue there is any magic in saving the 
exact amounts of Social Security Trust Fund surpluses. But, 
once you use a $1 dollar of Social Security taxes to ``pay 
for'' non-Social Security programs or tax changes, it is very 
difficult to imagine another place to draw the line--to guard 
against 100% of projected surpluses being used to pay for 
popular priorities.
    We are submitting for the record, copies of an Interim 
Report and the Dallas results, from a joint the project 
Building a Better Future: An Exercise in Hard Choices, which 
included more than 1500 people in cities around the country. 
Large majorities favor some combination of individual accounts 
and tax-financed benefits in Social Security reform. Our group 
can support individual accounts, if there is sufficient 
financing for both the new accounts and traditional Social 
Security. But using surpluses to set up individual accounts, 
without restraining the growth in traditional benefits or 
raising taxes, would make the crunch more excruciating when 
surpluses disappear. Please, having finally balanced the 
unified budget, let us not make matters worse than they are 
before turning to real Social Security and Medicare reform.
    Thank you. I would be happy to answer any questions you may 
have.
      

                                


    Mr. Shaw. My job is to ask the questions, not to answer 
them at this particular point, but I appreciate the sympathy 
that you are reaching out to me with.
    Mrs. Johnson.
    Mrs. Johnson of Connecticut. I think your unanimous focus 
on the fact that the amount of publicly held debt would 
diminish more under current law than under the President's 
budget is very helpful. It is also true and no secret, although 
not admitted in documents, that the current budget is not 
workable in defense and in certain other areas.
    Our 5-year predictions aren't going to hold. So it would be 
very helpful if we could get some help. Or at least it would be 
helpful to me to get some help.
    And knowing that spending does have to go up a little bit 
in the budget, you know, what kind of latitude do we 
realistically have to keep that public debt growth down to a 
level that will enable us to address the problems that we face?
    Then second, I'd like to ask you the question that I asked 
the preceding panel and really got no answer to. You know, what 
is--what are three or four of those ideas--five or six, seven 
or eight, nine or ten--beyond the sort of obvious of cut 
benefits, increase taxes or increase retirement age that we 
should be looking at?
    Because the other--the options that we relied on in1982 do 
have some very significant disadvantages for us now that they 
didn't have as significantly in 1982.
    So I'd just be interest in your ideas, but also how you can 
help us better focus on the fact that this year--if we stayed 
at this year's budget, if we adhered to our 5-year budget plan 
because of what we did under emergency spending last year, we'd 
have to cut spending to a degree that, frankly, I don't believe 
we can.
    Plus, we have problems in the defense budget and some other 
areas that I think are going to require some new spending. So 
given some sort of basics, I can see what you're saying about 
the President's budget. And certainly he increases spending 
dramatically, and taxes and fees and everything supposedly to 
support it.
    But we do have a budget problem, an immediate, short-term 
budget problem; but we also have a long-term options problem 
and I'd like to hear your comments on both of those issues.
    Mr. Walker. I'll start. On behalf of the General Accounting 
Office, two things. First, we do provide virtually every year 
to the Congress a compendium of potential spending reduction 
items that might help to be able to stay within the caps or to 
be able to minimize the amount that you have to modify the 
caps.
    We have that project under way and we will be issuing a 
report on that in the near future.
    Second, with regard to options for fundamental Social 
Security reform, we have done a lot of work in this area and 
have a number of projects underway to try to be able to help 
the Congress there. I would also mention that there are a 
number of reform proposals that have already been put forward 
by various external groups.
    For example, the Center for Strategic and International 
Studies' National Retirement Policy Commission, which included 
members of government, including the Senate and the House, and 
the private sector; and in the interest of full and fair 
disclosure, also including myself.
    There were 24 individuals on that including Senator Breaux, 
Senator Gregg, Congressman Stenholm, Congressman Kolbe, a 
number of former executive branch officials including myself, 
and chief executive officers from the private sector. They came 
up with a proposal that is not perfect by any means, but it 
passed as a package 24-0, and it gets the job done.
    So I would commend that to you as one example. The 
Committee for Economic Development, the various proposals that 
came out of the Advisory Council on Social Security--we would 
be happy to help the Congress in summarizing some or all of 
these if necessary in order to let you know what the different 
options are and what the impact is on solvency and 
sustainability.
    Any way that we can be helpful, we'd like to know.
    Mrs. Johnson of Connecticut. Thank you.
    Thank you, Mr. Chairman.
    Mr. Shaw. Thank you.
    Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman.
    I listened with interest as you gentlemen made your 
comments, and you didn't have to be corrected by Ms. Wait. 
That's commendable, as I know that she probably has some of the 
same feelings and concerns that you all do.
    You mentioned caps, and you've mentioned some ideas of 
reduction in spending within the caps. I'd like to refer to the 
cap. That is, the total spending. And then the caps under the 
cap where you can move funds around. And hopefully Mrs. Johnson 
and some of us can work together to find some of those areas 
that we can transfer funds around to cover some of the needy 
programs that she's referring to.
    I know, Mr. Walker, you're familiar with the word 
``s'posin.'' It's a good southern word for supposing. Supposing 
we had the discipline to hold the line on the budget and by 
doing so, interest rates remained low for everyone. And I think 
that's been one of the strongest points of today's economy 
because people have more funds to spend on consumer goods due 
to lower interest rates and less financial cost.
    So s'posin we were able to hold our discipline and keep the 
budget cap in place. And that zero of public held debt--or that 
public held debt reached zero earlier than 2014 and we were 
still building the surpluses in the trust funds or the area 
that I call ``encumbered funds'' because they're owed at some 
point in time in the future.
    How would you invest those funds then if the government had 
no need to borrow?
    Mr. Walker. Under the President's projections, he gets to 
the point where the U.S. is lending money to others, 
presumably, and generating interest income, which I have a hard 
time seeing how that would really happen.
    I think one of the real questions is what you could do then 
is to wall off that money. We could learn from the experiences 
of some of the other countries that have faced similar 
challenges. In my statement I include several examples of what 
other countries have done in order to set up separate and 
distinct trust funds with hard assets that are dedicated for 
the purpose of meeting certain longer range commitments due to 
demographic challenges or other challenges, if you will.
    So there are several things you could do that are referred 
to in my statement, but I'd be happy to provide additional 
information if you'd like.
    Mr. Collins. Well, I just find it interesting that, at some 
point in time, if we maintain our control on our spending 
habits, that we could actually totally eliminate the public-
held debt and then all we would have would be government-held 
debt.
    What would you do with those funds then? I've never heard 
the question asked, so I don't know the answer. And I'm just 
curious if you had a suggestion.
    Mr. Frenzel, you're reaching for your microphone.
    Mr. Frenzel. In the first place, if you paid the debt off 
to zero in the year 2013, you still have nothing in the Social 
Security Trust Fund but some paper. But you've got to pay 
claims. And claims will exceed dedicated taxes in that year.
    Mr. Collins. Yes, sir.
    Mr. Frenzel. And so, you know, you probably don't have 
much.
    Mr. Collins. But you've missed a key word.
    Mr. Frenzel. On the other hand, if you ever get to a point 
where you own assets that you need to manage, then you haven't 
treated your taxpayers right and you should have given them 
back some money before that happens.
    Mr. Collins. You've just hit the nail on the head, Mr. 
Frenzel.
    Thank you, very much.
    Mr. Shaw. Mr. Ramstad.
    Mr. Ramstad. Thank you, Mr. Chairman. I'll be brief. But I 
want to thank the four witnesses on this panel. Certainly--and 
especially in contrast to the last panel, you represented a 
breath of fresh air. Your candor and your counsel are both 
refreshing and appreciated.
    I especially appreciate the testimony of the cochairman of 
the Committee for a Responsible Federal Budget, who happens to 
be my esteemed predecessor and mentor, and who everybody on 
this panel knows, respects and loves for his longtime service 
on this Committee, as well as the full House.
    I appreciate seriously the work that your group does and 
your leadership, Ms. Wait, as well.
    Let me just very quickly ask either of you, Ms. Wait or 
Bill. Certainly I think, if anything, you're kind in your 
critique about the proposal to transfer general revenues into 
the trust fund and delink payroll contributions from benefits.
    Isn't it absolutely critical and shouldn't it be 
nonnegotiable that we maintain the link between work and 
benefits?
    Mr. Frenzel. It is, in my opinion, and I let Carol speak 
