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



 
      PRESIDENT'S FISCAL YEAR 2006 BUDGET WITH OMB DIRECTOR BOLTEN

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




                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 9, 2005

                               __________

                            Serial No. 109-2

                               __________

         Printed for the use of the Committee on Ways and Means












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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
RON LEWIS, Kentucky                  STEPHANIE TUBBS JONES, Ohio
MARK FOLEY, Florida                  MIKE THOMPSON, California
KEVIN BRADY, Texas                   JOHN B. LARSON, Connecticut
THOMAS M. REYNOLDS, New York         RAHM EMANUEL, Illinois
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 
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                            C O N T E N T S

                               __________

                                                                   Page

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

                                WITNESS

Office of Management and Budget, Hon. Joshua B. Bolten, Director.     5

                       SUBMISSION FOR THE RECORD

Embassy of Peru to the United States, Eduardo Ferrero, statement.    70



















      PRESIDENT'S FISCAL YEAR 2006 BUDGET WITH OMB DIRECTOR BOLTEN

                              ----------                              


                      WEDNESDAY, FEBRUARY 9, 2005

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

    The Committee met, pursuant to notice, at 2:06 p.m., in 
room 1100, Longworth House Office Building, Hon. Bill 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 02, 2005
No. FC-2

                      Thomas Announces Hearing on

                  President's Fiscal Year 2006 Budget

                        with OMB Director Bolten

    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 
jurisdiction of the Committee on Ways and Means. The hearing will take 
place on Wednesday, February 9, 2005, in the main Committee hearing 
room, 1100 Longworth House Office Building, beginning at 2:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. The 
witnesses will be the Honorable Joshua Bolten, Director, Office of 
Management and Budget. 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:

      
    Since his reelection to a second term in office, President George 
W. Bush has outlined several budget and tax proposals. The details of 
these proposals are expected to be released on February 7, 2005, when 
the President is scheduled to submit his fiscal year 2006 budget to the 
Congress.
      
    In announcing the hearing, Chairman Thomas stated, ``I look forward 
to Director Bolten's appearance before the Committee and discussing 
details of the President's budget and policy initiatives.''
      

FOCUS OF THE HEARING:

      
    Office of Management and Budget Director Bolten will discuss the 
details of the President's budget proposals that are within the 
Committee's jurisdiction.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
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formatting requirements listed below, by close of business Wednesday, 
February 23, 2005. Finally, please note that due to the change in House 
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encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
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    1. All submissions and supplementary materials must be provided in 
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business days notice is requested). Questions with regard to special 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman THOMAS. Good afternoon. Today's hearing is the 
second in a series examining the President's fiscal year 2006 
budget. We are honored to have the Office of Management and 
Budget (OMB) Director Joshua Bolten once again testifying 
before our Committee. Thank you for coming and we look forward 
to your testimony and to your responses to Members' inquiries. 
The President has presented a budget blueprint that funds the 
Nation's priorities while reigning discretionary spending and 
cutting the deficit in half by 2009. It will be difficult work, 
but it is our responsibility to ensure taxpayer dollars are 
spent wisely. To that end, Congress must work to eliminate 
duplicative and ineffective programs while continuing to pursue 
policies that enhance individual Americans and economic growth. 
Last year, the economy, as I said yesterday, created 2.2 
million jobs, and aftertax income increased nearly 9 percent. 
Today, the unemployment rate has declined to 5.2 percent. This 
growth is, I think, to a very great extent directly the result 
of Republican tax policies. Our strengthened economy has 
resulted in higher than anticipated Federal revenue, which has 
helped lower the deficit.
    While being mindful of deficits, we must also think about 
the economy of tomorrow, which, of course, is going to be 
increasingly competitive and the battlefield will be trade. 
Currently, we have a government that in many respects was built 
for the past. The President has provided Congress a rare 
opportunity to fundamentally examine key elements of our 
governmental structure, including Social Security and the Tax 
Code, and we should take this opportunity to develop solutions 
that meet the needs of our aging society and take the 
opportunity to also address the challenges of the 21st-century 
economy. Our Nation can emerge stronger and healthier if we 
approach this assignment responsibly. We can ensure government 
is prepared to meet its obligations to today's and tomorrow's 
workers and as they retire. We can produce changes that ensure 
America is the most attractive place to do business and that 
each American is treated fairly by a simpler tax system. The 
opportunity is ours to address crucial changes to government 
systems that can move America forward. This Committee should be 
in a place where these great challenges can be discussed and 
debated in a constructive environment. The Chair hopes that 
that is where the Committee will be. Prior to recognizing the 
gentleman from New York, Mr. Rangel, for any comments he may 
wish to make, the Chair wishes to thank the Members for their 
willingness to participate in the orderly fashion that we did 
yesterday which allowed us to be able to have every Member of 
the Committee an opportunity to inquire of our witness. The 
Chair hopes that will be possible again today. With that, the 
gentleman from New York.
    Mr. RANGEL. Thank you, Mr. Chairman. I really welcome you 
to the Committee. After yesterday's hearing, you have no idea 
how badly we need you to explain how the budget was put 
together and what is in and what is out, because quite frankly, 
some of us were unable to follow the explanations given by the 
Secretary of the U.S. Department of the Treasury. But, since it 
is your job for the Nation and our job to try to fit into the 
President's budget what we think is a priority, your presence 
here is so important. So, during the questioning, I hope that 
you will be able to explain why a nation at war would not see 
fit to put into a budget the cost of that war, or in addition, 
why when the President says that his number one domestic 
priority is Social Security and every economist says that there 
are going to be tremendous transitional costs even up to 
trillions of dollars, why that is not in the budget, and also 
where there are provisions in the Tax Code to try to make 
certain that everybody that is wealthy pay a minimum tax and to 
find out through no fault of their own they get caught up in 
this complicated Tax Code and pay over $600, $700 billion over 
10 years and that relief is not in the tax code. We know that 
there is an explanation for this, but we have to be able to 
explain to our constituents what makes this budget so different 
from a family budget, that if you don't see money for what you 
want or what you have to get in the budget, that you are not 
going to get it. So, rather than say the war has ended, that 
Social Security is dead on arrival, or to forget about it for 
middle-income voters, we hope you will be able to find the 
language to help us to have a better understanding of where the 
compassion is in this budget. Thank you.
    Chairman THOMAS. With that, Director Bolten, if you have a 
written statement, it will be made a part of the record, 
without objection, and the Committee is anxious to hear from 
you in any way you see fit for the time you have.

