[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
                PRESIDENT'S FISCAL YEAR 2006 BUDGET WITH
                    U.S. DEPARTMENT OF THE TREASURY
                          SECRETARY JOHN SNOW

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 8, 2005

                               __________

                            Serial No. 109-1

                               __________

         Printed for the use of the Committee on Ways and Means



                    U.S. GOVERNMENT PRINTING OFFICE
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
ROB PORTMAN, Ohio                    WILLIAM J. JEFFERSON, Louisiana
PHIL ENGLISH, Pennsylvania           JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona               XAVIER BECERRA, California
JERRY WELLER, Illinois               LLOYD DOGGETT, Texas
KENNY C. HULSHOF, Missouri           EARL POMEROY, North Dakota
SCOTT MCINNIS, Colorado              STEPHANIE TUBBS JONES, Ohio
RON LEWIS, Kentucky                  MIKE THOMPSON, California
MARK FOLEY, Florida                  JOHN B. LARSON, Connecticut
KEVIN BRADY, Texas                   RAHM EMANUEL, Illinois
THOMAS M. REYNOLDS, New York
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana

                    Allison H. Giles, 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 
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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of February 1, 2005 announcing the hearing..............     2

                                WITNESS

U.S. Department of the Treasury, Hon. John Snow, Secretary.......     5

                       SUBMISSIONS FOR THE RECORD

Embassy of the Government of Peru, statement.....................    68
Investment Company Institute, Stevens, Paul, statement...........    70
Williams, Janie, Ridgecrest, CA, statement.......................    74


                  PRESIDENT'S FISCAL YEAR 2006 BUDGET
                  WITH U.S. DEPARTMENT OF THE TREASURY
                          SECRETARY JOHN SNOW

                              ----------                              


                       TUESDAY, FEBRUARY 8, 2005

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to call, at 10:10 a.m., in room 
1100, Longworth House Office Building, Hon. William M. Thomas 
(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 01, 2005
No. FC-1

                      Thomas Announces Hearing on

                President's Fiscal Year 2006 Budget with

                    U.S. Department of the Treasury

                          Secretary John Snow

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
President Bush's budget proposals for fiscal year 2006 within the 
jurisidiction of the Committee on Ways and Means. The hearing will take 
place on Tuesday, February 8, 2005, in the main Committee hearing room, 
1100 Longworth House Office Building, beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from the Honorable John Snow, 
Secretary of the Treasury. 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:

      
    On February 7, 2005, President George W. Bush is expected to 
deliver his fiscal year 2006 budget to Congress. The budget will detail 
his tax proposals for the coming year. The Treasury plays a key role in 
many areas of the Committee's jurisdiction, including taxes and 
customs.
      
    In announcing the hearing, Chairman Thomas stated, ``The 
President's budget will include tax and other proposals related to 
Treasury functions within the jurisdiction of the Committee. I look 
forward to receiving the President's budget and discussing his 
proposals with Secretary Snow.''
      

FOCUS OF THE HEARING:

      
    Secretary Snow will discuss the details of the President's budget 
proposals that are within the Committee's jurisdiction.
      

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noted above.

                                 

    Chairman THOMAS. Good morning. Today marks the first in a 
series of hearings to examine President Bush's proposed budget 
for the Fiscal Year 2006. Secretary John Snow of the United 
States Treasury Department is our guest today. Mr. Secretary, 
we welcome you back, and we look forward to your testimony. 
Since your appearance before the Committee about a year ago, 
the economy, in the Chair's opinion, has performed extremely 
well. More than 2.2 million jobs were created last year, 
aftertax income rose nearly 9 percent, and average economic 
growth was 4.4 percent. Americans now keep more of their 
paychecks, and America's businesses are better positioned to 
compete in the global marketplace and create more jobs at home. 
These positive outcomes, I believe, are the result of well-
timed tax relief proposed by the President and modified and 
approved by Congress.
    During the past 4 years, we have done a great deal to 
improve the Tax Code. We have lowered marginal income tax 
rates, reduced the tax burden for families and job creators, 
lowered the tax rate on capital gains and dividends and 
enhanced savings incentives in pensions and Individual 
Retirement Accounts. But, clearly, much more needs to be done. 
The Chair compliments the President in initiating a commission 
to examine more fundamental tax reform, and we look forward 
with working with the Administration on that effort. During the 
State of the Union message last week, President Bush firmly 
framed Social Security in policy terms instead of political 
ones, and I commend the President for opening the Social 
Security debate to ensure that Social Security remains safe and 
secure for our children and grandchildren.
    In the coming weeks, this Committee will engage in an even 
broader discussion about retirement security. Our society is 
aging, and we have a responsibility to address its changing 
needs. Social Security, as in its initial creation, is a key 
component of that retirement security. It is not, however, the 
entire need of seniors, especially today. Medicare, long-term 
or chronic care, pension reform, savings incentives are 
critical pieces as well and will be examined. Our goal is to 
develop a bipartisan approach that helps protect the future of 
our children and grandchildren, while providing them with 
greater opportunities to build nest eggs for their anticipated 
golden years. Mr. Secretary, thank you. As managing trustee of 
Social Security and Medicare, we are very interested in hearing 
your perspective on how to tackle the challenges facing this 
Nation. Now it is my pleasure to recognize the gentleman from 
New York, Mr. Rangel, the Ranking Member, for any comments he 
may wish to make.
    [The opening statement of Chairman Thomas follows:]

    Opening Statement of The Honorable Bill Thomas, Chairman, and a 
        Representative in Congress from the State of California

    Good morning. Today marks the first in a series of hearings to 
examine President Bush's proposed budget for Fiscal Year 2006. 
Secretary John Snow of the U.S. Treasury Department is our guest today. 
Mr. Secretary, we thank you for coming and look forward to your 
testimony.
    Since your appearance before the Committee a year ago, the economy 
has performed extremely well. More than 2.2 million jobs were created 
last year; after-tax income rose nearly 9 percent, and average economic 
growth was 4.4 percent. Americans now keep more of their paychecks and 
America's businesses are better positioned to compete in the global 
marketplace and create more jobs at home. These positive outcomes are 
the result of well-timed tax-relief proposed by President Bush and 
approved by the Congress.
    During the past four years, we have done a good deal to improve the 
Tax Code. We have lowered marginal-income tax rates, reduced the tax 
burden for families and job creators, lowered the tax rate on capital 
gains and dividends, and enhanced saving incentives in pensions and 
IRAs. The Committee looks forward to working with you to continue down 
this path of tax reform.
    During his State of the Union address last week, President Bush 
firmly framed Social Security in policy terms, instead of political 
ones. I commend the President for opening the Social Security debate to 
ensure that Social Security remains safe and secure for our children 
and grandchildren.
    In the coming weeks, this Committee will engage in an even broader 
discussion about retirement security. Our society is aging and we have 
a responsibility to address its changing needs. Social Security is an 
important piece of retirement security. Medicare, long-term and chronic 
care, pension reform and savings incentives are critical pieces that 
also should be examined. Our goal is to develop a bipartisan approach 
that helps protect the future of our children and grandchildren, while 
providing them with greater opportunities to build nest eggs for their 
golden years.
    Mr. Secretary, thank you for coming today. As managing trustee of 
Social Security and Medicare, we are very interested in hearing your 
perspective on how to tackle the challenges facing this nation.
    I now recognize the gentleman from New York, Mr. Rangel, for any 
opening statement he may have.

                                 

    Mr. RANGEL. Thank you, Mr. Chairman.
    Mr. Secretary, I think that the Chairman would advise you 
that we want to accommodate your very busy schedule. So, 
therefore, instead of reading a lengthy opening statement, what 
I would want to do is to share with you that I intend to put 
out a press release saying that the Social Security proposal 
that the President is talking about is dead, that it is not 
coming here, it is all over. One, because if we don't get it 
this year, certainly the President wouldn't ask my Republican 
friends to even touch that third rail in an election year; and, 
second, if you were serious about it, certainly it would be 
included in the budget. So, I will tell them to put in my press 
release there is no money in there for the budget, and maybe we 
might get into the fact that the war is over, since that is not 
in the budget. I may get a chance to say, and don't put any 
faith with those bonds that are in the Social Security Trust 
Fund, because the President said that is not money either. So, 
I will tell my Communist friends in China, be careful what they 
buy, because it is not cash that they can depend on. So, 
generally speaking, I will be going in that direction. I yield 
back the balance of my time in an effort to keep this short.
    Chairman THOMAS. Mr. Secretary, as you can see, it is a new 
year, but some things don't change. If you have a written 
statement, without objection it will be placed in the record; 
and you may address us in any manner you see fit.

            STATEMENT OF THE HONORABLE JOHN W. SNOW,
           SECRETARY, U.S. DEPARTMENT OF THE TREASURY

    Mr. SNOW. Thank you very much, Mr. Chairman, Ranking Member 
Rangel, Members of the Committee. It is always a pleasure and a 
great honor to appear before this Committee, which does so much 
to shape the contours and outlook for the American economy by 
your actions. I want to begin by complimenting you for the 
leadership the Committee has shown in the tax legislation that 
you put in place, which is clearly at the very core, at the 
very center, at the very heart of the fact that the American 
economy is now the best-performing industrialized country in 
the world, the best-performing major industrialized country in 
the word.
    That wouldn't happen by accident. It happened because of 
conscious leadership, Mr. Chairman, you and Members of this 
Committee took in putting into place the lower marginal tax 
rates that you referenced, the reductions in capital gains, the 
reductions in dividend rates, the expensing, and I don't need 
to go on. You know what you did. But I think it is only fair to 
say that it is because of your action in doing that that the 
American economy is now performing so well, with the highest 
growth rates, gross domestic product (GDP) growth rates we have 
seen in some 20 years, with the unemployment number down, 5.2, 
with jobs being created, with inflation low, with productivity 
high, with the American economy back on its feet and strong, 
expanding, with a very bright, very bright future ahead. We 
need to keep that going. The President's budget is designed to 
do that. That is why it calls for a number of measures to 
strengthen the economy, including, importantly, making the tax 
cuts permanent. I would urge to you act on that.
    The President's budget also, though, frames the issue of 
the deficit, calls attention to the deficit, says the deficit 
is unwelcome, says the deficit is too large, says it needs to 
be addressed. There are only two ways to really deal with the 
deficit, as you know. One

is continue to have strong growth, because with strong growth 
we see government receipts rise, and we are seeing that now. 
The rising receipts lie at the very center of why the deficit 
situation is improving. We need to keep those receipts strong. 
That means jobs, that means business is growing and expanding 
and investing. The other part of the equation, though, 
obviously is spending and spending restraint. The budget calls 
for tight spending restraint, just as it did last year. Many--
Congressman Rangel pronounced the call for spending restraint 
dead on arrival last year, and yet the budget that came out, 
approved by the Congress, reflected the very sort of tight 
spending controls that the President called for. I very much 
think and hope that will be the case again this year. The 
President has also said, though, that we can't simply worry 
about the next 5-year budget window, we need to think about the 
longer-term budget window.
    We are on a path to reduce the deficit in half over the 
course of the next few years. That is in the budget. I think it 
is very doable. The larger issue is the unfunded mandates, the 
obligations that we have to the future generations, and there 
the President has called for action on Social Security. I think 
it is an act of great leadership on his part and courage on his 
part to confront that issue that, as you say, Congressman 
Rangel, some people call the third rail of American politics. 
Why does the President want to do it? Why does he say it is an 
urgent issue? He wants to confront it for two very important 
reasons. One, the future health of our economy depends on 
dealing with the $10.4 trillion deficit obligation that hangs 
over us, an obligation that, if we don't deal with it, grows 
every year, becomes larger and larger and more difficult to 
confront. I think we have an obligation to future generations 
to deal with that. As the President said, this shouldn't be a 
partisan issue. The future of our children's well-being should 
be an issue that we can all collectively act on.
    It is also important, though, because the longer we wait, 
the larger the problem is for future generations. By acting on 
it now we can perform an act of intergenerational fairness to 
the future generation. The longer we wait, the larger the 
burden on future generations. Let me say that this is clearly 
an issue of basic arithmetic, not ideology. The numbers you all 
know well. When the system was put in place back in the 
thirties, there were some 40 workers for every retiree, people 
didn't live as long, and they had more children. In 1950, that 
ratio was 16 to 1, 16 workers for every retiree. Today, it is 
about 3 to 2. With the baby boomers coming on stream in just a 
few years--2008 is the first retirement year for the baby 
boomers. With the baby boomers coming on stream, that ratio is 
going to go to about 2. A pay-as-you-go system works all right 
when you have got 16 workers. It doesn't work very well when 
you have got 2 workers for every retiree. This is fundamentally 
a problem of basic arithmetic, and we need to confront the math 
of the problem.
    The President has proposed that, in confronting it, that 
people who are 55 or older not be affected, their benefits not 
be taken away. That is a deep commitment the President has 
made. He has also said that, for younger people, they should 
have an opportunity to do better than they would under the 
promises that Social Security has made but can't keep. Can't 
keep because they are not--the system is not sustainable. That 
is why these personal accounts are so important. Through the 
personal accounts, younger people have an opportunity to invest 
and build a nest egg to use what Albert Einstein called the 
most powerful force in the universe to their advantage, the 
power of compounding. A 20-year old, a 25-year old who puts 
away some of their payroll taxes into these accounts can count 
on a much better retirement than would otherwise be the case 
under Social Security. I would urge you to move forward on that 
critical initiative. So, Mr. Chairman, I am delighted to be 
here; and I look forward to trying to address the questions 
that the Committee will have for me.
    [The prepared statement of Mr. Snow follows:]

          Statement of The Honorable John W. Snow, Secretary,
                    U.S. Department of the Treasury

    Good morning and thank you Chairman Thomas and Ranking Member 
Rangel for having me here today to discuss the President's budget. I 
think you'll find that it exhibits a dedication to fiscal discipline, 
transparency, and economic growth.
    By focusing on priorities and looking for savings in every agency, 
across the board, the President's administration has come up with a 
budget that we believe is fair while also holding the government 
accountable. As the President announced in his State of the Union 
Address last week, this budget adheres to the principle of ``Taxpayer 
dollars must be spent wisely, or not at all.''
    It holds the growth of discretionary spending to just 2.1 percent, 
below the rate of inflation. Non-discretionary spending in this budget 
falls by nearly one percent, the tightest such restraint proposed since 
the Reagan administration.
    This administration appreciates that cutting taxes and exercising 
fiscal discipline must go hand in hand. We appreciate that this is the 
people's money that we are dealing with, and that we work for the 
taxpayers.
    That is why we are committed to making the President's pro-growth 
tax cuts permanent and building on our strengthened economic 
fundamentals as we submit to you a budget that will increase the 
efficacy of our government programs without over-spending the 
taxpayers' money.
    Over the weekend, the finance ministers of the G7 met--the U.S. was 
represented by Treasury Undersecretary for International Affairs John 
Taylor so that I could recover from a bad cold--and they discussed the 
importance of promoting and achieving economic growth in our countries, 
as well as keeping our respective financial houses in order. These two 
issues are inextricably linked.
    The way that we, as the executives of the Federal Government, 
manage the taxpayers' money sends a message to the people of America as 
well as to our trading partners and investors around the globe. When we 
control our spending, we are showing our citizens and the world that 
fiscal discipline is a priority on par with our policies that promote 
economic growth.
    I'll talk more about fiscal discipline in a moment, but I'd like to 
start with a look at what we have recently achieved through pro-growth 
economic policies.
    Well-timed tax cuts, combined with sound monetary policy set by the 
Federal Reserve Board, have resulted in very good economic growth and, 
most importantly, continual job creation. The economy has created over 
2.7 million jobs since May of 2003. And while job growth can never be 
fast enough for those looking for work, the steady pace of job creation 
has been an unmistakable sign of an economy that has recovered from 
very tough times, and is now expanding.
    Whenever I speak with my counterparts in the G7, I am reminded that 
the American economy is the envy of the world. Our recovery and growth, 
our successful dedication to entrepreneurship--all these things are 
admired, and increasingly emulated, by our G7 partners.
    Is it any wonder that they want to learn the secret to our economic 
resiliency? A quick look at the facts reveals much to be envied: GDP 
growth for 2004 was 4.4 percent. Our economy has posted steady job 
gains for twenty straight months. The unemployment rate is down to 5.2 
percent--lower than the average rate of the 1970s, 1980s and 1990s. 
After-tax income is up by over ten percent since the end of 2000 and 
household wealth is at an all-time high. Inflation, interest rates, and 
mortgage rates remain at low levels. Homeownership rates are at record 
highs.
    Tax cuts can be hard on budgets and deficits in the short term, but 
if the tax cuts are geared toward improving incentives the long-term 
benefits can far outweigh the short-term discomfort, and this fact has 
been well illustrated by these outstanding economic results.
    I point to this record because it is so important that we continue 
on a pro-growth path. Continued economic growth is needed, and will be 
needed, to continue to improve our standard of living and until every 
worker in America who is still looking for a job can find one.
    For example, we've got to make the President's growth-enhancing tax 
cuts permanent--and that is included in this budget. The President's 
Panel on Tax Reform was also created with economic growth in mind. It 
is a group of some of the best minds in our country, and they'll be 
looking critically at the entire existing code and coming up with 
proposals that would make it fairer, less complex, and more pro-growth.
    While the Panel is working on that historic task, our efforts to 
grow the American economy will continue in many other areas--I am 
particularly interested in legislation that will reduce the burden of 
frivolous lawsuits on our economy--and this budget is part of the 
Administration's overall pro-growth policy agenda.
    As I already mentioned, economic growth is good for our country for 
the jobs it creates and the prosperity it spreads. But it is also, 
importantly, part of a winning strategy on deficit reduction--one of 
the top priorities of this budget--because economic growth increases 
Treasury receipts.
    Treasury receipts are rising--in the second half of calendar 2004, 
individual income tax revenue is up 10.5 percent versus the same period 
in 2003--and will rise, as long as we have economic growth. That must 
be accompanied, as I emphasized earlier, by strict fiscal discipline. 
That is why the President's budget proposes real savings. I know it 
will have its critics as a result, but its frugality is essential.
    Let me be very clear on this: we have deficits and they are 
unwelcome. But we are not under-taxed and higher taxes will not be the 
solution to reducing deficits. Fiscal discipline, combined with 
economic growth, is the correct path.
    Using this approach, we are making headway on deficit reduction, 
and we're on track to halve the deficit by 2009. The deficit is also 
forecast to fall to 3.0 percent of GDP in 2006 and to 1.5 percent by 
2009, well below the 40year historical average of 2.3 percent of GDP.
    The 2004 deficit came in at 3.6 percent of GDP--nearly a full 
percentage point lower than had been projected. And the 2005 deficit is 
projected to show another decline.
    While we are pleased with this progress, we recognize that more 
needs to be done.
    We need to make the tough choices on spending and stand steadfast 
in our commitment to continuing economic growth in order to see that 
deficit whittled down.
    We also need to look at our long-term deficit situation. I spoke 
earlier about transparency, specifically the honesty of this budget, 
which deals openly with the needs of the times in which we live, from 
the war on terror to the need for continuing growth.
    In the interest of honesty and transparency, I encourage all of us 
to look at, and deal with, the $10.4 trillion deficit facing our 
children and grandchildren in the form of an unsustainable Social 
Security program
    The program is an important institution, a sacred trust, and it 
well for the times in which it was designed. It is, however, doomed by 
our country's demographics and in need of wise and effective reform.
    The arithmetic is simple. As people have begun to live longer and 
have fewer children, the ratio of workers paying into the system and 
retirees taking benefits out has dwindled dramatically. We had 16 
workers paying into a system for every one beneficiary in the 1950s, 
and today we have just three workers for every beneficiary. That ratio 
will drop to two-to-one by the time today's young workers retire.
    We all must agree that this demographic reality exists, that this 
problem exists. Social Security is secure for today's retirees and for 
those nearing retirement but it is offering empty promises to future 
generations.
    It is the future of the program that President Bush is concerned 
about, and it is the future of the program that we must address, this 
year, here on Capitol Hill. I echo the President's State of the Union 
Address in saying that we must join together to strengthen and save 
Social Security.
    We can, and should, do this without increasing payroll taxes. The 
level of increases that would be necessary, if we maintain the status 
quo, would have a terrible impact on our economy. It would negatively 
impact economic growth; jobs would be lost. We don't have to go that 
way.
    We can, and should, reform the system in a way that encourages 
younger generations of workers to build a nest egg that they own and 
control and can pass on to their loved ones.
    Saving Social Security is an undertaking of historic proportions. 
We have hard work ahead of us as we strive for consensus in the name of 
younger generations.
    We also have hard work ahead of us when it comes to strengthening 
the fundamentals of our economy: deficit reduction, good fiscal policy, 
energy policy, lawsuit abuse reform, and encouraging savings.
    I appreciate that this Administration has an ambitious agenda . . . 
but it is a good one, worth the work it will take to move forward, 
together, on it.
    Let's start by passing this responsible, pro-growth budget.
    Thank you for having me here today; I'm pleased to take your 
questions now.

                                 