for herself. We have had that link during the lifetime of 
Social Security.
    There may come a time when you'll choose to have other 
taxes pay for Social Security benefits. But, in my judgement, 
you should be very careful when you do that. For instance, the 
President's suggestion gives the Social Security annuitant a 
draw on personal income taxes. We have, over the years, reduced 
the personal income tax rolls by taking people off the bottom. 
They still pay a lot of Social Security taxes. It's a pain 
because it's a very regressive tax. On the other hand, I don't 
think you want a situation where you let people who aren't 
paying an income tax be able to demand benefits from an income 
tax pool.
    That's what I mean when I say linkage. And I think you got 
that right.
    Carol.
    Ms. Wait. I would agree with what Bill said and I would go 
further. I would say that if you ever decide to delink the 
Social Security tax from the Social Security benefits, cut 
Social Security taxes. They are a very burdensome tax; a much 
more burdensome tax for the vast majority of the population 
than any other tax they pay.
    If you're going to cut that knot, why don't you do it in a 
way that provides real tax relief for a very large number of 
people? I'm not saying it's a good idea. I'm just saying rather 
than doing it by overtly subsidizing Social Security benefits 
from Federal general revenues, do it in a way that may put some 
downward pressure on benefits and provide some real tax relief 
to people.
    Mr. Ramstad. Yes, please.
    Mr. Walker. I think to the extent that you grant these 
additional securities, which is what the President proposes, 
this in effect, represents an explicit, general fund subsidy of 
Social Security, and you take away from primary self-financing 
through payroll taxes, you move away from the insurance 
concept.
    You move toward more of a welfare structure. You create a 
slippery slope that may be more difficult to establish the 
necessary fiscal discipline over. Let me give you an example, 
Congressman.
    When the SMI program was created, the Supplemental Medical 
Insurance, Part B of Medicare--well, that is funded through 
general revenues. But when it was originally created, 50% of 
the cost was paid for through premiums. Now it's down to 25%.
    In addition, if we look at the HI Program, which is still 
primarily payroll taxes, things have been done over the years 
to transfer money from Social Security into Medicare because 
Social Security was in good shape but Medicare was not, to move 
programs out of the payroll tax into the program which is Part 
A to Part B to help prop up Part A.
    I think it creates a very slippery slope.
    Mr. Ramstad. Well, thank you again to all five of you for 
helping lead us out of the wilderness. We certainly need your 
continuing counsel and appreciate your being here today.
    Yield back, Mr. Chairman.
    Mr. Shaw. Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman.
    And I do want to thank the panel for a much more honest 
assessment of where we are. And I think this was a very helpful 
exercise. I wish everybody were here to hear it.
    Ms. Wait, I want to thank you all for having the Exercise 
in Hard Choices in my district.
    Mr. Frenzel, you couldn't come out for it, but we had a 
vigorous debate over a lot of these issues with about two or 
three hundred people in a room in a town meeting format then 
broke out into working groups and solved all the problems 
before us.
    And of course, none of those solutions were politically 
palatable, but it was a good exercise. I think you did that 
along with AARP, the Concord Coalition, and a lot of other 
groups.
    Mr. Walker, my colleague from Georgia waited until you were 
done talking to determine whether or not he liked what you said 
to claim you as a Georgian, and I told him you must have been 
born in Ohio and then worked your way down to Georgia. But 
welcome aboard.
    And I think this is very helpful to have a Comptroller 
General who has this background and experience as we go----
    Mr. Shaw. If the gentleman would yield for 1 second, I 
would like to tell the gentleman from Georgia that Mr. Walker's 
mother and father now live in Gainesville, Georgia. [Laughter.]
    Mr. Portman. Is that accepted?
    Mr. Collins. That's accepted.
    Mr. Shaw. Florida transplants, by the way, and that's very 
unusual.
    Mr. Portman. But I think GAO is going to play, from what 
I've seen from your testimony and just reading through it 
quickly, also a more aggressive role in this. Which is great, 
because we've got two huge challenges obviously for the next 
century, and these are Social Security and Medicare.
    And the demographics don't lie. And with the 76 million 
baby boomers starting to retire around 2010, 2013 and with 
people living longer, this is going to be the big issue, I 
think, for this Congress and for future Congresses.
    So I'm glad that you are on board and I hope you will 
continue to be assertive in giving us the straight scoop and, 
frankly, taking on the administration where you think they are 
not giving us the information we need to make intelligent 
choices for our grandchildren and great grandchildren, which is 
really the issue here.
    I have a couple of questions I'd love to run by you. I wish 
we had a couple of hours here. But one is this whole notion of 
the debt held by the public versus the debt held by the 
government.
    Am I to understand that, in analyzing the President's 
budget--and Mr. Crippen, jump in here, too--you all believe 
that the debt held by the public, which is, of course, the part 
that Secretary Rubin and today Mr. Lew and others have focused 
on, will actually be higher than it would be without the kinds 
of changes that they're proposing in the budget?
    Mr. Walker. Yes.
    Mr. Portman. OK, that's a surprise to me because, I mean, I 
listened with great interest to Secretary Rubin's testimony a 
couple of weeks ago and then today to Mr. Lew's, and it seems 
to me the strength of their budget, if anything, would be that 
there is a shift away from public debt toward government and 
that that somehow is better.
    And I can understand from an analyst point of view as you 
look at credit worthiness of a company or look at even a 
government that the public debt number is important and 
different in the private--than the so-called intragovernmental 
debt.
    But you're saying that even the public debt would increase 
more rapidly than it would without the changes that are 
proposed in the President's budget.
    Mr. Crippen. Or put another way, it wouldn't decrease 
nearly as much. The debt held by the public would go down on 
its own under current law if the Congress didn't meet for the 
next 10 years.
    If you enact the President's budget, on the other hand, it 
wouldn't go down as much. In economic terms, as an economist, 
the jargon is keep your eye on net national savings. Are we 
actually saving more money or not? And by looking at this 
number and this number alone, you can tell whether the Federal 
Government is saving more or not.
    And under current law, we would save more than under the 
President's proposal. He's proposing to save some of the 
surplus, but he's not proposing to save it all. Whether it's 
57% or 62%, we'll know more as we get more detail from them; 
but there is a third or so that's not being saved, this $1,168 
billion by 2014 goes somewhere else and we're not sure where 
yet, but it's not saved.
    Mr. Portman. Because it hasn't been spelled out yet in the 
budget documents or--because we also know that there is a 
percentage allocated to Medicare. I think it's 15%. Is that 
correct? And then is it 14% for the USA accounts and then an 
increase in defense spending?
    Mr. Walker. Well, they give some information in the budget 
documents, but particularly when one goes out 15 years--no 
other budget has ever gone out 15 years.
    Mr. Portman. Right.
    Mr. Crippen. And the detail provided in the President's 
budget document for the proposals that go out 15 years are 
condensed into one table. And so there's just very limited 
information available. And even I think earlier today there was 
acknowledgement about USA accounts and a variety of other 
things that the proposals haven't been prepared yet.
    Mr. Portman. Yeah, we did get into that.
    Yes, Ms. Wait.
    Ms. Wait. If I may, in Bill's testimony there's a graphic 
that looks like this that attempts to describe what the 
President's budget proposes to do in Social Security reform. 
One of the things that it tells you, as Barry has said, there 
isn't a lot of detail, but they do give you 5-year numbers.
    And over 5-years, you would reduce debt about--by about 60% 
of total budget surpluses or about 70% of Social Security trust 
on surpluses. That clearly is not 100% of anything.
    Mr. Portman. Right. But really, when you look at the 
President's proposal, and this is the bigger picture that we 
have to grapple with here, the 62% figure, if you take that as 
the Republican and Democrat agreed upon number, it is--62% 
happens to be, as I understand, over 15 years roughly the 
amount of payroll taxes that would otherwise have gone into the 
trust fund.
    Is that accurate?
    Ms. Wait. Yes.
    Mr. Portman. Or do you dispute that number even?
    Mr. Collins. No, unfortunately, it's not accurate.
    Mr. Portman. Would it have to be more than 62% even to come 
up with a number that makes some sense over the 15-year period?
    Just so people who are watching this can understand maybe a 
little more of what we're talking about, you've got a situation 
now where the surplus this year is only because there is 
payment through FICA taxes, payroll taxes, that exceeds 
benefits being paid out.
    That money is being borrowed by the government when it ends 
up in the trust fund. So in fact, one could argue, assuming a 
trust fund is really a trust fund, there is no surplus this 
year and that your projections, I think, at CBO are that, 
indeed, that can be used for at least the next 2 years.
    Is that correct, that there would be no surplus other than 
Social Security Trust Fund surpluses?