 STATEMENT OF THE HONORABLE JOSHUA B. BOLTEN, DIRECTOR, OFFICE 
                    OF MANAGEMENT AND BUDGET

    Mr. BOLTEN. I do have a statement, Mr. Chairman, and thank 
you for your hospitality, Mr. Rangel, other distinguished 
Members of the Committee. The President's 2006 budget, which 
was transmitted to this Congress on Monday, meets the 
priorities of the Nation and builds on the progress of the last 
4 years. We are funding our efforts to defend the homeland from 
attack. We are transforming our military and supporting our 
troops as they fight and win the global war on terror. We are 
helping to spread freedom throughout the world. We are 
promoting the pro-growth policies that have helped to produce 
millions of new jobs and restore confidence in our economy. 
Over the past 4 years, the President and Congress rose to meet 
historic challenges--a collapsing stock market, a recession, 
the revelation of corporate scandals, and, of course, the 
attacks of September 11. To meet the economy's significant 
challenges, in each year of the President's first term, 
Congress and in particular this Committee and the President 
enacted major tax relief that fueled recovery, business 
investment, and job creation. The chart that is on the screen 
right now shows the strong economic growth unleashed by the tax 
relief that you enacted. Since the recession year of 2001, 
economic growth has increased in each of the following 3 years. 
A primary goal of this 2006 budget is to assure that our 
economic growth continues.
    A strengthening economy produces rising tax revenue. Last 
year, after declining 3 years in a row, Federal revenue grew by 
nearly $100 billion. Reflecting strong continued growth, we 
project that Federal revenues will grow by an even larger 
figure this year. The President and Congress have also devoted 
significant resources to rebuild and transform our military and 
to protect our homeland. In the first term, the defense budget 
grew by more than a third, the largest increase since the 
Reagan Administration. To make our homeland safer, the 
President worked with Congress to create the U.S. Department of 
Homeland Security and nearly tripled funding for homeland 
security government-wide. While committing these necessary 
resources to protecting America, the President and Congress 
have focused on spending restraint elsewhere in the budget. 
Working together, we have succeeded in bringing down the rate 
of growth in non-security discretionary spending each year of 
the President's first term. In the last budget year of the 
previous Administration, non-security discretionary spending 
grew by 15 percent. That is the green bar shown on your 
screens. In 2005, such spending will rise only about 1 percent, 
reflected by the small yellow bar at the right of the screen.
    Because of this increased spending restraint, deficits are 
below what they otherwise would have been. In order to sustain 
our economic expansion, we must exercise even greater spending 
restraint than in the past. When the Federal government focuses 
on its priorities and limits the resources it takes from the 
private sector, the result is a stronger, more productive 
economy. The President's 2006 budget proposes that enhanced 
restraint. As you can see from this chart, the 2006 budget 
proposes a reduction in the non-security discretionary category 
of the budget. It is reflected in the purple bar right there. 
This is the first proposed cut in non-security spending since 
the Reagan Administration. The budget proposes more than 150 
reductions, reforms, and eliminations in non-defense 
discretionary programs, saving about $20 billion in 2006 alone. 
As a result of this enhanced restraint, overall discretionary 
spending, even after significant increases in defense and 
homeland security, will grow by only about 2.1 percent, less 
than the projected rate of inflation in 2006 of 2.3 percent. In 
other words, under the President's 2006 budget, overall 
discretionary spending will see a reduction in real terms. In 
addition, the budget also proposes savings from an additional 
set of reforms in mandatory programs, saving about $137 billion 
over the next 10 years. As this Committee well knows, both 
mandatory and discretionary categories of spending are 
inherently difficult to control, but mandatory programs are 
especially difficult because of their auto-pilot feature. The 
Administration looks forward to working with the Congress on a 
package of mandatory savings.
    We will also work with Congress on budget process reforms. 
Last year, I transmitted to Congress on behalf of the 
Administration proposed legislation to establish statutory 
budget enforcement controls. We plan to transmit a similar set 
of proposals this year. In addition, the Administration 
proposes other enforcement and budget process reforms, such as 
the line-item veto, a results commission, and a sunset 
commission. These reforms will put in place the tools we need 
to enforce spending restraint and will bring greater 
accountability an transparency to the budgeting process. This 
budget restrains spending in a responsible way by focusing on 
priorities, principles, and performance. We were guided by 
three major criteria in evaluating programs. First, does the 
program meet the Nation's priorities? Second, does the program 
meet the President's principles for the use of taxpayer 
resources? Is there a real Federal role? Third, does the 
program produce the intended results? The Bush Administration 
is comprehensively measuring the effectiveness of the 
government's programs and the results are helping us make 
budgeting decisions. As part of the President's management 
agenda, the Program Assessment Rating Tool (PART) was developed 
to measure the performance of all Federal programs. Roughly 60 
percent of all Federal programs have undergone the PART and 
those scores figured into our budgeting process.
    By holding government spending to these accountability 
standards, by focusing on priorities, and by maintaining pro-
growth economic policies, we are making progress in bringing 
down the size of the deficit in 2006 and beyond. Last year's 
budget initially projected a deficit of 4.5 percent of gross 
domestic product (GDP) in 2004, or $521 billion. The President 
set out to cut this deficit in half by 2009. Largely because 
economic growth generated stronger revenues than originally 
estimated, the 2004 deficit came in $109 billion lower than 
originally estimated. At 3.6 percent of GDP, the actual 2004 
deficit, while still too large, was well within historical 
range and smaller than the deficits in 9 of the last 25 years. 
We project the 2005 deficit to come in at 3.5 percent of GDP, 
or $427 billion. If we maintain the policies of economic growth 
and spending restraint reflected in the budget, the deficit is 
expected to decline in 2006 and each of the next 4 years. By 
2009, the deficit is projected to be cut by more than half from 
its originally estimated 2004 peak, to just 1.5 percent of GDP. 
This is well below the 40-year historical average deficit of 
2.3 percent of GDP and lower than the deficit level in all but 
seven of the last 25 years. The Administration intends to 
submit shortly a supplemental appropriations request of 
approximately $81 billion, primarily to support operations in 
Iraq and Afghanistan for the remainder of the fiscal year. The 
2006 budget spending and deficit projections fully reflect the 
outlay effects of this supplemental request. They also fully 
reflect the prior $25 billion supplemental bill passed by the 
previous Congress. However, the budget does not reflect the 
effect of undetermined but anticipated supplemental requests 
for ongoing operations in Iraq and Afghanistan beyond 2006.
    The published version of the 2006 budget also does not 
reflect the effects of transition financing associated with the 
President's proposal to create personal retirement accounts as 
part of a comprehensive plan to permanently fix Social 
Security. As the Administration announced last week, the type 
of personal accounts the President is proposing will require 
approximately $664 billion in transition financing over the 
next 10 years with an additional $90 billion in related debt 
service. This transition financing would result in a deficit in 
2009 and 2010 of 1.7 percent of GDP. If I can get the next 
chart, you will see that reflected on this chart. This is still 
consistent with the President's goal of cutting the deficit in 
half by 2009 and still well below the 40-year historical 
average deficit. It is important to remember that this 
transition financing does not have the same impact on national 
savings, and thus on the economy, as does traditional 
government borrowing. Every dollar the government borrows to 
fund the transition to personal accounts is fully offset by an 
increase in savings represented by the accounts themselves. In 
addition, the transition financing of retirement benefits does 
not represent new debt to the government. These are obligations 
that the government already owes in the form of future 
benefits. Perhaps most important, comprehensive Social Security 
reform that includes personal accounts can eliminate the 
system's current $10.4 trillion in unfunded obligations. Those 
of us who devote our time to thinking about fiscal policy all 
share a common interest in averting this danger. There is no 
task as vital to fiscal policy makers this year than removing 
these unfunded obligations by enacting comprehensive Social 
Security reform. Confronting these long-term obligations, 
combined with our near-term deficit reduction efforts, will 
help assure a strong economy both now and in the future. I look 
forward to working with the Committee and the full Congress on 
this budget, which meets the priorities of the Nation in a 
fiscally responsible way. Thank you very much, Mr. Chairman. I 
would be happy to take questions.
    [The prepared statement of Mr. Bolten follows:]
   Statement of The Honorable Joshua B. Bolten, Director, Office of 
                         Management and Budget
    Chairman Thomas, Ranking Member Rangel, and distinguished members 
of the Committee, the President's 2006 Budget, which was transmitted to 
the Congress on Monday, meets the priorities of the Nation and builds 
on the progress of the last four years.
    We are funding our efforts to defend the homeland from attack. We 
are transforming our military and supporting our troops as they fight 
and win the Global War on Terror. We are helping to spread freedom 
throughout the world. We are promoting high standards in our schools, 
so that our children gain the skills they need to succeed. We are 
promoting the pro-growth policies that have helped to produce millions 
of new jobs and restore confidence in our economy.
    Over the past four years, the President and Congress rose to meet 
historic challenges: a collapsing stock market, a recession, the 
revelation of corporate scandals and, of course, the terrorist attacks 
of September 11th.
    To meet the economy's significant challenges, in each year of the 
first term, Congress and the President enacted major tax relief that 
fueled recovery, business investment, and job creation.
    Recent economic indicators support the case for tax relief. Since 
the recession year of 2001, economic growth has increased in each of 
the following three years. A primary goal of this Budget is to assure 
that our economic growth continues.
    A strengthening economy produces rising tax revenues. Last year, 
after declining three years in a row, federal revenue grew by nearly 
$100 billion. Reflecting strong continued growth, we project that 
federal revenues will grow by an even larger figure this year.
    The President and Congress have also devoted significant resources 
to rebuild and transform our military, and to protect our homeland. In 
the first term, the defense budget grew by more than a third, the 
largest increase since the Reagan Administration. To make our homeland 
safer, he worked with Congress to create the Department of Homeland 
Security and nearly triple funding for homeland security government-
wide.
    While committing these necessary resources to protecting America, 
the President and Congress have focused on spending restraint elsewhere 
in the Budget. Working together, we have succeeded in bringing down the 
rate of growth in non-security discretionary spending each year of the 
President's first term. In the last Budget year of the previous 
Administration, non-security discretionary spending grew by 15 percent. 
In 2005, such spending will rise only about 1 percent. Because of this 
increased spending restraint, deficits are below what they otherwise 
would have been.
    In order to sustain our economic expansion, we must exercise even 
greater spending restraint than in the past. When the Federal 
government focuses on its priorities, and limits the resources it takes 
from the private sector, the result is a stronger, more productive 
economy.
    The President's Budget proposes that enhanced restraint. The 2006 
Budget proposes a reduction in the non-security discretionary category 
of the Budget. This is the first proposed cut in this non-security 
spending since the Reagan Administration.
    The Budget proposes more than 150 reductions, reforms, and 
eliminations in non-defense discretionary programs, saving about $20 
billion in 2006 alone.
    As a result of this enhanced restraint, overall discretionary 
spending, even after significant increases in defense and homeland 
security, will grow by only 2.1 percent--less than the projected rate 
of inflation, which is 2.3 percent. In other words, under the 
President's 2006 Budget, overall discretionary spending will see a 
reduction in real terms.
    In addition, the Budget also proposes savings from an additional 
set of reforms in mandatory programs, saving about $137 billion over 
the next 10 years.
    As you well know, both mandatory and discretionary categories of 
spending are inherently difficult to control, but mandatory programs 
are especially difficult because of their "auto-pilot" feature. The 
Administration looks forward to working with the Congress on a package 
of mandatory savings.
    We will also work with Congress on budget process reforms. Last 
year, I transmitted to Congress, on behalf of the Administration, 
proposed legislation to establish statutory budget enforcement 
controls. We plan to transmit a similar set of proposed statutory 
controls to establish caps on discretionary spending, a pay-as-you-go 
requirement for mandatory spending only, and a new enforcement 
mechanism to control long-term unfunded obligations. The President's 
Budget also proposes that Congress include these budget enforcement 
mechanisms and associated reforms in the FY 2006 Budget resolution.
    In addition, the Administration proposes other enforcement and 
budget process reforms, such as the line-item veto, a Results 
Commission, and a Sunset Commission. These reforms would put in place 
the tools we need to enforce spending restraint and would bring greater 
accountability and transparency to the budgeting process.
    This Budget restrains spending in a responsible way by focusing on 
priorities, principles, and performance. We were guided by three major 
criteria in evaluating programs:
    First: Does the program meet the Nation's priorities? The Budget 
increases funding to strengthen our Armed Forces, improve the security 
of our homeland, promote economic opportunity, and foster compassion.
    Second: Does the program meet the President's principles for the 
use of taxpayer resources? If an appropriate Federal role could not be 
identified in a program's mission, the Budget generally proposes to 
reduce or eliminate its funding.
    Third: Does the program produce the intended results? The Bush 
Administration is comprehensively measuring the effectiveness of the 
government's programs--and the results are helping us make budgeting 
decisions. As a part of the President's Management Agenda, the Program 
Assessment Rating Tool, or PART, was developed to measure the 
performance of Federal programs. Roughly 60 percent of all Federal 
programs have undergone the PART, and those scores figured into the 
budgeting process.
    By holding government spending to these accountability standards, 
by focusing on our priorities, and by maintaining pro-growth economic 
policies, we are making progress in bringing down the size of the 
deficit in 2006 and beyond.
    Last year's Budget initially projected a deficit of 4.5 percent of 
Gross Domestic Product (GDP) in 2004, or $521 billion. The President 
set out to cut this deficit in half by 2009. Largely because economic 
growth generated stronger revenues than originally estimated, and 
because the Congress delivered the spending restraint called for by the 
President, the 2004 deficit came in $109 billion lower than originally 
estimated.
    At 3.6 percent of GDP, the actual 2004 deficit, while still too 
large, was well within historical range and smaller than the deficits 
in nine of the last 25 years.
    We project the 2005 deficit to come in at 3.5 percent of GDP or 
$427 billion. If we maintain the policies of economic growth and 
spending restraint reflected in this Budget, the deficit is expected to 
decline in 2006 and each of the next four years. In 2006, we project 
the budget deficit to fall to 3.0 percent of GDP, or $390 billion. In 
2007, the deficit is projected to fall further to 2.3 percent of GDP, 
or $312 billion.
    By 2009, the deficit is projected to be cut by more than half from 
its originally estimated 2004 peak-to just 1.5 percent of GDP, which is 
well below the 40-year historical average deficit of 2.3 percent, and 
lower than the deficit level in all but seven of the last 25 years.
    The Administration intends to submit shortly a suppl emental 
appropriations request of approximately $81 billion, primarily to 
support operations in Iraq and Afghanistan for the remainder of the 
fiscal year. The 2006 Budget's spending and deficit projections fully 
reflect the outlay effects of this supplemental request, as well as the 
prior $25 billion supplemental bill already enacted by the Congress. 
However, the Budget does not reflect the effect of undetermined but 
anticipated supplemental requests for ongoing operations in Iraq and 
Afghanistan beyond 2005.
    The published version of the 2006 Budget also does not reflect the 
effects of transition financing associated with the President's 
proposal to create personal retirement accounts as part of a 
comprehensive plan to permanently fix Social Security. As the 
Administration announced last week, the type of personal accounts the 
President is proposing will require approximately $664 billion in 
transition financing over the next ten years, with an additional $90 
billion in related debt service. This transition financing would result 
in a deficit in 2009 and 2010 of 1.7 percent of GDP, which is still 
consistent with the president's goal to cut the deficit in half by 
2009, and still well below the 40-year historical average.
    It's important to remember that this transition financing does not 
have the same impact on national savings, and thus on the economy, as 
does traditional borrowing. Every dollar the government borrows to fund 
the transition to personal accounts is fully offset by an increase in 
savings represented by the accounts themselves. In addition, the 
transition financing of retirement benefits does not represent new 
debt-these are obligations that the government already owes in the form 
of future benefits.
    Perhaps most important, comprehensive Social Security reform that 
includes personal accounts can eliminate the system's current $10.4 
trillion in unfunded obligations. Those of us who devote our time to 
thinking about fiscal policy all share a common interest in averting 
this danger. There is no task as vital to fiscal policymakers this year 
than removing those unfunded obligations by enacting comprehensive 
Social Security reform.
    Confronting these long-term obligations, combined with our near-
term deficit reduction efforts, will help assure a strong economy both 
now and in the future.
    I look forward to working with the committee and Congress on this 
Budget, which meets the priorities of the Nation in a fiscally 
responsible way.