    Chairman THOMAS. Thank you very much.
    The Chair would indicate that, given the time constraints 
and the number of Members that we have on the Committee, that 
the Chair will place himself under time constraint and would 
urge all Members to stay within the 5-minute timeframe. That 
doesn't mean perfecting the art of the 5-minute question and 
then assuming that the Secretary will have time to answer 
beyond the 5 minutes. If a question does consume a major 
portion of time and the Secretary's short response doesn't seem 
satisfactory, I have indicated to the Secretary and his staff 
that they should anticipate answering your questions in 
writing. Mr. Secretary, it is almost ironic that you are 
meeting here in this particular room to discuss Social 
Security. If you will notice, we have recently remodeled the 
room. We went through five layers of paint to get to the 
original colors which were placed on those walls about the same 
time that the Committee was considering the Social Security 
Act. It is also rather ironic that there are 41 Members of the 
Ways and Means Committee, which means, in the graphic example 
that you just gave, if you were the retiree at the time these 
walls received their first fresh coat of paint, the entire 
Committee would be paying into the Social Security fund to 
support you.
    Today, it is about three Members. If I were to select 
randomly three from the Committee, I might choose myself, the 
gentleman from New York, Mr. Rangel, and the gentleman from 
Illinois, Mr. Emanuel. If we were to discuss the issue that you 
just outlined, you would currently have two noes and one yes, 
in part because the minority leadership decided to impose a 
litmus test for Membership on this Committee----
    Mr. RANGEL. Point of personal privilege.
    Chairman THOMAS. I didn't mention anyone.
    Mr. RANGEL. Okay. Go ahead.
    Chairman THOMAS. Thank you--and that this Committee 
hopefully is atypical of the Members in terms of their need to 
respond to the problem that you outlined. In fact, I think you 
will find that very few, if any, of the Members to my left 
would be able to agree that it is a problem. So, you need to 
appreciate the job in front of us, and that is not only are 
they not going to be supportive of your answer to the problem, 
they are going to argue--I hope not--that there isn't even a 
problem. So, I applaud the President personally going out and 
using the power of the Presidency to focus on an issue that I 
believe is a real problem. At one time, the entire Committee 
supported you, and now we are down to three, and we will be 
down to two shortly. But that if in fact they don't believe 
that the President's approach to the problem is the most 
effective way to deal with the problem, first of all, I assume 
they have to admit that there is a problem, that they would be 
willing to engage an examination of alternatives which might 
address the problem. The Chair in his opening comments stressed 
that we were going to be looking at retirement in a broader 
context. Just as even during FDR's Presidency when they 
addressed the question of income support for seniors, Social 
Security was seen as a part of the solution, we are going to be 
looking at other parts that are 21st century and necessary for 
today's seniors in the significant profile.
    I want to urge the Secretary to understand that the 
argument of whether or not there is a problem is before the 
Committee, and solutions to that problem. I want to underscore 
that I want to thank the President for his presentation of the 
problem and the fact that he has offered a solution to that 
problem. Mr. Secretary.
    Mr. SNOW. Thank you very much, Mr. Chairman. I hear you. I 
know what you are saying. We are in the phase of this effort--I 
think it is an historic effort--to secure and strengthen Social 
Security, which has been one of the great hallmarks of our 
country for a long time. The fundamental fact, and I think it 
is undeniable, is that the system as currently constituted 
isn't sustainable. Now that is not the President's view. That 
is the view of the Actuary of the Social Security 
Administration, the nonpartisan Actuary. That is the view of 
the CBO. It is the view of the GAO, is the view of any number 
of commissions that have been asked to look at the facts. I 
think the facts tell the story. The President is, as you said 
so well, open to a real dialog on finding the answers. But, as 
Senator Moynihan famously said when he opened the chairmanship 
of a Committee some years ago, we have Republicans and 
Democrats here, we have Independents, we have liberals, we have 
conservatives, we have Libertarians. Before we address the 
issues before the commission, can I ask that we put aside our 
partisan views and get the facts and, after we get the facts, 
approach it with our political views in mind? I think that is 
critical to this debate, Mr. Chairman.
    Chairman THOMAS. Thank you, Mr. Secretary. The gentleman 
from New York wish to inquire.
    Mr. RANGEL. Mr. Secretary, we don't have any debate, 
because we don't know when we expect to get the President's 
proposal. Can you enlighten me on what timeframe we are going 
to get a proposal from the President on Social Security?
    Mr. SNOW. The President in the State of the Union message--
--
    Mr. RANGEL. Mr. Secretary, time is such a big problem that 
this guy has me under a 5-minute rule. Can you tell me whether 
or not you know? Any guess?
    Mr. SNOW. The President outlined the proposal for personal 
accounts. He also cited four or five, five or six options that 
he----
    Mr. RANGEL. That is enough. So, we will be getting 
recommendations. Now, besides dead Democrats, do you know of 
any alive Democrat that is working with the President on this, 
with all due respect to Pat Moynihan.
    Mr. SNOW. I think----
    Mr. RANGEL. Just one. I don't care. Not even on the 
Committee. Anyone on Commerce or anything. Because you are the 
one talking about bipartisanship. The Chairman said the problem 
is on this side. So, give me the name of anybody that is alive, 
that has been elected to the Congress, that is working with the 
President as he gives his outline for where we go from here. 
Anybody.
    Mr. SNOW. Well, I thought Congressman Stenholm showed a lot 
of openness on the issue when he----
    Mr. RANGEL. But he is not here with us. You said anybody 
alive I thought. He is still alive.
    Chairman THOMAS. He is half-way there. He is still alive.
    Mr. RANGEL. Now, the President said in his State of the 
Union, by the year 2042 the entire Social Security system would 
be exhausted and bankrupt. You being the trustee and following 
these things, do you agree with the President?
    Mr. SNOW. Yes, I agree that the system goes bankrupt----
    Mr. RANGEL. Now why do you think the Social Security system 
would go bankrupt in 2042?
    Mr. SNOW. Well, for the same reason that a company that 
becomes insolvent files for Chapter 11. The in-flow of revenues 
isn't adequate to meet the obligation. That is the definition 
of bankruptcy.
    Mr. RANGEL. Okay, then. Would you say that the incoming 
revenues that we receive in the United States of America does 
not meet the amount of money that we are spending today?
    Mr. SNOW. Do we have a deficit, are you saying?
    Mr. RANGEL. No, I am asking the same thing that you said 
about why we would be bankrupt, is that are we spending more 
than we are taking in now in the United States of America? The 
next question will be, so that we can maintain this friendship, 
is the United States of America, the leader of the free world 
and the most exciting economy that you can discover, are we 
bankrupt?
    Mr. SNOW. Far from it. We are the strongest economy in the 
world. It is because we can meet our obligations. We are able 
to meet our obligations.
    Mr. RANGEL. Tell me the difference, for purpose of 
education, the difference between the bonds that we have in the 
Social Security Trust Fund and the bonds that you are so 
confident are going to get us through this deficit that we are 
going through? What is the difference? Why is the Social 
Security Trust Fund bankrupt and the United States is not 
bankrupt?
    Mr. SNOW. Well, the IOUs, the bonds in the Social Security 
Trust Fund, are just like the bonds that are issued and held by 
many, many Americans and non-Americans all across the world.
    Mr. RANGEL. Including the Communist Chinese.
    Mr. SNOW. They are backed by the full faith and credit of 
the United States. The problem is that, in 2042, that surplus 
in the Social Security Trust Fund represented by those bonds is 
exhausted.
    Mr. RANGEL. Why is it exhausted? Because we have taken the 
money out of it. If we put all of the money that we had, as 
President Clinton was trying to do, we would not have this 
problem. So, right now, there is more money being paid into the 
Social Security Trust Fund than we are paying out. What happens 
to the rest of that money, Mr. Secretary?
    Mr. SNOW. Well, the money is recognized as an obligation of 
the United States, with every penny that has been paid in 
pledged to be paid back to the Social Security retirees.
    Mr. RANGEL. That is my point. Now what is the difference 
between the bonds that we promise the Chinese that we are going 
to pay back and the bonds that we promise the future Social 
Security retirees we are going to pay back? Is there a 
difference between the bonds that make Social Security bankrupt 
and not our great Nation?
    Mr. SNOW. The distinction is this, Congressman. All bonds, 
all paper issued by the United States is backed by the full 
faith and credit--the Social Security system, though, in 2042 
reaches the first year in which it is not able to fulfill its 
obligations, its promises. That is the definition of not being 
sustainable. That is the definition of bankruptcy.
    Mr. RANGEL. Okay. Could you tell me in writing why we 
cannot fulfill our promise to Social Security retirees but yet 
we can fulfill our promise to Communist China?
    Mr. SNOW. We are talking very different things there. I 
will be happy to elaborate on why they are so different.
    Chairman THOMAS. I will indicate to any Member whose 
interest is piqued by a written response to a question that may 
be asked--pretty obviously, if it were presented here, it would 
be on the public record, and any Member can have access to the 
written answers provided to questions in open session. We will 
make those available to all Members.
    Mr. RANGEL. That is great.
    Chairman THOMAS. Does the gentleman from Florida, Mr. Shaw, 
wish to inquire?
    Mr. SHAW. I sure do. Mr. Secretary, it is a pleasure to 
have you back in front of this Committee and have your good 
words with regard to the future of Social Security. As a 
grandfather of 14, soon to be 15, I am very concerned about 
their future. In fact, I am more concerned about their future 
than I am the 2006 election, and I think everybody here should 
be. I would like to bring up a couple of questions, following 
up on Mr. Rangel. The gentleman from New York asked you how 
many Democrats you are working with. I heard very clearly in 
the President's State of the Union address, I heard him reach 
out for any ideas, any good ideas that would be considered. How 
many good ideas have you heard from Democrats in the House of 
Representatives or the Senate?
    Mr. SNOW. Congressman----
    Mr. SHAW. Just name one, Mr. Secretary.
    Mr. SNOW. Well, I thought Allen Boyd, your fellow 
Floridian, apparently has offered some good thoughts on it. But 
we are still hopeful, let me put it that way. We still are 
hopeful that this can be approached in a bipartisan way. That 
is the way that the President wants to approach it. As he said 
in the State of the Union speech, and you alluded to it, our 
children's retirement security is more important than partisan 
politics. I think we need to rise above partisan politics on 
this one.
    Mr. SHAW. It is interesting to note that a Democrat-leaning 
PAC has already gone after Mr. Boyd for speaking up, which I 
found despicable, and I am very concerned about that. Now let's 
go talking about the solvency of the program. You said it is 
going to go bankrupt in 2042, but in which year are we not 
going to have enough money coming in, actual cash--I am talking 
about cash flow--to pay the dividends, and we are going to have 
to go into the trust fund and start cashing those bonds?
    Mr. SNOW. Congressman, the system becomes negative on a 
cash-flow basis--that is annual in-flow and annual out-flow--in 
2018.
    Mr. SHAW. So, the Congress is going to have to get the 
money to pay off the bonds to pay beneficiaries after 2018. 
What is the cash shortfall between 2018 and 2042?
    Mr. SNOW. The cash shortfall is very, very--it is in the 
trillions of dollars.
    Mr. SHAW. I think it is somewhere around $2 and a half 
trillion.
    Mr. SNOW. That is correct.
    Mr. SHAW. If I am correct on my figures----
    Mr. SNOW. That is right. I can give you that number 
precisely in a second.
    Mr. SHAW. I think that would be very, very helpful, because 
this Congress is going to have to come up with approximately $2 
and a half trillion, beginning in 2018 to pay the benefits. Now 
let's continue to talk about cash flow, because this is 
terribly important, because that is the way our budget goes 
here. Now I have been told and I understand that, in terms of 
today's dollars, that over the next 75 years--and we must look 
at a pension plan over the full term of the life of today's 
workers or the young children that will be coming into the work 
force--that there is a cash shortage, in terms of today's 
dollars, of $10.3 trillion. Or if we actually see what is the 
actual cash flow, the out-go, I have been told that it is $26 
trillion. Am I correct on those figures, Mr. Secretary?
    Mr. SNOW. Yes, you are, according to the Social Security 
Actuary, Congressman. It is $10.4 trillion present value going 
out, and the 26 is the nominal.
    Mr. SHAW. I also understand that, according to the 
actuaries, that the longer we wait, it is going to cost us $600 
billion a year. Is that a correct figure?
    Mr. SNOW. Yes, indeed it is.
    Mr. SHAW. Mr. Secretary, we are faced with a dilemma at 
this particular point. This is a historic occasion. I can tell 
you, from just looking at my kids and my grandkids, they will 
turn our pictures to the wall if this Congress doesn't act to 
do something. They are going to be required to pay into a 
system that we know will not be adequate upon their retirement 
to pay full benefits. The Congress is then going to be faced 
with a dilemma of either increasing the tax tremendously on the 
backs of the working people or cutting benefits, and that is 
something we do not have to face if we were to act now and act 
responsibly. I think there is still hope. I will repeat what 
you said: Hope is still there that we will get good bipartisan 
support. Because I think this is terribly important. This is 
much more important than any of our reelections. It is about 
our children and our grandchildren. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank the gentleman. Does the gentlewoman 
from Connecticut wish to inquire?
    Mrs. JOHNSON OF CONNECTICUT. Thank you very much, Mr. 
Chairman; and welcome, Mr. Snow. Given the rules, I want you to 
know I have two questions I want you to comment on. So, I will 
make them brief and hope that you will make your answers brief 
so that we can get through both of them. First of all, I was 
very disappointed in the President's budget this year. He did 
not include the $25 billion for long-term care that he included 
in last year's budget. He did, however, continue to include 
support for the reform of Medicaid. Now you can't really reform 
Medicaid unless we begin to build an alternate source of 
funding for long-term care. While we are doing Social Security 
reform, we really ought to be looking at how do we help people 
protect themselves from literally being wiped out by long-term 
care costs. So, if you have any comment on the willingness of 
the Administration to really look at the comprehensive approach 
to long-term care reform, which does include the Tax Code, I 
would be interested in those comments.
    Mr. SNOW. Well, the issue of the Code and health care is a 
matter that will be addressed, Congresswoman, by the panel that 
the Chairman alluded to. Obviously, the Code has a heavy 
bearing on the health care delivery system; and in my 
conversations with panel Members, it is clear that those 
issues--in fact, all of the great issues of our time in terms 
of the Code--will be on the table. So, I fully anticipate the 
issues you are talking about, the health care tax credit and 
others, being addressed by the panel.
    Mrs. JOHNSON OF CONNECTICUT. I think that is relinquishing 
an extraordinary amount of responsibility and creativity to a 
nonelected group, but I will be interested in what they do.
    My second concern was to, first of all, compliment you on 
taking up the issue of currency manipulation with China. But I 
am very concerned that China continues to peg its currency to 
the value of the Dollar. It is giving its businessmen a 
tremendous advantage over our businessmen, and between the 
currency peg and their cornering of the steel market and 
driving the price of steel up, we are really facing some very 
great challenges to our industrial base and the ability of 
America to manufacture the quantity and the diversity of 
products necessary to sustain a strong defense industrial base. 
So, I think this issue of currency manipulation is big, and it 
is particularly big with China, because China couples it with 
an inability to enforce its obligations under the intellectual 
property protection provisions of the World Trade Organization 
(WTO).
    Mr. SNOW. The whole issue of the Chinese peg is one that we 
have taken very, very seriously. I have engaged all of the 
senior political and economic leadership of the country on the 
question. We made it clear to them that they need to move to a 
flexible exchange rate, to let the market set the currency, 
rather than do it through administrative fiat. We have received 
from the political leadership of the country and economic 
leadership a positive response on that. They have indicated 
that they agree that they need to move to flexibility, but they 
can't move to it until they modernize the financial 
infrastructure of the country. Of course, they have had huge 
problems with nonperforming loans, with the absence of a 
market-based financial system, with the absence of the sort of 
institutions, of the financial marketplace that we know and 
rely on in all developed countries.
    They are making great progress, Congresswoman, let me say 
that. We are not satisfied, but they are making great progress. 
I would cite the fact that recently they entered into an 
agreement with the Chicago Mercantile Exchange to put in place 
a forward hedge on their currency, a derivatives market on 
their currency. Now there is no reason to hedge a currency that 
is pegged. So, I am encouraged. They know where we are coming 
from. They know that we are intent on seeing them move there, 
and I think they understand it is in their interest to do so as 
well. I am very sympathetic to your question. On the long-term 
health care, we are not going to abdicate the ultimate 
responsibility to a nonelected body. They will report back to 
us, of course, and the President ultimately will make the 
decision. I hope we will have legislation proposed to this 
Committee and to the Congress shortly after the Committee 
reports, which is this summer.
    Chairman THOMAS. Does the gentleman from California, Mr. 
Stark, wish to inquire?
    Mr. STARK. Thank you, Mr. Chairman. Mr. Chairman, is it 
proper--I have some questions on health care, which is a new 
topic for the Secretary, that I would like to submit them in 
writing and see if he would respond to them.
    Chairman THOMAS. Without objection. To the degree the 
Secretary, in the capacity of Secretary of the Treasury, 
couldn't be as responsive as we would like, I assume you would 
like him to try to get the Administration to respond to your 
question, not having seen the questions?
    Mr. STARK. Thank you, Mr. Chairman.
    Chairman THOMAS. Without objection.
    Mr. STARK. Thank you, Mr. Secretary, for being with us here 
today. I just wanted to reaffirm something with you. I have a 
problem at home. My son will be 10 shortly, and he received 
from his grandparents a thousand-dollar savings bond, which 
will mature shortly after his 10th birthday. With all of this 
discussion, the Budget Committee--the majority of the Budget 
Committee spokesmen suggested that the trust fund was going 
bankrupt because it is just IOUs from the government. I was 
trying to explain to my son that what he has is an IOU from the 
government, and can I go home and tell him that the Secretary 
of the Treasury assures him that that thousand-dollar U.S. 
savings bond is gilt-edged and will be honored by the United 
States and the full faith and credit of the United States?
    Mr. SNOW. Yes. Yes, you can. Those are full faith and 
credit obligations.
    Mr. STARK. Is it not true then that all of the assets in 
the Social Security Trust Fund are as gilt-edged and secure as 
my son's U.S. savings bond?
    Mr. SNOW. As I said to Congressman Rangel, they are all 
backed by the full faith and credit of the United States 
Government. There has never been a default.
    Mr. STARK. There has been some question raised here. I 
thank you for that answer. Now you have argued that Social 
Security, or the Administration has, is unsustainable. But the 
budget you give us extends the President's tax cuts and makes 
them permanent. The total cost of those tax cuts is three to 
five times more than the cost of shoring up Social Security 
without any benefit cuts. How can one policy be unsustainable 
and the other not?
    Mr. SNOW. Congressman, the budget we have submitted, which 
includes making the tax cuts permanent, does so within the 
President's budget reduction parameters. As you look at the 
out-years on that, on the budget we have submitted, you will 
see that it comes down, I think, to 1.7 percent of GDP, which 
is low by historical standards. We can incorporate and will 
incorporate the tax permanence in the budget numbers you see. 
There is total transparency there. While incorporating them 
into the budget we also achieve the President's objectives of 
reducing the deficit----
    Mr. STARK. I understand what you have said in the budget, 
Mr. Secretary. But when you have got tax cuts for the top 1 
percent of the households, with average incomes over a million 
bucks, and they exceed--those tax cuts alone exceed the cost of 
shoring up Social Security, without any benefit cuts, what are 
the President's priorities? Tax cuts for those of us who are 
wealthy, or repaying the trust fund for those who have 
contributed throughout their working lifetime? I want to know 
what your priorities are.
    Mr. SNOW. Congressman, our priorities, I want to 
underscore, are to keep the American economy strong and 
prosperous, growing and creating jobs. Because of those tax 
cuts, as the Chairman said, there are some 2.7 million 
additional Americans working today. I think it is important we 
keep the economy strong and capable of creating jobs. That is 
where the tax cuts are so important. That is why sustaining the 
tax cuts is so important.
    Mr. STARK. So, you think that giving all of that money to 1 
percent of the households, those who make over a million 
dollars, is what is going to drive our economy, rather than 
keeping senior citizens out of poverty and providing them 
decent health care. That is your opinion as to how we will have 
a better society. Is that correct?
    Mr. SNOW. Congressman, I don't see this at all as an 
either/or. I think we need the tax cuts made permanent, because 
that allows the American economy to grow and expand and create 
jobs.
    Mr. STARK. But it is that. Social Security, it is either/
or, Mr. Secretary.
    Mr. SNOW. Well, no, Congressman. There are ways to fix 
Social Security as laid out by many people, including the 
President's Commission on Social Security. There are ways to 
fix Social Security in ways that are fair to future generations 
and put the system on a sustainable basis and secure and save 
it for the future. We can do that.
    Mr. STARK. Your plan is to cut benefits for Social 
Security, Mr. Secretary, and not--and cut taxes for the rich. 
That doesn't seem to me to be very fair. That is all, my 
concern. I just wondered how that fits in with your priorities. 
Is it moral? Is that a good thing to do?
    Mr. SNOW. Congressman, it is critically important that we 
keep the economy on the right path. It is critically important 
that people who are looking for work find work. I think we have 
an obligation to people who are looking for jobs to give them 
the ability to find a job. Lower tax cuts clearly make that 
possible. So, lower tax cuts are critical. At the same time, we 
need to address Social Security, and we can, and there are ways 
to do it that are fair and equitable.
    Mr. STARK. Mr. Chairman, I think I have just been given a 
snow job. That is all.
    Chairman THOMAS. I can't believe you would be that stark in 
your comment.
    Does the gentleman from California, Mr. Herger, wish to 
inquire?
    Mr. HERGER. Thank you, Mr. Chairman.
    Mr. Snow, I want to thank you for appearing before this 
Committee; and I particularly want to thank President Bush for 
the courage that he has shown in stepping forward on addressing 
this incredibly crucial issue affecting our children and our 
grandchildren. If I understood you correctly, the major part of 
the essence of the problem is that, when Social Security began 
back in 1935, we had 41 workers paying in for every 1 receiving 
it. Today, we are down to a little more than 3 paying in for 
every 1 receiving it, and that drops even lower than that. That 
very soon we will actually--we can see where, when the baby 
boomers begin retiring in 2008, we begin having a very major 
problem. It is--being aware of that, I am amazed that there are 
so many on the other side of the aisle, my good Democrat 
friends, who don't even see a problem here, who think that 
everything, evidently, is just fine; and I want to thank you 
and the President for stepping forward.
    Now the President has been accused of proposing to cut 
Social Security benefits to pay for a, quote, risky scheme. 
However, the personal accounts proposed and detailed by the 
President during his State of the Union address is modeled on 
the Thrift Savings Plan (TSP) enjoyed by all Members of 
Congress and all U.S. Federal employees which enables them to 
invest a portion of their wages in a government bond fund, 
corporate bond index fund and equity index fund at a very low 
administrative cost. Would you review the investment options 
and administration of the proposal accounts President Bush 
proposes and steps that would be taken to protect workers' 
investments?
    Mr. SNOW. Yes, Congressman, thank you. Thank you very much.
    The idea that is being put forward here by the 
Administration, by the President, is simply this: The system 
can't pay the benefits that it has promised. We know that. That 
is what those numbers you just went through tell us.
    In 2042, the people who seek to get their benefits that 
year, if we don't do anything in the interim, will face a very 
sizable reduction in the benefits, because the system can't pay 
the benefits. That is what the bankruptcy is all about. It has 
nothing to do with the IOUs, it has everything to do with the 
amount of revenue flowing into the system. The President has 
said, given that fact, let's give people a chance to do better 
than they would under the system that can't fulfill those 
promises. How do you do that? Well, you do that by allowing 
people to invest and build a nest egg over a long working life, 
applying the laws of compounding, the powerful laws of 
compounding. At the same time, though, we recognize that these 
have to be very safe investment vehicles. This has to be a 
secure investment. This is not going to the roulette wheels. It 
isn't going to the race track. These are safe and secure 
investments.
    The investment vehicle, as you point out, will be very much 
patterned on the TSP available to government employees and 
Members of Congress. It will have a limited number of options, 
all secure, all broad-based. Nobody will be allowed to invest 
in hedge funds or derivatives or put and call options. There 
will be treasuries--I think there will be treasuries that are 
inflation protected, all in funds, funds of treasuries, funds 
of safe corporate bonds, funds of large cap stocks and funds 
of, I think, foreign stocks and funds of mid-cap stocks. But 
funds. So, that the individual won't be buying the shares of 
the ABC company. He will be buying a fund of shares of 
companies. So, the risks get highly diversified. You also asked 
about administrative expense. These will be administered in a 
way that minimizes administrative expenses. I think the 
estimate is 30 basis points of administrative expense, which is 
very, very low. The whole point here is to give people a chance 
to do better than they otherwise would do with promises that 
can't be kept.
    Mr. HERGER. Thank you very much, Mr. Secretary.
    Chairman THOMAS. Does the gentleman from Louisiana, the 
Chairman of the Social Security Subcommittee, wish to inquire?
    Mr. MCCRERY. Thank you.
    Mr. Snow, welcome. Nice to see you again.
    Mr. Herger touched on some who criticized the President's 
proposal for personal accounts as a risky scheme. Here is an 
ad, a recent ad, from the American Association of Retired 
Persons (AARP), saying if we wanted to gamble we will play the 
slots. You may have read or heard, Mr. Secretary, that I 
recently spoke to the Board of Directors from AARP. If you 
missed it, I will send you some copies of the press releases.
    Mr. SNOW. I actually read the real--what you really said, 
not what was reported.
    Mr. MCCRERY. Glad you got that. Well, actually I had a very 
pleasant, constructive discussion with the Board of Directors 
of the AARP about Social Security; and at that meeting I 
congratulated them on winning the first round. Because, in 
fact, these ads did some good. The President obviously listened 
to the AARP and in his proposal that he made, in his State of 
the Union address, in fact, as Mr. Herger pointed out, followed 
the advice of the AARP and constructs a system for investment 
of personal accounts in a very safe manner, wouldn't you say?
    Mr. SNOW. Absolutely.
    Mr. MCCRERY. Based on the history of the TSP, which is very 
similar to the President's proposal, I would say it is a very 
safe bet, wouldn't you?
    Mr. SNOW. Yes. Yes, I would. It is a safe bet, but it is a 
bet that will allow the workers who put the money into those 
accounts to sustain much higher rates of return than they would 
through the traditional Social Security system.
    Mr. MCCRERY. Exactly. Which helps us in the long run to 
save Social Security and to prevent it from going bankrupt in 
the traditional sense of that definition. Now, speaking of 
that, I just want to underscore you gave the right answer, Mr. 
Secretary, to Mr. Rangel's question about the bonds in the 
trust fund. Indeed, they are as good as gold. They are backed 
by the full faith and credit of the U.S. Government, safest 
investment in the world. They are going to be paid. No one 
questions that. But the point is, in 2042, there will be no 
more bonds in the trust fund, is that correct?
    Mr. SNOW. That is precisely it. The surplus is exhausted.
    Mr. MCCRERY. There are no more bonds in the trust fund, 
there are no more bonds to redeem, there are no more IOUs. At 
that point, revenues, if we don't change anything, revenues 
coming in through the payroll tax will be sufficient to pay 
only about 72, 73 percent of promised benefits. Is that 
correct?
    Mr. SNOW. That is precisely the point. In 2042 the trust 
fund can only pay out, in accordance with the revenues that it 
brings in, all of the bonds; all of the IOUs have been paid 
off, there is no more stash of IOUs or bonds that the Social 
Security Administration has that they can present to the 
Treasury.
    Mr. MCCRERY. Exactly.
    Mr. SNOW. So, the Social Security system is entirely 
dependent on its inflow, and its inflow is only some 72 percent 
of its then-projected outflow. So, it has to reduce.
    Mr. MCCRERY. So, by anybody's definition, even if you are 
looking at Social Security in isolation, that is a problem. 
That is a big problem. But we are talking today about the 
President's budget. So, let us look at Social Security not in 
isolation but in terms of the overall budget of the United 
States and where we are headed down the road. I am looking at a 
Congressional Budget Office (CBO) document that estimates that 
if no changes are made, Mr. Secretary, in Social Security, 
Medicare, Medicaid, just those three programs--all of which 
will soon suffer from the same malady, the retirement of the 
baby boomers, my generation--if those three programs stay the 
same, no changes, Mr. Secretary, CBO estimates that in the year 
2050 they will represent 27.4 percent of GDP.
    Mr. Secretary, do you know what the total budget of the 
United States today represents? Total budget, defense, 
everything.
    Mr. SNOW. Yes. It is----
    Mr. MCCRERY. Last year was 19.8 percent of GDP. Wasn't it?
    Mr. SNOW. The unfortunate thing is that these mandatory 
programs are taking a larger and larger share of that total 
budget.
    Mr. MCCRERY. Mr. Secretary, if those changes are made, they 
won't take a larger share, they will take the whole budget, 
plus some.
    Mr. SNOW. Well, that is the course we are on.
    Mr. MCCRERY. So, if you don't look at Social Security in 
isolation, then you have got--the sky will be falling soon, Mr. 
Stark, if we don't do something. That is the point. I think it 
is an irrefutable point, and I commend the Secretary and the 
President for taking note of that and urging responsible 
Members of Congress to do something about the problem before it 
is too late, before the solutions are too drastic.
    Thank you, Mr. Secretary.
    Chairman THOMAS. I could tell my colleague, if it had been 
the gentleman from California, he would have used the analogy 
of the Earth opening up. Those of us from California are 
familiar with that. I believe it was the gentleman from 
Washington who hasn't seen the sky for a long time, and they 
had thought it had fallen some time ago.
    Mr. MCCRERY. I apologize, the gentleman from California. 
The gentleman from Washington often sounds like the gentleman 
from California, so I got them confused. So, I apologize.
    Chairman THOMAS. Does the gentleman from Michigan, the 
Ranking Member on the Social Security Subcommittee, wish to 
inquire?
    Mr. LEVIN. The skies are always clear in Michigan. So.
    Indeed, Mr. Secretary, we are very happy to let the facts 
tell the story. One fact is, in 1983 when there was a problem, 
the Democrats provided two-thirds of the votes to address it, 
two-thirds in the House. This notion that we don't understand 
there is a shortfall is a pure canard. The shortfall, you used 
2042; the CBO says 2052, 72, 73 percent of the benefits would 
be paid. I also ask you to look at the dependency ratios. You 
mentioned about 16 workers, and so forth. Look at the 
dependency ratio, which for the baby boomers will be about the 
same when they retire as when they were kids. I think you are 
trying to create a notion of bankruptcy when that really is not 
an accurate description. So, let me ask you, in the White House 
briefing last Thursday, it was acknowledged that the private 
accounts would not do anything to address the shortfall; do you 
agree? If you could give me a quick answer.
    Mr. SNOW. Yes, I will. No, I think they are an integral 
part of any resolution.
    Mr. LEVIN. No, but the private accounts by themselves as 
described by the President, would that do to anything to relate 
to the shortfall? Will it reduce the shortfall?
    Mr. SNOW. It is part of any----
    Mr. LEVIN. No, it by itself; will private accounts address 
the shortfall, yes or no? The White House said no on Thursday.
    Mr. SNOW. I didn't see that.
    Mr. LEVIN. You didn't see the briefing of the White House?
    Mr. SNOW. No, I didn't see the comment that you are 
referring to. The three plans that were produced by the 
Commission all had the Social Security system being fixed in 
the sense that it was permanently sustainable and they all had 
the private accounts.
    Mr. LEVIN. Okay. Let me----
    Mr. SNOW. Personal accounts is an integral part of that 
solution. So, I view the personal accounts that give people a 
chance to build this nest egg and do better than they otherwise 
would do as an integral part of any solution.
    Mr. LEVIN. Good. I am glad you mentioned the three, because 
the accounts, the private accounts, do nothing by themselves. I 
could quote what the White House said. You then go over to the 
three plans. The plan the President says is a good blueprint, 
does it have benefit cuts in it? Yes or no?
    Mr. SNOW. I think both plan two and plan three do have--
change the index, which has the effect of slowing the growth 
rate.
    Mr. LEVIN. Is that a cut in benefits from the present 
structure? Yes or no?
    Mr. SNOW. Well, it slows the rate of growth of future 
benefits.
    Mr. LEVIN. You know, one of the problems is this White 
House won't give a straight answer. The answer is it reduces 
the benefits for younger workers over 40 percent, plan two, 
which the President called a good blueprint. I think you ought 
to just say yes when the answer is yes. Now I want a yes or no 
answer to this. Why isn't the transition cost in the budget? 
Vice President Cheney said this just a few days ago: The 
government would have to borrow 754 billion over the next 10 
years, and conceded that the price tag would involve borrowing 
trillions of dollars more in subsequent decades.
    That is right, the Vice President said, trillions more 
after that. Why isn't the 754 billion in the budget?
    Mr. SNOW. The 750 has been acknowledged.
    Mr. LEVIN. Why isn't it in the budget?
    Mr. SNOW. Well, it is reflected in the budget in 2009 and I 
think 2010, the last 2 years of the budget, as a two-tenths of 
1-percent increase in the ratio of GDP to the deficit. It adds 
2 percent to that ratio.
    Mr. LEVIN. Two-tenths.
    Mr. SNOW. Two-tenths, I am sorry.
    Mr. LEVIN. Is 754 in the budget fully?
    Mr. SNOW. Yes. It is reflected in the table that shows the 
ratio of the deficit to GDP.
    Mr. LEVIN. But in the budget itself when the numbers are 
there, is there a number that says Social Security transition 
costs 754 billion?
    Mr. SNOW. Whether it is in the budget, Congressman, I don't 
know. It is a number we acknowledge as the number going forward 
for the 10-year period. We acknowledge it. Whether it is 
formally in the budget or not, I don't know, But we have been 
transparent.
    Mr. LEVIN. Why not?
    Mr. SNOW. I don't know. But we are transparent. We are 
telling you what it is.
    Mr. LEVIN. But it is not in the budget.
    Chairman THOMAS. The gentleman's time has expired. Does the 
other gentleman from Michigan, the gentleman Mr. Camp, wish to 
inquire?
    Mr. CAMP. I do, Mr. Chairman. Thank you very much. Thank 
you, Mr. Secretary, for being here and for your testimony, 
certainly about the strength of our economy. My question, 
though, is really about the idea of voluntary personal 
accounts. In 1983, the Democrat Congress increased the 
retirement age for Social Security. In your view, is that a 
benefit reduction or benefit cut?
    Mr. SNOW. It would be scored as that, certainly.
    Mr. CAMP. All right. Does borrowing--obviously to establish 
personal accounts in a large sense would require some borrowing 
in the near term, and add--and that would add to the publicly 
held debt in the short term. But does borrowing to establish 
personal accounts have the same economic impact as borrowing to 
finance other government spending?
    Mr. SNOW. No, it is entirely different. Borrowing to 
finance the personal accounts creates savings in the owners of 
the personal accounts. It in effect prefunds an obligation. 
Therefore, unlike traditional borrowing which leads to 
spending, this is borrowing that leads to savings.
    Mr. CAMP. Would that borrowing, then, that leads to 
savings, as you describe it, which has a better impact 
certainly on our economy and on individuals as well, would that 
also allow Congress then to spread the impact of transitioning 
to a Social Security system that starts paying out more than it 
brings in, in almost 10 years, would that allow us to spread 
that impact of transitioning over a longer period of time, 
thereby lessening any effect on any single generation of 
workers?
    Mr. SNOW. Yes. That is one of the great merits of the 
approach is that spreading out across many generations.
    Mr. CAMP. So, we would be able to borrow in a way that had 
some positive effect by increasing savings, and also lessen any 
impact on any particular generation of workers?
    Mr. SNOW. Yes. The borrowing is turned into savings; and as 
the workers put the money into the accounts, they reduce the 
future claims on the system by an amount which is in present 
value terms equivalent to the money they take out.
    Mr. CAMP. And also would boost retirement income, which is 
not something we have talked about.
    Mr. SNOW. Well, that is the key to it. The reason that 
these accounts are so important is they give younger people the 
chance to have a better retirement than they would in the 
current system, a system that can't pay the full benefits 
beginning in 2042, if you rely on the actuary, or 2052 if you 
rely on CBO.
    Mr. CAMP. Thank you, Mr. Secretary.
    Thank you, Mr. Chairman.
    Chairman THOMAS. Thank the gentleman. Does the gentleman 
from Maryland, Mr. Cardin, wish to inquire?
    Mr. CARDIN. Thank you, Mr. Chairman. Mr. Chairman, first 
let me assure you, the Democrats understand the math of Social 
Security and understand the need to strengthen Social Security, 
but we do not believe it is in crisis nor do we believe it is 
heading toward bankruptcy. Mr. Secretary, let me thank you for 
clarifying the date, 2042, a critical date when there would not 
be enough assets to pay full benefits in the Social Security 
system according to the current projections. But let me just 
remind you that in 1996, the same actuaries made a projection 
that gave solvency 13 additional years than we have now.
    So, my point is that these are very uncertain. The 
Administration, as I understand it, is very reluctant to do 
more than 5-year budgeting. I might ask you, when I complete 
comments, if you could tell me any other program in government 
that is as well funded for 37 years as Social Security is. I 
can't think of another major program that is that well funded. 
Let me also point out that these projections take into 
consideration the changes that were made in 1979 and 1983 when 
we recognized the demographic changes of the Nation and created 
the Social Security Trust Fund to generate a lot more in 
assets. As I understand it, the current projections of 2042 is 
based upon a 1.8 percent economic growth, and yet you seem more 
optimistic that we will exceed that, and that the economic 
activity is greater than you are saying, and then the solvency 
dating will be much greater than 2042.
    I just mention all that because I don't want to see us rush 
to get it wrong. I think we have got to get it right, and 
Democrats believe we should get it right. I think it is a 
matter of simple math. I think the first thing you could do is 
help us by carrying out what you said in your opening statement 
about this budget causing attention to the deficit. I think it 
would be helpful if you would tell the deficit next year to be 
not $390 billion under your projected budget but 560 billion, 
because that is the only budget deficit. Once again, we are 
using the Social Security Trust Funds to mask the size of the 
real deficit. If we really had a lockbox, if we really kept 
that Social Security Trust Fund for Social Security and invest 
them wisely, invested them wisely, we would have a much less 
problem than we have today.
    So, I do agree with Mr. Herger; I want people in my 
district to have the same benefits as a Federal employee or a 
Member of Congress. I am very privileged to be able to 
participate in Social Security, to be able to have a good 
pension plan that my employer helps pay for, and--a TSP or a 
private retirement plan that I put money in, and it is at risk. 
But I know that I have, and Americans have on average, a core 
benefit in Social Security that protects one-third of their 
income when they retire.
    My question to you: If I am under 55, under the President's 
proposal, and I don't participate in a private retirement plan, 
as I understand it, my benefits are going to be reduced. I am 
not going to get one-third of my replacement when I retire. If 
I am 27 today and retire when I am 65, under the President's 
proposal, if I don't participate in a private account, my 
benefits are going to be less. That is guaranteed. I am not 
going to get one-third of my replacement, on average. Even if I 
participate, you have got to pay for this somehow. We don't 
know what is going to happen. There is no guarantee that I am 
going to be able to get that core benefit. So, my question to 
you: Aren't we talking about benefit cuts and dramatic benefit 
cuts for those under 55 and a real question mark to people who 
are disabled, survivors, and so forth, as to whether they are 
going to be able to get the same type of protection that they 
have under current law under the President's proposal?
    Mr. SNOW. Congressman, the current system, unless 
addressed, will result in a major reduction in benefits. That 
is what lies ahead unless this situation is addressed. When 
2042 comes, according to the Social Security actuary, there 
will be a 27-percent reduction, I think is the number that he 
uses, in the benefit levels. It will get larger and larger and 
larger with future generations, because the trust fund can only 
pay out what it has coming in. Therefore, it seems to me we 
have an opportunity now to address it and put in place savings 
accounts for people that will allow them to make up for some of 
that shortfall and do better than they would under the current 
system.
    Mr. CARDIN. I would just appreciate it if you would get to 
simple math. It seems to me simple math is, if you want to 
improve the system, you strengthen it by putting more in, you 
don't take money out, one-third of the payroll taxes.
    Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Minnesota, Mr. Ramstad, wish to inquire?
    Mr. RAMSTAD. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary, for your important leadership. Certainly the 
President and the country are well served by your being in this 
critical position. I want to ask you a question with respect to 
Social Security reform, if I may. As you know, our country has 
long financed Europe's social assurance by paying value-added 
taxes (VATs) on our exports, while European exports to the 
United States are exempt from VATs. Doesn't it make good 
economic sense to link Social Security reform with overall tax 
reform to find a better method of financing Social Security 
other than the payroll tax?
    Mr. SNOW. Well, Congressman, the whole issue of the tax 
system is one that we are going to be addressing in a direct 
and forthright way. Right now we have asked the panel to look 
at all options for improving the performance of the tax system, 
including VAT taxes, sales taxes and so on. They are all on the 
table. I don't want to prejudge where they will come out, but I 
do know that this is a very able panel with very accomplished 
people, Chaired by former Senator Connie Mack, former Senator 
John Breaux, both of whom served in the House. We will be 
working closely with them. I just don't want to try to 
foreshadow where they might come out. But that issue is on the 
table.
    Mr. RAMSTAD. So, given the timing of that panel--by the 
way, my distinguished predecessor and mentor, Bill Frenzel, is 
also on that panel.
    Mr. SNOW. He is indeed.
    Mr. RAMSTAD. Doesn't it make sense, given the timing of the 
panel's recommendations--which I understand the panel was 
charged with coming up with the recommendations by July 31--
doesn't it make sense to defer action on Social Security until 
we get the tax reform recommendations, and then do Social 
Security reform within the comprehensive context of tax reform?
    Mr. SNOW. No, I don't think so. I think Social Security 
needs to be addressed. The ideas that come from the panel will 
be available, by the latest, by July of this year. I would hope 
that the Congress would continue to move forward with Social 
Security reform, would look at the options, would help define 
the nature of the problem. We are having some difficulty right 
here defining the nature of the problem. I think it is going to 
take some time to get together on what the nature of the 
problem is before we get to the fix. But I would not want to 
see us deflect attention from this critically important issue.
    Mr. RAMSTAD. But the Administration isn't necessarily 
wedded to continuing to finance Social Security with the 
payroll tax.
    Mr. SNOW. Well, the Administration wants to see what the 
panel comes up with in terms of options. What we are primarily 
working for is a way to put Social Security on a sustainable 
basis. There have been any number of efforts to reform Social 
Security, to fix Social Security in the past, and none of them 
have put it on a permanently sustainable, financially financial 
basis. So, that is the real objective here, is to put Social 
Security on a financially sustainable basis while giving 
younger people the chance to take advantage of the ability to 
invest and have a higher rate of return.
    Mr. RAMSTAD. I certainly commend that compelling objective, 
and it is compelling that we act. Let me shift gears quickly to 
the alternative minimum tax (AMT). As you know, this AMT is 
staring more and more middle-income taxpayers for whom it was 
not intended. Now, I know the President has asked Treasury to 
study the AMT problem and make recommendations for reform. What 
is the status of that study? Am I correct in assuming that 
because the study is not yet completed, that is why AMT relief 
is not included in the budget?
    Mr. SNOW. Precisely, Congressman. Precisely. Again, the AMT 
relief is a matter that has been under review for some time at 
the Treasury. When we met with the panel chairman and 
cochairman we asked them to include AMT as one of the issues 
they review and look at and give us recommendations on. So, the 
issue is being worked very, very hard. You are right; this is a 
tax that burdens millions and millions of Americans, it will 
burden many, many more millions of Americans. It is a 
duplicative tax, it isn't fair, it isn't growth-oriented, and 
it isn't simple. The objectives of the President are to make 
the Code simpler, fairer, and more growth-oriented. The AMT 
needs to be fixed because it doesn't serve those two 
objectives.
    Mr. RAMSTAD. As one of my accountant friends caught, this 
really is a ticking time bomb that needs to be dealt with. I 
appreciate your sense of urgency as far as the dealing with it 
is concerned.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Ramstad follows:]
  Opening Statement of The Honorable Jim Ramstad, a Representative in 
                  Congress from the State of Minnesota
    Mr. Chairman, thank you for calling this important hearing today to 
review the President's fiscal year 2006 budget proposals.
    We are fortunate to have Secretary Snow with us today, who is not 
only responsible for helping shepherd the many tax proposals outlined 
in the President's budget, but also the daunting but essential efforts 
to reform our federal tax system and ensure the solvency of our Social 
Security system.
    With Americans spending some 6 billion hours and $100 billion per 
year trying to comply with our complex tax system, I applaud the 
President for working to make the system simpler and fairer for 
taxpayers and better for jobs and our economy.
    I also applaud the President for tackling the problems facing 
Social Security, which will face $10.4 trillion in unfunded liabilities 
if we do nothing to save it.
    I look forward to working with my colleagues and Secretary Snow, 
both on the proposals already outlined in the President's budget and 
the broader issues of tax and Social Security reform.
    Again, Mr. Chairman, thank you for convening this important 
hearing.