    So that really, by taking only 62% of the surplus, you're 
not even accounting for Social Security over the short time. 
And then I had thought that over 15 years it evened out. In 
other words, the projections would show that 62% of the surplus 
over 15 years happened to be the amount that would otherwise 
have ended up in the trust fund.
    But that's not even accurate?
    Mr. Walker. My understanding--and I would yield to CBO. But 
my understanding is about 57% of the surplus over a 15-year 
period--of the unified surplus is attributable to Social 
Security. In the early years, it's a much higher percentage.
    Because keep in mind the Social Security surplus--you turn 
a deficit in 2013, so it's actually going to be a drag starting 
in 2013. That's my understanding, but I'd yield to CBO.
    Mr. Collins. I think it actually gets worse. First of all, 
if you just look at the Social Security surpluses, over 15 
years the President's budget does not save the Social Security 
surpluses, as that chart indicates. It uses some of the Social 
Security surpluses for spending on other programs.
    By the way, they don't provide any detail on exactly that 
amount. Those estimates are very crude estimates that we made. 
And we will have more in about a week or so, but they're very 
crude.
    But second,----
    Mr. Portman. Is this because your projections at CBO are 
different than OMB's projections----
    Mr. Collins. No.
    Mr. Portman [continuing].  Or is it because they have their 
own projections?
    Mr. Collins. There is that, too.
    Mr. Portman. OK.
    Mr. Collins. But the reason for it is really because they 
just don't provide the detail.
    Mr. Portman. Yeah.
    Mr. Collins. One needs the year by year numbers in order to 
do this, and they don't have that detail.
    But the second thing, and that's the thing I really wanted 
to point out to you, is that 62% has sort of gotten a life of 
its own. And it is frequently described as you've described it, 
and I heard earlier today it being described, too: 62% of the 
unified surplus is saved for Social Security.
    Mr. Portman. Right.
    Mr. Collins. No, that's not what their figures reveal. They 
take the unified surplus and then they reduce it by something 
called financing cost. That is the debt service on the new 
spending that they have in the President's budget. Then, of 
this amount, unified surplus less financing cost,----
    Mr. Portman. Right.
    Mr. Collins [continuing]. Then they save or transfer 62% of 
that lower amount for the transfers to Social Security. The 
importance of this is twofold. First of all, if it were the way 
they stated it, 62% of--or a percentage of the unified surplus, 
the number wouldn't be 62%, it would only be 57% or something 
like that.
    Second of all, even if one adheres to a certain percentage 
such as 62%, the actual dollar figure can be varied because of 
the back loading or front loading of the spending or tax 
proposals one uses. And I recall--maybe you do, too--that back 
loading and front loading of proposals can have a big--a major 
impact on what those proposals are.
    Mr. Portman. Absolutely.
    Mr. Collins. So one needs to look at that 62% very 
carefully, I would suggest, before one adopts it.
    Mr. Portman. Well, you know, it's interesting. Having again 
heard from the administration on this and heard their 
description in general terms several weeks ago really when they 
first starting talking about the State of the Union and the 
budget, and then more recently with the budget testimony, they 
are giving us different information as to both the public debt 
issue and as to the significance of the 62% figure and really 
what it does in terms of putting the trust fund over time 
essentially off budget so that the unified budget would not 
reflect that.
    So this is troubling and makes it even again more difficult 
for us to get at our task, which is to start with the same 
facts and then move forward with some tough exercise and hard 
choices.
    Let me ask you another question that relates to this.
    Mr. Chairman, I appreciate your indulgence and I'll try to 
be fast here.
    Mr. Shaw. My indulgence is running short. Go ahead.
    Mr. Portman. This gets to a question--and again, there's a 
lot more on the debt I'd love to talk about, but I want to be 
sure and get one more question out here to this distinguished 
panel, and that is this notion of individual accounts and how 
it could affect the long-term solvency of Social Security.
    Mr. Frenzel said, as many of us have said, you know, it's a 
mistake to move away from having the payroll taxes exclusively 
fund the entitlement program because it becomes, as Mr. Walker 
said, more like a welfare program or because, in the end, you 
don't have the kind of integrity and budgeting that you need 
long term to deal with the demographic shifts that are 
occurring.
    If you were to have individual accounts and tie them back 
into Social Security with a floor, but a reduced benefit for 
those who chose to save their money--let's say 2% of payroll 
tax--doesn't long term--and when I say long term, I'm talking 
out 40, 50, 60, 70 years that add to the solvency of the Social 
Security system.
    By essentially refunding at least a part of the Social 
Security system--right now it's a pay as you go system. There's 
no funding, there's no account for me, there's no account for 
you.
    But if you did, in fact, have some percentage, and this is 
2% really of 12.4% being the 6.2% for the employee and the 6.2% 
for the employer--if you could take 2% of that out, invest it 
through a highly regulated government system where you could 
only invest in certain funds, not pork belly futures or your 
uncle's real estate, and that came back into Social Security in 
the sense that when you retired, indeed you would have a 
reduction in your benefit, although a safety net benefit or a 
floor benefit, doesn't that begin over time to really help to 
fund the system--in other words, have a partially funded 
mechanism--that indeed is, I would think, something that we 
could leave as a legacy for future generations, or does that 
not help the system long term because of the enormous 
transition costs that are incurred in getting to that point?
    Mr. Walker. It depends. What I would commend to you, if you 
look at--as one example, if you look at the Center for 
Strategic and International Studies' National Retirement 
Commission Report, you'll find that they proposed a 2% carve 
out for individual accounts for individuals below the age of 
55, but you have to pay for that in order to deal with the 
transition costs.
    And there were a number of program reforms that they 
propose to implement in order to do that. For example, to 
gradually increase the normal retirement age to 70 from the 
current scheduled 67; to make the benefit formula more 
progressive; to also increase the number of years that it would 
take to earn the maximum benefit.
    At the same point in time, they propose to do some things 
that actually were very progressive, and that is to provide a 
minimum benefit equal to the poverty level for individuals that 
worked at least 40 years, which does not exist right now; to 
strengthen certain survivor benefits.
    So you've got to figure out how you're going to pay for it. 
And the other thing is, to the extent that you end up using--
creating individual accounts, that's money you don't have to 
pay down publicly held debt unless you figure out some way to 
pay for it.
    And in conclusion, I think one of the things that we've got 
to do is recognize we need to figure out what's fiscally 
responsible to do with regard to the surplus. We need to get on 
with Social Security program reform.
    And we need to recognize that, in the end, that the kind of 
reform that makes policy sense and that is politically feasible 
is a combination of a bunch of different elements that as a 
package makes sense; whereas individually you could shoot holes 
in any individual proposal, but as a package it makes sense, 
it's understandable, it's salable to the American people.
    Mr. Portman. And Mr. Chairman, if I could just get a couple 
other answers to that question just to rethink the point. His 
indulgence is wearing thin, but he's a great Chairman, let me 
tell you. And he didn't get the short straw, he got the long 
straw because----
    Mr. Shaw. Ask your question.
    Mr. Portman. Thank God he's there. [Laughter.]
    If, indeed, we are interested in getting higher rates of 
return, there are basically two ways to do it. One is the 
government to invest, which none of us left on the panel here 
today support. And I know at least a couple of the panelists 
here have already expressed concern about it, and I would think 
all of you would have concern about the government being the 
largest investor and so on even with the President's proposal.
    The other way to do it is for the individual to direct that 
investment. And this is where--Mr. Walker, the question I'm 
getting at really--I understand what you're saying about the 
transition cost.
    On the other hand, if you look over the last 50 years, the 
average would be that you're going to get at least a doubling 
of the rate of return, 2.9% on Treasury specials right now 
versus at least a 6% return. And many think, you know, you 
don't look--50 years look like 15 years, you get a higher rate 
of return, far higher.
    That, in the end, helps the Social Security system if you 
tie it into the benefits upon retirement. And that's my 
question to you, is obviously there is a transition cost and 
whether that's not paying down as much public debt or whether 
that's being able to simply pay benefits during this period 
when the baby boom generation is retiring.
    But in the end, you get a benefit to the system of Social 
Security, I would think, which is increased solvency through 
having again a partially funded system with real money that's 
in there depending on how you work out the quid pro quo at the 
end. And that's my question to you all, is that you--that you 
all looked at and would agree with?
    Ms. Wait. If you go back and look at the exercise we did in 