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


                                 

    Chairman THOMAS. Thank you very much. As you might expect, 
much of the discussion with Secretary Snow was over the 
President's Social Security provisions. You have touched on 
them and we will focus questions, as well. The Chair, however, 
believes that there are some other provisions that if not 
directly relating to retirement, at least tangentially assist 
individuals in retirement that are in the President's budget 
that if I don't ask the question in the way I am asking it, 
probably will not come up in the course of this hearing. 
Frankly, the Chair has said in a number of forums that we want 
to look at an aging society and the question of retirement in a 
broader way, but clearly, Social Security being one of the key 
factors. So, if the Director would indicate briefly, and 
Members will be asking questions that the Director will not be 
able to fully answer in the timeframe that we have, written 
responses will be circulated among other Members. So, if you 
would merely begin to set the tone of getting Members to 
understand the full impact of the President's focus on 
retirement and assistance near retirement in the budget, I 
believe it would be helpful to the discussions.
    Mr. BOLTEN. Mr. Chairman, there are a number of provisions 
in the President's budget that relate to retirement security. 
We have proposed long-term savings accounts, retirement savings 
accounts. All of those are reflected in our budget estimates 
and reflected in the proposals. These are important measures 
that can be taken to assure that people are able to keep more 
of their own money and save it responsibly for their 
retirement. There are a variety of other measures that have 
already been adopted, in part through your efforts, Mr. 
Chairman, and this Committee. Health Savings Accounts are in 
law. We have proposed enhancements for them through additional 
tax benefits for Health Savings Accounts to make sure that all 
of our citizens are able to control more of their own health 
care and make responsible health decisions on their own. There 
are a whole variety of other mechanisms in the budget, and you 
are absolutely right, Mr. Chairman, that don't get much 
attention but that relate to individual citizens' ability to 
control their own finances and to control their own retirement 
in ways that I think are helpful to be brought into the Social 
Security conversation.
    Chairman THOMAS. One of the directions that I hope the 
debate takes at various times is that as we are looking for 
ways of addressing health care, both in terms of an immediate 
or acute need or chronic and long-term, that as we try to 
stress within the premier government program for seniors, 
Medicare, it is something that shouldn't be initiated at 
retirement, and that is preventive and wellness. Without a 
health program, either through a health savings account or 
assistance with small employers through new structures that I 
believe are also in the budget, it is very difficult for 
individuals to begin to prepare a lifelong health relationship 
which, in fact, would significantly enhance retirement, as 
well. We won't go into those details. But, if you begin to look 
at the budget in that fashion there are a number of areas that 
coordinate together that we hopefully believe will produce an 
aging society that will age even older, but in a comfort level 
heretofore unseen with the finances necessary to have that 
comfortable retirement. The Chair would indicate to the Members 
that the Chair intends to follow the Gibbons' Rule. Most of you 
would be familiar with that. Some of the freshmen would not. 
The former Member from Florida initiated a procedure in which 
the order that the Chair would call on Members to question 
witnesses was based on who was present at the fall of the 
gavel. I can't believe it was designed to encourage attendance. 
However, there is a secondary effect in which it actually does. 
As I go down the list of names, if you weren't called when it 
should have been called, in your opinion, from a seniority 
point of view, it is because I am following the Gibbons' Rule, 
and almost always the Committee will function by the Gibbons' 
Rule and that is if you were here when the gavel fell, you will 
be called in order of seniority. With that, the Chair would----
    Mr. BECERRA. Mr. Chairman, is that something that was 
articulated by you prior to the commencement of----
    Chairman THOMAS. It has been the rule for every Congress 
that has been announced and utilized. I almost want to say 
decades, but I don't want to claim the gentleman from New York 
and I are that old. At least for the last several Congresses 
that we can remember. The gentleman recognizes the gentleman 
from New York.
    Mr. MCDERMOTT. Mr. Chairman, may I ask a question?
    Chairman THOMAS. Certainly.
    Mr. MCDERMOTT. Would it not be fair to say that the next 
hearing, you would start with that rule, and then go by 
seniority today, since it was not--you didn't expressly state 
that prior----
    Chairman THOMAS. The Chair would have assumed the senior 
Member would have dealt with that, knowing that that is the way 
the Committee has proceeded both under Democratic Chairs and 
Republican Chairs. However, to move forward in a reasonable 
fashion in which the Chair hopes those Members of the Committee 
who were anticipating being called on sooner than would 
otherwise have been the case need to focus on the gentleman 
from Washington as the one responsible for that not occurring. 
The Chair is willing to say that for this hearing, we will not 
follow the Gibbons' Rule, notwithstanding the fact Members were 
here and ready at the time the gavel fell. So, with the 
understanding that if the sky falls, it is on the gentleman 
from Washington, Mr. McDermott----
    [Laughter.]
    Mr. RANGEL. It sounds like it is Gibbons.
    Mr. MCDERMOTT. I am going to put my hands up over my head.
    Mr. RANGEL. Okay.
    Chairman THOMAS. The Chair would indicate that is one place 
they could be.
    [Laughter.]
    The gentleman from New York.
    Mr. RANGEL. Thank you, Mr. Chairman, and thank you again, 
Mr. Director. Now, would you say that elimination of these 
entitlements will make your budget problems a lot easier? Are 
entitlements good for budgets or bad, entitlements, Medicare, 
Social Security----
    Mr. BOLTEN. I am sorry, Mr. Rangel. I didn't follow the 
question.
    Mr. RANGEL. Do you believe that the elimination of 
entitlements would have a positive effect on our budget if we 
just didn't have the Social Security entitlement, the 
Medicare----
    Mr. BOLTEN. The elimination----
    Mr. RANGEL. Just, yes, to have it done by the private 
sector. Would it help?
    Mr. BOLTEN. I am not sure what you mean by the elimination 
of the entitlements. What I can tell you is that the----
    Mr. RANGEL. I mean wipe them out, eliminate, gone. Private 
sector. Let the free market work its will. Wall Street. 
Prescription--that is what I mean.
    Mr. BOLTEN. Entitlements are, by far, the biggest fiscal 
challenge this country faces.
    Mr. RANGEL. You would----
    Mr. BOLTEN. It is the unfunded liabilities that--I am 
sorry.
    Mr. RANGEL. You would like to get rid of these big fiscal 
challenges, wouldn't you?
    Mr. BOLTEN. I would like to get rid of the unfunded 
liabilities in the entitlements, certainly.
    Mr. RANGEL. Okay.
    Mr. BOLTEN. Not the programs themselves.
    Mr. RANGEL. You have to be better than yesterday, but you 
are getting close already. Now, if, indeed, the Social Security 
program was one of--you have got some dramatic language here, 
biggest saving yet. Anyway, it is a big deal. There is no task 
as vital to fiscal policy makers this year than removing those 
unfunded obligations by enacting comprehensive Social Security 
reform. Now, how do you expect Americans to believe that this 
is so important when for whatever reason, nothing is included 
in the budget? You would have to be the first to admit that no 
matter what the President gives us, it is going to have fiscal 
implications, is that not correct, of hundreds of billions of 
dollars if not trillions of dollars, and yet not one mention is 
in the budget that is presented to us. Is that true?
    Mr. BOLTEN. There are fiscal implications, Mr. Rangel, and 
they are reflected in the last chart that I had up in my 
presentation, which----
    Mr. RANGEL. Sir----
    Mr. BOLTEN. I will put it back on the screen----
    Mr. RANGEL. Sir, we are not going to vote on your chart. I 
am talking about a budget. Will you submit something--submit it 
in writing. Social Security--is there a dollar next to the cost 
of this dramatic change in Social Security? Is the dollar 
amount there at all? I thought you said it was not.
    Mr. BOLTEN. It is not reflected in the prepared documents 
that you have.
    Mr. RANGEL. That is all I am asking. I would assume, then, 
that it doesn't appear to be as serious as you said if dollars 
are not there. The other thing that I am concerned about is the 
Alternative Minimum Tax (AMT). Would you admit that the middle-
income taxpayer has gotten caught into this, people that you 
and I and the President want to have relief, and the President 
has said that over and over?
    Mr. BOLTEN. Sure. The AMT is a----
    Mr. RANGEL. Very important.
    Mr. BOLTEN. A very complex mechanism for collecting taxes.
    Mr. RANGEL. Yet you know that it costs. There is going to 
be a cost to that, right? We are going to have to borrow money 
in order to give this relief, is that correct?
    Mr. BOLTEN. What the President has called for is 
fundamental tax reform and we believe that the AMT can be 
reformed in the context of overall revenue-neutral fundamental 
tax reform.
    Mr. RANGEL. Oh, so it won't cost anything?
    Mr. BOLTEN. In the context of fundamental tax reform, we 
believe it can be done in a revenue-neutral fashion.
    Mr. RANGEL. You are saying that we, over 10 years, can find 
$700 billion to provide this relief for the American people 
without any lost revenue, to make it revenue neutral?
    Mr. BOLTEN. I think in fundamental tax reform----
    Mr. RANGEL. That is good by me.
    Mr. BOLTEN. That can all be done.
    Mr. RANGEL. We are moving, then. This is better than 
yesterday. Now, how about the war? I cannot find anyplace in 
this budget where anyone is making any sacrifice except our 
brave fighting men and women and veterans. The war has to cost 
money and sooner or later, we will be asked to vote on the cost 
of the war. Some people think the whole thing is going to cost 
$400 billion. Is there anything, any page in the budget that 
you are presenting to the Congress where we can find out what 
the President or you will be asking us to fund? Is the war cost 
in the budget?
    Mr. BOLTEN. The costs for 2005 are included in the budget 
figures that are contained in these volumes. They are also 
included in the charts I just presented. That supplemental 
request has not come forward yet to the Congress. It will be 
coming forward shortly. It is $81 billion.
    Mr. RANGEL. Okay. Now, in a normal family household----
    Mr. BOLTEN. Mr. Rangel, it is reflected in the documents 
here.
    Mr. RANGEL. If you are going to ask for something, 
normally, it is in the budget. Here, the war cost is not in the 
budget.
    Mr. BOLTEN. I think, Mr. Rangel, what I was just trying to 
say is that the $81 billion that the Administration will be 
requesting shortly is reflected in the budget numbers that are 
contained in the documents before you and in the charts I just 
showed you.
    Mr. RANGEL. Okay. I am running out of time. You would agree 
that we need to have this done in a bipartisan way, Republicans 
and Democrats?
    Mr. BOLTEN. I would hope so, sir.
    Mr. RANGEL. Are you included in the formulation of the 
Social Security plan that we have not received but the 
President has?
    Mr. BOLTEN. Am I a part----
    Mr. RANGEL. Yes.
    Mr. BOLTEN. You mean, am I a participant in the internal 
policy debate?
    Mr. RANGEL. Yes.
    Mr. BOLTEN. Not the principal one, but I am one of the 
participants.
    Mr. RANGEL. Do you know of any alive Democrat in the House 
or the Senate that is working with you and the President on 
this issue?
    Mr. BOLTEN. Mr. Rangel, I am sure there are many Democrats 
in both Houses that are prepared to work with the 
Administration. The Administration is certainly prepared to 
work with you or anybody else that is interested in fundamental 
Social Security reform.
    Mr. RANGEL. But, you don't know of anyone now? Thank you.
    Mr. BOLTEN. That is not my role, sir.
    Mr. RANGEL. I understand.
    Chairman THOMAS. The Chair believes the gentleman from New 
York did not intend to imply that there were other than alive 
Democrats in the House and the Senate.
    [Laughter.]
    Mr. RANGEL. No, I am talking about Pat Moynihan. Pat 
Moynihan is a great American, a great Senator----
    Chairman THOMAS. I understand that.
    Mr. RANGEL. Obviously he has worked very closely with the 
President, however the President communicates with him. But, it 
doesn't help us in the bipartisanship.
    Chairman THOMAS. The record will reflect that the gentleman 
from New York said, does he know any live Democrats in the 
House or the Senate.
    Mr. RANGEL. As opposed to dead ones.
    [Laughter.]
    Chairman THOMAS. But, the Chair is trying to indicate we 
don't believe there are any dead Democrats in the House or the 
Senate.
    Mr. RANGEL. I thought the President----
    Chairman THOMAS. We believe they are all alive.
    Mr. RANGEL. Thought that Pat Moynihan was still in the 
Senate.
    Chairman THOMAS. Boy, the current Senators from New York 
would be interested in learning that one.
    Mr. RANGEL. I yield.
    Chairman THOMAS. Does the gentleman from Florida wish to 
inquire?
    Mr. SHAW. Yes. I am reminded of the old-time Louisiana 
politics, where if you put in Huey Long, it says when he dies, 
if he dies, he would like to be buried in Southern Louisiana so 
he can stay active in politics.
    [Laughter.]
    That was Louisiana. In New York, they keep voting, I am 
sure. I am not positive of that.
    Mr. MCCRERY. I am from North Louisiana.
    [Laughter.]
    Mr. SHAW. Reclaiming my time, I would like to continue this 
discussion that you are having with Mr. Rangel regarding the 
input from Democrats. As I pointed out yesterday to Secretary 
John Snow, the President certainly did put out the invitation. 
He said he wants to work with all the Members of Congress. Any 
idea that comes in with regard to saving Social Security is 
tremendously important. As to date, I asked the Secretary, I 
said, what Democrat have you been able to work with, and he 
could come up with Alan Boyd and that was the only name that he 
could come up with. So, I would like to tell my friend from New 
York that the door is open to all, you, Mr. Levin, anybody on 
this Committee, as well as anyone on our side of the aisle and 
your side of the aisle in the U.S. Congress.
    Mr. RANGEL. If the gentleman would yield----
    Mr. SHAW. We are looking for good ideas. I will yield 
briefly.
    Mr. RANGEL. I met with the President on this and the 
President told me and a number of other people that what he 