                                 

    Chairman THOMAS. Does the gentleman from Washington, Mr. 
McDermott, wish to inquire?
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Snow, we have 
all read your predecessor's book, ``The Price of Disloyalty,'' 
so we know that we are going to hear the line from the White 
House, unadulterated. It gets a little Orwellian in this room 
when we listen to the word ``transparency'' from the first line 
in your speech, and you have used it at least 12 times since: 
We are very transparent, we are very transparent, we are very 
transparent. I know if, you say something enough, people will 
start to believe it. It is like Coca-Cola, its advertising. We 
understand.
    But the fact is that this budget that you put before us 
that you say is a transparent budget has nothing in it for the 
Iraq War. Now, you don't think that the Iraq War isn't going to 
cost something. Oh, well we don't know how much it is, is what 
you are going to say. Well, then you hear about the AMT. The 
AMT cost $25 billion to extend what was in the last budget last 
year. You don't even put in the extension, it just drops dead. 
You know that there is at least $25 billion that doesn't show 
in this budget. Then you go to the privatizing or permanent 
cost of the taxes. You fold it into the baseline. Then you take 
the privatizing funds and that is not shown at all.
    Now, I know you are going to say, well, we haven't written 
the bill. This process started 25 years ago when Cato put out a 
resolution, or put out a paper saying how this should be done. 
The President has been saying it since 1978 that bankruptcy was 
around the corner. You don't have a bill to lay in front of us. 
Now, how can you call this a budget that leaves out the 
privatization cost? How can you call that transparent when you 
have the war, the AMT, the privatization, sitting there and you 
know it is going to be costly? What is the deficit really going 
to be this year?
    Mr. SNOW. Well, it is as laid out in the Office of 
Management and Budget (OMB) document, the President's budget 
proposal. On each of those issues, let me just make a brief 
comment. On the war, we have indicated that the supplemental 
would be a supplemental-
    Mr. MCDERMOTT. Does that count in the budget as part of the 
deficit?
    Mr. SNOW. Would be $80 billion. We have been transparent in 
saying that.
    Mr. MCDERMOTT. But does that add to the deficit?
    Mr. SNOW. Yes, that is included in the deficit number.
    Mr. MCDERMOTT. Okay. In that 500 figure that you just gave?
    Mr. SNOW. The effects of that are incorporated in the total 
deficit number. The AMT is, as I have indicated in response to 
the previous question, is being looked at and will be addressed 
by the panel. We don't know how they will address it, so, 
therefore, we are not including the so-called patch this year. 
The tax cuts being made permanent are included in the budget 
window.
    Mr. MCDERMOTT. So, we see everything. You are willing to 
stand behind this deficit number that is in that budget as the 
one that we are going to finish the year with?
    Mr. SNOW. I think it is the best estimate anybody has. It 
is very similar to the estimate that CBO has.
    Mr. MCDERMOTT. Let me ask you a question about the problems 
with Social Security. You are a trustee; you sit there, and 
they present you with three options. The trustees always select 
the lowest option. This is based on a 1.8-percent growth. Now, 
when was the last year the United States economy grew 1.8 
percent?
    Mr. SNOW. Congressman, we are looking at 40 years. 
Remember, we are not dealing with Social Security in 2007 
alone, we are dealing with it over the----
    Mr. MCDERMOTT. But what was the year that it ever was that 
low?
    Mr. SNOW. Well, that is the Social Security actuary's 
estimate.
    Mr. MCDERMOTT. That is their low estimate. What about their 
medium estimate? What if we said 3 percent; what would that do 
to the extension of the Social Security?
    Mr. SNOW. Almost nothing.
    Mr. MCDERMOTT. Nothing?
    Mr. SNOW. Almost nothing. Because the growth in wages 
translates into growth in benefits and absorbs the effects, so 
that the obligation of Social Security rises at the same rate, 
basically.
    Mr. MCDERMOTT. So, your testimony is that the growth in 
wages means absolutely nothing in terms of increasing the 
longevity of the fund? Is that what you are testifying here?
    Mr. SNOW. Not absolutely nothing. It means very little, and 
over the long term means almost nothing.
    Mr. MCDERMOTT. Would you put that in writing? I would like 
to see that. Show me the 3 percent and the 1.8 percent, and 
show me how it works out.
    Mr. SNOW. I would be delighted. This is mysterious, but it 
is correct. Social Security is basically a function not of GDP 
but of demographics.
    Chairman THOMAS. That is one of the reasons when you focus 
on wages versus prices, the multiplier on that basis produces 
very much the effect the Secretary is talking about. That 
information on paper will be presented to all the Members.
    Mr. MCDERMOTT. Mr. Chairman, could I just ask, are you 
saying his answer is based on shifting from wages to prices?
    Chairman THOMAS. No. I am saying that, under the current 
law as you extrapolate out, based upon increasing the benefit 
based upon the wage adjustment formula, and the amount of money 
that it costs versus what comes in on the productivity 
increase, creates the very minimal difference between the 
increase. That is how it gets eaten up. You will see it when 
you see the numbers.
    Mr. MCDERMOTT. I would be glad to look at it.
    Chairman THOMAS. That is an area that we do want to focus 
on, at least in terms of understanding the relationship between 
the formula that determines how much you get paid and the 
multiplier that increases the amount that has been determined 
under the formula. This Committee at the very least is going to 
understand how the system works if we are going to examine 
making changes to it. Does the gentleman from Pennsylvania, Mr. 
English, wish to inquire?
    Mr. ENGLISH. Thank you, Mr. Chairman.
    Mr. Secretary, it is a privilege to have you here today. I 
have been listening very carefully to your answers, and I 
apologize if some of mine prove to be a little repetitive. I 
welcome the fact that in the President's budget there is a 
clear move to get us in the direction of lower deficits. But, 
frankly, I am haunted, sir, by a deficit that seems to attract 
too little attention within the Washington Beltway, and that is 
the fact that we are running a trade deficit against the rest 
of the world that is comparable to 5.5 percent of our GDP.
    Now, I know you understand that. For a lot of people in my 
district, which is a manufacturing district, they less 
understand that abstraction than the fact that we have recently 
had roughly 200 steelworkers with their jobs at risk because of 
imports in the pipe and tube industry. There are a number of 
factors that have come into this situation, but I would like to 
pursue the line of questioning raised by Mrs. Johnson earlier, 
and that--and, frankly, ask you to elaborate a little further. 
In your budget, first of all, how do you envision us moving to 
a lower trade deficit and sustainable trade deficit over time?
    Number two, given that our largest problem in trade, in my 
view, is our trade relationship with China, and given that 
China entered the WTO making a series of commitments, one of 
them implicitly that they were going to follow currency 
standards, and since their economy is a little more substantial 
than that of, say, Sudan or Somalia, I think it is important 
that they follow these standards, recognizing, Mr. Secretary, 
that you and members of the Administration have been jawboning 
the Chinese to float the yuan for the last year and a half, and 
with, may I respectfully suggest, with very limited results, 
through no fault of your own. The fact is the Chinese continue 
to give us rhetoric. As you said in your answer to Mrs. 
Johnson, they express an understanding of our position, but 
they do not move in the direction of floating their currency 
the way they should and the way the WTO, by a common 
understanding, obliges them to do. Is the Administration 
prepared to confront China on its currency policies and the 
other elements of its mercantilism, and how can Congress help?
    Mr. SNOW. Well, thank you very much, Congressman. The whole 
issue of the current account deficit is one we are spending a 
lot of time on, and a big part of the current account deficit 
is the result of the fact that the American economy is growing 
so much faster than our trading partners. As we grow faster 
than our trading partners, we generate more disposable income. 
Some part of that disposable income gets spent in purchasing 
imports from those countries. So, we are urging--urging the 
trading partners of the United States to adopt policies that 
will allow their economies to grow faster. As they grow faster, 
they will be in a position to buy more from us. Now, that means 
taking political action among our trading partners to take down 
barriers inside their economy, structural barriers to improve 
performance.
    Secondly, we are pressing the yuan. It has been a matter of 
great importance to this Administration. The President has 
talked to the leadership of China about it, I have talked to 
the leadership of China about it. Former Secretary Evans has 
been in the forefront of market opening issues, I know you are 
aware of that, with China. I think that our course of quiet 
diplomacy, financial diplomacy, is better calculated to produce 
the desired outcome than are the alternatives like the 301s 
that were proposed by some last year, the trade sanctions. But 
we are not satisfied. It is critically important that China, as 
such a large part of the global trading system, play by the 
rules and have a transparent open economy where its currency 
values are set in the marketplace, just as ours are, and not 
the product of artificial manipulation.
    Mr. ENGLISH. Thank you, Mr. Secretary. Please tell the 
Chinese that in Congress, among your allies, patience is 
running out. Thank you.
    Mr. SNOW. Thank you.
    Chairman THOMAS. If the Chair might very briefly. In that 
discussion, clearly asking the Chinese to float the yuan at the 
current time is a very difficult decision for them to make. You 
also rightly indicated that you wanted to see some economies 
improve, do better. One of the problems with the Chinese 
economy is that it is not only doing better, the money is so 
cheap, it is I think somewhat overheated. One of the things you 
might ask the Chinese to do is to at least look at their 
interest rate, and not provide as cheap of money as they do, as 
a first step, to indicate they understand that we expect to 
allow some things to be realistic, and a real interest rate 
would be the first step toward a real currency. That hadn't 
been discussed in that exchange, and I wanted to put that on 
the table. That is far easier for the Chinese to do in the 
short run to show some good faith.
    Mr. SNOW. Mr. Chairman, I agree with you. In our continuing 
dialog with the Chinese, there are a whole number of issues, 
including opening up the marketplace, using interest rates to 
allocate capital, and so on. So, you are onto a very good point 
there.
    Chairman THOMAS. I thank the gentleman. Some are long 
range, some are much closer, and we expect the ones that are 
closer to be done. Does the gentleman from Massachusetts, Mr. 
Neal, wish to inquire?
    Mr. NEAL. Thank you, Mr. Chairman. Mr. Secretary, you 
indicated in your opening comments that we should pay great 
attention to basic arithmetic. I think you mentioned that a 
number of times, and you said that we should put partisanship 
aside in our discussions here as they relate to Social 
Security. Let me see if I can get you to clarify the response 
you offered to Mr. Levin earlier. For that 40-year-old, does 
the President's plan cut the Social Security benefit?
    Mr. SNOW. Well, the President at this point doesn't have a 
plan. He is offering a lot of ideas, he is helping to define 
the problem, he is inviting others.
    Mr. NEAL. Well, let me follow up on that question then. I 
have read and I have listened and I have watched the President 
use the phrase, ``the personal account.'' So, for that 40-year-
old that I just described, would the personal account, in your 
judgment, fix his Social Security problem?
    Mr. SNOW. Congressman----
    Mr. NEAL. To ensure that the Social Security benefit would 
not be reduced?
    Mr. SNOW. The personal account for a 20-year-old, 30-year-
old----
    Mr. NEAL. I said a 40-year-old.
    Mr. SNOW. A 40-year-old would give them an opportunity to 
do better than they otherwise would.
    Mr. NEAL. That is not the question, Mr. Secretary. I am 
asking, would they be guaranteed the same benefit, assured the 
same benefit as they are now with the personal account?
    Mr. SNOW. Assuming they go into the account?
    Mr. NEAL. Assuming they go into the account.
    Mr. SNOW. Well, if they earn better than 3 percent on the 
money that they put into the account, which would be expected, 
they would do better.
    Mr. NEAL. Could they foresee a reduced benefit under the 
current Social Security benefits?
    Mr. SNOW. In the unlikely circumstance that the money taken 
out of Social Security----
    Mr. NEAL. Is it possible?
    Mr. SNOW. And put into these accounts earned less than 3 
percent, it would be possible. That is very unlikely.
    Mr. NEAL. Mr. Secretary, the President indicated that 
permanent accounts, private accounts on their own would not fix 
the Social Security problem. So, can you assure that 40-year-
old that they are going to derive the same benefit as currently 
promised under Social Security?
    Mr. SNOW. The----
    Mr. NEAL. Why is it so hard to get a yes or no answer, Mr. 
Secretary? You would give a yes or no answer in your previous 
life as a chief executive officer, and you would do it flatly 
and you would do it with great confidence.
    Mr. SNOW. I am trying to answer the richness of the 
question with the intention that you----
    Chairman THOMAS. The Chair would indicate that if we could 
not go there, to personal references, the Chair would 
appreciate it.
    Mr. NEAL. Mr. Chairman, he indicated there was a richness 
to my question.
    Chairman THOMAS. I understand. But you made representation 
of the way he responded in a different situation.
    Mr. NEAL. Well, if I could perhaps get a straight answer, 
Mr. Chairman, just a yes or no. I am talking about that 40-
year-old.
    Chairman THOMAS. I would tell the gentleman you have every 
right to ask a question; he has every right to answer it the 
way he sees fit. If he won't allow you to put words in his 
mouth, that is your problem, not his.
    Mr. NEAL. Mr. Chairman, there is no attempt here to put 
words in his mouth. There is an attempt to extract words from 
his mouth.
    Chairman THOMAS. We will discuss the dental plan later.
    Mr. NEAL. So, we are not doing very well on that count. Let 
me ask you this. Are you familiar with Lawrence Lindsey?
    Mr. SNOW. Yes.
    Mr. NEAL. Do you have a pretty high opinion of him?
    Mr. SNOW. Yes; I am a personal friend of Larry Lindsey. I 
think he is a good fellow. I don't agree with him on 
everything, but I think he is a very able person.
    Mr. NEAL. Would you agree with him that the war in Iraq was 
going to cost between 200 and $300 billion?
    Mr. SNOW. Going forward? Or what time frame are you talking 
about?
    Mr. NEAL. He indicated that the war in Iraq would cost 
between 200 and $300 billion before we were done. Is that your 
position?
    Mr. SNOW. Let us see. The war in Iraq is laid out in the 
supplementals. I would have to go back and look at the 
supplementals to see what that sums to.
    Mr. NEAL. Let me ask you this, then. We are not doing very 
well in this question-and-answer period, obviously. The AMT is 
not included. I have talked about that for a long time. Time 
and again we have had this same sort of reference with the 
Administration. There has been a willingness on this Committee 
to take up the issue. We can't do it very well without the 
Administration's cooperation. The transition costs for Social 
Security are not included in the budget. The cost of the war in 
Iraq is going to be between 200 and $300 billion, probably 
more, and a simple yes from you would go a long way toward 
helping those of us on this side refrain from the partisanship 
that you so carefully worded at the outset of your opening 
remarks.
    Mr. SNOW. Congressman, I would be delighted to give you a 
simple yes if a simple yes would answer the question. 
Unfortunately, it doesn't. Therefore, I am not going to render 
a simple yes. What the war in Iraq will cost going forward is 
not at this point determinable. To the extent we do have a 
sense of that, it is reflected in the supplemental.
    Mr. NEAL. Mr. Chairman, could I make a quick rejoinder?
    Chairman THOMAS. Tell the gentleman that the Chair 
anticipated this and indicated that there could be a response 
in writing. I know Members are frustrated because they have 
worked on these questions for hours, indeed days. When you 
spring them on someone----
    Mr. NEAL. Mr. Chairman, that was not the case with me at 
this moment.
    Chairman THOMAS. I will tell the gentleman that when you 
spring them on someone and they don't give you the answer that 
you hope you get, a little bit of reflection I think is 
entirely appropriate. That is why we indicated the written 
response. If the gentleman wants a lengthy response to a 
question he asks, he might submit his questions in writing 
ahead of time so that someone could take as much time in their 
answer as he does in framing the question. Therefore, when we 
run out of time in our 5 minutes, it will be a written response 
which will be shared with the rest of the Committee. If the 
gentleman has additional questions, he certainly can submit 
those for additional written response. Does the gentleman from 
Arizona, Mr. Hayworth, wish to inquire?
    Mr. HAYWORTH. Yes, I do. Thank you, Mr. Chairman. Mr. 
Secretary, let me add my words of welcome among other words 
that have been offered from the Committee today. We have heard 
any number of concerns, putting it mildly, about the future of 
Social Security. A couple of things perhaps we need to clear up 
and amplify. I heard my friend from Maryland mention the 
challenges confronted by individuals with disabilities. Some 
concerns have been aired about how the introduction of 
permanent accounts and some other possible changes to Social 
Security could affect benefits for individuals with 
disabilities and survivors. Would you now take some time and 
clarify the Administration's position on this issue?
    Mr. SNOW. Yes, I will, Congressman. I am delighted to do it 
and delighted to have the chance to clarify that. The President 
has made clear that disability benefits will be sustained going 
forward, that people on disability will not be adversely 
affected because of the actions that are taken to put Social 
Security on a long-term sustainable basis. In fact, by putting 
it on a long-term sustainable basis they are going to do 
better, because the risk that those benefits won't be there, 
which are real risks today, will be addressed.
    Mr. HAYWORTH. Mr. Secretary, we have heard a lot of other 
concerns shared today, and there have been desires expressed by 
some in this town on some of the Sunday morning news programs 
that the tax relief that we have enacted through this 
Committee, through the Congress, the President has signed into 
law, the tax relief that you again reaffirmed today should be 
made permanent, if we were just to get rid of that, to get rid 
of the tax relief and the permanence of it, we could take those 
funds and dedicate that tax increase to Social Security and 
that would solve the problem. It seems to me that is viewing 
this in a vacuum. While there are those who would advocate 
major tax increases, let me point out for the record I am 
certainly not among them. To put that on the table, what effect 
would tax increases of this magnitude have on our economy, have 
on our American families, and ultimately on the Social Security 
program?
    Mr. SNOW. Congressman, I think it is pretty clear that 
higher tax rates of the sort that would result from that 
action, the tax increases that would result, would have a very 
harmful effect on the American economy. We are in a good strong 
recovery now because of the lower tax rates. We have the 2.7 
million jobs because of the higher tax rates. We have capital 
spending rising because of the higher tax rates. We have the 
best housing market we have seen because of the tax rates. We 
have the unemployment rate at 5.2 because of the tax rates. We 
risk all of that. We risk the prosperity and the job creations 
that have occurred if we reverse course. So, I would strongly 
urge us not to reverse course. I spend a lot of time talking to 
counterparts, central bank Governors and finance ministers from 
the rest of the world, the G-7, the G-20. We are the envy of 
the world. The performance of our economy strikes awe on the 
part of the finance ministers of the rest of the world. The 
Euro zone has growth rates less than half of ours. They have 
much higher tax rates. The Euro zone has unemployment rates 
double ours, triple ours. They have much higher tax rates. I 
think the lessons are clear here. To sustain the strong 
performance of the American economy, we need low tax rates.
    Mr. HAYWORTH. Mr. Secretary, I thank you. Mr. Chairman, I 
thank you for the time. I yield back.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Louisiana, Mr. Jefferson, wish to inquire?
    Mr. JEFFERSON. Thank you, Mr. Chairman. I want to see if I 
can give Chairman Thomas some support this morning from this 
side. He has made some comments, he made some early on 
comments. When the President announced his plan for Social 
Security or part of the plan for it, that we really could look 
at this thing in isolation. As my colleague from Louisiana, Mr. 
McCrery, has said, it is tied up with demographic problems of 
an aging America and an aging world. He said, Chairman Thomas 
has said that we need to look at this not only in the paradigm 
of the existing Social Security system, but we must look beyond 
that and to the totality of retirement security issues. Do you 
agree or disagree with the Chairman's statement in that regard?
    Mr. SNOW. I agree with the Chairman. The issue we are 
dealing with here is really retirement security and how to 
promote retirement security.
    Mr. JEFFERSON. If you agree with that, then, wouldn't it--
isn't it incumbent upon the Administration to talk about this 
budget in those terms, to talk about what would happen with 
Medicare, what would happen with Medicaid for the elderly, and 
what should happen with Social Security in this budget document 
so that we can see how we can approach the Chairman's objective 
here?
    Mr. SNOW. Congressman, in the budget we have submitted 
talks about enhancing savings vehicles for retirement, so-
called retirement savings accounts, which are an awfully good 
idea. It talks about----
    Mr. JEFFERSON. If I might cut you off there. We are talking 
about a problem with aging population and the Medicare, 
Medicaid, and the Social Security as all being part of a bundle 
of problems. The Chairman has said we should address these, and 
the budget doesn't seem to tell us how to get there.
    Chairman THOMAS. Would the gentleman yield briefly?
    Mr. JEFFERSON. Yes, sir.
    Chairman THOMAS. The Chair is anxious to provide the 
gentleman with more time based upon his direction of 
questioning. But the Secretary is here to present the 
President's budget. The President has every right to structure 
his budget as he sees fit to present to us. We, however, have 
every right to examine that budget and deal with it as we see 
fit. So, the Chair appreciates the gentleman's attempt to get 
the Secretary of the Treasury to say that they should have 
written a different budget, but I think they have every right 
to write the budget that they choose to write, just as we have 
every right to deal with the issues as we see fit. So, the 
Chair thanks the gentleman.
    Mr. JEFFERSON. Of course, I hope that the Chair would 
appreciate my concern for his position, and I believe that the 
Chair has stated a wise position. The other point I want to 
make--I hope it didn't take away from my time as we were going 
through that. The other point I want to make is that if you 
agree that the Chair is on the right track, then it opens up a 
lot of possibilities that we have to talk about either in this 
context or later on. It seems to me that this budget ought to 
talk about how we get to the issue of new revenue sources for 
the Social Security system, if we follow the Chairman's line of 
thinking here. Mr. McCrery also talked about the need for a new 
revenue source there.
    We have taken everything off the table here, we have taken 
the payroll taxes off the table, but there are many other 
revenue sources that ought not be off the table that we ought 
to take a look at. I am hoping that in this debate and 
discussion that we will come forth honestly with a plan to deal 
with all these issues that deal with the demographics of our 
country and our whole retirement system. I don't think, Mr. 
Chairman, and I know you don't want me to help you out anymore 
along this line, but I do believe that it is important to get, 
to find out why the Administration won't acknowledge the fact 
that you have made a wise statement here and that this 
Committee ought to be working, the Administration ought to be 
proposing along the lines of your----
    Chairman THOMAS. Would the gentleman yield briefly? I 
think, in all fairness, had the Chair made his statement 
sometime last year while they were beginning the process of 
putting the budget together, that we could indicate why you 
didn't respond to what we had to say. But the Chair made its 
statements after the budget was pretty well locked up. So, we 
have a document that is being presented; then we can move on in 
terms of Congress dealing with the budget that is presented. 
That is the area that I especially hope the gentleman from 
Louisiana continues to talk the way he does with the additional 
time the Chair is willing to allow him because of the Chair's 
interventions.
    Mr. JEFFERSON. I am hopeful that if we are going to reach a 
bipartisan result, then we can't take a starting point--we 
can't take the ending point as the starting point for the 
President nor for the starting point of where some of us may be 
on this side. But we have to have an open discussion about 
where we ought to go. I am confident that if we look at this 
whole panoply of things the way we can--the blocks that we can 
use to fix Social Security, there will be many ways to fix it 
outside of this property account business. One point, it really 
doesn't do the job anyhow on property accounts; it doesn't 
bring solvency to the system. It may add some retirement 
security if you exceed the 3 percent that you talked about, 
which is another whole notion here. It doesn't work like a 401 
account where all the money is yours really; it is not your 
nest egg; you take away the 3 percent, it is like a loan you 
borrow from the government with 3 percent adjusted for 
inflation down the line, and you end up with whatever is left, 
if there is anything left over and above it.
    So, there are a lot of complicated issues related even to 
that. If you believe the stock market is going to work 
beautifully, and then there will be a hitch in it, and 
everything is going to work and personal accounts are going to 
grow. At the end of the day it is a loan from the Government, 
administered by the government, with the 3 percent, inflation-
adjusted, paid back to the government for retirement; and, 
whatever is left, you end up keeping; minus you are going to 
take something from the guaranteed benefits to even make that 
work. So, it has got to be an open discussion about this. I 
appreciate the Chairman's suggestion in that regard, and I hope 
we can find a way to support our Chairman as we move along to a 
much broader discussion of private accounts and this whole 
business.
    Chairman THOMAS. I would tell the gentleman that our job is 
to legislate, get to a conference that the House and the Senate 
can agree on; then the next step in the legislative process is 
to have the President sign the bill. That needs to be part of 
the process as we move forward, because without it we won't 
make law that all of us want to in the area of an aging 
society. The Chairman thanks the gentleman's comments, and 
hopes that he won't be abused too much by his side for his 
admittance.
    Mr. JEFFERSON. Mr. Chairman, I hope you recognize how 
committed I am to this whole process. I missed Mardi Gras in 
Louisiana today just to come here to support----
    Chairman THOMAS. No one else can up that in terms of the 
commitment that has been made. The Chair appreciates it. 
Although it may be a contribution to your continued aging by 
not going to Mardi Gras. You will live longer. Does the 
gentleman from Illinois, Mr. Weller, wish to inquire?
    Mr. WELLER. Thank you, Mr. Chairman. Mr. Secretary, thank 
you for your time before us today. It is good to see you. Let 
me begin by commending you, and particularly President Bush, 
for your leadership on addressing the need to change our Tax 
Code and make it more simple and more fair, but also more 
competitive in today's global economy.
    One thing that is really handicapping American 
manufacturers, particularly Illinois manufacturers and other 
Illinois employers, is our Tax Code which is holding us back. I 
am looking forward to the recommendations of the Commission 
that the President has appointed soon, and look forward to 
working with you on that. This past year--and I have got two 
subjects I would like to ask you questions about, Mr. 
Secretary, and I appreciate your response. This past year with 
the leadership of Chairman Thomas, the American Jobs Creation 
Act of 2004 (P.L. 108-357) was moved through this Congress and 
signed into law. Of course the primary goal in that legislation 
was helping simplify the Tax Code as it impacts manufacturing 
and other sectors of our economy.
    One of the areas that I worked with the Chairman on and 
others on this Committee was helping our maritime industry, 
U.S.-owned international shipping, to be more competitive. We 
included in the legislation, it was in section 415 of the Jobs 
Creation Act regarding subpart (f), tax treatment for U.S.-
owned shipping, a provision designed to give American companies 
the opportunity to be more competitive. I was concerned when I 
learned that there are some within your Department that are 
actually--the way they are interpreting the legislation as it 
was passed and signed by law. The interpretation and the 
implementation of this law under Treasury rules would actually 
place U.S.-owned shipping in a less competitive position than 
they were prior to the enactment of this law. I was wondering, 
number one, can you just tell me what your view of this is? 
Where is the Department?
    Mr. SNOW. Congressman Weller, we will work with you and 
your staff. I know you have got an issue here, and I was 
advised about it. Treasury is intent on implementing all the 
provisions of the Jobs Act in a way that fulfills the 
congressional intent, and we always try and do that. I know 
from time to time Members of Congress think we don't get it 
right and we hear from you. We will always be attentive to 
those comments. But our intent is to get it right and interpret 
that legislation, that provisional legislation, in a way that 
fulfills your clear intent.
    Mr. WELLER. Thank you, Mr. Secretary. We do want to work 
with you. I appreciate your commitment to work with us, 
because, again, our goal is to give American-owned shipping 
firms the opportunity to be competitive in today's global 
economy.
    The second issue I would like to raise with you is one that 
has been hanging out there for 6 years. For thousands of 
middle-class investors, people who want to invest in a little 
piece of land or a rental property or a storefront for some 
income, the ability to do a like-kind exchange is an important 
opportunity for them to protect what for them is their nest egg 
for their retirement. Six years ago, in 1999, the Treasury 
Department--and this, of course, began in the previous 
Administration--proposed regulations relating to like-kind 
exchanges. For 6 years now, those who make this type of 
investment have been waiting for those regulations to be 
finalized and put forward. I was wondering, Mr. Secretary, can 
you tell us the status of those regulations? How soon do you 
expect them to be issued and what do you expect them to say?
    Mr. SNOW. Well, I can't tell you what I expect them to say 
at this point, Congressman. But I am aware of the 468(b) 