Loveland, you'd find the answer to your question. I'm sorry, it 
is a lot like the Comptroller General suggested. You have a 
size-16 woman you're trying to put in a size-12 dress.
    Beefing her up to size 18 doesn't solve the problem. Mr. 
Frenzel says it makes things more interesting because you don't 
know when the seams are going to pop. If you want to take part 
of the 12.4% payroll tax that goes to pay for retirement 
benefits today, you must cut something you're paying for with 
that tax today before you can divert it to something else 
without having a very serious problem.
    And that is exacerbated because the Social Security system 
is so much more than just a retirement system today, as you 
well know. You all write the laws. You have disability 
benefits, you have survivor's benefits, you have all these 
other things.
    There's a massive income transfer that occurs in the 
system. And the people who are most likely to want and be able 
to take their 2% and invest it for themselves are not apt to be 
the people who are going to need those transfers on the other 
end.
    In the last instance, you have to pay for the whole 
program. You have to pay for whatever residual benefits you 
leave in the tax financed Social Security program, plus the 2% 
that you're diverting to individual accounts.
    If that's not paid for, if you diminish the benefits Dan 
and others described as a result of buying down debt held by 
the public, which increases net national savings, productivity 
and growth. You're giving up the growth dividend in the short 
term. It's hard to imagine getting a long-term benefit 
sufficient to offset that loss.
    The concern is that you balance in the transition period 
the money you divert and the changes you're willing to make in 
current benefits or the taxes you're willing to increase to pay 
for them so that you don't diminish the growth benefits that 
otherwise would flow from debt reduction, increased saving 
investment, and growth.
    Mr. Portman. I would just mention also that, at that level 
and session, 70% of the people supported individual accounts.
    Ms. Wait. But they had big cuts in benefits.
    Mr. Portman. Well, but I'm saying it's not necessarily big 
cuts in benefits, it's whatever the quid pro quo is at the end 
of your working life. I mean, if you're willing to take 2% out 
and take--I'm sorry, Mr. Chairman--and take lesser of a benefit 
less than that 2% equivalent, which I would be--anybody under 
40 would be nuts not to--it indeed does help the Social 
Security system long term.
    It depends what--it depends what the transfers at the end.
    Ms. Wait. If you change the benefits on the other side, 
that's all.
    Mr. Frenzel. That's the point we want to make. All these 
things have a cost. Paying down the debt, makes those costs 
easier to manage. Keeping the separate accounts gives you some 
extra cost. And then you lose the 2%. So what do you do?
    Are you going to reduce benefits? I mean, are you going to 
extend the age of retirement? Are you going to cut the COLAs or 
are you going to means test the program? There are a lot of 
ways you can do that. But what you're doing is introducing 
quite a change into the system, and I don't think any of us 
here would disagree that getting a higher return on an 
investment is getting better than getting a lower return.
    But you really have to be careful because you have a 
program here that doesn't contemplate that kind of investment. 
You're going to overlay this old fashioned--I call it an 
entitlement program. What do you call it? I certainly wouldn't 
call it a pension program.
    And then you're going to stick an investment program in on 
top of it. It's going to take an enormous amount of care. And I 
know the gentleman from Ohio has been working on this program 
and been a leader, and I wish you lots of luck.
    I think it's promising, but it is exceedingly difficult.
    Mr. Shaw. Mr. Walker, I have a question for you. The 
President is talking about taking this surplus, funneling it 
through the Social Security Trust Fund and then coming out the 
other side, leaving an IOU or a Treasury bill as indebtedness 
to the trust fund by the Federal Government, and then talking 
those funds and reducing the debt. Obviously what the President 
is doing sounds good because it looks like he's building up the 
trust fund. In reality it's just more paper, more promises, 
more calls upon future taxpayers, which we know is out there 
anyway if we do nothing.
    If we were to take those same funds and just simply reduce 
the debt, looking out to the year 2015, 2016, the people that 
are going to be taking care of paying my Social Security, does 
it make any difference whether you ran it through the trust 
fund or whether you just paid down the debt?
    Mr. Walker. I assume, Mr. Chairman, you're talking about 
the additional grant, the 62% of the surplus?
    Mr. Shaw. Right.
    Mr. Walker. That does not have to be inherently linked. 
From a future economic capacity standpoint, what's important is 
paying down the publicly held debt.
    So once you do that, what the President proposes to do, 
which is to issue this grant, actually restrains our options 
for the future. It basically represents a commitment of future 
general revenues above and beyond the excess cash flows of 
Social Security, which reduces our flexibility in the future.
    Mr. Shaw. So following that through, I mean you could take 
that same 62% grant and run it through three or four times.
    Mr. Walker. I wouldn't recommend it, Mr. Chairman.
    Mr. Shaw. In the end the accounting process would simply 
just continue to build up the trust fund, but that year 2013 
would not move.
    Mr. Walker. 2013 would be unaffected.
    Mr. Shaw. And that is the date we have to zero in on. 
People talk about extending the trust fund out to 2050, 2060, 
2070. Well, you can run that money through there enough times 
and buildup enough IOUs that you can extend it way out, but you 
haven't changed the ball game.
    The people that are paying taxes after 2013 are going to 
have to be paying taxes to be able to accommodate the people in 
retirement at their present benefit levels. I mean, it's just 
as plain and simple as that.
    The people forget that it's a matter of ``watch the cash 
flow''. Never take your eye off the cash. When you take your 
eye off of the cash flow, then all of these other things seem 
to make sense until you start thinking it through and say wait 
a minute, in 2013 we're still going to have to come up with the 
bucks to pay the people that are going into retirement.
    It's absolutely no different. It makes no difference. So I 
think this whole panel has agreed that there's a good thing in 
paying down the debt. But let's not run it through the trust 
fund and create some type of subterfuge like we're really doing 
something when we're really not.
    I think it is very important that we do reduce the debt and 
that we do use a great deal of the surplus to do that. But the 
plain and simple answer is: if we're not going to change the 
benefit level, which we're not, and we're not going to change 
the level of taxation, which neither party is willing to do, 
then what are you going to have to do?
    You're going to have to find some way to increase the 
return, the return on the moneys that are paid into the trust 
fund other than just coming up with some IOUs.
    Mr. Herger read a provision that was out of the President's 
budget on page 337, and I'm going to read it again because I 
think it is something that, even though Mr. Lew backed away 
from it and said he wished it wasn't in there, is just as true 
today as it ever was.
    It says, ``These balances,'' in speaking of the trust fund, 
``are available to finance future benefits and other trust fund 
expenditures, but only in a bookkeeping sense. These funds do 
not consist of real economic assets that can be drawn down in 
the future to fund benefits.
    ``Instead, they are claims on the Treasury that, when 
redeemed, will have to be financed by raising taxes, borrowing 
from the public, or reducing benefits or other expenditures. 
The existence of large trust fund balances therefore does not, 
by itself, have any impact on the government's ability to pay 
benefits.''
    So that simply is saying to forget how many times you run 
this surplus through the trust fund, and that it's not going to 
make a bit of difference. But I would like to say, and to try 
to end on a positive note, that I think the President has moved 
the agenda forward.
    And I for one, as Chairman of the Social Security 
Subcommittee, appreciate that. He's introduced into the mix the 
reality that we're going to have to increase the return on our 
investment, which means investment in the private sector.
    Although there is great disagreement on the Republican 
side, that we feel this should not be done by the trust fund 
but should be done by putting together individual savings 
accounts for the American worker. But he has advanced that in 
the USA accounts that he has put forward.
    This idea certainly could be folded into this mix and it is 
putting out a concept. Mr. Lew said that they're working 
through the details on that. We'll be very anxious to see them 
because I'm sure we'll pick up some things in there that we 
could use in order to be sure that the security of these 
individual funds is not jeopardized by bad judgement or total 
lack of judgement, that they can't be drawn down, that there 
are some guarantees. One of the greatest things about this 
country, which is in great trouble right now, is the Social 
Security system, and it is incumbent upon the Congress to fix 
it.
    And I, for one, am still very confident that we will get 
great bipartisan support and tremendous cooperation from the 
White House in the end to accomplish our mutual goal.
    And with that positive comment, I will now pronounce that 
the hearing is now adjourned.
    [Whereupon, at 7:27 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of Alan S. Blinder, Gordon S. Rentschler Memorial Professor 
of Economics, Princeton University