wanted us to do is to wait until he got his Social Security 
plan together. Now, we Democrats want to be cooperative, but we 
can't until we find out what he and the Republicans are going 
to bring to us.
    Mr. SHAW. Reclaiming my time----
    Mr. RANGEL. We are anxious to work with you.
    Mr. SHAW. Reclaiming my time, for the last 6 years that I 
was Chairman of the Subcommittee on Social Security, I was 
looking and reaching out and asking for ideas from your side 
that never came. The only thing that came was criticism. Mr. 
Bolten, I appreciate your mentioning something that we hear too 
seldom up here, and that is talking about the unfunded 
liability to today's workers tomorrow for their retirement 
benefits because that doesn't show up in our budget and that we 
are on a cash basis here in this country. I think we should 
start looking more toward capital budgeting in many areas that 
we can start reflecting the obligations that we are piling up 
on tomorrow's generation, and if we were to do that, I think 
perhaps we might be more responsible. I think we should start 
thinking about going down a dual--two roads, one with the 
accrual type of accounting as businesses do and the other cash, 
which is traditional to municipal accounting. I think this 
would be very, very helpful to a lot of us, not only on how we 
spend the money, whether we lease buildings whether buy 
buildings or build buildings, and a lot of the decisions that 
we make seem to be skewed with the archaic budget process that 
we have. Have you looked into anything like that, of going 
toward capital budgeting or what we should do as to the 
disclosure of unfunded liabilities, which has been going on 
from the first day of our country?
    Mr. BOLTEN. We have looked at some things, but I have to 
agree with you, Mr. Shaw, that one of the big surprises I had 
when I took over this job a year and a half ago was the extent 
to which we are bound by the accounting conventions on which 
government operates and how that tends to, I think, distort 
good decisionmaking. I think a move toward capital budgeting 
would be very helpful. We have a couple of proposals in this 
budget to try to make sure that we are not expanding unfunded 
liabilities outside the budget window because that is--when we 
operate outside the 5-year, or it used to be 10-year, budget 
window, you can do things that escape the notice of 
congressional rules. But, we have proposed some things in the 
budget that would try to capture the outside the budget window 
unfunded liabilities, as well, and prevent those from growing 
at the same time.
    Mr. SHAW. I would like to follow up on another thing Mr. 
Rangel was discussing with you, and that is the question of the 
AMT. It is a growing problem. Of course, the size of the 
problem, and it continues to grow, makes it very difficult for 
us to find the revenue in which to put that it. It is a 
dinosaur. It should be done away with. Charlie threw out the 
figure of $700 billion. I think he is about right on that. But, 
it is going to be very difficult to find the revenue or the 
adjustments. I know I had the Joint Committee on Taxation do a 
study for me last year in which it was looking at the various 
brackets, how much would you have to raise in the bracket to 
make up the revenue that was lost within that particular 
bracket, and I was astounded by the figure that came up or the 
percentage that we would have to adjust the tax rate. Thank 
you, Mr. Chairman. I yield back.
    Chairman THOMAS. I thank the gentleman. Does the 
gentlewoman from Connecticut wish to inquire?
    Mrs. JOHNSON. Thank you very much. Welcome, Mr. Bolten. 
First of all, let me congratulate you on including in what must 
be in these days a very tight budget about $125 billion to help 
us address the problem of the uninsured. Indeed, the system is 
beginning to be unworkable because not everyone has equal 
access to affordable health insurance. I congratulate you on 
protecting that interest that the President has long stood by 
and was eloquent in defense of during the campaign and we 
intend to present you with very good ideas about how to carry 
through on his commitment.
    Mr. BOLTEN. Congresswoman, we have had a chance to talk 
about that, I know, in person and I know how strongly you feel 
about it. We are glad of your interest in the President's 
proposals for tax credits and other elements for the uninsured 
and look forward to working with you.
    Mrs. JOHNSON. Thank you. I also want to say that I am very, 
very proud of the fact that we experienced in 2004 a 4.4-
percent growth in our GDP, that the last 3 months have seen the 
fastest growth in small business income, the fastest rise in 
that income over the past 10 years, that aftertax income rose 
8.9 percent. I could go on, but your leadership, this 
President's leadership and the Administration's leadership has 
given the economy greater strength. One area in which you have 
done that is in the health services area, where as a result of 
the leadership of the President and Secretary Thompson, with 
the close collaboration, I will have to say, of the House and 
Senate, we have put in place resources that will, for the first 
time, enable us to restructure delivery of health care services 
to improve quality and control costs. My question to you is, in 
your estimates of the cost of Medicare, did you anywhere take 
into account the impact of technology in reducing the cost of 
medical errors, the impact of disease management, and the 
extraordinary capability it gives us to control health care 
costs? Just Pacific Care saved $244 million on disease 
management, implementing disease management for its Medicare 
beneficiaries. McKesson saved $3,089 per person annually 
through disease management, reduced emergency room visits 61 
percent, reduced hospitalization 66 percent. We have embedded 
now in Medicare and through what Dr. Brailler is doing and the 
administration is doing, are working to embed throughout the 
health care delivery system of America both the technology and 
most advanced medical knowledge to both improve quality and 
reduce cost. Is any of that reflected in your estimates?
    Mr. BOLTEN. Congresswoman, I can't speak for the Medicare 
actuaries of the U.S. Department of Health and Human Services 
who have responsibility for doing the estimates, but I do have 
a strong conviction that whatever estimates we have used have 
not adequately taken account of the kinds of innovations you 
are talking about. Those are extremely important. Our fiscal 
crisis is really just a reflection of a broader health care 
financing problem in this country, and one of the best ways 
that we can get a hold of it is through the advancing use of 
technology that you are so interested in, health information 
technology that you worked with Dr. Brailler on. I think that 
we are amply funding those initiatives in this budget and we 
are anxious to work with you to make sure we promote those 
initiatives because that really is one of the key answers to 
bringing health care costs under control in this country.
    Mrs. JOHNSON. I thank you for in your supplemental for 
reprogramming the money to Dr. Brailler's office. It is 
terribly, terribly important. But, the answer to my question 
is, no, neither your actuaries nor the Congressional Budget 
Office's (CBO's) actuaries are taking one penny of these 
reductions into account and they are simply of extraordinary 
dimensions. I thank you for sticking by them and making sure 
that we will have the resources to do what the American people 
need as well as what Medicare recipients need, which is to have 
access to high-quality health care at an affordable dollar. 
Thanks.
    Chairman THOMAS. Would the gentlewoman yield briefly with 
the remaining time?
    Mrs. JOHNSON. Yes.
    Chairman THOMAS. I would tell the gentleman, I was pleased 
to see the President has made a very strong statement on 
electronic medical recordkeeping. He has almost 4 years left on 
his second term. The disappointing point of reading that 
section was that he hopes that he could achieve this by 2014. 
Our goal will be to hopefully have each of the next 4 years 
multiplied by two or possibly three so that we can accomplish 
this in a much faster time. That is, I think, the basis for a 
significant change in everything that the gentlewoman was 
discussing. That would be a terrific improvement. Does the 
gentleman from California wish to inquire?
    Mr. STARK. Yes. Thank you, Mr. Chairman. I would like to 
deal with issues here that deal with credibility of the 
information that we in the Congress receive from the 
Administration, and I think it is important because we are 
asking a lot of American people to rely on the information, 
particularly empirical information. When you cannot depend on 
the accuracy or the integrity of that information--just a few 
minutes ago, Mr. Bolten told Mr. Rangel that the budget did 
include the war costs, but his testimony, whoever wrote his 
testimony forgot to point this out, but you said in your 
testimony, Mr. Bolten, that the budget does not reflect the 
effect of undetermined but anticipated supplemental requests 
for ongoing operations in Iraq and Afghanistan beyond 2005. 
Now, I want to talk about Medicare and the drug benefit because 
I just recall that back in February of 2003, at the budget 
hearing, Chairman Nussle asked Secretary Thompson whether his 
proposal would cost no more than $400 billion over the 10-year 
period. Secretary Thompson said, ``That is correct,'' and the 
giant share of it is the prescription drugs. Then in our own 
club here, Chairman Thomas and the debate on June 27 said that 
the program stays within the reasonable bounds of the $400 
billion that we are proposing, and my colleague, Mr. Shaw, said 
we are putting, in that same debate, $400 billion into 
Medicare. Chairman Nussle said we are increasing Medicare by 
$400 billion. It goes on. Congresswoman Johnson said that we 
are going to strengthen Medicare with a $400 billion plan that 
adds prescription drugs and preventive chronic care benefits. 
That was in the press release on February 3. Congressman Dreier 
from California said the program scores at $395 billion--he was 
more accurate--which is within the budget.
    Now, we all know that those numbers were subject to change 
and there was a $534 billion number that the OMB was working 
with and they had it all along. They never mentioned it to 
anybody during the debate, but they knew that it was $534 
billion, according to their experts, not $395 billion. They 
probably also knew that the bill might have failed if they let 
that information out of the box. I wouldn't suggest for a 
minute that my good friends on the other side of the aisle were 
lying, but I would suggest that they are awfully gullible if 
they keep believing the budget projections that the 
Administration brings to us, and that embarrasses all of us, 
not just one side of the aisle or the other, because if we 
don't have proper information and decent numbers that we can 
rely on, we are apt to make mistakes. If we can't rely, for 
instance, on the Social Security numbers, which aren't in the 
budget, we may ruin Social Security just the way we started to 
ruin Medicare in the Medicare bill. What we are really doing is 
giving a blank check from the Treasury to the pharmaceutical 
companies and insurance plans, and so we built up special 
interests at the expense of the beneficiaries and taxpayers, 
and that is an expensive way to deliver a lousy benefit, which 
it is, much less than a good benefit. When you break the market 
into small chunks and use private plans with higher overhead 
than Medicare and you prohibit specifically the Secretary from 
negotiating a better price, you have just given the key to the 
Treasury to the pharmaceutical industry, and that is what we 
did, being reassured time after time after time by the OMB, by 
the Administration, by the CBO, that it was only going to cost 
$400 billion. Well, guess what, yesterday we learned that 
hidden in Mr. Bolten's budget--hidden, mind you--was the number 
of $913 billion. It is just a projection of the $534 billion, 
but he never mentioned the $534 billion before. So, now the 
$534 billion just creeps into the OMB budget and you have 
projected out to $913 billion and they have got some cockamamie 
way to bring it down to $720 billion, which CBO says they can't 
do in theirs. I guess the question is, ladies and gentlemen, 
how can we trust you, the Administration, on Social Security 
when you have got such a bad record of hiding the truth on 
Medicare?
    Chairman THOMAS. The time of the gentleman has expired and 
the Chair would indicate that that response is probably one 
that would be appropriate as a written response. However, the 
Chair recognizes the gentleman from----
    Mr. STARK. I have one for the record, Mr. Chairman. I would 
submit it. I anticipated----
    Chairman THOMAS. Without objection, the gentleman has a 
question for the record.
    Mr. STARK. Thank you very much.
    Chairman THOMAS. The gentleman from California is 
recognized.
    Mr. HERGER. I thank the gentleman.
    Chairman THOMAS. Would the gentleman from California yield 
to the Chair?
    Mr. HERGER. I will.
    Chairman THOMAS. I thank the gentleman for yielding. The 
Chair wishes to place in the record a letter from the CBO dated 
February 9, 2005. It says, ``Dear Mr. Chairman, as per your 
request, this letter discusses the Congressional Budget 
Office's current projection of spending for the Medicare Part D 
benefit. That estimate, which was published in the January 2005 
Budget and Economic Outlook, is nearly identical to the cost 
estimate for Part D that we prepared in 2003.'' As far as the 
CBO is concerned, those numbers are virtually the same. As far 
as the numbers that you utilized in terms of the 
Administration's position, the Chair would ask unanimous 
consent to place in the record two documents of this 
Committee's creation based upon numbers that are in the 
President's budget. I will briefly go over them and then I 
would ask Director Bolten to briefly respond as to their 
accuracy and what they really mean. The Chair is very grateful 
to the gentleman from California for the time.
    On this sheet, it says, cost projections for the Medicare 
drug benefit from 2006 to 2015. If you will recall, the last 
budget was over the previous 10-year period. That is, you pick 
up last year and you eliminate the out year of 2015 to 2014. 
The drug program in the Medicare Program had a 2-year ramp-up. 
It is extremely complicated, difficult. So, last year, the 
first year, was zero, in essence, zero cost. Then you added a 
last year, which is now a full benefit cost. What is missing 
from the $1.191 trillion figure, which is the gross spending, 
is apparently the failure on the part of our colleagues to 
remember that this is a voluntary program in which people 
choose to sign up, and if so, are subject to beneficiary 
premiums, unless, of course, they are low-income. That is 
anticipated over the same period of time to bring in $145 
billion of revenue, which you then subtract from the gross 
spending. We also for the first time elevated seniors as 
seniors first and low-income second, as opposed to the 