project rules, and Treasury and the Internal Revenue Service 
(IRS) are both working to complete the project and hope to 
release those rules fairly soon. So, we are making progress on 
them and expect to see them out here before too long.
    Mr. WELLER. Thank you, Mr. Secretary. I certainly encourage 
a timely conclusion to this process. Six years is far too long 
for middle-class investors to wait. So, thank you.
    Mr. SNOW. I agree.
    Mr. WELLER. I yield back, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Tennessee, Mr. Tanner, wish to inquire?
    Mr. TANNER. Thank you very much, Mr. Chairman. I will try 
to be brief. I have got some questions in writing I would like 
to submit, Mr. Secretary, in the interest of time. When you 
were here in 2003 before the Committee, I asked you about the 
debt, part of the publicly held debt held by foreigners.
    Mr. SNOW. Right.
    Mr. TANNER. In 2001, that was about 30 percent of our 
outstanding debt; in 2003, it was 37 percent. Now it is 44 
percent. I wanted to ask you, is there any point at which 
foreign holdings of U.S. publicly held debt pose a problem, in 
your opinion?
    Mr. SNOW. Not at the current levels, Congressman Tanner.
    Mr. TANNER. At what level, sir, would you say?
    Mr. SNOW. I don't know that I want to draw a line there and 
identify any particular level.
    Mr. TANNER. Well, it is something less than a hundred, I 
would assume.
    Mr. SNOW. Sure. But I do not think it is helpful for me to 
draw a line and say, anything above that is where the alarm 
bells go off. Foreign governments are interested in holding 
U.S. paper for reasons we talked about earlier. I think 
Congressman McCrery laid it out well. It is the best paper in 
the world. It is the safest, most secure investment in the 
world, and foreign governments have investment profiles that 
cause them to want to hold this gilt-edge paper in the United 
States.
    Mr. TANNER. I agree. The reason I asked that question is, 
there have been some comments in the London Financial Times and 
from Asia recently that, really, prior to 4 or 5 years ago, 3 
or 4 years ago, there was not an alternative for Reserve 
currency to the dollar. We are now seeing people talk about the 
euro being an alternative. The reason I ask, at what point do 
you see this, and I understand why you cannot answer in this 
forum, this not--this being a problem, is, because once they 
shift or begin to shift, if they do, from the dollar to the 
euro, we have got a major problem in refinancing that debt. I 
want to follow that up with you at some point, and not in this 
setting. Let me move quickly to----
    Mr. SNOW. I would be happy to do that, Congressman.
    Mr. TANNER. One other question. Under this budget, we will 
incur an additional $1.3 trillion of publicly held debt under 
the budget that you have submitted. In 2001, the privately held 
debt upon which we write interest checks every year was about 
$2.96 or about $3 trillion. Of that number, we were paying 
about $120 billion in interest. Today, it is $4.42 trillion. We 
are now up to about $160 billion a year that we write checks 
for in interest. You are going to add to that another $1.3 if 
your budget is true. Now, Mr. Secretary, at what point is the 
interest that is coming out of the current tax base going to 
impact, or is it already impacting directly our ability to meet 
the obligations of the United States Government with regard to 
investments in human capital and infrastructure? We are 
diverting billions of dollars from productive, hopefully, 
expenditures to interest.
    Mr. SNOW. Right. Congressman----
    Mr. TANNER. This is a matter of real of concern to me. We 
have talked about it before, about what we are doing is 
creating a tax that cannot be repealed called interest.
    Mr. SNOW. Well, I am glad you raised the whole issue. 
Despite the rising debt of the United States, which we need to 
keep focused on, I agree with you, interest obligations as a 
fraction of the deficit are falling, reflecting the very 
favorable interest rate environment we enjoy today, and which 
we would expect to enjoy for the future, because we have such 
low inflation in the United States. Inflation is low. Interest 
rates are low. That has created a very favorable environment. 
Even as the debt levels rise here in the years ahead, in the 
budget that we put forward, you will see that the interest 
obligation portion of the deficit remains fairly modest, 
because of low interest rates. But it is something that we very 
much need to keep attuned to. I agree with you.
    Mr. TANNER. I just hope you are right about that 
assumption, because if you are not, this thing can explode on 
us. As interest rates rise, there is nothing that we can do 
about it.
    Chairman THOMAS. Thank the gentleman. The gentleman from 
Kentucky, Mr. Lewis, wish to inquire?
    Mr. LEWIS OF KENTUCKY. Thank you, Mr. Secretary. In 2042, 
my daughter is going to be right at the age of retirement. My 
granddaughter is going to be paying for her retirement. If we 
do nothing, how is that going to affect my daughter's benefits 
and my granddaughter's ability to pay?
    Mr. SNOW. Well, your granddaughter is one of those two that 
the Chairman opened with. Your daughter, assuming nothing is 
done, will have her benefits much lower than the benefit that 
is available today, because the system cannot pay the benefits 
that are scheduled today. That is, I think, a simple and 
undeniable fact; the system is going to be unable to pay those 
benefits
    Mr. LEWIS OF KENTUCKY. Without massive increases in the 
payroll tax?
    Mr. SNOW. Without a massive increase in the payroll tax or 
a huge amount of borrowing, neither of which is consistent with 
keeping the American economy on the sort of course that you 
want to see it for your daughter and granddaughter
    Mr. LEWIS OF KENTUCKY. You probably could not even increase 
the retirement age to even affect it in any way?
    Mr. SNOW. Increasing the retirement age alone, while it has 
some effect, does not have a major effect on sustainability. It 
helps, but it is far from the major factor
    Mr. LEWIS OF KENTUCKY. So, with the exception of Mr. 
Jefferson, it seems like my colleagues on other side, they do 
have a plan. I would call it the do-nothing plan. The do-
nothing plan would increase the payroll tax significantly, 
maybe by as much as 50 percent. The do-nothing plan would cut 
benefits. The do-nothing plan would increase retirement. So, 
when I see people wringing their hands and worrying about what 
the President is trying to do and what we are trying to do as a 
Congress to make sure that my daughter and my granddaughter are 
going to have a sustainable retirement plan, one that is even 
going to provide benefits greater than what is being received 
today, I have to wonder, what is the problem here? I think it 
is certainly better to do something now than to stick our head 
in the sand and wait for a disaster to happen to our kids and 
our grandkids.
    Mr. SNOW. That is why the President has put this issue 
before the American people and before the Congress, Congressman 
Lewis, because now is the time to act. Every year we wait it 
gets more difficult. By acting now, we can secure for your 
daughter and granddaughter a much better retirement future than 
otherwise would be the case.
    Mr. LEWIS OF KENTUCKY. Thank you, sir.
    Chairman THOMAS. Thank the gentleman for yielding back a 
minute and a half. The Chair intends to ask the Secretary to 
stay until 1 p.m. He has other commitments on the other side of 
the Capitol shortly after that. That will even rush it. If 
every Member who is left takes the full 5 minutes, not every 
Member will have the ability to inquire. So, if Members could 
show some focus and willingness to share, everyone will be able 
to ask at least a question. The gentleman from California, Mr. 
Becerra wish to inquire?
    Mr. BECERRA. Yes, Mr. Chairman. Thank you very much. Mr. 
Secretary, thank you for coming again. Mr. Secretary, we went 
into this whole idea of a plan again and the discussion about 
plans. As far as I can tell, there is no plan from anyone that 
the President has accepted or adopted; the President himself 
has not issued a plan. You yourself just said the President 
does not have a plan. It would be much better for this debate 
if, at some point, the President would give us a plan so we 
have a sense of what he would like to see done. Congress, 
otherwise, is going to be debating with nothing to look at from 
the President, who is the one who is initiating this 
discussion. So, I hope that, at some point, we will get a plan 
with specifics in writing, because we know the devil is in the 
details, from the President. I would like to just ask a series 
of questions, because I want to make sure there is 
clarification on some of these issues. Today, the Social 
Security trust fund has assets. My understanding is that they 
total about $1.7 trillion in the bank. Would you agree with 
that?
    Mr. SNOW. Yes.
    Mr. BECERRA. By the year 2018, if I have these numbers 
correct, the trust fund, the Social Security trust fund, will 
have in the bank, in assets, about $5.3 trillion. Is that 
correct as well?
    Mr. SNOW. I would have to check that. But it will have 
substantial assets.
    Mr. BECERRA. Everything I am looking at from the actuary 
says that, by 2018, we are looking at about a $5.3 trillion 
surplus in the Social Security trust fund.
    Mr. SNOW. Yes. There will be a surplus, and then it gets 
drawn down over the next decades.
    Mr. BECERRA. If you are not sure about 2018, you might not 
be sure about the next date.
    Mr. SNOW. Oh, no. I am sure about the 2018. I was not sure 
whether it was $5 trillion or $5.5 or whatever in the account 
at that time.
    Mr. BECERRA. $5.3 trillion. Some 9 years later, 2027, we 
are told that the Social Security trust fund will have assets 
projected to be around $6.6 trillion. Do you agree with that 
number?
    Mr. SNOW. Well, if you are taking it from the actuary, I 
will stipulate to it.
    Mr. BECERRA. Actually, these are my notes from all the 
information provided by the actuary and others. You mentioned 
2042 as the date when we expect those trust funds assets to be 
depleted. If I read your budget that has been submitted by the 
President correctly, this fiscal year, 2005, you are projecting 
a unified budget deficit for this 2005 year of $427 billion. 
Correct?
    Mr. SNOW. Yes.
    Mr. BECERRA. Now, if you were to extract the $162 billion 
from the Social Security trust fund surplus that you are using 
to reduce the size of the deficit, the actual size of the 
deficit for this operating year, 2005, would be $589 billion. 
Correct?
    Mr. SNOW. If you did the math that way, yes.
    Mr. BECERRA. So, over the next 5 years, the President's 
budget runs up a deficit, cumulative deficit, of approximately 
$1.4 trillion. If you were to exclude the Social Security 
surplus money that you are using, you are spending each of 
these next 5 years for something other than Social Security, 
the actual size of the government's operating budget deficit 
would be closer to $2.5 trillion. To me, the question becomes, 
and this is perhaps what I would like to ask you, how is it 
that a trust fund and a system that is running surpluses, where 
up until the year 2027, some 20 years from now, we find that 
the system itself will have in the bank more than $6 trillion, 
that there is a crisis and a need to act so immediately to 
dismantle that program that is running a surplus, where the 
Federal Government, under the President's own budget is running 
massive deficits today, and yet there is no need to change a 
course when it comes to tax cuts that go principally to wealthy 
folks?
    Mr. SNOW. Well, Congressman, you are correct that the 
Social Security trust fund will continue to have substantial 
assets in it after 2018. The point is, though, that those 
assets will be depleted over the next several decades.
    Mr. BECERRA. I think, Mr. Secretary, all of us agree with 
that.
    Mr. SNOW. Good. We made progress.
    Mr. BECERRA. Do you disagree with the statement that was 
made earlier by one of my colleagues that, in fact, if you were 
to take just the 1 percent wealthiest American households in 
this country, that you can actually use that savings and 
preserve Social Security forever?
    Chairman THOMAS. The Chair thinks that is an excellent 
question to respond to in writing.
    Mr. BECERRA. I would appreciate a response, Mr. Secretary, 
in writing if you could.
    Chairman THOMAS. The gentleman from Florida, Mr. Foley, 
wish to inquire?
    Mr. FOLEY. Thank you. Welcome back, Mr. Secretary. I 
understand the budget contains language on a bill I offered, 
along with Senator Bond. The IRS recently has taken the opinion 
that a Federal Emergency Management Agency mitigation grant 
could be considered taxable income. I understand the budget 
does contain language that would keep those from being taxable. 
Am I correct?
    Mr. SNOW. Yes.
    Mr. FOLEY. I also understand in this budget that the 
President has chosen to make the 15 percent tax on capital 
gains on stocks and dividends permanent?
    Mr. SNOW. Yes.
    Mr. FOLEY. Good news for investors. Let me give you the 
following returns on our Thrift Savings Accounts: G fund, which 
is the bond, 6.04 over 10 years, averaged; the F fund, fixed 
income, 6.95 percent 10-year average, compounded; C fund, the 
equity in the markets, 10.99. The S fund, the small cap fund, 
9.70, 10-year average, including the bad years, we had 3 bad 
years; 4.32 in the international fund, a more recent addition 
to the portfolio. Are these returns better than we are 
currently achieving in the Social Security fund?
    Mr. SNOW. Yes.
    Mr. FOLEY. Those returns, if aggregated, would in fact 
enhance the well-being of the program?
    Mr. SNOW. Yes. The individuals who would be the beneficiary 
of the investments in those programs. Yes.
    Mr. FOLEY. We have got a lot of new beneficiaries coming 
online, don't we?
    Mr. SNOW. Yes, and fewer workers. That is the basic 
problem. Demographics is the problem.
    Mr. FOLEY. If you would indulge me, let me read a few 
quotes. 1998, Bill Clinton: The fiscal crisis in Social 
Security affects every generation. Dick Durbin, Senator of 
Illinois. Durbin said, due to the increasing number of baby 
boomers reaching retirement age, Social Security will be unable 
to pay out full benefits. Unable to pay out full benefits. 
Harry Reid, Senate Minority Leader: Most of us have no problems 
with taking a small amount of the Social Security proceeds and 
putting it into the private sector. In fact, on Fox News' With 
Tony Snow, he says, are you opposed to be letting people make 
investment decisions, in other words, having some component 
where they say, I will save the money rather than letting Uncle 
Sam do it for me? Senator Reid: I think it is important that we 
look, and I am totally in favor of doing this. Senator Baucus: 
I think the problems we are facing with Social Security are 
going to be upon us a little more quickly than I think some 
people realize. Chuck Schumer, Senator from New York, 1999: We 
have to move on now and start fixing Social Security and 
preserving it. Senator Dorgan: Fixing Social Security is an 
urgent priority. It ought to be at the top of both parties' 
agendas. Former Representative Dick Gephardt: Why should Social 
Security recipients be disadvantaged by not getting to be able 
to have high returns out of the stock market? President 
Clinton: Investing will earn a higher return and keep Social 
Security sound for 50 years. The President proposes--Clinton: I 
propose to limit the aggregate amount of our investments to 
about 4 percent. It will never get over 4 percent the next 20 
years. Let's just drop here a few more. The financial crisis in 
Social Security affects every generation. I have said that. 
Senator Clinton, New York: Clearly, it is in all of our 
interests to preserve and strengthen Social Security into the 
next generation. If we do not want to burden our children and 
grandchildren, if we want to make sure that Social Security 
remains solvent well into the 21st Century, we must make bold 
decisions now. That, again, is 1999. Gene Sperling, White House 
Economic Advisor: Over a long period of time, there is every 
reason to believe that people will get higher returns if 
government invests part of the Social Security surplus. Vice 
President Gore: This whole national discussion, one of the 
single most important salient facts that jumped out at 
everybody is that, over a 10-year period in American history, 
returns on equities are just significantly higher than these 
other returns. Fairly compelling statements. Wouldn't you 
agree?
    Mr. SNOW. I would agree.
    Mr. FOLEY. All from Democrats, all indicating that Social 
Security needs to be fixed. My hope is, representing the fifth 
largest senior population in America, that we put everything on 
the table, that we look at these programs in context to their 
survivability, if you will.
    Now, a lot of people have questioned you today about the 
sterling nature of our bonds, and they are first to pay. That 
is the nature of Treasuries. Our first obligation is to pay our 
debt. So, we will always back up the bonds. But you made a 
poignant example of a corporation. You can only go so long 
taking in less income and paying out more before you are 
subjected to Chapter 7 or 11. Isn't that correct?
    Mr. SNOW. That is absolutely right.
    Mr. FOLEY. We are heading in that direction?
    Mr. SNOW. Without any doubt, that is where we are headed.
    Chairman THOMAS. The gentleman's time has expired. The 
Chair would indicate that continuing along with the full 5 
minutes until the red light will deny some of our colleagues 
the opportunity to inquire. The gentleman from Texas, Mr. 
Doggett, wish to inquire?
    Mr. DOGGETT. Thank you, Mr. Chairman. Thank you, Secretary. 
Mr. Secretary, the figures that I have here suggest that, over 
the next decade, Social Security will actually generate a 
surplus of about $2.6 trillion. Does that sound about right?
    Mr. SNOW. Yes. The system----
    Mr. DOGGETT. Do I understand that the budget that you are 
so proud of, and the administration's proud of here this 
morning, proposes to borrow every penny of that $2.6 trillion 
from the Social Security trust fund and use it for non-Social 
Security purposes?
    Mr. SNOW. Well, the obligations in Social Security, 
Congressman, as I have said over and over, will be honored. 
Every penny----
    Mr. DOGGETT. Yes, sir, you are going to honor them, but you 
are going to borrow from Social Security and use it for non-
Social Security purposes. Correct? $2.6 trillion worth of 
borrowing?
    Mr. SNOW. That is correct. They will be backed by the IOUs 
and obligations of the U.S. Government.
    Mr. DOGGETT. I appreciate the fact that they will be 
honored and backed up, even though you are going to borrow from 
them for purposes that people did not pay into Social Security. 
You are raiding the trust fund. Let me ask you about the 
accuracy of one other thing. Last Friday, the Washington Post, 
under an article entitled, ``Benefit Cuts Would Offset 
Contributions, White House Explains the Proposal Further,'' 
there was an indication by the White House that there would be 
an offset, dollar-for-dollar reductions in Social Security 
statutory guaranteed benefits, for the new personal investment 
accounts. That is, every dollar that goes into personal 
investment accounts, there will be a dollar-for-dollar cut in 
the guaranteed benefits. I have not seen any correction 
requested from the White House to that story since last Friday. 
Are you demanding a correction of it this morning?
    Mr. SNOW. Congressman, I have been traveling so I did not 
see the story.
    Mr. DOGGETT. Yes, sir. Well, you do not disagree that, 
under the general principles, you said that, although there is 
a crisis, the President does not have a plan to address the 
crisis, but under the principles that he has announced, the 
plan is that, every time you take a dollar out of your Social 
Security for these investment plans, you are going to have a 
reduction in your guaranteed statutory benefits?
    Mr. SNOW. On the other side----
    Mr. DOGGETT. You may have some gain, you may have some 
loss; it is up to the market.
    Mr. SNOW. You are going to have an account.
    Mr. DOGGETT. Let me ask you about advice that you have 
received from Mr. McCrery, who has already questioned, Mr. 
Shaw, as reported in that same Friday issue of the Post, a 
suggestion, according to the Post, that Mr. McCrery thinks the 
President's plan, and I guess he assumes the President has one, 
must be changed in a fundamental way, and that we need to scrap 
the idea of funding the private accounts with money earmarked 
from the Social Security trust fund. Why is the Administration 
rejecting the advice of Mr. McCrery and Mr. Shaw on this 
important point?
    Mr. SNOW. I do not think that the coverage that you read 
properly characterized the comments of the very distinguished 
Member from Louisiana.
    Mr. DOGGETT. You think I mischaracterized the comments? Let 
me just read it to you . . .
    Mr. SNOW. No. No. I said, I do not think the newspaper 
coverage that you are citing properly and authentically covered 
the comments that the----
    Mr. DOGGETT. Well, it was not just one. I mean, it was 
repeated in a number of papers, that they thought the idea of 
funding accounts with money earmarked for Social Security from 
the trust fund was not a good idea. You think it is?
    Mr. SNOW. Oh, yes. Yes. Absolutely. But you say the 
President does not have a plan. On the----
    Mr. DOGGETT. No, sir. You said that earlier this morning. I 
am just repeating your words.
    Mr. SNOW. The President has put forth quite a detailed plan 
on how the personal accounts would operate.
    Mr. DOGGETT. Well, Mr. Secretary, the record will speak for 
itself, but you told this Committee a few minutes ago the 
President does not have a plan. I know he has some principles, 
and those principles are based on the fact that you all think 
the Social Security system is about to go bankrupt. Is that 
because the Social Security system cannot fully fund all of its 
future obligations?
    Mr. SNOW. That is precisely what bankruptcy means.
    Mr. DOGGETT. If you use that definition, don't you have 
bankruptcy in many private pension plans of major corporations 
in America?
    Mr. SNOW. Congressman, no. I would not say that.
    Mr. DOGGETT. Well, don't you have many private pension 
plans, I mean the Pension Benefit Guaranty folks put out a 
report; many private pension plans that are not fully funded to 
meet all of their future obligations?
    Mr. SNOW. There are some that are not fully funded. But 
there is a major difference between not being fully funded and 
being bankrupt.
    Mr. DOGGETT. Yes, sir, there surely is.
    Mr. Secretary, the House Republican Study Committee has 
said that your approach is too timid at just 4 percentage 
points of Social Security, and you ought to go to 6 percentage 
points in almost all of the employees contributions to Social 
Security. Why aren't you doing that?
    Chairman THOMAS. The gentleman's time has expired. That 
will be a written answer submitted by the Administration. The 
other gentleman from Texas wish to inquire?
    Mr. BRADY. Yes. Thanks, Mr. Chairman. Let's have a quick 
reality check. One, the Washington Post article was corrected 
the very same day; the key point of that article being 
discredited. Secondly, Congress has borrowed from the Social 
Security trust fund since President Johnson initiated it way 
back when. Finally, if the President has no plan, why is 
everyone so critical of it? The fact of the matter is, the 
President laid out a plan to the Nation. Today, I see in one of 
the local Capitol Hill papers, Democrats will offer no Social 
Security reforms. On one of the most serious matters affecting 
our future, our kids' future, Democrats will offer no Social 
Security reforms for now. Let's stay on the issue of hypocrisy. 
People back home always ask me, especially since this debate 
has started: Why is it that Members of Congress are able to put 
their hard-earned savings into personal accounts that are safe 
and secure for their families, but you deny it for average 
Americans? Why do Members of Congress and their staff and our 
coworkers put $15 billion a year from our paychecks into 
personal accounts like, as has been proposed, that it is good 
enough for our families, but it is not good enough for the 
average people who pay our salaries. What would you tell my 
folks back home about why we are allowed to do that and embrace 
it as safe and secure, but we call it a guaranteed gamble for 
regular families. Can you give me an answer?
    Mr. SNOW. Congressman, I think if I was the sitting Member 
from your district, I think I would say they ought to be given 
that opportunity.
    Mr. BRADY. Well, a lot of my folks say, maybe Members of 
Congress ought to lead by example. If all personal accounts are 
so risky and a guaranteed gamble, why don't we withdraw from 
them? Why don't we set the example and live like everyone else 
in America? It seems to me, Mr. Secretary, that in this 
proposal by the President, we are giving younger workers a 
choice. They can choose real money in a real account, building 
up over time, or they can accept an IOU in an imaginary ledger; 
hopefully, it will be paid by a generation once removed from 
them. It seems to me, if we are serious about preserving Social 
Security, if we can take good ideas instead of offering no 
Social Security reforms, getting good ideas from your 
Democratic friends, taking the best ideas from the country and 
from the Republican side, I am just convinced, if we will set 
aside the politics and the petty stuff in here that we actually 
can come up with a plan that can preserve Social Security once 
and for all, and for every generation. If we will call time out 
on the silliness and just get serious.
    Mr. SNOW. Congressman, I think you framed the issue very 
well there. With the personal retirement accounts what really 
happens is this: Americans have the opportunity to become 
owners of their own retirement, rather than merely being 
creditors in a promise that the government cannot keep. That is 
the essence of this situation.
    Mr. BRADY. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman for the 1 minute and 
30 seconds that he was kind enough to yield back. Does the 
gentleman from North Dakota, Mr. Pomeroy, wish to inquire?
    Mr. POMEROY. Mr. Secretary, I would like to follow up on 
the preceding line of questions. The TSP is essentially a 
defined contribution plan available to employees of the Federal 
Government. Is that correct?
    Mr. SNOW. Yes.
    Mr. POMEROY. That is not like some alternative Social 
Security program, Members or staff members of the Federal 
Government today are part of the Social Security program. Is 
that correct?
    Mr. SNOW. Yes.
    Mr. POMEROY. So, I think you would be a little confused 
listening to my Texas colleague. The TSP is essentially a 
401(k). Now, that is not unique to people in the Federal 
Government. There are 401(k)s all over the country, indeed 
about $2 trillion is invested in 401(k) accounts. Is that 
correct?
    Mr. SNOW. Yes. The 401(k)s are a very popular investment 
vehicle.
    Mr. POMEROY. Mr. Secretary, if I might. We need to make 
this clear. The 401(k) is an account on top of Social Security. 
So, you have the Social Security providing the foundation of 
retirement income, and I am informed that, in my State, the 
average Social Security check is about $834 a month. The 401(k) 
proceeds the worker may have and be drawing down on retirement, 
that would be on top of Social Security. Is that correct?
    Mr. SNOW. Yes.
    Mr. POMEROY. For example, when you have a market 
correction, and you go from the late nineties valuations in the 
stock market to after the correction in the early part of this 
decade, very substantially smaller amounts in 401(k)s. The old 
joke: My 401(k) became a 201(k). Even though there would not be 
as much retirement assets available to the retired worker 
because of the stock market fluctuation relative to their 
401(k), Social Security continues to pay that annuity every 
month. That was not effective; was it, Mr. Secretary?
    Mr. SNOW. No, it was not. But it will be in 2042 when you 
cannot pay it out any more. That is the whole point.
    Mr. POMEROY. Well, 37 years from now, if we do not do 
anything, there would be a 25-percent reduction. I think we 
need to do something. In fact, the comments made by my Florida 
colleague about Democrats saying we should address Social 
Security; when we had a surplus, we wanted to use that surplus 
to address the long-term issues about Social Security.
    Unfortunately, decisions made by this panel, the majority, 
have spent that surplus on tax cuts and other things and driven 
us to the deepest deficit position in the history of the 
country. You, who presided over that decline. The issues that I 
want to get into, and that I think are critically important, 
involve this change of the price index to the price index from 
the wage index. Are you familiar with the strategy memo written 
by a member of the White House staff, Peter Wehner, Director of 
Strategic Initiatives for the Bush Administration?
    Mr. SNOW. I have seen it.
    Mr. POMEROY. I will quote to you from it. We simply cannot 
solve the Social Security problem with private retirement 
accounts alone. If we borrow $1 to $2 trillion to cover 
transition costs for personal savings accounts and make no 
changes to wage indexing, we will have borrowed trillions and 
will still have unfunded liabilities. Is that your position, 
too, Mr. Secretary?
    Mr. SNOW. My position, as I have said repeatedly here, is 
that the personal accounts are an integral part of any solution 
to this Social Security feasibility problem.
    Mr. POMEROY. Now, Mr. Secretary, do you believe that 
changing from a wage index to a price index is also an integral 
part of long-term sustainability for Social Security?
    Mr. SNOW. It is not a necessary condition to put Social 
Security on a feasible course.
    Mr. POMEROY. Mr. Secretary, this is critically important.
    Mr. SNOW. There are a number of ways to do that.
    Mr. POMEROY. Mr. Secretary, on the index, which is 
critically important, on this future inflation adjustment to 
Social Security, the wage index to the price index. Are you 
saying in your testimony today that we do not need to make that 
change; we do not need to change the price index going forward 
as part of Social Security reform?
    Mr. SNOW. I am saying it is one option. It is an option 
that should be looked at. There are a number of options.
    Mr. POMEROY. Mr. Secretary, is it an integral part? You 
have said private accounts are integral parts. Is the wage 
index to the price an integral part?
    Mr. SNOW. Not in the same sense, because it is one of a 
number of options. The objective here has to be to put Social 
Security on a sustainable permanent course. Whatever the answer 
is, and the President has suggested a number of options in his 
State of the Union address, whatever it is, it has to achieve--
--
    Mr. POMEROY. The price index change would steeply cut 
benefits going forward, even if you count the value of the 
private account. I would----
    Mr. SNOW. Well, according to the Social Security 
Commission, both model two and model three, you can come out 
ahead of where you would be with Social Security if you have 
the private accounts.
    Chairman THOMAS. The gentleman's time has expired. The 
gentleman from Wisconsin wish to inquire?
    Mr. RYAN. I do. Mr. Secretary, I do have a few questions. I 
notice that you are hearing a lot of rhetoric on the other 
side. This is essentially the plan that is being offered by the 
other side: Nothing. Now, I would like to get to the question 
of whether there is a problem or not, because we have been 
distributed 5 pages of quotes from then-President Clinton and 
leading Democrats all in 1998 and 1999 saying, Social Security 
is going broke; there is a problem; we have to act to fix it 
now. The more we delay, the more painful the options become. We 
can go on and on about that. The point is, let's get to this 
whole trust fund idea. It has been said that we have $1.7 
trillion of assets in the trust fund; that we will have by the 
time 2018 rolls around something like $5.3 trillion in assets. 
What are those assets in the trust fund? Is there a bank 
account with money in it? Are there tradable bonds or stocks 
that we can just draw on, once 2018 rolls around, that will 
take us to 2042? What are those assets?
    Mr. SNOW. Well, those assets are IOUs from the United 
States Department of the Treasury to the Social Security 
Administration.
    Mr. RYAN. So, when 2018 comes, and according to the 
trustees, of which you are a member, we have less revenues 
coming in than benefits being paid out, is there, all of a 
sudden, money that we can draw upon from these assets, or do we 