    Mr. Chairman, Members of the Committee, I am grateful for 
the opportunity to appear before you this afternoon to offer my 
views on the President's plan for putting Social Security on a 
sounder financial basis.

                     What Needs to be Done and Why

    It is truly remarkable that we are sitting here today, in February 
1999, discussing this subject--not in the abstract, but with 
legislative intent clearly in mind. After all, Social Security is 
hardly in crisis right now. The System is currently taking in much more 
revenue than it is paying out in benefits, and the Social Security 
surplus is expected to grow, not shrink, for years to come. The 
eventual funding crunch is a generation or more away--well beyond the 
political event horizon. And the program is wildly popular with the 
American people. These are not the conditions that normally spur 
Congress into action.
    And yet last month the President proposed several major initiatives 
designed to shore up Social Security's shaky financial foundations, and 
Congress is now carefully considering his ideas. As a citizen, I can 
only praise both the Administration and Congress for their willingness 
to take on this difficult problem so far in advance. As you know, the 
payoff to delay is very likely to be negative. Frankly, fixing Social 
Security's finances is not that hard a problem--either economically or 
politically--if we take action soon. But if we wait until the funding 
crisis is imminent, some nasty things will have to be done.
    What, then, should be the major objectives of Social Security 
reform at this stage?
    First, we need to reduce the long-run funding gap. As members of 
this committee well know, the benefits stream promised under current 
law greatly exceeds projected receipts over the 75-year period used to 
appraise Social Security's actuarial balance. Policy changes are needed 
to bring these two streams into alignment, and there are only four 
choices:
    1. reduce benefits
    2. raise the payroll tax
    3. increase the rate of return earned by the Trust Fund
    4. find some other revenue source for Social Security.
    The funding gap has two distinct aspects, which are 
sometimes confused. One is the need to balance Social 
Security's books, because benefits can be paid only from 
prescribed sources. This is partly an economic problem, but 
partly a bookkeeping problem. The other, and more fundamental, 
problem is the need to generate more national saving--and that 
should be the second objective of Social Security reform. I say 
this for two reasons. One is that our national saving rate is 
quite low, leading us now to borrow enormous sums from the rest 
of the world. The other is that by saving more today we will 
build more capital for the future, which will make future 
American workers more productive. The same payroll tax rates 
will then bring the Social Security System more revenue.
    Third, and finally, there seems to be agreement in both 
parties that payroll tax increases should be used little, if at 
all, to solve the problem.

                       The President's Proposals

    The President's plan scores quite highly on these three criteria. 
Working backward, it does not propose to raise the payroll tax at all. 
Second, it would boost national saving enormously by saving most of the 
looming budget surpluses. Third, the vastly lower interest burden 
brought about by the disappearing national debt would make room in the 
budget for future Social Security benefits. And the unusual new bonds 
to be issued to the Trust Funds would strengthen the pledge of future 
revenue to the System. All in all, it's a pretty good package--though 
definitely not a full solution, as the Administration acknowledges.
    However, I can also understand why some people have attacked the 
plan for double-counting. My initial reaction was the same, and it took 
some hard work with paper and pencil to convince myself that the charge 
is beside the point.
    When you cut through all the complexities, as I will do shortly, 
what you see is that, while the Administration's rhetoric and 
exposition are clumsy, the plan itself is sound. At bottom, it does 
three things:
    1. It saves the lion's share of the projected budget surpluses--
$3.45 trillion over 15 years--and assigns that money to the Social 
Security and Medicare Trust Funds. Running large budget surpluses is 
the surest way we know to boost national saving, and it is in my view 
the plan's strongest feature. It also appears to be what most people in 
both parties want done.
    2. It invests a modest share (about 21%) of the money accruing to 
Social Security in equities, which should increase the Trust Fund's 
returns. This additional revenue reduces the benefit reductions or tax 
increases that will ultimately be needed to restore actuarial balance.
    3. Most controversially, it creates a new accounting device that 
would convert what is now an implicit promise to Social Security into 
an explicit, contractual pledge. The motive here is more political than 
economic. The new bonds that the Administration proposes to give to 
Social Security have given rise to a charge of double counting. But 
they really amount to a bookkeeping and legal device designed to 
stiffen the backs of future Congresses, so they will not ``raid'' the 
Social Security surpluses to fund other programs or tax cuts. On this 
matter, you ladies and gentlemen are better judges of the proposal than 
I am.
    Let me take up these three hallmarks of the plan in turn.

1. Saving most of the surpluses

    The President's plan would take the projected $4.85 trillion in 
unified budget surpluses over the next 15 years and spend only $1.4 
trillion on tax cuts and new programs,\1\ saving $3.45 trillion or 71% 
of the total. (See Chart 1.) Is that a lot or a little? It all depends 
on what alternative you compare it with. Compared to a fiscally 
irresponsible policy that would use the entire $4.85 trillion to fund 
tax cuts and new programs, the increase in national saving is 
enormous--$3.45 trillion. But compared to a Midas-like policy of saving 
every dollar of the unified surplus, the President's plan spends $1.4 
trillion more.\2\
---------------------------------------------------------------------------
    \1\ About $0.4 trillion of this spending is for debt service. White 
House presentations subtract this debt service from the $4.85 trillion 
in surpluses and speak of spending $1 trillion out of $4.45 trillion. I 
find my accounting treatment clearer. But there is no issue of 
substance here.
    \2\ Just over half of this $1.4 trillion, including the associated 
debt service, goes to USA accounts, which are designed to spur private 
saving. The Administration has not yet released the details of this 
proposal.
---------------------------------------------------------------------------
    Perhaps a more natural baseline is a policy that would save the 
Social Security surpluses and use the rest for new spending and/or tax 
cuts. Compared to that alternative, the President's plan raises 
national saving by an additional $750 billion over 15 years. I applaud 
that change. The nation needs the saving. As you consider ways to 
modify the plan, I hope Congress will not lower this national saving 
target.
    Now, what happens to the $3.45 trillion that is saved? Under the 
President's plan, $2.87 trillion is used to reduce the national debt. 
The rest, $0.58 trillion, goes into equity purchases by the Social 
Security System. So perhaps I should take up this aspect of the plan 
next.

2. Investing in equities

    The motivation for investing part of the Social Security Trust Fund 
in the stock market was already mentioned: It boosts the Trust Fund's 
rate of return, thereby reducing the need to either cut Social Security 
benefits or raise payroll taxes in the future. That is the idea's chief 
merit. Higher Trust Fund returns mean that fewer benefit cuts and tax 
increases will be waiting for us in the future.
    But, of course, every dollar that the Trust Fund invests in 
equities is one dollar less that it invests in government bonds. 
Holding everything else constant, this means that the Treasury must 
sell one additional dollar of bonds to private investors, thereby 
incurring greater interest costs. So part of the gain to the Social 
Security Trust Fund (the dividends and capital gains it earns) is paid 
for by higher interest charges against the General Fund. In a word, 
investing part of Social Security's assets in the stock market can be 
viewed as an indirect way to transfer money from the General Fund to 
the Social Security Trust Fund. I am not opposed to that on principle, 
but people should understand that that is the essential effect.
    The proposal to invest roughly $580 billion in equities over 15 
years has been attacked on the grounds that government-controlled 
investments in the stock market will inevitably lead to politically-
motivated investment decisions. I respectfully disagree. I am not so 
naive as to assert that political interference is impossible. But I do 
believe that the following quadruple layer of insulation can push 
politics so far away from investment decisions that interference is 
extremely unlikely:
    First, Social Security's investments should be overseen by a board 
with as much political independence as the Federal Reserve Board. I was 
Vice Chairman of the Fed in 1994-95, a time when our policy of raising 
interest rates was under attack by Republicans and Democrats alike. But 
we technocrats did it anyway because we thought it was the right thing 
to do, and the country has reaped rich dividends. I do not believe that 
political independence is impossible in Washington. It's just difficult 
to maintain, and must be jealously guarded.
    Second, Social Security's investment board should be empowered to 
hire professional fund managers from the private sector, not to pick 
stocks.
    Third, those fund managers should be instructed to invest mainly, 
and probably exclusively, in indexed funds--and the government should 
not vote its shares.
    Fourth, any President or Member of Congress who attempted to breach 
these three lines of defense should be called to public account by an 
ombudsman or whistle-blower. Again, you ladies and gentlemen are the 
politicians, not I. But what elected official would run the risk of 
being publicly upbraided for undermining the pension security of every 
single American? Social disapprobation and bad press strike me as quite 
powerful sanctions in this context.
    In sum, I would sleep quite peacefully at night, unconcerned about 
my Social Security investments, if these four layers of insulation were 
in place. And the first three of them are very similar to the 
President's plan.