historical pattern of the former majority, and that instead of 
having uneven treatment of seniors at the State level through 
the Medicaid program, we now have a uniform senior program that 
will, in fact, provide us with $134 billion of State Medicaid 
payback for the Federal assumption of that. Since Medicaid is a 
matching 50 cents or a dollar program between the Federal 
government and the State program, we have a Federal Medicaid 
savings of $188 billion from which you subtract from the $1.191 
trillion. That provides the net spending drug benefit of $724 
million that the gentleman referred to.
    To really compare apples to apples, you then have to 
examine the effect of 2 years of the budget window of a fully 
functioning program that wasn't in the previous 10-year period. 
I am sure the gentleman didn't intend to assume that 2 years at 
zero would be compared to 10 years at full cost. If you 
subtract that figure, which is $206 billion, you wind up with a 
figure of net spending over the 2004-2013 period of $518 
billion, virtually identical to the $511 billion that had been 
stated by the Administration last year. The point being, these 
are the Administration's figures, which always had different 
assumptions which produced the differing numbers between the 
CBO and the Office of the Director of OMB. If you did the same 
thing to the CBO numbers, which the CBO has not yet done but 
will do for us in March, I think you will find they will have 
the same discrepancy window, very close to $400 billion. The 
point is, the exercise takes you nowhere, notwithstanding 
headlines that seem quite interesting and anticipatory of a 
major coup on the part of my colleagues on the other side of 
the aisle. The numbers are the same if you do the math fairly 
and accurately. I apologize to the Director. Maybe another 
Member will give him additional time to respond, and the 
Chairman thanks the gentleman from California for his 
courtesies and will find ways to make it up to him. The Chair 
would then recognize the gentleman from Michigan, Mr. Levin, if 
he wishes to inquire.
    Mr. LEVIN. Welcome. Why aren't the Social Security costs of 
the proposed private account plan in the budget?
    Mr. BOLTEN. The President's proposals are still in the 
formulation process. He has announced some portion of it, the 
early years of a private account, which he announced last week. 
That was announced after the budget was put to bed. Because he 
has announced those, I did include those in my comments and in 
the charts I put before you just now. So, we can now show you 
at least the short-run deficit effect of the President's 
proposals for private accounts.
    Mr. LEVIN. Those should be--you amended the chart, and by 
the way, the Secretary yesterday was unaware that you were 
going to amend your chart from 1.5 to 1.7, because it is not in 
the chart that is in the budget book, right? You have since 
amended the chart?
    Mr. BOLTEN. That is correct.
    Mr. LEVIN. Okay. So, to be truthful about budgeting, surely 
the first year costs should be added to the deficit, right?
    Mr. BOLTEN. If the President's plans were adopted, and I 
think we have to wait and see what the full plan is, but what I 
wanted to reflect here was the short-term deficit effect of the 
creation of personal accounts. These would be the accurate 
numbers from what we know now. It would be a 1.7 percent 
deficit----
    Mr. LEVIN. That should be reflected in the budget. What is 
that number for the first year that it would be operative, do 
you know?
    Mr. BOLTEN. You mean the cost of personal accounts in the--
--
    Mr. LEVIN. The $740 billion over 10. What is the first----
    Mr. BOLTEN. It ramps up. My recollection is about $23 
billion in 2009, about $56 in 2010.
    Mr. LEVIN. Then it goes up the last years to what?
    Mr. BOLTEN. I don't have those numbers.
    Mr. LEVIN. According to----
    Mr. BOLTEN. We can provide that to you, and I think they 
were actually on sheets of presentation when the President made 
the announcement about his Social Security--the short-term 
elements of it.
    Mr. LEVIN. Yes, because according to the Social Security 
Administration (SSA), it goes up--this is on a calendar basis--
$34 billion, and then in the two, four, six, seventh year, $176 
billion, and then if you add, in increased costs, we are 
talking about $1 trillion $400 billion the first 10 years of 
the plan. I think if we are going to be honest, and you are 
going to be honest about budgets, you should include those 
figures, surely those that are within your budget window. You 
should revise not only your chart, you should revise the 
budget.
    Mr. BOLTEN. Mr. Levin, we will be glad to provide you 
revised charts when----
    Mr. LEVIN. How about a revised budget?
    Mr. BOLTEN. I think that all that would need to be 
reflected is the costs in the out years. I think that would 
provide----
    Mr. LEVIN. Why don't you send us a letter saying the dollar 
figure that should be added.
    Mr. BOLTEN. I would be glad to do that when the President's 
plan is fully formulated.
    [The information follows:]
    Mr. LEVIN. Well, look, it isn't formulated fully by any 
means, but that part of it has been discussed by the White 
House, by some unnamed official. I take it that wasn't you.
    Mr. BOLTEN. No.
    Mr. LEVIN. Look on the last part of your testimony, if you 
would, where you say comprehensive Social Security reform--I 
question that word--that includes personal accounts, private 
accounts, can eliminate the system's current $10.4 trillion in 
unfunded obligations. By the way, that $10.4 trillion is based 
on infinity. Let me ask you this point blank. Do the private 
accounts, by themselves, would they do anything to reduce the 
shortfall projected for 2042 or 2052?
    Mr. BOLTEN. In and of themselves, the personal accounts do 
not solve the solvency problem----
    Mr. LEVIN. It does not solve it. Does it reduce the 
solvency--what is called insolvency--one dollar?
    Mr. BOLTEN. If they are part of--I believe they are an 
integral part of a comprehensive plan.
    Mr. LEVIN. No, no, no. Why don't you want to answer, no? 
Why do you then talk about integralness? When you are asked a 
straightforward question, would the private accounts by 
themselves address the shortfall projected for 2042 and 2052, 
is the answer yes or no?
    Mr. BOLTEN. Personal accounts in and of themselves don't 
address the solvency issue, but they are part of a 
comprehensive plan that does address the solvency issue.
    Mr. LEVIN. I know you have been told to put another clause 
on, but if you put a period before ``but,'' the answer is no, 
right?
    Mr. BOLTEN. Mr. Levin, we wouldn't be proposing the 
personal accounts in the absence of a comprehensive plan, so I 
don't--I think trying to cut the sentence off before you get to 
talk about the overall plan doesn't make any sense.
    Mr. LEVIN. There is no comprehensive plan yet.
    Mr. BOLTEN. There will be and I hope we can attract some 
support.
    Chairman THOMAS. The gentleman's time has expired.
    Mr. LEVIN. Not on this side.
    Chairman THOMAS. Does the gentleman from Louisiana, 
Chairman of the Social Security Subcommittee, wish to inquire?
    Mr. MCCRERY. Thank you, Mr. Chairman. Yes. Mr. Bolten, just 
a quick follow-up on Mr. Levin's question. I believe the right 
answer is, as designed and proposed by the President, the 
personal accounts do, in fact, have a salutary effect on trust 
fund payout in the out years, isn't that correct?
    Mr. BOLTEN. Again, Congressman, we need to see the full 
development of the plan, but the important part about the 
personal accounts from our budget perspective is that although 
there are these short-term financing requirements, it is not a 
new cost to the government.
    Mr. MCCRERY. Right.
    Mr. BOLTEN. This is money the government already owes in 
the form of future benefits. Letting people keep it sooner, 
keep it for themselves sooner, is essentially neutral to the 
government but gives the individuals a chance to get a much 
better return on that money than the Social Security system can 
possibly promise.
    Mr. MCCRERY. Okay. Well, let us talk a little more about 
that aspect, the financing of the accounts. Can you explain why 
borrowing, why the government borrowing money to fund the 
personal accounts is different from the government borrowing 
money to pay for--let me be careful which subject I pick----
    Mr. BOLTEN. Unwarranted spending of some non-identified 
nature.
    Mr. MCCRERY. Yes. Pork-barrel spending. Yes. Can you 
explain the difference?
    Mr. BOLTEN. Yes. Mr. McCrery is raising a very important 
point here, and that is that--in fact, it is why I prefer to 
refer to transition financing rather than transition costs. 
First is the point that I have just alluded to, which is that 
in creating these personal accounts, we allow people to keep 
more of their money now, so it is not a new cost to the 
government. We are just taking the benefits we need to pay 
later on, letting people keep it now. Second, government 
borrowing, usually for additional spending, has a net negative 
effect on national savings. There is no net negative effect on 
national savings from borrowing for people to use for personal 
accounts because there is an equality between the borrowing 
that the government does and the money that people set aside in 
their personal accounts, which is itself savings. So, the 
effect on the economy is at worst neutral, and in my judgment, 
the creation of the personal accounts is overwhelmingly 
positive for the economy.
    Mr. MCCRERY. I understand what you just said and it is, I 
think, perfectly clear. But, why--go one step further. Why is 
net national saving important to the economy?
    Mr. BOLTEN. Well, I am not an economist and I am sure I 
will prove that many times during the course of this hearing, 
but the economists will tell you that the savings rate in the 
country, that the national savings in the country is very 
important for assuring the continued growth that we have seen 
over the last few years. To keep that growth growing, we need 
to have a good savings rate so that investment can carry on and 
the fruits of investment can be properly realized.
    Mr. MCCRERY. So, when you borrow to put money in a personal 
account, you are not affecting the national savings rate. But, 
if you borrow to pay for some spending by the Federal 
government, then you are, in fact, affecting--you are reducing 
the national savings rate.
    Mr. BOLTEN. Correct.
    Mr. MCCRERY. Now let us go to taxes for just a moment, and 
I want to preface this by saying that as a result of 9/11 and 
the recession, going back to Mr. Rangel's question of who is 
sacrificing, actually, quite a few people sacrificed in that 
scenario--those who lost their jobs, their families, so there 
were sacrifices made by Americans in that. What we try to do as 
a Congress, and I think the President, we have tried to create 
an economic atmosphere that was conducive to creating jobs so 
those folks who lost their jobs could get them back or could 
get other jobs and their families could feel better about their 
station in life and all those things. How important is it for 
us to extend the tax cuts that are already in place? 
Particularly, I want you to touch on the dividend and capital 
gains tax relief.
    Mr. BOLTEN. Mr. McCrery, I think it is absolutely crucial 
that we extend the tax cuts that you all have put in place to 
continue the kind of strong growth we are getting in the 
economy. It is especially important for those at the bottom end 
of the income spectrum because those are the people that suffer 
the most when we have an economic downturn, as they did during 
the economic downturn that greeted the President when he came 
into office. Dividends and capital gains, economists will tell 
you, are at the top of the list in promoting economic growth.
    Chairman THOMAS. The Chair believes that is an excellent 
first paragraph in a written response.
    Mr. BOLTEN. Thank you, Mr. Chairman.
    Chairman THOMAS. Does the gentleman from Michigan, Mr. 
Camp, wish to inquire?
    Mr. CAMP. I do. Thank you, Mr. Chairman. Director Bolten, 
clearly, the economy is on strong ground. When you look at 
average GDP growth last year at over 4 percent, more than two 
million jobs created last year, wages and salaries increased, 
small business income up, aftertax income increased, what role 
do you believe that tax policy enacted in recent years had on 
this economic growth in terms of our economy and our budget?
    Mr. BOLTEN. The Council of Economic Advisors at the White 
House and the Treasury Department did a study recently in which 
they tried to isolate the effects of the tax cuts that had been 
enacted over the course of the President's first term and their 
conclusion was--I think using cautious estimates--their 
conclusion was that last year, we had three million more jobs 
and 3.5 percent larger GDP than we would have had without the 
tax cuts. I think the tax cuts have been crucial in bringing us 
back out of a recession and I think they remain crucial for our 
projections of continued strong economic growth out over the 
rest of the budget window.
    Mr. CAMP. Can we afford to make the 2001 tax cuts on 
individual rates, capital gains, dividends, permanent and at 
the same time reform Social Security? Can we afford to do that?
    Mr. BOLTEN. My own judgment is that we can't afford not to 
do that, that the most important thing for our fiscal position 
is a strong and growing economy. What put us in a fiscal hole 
at the start of this administration was primarily a weak 
economy. We now have a strong economy and we have revenues 
recovering. I think the continuation of the tax cuts that you 
all have put in place is crucial for our fiscal position going 
into the future and it is crucial if we are going to address 
issues like issues of our unfunded liabilities in our 
entitlement programs like Social Security.
    Mr. CAMP. Do you believe we can do that and still fulfill 
the President's goal of cutting the deficit in half by 2009?
    Mr. BOLTEN. I believe we can. The last chart I had up there 
showed the deficit declining even with the Social Security 
financing elements included, declining to about 1.7 percent of 
GDP. That is well below the 40-year historic average of 2.3 
percent. The estimates that I showed on that chart include an 
assumption that the President's tax cuts will be continued. 
Now, we don't do 10-year budgeting any more, but I think if you 
look out over the next five years in a budget window, you will 
see that trajectory continuing, that even with the Social 
Security financing elements included, we can and should have a 
continuing declining deficit as a percentage of our GDP if we 
have the strong economic growth that the tax cuts have helped 
generate.
    Mr. CAMP. If Congress does nothing to reform Social 
Security, as some of my Democrat friends suggest, how much will 
it cost ultimately the taxpayer if we delay acting on fixing 
the program, not to mention denying a whole generation of 
workers choice in their retirement options?
    Mr. BOLTEN. The actuaries have estimated that the overall 
present value of the unfunded liability on a permanent horizon 
is $10.4 trillion. That is a hard number for anybody to grasp, 