have to come up with the money somehow?
    Mr. SNOW. No. You have to come up with the money. It will 
be a sizeable amount of money. It will have a major impact on 
the deficit.
    Mr. RYAN. So, there is no cash behind those assets, we have 
to either raise taxes, cut spending, or borrow more money 
starting in 2018 to continue paying benefits for Social 
Security in 2018. Is that correct?
    Mr. SNOW. Unfortunately, Congressman, those are the only 
options.
    Mr. RYAN. That is right. So, I think this notion that we 
are fine for 37 years, no problem until 2042, is really quite 
misleading. That is wrong. We will, in 2018 have to come up 
with money, which we do not have right now, to continue paying 
seniors' benefits. The question then that I think we are trying 
to get at is, can we do a better job than we are doing right 
now for Social Security? My generation is looking at about a 1-
percent rate of return. My children are getting a negative-1-
percent rate of return. No one is talking about depriving 
people who are in or near retirement of any promised benefit. 
It has been taken off the table. The President and Congress 
have all been saying, if you are in or near retirement, you 
will have exactly the same Social Security benefits with no 
benefit change whatsoever. The question is, can we take this 
debt that we owe, this unfunded liability, which is really $12 
trillion in present value terms, and convert it into a real 
asset where workers can get a better rate of return, retire 
with better benefits and wipe this liability off our books? So, 
even if the critics who are saying this plan will cost $2 
trillion, let's just give them face value and say the plan does 
cost $2 trillion. If we have a plan that costs $2 trillion and, 
in doing so, it gives workers personal retirement accounts 
where they can own and control their money, they retire with 
better benefits, and it wipes off the books a $12 trillion 
debt, I will take that deal any day. So, the question I have, 
Mr. Secretary, is, starting in 2018, what is the debt that we 
owe? What is the money that we will have to start paying out on 
that day? What are the differences between payable and promised 
benefits starting at that time?
    Mr. SNOW. Well, in--if you go to 2028, you will have to 
come up with about $250 billion.
    Mr. RYAN. In that year alone?
    Mr. SNOW. In that year alone. This is the chart, if you can 
see it. This is 2018. Every year thereafter, you can see a huge 
Federal deficit being developed as a result of the shortfall 
between the in-flow and the out-flow, and it can only be met in 
the ways you addressed.
    Mr. RYAN. So, are the alternatives to either raise taxes, 
cut benefits, borrow more money or grow the rate of return 
coming to Social Security? Are those essentially our four 
alternatives?
    Mr. SNOW. Those are the alternatives. Unfortunately, as we 
discussed earlier, higher growth rates for the economy as a 
whole do not fix this problem, because with the way the Social 
Security system works, they just get translated back into 
higher compensation levels to the retirees.
    Mr. RYAN. So, is it correct to say that, if we do not have 
personal retirement accounts as part of the reform, then you 
would have to resort more toward either more borrowing, deeper 
benefit cuts or higher tax increases?
    Mr. SNOW. I think it is safe to say that the situation that 
retirees face will be much worse if we do not have personal 
retirement accounts. Absolutely.
    Mr. RYAN. Thank you.
    Chairman THOMAS. The gentleman's time has expired. The 
gentlewoman from Ohio, Mrs. Tubbs Jones wish to inquire?
    Mrs. JONES. Mr. Secretary, thank you for coming to our 
Committee this morning. My first question is, is it a fact that 
the tax cuts for just the top 1 percent of households, with 
average incomes of more than a million dollars, exceeds the 
cost of shoring up Social Security without any benefit cuts?
    Mr. SNOW. Congresswoman, I do not know that. I would have 
to check on the facts of that. I do not have that readily 
available.
    Mrs. JONES. Well, assume it for the purpose of my question. 
Would you please, sir?
    Mr. SNOW. I will for the purpose of your question.
    Mrs. JONES. Then that is the proposal that the Democrats 
are offering to shore up Social Security, that you take the 
money from those tax cuts, and they will pay for the Social 
Security costs, just so that the record is clear, that 
Democrats are offering a proposal. Let me go to this. It is in 
your statement. It says in the interests of honesty and 
transparency. In the interests of honesty and transparency, Mr. 
Secretary, is it not a fact that the personal accounts that you 
propose are not like a 401(k) plan? Isn't it a fact that if I 
were to get to the point where I would get an annuity, I would 
get money from the personal accounts that you are proposing, 
that I would be forced to be put it into an annuity, I could 
not get a lump sum payment?
    Mr. SNOW. Well, the lump sum option, I think will be 
available, where an individual can demonstrate that they will 
not outlive the anxiety.
    Mrs. JONES. Mr. Secretary, in fact, that is not the 
proposal that is on the table. Every proposal that I have seen 
for the personal accounts says that it will be turned into an 
annuity, and an annuity cannot be directly passed on, you could 
not give it to your child immediately?
    Mr. SNOW. Congresswoman, I think, perhaps, we have not made 
available all of the materials that we should, or you have not 
had a chance to see them. But, it is my understanding that the 
Administration proposal here does contemplate the opportunity 
for a lump sum payment once some means test is met, because you 
do not want people to take a lump sum----
    Mrs. JONES. But you have to meet a means test. I do not 
have to meet a means test for my 401(k). I can take it and do 
whatever the heck I want to do with it. Right?
    Mr. SNOW. Well, I am agreeing with you that----
    Mrs. JONES. If so, therefore, I must meet a means test, it 
is not like a 401(k).
    Mr. SNOW. Well, it is, and it isn't. It has some things in 
common with it and some things that are different.
    Mrs. JONES. Mr. Secretary, if I have to meet a means test, 
I do not have the ability to take that money and do what I want 
to do with it. Correct? Yes or no, sir?
    Mr. SNOW. Unless you meet the means test.
    Mrs. JONES. You know what, I do not think you are 
responding to my questions appropriately. In the interests of 
honesty and transparency, answer my question, Mr. Snow. That 
you cannot, if you have to meet a means test, then the ability 
that I have to take my annuity is not the same as a 401(k). Yes 
or no, sir?
    Mr. SNOW. Well, it is if you meet the means test.
    Mrs. JONES. Okay. Mr. Snow, let's move on. I hope the whole 
world is seeing that you are not answering questions in the 
interests of honesty and transparency. Let me ask you also, 
part of the proposals, of the Government's proposals on Social 
Security are suggesting that African-Americans would fare 
better under the proposed changes than they do under current 
programs. Is that correct, sir?
    Mr. SNOW. Yes, I think there has been some suggestion to 
that effect made. Yes. To that effect, yes, that both with 
respect to women and with respect to minorities, the current 
system works in some ways that one can question the fairness.
    Mrs. JONES. On the other hand, it works in some ways that 
are in the greatest, best interest of African-Americans and 
women with regard to wage indexing, with regard to the survivor 
benefit and also with regard to the tenet from Social Security 
that, if I am disabled, my children are able to get funds from 
my disability, or I die and my children are able to get funds 
from my disability, that I can never purchase in the open 
market because I do not have enough money. That is a fact, 
isn't it, Mr. Snow?
    Mr. SNOW. Well, I think all of those facts depend on 
individual circumstances.
    Mrs. JONES. Well, if we look at the income that women and 
African-Americans receive as compared to white men in this 
country, sir, it is clear that they make less money, and it is 
clear that they are often in the work force less--a shorter 
period of time than white men. So, therefore, the fact is, that 
under a disability or survivor benefit, most women and most 
African-American children receive a greater beneficiary from 
Social Security disability than they could ever receive from an 
annuity that they would attempt to purchase out in the world.
    Mr. SNOW. Congresswoman, they are more dependent on it and, 
therefore, have a bigger stake in seeing it sustained.
    Mrs. JONES. I thank you for your responses.
    Chairman THOMAS. Does the gentleman from New York wish to 
be recognized?
    Mr. RANGEL. Thank you. I just want to clarify the position 
of the Democrats as it relates to Social Security. The 
Democrats are anxious to put everything on the table in order 
to resolve this issue. When the leadership met with the 
President not too long ago, the President asked--and Mr. 
Secretary was there--the President asked us to hold our fire 
until such time as he presented us with a plan and not to be 
critical of it. The Treasury Department is saying that there 
are proposals and suggestions. But, so far we have not gotten a 
plan. So, there is no Democrat--of what Congresswoman Jones is 
suggesting, that these things on the Democratic table to 
respond at the time that is appropriate. But, I think the 
Secretary said he was there when the President requested of us 
not to be critical and not to come up--he did not say not to 
come up with anything, but at least to wait until he put these 
pieces together. That is what we are doing.
    Chairman THOMAS. The Chair thanks the gentleman for the 
clarification. The record shows that the gentlewoman from Ohio 
is in favor of raising taxes in substitution of the President's 
program. The gentleman from Georgia, Mr. Linder wish to 
inquire?
    Mrs. JONES. Mr. Chairman, I would like to object to your 
interpreting what my responses were, or what I said.
    Chairman THOMAS. The record will speak for itself. The 
gentleman from Georgia has the time.
    Mr. LINDER. Thank you, Mr. Chairman. Mr. Secretary, 
welcome. Nice to see you again. Isn't it true, that if we were 
to go and rescind the tax increase on the top 1 percent of the 
tax cuts, we would be increasing taxes?
    Mr. SNOW. Absolutely.
    Mr. LINDER. Isn't it further true that when we increase 
taxes we tend to slow the growth of the economy?
    Mr. SNOW. Yes.
    Mr. LINDER. Isn't it further true that when you slow the 
growth in the economy you cost jobs, reduce the revenues to the 
Federal Treasury, and you reduce the revenues to the Social 
Security Administration?
    Mr. SNOW. No question about it.
    Mr. LINDER. Our Chairman has spoken some time ago, and 
recently, and I agree that trying to save this system 
predicated on workers paying for retirees is going to be 
difficult to do. We will have to look at a bigger picture. We 
are going to increase the number of retirees in 25 years by a 
hundred percent. We are going to increase the number of workers 
paying for them by 15 percent. Maybe we ought to look at a 
broader picture. Maybe just the payroll tax is insufficient to 
the challenge. But this structure of income taxes also, and I 
am going talk about something you and I have talked about, 
drains on our economy in other ways. We know that 22 percent of 
the price system represents a tax component. But it makes us 
very uncompetitive in the global economy. Add to that the VAT, 
when we export something, we are doubly less competitive. We 
know that we have somewhere in the range of $200 to $500 
billion per year in just compliance costs. That is a huge tax 
burden on our economy. We now know that we have driven $6 
trillion offshore because of the Tax Code, and to euro-dollar 
markets and to offshore financial centers. Do you have a 
working group in your Department looking at fundamental tax 
reform and tax simplification?
    Mr. SNOW. Yes, we do, Congressman Linder, and we have for 
some time. We will share our research and analysis with the tax 
panel. Some of the tax experts are right behind me here who 
have done their best to give me an education on the options 
available. I am not sure what grade they give me, but at least 
I have been a diligent student.
    Mr. LINDER. Could I have access to some of that research?
    Mr. SNOW. Sure. We would be delighted to share it with you.
    Mr. LINDER. Let me ask you one further question, and you 
may answer it in writing. Dr. Kotlikoff of Boston University 
has recently written a study that says that the unfunded 
liability over 75 years in Social Security and Medicare is $51 
trillion. The Social Security Administration says the unfunded 
liability is about $13 trillion. Would you ask somebody to look 
at those two studies and, in writing, explain to me what the 
shortages are?
    Mr. SNOW. Sure.
    Mr. LINDER. Thank you, Mr. Chairman. I yield back.
    Chairman THOMAS. Based upon the time saved on the 
Republican side, it is over 5 minutes, the Chair will call on 
the gentleman from Colorado, Mr. Beauprez.
    Mr. BEAUPREZ. I thank the Chairman, and I thank the 
Secretary for being here for enduring this rather tortuous, 
sometimes, exercise. I think the gentleman from Ohio a moment 
ago hit on the key subject here. Simple question: Can we, I am 
paraphrasing, can we do a better job of Social Security in the 
future than the current system provides? At about, I do not 
know, 2042, I do not know if it is some other year, but in and 
around that time, I know I have got four children that I 
brought into this world that are going to reach retirement age; 
just a little bit before that and a little bit after that. I 
asked them that question. They said, ``Dad, you had better do 
something better with the system in the future than it 
currently provides or we are not going to have one.'' They get 
it, Mr. Secretary, and I think most people out there in the 
real word get it, too. We throw the word around: Unsustainable. 
I think it fits. I think it fits.
    As luck would have it, yesterday, in my office, I had four 
representatives of PERA, that is a public pension fund in 
Colorado, the 23rd largest in the country I am told, that 
represents public employees, that is what it stands for, Public 
Employees Retirement Association. It has got municipal workers, 
State troopers, teachers--typically our teachers belong to it, 
State employees. It has about 361,000, I think, members, again 
the 23rd largest pension fund in the Nation, I am told, public 
pension fund. They seem to understand what a better plan might 
be, because the message they gave me loud and clear was: Do not 
mess with our retirement account. There is a reason. Because it 
is theirs. It is a personal account. They own it. They can 
transfer it. They enjoy the benefits of compound interest with 
it.
    Now, question for you. I suppose there is one other way we 
can do this. We have heard that you can cut benefits 
dramatically. Don't want to do that. I submit that no Congress 
will. We can raise taxes rather dramatically as well. Difficult 
choice as well, with serious economic implications. Or we can 
whack away at the other things that the Federal Government 
spends money on, like National Defense or Homeland Security or 
our intelligence community or affordable housing or our 
veterans or we can get around to Education and Medicare and 
Medicaid, but I think Congress will find that very difficult to 
do. In fact, I think, if we face the real music, Medicare and 
Medicaid, our other large entitlements, we are headed to a very 
serious day of reckoning with our major entitlements. Isn't 
that what we are about here, Mr. Secretary, is simply, as the 
Gentleman from Ohio to my right, a moment ago pointed out, 
aren't we challenged with, can we do a better job than the 
wonderful job that those who came before us did in providing a 
benefit, but can't we do a better job?
    Mr. SNOW. That is the whole question, Congressman. You put 
it well. He put it well. I think we can. But the option to do 
that gets diminished as we put it off, as you put it off, as 
Congress puts it off. So, the sooner you act, the more options 
that are available.
    Mr. BEAUPREZ. You held up a page earlier that I think I 
have seen before, that simple graph. Doesn't that show that, as 
we go forward into the future, if we do not fix the system 
somehow so it is sustainable, then those funds, unless we raise 
taxes or dramatically reduce the benefits, we are going to have 
to find them somewhere, and the only other somewhere would be 
to essentially reduce or eliminate these other programs of the 
Federal Government, parts of the Federal Government that we 
have become very dependent upon.
    Mr. SNOW. Congressman, you have stated it well. In fact, 
cutting them will not be enough. If this trend continues the 
entire budget of the United States will be absorbed by 
Medicare, Medicaid and Social Security.
    Mr. BEAUPREZ. I thank you and the President for having the 
courage to bring forward what obviously is going to be a 
difficult question, but a necessary question, for us to answer. 
Thank you, Mr. Secretary.
    Chairman THOMAS. Does the gentleman from California wish to 
inquire?
    Mr. THOMPSON. Thank you, Mr. Chairman.
    Mr. Secretary, could you just help me in clarifying the 
amount of the deficit in this budget. On one figure, I see $427 
billion. Is that----
    Mr. SNOW. That is the number. That translates into the 3.6 
percent of GDP.
    Mr. THOMPSON. If we add up all of the things that we have 
been talking about, for instance the $754 billion to pay the 
transitional cost to privatize Social Security; the extension 
on the AMT of $25 billion; the war supplemental of $80 billion; 
and the fact that this budget borrows $160 billion from Social 
Security, we have a real deficit of about $1.2 trillion, $1.3 
trillion?
    Mr. SNOW. Well, Congressman, the deficit is as reflected in 
the document that you have from OMB.
    Mr. THOMPSON. Thank you. Can you tell me, does that 
include, and I think Mr. Tanner, my colleague from Tennessee, 
brought this up earlier, the amount that we borrow from foreign 
governments, from foreign countries? Specifically, over the 
course of the last year--you talked to me last year when I was 
on the Budget Committee. This year the venue is different but 
the topic is the same. Are growth and debt to foreigners, we 
have borrowed $139 billion more from Japan; $43 billion more 
from China; and $15 billion more from the OPEC nations. Is this 
included in that?
    Mr. SNOW. Oh, sure. All of the borrowing of the United 
States will be reflected.
    Mr. THOMPSON. Thank you. Then it has been discussed here 
today that the full faith of our U.S. Government provides this 
guaranteed benefit to anyone who is collecting Social Security 
benefits today. That has been brought out a number of times. 
So, our Government stands behind, even if we are borrowing 
money from the Social Security trust fund to run our everyday 
government operations as we just talked about, our Government 
stands behind that borrowing, that obligation to those on 
Social Security?
    Mr. SNOW. Yes. The Government stands behind all of the 
obligations. Yes, it does.
    Mr. THOMPSON. After the privatization, and money is taken 
out of an individual's Social Security account and put into the 
private sector, the private accounts, if there is any loss in 
that, does the full faith of our Government stand behind that? 
Or is that just money that will be lost from the Social 
Security benefactor?
    Mr. SNOW. Congressman, our Government stands behind with 
the full faith and credit that surplus that is currently in 
Social Security, the IOUs.
    Mr. THOMPSON. That is not my question. If you take money 
from my Social Security account and invest that in the private 
sector, and that investment loses, does the full faith of the 
Government still stand behind that, or do I get the amount from 
the loss?
    Mr. SNOW. Well, you--this is a personal account. We did not 
propose to guarantee it, because if you guarantee----
    Mr. THOMPSON. So, there is no guarantee?
    Mr. SNOW. That is right. I would not propose to guarantee 
it.
    Mr. THOMPSON. As pointed out by the gentleman from North 
Dakota, the private accounts themselves will not be enough to 
sustain the program. So, we can realize the risk in regard to 
the private portion, and we can also expect to see some other 
manipulation of whatever is left over.
    Mr. SNOW. Well, yes. The President, when he talked about 
that, indicated that there were some options that needed to be 
considered by the Congress. He invited you to come out with 
others. But he also----
    Mr. THOMPSON. One last question I want to get before the 
light turns red. This budget also proposes eliminating 150 
programs to realize some considerable savings. But last year 
the budget that you proposed to us suggested we eliminate 65 
programs and save $5 billion. In reality, we eliminated 5 
programs and saved about $290 million. Believe me, I think if 
there are ways to become more efficient or get rid of programs 
that aren't doing what they are supposed to be doing, we should 
do that, and $5 is a good savings. But how realistic is it that 
we can get rid of 150 programs given what happened last year 
when you proposed the modest 65-program reduction?
    Chairman THOMAS. The Chair believes that is an excellent 
question to respond in writing, because, frankly, any kind of a 
response in the 10 seconds left wouldn't do it justice, and we 
do need to examine that.
    Mr. THOMPSON. Mr. Secretary, thank you.
    Mr. SNOW. I would be happy to respond.
    Chairman THOMAS. Does the gentleman from Indiana Mr. 
Chocola wish to inquire?
    Mr. CHOCOLA. Yes. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary, for being here today. Mr. Secretary, I have the 
privilege of having some ads run in my district right now that 
leave the impression that Social Security benefits will be cut 
significantly for current retirees. Don't you think it is safe 
to say that, under the principles that the President has 
offered, or really under any plan that is offered right now, 
that those about to retire and current retirees benefits will 
be safe and secure?
    Mr. SNOW. Absolutely. We have tried to make that just as 
clear as possible, reiterating over and over and over again 
that Social Security benefits won't be changed for anybody 55 
and over.
    Mr. CHOCOLA. In your opening comments, you pointed out that 
the most powerful force in the universe is compound interest. I 
would offer the argument that the second most powerful force in 
the universe is the power of ownership. I have seen the magic 
of ownership in personal accounts, having run a business with a 
401(k) and profit-sharing accounts, and seen people retire 
after a great career having built wealth and a nest egg, that 
they really achieved retirement security. One of the criticisms 
I have heard of personal accounts is that the administrative 
fees would eat up the return. Our experience, with about 1,000 
people in our account, was less than one-half of 1 percent 
administrative fee. The TSP has one-tenth of 1 percent 
administrative fee. Do you have any idea on personal accounts 
what we might see?
    Mr. SNOW. Yes, Congressman. We have looked into that and 
feel confident that the personal accounts will have an 
administrative fee no higher than about 30 basis points.
    Mr. CHOCOLA. Just finally, in 2018, if we do nothing, we 
won't have to worry about raiding the Social Security Trust 
Fund anymore, will we?
    Mr. SNOW. No. The trust fund will be on a straight downward 
course which exhausts all the obligations by 2042.
    Mr. CHOCOLA. In other words, it would exacerbate the 
deficit?
    Mr. SNOW. Well, absolutely. In that chart that we show, 
that is how much it gets exacerbated in each of those years, 
reaching by--just to take the year 2042, about 400 billion 
added to the deficit in that year.
    Mr. CHOCOLA. Thank you, Mr. Chairman. I will yield back.
    Chairman THOMAS. The Chair is pleased to say that there is 
2 minutes and 30 seconds returned back. I know that I indicated 
to the Secretary that we would end at 1:00. We have two 
additional Members who I assume wish to inquire, and if we 
could be mindful of the fact that we are overtime and that it 
was possible for other Members to return a portion of the time, 
the Chair would inquire if the gentleman from Connecticut 
wishes to ask questions?
    Mr. LARSON. Thank you. Yes, I would.
    Chairman THOMAS. The gentleman is recognized.
    Mr. LARSON. Thank you, Mr. Chairman. What an honor to serve 
with you, and the distinguished Member from New York Mr. 
Rangel, and my colleague Mrs. Johnson. Mr. Snow, thank you for 
your service to our country. Let me cut to the chase. I am 
going to pick up where Mr. Rangel began. What is on the minds 
of a number of my constituents is a lot like the conversation 
went with Mr. Brady. They have questions that they want to ask, 
and I will pose these in four quick questions, and then you can 
answer them in writing. That will allow time.
    The first question that is on the minds of a number--people 
who meet with my mother, they are called The Golden Girls, and 
they are from the greatest generation. What they wonder is why 
we just don't pay the money back. They are concerned about all 
this talk about surplus and deficit, and they have been a 
generation that witnessed a great deal of sacrifice. They want 
to know in plain language why don't we just pay that money back 
that we owe.
    Secondly, they want to know, and it is especially important 
given Mr. Rangel's concerns about--and mine and others about 
the Social Security, the transition costs not appearing in the 
budget, the cost of the war currently and ongoing not in the 
budget. They want to know is the war being funded with the 
Social Security surplus? Because, in their generation, they 
sacrificed, and there were funds that were created especially, 
and they specifically went on drives and they paid as they go 
for this effort. They see this as contrary to all the kind of 
sacrifice that they had.
    Thirdly, and the question was posed by many Members here 
about thrift savings and the idea that--even as was mentioned 
before about possibly with the AARP sitting down to make sure 
that these go into safe accounts if the President's plan were 
to be followed. Well, the question is why don't we take the 
existing account of Social Security within the context of 
Social Security and apply those same financial tools without 
having to take it outside of the system and privatize it? 
Wouldn't that give them greater assets and greater return with 
a greater amount of money? Those are the questions that my 
constituents pose. The final question is more one of a little 
bit--I know that there is no discussion of politics and 
ideology, but the question that they have is it seems to them, 
at least a generation that believed in the common wealth going 
toward the common good, that the ownership society smacks of a 
``me society,'' and where we are exalting the individual at the 
expense of the collective good. I know that that is somewhat 
philosophical and ideological, but I would appreciate your 
comments. I thank the Chairman.
    Chairman THOMAS. I thank the gentleman very much for the 
expeditious use of the time. The Chair would ask the gentleman 
from Illinois if he wishes to inquire for a modest period of 
time.
    Mr. EMANUEL. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. I will be real quick. I think it 
is interesting that since a lot of projections and discussions 
have been about the year 2018 and 2042, it is on the day that 
you were here to talk about the budget that last year we were 
told that prescription drug bill would cost about 396--over 10 
years, and today's budget submits that it costs $395 billion 
over 5 years, and over a 10-year period of time it will cost a 
total of $800 billion. So, just last year, 1 year away, not 
2018, not 2042, the projections of those in this room was that 
it would only cost 400 billion, and you were off by only 400 
billion. So, when it comes to one's credibility about 
projecting into 2018 or 2042, just last year one's credibility 
is not exactly what I would say rife with a lot of heft. It 
chopped through. If you are looking for a crisis, I would 
suggest you look at a crisis that was self-made in just last 
year, because the crisis exists in what has happened to 
Medicare by weighing it down, and those of us who told you it 
was going to cost twice as much were right. This hearing was 
about the budget. You submitted a budget with a prescription 
drug benefit plan that over 5 years costs what you said it was 
going to cost in 10 years, and you have yet to correct it, and 
you put more greater weight on Medicare because of foolish 
politics.
    Second, as it relates to those who wanted to quote 
President Clinton, I would like to remind them that it was 
President Clinton who said, save Social Security first. He 
created three surpluses in a row and was part of creating an 
economy that was dynamic, which is highly different from the 
type of economy that we have, which has 4 years in a row of 
record deficits. If you are looking for a crisis to help people 
save, I believe we have a savings crisis, not a Social Security 
crisis, a savings crisis where 80 percent of the employees of 
small businesses have no employer-based retirement plan, unlike 
you did at CSX that did have a savings plan in addition to 
Social Security. Forty percent of the American people rely on 
Social Security for their only retirement. The idea that we 
would take that guaranteed benefit of their retirement benefit 
and trade it for a guaranteed fee for Wall Street is not a 
trade worth making, as somebody who has spent little time on 
Wall Street. I look forward to discussing the budget as it 
relates to any entitlements. But the notion that we are going 
to talk about a crisis and look at one that was submitted today 
that was $400 billion off the mark just last year so one's 
projections about what the future will bring is highly 
susceptible----
    Mr. SNOW. Congressman, thank you. If I could just make one 
comment. There is, it seems to me, maybe you would agree, a big 
difference between trying to forecast take operates take-up 
rates on prescription drugs, which is at the heart of that 
issue, and the demographics of the country, which are known to 
a much higher degree of certainty.
    Mr. EMANUEL. Mr. Secretary, not only--and I know we are all 
sensitive here to time. As Mr. Greenspan said in the Budget 
Committee last year and others have said, the real issue we 
have and the challenge we have is in Medicare, not in Social 
Security. Thank you.
    Mr. SNOW. That is not to deny, though, and I think Mr. 
Greenspan would agree, there is a serious sustainability issue 
and therefore a serious issue for the future of this country 
implicit in Social Security as well.
    Mr. EMANUEL. Again, I want to be sensitive to your time and 
the Chairman's time, and you have been very generous. 
Unbelievably, Mr. Chairman. But the truth is the one that comes 
front and center that we are going to hit on is Medicare. We 
have created a bigger burden for that problem. To the issue of 
Social Security, the issue in front of the American people is 
that when we used to have employer-based savings, individual 
savings, and Social Security, you are knocking two legs out and 
trying to have that stool stand on one leg, and you are doing 
it in a risky way on Wall Street. If the economy is growing by 
1.8 percent as you projected, and you think somebody on an 
individual account is going to get 5 to 6 percent, my slight 
recommendation is they maybe should be setting up a hedge fund, 
not an individual retirement company, because when the economy 
is growing 1.8 percent, the only way you make that type of 
return is if you are shortening it.
    Mr. SNOW. Could I make just one response to that? This 
could go on. The 1.8 is the growth of productivity. It is the 
growth of productivity per capita. The Social Security trustee 
actuary has found that there is a high correlation between 
productivity growth per capita and equity markets and capital 
markets.
    [The prepared statement of Mr. Emanuel follows:]
 Opening Statement of The Honorable Rahm Emanuel, a Representative in 
                  Congress from the State of Illinois
    Mr. Chairman, the President's budget is much harder on the middle 
class than on the deficit. First, he proposed shredding the safety net 
of Social Security. Now, he wants to pull the rug out from under the 
middle-class.
    When it comes to cutting the deficit, President Bush has declared, 
Women, children and middle-class families first.
    If this were the Superbowl, the President's budget would be flagged 
for unnecessary roughness on middle-class families.
    The President's FY 2006 budget proposal includes:

      $4.3 billion cut from 48 education programs;
      $960 million cut in direct student loans;
      $540 million cut from police grants;
      $361 million cut from clean water programs;
      $355 million cut from Safe and Drug Free Schools;
      $225 million cut from the Even Start literacy initiative;
      $215 million cut from firefighter grants;
      $200 million cut from job training programs;
      $100 million cut from community health centers;
      $100 million cut from land and water conservation;
      Neglecting the cost of $774 billion 10-year cost of 
reforming the Alternative

    Minimum Tax;
    Following four consecutive budget deficits--including the last 
three record-breaking deficits--the Administration's economic policies 
should focus on cutting the deficit, not cutting middle class 
priorities.
    With his tax cuts continuing to favor the wealthiest individuals 
and special interests, middle class families deserve more balanced tax 
and spending priorities to help them keep up with rising costs in 
health care, education, and retirement.
    Middle-class families deserve more than accounting gimmicks, budget 
sleight of hand and cuts to critical programs to pay for unnecessary, 
unwise tax cuts. The Administration should scrap this budget, start 
over, and work with the Congress to put this government back on the 
path of fiscal responsibility.

                                 

    Chairman THOMAS. The Chair would recognize the gentleman 
from New York.
    Mr. RANGEL. I just want to thank the Secretary, especially 
in light of the harsh questions that we felt compelled to ask, 
because, as you know, the President said wait until he has a 
plan, and we don't have that plan, so that there is no 
Democratic position until the President comes forward with 
something. We all have to admit that this particular subject 
matter, as with tax reform, it screams out for a bipartisan 
approach. So, I just do not want you to walk away thinking that 
we did not believe there was a problem. We know there is a 
problem, and we thank the President for not saying there is a 
crisis. Thank you.
    Mr. SNOW. I thank you, Mr. Rangel.
    Chairman THOMAS. The Chair would also like to thank the 
Secretary. Of course the 1.8 percent is one line that the 
trustee has offered. There are two others. But, most 
importantly, the President has decided to assist us in being 
out front in Social Security. He assisted us in being out front 
in Medicare in the last Congress. We were successful. We look 
forward to at least as much bipartisan cooperation in dealing 
with Social Security as we had with Medicare. If there are no 
further questions, the Committee stands adjourned.
    [Whereupon, at 1:13 p.m., the hearing was adjourned.]
    [Questions submitted from Messrs. Rangel, Stark, Herger, 
McDermott, Tanner, Becerra, Doggett, Thompson, and Larson to 
Secretary Snow, and his responses follow:]

              Question Submitted by Representative Rangel

    Question: Mr. Secretary, I appreciate your comments during the 
hearing that indicated the full faith and credit of the United States 
stood behind the bonds held by the Social Security Trust Funds. 
However, at other points in the hearing you agreed with questioners who 
disparaged those holdings as IOUs and spoke as if they were somehow 
different than the bonds sold to China and other overseas investors.
    It is true that the bonds are not cash and that the Federal 
Government will have to either raise taxes, cut spending, or increase 
borrowing in order to redeem them and repay the Trust Fund in order to 
finance future benefits. But, even if we did not have to redeem bonds 
and repay the Social Security Trust Fund after 2018, we will still run 
large deficits in those years under current policies. Isn't it true 
that the same actions--raising taxes, cutting spending, or increased 
borrowing--that will be needed to redeem the bonds held by the Social 
Security Trust Funds, will also be needed to repay the bonds currently 
being sold to overseas investors?
    Those bonds being issued today are being used largely to finance 
the President's policies, which have reversed the $433 billion surplus 
that CBO projected for this year when the President took office, and 
instead produced a deficit of over $400 billion. Much of the bonds 
being bought by overseas investors today are being used to finance tax 
cuts and the war in Iraq. Why are they, and our obligation to repay 
them, somehow different than the bonds in the Social Security Trust 
Fund?
    Response:
    First, we need to clarify what the sources of change have been in 
the fiscal outlook. The U.S. economy had a recession which began in 
March 2001, then endured the terrorist attacks, then faced the 
revelation of corporate wrongdoing. These unforeseen factors of course 
had a large impact of the revenues of the Government.
    Additionally, American policymakers wisely increased spending on 
defense and homeland security to win the war on terror. This also 
increased the deficit, but was an absolute necessity.
    By proposing tax cuts in 2001 and 2003, the President sought to 
increase the economy's prospects, both short and long term, by removing 
some of the barriers in the Tax Code to increased work, savings and 
investment. Since the enactment of those tax cuts, the economy has 
grown at almost 4% per year and the American people have created 3 
million jobs.
    The markets have recognized that these deficits are short term, are 
not large relative to the economy, and that the tax cuts, if made 
permanent, will spur long term growth. Market set interest rates have 
stayed at moderate levels, and net interest on the debt last year (the 
Government's annual cost of borrowing) was the lowest in 30 years.
    As to the similarity between the publicly held debt and Treasury 
securities in the trust fund, it is accurate to say that the publicly 
held debt owned by domestic and foreign investors must be redeemed by 
either rolling over the debt, increasing tax revenue, reducing spending 
below what it could otherwise be, or some combination of the three. In 
that sense, it does not differ from the debt held by the Social 
Security Trust Fund.
    However, it is precisely because the government must generate funds 
in order to redeem debt that does not, in and of itself, help the 
government to fund the Social Security system. To the extent that a 
bond in the trust fund is an asset to Social Security, it is a debt to 
the remainder of the Federal Government.
    That's why it's time to strengthen and modernize Social Security 
for future generations with growing assets that workers can control, 
that they can call their own--assets that the government cannot take 
away.
    If the President's proposals are adopted, workers who choose PRA's 
would personally own the assets within those accounts.
    While Social Security can continue to pay scheduled benefits until 
the trust fund is exhausted, it would be irresponsible to wait until 
the exhaustion date to modify the program to make it solvent. The 
longer reform is delayed, the more difficult it will be to make Social 
Security solvent.
                                 ______
                                 