3. Enhancing the pledge by giving bonds to the trust funds

    I come now to the controversial accounting device mentioned 
earlier--and to the charge of double-counting. (See Chart 2.) Under the 
President's plan, the Treasury would grant to the two trust funds, as 
outright gifts, some $2.87 billion in new special purpose bonds. ($2.18 
trillion of these new bonds go to Social Security, $0.69 trillion to 
Medicare.) These pieces of paper create assets for the trust funds and 
equal liabilities for the Treasury. The hope, however, is that these 
pieces of paper will have real political significance.
    The idea, as I understand it, is this. Under current law, Congress 
has promised to pay a certain stream of Social Security benefits, but 
the payroll tax will not bring in enough revenue to fund this stream. 
Thus Congress has implicitly pledged to balance the books by enacting 
some combination of benefit cuts and payroll tax increases in the 
future. By giving the trust funds $2.87 trillion in new bonds, the 
President takes part of that implicit pledge and inscribes it 
explicitly on pieces of paper called bonds. These bonds, of course, 
have legal force: Future governments will be compelled to pay interest 
and principal as promised. So at least this part of the money that 
Social Security has been promised must be delivered. In that sense, the 
pledge is strengthened.
    And notice a second change. The money to pay off the bonds will 
presumably come from general revenues or from spending cuts in on-
budget programs (including interest payments), not from payroll taxes 
or cuts in Social Security benefits. Thus, if Congress accepts this 
accounting device, it is implicitly signing on to partial general-
revenue financing of Social Security. As I have said already, I see no 
strong objections to doing so, but I know others hold a different view. 
The much lower national debt, by the way, will free up funds that would 
otherwise be needed for interest payments, so the General Fund will be 
better able to bear the burden.
    Finally, let me explain how the charge of double-counting arises. 
The $2.87 trillion in new bonds and the $0.58 trillion to be invested 
in stocks are outright gifts to the trust funds.\3\ They add up to 
$3.45 trillion, which is precisely the amount that is to be saved over 
15 years. This is no coincidence. The Administration proposes a change 
in scorekeeping rules that would count such gifts from the Treasury to 
the Trust Funds as outlays in the unified budget. It does so to ``use 
up'' the surplus and thereby create a ``balanced budget.''
---------------------------------------------------------------------------
    \3\ It is my understanding that the precise budgetary mechanics for 
the $0.58 trillion are yet to be worked out.
---------------------------------------------------------------------------
    This is surely unorthodox bookkeeping. After all, the government's 
left hand is merely conveying funds to its right hand. The reason is, 
once again, to build a political wall around Social Security. By 
counting the $3.45 trillion in gifts as spending, the unified budget is 
declared ``balanced,'' leaving no ``surplus'' available for use by 
future Congresses. So this proposed new accounting device is really an 
attempt to get the present Congress to deter future Congresses from 
tampering with the decision to save the $3.45 trillion.\4\
---------------------------------------------------------------------------
    \4\ I use the verb ``deter'' rather than ``prevent'' because no 
Congress can truly bind a future Congress. Both the law and accounting 
procedures can be changed.
---------------------------------------------------------------------------
    Politically speaking, is this idea foolish or clever? I'll let you 
be the judge of that. But it has had at least one unfortunate 
consequence. The fact that the $3.45 trillion ``gift'' exactly matches 
the $3.45 trillion that is saved has given rise to the charge that the 
Administration is double counting.\5\ But there is no second $3.45 
trillion to be parceled out. The same number, $3.45 trillion, appears 
once in the plan as national saving--which it is--and again as a 
``gift'' to the trust funds. But the latter is just an accounting 
device designed to say ``hands off.'' It amounts to a pledge to provide 
that much more money for Social Security in the future--somehow. But it 
does not specify the sources. Thus, by itself, it does not fill any of 
the funding gap. If this strikes you as double counting, don't count 
it! The policy remains the same.
---------------------------------------------------------------------------
    \5\ The Social Security portion of this $3.45 trillion is $2.76 
trillion, which is the amount that has often been talked about as 
``double counted.''
---------------------------------------------------------------------------

                               Conclusion

    There is a simpler and more intuitively appealing plan which, had 
the President proposed it, would, I believe, have generated less 
confusion and raised fewer objections. (See Chart 3.) That would be to 
dedicate the $2.70 trillion in Social Security surpluses over the next 
15 years to debt reduction, and therefore to national saving--and to 
forget about the new gift bonds and odd scorekeeping rules. The unified 
budget would therefore show consistent surpluses as the national debt 
declined.\6\
---------------------------------------------------------------------------
    \6\ Under the President's proposed accounting change, the national 
debt will decline even though the budget is ``balanced''!
---------------------------------------------------------------------------
    Compared to this simple plan, the President's proposal consists of 
three significant policy changes, and you can consider each of them 
independently of the others:
    1. It adds an additional $750 billion to national saving over 15 
years.
    2. It invest $580 billion of Social Security money in the stock 
market.
    3. It creates $3.45 in gift bonds and the accounting device that 
treats them as spending.
    As I have explained, I heartily endorse the first two changes and 
leave it to Members of Congress to judge the political merits of the 
third. But please do not reject it on the grounds that it constitutes 
``double counting,'' when it is actually an attempt--whether awkward or 
skillful--to build a political wall around funds that will one day be 
needed for Social Security.
    Thank you all for listening.
    [GRAPHIC] [TIFF OMITTED] T5091.011
    
    [GRAPHIC] [TIFF OMITTED] T5091.012
    
    [GRAPHIC] [TIFF OMITTED] T5091.013
    
      

                                


Statement of Peter Orszag and Robert Greenstein,\1\ Center on Budget 
and Policy Priorities

                   Federal Debt: What Matters and Why

    The Clinton Administration's proposal to dedicate a portion of the 
projected unified budget surplus to Social Security and Medicare has 
generated a confusing debate over its impact on the federal debt.
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    \1\ Peter Orszag is President of Sebago Associates, Inc., an 
economics consulting firm, and lecturer in economics at the University 
of California at Berkeley. He previously was special assistant to the 
President for economic policy and senior economist on the Council of 
Economic Advisers. Robert Greenstein is executive director of the 
Center on Budget and Policy Priorities.
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    President Clinton noted in his State of the Union address 
that, ``If we set aside 60 percent of the surplus for Social Security 
and 16 percent for Medicare, over the next 15 years, that saving will 
achieve the lowest level of publicly-held debt since right before World 
War I, in 1917.''
    Representative Bill Archer, in a Congressional hearing 
February 11, stated that ``the Administration's proposal increases the 
total Federal debt by $1.2 trillion between 1999 and 2004 and it 
increases the debt held by the government by $1.5 trillion over the 
same period.''
    An interested observer would understandably be perplexed by these 
apparently contradictory statements. The purpose of this short paper is 
to examine different measures of ``federal debt'' and to clarify the 
effects of the Administration's proposal on them.
    The two most commonly used measures of federal debt are:
    Debt held by the public. Debt held by the public reflects 
the government's borrowing from the private sector (i.e., from banks, 
pension plans, private bond-holders, foreign investors, and others).\2\ 
Changes in debt held by the public have important economic 
implications. These changes can affect national saving, private-sector 
investment, interest rates, and economic growth.
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    \2\ Debt held by the public includes debt held by the Federal 
Reserve Banks. In 1998, debt held by the public amounted to $3,719.9 
billion. The Federal Reserve Banks held $458.1 billion of that total. 
Many economists believe the Federal Reserve Banks should be included as 
part of the government and remove the portion held by the Federal 
Reserve Banks from debt held by the public.
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    Gross Federal debt. Gross Federal debt includes debt held 
by the public plus debt that various parts of the government hold. In 
other words, it includes debt that one part of government owes to 
another part. For example, Social Security surpluses are currently used 
to help finance other parts of the government; in exchange, the Social 
Security trust fund is given an IOU from the rest of the government. 
Such IOUs, held as Treasury bonds, increase the gross Federal debt but 
do not affect the debt the government owes to outside entities (i.e., 
the debt held by the public). The majority of debt that one part of the 
federal government owes to another part is debt the Social Security and 
Medicare trust funds hold in the form of Treasury bonds that reflect 
the recent surpluses in these programs.
    Debt that the Treasury issues and other parts of the government 
hold does not directly affect national saving and investment. Since 
this debt reflects money the Treasury has borrowed from other parts of 
the government rather than from private credit markets, it does not 
directly place upward pressure on interest rates or affect the amount 
of private capital available for business investment.\3\ Government-
held debt does not have the economic effects that ``publicly held 
debt'' has.
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    \3\ The surpluses in specific government programs, reflected in 
trust funds for those programs, may have indirect effects on national 
saving and interest rates if they cause policymakers to change their 
behavior. For example, if a larger trust fund induced policymakers to 
raise spending or cut taxes (i.e., to run smaller budget surpluses) to 
a greater degree than they otherwise would, the debt held by the trust 
funds would have indirect effects on national saving and investment. 
Even such indirect effects, however, would manifest themselves through 
changes in debt held by the public.
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    Another common term is ``debt subject to limit.'' This 
refers to the debt that is subject to the debt ceiling, or debt limit, 
established by statute. ``Debt subject to limit'' is essentially the 
same as the gross Federal debt.\4\
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    \4\ At the end of 1998, gross Federal debt amounted to $5,478.7 
billion. Debt subject to the statutory limit amounted to $5,439.4 
billion. This small difference--a difference of less than one percent--
arises because of debts issued by the Federal Financing Bank that are 
included in gross Federal debt but not in the debt subject to limit, 
debt issued by federal agencies that is included in the debt limit but 
not in the gross Federal debt, and differences in the treatment of 
discounts and premiums on bonds when issued. The statutory maximum on 
the debt subject to limit was raised to $5,950.0 billion on August 5, 
1997.
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    The two principal definitions of Federal debt thus are quite 
different from each other. Most economists and fiscal analysts agree 
that debt held by the public is the much more meaningful and important 
measure. David Walker, the Comptroller General of the United States 
(i.e., the head of the General Accounting Office), explained in Senate 
Finance Committee testimony on February 9, 1999 that ``Debt held by the 
public and debt held by trust funds represent very different concepts. 
Debt held by the public approximates the Federal government's 
competition with other sectors in the credit markets. This affects 
interest rates and private capital accumulation. Further, interest on 
debt held by the public is a current burden on taxpayers. In contrast, 
debt held by the trust funds performs an accounting function. . . . [it 
does not] have any of the economic effect of borrowing from the public. 
It is not a current transaction of the government with the public; it 
does not compete with private sector funds in the credit market.'' \5\
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    \5\ David Walker, ``What the President's Proposal Does and Does Not 
Do,'' Testimony before the Committee on Finance, U.S. Senate, February 
9, 1999, page 4. For a similar statement by Robert Eisner, former 
president of the American Economic Association, see Eisner, the 
Misunderstood Economy: What counts and How to Count It, Harvard 
Business School Press, 1994, p. 92.
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    The difference in the economic effects of these two kinds of debt 
can be seen by examining what happens in the economy when each kind of 
debt increases. When debt held by the public rises, the government must 
compete with private borrowers to a greater degree for the capital (or 
saving) from which one can borrow. That dissipates the amount of 
capital available that private borrowers can invest in the private 
economy. With the government soaking up more of the capital available, 
less remains for investment in new plants and equipment and start-up 
businesses. Stated another way, some of the money that otherwise would 
be available for private investment is used instead to purchase the 
increased volume of bonds the Treasury is issuing.
    Increased government borrowing from entities outside government 
(i.e., increases in debt held by the public) discourages private 
investment in part through higher interest rates. Since the increase in 
government borrowing results in more competition for the capital 
available in private credit markets, the amount that lenders can charge 
to lend funds--i.e., interest rates--can rise. Higher interest rates 
make it more costly to buy a home or car and discourage business 
investment.
    Conversely, when debt held by the public decreases, the government 
is borrowing less in private credit markets, leaving more capital for 
private investment. By boosting private investment, this creates a 
basis for higher levels of productivity and hence a larger economy in 
the future. (The economy should have more modern and efficient plants 
and equipment as a result of the increased investment.)
    By contrast, changes in the amount of debt the trust funds hold 
(i.e., the amount of Treasury bonds they hold) do not have direct 
economic implications, as the Comptroller General's testimony 
explained. Rep. Archer also has noted this distinction. In his recent 
statement, he acknowledged that debt held by the public is the ``debt 
that hurts the economy by crowding out private savings,'' whereas debts 
owed one part of the government to another ``do not hurt the economy 
nor do they crowd out private savings.'' \6\
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    \6\ Chairman Bill Archer, Opening Remarks, Hearing on Social 
Security, Committee on Ways and Means, U.S. House of Representatives, 
February 11, 1999.
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    There also is one other important difference between debt held by 
the public and debt held by the trust funds. Interest payments on debt 
held by the public are a government expenditure. In fiscal year 1998, 
they consumed $230 billion, or about one dollar in every seven in the 
federal budget. By contrast, interest payments on debt held by the 
trust funds are not an expenditure--they are simply a transfer of funds 
from one part of the government to another. (The actual expenditure 
occurs when Social Security and Medicare pay benefits, not when an 
intra-government fund transfer is made.) Reducing or eliminating debt 
held by the public thus cuts government costs; under the 
Administration's proposal, for example, federal expenditures for 
interest payments on the debt held by the public would drop from 14 
percent of the budget in 1998 to just two percent by 2014. Increases or 
decreases in the debt held by the trust funds have no similar effect--
they do not raise or lower government expenditures.