I think. But, an important element that you have just raised 
for this administration and this Congress is that that huge 
number grows by at least $600 billion a year and more each year 
that we delay in addressing the problem. So, it is crucially 
important to our fiscal position that we address this unfunded 
liability as soon as possible.
    Mr. CAMP. Ultimately, what effect will that have on the 
economy if we do nothing?
    Mr. BOLTEN. I think the economy will be in serious 
difficulty--it is hard to say when, when the difficulty would 
come. But, we would face a serious financial crisis in this 
government if we did not address these long-term unfunded 
liabilities. Exactly when the crisis would hit us is uncertain 
because we now enjoy very low interest rates because there is a 
great deal of investor confidence in our economy. If we 
demonstrated that we were unwilling to take on these unfunded 
liabilities out into the future, I don't know whether that 
confidence would be sustained, and if the confidence goes, so 
also go the low interest rates. That is why it is very 
important to act promptly to deal with the unfunded 
liabilities.
    Mr. CAMP. Thank you. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Maryland, Mr. Cardin, wish to inquire?
    Mr. CARDIN. Thank you, Mr. Chairman. Mr. Bolten, it is a 
pleasure to have you before the Committee.
    Mr. BOLTEN. Thank you, sir.
    Mr. CARDIN. I take it that you are in agreement with the 
Social Security actuaries in that there is enough revenue 
coming into the Social Security trust funds and their assets to 
be able to pay for benefits without any reductions for 37 
years?
    Mr. BOLTEN. I believe the Social Security actuaries' 
estimate was through 2042, yes.
    Mr. CARDIN. That is right. In fact, the CBO, I believe, is 
10 years later, that they believe there are enough assets and 
revenues coming in to actually take us to 2052. Of course, in 
1996, the actuaries actually told us 2029, so it has improved 
13 years solvency in the last 8 years without any change in 
law. The only reason I mention that, as I said yesterday to 
Secretary Snow, I don't think we should rush to make a mistake. 
I think we have got to get this right. Has there ever been a 
Budget Director who has been able to predict 37 years into the 
future? Are you the first?
    [Laughter.]
    Mr. BOLTEN. If they were my own projections, I would be 
more hesitant about them. They are not. They are the Social 
Security actuaries' projections.
    Mr. CARDIN. Right. Okay. Have we ever had an actuary who 
has been accurate that long? I would like to see that. I guess 
my concern, again, is that the administration is very reluctant 
to go beyond 5 years in the budget, and I understand that, even 
though Congress likes to do a little bit further. I just am 
concerned about the decisions that we are trying to make today 
based upon circumstances so far in the future with so many 
changes that could take place.
    Mr. BOLTEN. Congressman, may I comment on that, and that is 
that, of course, 2042, 2052, it might be 2032, but there is no 
doubt about the direction in which it is headed.
    Mr. CARDIN. There is one part of your testimony that I take 
issue with that I think you could have been more helpful to us 
in this debate, where you talk about the projected deficit for 
2005 under your budget being $427 billion. I think that is 
wrong because you are counting Social Security trust funds. I 
think every Member of this Congress has said and made a 
commitment that these are trust funds and they shouldn't be 
commingled with on-budget spending. So, why don't we just get 
that out of our vocabulary and be transparent to the American 
people, let them know that the trust funds are trust funds and 
we are not going to commingle them as we present the budget 
deficit numbers. We are not going to mask the size of our 
spending. I think that would help us all in trying to get a 
handle on current spending.
    Mr. BOLTEN. Well, what we use our budget deficit figures 
for are to determine what are the current borrowing needs of 
the government. But, we are not masking it. There is even a 
table at the back of our book which shows exactly what the off-
budget and on-budget liabilities are. Budget Directors before 
me have consistently referred to the overall budget, including 
the Social Security surplus that we are now enjoying, and I 
suspect when the Social Security system goes into deficit in 
the next decade, those numbers will have to be included, as 
well.
    Mr. CARDIN. I would suggest to you that when we were 
heading toward a surplus, in fact, had a surplus in the 
operating budgets, it is a lot easier to be able to do that. 
Now, when you are bragging that you are reducing the deficit by 
a certain amount over time, you are using Social Security 
surplus funds to equal that number and I just think it is wrong 
to do that because we have a growing surplus in Social Security 
over the next 5 years, whereas you are claiming we are having a 
reduced budget deficit when in reality you are using Social 
Security to mask the size of the deficit. I just would urge us 
all, those of us who believe that we should be paying for our 
current needs today, don't keep using those Social Security 
trust funds because it is making it more difficult to deal with 
a budget as well as the solution to Social Security.
    Now, the private accounts in Social Security, I am one of 
those who strongly supports encouraging Americans to save more. 
But, by taking the money out of Social Security, I am glad that 
you acknowledge that that alone hastens insolvencies, does not 
improve the solvency of the system. In order to do that, in 
order to bring about the long-term needs of Social Security, 
you have got to cut benefits, and I think the President has 
made it clear we are not going to increase taxes, so we have 
got to cut benefits.
    If you could help us with how much we are going to have to 
cut benefits for those who are in private accounts and those 
who are not in private accounts, I know the CBO has estimated 
that there would be as much as an 80-percent reduction in the 
private accounts when your Social Security benefits, if we get 
to the expected return. If you could provide us with some 
numbers here today or by letter, I would appreciate it. How 
much of a reduction in benefits individuals who are 54 years 
old today or 27 years old today can expect if they enter a 
private account or if they don't enter a private account.
    Mr. BOLTEN. Congressman, if you will--I think you should 
await the full articulation of the President's plan, but the 
one thing I can tell you is that whatever the full details of 
that plan are, they will be able to pay beneficiaries in the 
future, those, for example, who are retiring after 2042, a 
better benefit than the current Social Security system can now 
pay.
    Mr. CARDIN. Thank you, Mr. Chairman.
    Chairman THOMAS. We will, of course, rely on those same 
actuaries for those projections. Does the gentleman from 
Minnesota wish to inquire?
    Mr. RAMSTAD. Thank you, Mr. Chairman. Director Bolten, it 
is good to see you here. I think we need to set the record 
straight. There is a lot of hyperbole, as you know, and 
downright falsehoods as to the President's proposal. There is 
an attempt that I have seen to scare seniors. My 85-year-old 
father received a mailing that alleged or that stated the 
voluntary personal accounts would jeopardize his benefits and 
the benefits of other seniors, retirees and near-retirees. I 
think that is loathsome, that critics are resorting to those 
tactics, those falsehoods, those scare tactics to scare 
seniors. As I said, I think we need to set the record straight. 
Let me just ask you straight out. For any and all Americans 55 
years of age or older, will the Social Security system change 
in any way their benefits by adding the option of personal 
accounts for younger workers?
    Mr. BOLTEN. The President has been clear, for that group, 
no change.
    Mr. RAMSTAD. So, the President's voluntary personal 
retirement accounts would not change benefits one iota, one 
penny, for any retiree or near-retiree, is that correct?
    Mr. BOLTEN. That is correct, sir.
    Mr. RAMSTAD. I think we need to, as I said, be honest in 
our discourse, and the level of discourse, I have never seen 
lower as far as Social Security is concerned with these, as I 
said, attempts to scare seniors. I think they are very, very 
unfortunate. Let us at least be honest, intellectually honest, 
as we argue the merits or lack thereof of the proposal. I also 
have seen the critics and heard the critics say, with reference 
to personal accounts, that Social Security voluntary personal 
accounts will not boost retirement income, but rather reduce 
it. The critics have described the President's personal account 
proposal as workers borrowing against their Social Security 
benefits and then repaying government in the form of an 
automatic benefit reduction at retirement. Certainly, this is 
not an accurate portrayal of the President's proposal, is it, 
Director Bolten?
    Mr. BOLTEN. I don't believe it is.
    Mr. RAMSTAD. Would workers be borrowing payroll taxes they 
contribute to Social Security to be repaid with interest later?
    Mr. BOLTEN. I don't believe that is--I am having trouble 
actually following what the idea there would be.
    Mr. RAMSTAD. Well, I mean----
    Mr. BOLTEN. That certainly is not the President's plan.
    Mr. RAMSTAD. Which underscores my point. Some of these 
attacks are absolutely ludicrous, they are so preposterous and 
absurd. Certainly, we need, though, I think, to clarify that 
the President's proposal for voluntary accounts is designed to 
boost retirement income, not to reduce it, as alleged by some 
critics.
    Mr. BOLTEN. That is correct, certainly well above what the 
current system now has an ability to pay.
    Mr. RAMSTAD. Given the time value of money and the 
principle of compound interest, I think that should be readily 
apparent to most honest critics, people working on this 
proposal. Thank you, Director Bolten. I will yield back.
    Chairman THOMAS. I thank the gentleman for the contribution 
of time. The Chair recognizes, if he wishes to inquire, the 
gentleman from Washington, Mr. McDermott.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Welcome, Director 
Bolten. Listening to you and Secretary Snow yesterday reminded 
me that we had been transported back to the days of the Delphi 
Oracle and we were listening to the wizard try and figure out 
what was going on here. Yesterday before the Budget Committee, 
you said the President is planning on coming forward with a 
proposal to address the funding shortfall that faces Social 
Security. But, I have a Reuters story this morning that says 
the White House has told lawmakers it has no immediate plans to 
submit its own detailed proposal to Congress for overhauling 
Social Security. A senior Bush Administration official said no 
final decision has been made. If there comes a point where the 
President needs to spell out a specific legislation, he won't 
hesitate. Now, I am sure you can understand our feeling of 
being a little at sea about what it is you are up here trying 
to sell. But, you are, I am sure, familiar with this article, 
which was printed in the Wall Street Journal. It is a memo from 
Peter Wehner, one of your friends up in the White House, and 
you are familiar with that memo, are you?
    Mr. BOLTEN. I am not, sir.
    Mr. MCDERMOTT. Well, let me read a little bit for you. I 
can't imagine you don't realize what is in here. ``We simply 
cannot solve the Social Security problem with personal 
retirement accounts alone. If we borrow $1.1 to $2 trillion to 
cover transition costs for personal saving accounts and make no 
changes in wage indexing to price indexing, we will have 
borrowed trillions and will still have to confront more than 
$10 trillion in unfunded liability.'' Now, my colleague, Mr. 
Cardin, asked you, will there be benefit cuts? Mr. Rangel says, 
why don't you ask him if he is as clear about people under 55 
as you are above 55. You say if you are above 55, there will be 
no cuts. Are you saying, or are you willing to say that if you 
are under 55 years of age, there will be no cuts?
    Mr. BOLTEN. Mr. McDermott, you need to wait for the full 
articulation of the President's plan----
    Mr. MCDERMOTT. Well, but when? How long are we going to sit 
up here and discuss ideas that float around? We can all have 
ideas. When are you going to write it down and make a law out 
of it? Franklin Delano Roosevelt brought it up to the Congress.
    Mr. BOLTEN. Well----
    Mr. MCDERMOTT. Actually, Mrs. Clinton brought up a health 
care plan to the Congress. So, you see, if you bring it up 
here, you might run into some problems, and you can't use this 
dodge, well, we have to wait until. We are having a hearing on 
Social Security and we know from what is going on in the White 
House--now, let me give you an answer, because I know my time 
will run out and I think you have got a copy, or somebody is 
going to give you a copy of this. It is from the Budget 
Committee and it shows that permanent tax cuts are $11.6 
billion, if we extend them. That is what it is going to cost 
over the next 10 years--the next 75 years. The tax cut to the 
top 1 percent is $3.4 trillion--billion--trillion, excuse me. 
Social Security shortfall is $3.7 trillion. Now, if you made 
one simple change in your tax cuts and took it away from the 
top 1 percent, there would be no problem for 75 years in the 
Social Security fund. So, it isn't hard to solve this if you 
want to make the program solvent, stable. If you want to borrow 
$2 trillion and put us out into the stock market and hope that 
we can claw back enough from people that they will ultimately 
get some benefit--you can't tell people what they are going to 
get under your plan because there is no plan. Reuters says it 
right out of the White House. How do you keep selling this to 
the people?
    Mr. BOLTEN. Mr. McDermott, if what you are proposing is 
that we raise taxes in order to try to cover the Social 
Security----
    Mr. MCDERMOTT. No, I just said let the law expire like it 
is. That is not raising taxes. That is just not getting in the 
way of it. You wrote the law that way. That is the way the 
President wanted it, with an expiration date out there 10 
years.
    Mr. BOLTEN. Well, however----
    Mr. MCDERMOTT. We always knew he was lying. He really 
wanted a permanent tax cut, but he couldn't get it, so he said, 
let us let it go, right?
    Mr. BOLTEN. However you want to characterize it, Mr. 
McDermott, I don't think tax increases are the answer for 
solving the Social Security problem, particularly within the 
Social Security----
    Mr. MCDERMOTT. What is your financing plan, then? There is 
nothing in this budget.
    Chairman THOMAS. The gentleman's time has expired and the 
Chair would ask unanimous consent that the chart that the 
gentleman from Washington used would be made a part of the 
record, with the understanding that although it was represented 
to come from the Budget Committee, it says, ``prepared by the 
Democratic staff of the House Budget Committee.''
    [The information follows:]