               Question Submitted by Representative Stark

    Question:
    The FY 06 budget includes $74 billion/10 for tax credits to 
purchase either ``traditional'' individual coverage or a high-
deductible health plan (HDHP) with an HSA. Yet, even this level of 
spending leaves significant financial gaps for these families.
    How much of the $74 billion do you estimate will be spent on each 
of these options?
    How many people do you estimate will enroll in each of these 
options?
    How many of those enrolled do you estimate were previously 
uninsured and what is the data source for these estimates?
    Current law requires deductible limits to be a minimum of $1,000 
for an individual, $2,000 for a family, and a maximum of $5,000 for an 
individual and $10,000 for a family. However, many plans are not clear 
about what is covered, which leads to spending that does not count 
toward either the deductible or the out-of-pocket limit. How will 
consumers know in advance what out-of-pocket costs do and do not count 
toward their policy?
    In the non-group market, can issuers use medical underwriting to 
refuse to sell a HDHP? Can they charge certain applicants higher 
premiums, based on their health history? Can they exclude certain body 
parts or conditions, based on the applicant's health history or history 
of someone in their family? If so, how will people be assured there is 
an affordable product available on the open market?
    Please provide examples that would fall under the IRS' definition 
of a ``qualified medical expense'' for HSAs. For example, how are 
prescription drugs treated? Would air filters or other non-medical 
devices be covered?
    The President claims that HDHPs will control costs.
    What are your underlying assumptions for this policy?
    What are your estimates of necessary vs. unnecessary spending by 
individuals currently?
    How do you define unnecessary spending?
    How much will aggregate health care spending be reduced as a result 
of high-deductible plans?
    If you project aggregate savings, how much will come from underuse 
of services vs. a reduction in prices vs. ``more careful shopping'' by 
patients? What are your data sources and assumptions for making such 
estimates?
    What effect would unmanaged chronic conditions or deferred 
treatment of illnesses have on future Medicare costs?
    How many HDHP policyholders are projected to actually use their 
benefit (vs. simply pay premiums for coverage they cannot afford to 
access)?
    Previous independent analyses from the Academy of Actuaries and 
others have indicated that widespread adoption of HDHPs/HSAs or similar 
policies would dramatically increase premiums for traditional 
insurance. What does the Administration assume happens to premiums for 
traditional policies?
    Administrative costs for the Health Care Tax Credit are 
approximately $35 million per year, while payments for insurance 
coverage are $62 million. It's a remarkably inefficient system to help 
people maintain coverage. Yet, enrollment in the Health Care Tax Credit 
program is low, at just over 13,000 individuals. Given the additional 
complexity of income verification, identification of eligible persons, 
and the much larger number of potential enrollees, can the IRS 
realistically implement this program by 2006? If so, how much does the 
IRS plan to spend on administration of the new tax credit proposals? 
How much will outside contractors receive?
    Advanceable credits are based on the last year's income tax filing. 
If income increases during the year, will the IRS make an attempt to 
collect the overpayment? If so, what is the administrative cost 
associated with this activity? Is it reflected any where in the budget?
    Because HSAs are exempt from all taxes, including payroll taxes 
(e.g., contributions by employers are not taxed), they reduce funding 
for the Medicare and Social Security trust funds. How much does the 
Administration estimate is lost to each Trust Fund as a result of (1) 
current law and (2) adoption of the President's HSA proposals in this 
budget?
    The budget provides $28.5 billion to allow individuals an above-
the-line deduction to offset the cost of premiums for a high-deductible 
health plan sold in conjunction with an HSA.
    How many people do you estimate will take this deduction?
    What is the estimated take-up by AGI and/or income tax bracket?
    How many people taking this deduction were previously uninsured?
    Why is the President proposing a special additional tax break for 
these plans when even conservative analysts have indicated that the 
extra tax preference will distort the health insurance market?
    As you are well aware, many states are facing tight budgets, and as 
a result are being forced to cut back on Medicaid, S-CHIP, and other 
programs that help vulnerable populations. Yet, the President's health 
tax proposals and other tax cuts in the budget will decrease state 
revenues. Will you please specify the effect the President's tax 
proposals will have on state budgets?
    Response:
    Why is the President proposing a special additional tax break for 
these plans when even conservative analysts have indicated that the 
extra tax preference will distort the health insurance market?
    The credit is designed to provide an incentive to purchase 
catastrophic coverage while giving consumers flexibility in choosing 
the kind of plan that best meets their needs. The HDHP combined with an 
HSA provides individuals with an additional choice. Given the 
uncertainty of how people will choose between the myriad of plans, we 
do not have an estimate of how many will choose the HSA option versus 
the non-HSA option, although it is likely to be small.
    The Administration strongly supports allowing consumers to choose 
the plan that best fits their needs. One aspect of ownership and choice 
requires that individuals take the responsibility for reading their 
plan documents and checking with their doctors to become informed about 
what is paid for by insurance as well as to become informed about the 
most effective way to take care of their medical needs.
    Under current law, states regulate the non-group market. Depending 
on the state law, HDHP issuers can use medical underwriting, charging 
some applicants higher premiums and rejecting other applications. 
Without underwriting, insurers would have to charge higher premiums 
discouraging many individuals from obtaining any coverage. For those 
with the highest risk, many states have high-risk pools that cap 
premiums or partially subsidize coverage.
    Generally, as provided under the statute, qualified medical 
expenses for HSA purposes are qualified medical expenses under section 
213(d) of the Internal Revenue Code--amounts paid for the diagnosis, 
cure, mitigation, treatment or prevention of disease, or for the 
purpose of affecting any structure or function of the body. Thus, the 
costs of prescription drugs would generally be a qualified medical 
expense. For purposes of HSAs, qualified medical expenses are in some 
ways broader than those expenses allowed as itemized deductions, in 
that nonprescription drugs may also qualify as a reimbursable expense. 
At the same time, the definition is somewhat narrower, in that except 
for certain situations, health insurance premium costs may not be paid 
by an HSA.
    You also ask about whether amounts paid for an air filter or other 
nonmedical devices would be qualified medical expenses. This issue 
existed prior to the enactment of the HSA law; the IRS and the courts 
have been addressing this issue with respect to the itemized medical 
deduction since its enactment, and those rulings and decisions are 
generally controlling for purposes of HSAs.
    Whether or not a particular expense that was not medical on its 
face would be allowed as a medical expense is a facts and circumstances 
determination. Under the regulations relating to section 213 in 
existence prior to the enactment of HSAs (and still applying for 
purposes of HSAs as well as the medical expense deduction), a capital 
expenditure which is related only to the sick person and is not related 
to permanent improvement or betterment of property, if it otherwise 
qualifies as an expenditure for medical care, shall be a qualified 
medical expense; for example, an expenditure for an air conditioner 
which is detachable from the property and purchased only for the use of 
a sick person. (The IRS has issued a number of rulings addressing this 
question with regards to air conditioners.) On a related matter, the 
IRS has ruled that a vacuum cleaner purchased by an individual with 
allergy to household dust would is not a medical expense, and the Tax 
Court has ruled that the cost of installing a dust elimination system 
in a home is not deductible as a medical expense.
    Low deductible health insurance that covers smaller more routine 
spending as well as coverage for catastrophic events provides a moral 
hazard to consume medical care that may be of little value because 
someone else is paying for it. In addition, coverage for smaller more 
routine expenses increases health insurance premiums. By separating 
smaller more routine expenses from catastrophic coverage, premiums are 
reduced and individuals are given the right incentive to be cost 
conscious on the smaller ticket items. As a result, each individual 
together with their doctor will decide what care is necessary. On the 
other hand, some individual may receive better catastrophic coverage 
because of the out-of-pocket limits. These limits could potentially 
help some individuals with high cost chronic conditions to receive 
better coverage than under other products.
    True insurance is designed to protect against very high cost low 
probability events. Individuals benefit from insurance even if they do 
not have a high cost event in a particular year, just as homeowners 
benefit from insurance even when their house does not burn down.
    HDHPs can also cover preventive care before the deductible is met. 
Insurers have an incentive to cover preventive care that is medically 
effective but not care that is of questionable value.
    As part of the estimation process, the Treasury department uses 
health insurance premium forecasts provided by the Office of Management 
Budget.
    Although premium increases have implicitly been taken into account 
with a number of other interacting factors in the analysis, they have 
not been explicitly estimated. The potential for premium increase or 
decrease depends upon the specifics of the HDHP/HSA rules as well as 
the insurance markets, nongroup or employer, and the structure of 
alternative choices. It is too soon to tell the result of HSAs.
    We have been learning much about the administration of tax credits 
from the HCTC program experience, and this experience will be 
enormously helpful in implementing a new tax credit for lower income 
individuals. Under the budget proposal, the advance payment component 
of the new credit would not become operational until July 2007. Given 
the knowledge and experience we have from the HCTC, we believe that 
July 2007 is adequate time to prepare for the new tax credit.
    The administration does not at this time have a formal projection 
on the administrative cost for the proposed tax credit. We are still 
refining the HCTC operations to be more efficient, and we believe that 
these improvements will be transferable to the new program. Finally, 
you ask about the potential use of contractors for the new tax credit. 
This will depend very much on the final structure of the new credit. 
For the HCTC, because of the newness and the uniqueness of the concept 
and the short timeframe for implementation, it was essential that we 
recruited contractors to provide the necessary skills and services to 
meet the legislative requirements. However, we will have to consider 
the administrative costs and approach for the new credit as the 
mechanism is designed.
    The credit amount if taken in advance is determined by the previous 
year's income so there is no need to make adjustments for current year 
income.
    Although the exemption of HSA from payroll taxes reduces funding 
for the Medicare and Social Security trust funds, reductions in 
employer contributions due to lower premiums and a shift in 
compensation to taxable wages has an offsetting effect. Overall, the 
changes are not expected to materially affect the trust fund balances.
    The budget provides $28.5 billion to allow individuals an above-
the-line deduction to offset the cost of premiums for a high-deductible 
health plan sold in conjunction with an HSA.
    Although the proposal will increase coverage, the proposal also 
changes the health care insurance market in two key ways. First it 
provides a tax preference for nongroup insurance. Unlike self-employed 
individuals and individuals who are covered by employer-provided health 
plans, individuals purchasing nongroup health insurance generally do 
not receive favorable tax treatment. Providing tax preferences in the 
individual market will give many individuals wider choice of affordable 
health insurance. Many other individuals, particularly those who work 
for small employers, do not have any tax preferred health insurance 
options under the current system because their employers cannot afford 
to offer coverage. The proposal will make insurance more affordable for 
these individuals. Secondly, by linking the tax preference to high 
deductible health insurance, the tax preference encourages consumers to 
be more cost conscious buyers of health care.
    We are unable to determine the effect of the President's tax 
proposals on state budgets. We would note that Federal tax proposals 
generally will impact both state receipts and state spending. For 
example, Federal budget proposals that increase health coverage for 
currently uninsured individuals reduce potential demands for health 
benefits from state programs. Also, as noted above, the Federal tax 
preference for HSAs will increase, not decrease, the Medicare and 
Social Security receipts as lower premium costs for employers tend to 
shift compensation to taxable wages. This shift would increase taxable 
wages for purposes of State income taxes.
    To the extent that States, as many do, rely on the Federal income 
tax law as a starting point for State taxable income, States are free 
to (and, in the past. often have) adjust the State tax base by 
rejecting some Federal inclusions or deductions or incorporating 
additional changes. Because of these potential adjustments to State tax 
bases, we cannot predict the impact of Federal budget changes on the 
State budgets.
                                 ______
                                 

              Question Submitted by Representative Herger

    Question: Mr. Secretary, the Administration's budget includes a 
provision that would impose an excise tax on non-profits that do not 
enforce the easements that they hold. We have recently seen a number of 
articles in the Washington Post--one entitled ``Loophole Pays Off on 
Upscale Buildings''--that raise great concerns about tax abuses 
relating to conservation easements. It is my understanding that the 
Senate Finance Committee is considering a more aggressive approach to 
stop this abuse and the Joint Committee on Taxation recently included 
in its report Options to Improve Tax Compliance and Reform Tax 
Expenditures a proposal that would disallow any charitable deduction 
taken with easements relating to a personal residence. Do you have a 
view on the Joint Tax Committee's recommendation and would Treasury 
consider such an approach to clamp down on tax abuses relating to 
conservation and facade easements?
    Response:
    The Administration believes that the current law policy of 
encouraging gifts of restrictions on real property that protect 
ecologically sensitive lands and preserve historic properties is a good 
one. However, we share many of the concerns expressed by the Joint 
Committee on Taxation in its report. As you mention, examples of 
flagrant abuse of the tax benefits of donating conservation and facade 
easements have been reported in the press in the past year, most 
involving inflated deductions and phony appraisals.
    The Administration's budget proposal would address non-compliance 
by imposing a penalty on a charity that fails to enforce a donated 
easement. The penalty would be based on the appraised value of the 
easement. An organization that accepts a donated conservation easement 
has a duty to monitor and enforce the restrictions for which a 
charitable contribution deduction was allowed. We will continue to 
consider the JCT proposals in our effort to balance the important goals 
of preventing abuses and encouraging easement donations that preserve 
nature or heritage, especially in areas not protected by local zoning.
    The Internal Revenue Service also is taking steps to address the 
abuses under current law. In Notice 2004-41, the IRS warned taxpayers 
that taxpayers claiming improper easement deductions face a 
disallowance of the deduction and possible penalties. The IRS also 
plans to revise tax forms and instructions to provide more detailed 
instructions on proper valuation of donated easements and to require 
additional reporting about these gifts.
                                 ______
                                 

            Questions Submitted by Representative McDermott

    Question: When the actuaries at Social Security estimate the 
system's solvency they provide a range of estimates, once of which 
relies on a prediction that our Gross Domestic Product (GDP) will rise 
by an annual rate of 1.8 percent. When was the last time GDP grew only 
by 1.8 percent? Is there any 10-year stretch in our history in which 
our economy grew only by 1.8 percent? If GDP grew by 3 percent each 
year, how long would Social Security be able to pay current benefits 
without changes to law? If the system could not, at some point, pay 
current benefits without changes to law if GDP grew by 3 percent per 
year, how much money would need to be injected into the Social Security 
Trust fund to ensure solvency for 75 years, or forever?
    You mention several times in your testimony that our economy is 
growing, is strong, and is the envy of the world. In fact, you even say 
that the reason we have a record high trade deficit is because our 
economy is growing too fast, compared to the rest of the world. The 
Federal Reserve raised interest rates for the sixth straight time last 
week to curb inflation by making sure the economy doesn't grow too 
fast. Why do you insist that the economy needs stimulus and needs to 
grow through further tax cuts when the Federal Reserve insists the 
economy needs to slow down? Please explain why these are not 
conflicting policies.
    Response:
    You mention several times in your testimony that our economy is 
growing, is strong, and is the envy of the world. In fact, you even say 
that the reason we have a record high trade deficit is because our 
economy is growing too fast, compared to the rest of the world. The 
Federal Reserve raised interest rates for the sixth straight time last 
week to curb inflation by making sure the economy doesn't grow too 
fast. Why do you insist that the economy needs stimulus and needs to 
grow through further tax cuts when the Federal Reserve insists the 
economy needs to slow down? Please explain why these are not 
conflicting policies.
    First of all, I'd like to restate the problem. It is not that the 
U.S. economy is growing too fast, but rather that other major economies 
are growing too slowly. For example, in the fourth quarter of last 
year, while our economy expanded at a healthy 3.8 percent annual rate, 
the economies of three of our G-7 partners (Japan, Germany, and Italy) 
were actually in decline.
    While I don't want to speak for the Federal Reserve, I don't 
believe they are trying to slow the economy down. They have repeatedly 
characterized recent increases in the Federal funds target rate as a 
move from stimulus toward a neutral rate, not one which restrains 
growth. Chairman Greenspan, in his recent Monetary Report to Congress, 
said he still regarded interest rates as fairly low. Now that the 
economy is on solid footing, monetary policy accommodation can be 
removed.
    The goal of the Administration's fiscal policy is the permanence of 
existing tax relief--not additional stimulus. Many important provisions 
of the tax relief passed in the past several years are scheduled to 
expire between 2007 and 2010. Among the expiring provisions are 
marriage penalty tax relief, the current more generous child tax 
credit, reduced marginal tax rates, lower taxes on dividends and 
capital gains, and estate tax relief. We want to make sure these 
provisions continue to benefit our economy in the years to come. If 
these provisions were allowed to end, as is required by current law, it 
would amount to a series of tax increases that would be a serious drag 
on real growth.
    Real GDP growth equals the growth of hours worked plus the growth 
of real GDP per hour worked (productivity). As shown in the Table 
below, relative to the 3.3 percent annual rate of real GDP growth 
experienced during the 8-year period 1995 to 2003, the slowdown in real 
GDP growth projected in the 2004 trustee Report (TR) for the 2016-80 
period is about half because of lower growth in hours worked and about 
half because of lower productivity growth relative to recent levels.


                           Real GDP Growth = Hours Worked Growth + Productivity Growth
----------------------------------------------------------------------------------------------------------------
                                                                          Annual Growth Rate
                                                     -----------------------------------------------------------
                     Time Period                                          Real GDP  Per Hour
                                                         Hours Worked           Worked              Real GDP
----------------------------------------------------------------------------------------------------------------
1948-74                                                           1.18                  2.81               4.00
1974-95                                                           1.65                  1.21               2.86
1995-03                                                           0.91                  2.36               3.27
2003-15 *                                                         0.96                  1.81               2.78
2015-80 *                                                         0.24                  1.60               1.84
----------------------------------------------------------------------------------------------------------------
* Projected in the 2004 TR.


    The projected slowdown in the growth of hours worked reflects the 
retirement of the baby boom generation. There is some debate about the 
extent to which individuals at retirement age may continue to work in 
some capacity, but the larger question is whether the productivity 
growth assumptions are too pessimistic, and how changes in those 
assumptions would alter the outlook for Social Security finances.
    As shown in the Table above, productivity growth averaged only 1.2 
percent between 1974 and 1995, but has averaged 2.4 percent between 
1995 and 2003. The trustees have been slowly raising projected 
productivity growth over the past several years in response to the 
persistence of the recent pickup in productivity growth. The ultimate 
productivity growth assumption was raised to 1.5 percent from 1.3 
percent for the 2000 TR, and was raised to the current 1.6 percent 
assumption starting with the 2002 TR. This assumption is roughly 
consistent with the most recent forty years of historical experience 
surveyed in the trustees' report.
    The 2004 TR estimates that a 0.5 percentage point increase in 
productivity growth would reduce the 75-year actuarial imbalance from 
1.89 percent of payroll to 1.35 percent of payroll, and would delay the 
insolvency date by 6 years. An extrapolation of this finding to a 0.8 
percentage point increased in productivity growth that would bring the 
ultimate assumption to the level experienced for 1995-2003 suggests 
that the actuarial balance would be reduced to about 1 percent of 
payroll. The insolvency date for this case cannot be reliably 
extrapolated.
    However, the 75-year projections are an extremely misleading 
indicator of the effect of productivity growth on Social Security's 
finances. Under current law, initial Social Security benefits tend to 
grow with economy-wide average real wages.
    Hence, a sustained increase in productivity growth would result in 
an immediate increase in payroll tax revenue that is followed much 
later by increased benefit payments. The 75-year scoring window 
captures a much larger share of the increased revenue than it does of 
the increased benefit payments.
     Beyond 75 years, a sustained increase in productivity growth does 
not significantly improve Social Security's finances.
    The trustees' report contains a stochastic analysis that shows how 
the future might be different from current projections. This year's 
analysis shows a 95% probability that the program will enter into 
permanent cash flow deficits some time between 2013 and 2023.
                                 ______
                                 

              Questions Submitted by Representative Tanner

    Question: At the hearing, I asked about the increase in foreign 
holdings of United States debt. As you know, foreign holdings of U.S. 
debt have increased from approximately $1 trillion to nearly $2 
trillion in only 4 years. Considering foreign central banks control the 
bulk of foreign ownership of U.S. debt, their ability to affect our 
economy seems very real. I think this poses an economic and national 
security threat, should these governments choose to sell large volumes 
of U.S. securities on the open market resulting in valuation issues and 
interest rate escalation.
    As of November 2004, foreigners owned 44 percent of the debt held 
by the public. I asked you at what point foreign holdings of U.S. debt 
could become a problem for the U.S. economy and our National security. 
You responded that you wanted to avoid answering my question in a 
public forum. Therefore, I ask you to provide me with information 
regarding the Administration's view of what, if any, percentage of 
foreign ownership of our publicly held debt creates a financial 
vulnerability with national security implications.
    It has been the Administration's position that the current U.S. 
budget deficit is manageable and not large as a percentage of U.S. 
Gross Domestic Product (GDP). In 2004, the deficit as a percentage of 
GDP was -3.6%, in 2003 it was -3.5%. Since the end of World War II, the 
U.S. has only accumulated deficits greater than -3.6% of GDP ten times. 
Is it the Administration's position that the structural deficits of the 
Federal Government, especially given our future demographic challenges, 
are manageable as a percentage of GDP?
    Federal Reserve Chairman Alan Greenspan recently stated, [the 
deficit] ``situation suggests that international investors will 
eventually adjust their accumulation of dollar assets or, 
alternatively, seek higher dollar returns to offset concentration 
risk.''
    It seems to me Chairman Greenspan is saying, we can't go on like 
this much longer. A borrower who runs up huge debts will become a 
bigger risk to lenders. Presently, the U.S. is a huge borrower. Last 
Friday, the Russian central bank confirmed that it has started pegging 
the ruble to a basket of currencies rather than solely to the dollar. 
This action will likely provide a major source of long-term euro 
buying. For the first time in almost 70 years, the dollar has a rival 
currency in the euro. During the past 2 years, the world has gone from 
having only 12% of global bank reserves in euros to 35% today.
    It appears that the Administration has abandoned the ``strong 
dollar'' policy. Do you think that the United States runs the risk of 
the global economy loosing faith in the dollar and what is the 
Administration doing to ensure that the value of the dollar does not 
continue its sharp decline?
    Response:
    It appears that the Administration has abandoned the ``strong 
dollar'' policy. Do you think that the United States runs the risk of 
the global economy loosing faith in the dollar and what is the 
Administration doing to ensure that the value of the dollar does not 
continue its sharp decline?
    The Administration faces two distinct deficit challenges. The ways 
to address these two separate problems are different. It would be a 
mistake to mix the two problems and two solutions together by talking 
only about whether the ``deficit'' is manageable as a percentage of 
GDP.
    We have a ``short-term'' deficit problem, which we are addressing 
in our FY06 budget proposal. We have argued that deficits are sometimes 
appropriate, and we have been in one of those periods recently. We have 
had to ramp up defense and homeland security spending to prosecute the 
war on terror and to improve our domestic security. We cut taxes to 
stimulate the economy as it struggled through the after-effects of the 
stock market decline and the uncertainty generated by the initial 
phases of the war on terror and revelations of corporate malfeasance 
dating back to the nineties.
    In the FY2006 budget, we've made a strong commitment to spend the 
public's money appropriately and rein in spending to make long-lasting 
improvements in the deficit. The FY06 budget proposes a 1 percent cut 
in non-security discretionary spending and holds overall discretionary 
spending to 2.1 percent--below the rate of inflation. If we hold the 
line on spending we expect the deficit to decline to well below 2 
percent as a percentage of GDP.
    We think that if we don't hold the line on spending and revenue 
grows as projected then our ``temporary'' budget deficits will remain 
with us for a very long time. In that sense, our deficits could become 
structural, and not just related to the recent weakness in the economy.
    The Administration firmly believes that long-term structural budget 
deficits do matter. A long string of structural budget deficits 
strongly suggests that government spending is out of control. Too much 
government spending for too many years actually slows the long-term 
growth of the economy, by diverting resources away from the private 
sector, which is the source of the goods and services and jobs that 
keeps our nation prosperous, strong, and resilient.
    Our longer term deficit challenge is related to the expected 
increases in outlays for the Social Security and Medicare Programs, 
which will balloon in the coming decade as the Baby Boom generation 
retires. OMB estimates that outlays for these two programs alone will 
rise from 6.6 percent of GDP in 2005 to 16.8 percent of GDP in 2075. 
Traditional fixes to budget deficits--like cutting discretionary 
spending and/or raising taxes--simply cannot do the job of balancing 
the budget with the current expected increases in outlays for these two 
programs.
    Putting Social Security on a sustainable path is the first step to 
dealing with the long-term deficit challenge facing the U.S. The 
administration firmly believes that some form of personal retirement 
accounts (PRAs) is needed to keep Social Security secure for future 
generations.
    Holdings of U.S. Treasury securities by all foreign residents, as 
described in the attached table, are estimated to have been $1.9 
trillion, or 52.8% of privately held public debt, at the end of 
December, 2004. The total holdings of all foreign official institutions 
is estimated to have been $1.1 trillion, or 32.0% of privately held 
public debt at the end of December, 2004. Foreign holdings of Treasury 
securities are distributed among many official and private foreign 
investors.
    To put this in perspective of U.S. capital markets, privately held 
public debt is only about 15% of the domestic nonfinancial credit 
market. The U.S. capital market is the deepest, most liquid, and 
resilient in the world.
    Our policy remains one of a strong dollar. A strong currency 
provides a reliable medium of exchange and serves as a stable store of 
value, which are very much in the interest of Americans.
    The increase of the U.S. current account deficit over more than a 
decade has been linked to domestic U.S. capital formation increasing 
more than U.S. saving.
    U.S. economic fundamentals--with low inflation, flexible labor 
markets and vigorous productivity growth--are extremely strong, 
especially in international comparison. This combined with an efficient 
and secure U.S. capital market make the U.S. an attractive foreign 
investment destination. The Administration is committed to growth 
enhancing, economic policies that keep U.S. fundamentals strong and 
maintain the confidence of U.S. and foreign investors in our economy's 
future.
                                 ______
                                 

             Questions Submitted by Representative Becerra

    Question: Do you disagree with the assessment made earlier during 
the hearing that the amount of revenue generated by not making tax cuts 
permanent for the wealthiest 1% would be sufficient to make Social 
Security solvent for the foreseeable future?
    Response:
    Question: Do you disagree with the assessment made earlier during 
the hearing that the amount of revenue generated by not making tax cuts 
permanent for the wealthiest 1% would be sufficient to make Social 
Security solvent for the foreseeable future?
    The recent tax cuts have had no effect on Social Security's 
finances. Social Security benefits are financed entirely from payroll 
taxes and there has been no change to the payroll tax system since the 
Administration took office. If non-Social Security taxes were raised, 
those moneys would not be available to fund Social Security benefits.
    Program revenues, including Trust Fund accumulations, are used 
exclusively to fund outlays. Since the enactment of those tax cuts, the 
economy has grown at almost 4% per year and the American people have 
created 3 million jobs. Repealing those tax cuts would harm the economy 
in the short and long term, and that is not going to provide any 
sensible fix to Social Security.
                                 ______
                                 

             Questions Submitted by Representative Doggett

    Question: The House Republican Study Committee has said that the 
Administration's approach is too timid by allowing worker's to invest 4 
percent of their pay in private accounts and that it ought to go to 6 
percent, which would be almost all of the employee's contribution to 
Social Security. Why isn't the Administration proposing that?
    Response:
    Question: The House Republican Study Committee has said that the 
Administration's approach is too timid by allowing worker's to invest 4 
percent of their pay in private accounts and that it ought to go to 6 
percent, which would be almost all of the employee's contribution to 
Social Security. Why isn't the Administration proposing that?
    The Administration settled on a 4 percent contribution rate as 
sufficient and appropriate. A major advantage of PRAs is that they 
ensure that pre-funding of retirement incomes occurs in personal 
accounts rather than the Social Security Trust Fund. The Administration 
believes that any attempt to pre-fund retirement incomes in the trust 
fund encourages excessive spending in the non-Social Security budget, 
which has the effect of making the pre-funding illusory. The accounts 
proposed by the Administration are sufficiently large as to make real 
pre-funding of retirement incomes possible, and to build substantial 
nest eggs for millions of American workers.
                                 ______
                                 

             Questions Submitted by Representative Thompson

    Question: We are told that this budget has identified about 150 
programs for elimination to save the government money. Last year, the 
Federal budget identified 65 programs for elimination--and that was 
supposed to save us about $5 billion. But, Congress only eliminated 5 
of those programs for a net savings of $292 million. I agree that non-
performing programs should be reviewed and when appropriate 
eliminated--and I agree that any dollars we can generate in savings are 
critically important. However, is it realistic for this Administration 
to base this budget in part upon the savings generated from program 
cuts--when it has never successfully gotten those program cuts through 
Congress?
    Response:
    Question: We are told that this budget has identified about 150 
programs for elimination to save the government money. Last year, the 
Federal budget identified 65 programs for elimination--and that was 
supposed to save us about $5 billion. But, Congress only eliminated 5 
of those programs for a net savings of $292 million. I agree that non-
performing programs should be reviewed and when appropriate 
eliminated--and I agree that any dollars we can generate in savings are 
critically important. However, is it realistic for this Administration 
to base this budget in part upon the savings generated from program 
cuts--when it has never successfully gotten those program cuts through 
Congress?
    The President's FY06 budget, like budgets submitted by all 
presidents, is his administration's set of proposals for the fiscal 
year and beyond. The administration's proposals are the result of 
careful planning and thought, representing the best estimates of the 
costs and benefits available. They reflect the President's goals. It 
would be inappropriate for the proposed budget to limit proposals only 
to those that had already been backed by a majority of Congress.
    In this budget, we propose more than 150 reductions, reforms, and 
eliminations in non-security discretionary programs, saving about $20 
billion in 2006 alone. We were guided by three major criteria for 
evaluating programs: (1) the program should meet the nation's 
priorities, (2) the program should meet the President's principles for 
using taxpayer resources, and (3) the program should produce the 
intended results.
    By holding government spending to these accountability standards, 
we are trying to make sure that tax dollars are spent wisely and that 
the essential business of the government be carried out by taking the 
least possible amount of money from American taxpayers.
    The FY06 budget proposes a 1 percent cut in non-security 
discretionary spending and holds overall discretionary spending to 2.1 
percent--below the rate of inflation. If we hold the line on spending 
we expect the deficit to decline to well below 2 percent as a 
percentage of GDP.
    The Administration firmly believes that structural budget deficits 
do matter. A long string of structural budget deficits strongly 
suggests that government spending is out of control. Too much 
government spending for too many years actually slows the long-term 
growth of the economy, by diverting resources away from the private 
sector, which is the source of the goods and services and jobs that 
keeps our nation prosperous, strong, and resilient.
                                 ______
                                 

              Questions Submitted by Representative Larson

    Question: The first question that is on the minds of a number--
people who meet with my mother, they are called The Golden Girls, and 
they are from the greatest generation. What they wonder is why we just 
don't pay the money back. They are concerned about all this talk about 
surplus and deficit, and they have been a generation that witnessed a 
great deal of sacrifice. They want to know in plain language why don't 
we just pay that money back that we owe.
    Secondly, they want to know, and it is especially important given 
Mr. Rangel's concerns about--and mine and others about the Social 
Security, the transition costs not appearing in the budget, the cost of 
the war currently and ongoing not in the budget. They want to know is 
the war being funded with the Social Security surplus? Because, in 
their generation, they sacrificed, and there were funds that were 
created especially, and they specifically went on drives and they paid 
as they go for this effort. They see this as contrary to all the kind 
of sacrifice that they had.
    Thirdly, and the question was posed by many Members here about 
thrift savings and the idea that--even as was mentioned before about 
possibly with the AARP sitting down to make sure that these go into 
safe accounts if the President's plan were to be followed. Well, the 
question is why don't we take the existing account of Social Security 
within the context of Social Security and apply those same financial 
tools without having to take it outside of the system and privatize it? 
Wouldn't that give them greater assets and greater return with a 
greater amount of money? Those are the questions that my constituents 
pose. The final question is more one of a little bit--I know that there 
is no discussion of politics and ideology, but the question that they 
have is it seems to them, at least a generation that believed in the 
common wealth going toward the common good, that the ownership society 
smacks of a ``me society,'' and where we are exalting the individual at 
the expense of the collective good. I know that that is somewhat 
philosophical and ideological, but I would appreciate your comments.
    Response:
    The President has made it clear that Social Security will remain 
unchanged for anyone who was born before 1950.
    The Social Security Trust Fund's bonds represent obligations to pay 
Social Security benefits. When those IOUs need to be redeemed, future 
generations will either have to raise taxes, reduce Social Security 
benefits, cut other programs, or run larger budget deficits.
    It is important to remember that even with every bond held in the 
Social Security Trust Fund being repaid, Social Security would still 
become insolvent in 2041. So the issue confronting us is much more 
serious than simply the repayment of bonds held by the Trust Fund.
    The existence of bonds in the Social Security Trust Fund does not 
by itself answer the question of where the money will come from to 
redeem those bonds and fund future benefits. If it did, then all we 
would need to do to fix Social Security is to issue more bonds to the 
Social Security Trust Fund.
    Unfortunately, the bonds in the Social Security Trust Fund do not 
represent any real saving that the government has done. They only 
represent our obligation to generate funds in the future.
    That's why it's time to strengthen and modernize Social Security 
for future generations with growing assets that workers can control, 
that they can call their own--assets that the government cannot take 
away.
    If the President's proposals are adopted, workers who choose PRA's 
would personally own the assets within those accounts. Younger workers 
would not have to wonder whether the Government will ``cut'' the PRA's, 
because they would own the assets themselves.
    The DOD budget has had no effect on Social Security's finances. 
Surpluses generated by Social Security must by law be invested in U. S. 
Treasury securities.
    This process of crediting the trust fund with payroll taxes occurs 
regardless of whether the overall budget for the Federal Government is 
in surplus, in perfect balance, or in deficit.
    The President opposes investing trust funds directly in private 
markets. He favors the establishment of personal accounts within the 
current Social Security system. The personal accounts would be a part 
of Social Security, a way of making sure that some Social Security 
money is saved.
    Investing the trust fund directly in the private markets has two 
fatal flaws. First, it would be extremely difficult for the government 
to invest Trust Fund assets in a manner that all asset sellers would 
regard as fair, and the government would likely feel pressure to 
politicize the trust fund investment process.
    Secondly, a major advantage of PRAs is that they ensure that pre-
funding of retirement incomes occurs in accounts that workers 
personally own, and would have the ability to personally pass on to 
their loved ones at death, which is not the case with a collective 
fund.
    The Administration supports a progressive Social Security system 
whereby Social Security remains a better deal for low-wage workers than 
it is for high-wage workers.
    Making the Social Security system sustainable over the long run and 
letting more workers enjoy the benefits of financial asset ownership 
would enhance the common good of the United States.