        Trends in federal debt and the Administration's proposal

    Table 1 shows both debt held by the public and gross 
Federal debt as percentages of the Gross Domestic Product, the 
basic measure of the size of the economy. As the table shows, 
under the Administration's proposal, debt held by the public 
would fall from 44 percent of GDP in 1998 to 30 percent in 
2004. It would continue to decline thereafter, reaching seven 
percent of GDP by 2014, its lowest level since 1917. This 
reduction would occur because budget surpluses would largely be 
saved and used to pay down debt held by the public. This 
reflects the primary economic benefit of the Administration's 
approach.
    Despite the decline in publicly held debt under this 
proposal, gross Federal debt would rise in nominal dollars (see 
Table 2) because of the additional debt issued to the Social 
Security and Medicare trust funds. Under the Administration's 
plan, for every dollar of publicly held debt retired, a dollar 
of additional Treasury bonds would be deposited in the Social 
Security or Medicare trust funds.
[GRAPHIC] [TIFF OMITTED] T5091.014

    The additional debt that would be issued to the trust funds 
in the form of these Treasury bonds would not increase the 
costs of these programs. The costs of the programs are the 
costs of providing Social Security and Medicare benefits; those 
costs are not raised by providing more Treasury bonds to the 
trust funds. Rather, the issuance of additional debt to the 
trust funds would help narrow the gap that already exists 
between the future costs of honoring the benefit commitments 
these programs have made and the revenues the trust funds are 
scheduled to receive to meet those costs.
    Stated another way, the additional debt that would be 
issued to the trust funds would reduce the unfunded liability 
in these programs. The Administration's proposal would make 
explicit, in form of additional debt the trust funds would 
hold, a part of the implicit debt the government faces as a 
result of these unfunded liabilities. Since these unfunded 
liabilities are not included in the measure of gross Federal 
debt, however, converting part of the unfunded liabilities into 
funded liabilities through the issuance of more Treasury bonds 
to the trust funds causes the gross Federal debt measure to 
rise.
    It should be noted that while gross Federal debt would 
increase in dollar terms, it would decline as a percentage of 
GDP between 1998 and 2004 (see Table 1). Under the 
Administration's proposal, gross Federal debt would fall from 
65.2 percent of GDP in 1998 to 62.7 percent in 2004. Most 
economists believe that variables like debt are best evaluated 
relative to the size of the economy, not in absolute dollar 
terms. On that basis, gross Federal debt would decrease.
[GRAPHIC] [TIFF OMITTED] T5091.015

    The increase in gross Federal debt is thus not meaningful 
economically for two reasons. First, and more important, gross 
Federal debt does not affect economic performance; debt held by 
the public does. Second, the dollar increase in gross Federal 
debt is misleading; relative to GDP, gross Federal debt 
declines between 1998 and 2004.
    Because the President's approach would lead to a large 
reduction in publicly held debt without raising Social Security 
and Medicare costs, it would result in a healthier long-term 
fiscal outlook than an approach that left publicly held debt at 
relatively high levels. If the nation can largely or entirely 
eliminate the publicly held debt over the next two decades, we 
will enter the baby-boom retirement period free of substantial 
annual costs for interest payments on the publicly held debt. 
Indeed, Social Security costs over the next several decades 
(including the period of the baby boomers' retirement), 
measured as a share of GDP, are projected to be at or below 
today's expenditures levels for Social Security and interest 
payments. In fiscal year 1999, Social Security and interest 
costs are projected to equal 7.4 percent of GDP; if the 
publicly held debt is essentially eliminated, as would occur in 
about 2018 under the Administration's plan, combined Social 
Security and interest costs should remain below 7.4 percent of 
GDP for several decades. Stated another way, elimination of the 
debt held by the public would produce large interest savings 
that could create room in the budget for anticipated increases 
in Social Security benefit costs during the next few decades.