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

    The Chair would recognize the gentleman from Ohio, if he 
wishes to inquire.
    Mr. MCDERMOTT. Mr. Chairman, could I ask one question?
    Chairman THOMAS. Certainly.
    Mr. MCDERMOTT. This is just a procedural question. We used 
a Power Point today and I brought this on Power Point, but I 
was told that it couldn't--the staff tried to make it work. Is 
there a way that we are going to be able to use Power Point in 
this----
    Chairman THOMAS. I would tell the gentleman that I was 
desirous of doing that. One of the things that the Director 
indicated to us was that he wanted to use it. We spent the 
early portion of the morning double checking, making sure 
everything worked. As we move forward with this new technology, 
we are going to be able to do it, but the ability to do it 
instantly is probably going to produce a few disasters, so that 
if Members----
    Mr. MCDERMOTT. There is a learning curve.
    Chairman THOMAS. Yes, there is a learning curve and we 
would like to do it without public presence because then you 
will want to take the time to get it fixed if it doesn't come 
up. If Members in the future have material that they wish to 
present in similar to this format, which I think will be very 
helpful to the Members, we need a little bit of lead time to 
try to see if we can, in fact, make it work and that it would 
be available to us.
    Mr. MCDERMOTT. Thank you.
    Chairman THOMAS. So, it is both the newness of the system 
and the timeliness problem of having it available.
    Mr. POMEROY. Mr. Chairman?
    Chairman THOMAS. The Chair looks forward to many multicolor 
presentations on the part of the Members with this new 
wonderful stuff. The gentleman from North Dakota----
    Mr. POMEROY. Just a quick procedural issue. The gentleman 
from Washington referenced a memo from the White House, Peter 
Wehner. I also referenced this yesterday and will again in my 
questions today. I wonder if we might include it----
    Chairman THOMAS. Without objection, the Chair will also 
place that material in the record.
    [The information follows:]
   Memo on Social Security from Peter Wehner, Director of Strategic 
                Initiatives for the Bush Administration
From: Wehner, Peter H. [mail to: [email protected]]
Sent: Monday, January 03, 2005 2:57 PM
Subject: Some Thoughts on Social Security
    I wanted to provide to you our latest thinking (not for 
attribution) on Social Security reform.
    I don't need to tell you that this will be one of the most 
important conservative undertakings of modern times. If we succeed in 
reforming Social Security, it will rank as one of the most significant 
conservative governing achievements ever. The scope and scale of this 
endeavor are hard to overestimate.
    Let me tell you first what our plans are in terms of sequencing and 
political strategy. We will focus on Social Security immediately in 
this new year. Our strategy will probably include speeches early this 
month to establish an important premise: the current system is heading 
for an iceberg. The notion that younger workers will receive anything 
like the benefits they have been promised is fiction, unless 
significant reforms are undertaken. We need to establish in the public 
mind a key fiscal fact: right now we are on an unsustainable course. 
That reality needs to be seared into the public consciousness; it is 
the pre-condition to authentic reform.
    Given that, our aim is to introduce market reforms in Social 
Security and make the system permanently solvent and sustainable.
    We intend to pursue the first goal by using our will and energy 
toward the creation of Personal Retirement Accounts. As you know, our 
advocacy for personal accounts is tied to our commitment to an 
Ownership Society--one in which more people will own their health care 
plans and have the confidence of owning a piece of their retirement. 
Our goal is to provide a path to greater opportunity, more freedom, and 
more control for individuals over their own lives. That is what the 
personal account debate is fundamentally about--and it is clearly the 
crucial new conservative idea in the history of the Social Security 
debate.
    Second, we're going to take a very close look at changing the way 
benefits are calculated. As you probably know, under current law 
benefits are calculated by a ``wage index''--but because wages grow 
faster than inflation, so do Social Security benefits. If we don't 
address this aspect of the current system, we'll face serious economic 
risks.
    It's worth noting that wage indexation was not part of the original 
design of Social Security. The current method of wage indexation was 
created in 1977, under (you guessed it) the Carter Administration. Wage 
indexation makes it impossible to ``grow our way'' out of the Social 
Security problem. If the economy grows faster and wages rise, this 
produces more tax revenue. But the faster wage growth also means that 
we owe more in Social Security benefits. This has produced a never-
ending cycle of higher tax burdens, even during periods of robust 
economic growth. It is the classic case of the dog chasing his tail 
around the tree; he can run faster and faster, and never make any 
progress.
    You may know that there is a small number of conservatives who 
prefer to push only for investment accounts and make no effort to 
adjust benefits--therefore making no effort to address this fundamental 
structural problem. In my judgment, that's a bad idea. We simply cannot 
solve the Social Security problem with Personal Retirement Accounts 
alone. If the goal is permanent solvency and sustainability--as we 
believe it should be--then Personal Retirements Accounts, for all their 
virtues, are insufficient to that task. And playing ``kick the can'' is 
simply not the credo of this President. He wants to do what needs to be 
done for genuine repair of Social Security.
    If we duck our duty, it can have serious short-term economic 
consequences. Here's why. If we borrow $1-2 trillion to cover 
transition costs for personal savings accounts and make no changes to 
wage indexing, we will have borrowed trillions and will still confront 
more than $10 trillion in unfunded liabilities. This could easily cause 
an economic chain-reaction: the markets go south, interest rates go up, 
and the economy stalls out. To ignore the structural fiscal issues--to 
wholly ignore the matter of the current system's benefit formula--would 
be irresponsible.
    Here's a startling fact: under current law, an average retiree in 
2050 would be scheduled to receive close to 40 percent more (in real 
terms) in benefits than an average retiree today--and yet there are no 
mechanisms in place to produce the revenue to pay out those benefits. 
No one on this planet can tell you why a 25-year-old person today is 
entitled to a 40 percent increase in Social Security benefits (in real 
terms) compared to what a person retiring today receives.
    To meet those benefit levels, one option would be to raise the age 
at which people receive benefits. If we followed the formula used when 
Social Security was first created--make the age at which you receive 
Social Security benefits above the average age of mortality--we'd be 
looking at raising the benefit age to around 80. That ain't gonna 
happen.
    Another way to meet those benefit levels is through the traditional 
Democrat/liberal way: higher taxation. According to the latest report 
of the Social Security Trustees, the current system's benefit formula 
would require some $10 trillion in tax increases over the long term. 
We'd therefore need to raise the payroll tax almost 20 percent simply 
to provide wage-indexed benefit levels to those born this year.
    This will all sound familiar. In the past, the way Congress usually 
addressed the built-in funding problem was by raising payroll taxes 
(from 2 percent in 1937 to 12.4 percent today). In fact, Congress has 
raised Social Security taxes more than 30 times--but it has never 
addressed the underlying problem. Avoiding the core issue by raising 
taxes is not the modus operandi of this President.
    The other key point, as you know, is that personal accounts, 
through the miracle of compound interest, will provide workers with 
higher retirement benefits than they are currently receiving from 
Social Security.
    At the end of the day, we want to promote both an ownership society 
and advance the idea of limited government. It seems to me our plan 
will do so; the plan of some others won't.
    Let me add one other important point: we consider our Social 
Security reform not simply an economic challenge, but a moral goal and 
a moral good. We have a responsibility to fulfill the promise of Social 
Security, not undermine it. And we have a duty to ensure that we do not 
create an inter-generational conflict--which is precisely what will 
happen if the Social Security system is not reformed. We need to retain 
strong ties between the generations, which is of course a deeply 
conservative belief.
    The debate about Social Security is going to be a monumental clash 
of ideas--and it's important for the conservative movement that we win 
both the battle of ideas and the legislation that will give those ideas 
life. The Democrat Party leadership, the AARP, and many others will go 
after Social Security reform hammer and tongs. See today's silly New 
York Times editorial (its only one for the day) as one example. But 
Democrats and liberals are in a precarious position; they are 
attempting to block reform to a system that almost every serious-minded 
person concedes needs it. They are in a position of arguing against 
modernizing a system created almost four generations ago. Increasingly 
the Democrat Party is the party of obstruction and opposition. It is 
the Party of the Past.
    For the first time in six decades, the Social Security battle is 
one we can win--and in doing so, we can help transform the political 
and philosophical landscape of the country. We have it within our grasp 
to move away from dependency on government and toward giving greater 
power and responsibility to individuals.
    There are of course other important issues dealing with Social 
Security; for now, though, I've covered quite enough ground. I wanted 
to let you know where things stand. If you have any questions, or if we 
can send you anything to clarify our plans and respond to critics, just 
let me know. The President remains flexible on tactics--and rock-solid 
on the principles. But there's nothing new there.
    In one of his last public acts of an extraordinary public life, the 
late Democratic Senator from New York, Daniel Patrick Moynihan, 
cochaired the President's Commission to Strengthen Social Security. In 
the introduction of its report, Senator Moynihan (along with Richard 
Parsons, his cochair) wrote, ``the time to include personal accounts in 
such action [reforming Social Security] has, indeed, arrived. The 
details of such accounts are negotiable, but their need is clear. . . . 
Carpe diem!''
    And so we shall.