                                 

    [Submissions for the record follow:]

           Statement of the Embassy of the Government of Peru

    The Embassy of Peru congratulates the Ways and Means Committee of 
the House of Representatives for holding a hearing and receiving 
written statements regarding the President's Fiscal Year 2006 Budget.
    We understand that the Office of Management and Budget (OMB) has 
presented a budget in the framework of the Andean Counter-drug 
Initiative of US$ 734.5 million ($ 3.5 million more than Fiscal Year 
2005). Unfortunately, in said initiative the amount assigned for drug 
cooperation to Peru is US$ 97 million or a proposed reduction of more 
than US$ 18 million (-16%) in comparison to Fiscal Year 2005 (US$ 
115.37 million).
    Within the full respect for U.S. legislation, the Government of 
Peru would like to express its utmost concern about the proposal to 
reduce the amount for bilateral anti-drugs cooperation with Peru in the 
U.S. Budget for Fiscal Year 2006. We see this proposed reduction as 
counter productive, particularly if we take into account the 
significant progress made in the fight against drug-trafficking and the 
challenges we must face.
    Peru and the United States share the same interest to cooperate 
against illegal drugs as they see this matter as a grave menace to 
national and hemispheric security. That is the reason why the fight 
against drug-trafficking has been placed as one of the high priorities 
of the Government of Peru in the last years. Positive results based on 
this effort are at hand, where close to 30,000 hectares have been 
eradicated in the last three years and almost 14 tons of cocaine and 
basic paste of cocaine have been seized from drug traffickers in the 
same period. These results would have not been achieved without the 
commitment of our Government and the support provided by the United 
States. However, to continue with this effort, the valuable and 
important support of the United Stated is needed.
    Furthermore, the reduction of these cooperation funds will have a 
negative effect in the progress we have obtained in the fight against 
drug-trafficking. Due to the success of ``Plan Colombia'' on the 
eradication of coca crops, a ``balloon effect'' has developed, where 
new coca crops have started to grow in neighboring countries. We have 
to realize that from a regional perspective facing this problem will 
have a negative correlation effect for the interdiction and eradication 
success in other countries of the region. Issues like security, drug 
trafficking and terrorism are closely related and the support of the 
United States is vital to continue facing together, as partners, these 
new challenges.
    We believe that the House of Representatives has an important role 
to play in this matter. We also believe it has the power to re-examine 
the Administration proposal for Fiscal Year 2006 in regard to the 
Andean Counter Drug Initiative and, particularly, the proposed amount 
assigned for the cooperation with Peru. Therefore, we respectfully 
request that the proposed anti-drug cooperation funds for Fiscal Year 
2006 be reconsidered or, at least, the amount provided by the U.S. 
Congress for Fiscal Year 2005 be maintained.
Co-responsibility is relevant because drug-trafficking affects both 
        countries. We have to stop the demand as well as the supply.
    The U.S. Congress is aware and very supportive of the efforts 
carried out by Peru in the fight against illegal drugs in the Andean 
Region. In 1991, U.S Congress approved the Andean Trade Preferences Act 
(ATPA) which was renewed and expanded by the Andean Trade Promotion and 
Drug Eradication Act (ATPDEA) of 2002. These U.S. laws have 
significantly contributed to coca eradication efforts in Peru by 
providing farmers and other populations at risk, with alternative 
economic activities to the highly profitable illegal crops.
    Thanks to the benefits provided by the ATPDEA, in 2004 our exports 
to the United States grew by more than 51.8 %. Textiles and apparel, 
agro-products and gold jewelry lead the expansion of sales to the US, 
generating thousands of new jobs and improving the livelihood of 
peasants and workers in Peru, especially in rural areas.
    Our government is firmly committed to the fight against drug 
trafficking. It created the National Commission for Development and 
Life without Drugs (DEVIDA), to design, conduct, and supervise the 
anti-drug policy and rehabilitation programs in Peru.
    On January 21, 2005, the Peruvian Government approved an updated 
version of the Peruvian National Strategy to Fight Drugs 2002-2007, 
which focuses on four major actions:
    Reduction of the drug consumption and rehabilitation
    Interdiction
    Alternative development and protection of the environment
    Eradication and auto eradication of illicit crops
    These four actions have to be sustained in time and executed in a 
coordinated manner.
    It is very difficult to tell a ``cocalero'', a farmer who grows 
coca leaves, to cease his activities if we do not provide him with an 
alternative crop. A licit crop may generate sufficient profit for him 
to stop growing coca plants. In the areas where coca is grown there is 
not just one crop that may be harvested, but several like coffee, palm 
oil, cocoa, cotton, corn, peanuts and fruits. We currently have several 
projects for all these products.
    As stated previously, we have to give farmers a chance to develop 
alternative crops and protect the environment. The production of 
alternative crops is only feasible if they can be delivered to major 
markets, either in Peru or abroad, where they can be sold. In this 
regard, the U.S. Government is cooperating in the rehabilitation of the 
important road between Juanjui and Tocache, in the Peruvian rainforest, 
through the U.S. Agency for International Development (USAID).
    As far as the environment is concerned, we know that drug 
traffickers do not care about protecting the environment. All the 
chemicals used in the elaboration of cocaine and its derivatives, many 
of them highly toxic, are thrown into the rivers of the highlands and 
jungle of Peru, contaminating clean waters and endangering wild flora 
and fauna.
    Current drug cooperation between the two countries has led to 
important results in the fight against drug trafficking. The efforts of 
Peruvian authorities have been very important, and the projected goals 
or eradication have been achieved in the last two years. As shown in 
the following chart, in the last three years, almost 30,000 hectares of 
coca crops have been eradicated, either through forced or voluntary 
eradication.


------------------------------------------------------------------------
    Coca Crops Eradication
          (Hectares)               2002           2003           2004
------------------------------------------------------------------------
Forced eradication                  7,134            7,022        7,605
Voluntary eradication                   0            4,291        2,733
                              ------------------------------------------
    Total                           7,134           11,313       10,338
------------------------------------------------------------------------
Source: DEVIDA

Interdiction
    Alternative development and eradication are not the only actions 
that our Government has taken to fight against drug trafficking. Our 
National Police, in cooperation with foreign enforcement agencies, have 
been able to seize great amounts of cocaine ready to be shipped to the 
United States, Mexico and Europe. In comparison to 2003, there was an 
increase of 71.69% in the amount of illegal drugs seized in 2004.


------------------------------------------------------------------------
     Illegal Drugs (kgs.)          2002           2003           2004
------------------------------------------------------------------------
Seized:
------------------------------------------------------------------------
  Basic Paste of Cocaine           10,439            4,366        6,329
------------------------------------------------------------------------
  Cocaine                           4,129            3,574        7,303
------------------------------------------------------------------------
      Total                        14,568            7,940       13,632
------------------------------------------------------------------------

Security
    It is undeniable that there is a criminal link between terrorists 
and drug-traffickers, not only in our country but also in other parts 
of the world. Illegal profits obtained from drug-trafficking may be 
used to buy weapons, bombs, etc. for terrorists. This ``alliance'' must 
be considered a threat to security, not only on a national level but on 
the hemispheric and global arena. Currently, the actions of terrorist 
groups, as well as drug-traffickers are not limited by official borders 
of countries. We must take into account that these groups move and act 
in less protected places where they still feel safe. The way they are 
organized, they are able to transcend those borders, and become a 
threat to security. We must be prepared to face and fight this new 
threat.
    Due to the new and enormous challenges that we must face in the 
fight against drug trafficking, our Government truly and respectfully 
considers that anti-drug cooperation should be increased and not 
reduced.
    The above mentioned positive results in the fight against illegal 
drugs, based on the cooperation between our two countries, prove that 
there has been important progress in the last years. Consequently, we 
need to continue working together to face these challenges with the 
valuable support of the United States.

                                 

        Statement of Paul Stevens, Investment Company Institute
    Chairman Thomas, Members of the Ways and Means Committee, I am Paul 
Stevens, President of the Investment Company Institute, the national 
association of mutual funds. On behalf of our many members who manage 
more than eight trillion dollars on behalf of nearly 90 million 
individual investors, I thank you for the opportunity to address the 
important tax, savings and retirement policy proposals the President 
has put forward for the coming year.
I. The Mutual Fund Industry's Role in Expanding Americans' Access to 
        Ownership
    Nearly half of all U.S. households--and nearly two-thirds of 
middle-income households--invest in mutual funds. Individuals from 
every walk of life choose to invest in mutual funds for the 
diversification, professional management and varying investment 
objectives that funds provide. Americans may invest in mutual funds 
through taxable accounts, retirement accounts, or qualified tuition 
programs (more commonly known as ``529 Plans'').
    The powerful impact that mutual fund popularity has had on the 
economy, on jobs, and on access to the markets for workers and small 
business is equally significant. Several years ago, The Economist 
reported that mutual funds had emerged as ``the biggest source of 
capital for American companies . . . giving small and medium-sized 
businesses unprecedented access to capital markets and thereby 
financing nearly all of America's employment growth.''\1\
---------------------------------------------------------------------------
    \1\ ``The Seismic Shift in American Finance: Mutual Funds,'' The 
Economist, October 21, 1995.
---------------------------------------------------------------------------
    In its 2002 study of the mutual fund industry, Congress' Joint 
Economic Committee found that mutual funds provide increased savings 
opportunities for Americans and ready and stable sources of capital for 
America's financial markets:\2\
---------------------------------------------------------------------------
    \2\ The Mutual Fund Industry: An Overview and Analysis, Joint 
Economic Committee, United States Congress, February 2002.
---------------------------------------------------------------------------
    The size and flexibility of mutual fund complexes, and of some 
individual funds, enable them to choose among a much wider range of 
investments than individual investors can. Mutual funds make markets in 
those investments more efficient by allocating capital so its marginal 
product tends to be substantially the same for different users. Mutual 
funds are just one of a few institutions that can, at the margin, bring 
supply and demand together for different types of financial instruments 
to maximize the aggregate real return on capital in society.\3\
---------------------------------------------------------------------------
    \3\ Ibid, page 22.
---------------------------------------------------------------------------
    In short,mutual funds are both an essential vehicle for enabling 
middle-income Americans to reach their long-term savings goals and an 
important source of capital and growth for the American economy.
II. The Mutual Fund Industry's Role in Preparing for Retirement
    Mutual funds play a particularly important role in helping millions 
of Americans prepare for a financially secure retirement. Funds are an 
important investment medium for employer-sponsored retirement programs 
(e.g., section 401(k) plans) as well as for individual savings vehicles 
(e.g., individual retirement accounts (``IRAs'')). Of the $2.9 trillion 
in 401(k) plan and other defined contribution assets accumulating for 
American workers as of December 31, 2003, $1.4 trillion--almost half--
was invested in mutual funds. Similarly, of the $3 trillion in IRAs, 
$1.3 trillion was invested in mutual funds. In addition to their role 
as important savings and investment vehicles, mutual fund companies 
also provide a broad range of services to defined contribution plans, 
such as 401(k) plans, and individual account plans, such as IRAs. These 
services include recordkeeping, tax compliance and reporting and 
participant education services.
    Intertwined as we are with Americans' retirement savings, the 
mutual fund industry believes it can offer a helpful perspective on the 
urgent retirement security issues now central to so many challenges--
challenges facing Washington lawmakers, regulators, businesses and 
working families.
    The President has launched a historic debate on both Social 
Security reform and retirement security proposals needed to strengthen 
the other legs of the retirement income stool--private pensions and 
individual savings. The President's budget sets forth a number of 
specific provisions that we believe hold great promise for encouraging 
the growth and retention of individual savings, strengthening the 
economy, promoting the adoption and continuation of employer-sponsor 
pension plans to supplement savings and Social Security, and much more. 
We welcome the opportunity to assist policymakers in addressing these 
issues. With the growth of defined contribution pension plans, 
retirement planning increasingly involves individual decisions and 
individual education about alternatives that can seem quite complex and 
overwhelming. In fact, an ICI household survey found that about a third 
of those offered but not participating in a 401(k) plan did not 
participate because of confusion about plan features. We want to work 
with you to break through the complexity and to expand savings 
opportunities as the President has challenged us all to do together.
III. Social Security
    To set our comments on specific tax initiatives in context, let me 
begin by addressing Social Security. The Institute believes it is 
imperative to ensure the permanent solvency and sustainability of the 
Social Security system. To this end, ICI commends the Bush 
Administration's effort to develop and propose appropriate reforms of 
the system. And the Institute commends the Chairman's leadership in 
encouraging all parties to be broad and creative in analyzing this 
challenge and seeking constructive solutions.
    The Institute strongly supports maintaining Social Security as a 
universal system, and one that provides a floor benefit to those many 
Americans who rely principally on Social Security for retirement 
income. Preserving the fiscal soundness and fairness of the Social 
Security system will help ensure Americans' continued faith in and 
support of the program.
    The Institute thus strongly supports the Administration's close and 
timely attention to Social Security reform. All credible reform options 
should be considered carefully. Under one such proposal, younger 
workers would have the option to place a portion of their Social 
Security contributions into a personal account invested in a 
government-sponsored fund or funds similar to those available to 
federal employees under the Thrift Savings Plan (``TSP''). The 
Institute believes that any proposal for personal accounts should be 
judged by whether they will bolster the permanent solvency and 
sustainability of the Social Security system.
    Personal accounts could provide other benefits in addition to 
retirement income. They would introduce many more Americans to basic 
principles of saving and investing. Encouraging American workers to 
focus more broadly on these basic principles could have very positive 
effects--including, for example, prompting them to make additional 
provisions for their retirement security through individual savings and 
employer-sponsored plans.
    If reform of the Social Security system entails opportunities for 
younger workers to invest in personal accounts, then care must be taken 
to protect them as investors, through measures similar to those in the 
federal securities laws, and to educate them about investing. The 
Institute has substantial expertise concerning such issues. Several 
federal agencies have important and intersecting roles to play in these 
areas and are hard at work with them currently in various initiatives 
aimed at improving disclosure to investors, making more comparable the 
information pension plan managers must analyze, and strengthening the 
tracking systems that will restore and enhance investor confidence in 
complicated systems needed to implement individual decisions in today's 
changing retirement plan landscape. We look forward to working with the 
Administration and Congress as they consider a range of proposals to 
enhance retirement security.
    We welcome the ongoing efforts of Congress and the Administration 
to expand private retirement programs and savings opportunities and to 
simplify the rules governing them. As noted above, these private 
programs, such as IRAs and employer-sponsored plans, are also essential 
to Americans' retirement security. The greater their success and the 
more widespread their use, the less pressure the Social Security system 
will be under in the future.
    Million of retirees today receive income above Social Security 
thanks to their employer-sponsored pensions and their savings. We know, 
too, that IRAs have been a tremendous success, particularly in the 
years in which decisions to save were not inhibited by the complexity 
of changing deduction and eligibility limits. However, we also know 
that much more is needed. Of the 151 million Americans working today, 
only 63.5 million, or less than half, are earning benefits under an 
employer's retirement plan. We also know that savings opportunities 
through IRAs and other options have been constrained over time, often 
for revenue raising reasons, and in time those constraints may appear 
increasingly costly, so to speak. The President proposes several 
important initiatives promoting greater retirement security for the 
future and we welcome the opportunity to work with the Committee to 
bring them to fruition.
IV. EGTRRA Permanence
    The Institute strongly supports the President's proposal to make 
permanent the retirement and education savings provisions enacted by 
the Economic Growth and Tax Relief Reconciliation Act of 2001 
(``EGTRRA''). Among the important improvements to our retirement 
system, EGTRRA:
    Increased contribution limits to IRAs--limits that had not been 
increased (even for inflation) since 1981;
    Increased the contribution limits to employer-sponsored retirement 
plans, such as 401(k) plans, 403(b) arrangements, and governmental 457 
plans;
    Provided for ``catch-up'' contributions to be made by individuals 
age 50 and over to employer-sponsored plans and IRAs;
    Made retirement assets significantly more portable, especially 
among different types of retirement plans, such as 401(k) plans, 403(b) 
plans, 457 plans, and IRAs; and
    Created additional long-term savings incentives for education 
savings vehicles such as section 529 Plans and Coverdell education 
savings accounts (formerly, education IRAs).
    Unless EGTRRA's retirement and education savings provisions are 
made permanent, the restrictive savings rules that applied in 2001 will 
once again be law in 2011. Making EGTRRA's provisions permanent will 
promote economic growth and individual savings and financial security. 
For individuals to plan appropriately for their retirement years, they 
must be able to rely on predictable rules--rules that apply now and 
throughout their career and retirement.\4\ The future termination of 
these provisions could affect the long-term savings strategies of 
working Americans, undermining the purpose of these reforms and 
jeopardizing saving and long-term growth.
---------------------------------------------------------------------------
    \4\ Americans will be better positioned to build adequate 
retirement plans if they know now whether, for example, they will be 
able to contribute $2,000 or $5,000 to an IRA in 2011 and whether they 
will be able to make catch-up contributions.
---------------------------------------------------------------------------
V. JGTRRA Permanence
    The Institute strongly supports the President's proposal to make 
permanent the important savings and investment provisions enacted by 
the Jobs and Growth Tax Relief Reconciliation Act of 2003 (``JGTRRA''), 
including reduced tax rates on capital gains and qualifying dividends. 
JGTRRA reduced the tax rate on long-term capital gains. The 20 percent 
rate has been reduced to 15 percent; the 10 percent rate has been 
reduced to 5 percent through 2007 and will be reduced to zero in 2008. 
Unless the changes enacted by JGTRRA are made permanent, the higher 
rates will be reinstated for tax years beginning in 2009. JGTRRA also 
reduced the tax rate on qualified dividend income (as defined in the 
Act) to the 15 percent and 5 percent capital gains rates. These lower 
rates expire after December 31, 2008.
    Just as employer plans and individual retirement savings habits are 
best served by consistent and predictable retirement laws, corporations 
and individuals are also best served by consistent and predictable 
expectations. Both individual investors and the financial markets need 
certainty in order to plan for the future. It is therefore imperative 
that the provisions of JGTRRA be made permanent
VI. Simplifying & Strengthening Private Savings Opportunities
    The Institute has long supported initiatives to enhance financial 
security by advocating efforts to encourage retirement savings through 
employer-sponsored plans and IRAs, to simplify the rules applicable to 
retirement savings vehicles, to enable individuals to better understand 
and manage their retirement assets, to encourage college savings, and 
to reduce the tax burden on other long-term investing through mutual 
funds.
    The President's budget includes several important savings 
incentives. One bold initiative is the proposed creation of Retirement 
Savings Accounts, Lifetime Savings Accounts and Employer Retirement 
Savings Accounts. These three new retirement and savings vehicles would 
both enhance the ability of Americans to save for their future and 
simplify the current rules governing retirement plans. The Institute 
strongly supports savings and simplification initiatives that would 
bring long-term savings and investment opportunities within the reach 
of every working American.
    Comprehensive reform like the President's proposals will 
significantly reduce the overwhelming complexity of our current savings 
system. Today's rules governing retirement and education saving are 
simply too difficult to understand and too unwieldy and costly to 
administer. Simple universal savings vehicles, without age and income 
limits and other burdensome restrictions, will give Americans of all 
income levels and in all workplaces greater opportunities to achieve 
retirement security.
    There are other important retirement savings proposals that can 
enhance the effectiveness of those discussed above. They include 
proposals to automatically enroll employees in 401(k) plans, to offer 
new ways of efficiently managing small accounts for missing 
accountholders, to expand access to the investment advice that defined 
contribution plan participants need as their choices expand in number 
and complexity, and more. On many of these initiatives, the 
Administration has already taken the lead and we welcome the 
opportunity to work with the Congress as the entire retirement security 
discussion moves forward.
VII. Clarifying Section 529 Qualified Tuition Program
    Helping American families save for the ever-increasing cost of 
college is a longstanding and important policy goal. Congress furthered 
this goal by enacting Code section 529 as part of the Small Business 
Job Protection Act of 1996 and granting certain federal tax benefits to 
these state-sponsored ``529 Plans.'' In 2001, EGTRRA significantly 
enhanced 529 Plans by allowing tax-free treatment of distributions used 
to pay for qualified higher education expenses.
    Congress' efforts, particularly the EGTRRA enhancements, increased 
investor awareness and participation dramatically. Assets in 529 Plans 
more than doubled since 2002, increasing from $26.8 billion at year-end 
2002 to $57 billion by September 2004. During the same period, the 
number of 529 Plan accounts rose to more than 7 million, and the 
average account balance was approximately $8,000.\5\ Although these 
statistics are encouraging, many Americans who want to save for college 
still do not save enough.\6\ Legislation making permanent the tax-free 
treatment of qualified deferrals from section 529 plans will remove 
uncertainty, encourage long-term savings for education, and enhance 
economic growth and productivity. The Institute supports prompt 
enactment of legislation making permanent this important savings 
program.
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    \5\ ICI Memorandum 18530.
    \6\ See Profiles of American Households Saving For College, ICI 
Research Series, Fall 2003.
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    The President's budget includes proposals to clarify the gift and 
estate tax consequences of contributions to 529 Plans. Among other 
things, the Administration's proposal would impose an excise tax of as 
much as 50% on certain distributions above $50,000 (computed on a 
cumulative, lifetime basis for each designated beneficiary). While the 
proposed clarifications are intended to eliminate transactions designed 
to avoid gift and estate tax consequences, they have the unintended 
effect of making 529 Plans significantly less attractive for American 
families saving for college. We look forward to continuing our dialogue 
with the Treasury Department to address its concerns without 
significantly compromising this important college savings tool.
VIII. Deferring Taxation of Reinvested Mutual Fund Capital Gains 
        Distributions
    The Institute strongly supports legislation that would permit the 
deferral of the payment of tax on capital gains realized by a fund 
until the fund shareholder receives the gain in cash, such as by 
redeeming fund shares. This proposal would remedy the result, 
misunderstood by many fund shareholders, that capital gains realized by 
the fund are taxed currently to the fund's long-term shareholders--who 
continue to hold, rather than sell, their shares.
    If this type of legislation were enacted, the millions of fund 
shareholders investing in taxable accounts would benefit. These 
investors are mainly middle-income investors who are providing capital 
necessary for continued economic growth--their own and the country's. 
At a time when the retirement community is struggling to prevent 
leakage of retirement savings, to encourage portability among 
retirement investments, and to address tax provisions that present 
obstacles to the retention of sufficient retirement savings to last 
through the much longer retirement many Americans now experience, it's 
right that this idea, too, should be put forward in the tax and 
retirement debate.
    By reducing current tax bills and allowing earnings to grow tax-
deferred, this change would boost long-term savings. The proposal would 
not result in these gains being excluded from tax. Instead, the gains 
would merely be deferred, albeit, in some cases, outside the relevant 
budget-scoring period. The proposal's boost to long-term savings would 
have little, if any, long-term cost and would provide benefits to the 
economy in both the short run and the long run. It would eliminate an 
event that threatens to prematurely interrupt long-term savings, as 
would proposals to delay the minimum required distribution ``start-
date'' that forces savings out of IRAs.
IX. Conclusion
    The Investment Company Institute thanks you, Mr. Chairman, for this 
opportunity to be heard. We also thank you for your interest in related 
policy issues--for example, health care reform and additional savings 
opportunities for health care expenditures--that will be important 
complements to other savings initiatives and will help make retirement 
security an achievable goal. The Institute is proud of its research 
capacity, its expertise in economic analysis and its educational 
efforts to reach special populations with savings and investing tools, 
and we welcome the opportunity to work with you on the challenges 
ahead. Thank you for the opportunity to present our views.

                                 

          Statement of Janie Williams, Ridgecrest, California
    Members of the Committee,
    I don't have a ten page letter. I don't have anyone else standing 
as a witness to the letter. I do have a reason to voice my opinion. I 
do have a right to voice my opinion. I just hope this request doesn't 
fall on deaf ears.
    The way our nation is taxed needs to be changed. A person in 
Congress told me once ``by its roots'' is how you should pull our tax 
system up. That was a nice term to use. I think that the House and 
Senate need to stop putting off what can be done today. Maybe instead 
of just pulling by the roots, we need to use some Roundup too, just to 
top it off.
    With our taxes, the decisions need to be made in the present time. 
Not a few years from now. If the House and Senate were scientists, we'd 
never learn anything. You can't judge something only my theories and 
statistics. It eventually has to be put into the laboratory. If the 
House and Senate were a laboratory and waited this long to find out if 
something works or not, the rats would all be dead! Okay, that isn't a 
good comparison, I know. But, this isn't only like the laboratory not 
doing anything, but the House and Senate decision making skills are a 
lot like the United Nations and the Sudan situation. Getting paid for 
no progress. To sit on decisions for such small arguments between 
parties is not acceptable. We need to get things rolling. I hope this 
doesn't offend you all. I just want the guys and gals in the government 
to understand how much pressure there is on people to do their jobs and 
money is needed to do so. I am a teacher. With my job, money is very 
limited. We need more tax dollars for education. We need to decide 
where our tax money goes. If we had that Sales Tax, that would make 
everyone help pay the bill, even foreign visitors.
    There was the bill passed for No Child Left Behind. Now that it was 
passed, give us the REAL money to pay the bills it's left us with. I 
hope that all those who work in the House and Senate will vote for the 
Sales Tax. It makes people remain responsible for what they spend their 
money on and makes us the money instantly. We won't have to waiting for 
the IRS to lose it.

                                  
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