                 The Question of Which Baseline to Use

    Comparing debt projections under the Administration's plan 
to the historical record shows the plan would result in a sharp 
drop in debt held by the public. Some analysts, however, 
compare the debt projections not to the historical record but 
to a budget baseline that assumes the unified budget surplus 
will be used solely to reduce debt held by the public. Such a 
baseline assumes that none of the surplus will be used for tax 
cuts, for increasing discretionary spending above the current 
discretionary spending caps, or for expansion of any 
entitlement programs. This baseline also assumes that none of 
the surplus is used to make additional transfers to the Social 
Security and Medicare trust funds. Debt held by the public 
would fall by more--and gross Federal debt would rise by less--
under such a baseline than under the President's proposal. (It 
may be noted that even under such a baseline, gross Federal 
debt rises; see Table 2.\7\)
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    \7\ The increase in gross Federal debt under the baseline reflects 
a variety of accounting issues. Perhaps most important, the Federal 
Credit Reform Act of 1990 changed the budgetary rules governing direct 
loans and loan guarantees. Under the new rules, only the estimated 
subsidy cost of a direct loan is scored as an expenditure. But the 
government must finance the full value of the loan. Therefore, the 
unified budget surplus (which reflects only the subsidy cost of a 
direct loan) is larger than the reduction in debt held by the public 
(which reflects the full value of the direct loan). Similarly, the on-
budget surplus does not exactly match the change in gross Federal debt. 
Other accounting discrepancies have similar effects.
[GRAPHIC] [TIFF OMITTED] T5091.016

    Gross Federal debt would be higher under the 
Administration's proposal than under such a baseline for two 
reasons. The primary reason is that under the Administration 
plan, additional debt would be issued to the Social Security 
and Medicare trust funds. The other reason is that under this 
plan, a modest share of the projected surpluses would be used 
to boost discretionary spending and provide tax cuts in the 
form of universal savings accounts, rather than to pay down the 
publicly held debt. As a result, debt held by the public would 
be somewhat higher under the Administration's proposal than 
under this baseline.
    It should be noted that any proposal to use the unified 
budget surplus for new spending or tax cuts would raise gross 
Federal debt as compared to this baseline. Such plans would 
raise the gross Federal debt compared to this baseline because 
those plans would use part of the surplus for tax cuts or new 
spending rather than for retiring debt held by the public. As 
explained above, the Administration's proposal would itself 
raise the gross Federal debt, but it would do so primarily 
because it would increase debt held by the trust funds, rather 
than debt held by the public. (Recall that gross Federal debt 
is the sum of debt held by the public and debt held by the 
trust funds.) Thus, two different policies that generate 
increases of equivalent size in the gross Federal debt can have 
very different economic effects if one policy raises the gross 
debt because it swells debt held by the public while the other 
policy raises the gross debt because it increases debt held by 
the trust funds.

                               Conclusion

    Debt held by the public affects saving and investment. 
Relative to current levels, the Administration proposal would 
lead to a substantial reduction in debt held by the public, 
boosting saving and spurring investment. Federal Reserve 
chairman Alan Greenspan and various other economists have 
lauded these aspects of the Administration plan.\8\
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    \8\ In testimony before the House Ways and Means Committee on 
January 20, Greenspan stated: ``The advantages that I perceive that 
would accrue to this economy from a significant decline in the 
outstanding debt to the public and its virtuous cycle on the total 
budget process is a value which I think for exceeds anything else we 
could do with the money.''
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    The Administration's proposal would make explicit a part of 
the government's existing, but implicit, obligation to Social 
Security and Medicare. It would do so by issuing more Treasury 
bonds to the Social Security and Medicare trust funds. As a 
result, gross Federal debt in dollar terms would rise even 
though debt held by the public would fall sharply. 
Nevertheless, gross Federal debt would fall as a percentage of 
GDP, and its increase in dollar terms would be economically 
benign; it would not reduce saving and investment. Nor would it 
increase the costs of paying future Social Security and 
Medicare benefits. Alternative proposals to use budget 
surpluses for tax cuts or spending increases also would raise 
gross Federal debt but could do so in an economically injurious 
manner if the proposals significantly raised the publicly held 
debt.
      

                                


Statement of Hon. Edward M. Gramlich, Member, Board of Governors of the 
Federal Reserve System

    Mr. Chairman and members of the Committee, I appreciate the 
opportunity to appear before you today to discuss Social 
Security reform. I speak for myself, as past chair of the 1994-
1996 Quadrennial Advisory Council on Social Security, and not 
in my current status as a member of the Federal Reserve Board.
    As you are all well aware, the U.S. population is aging. 
Today there are 3.4 workers per retiree; by 2030 it is 
projected that there will only be two. This fundamental change 
in the demographics of our population poses a large challenge: 
how can we provide adequate health and retirement benefits to 
our retired population, without imposing undue burdens on 
tomorrow's workers?
    Clearly, the answer to this question is that we must act 
now to increase the total amount of resources to be available 
in the future. By increasing the size of our economy, we can 
devote a greater share of output to the retired population, 
without reducing the consumption of the working population. The 
only way to achieve this critical objective is for us to build 
up the stock of productive capital by increasing our rate of 
national saving. Indeed, in the current expansion, investment 
has expanded at a rapid clip, without inducing a rise in 
interest rates. This investment boom, and the accompanying 
step-up in the growth of the capital stock, is partly 
attributable to an increased rate of national saving. Between 
1992 and 1998, national saving increased from 3.7 percent to 
7.5 percent of net national product. While private and state 
and local government saving actually dipped during this period, 
this decline was more than offset by increased saving by the 
federal government through deficit reduction.
    The stellar performance of the economy over recent years 
provides the nation a unique opportunity to begin to tackle its 
long-run problems. In particular, the large budget surpluses 
that 1are projected over the next 15 years or so, if they are 
permitted to materialize, will significantly improve our fiscal 
and economic position as the baby boom starts to retire. From 
the government's perspective, using those surpluses to pay down 
the federal debt will reduce future interest payments and free 
up future tax revenue; from the macroeconomic perspective, the 
increase in national saving represented by the increase in 
government saving will lead to a larger capital stock, higher 
productivity, and an improved standard of living.
    From this standpoint, the broad objective of the Clinton 
Administration's budget--that is, to preserve most of the 
projected surpluses--seems to me both responsible and 
appropriate. The Administration would devote about $1.4 
trillion of the projected $4.9 trillion of current law 
surpluses over the next 15 years to new spending, and use the 
remainder to pay down our national debt. According to the 
Administration's calculations, the ratio of debt held by the 
public to GDP would fall from its current 44 percent to 7 
percent by 2014. If such an outcome were to materialize, it 
would represent a dramatic improvement in the fiscal position 
of the nation.
    Under current law, the Social Security revenues exceed 
outlays, creating surpluses that are credited to the Social 
Security trust fund. Without any legislative changes, the 
Social Security trust fund will continue to accumulate funds, 
reaching a peak in 2020 of $3.8 trillion, or almost 16 percent 
of GDP. These surpluses both reduce the national debt and 
improve the long run fiscal condition of Social Security. This 
claim does not stem from any accounting gimmickry: By reducing 
future interest payments, these surpluses do indeed free up 
future revenues.
    In addition to this accumulation already scheduled under 
current law, the Administration is also proposing to transfer 
an additional $2.8 trillion of general revenues to the Social 
Security trust fund. While the Administration's rationale for 
these transfers is to ensure that the surpluses actually 
materialize, the transfer of general revenues represents a 
major shift from past practice, under which Social Security has 
been financed almost entirely from dedicated payroll taxes.
    During the deliberations of the 1994-1996 Social Security 
Advisory Commission, we considered whether general revenues 
should be used to help shore up the Social Security program. 
This idea was unanimously rejected, for a number of reasons. 
First, using general revenues to fund Social Security puts the 
Social Security system in competition with other spending 
programs during the budget cycle. But Social Security is a 
long-range program--people pay dedicated taxes today toward 
benefits that may not be received for 30 or 40 years--and many 
feel that it should not be part of an annual budgetary 
allocation process.
    Perhaps more importantly, using general revenues to fund 
Social Security undermines the fiscal discipline imposed by the 
need to ensure that income earmarked for Social Security is 
sufficient to meet the entire cost of the program, both in the 
short run and long run. Without a long-range budget constraint 
on Social Security, it will be much more difficult to limit 
future benefit growth. And, notwithstanding the large surpluses 
being projected, some reductions in benefits are almost certain 
to be necessary as the U.S. population ages.
    It is important to remember that the aging of the 
population will bring pressures to programs other than Social 
Security. The trustees of the Medicare trust fund project that 
Medicare expenditures as a share of GDP will more than double--
from 2.7 percent today, to over 5.8 percent in 2030, and 
Medicaid spending on long-term care likely will face similar 
increases. Because under the current budget system, Medicare 
Part B and Medicaid are financed with general revenues, there 
is much less pressure to take measures now to improve their 
long-run financing. But these programs too will put significant 
demands on government resources in the future. If we use the 
projected surpluses as a rationale for not making hard choices 
in Social Security, finding the resources to provide Medicare 
and Medicaid to our aging population will prove that much 
harder.
    Thus, there are serious drawbacks to relaxing Social 
Security's long run budget constraint through general revenue 
transfers. I would prefer Social Security reforms that maintain 
the link between dedicated taxes and benefits, and maintain the 
value of long-range actuarial analysis. This discipline is 
essential if we are to limit the impending explosion of 
entitlement spending. The President's budget proposal, by 
preserving future surpluses and paying down our national debt, 
makes an important contribution to raising national saving. But 
to me the proposal looks even better without the general 
revenue transfer.

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