                                 
    Mr. BRADY. Mr. Chairman?
    Chairman THOMAS. The gentleman from Texas?
    Mr. BRADY. Very quickly, I recognize that this chart is 
prepared by the Democratic staff. The source of it is not 
clear. Can that be clarified before it is put in the record?
    Chairman THOMAS. Who is CBPP?
    Mr. BRADY. Is that the Center for Budget Policy Priorities?
    Mr. MCDERMOTT. The Center on Budget Priorities and 
something or other, another Washington acronym. I don't know 
what it means.
    Mr. BRADY. As long as we clarify that this group is deathly 
opposed to both tax relief and Social Security reform----
    Chairman THOMAS. Well, the gentleman should have picked 
that up with the scribbling in the lower right-hand corner, 
which indicates where it was faxed from, I assume.
    Mr. LEVIN. I would object to any characterization of the 
source. If you don't know what CBPP is, we will tell you, but I 
don't think any of us should characterize----
    Mr. BRADY. Other than the mumbling on what the PP might 
stand for, I think----
    Mr. LEVIN. Policy and Priorities.
    Mr. BRADY. Okay. This group is historically opposed to tax 
relief and Social Security reform as proposed----
    Mr. LEVIN. That is not true.
    Mr. BRADY. I think it is always important----
    Mr. LEVIN. That is not true.
    Mr. BRADY. To understand the source. That is all.
    Mr. LEVIN. It is just not true.
    Chairman THOMAS. Hope springs eternal, and the President's 
current opportunity to persuade people means even this group is 
open to possible persuasion. I just wanted to clarify the fact 
that this was not Budget Committee prepared, but by the 
Democratic staff from another source.
    Mr. MCDERMOTT. Mr. Chairman----
    Chairman THOMAS. The gentleman from Ohio----
    Mr. MCDERMOTT. Could I just say----
    Mr. PORTMAN. Thank you, Mr. Chairman.
    Mr. MCDERMOTT. These figures were--Mr. Brady, the figures 
from the Social Security shortfall came from the SSA. These are 
not--they are taken from their data.
    Mr. BRADY. And manipulated by the source. My only point is, 
let us just be open about what the source is and we can all 
draw our own conclusions.
    Chairman THOMAS. The Chair would indicate that the source 
rather than initials would be spelled out in its entirety so 
that people could understand who they are.
    Mr. BRADY. Mr. Chairman----
    Chairman THOMAS. The gentleman from Ohio is recognized.
    Mr. PORTMAN. Thank you, Mr. Chairman. I promise not to ask 
that any charts be inserted into the record to avoid any 
further disruptions to the Committee. I want to start by 
commending the budget. This administration has a lot to be 
proud of in terms of the economic growth we have seen over the 
last year, and when Mr. Bolten was before this Committee 
previously and before the Budget Committee, we weren't sure, 
frankly, what the results of the tax relief would be, and now 
we are seeing it, incredible growth over the last year. We have 
also seen 9.2-percent increase in receipts in 2005. Despite all 
of the hand-wringing we heard about the 2001, 2002, 2003 tax 
relief, that it was going to result in robbing the Treasury, we 
have seen, what, an increase in receipts to the government.
    The budget reflects that going forward. It says we need to 
promote pro-growth economic policy on the one hand. On the 
other hand, we need to restrain spending, which is the only 
thing that works. We saw this in the late nineties going into 
this decade. We need to restrain our spending and have the 
economy grow. So, I commend you for it. We may have some 
differences on some specifics, but this is an excellent budget 
because it does fund our top priorities and yet has spending 
restraint and pro-growth economic policies and I think that is 
the solution for us indeed meeting this target of reducing the 
deficit in half by 2009.
    I was interested in the discussion you had a moment ago, 
Director Bolten, with Mr. McDermott talking about the fact that 
you guys don't have all the details yet on your plan and when 
are you going to write it down. I guess you could have said to 
him, when are you going to write your plan down, but then I 
think he said what it is, which is raising taxes. Saying that 
taxes on the wealthy can pay for all of our Social Security 
fixes, I don't believe that is true. I wonder if you could 
comment on that quickly, as to whether not allowing the tax 
cuts to continue, in other words, raising taxes on the top 1 
percent would pay for all the Social Security needs over the 
next decade.
    Mr. BOLTEN. Mr. Portman, I don't believe they would at all 
and it would also require a relatively radical change from the 
traditional Social Security system that operates within its own 
system to now drawing revenues out of the regular income tax.
    Mr. PORTMAN. I would also ask you, because there is this 
assumption, well, gee, just raising taxes on the rich should 
solve this problem. You responded earlier that tax relief has 
helped grow the economy, particularly some tax relief that is 
pro-growth was, and I would put that in that category. What 
happens with regard to taxes as a percentage of our economy? 
Right now, we are at 16-some percent. Let us assume that the 
President does make permanent his tax relief which is in his 
budget and provided for. What happens in terms of the 
percentage of taxes as to our economy, our GDP? Does it go up 
or down? It must go down, right?
    Mr. BOLTEN. It goes up----
    Mr. PORTMAN. It goes up? Interesting. So, we are going to 
actually have more revenue coming in, and as a percentage of 
GDP, taxes actually go up, even though we make permanent the 
tax relief you have put in place.
    Mr. BOLTEN. Yes. The budget figures that you will see 
reflected in our documents assume the full permanence of the 
tax cuts that the President proposed and you enacted, and even 
with those tax cuts in place, we see revenues rising steadily 
up to about 18 percent by the end of the budget window, which 
is the historic average that taxes have taken as a percent of 
our economy.
    Mr. PORTMAN. So, the notion we are undertaxed, the 
percentage actually rises during this period that we make the 
tax relief permanent. How about on distribution? Who is paying 
these taxes? I assume from what I am hearing to the side that 
those who are higher-income Americans are paying less of the 
burden, right?
    Mr. BOLTEN. The tax cuts that you enacted and that the 
President signed are often considered to have made the Tax Code 
less progressive. The truth is that they have made the Tax Code 
more progressive.
    Mr. PORTMAN. Interesting. So----
    Mr. BOLTEN. If you----
    Mr. PORTMAN. Can you give me some numbers on that?
    Mr. BOLTEN. If you take a segment of the population, say 
the top 5 percent of income earners in this country--that is 
people making more than $140,000 a year--in the absence of the 
President's tax cuts, they would be paying a little less than 
52 percent of the overall income tax take of this country. 
After the President's tax cuts, they pay a little more than 54 
percent of the total income tax take of this country. The Tax 
Code, as a result of the changes that you and the President 
have made, has become more, rather than less, progressive. 
Everybody got a tax cut, but the Code is more progressive than 
it used to be.
    Mr. PORTMAN. I appreciate that clarification. I just think 
as we are looking at how to fund our key priorities, including 
Social Security, and in my view, I think the power of compound 
interest, having those assets out there building up, is a 
solution to part of the Social Security problem, one we 
definitely need to allow our young people to access. But, we 
need to look at the tax situation and realize that tax relief 
has helped to grow this economy. At a minimum, we should not be 
raising taxes. In fact, taxes will grow as a percentage of the 
economy and those wealthier Americans are paying more of the 
load, not less of the load, under the President's proposals. I 
think we need to lay that out. Again, I would commend you on 
the budget. I think it reflects those priorities. I think it 
will enable us to reduce this deficit in half and be sure that 
Social Security, therefore, is on a more solid footing. I thank 
you, Mr. Director.
    Mr. BOLTEN. Thank you.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Georgia, Mr. Lewis, wish to inquire?
    Mr. LEWIS. Thank you very much, Mr. Chairman. Mr. Director, 
I want to thank you for being here. Mr. Director, apparently 
during the briefing on the budget on Monday, you told a group 
that you entered this discussion, you entered this debate with 
a happy spirit. I assume your spirit is still happy. But, how 
could your spirit be so happy with Social Security facing a 
major crisis, major problems, bankruptcy, as the President put 
it? I would like for you to just elaborate. I want to know your 
mindset when you talk about privatizing Social Security, when 
you talk about making a choice, a decision between making the 
tax cuts permanent and privatizing Social Security.
    Mr. BOLTEN. Mr. Lewis, I don't believe we face a choice and 
I am very optimistic, A, about the short--and medium-term path 
that we are on if we adopt the President's pro-growth policies 
and spending restraint. I am very optimistic about the short--
and medium-term deficit path we are on. In the long-run, the 
serious problem we face is in the unfunded liabilities in our 
entitlement programs and I am optimistic that the President and 
this Congress will come around on the issue of Social Security 
to finding a way to fix that problem permanently.
    Mr. LEWIS. Is it true that when the President was moving 
around on the stump last week, didn't he say even with private 
accounts, this will not fix Social Security for the long run? 
Why is it so sacred? Why is it so special?
    Mr. BOLTEN. Personal accounts, I think, are a tremendous 
innovation for the Social Security system----
    Mr. LEWIS. I should have said personal accounts, I guess, 
but it is privatization of Social Security.
    Mr. BOLTEN. The personal accounts are a tremendous 
innovation for many reasons. One of them is that you are simply 
letting people keep more of their own money and control it 
themselves, pass it on to their heirs, and basically exercise 
more control over their own retirement and receive a better 
return on their money than the Social Security is now able to 
promise. So, it is a very important innovation for the system, 
and as part of comprehensive reform, I think it is very good 
fiscal news for the country, as well.
    Mr. LEWIS. Mr. Director, do you subscribe to the idea, to 
the concept that Social Security is a contract with the 
American people, it is a matter of trust that we promised the 
American people, going back to the New Deal, FDR? So, is this 
administration proposing to violate this sense of trust, this 
contract?
    Mr. BOLTEN. Oh, I think on the contrary, what this 
administration is proposing to do is fulfill the trust and the 
contract. The problem we are facing now is that by the time 
some of our youngest workers are ready to retire, the system 
will not be able to pay the benefits it promises. We need to 
fix that system.
    Mr. LEWIS. The President said on the stump last week that 
this is not fixing it. You can't have it both ways. You can't 
say you are fixing it and then the President is saying it will 
not fix it, it will not make it whole.
    Mr. BOLTEN. I am not sure what comment of the President you 
are referring to, but----
    Mr. LEWIS. President Bush, because he is the President, and 
he said someplace during the past few days when he was 
campaigning in five or six States that personal accounts, 
private accounts, would not fix the problem or the crisis of 
Social Security alone.
    Mr. BOLTEN. I don't know what the exact quote of the 
President is, but I said something similar here just this 
afternoon, which is that in and of themselves, the personal 
accounts don't solve the solvency problem of Social Security. 
But, they are an integral part to a comprehensive plan that 
does fix the system and does ensure that our workers get the 
kind of benefit they expect.
    Mr. LEWIS. You said to some others that you don't have the 
blueprint, you don't have the road map, you don't have the 
complete plan. How can you bring a piece, a part, however this 
piece, this part is going to fit into the overall plan?
    Mr. BOLTEN. I think the President has kicked off the debate 
with a portion of the proposal, which is the parameters of the 
personal account. I think a lot of the Members in the past have 
welcomed the opportunity to work with the administration before 
any proposal is in concrete and that is the process that is 
ongoing now. It is a process of back and forth with the 
Chairman and other Members who are interested in Social 
Security reform.
    Mr. LEWIS. Thank you. Thank you, Mr. Chairman.
    Mr. BOLTEN. Thank you, sir.
    Chairman THOMAS. I thank the gentleman very much. Does the 
gentleman from Arizona, Mr. Hayworth, wish to inquire?
    Mr. HAYWORTH. I do, Mr. Chairman, and I thank you, and to 
Mr. Bolten, welcome to the Committee. I listened with interest 
to my friend from Georgia and I thank him for his comments. Of 
course, he mentioned the historical precedent of President 
Franklin Roosevelt, and at least through some media outlets, we 
have seen that while we describe personal accounts as an 
innovation, at least somewhere early on in the historical 
record, President Franklin Roosevelt spoke of these same types 
of accounts eventually. I think it is perhaps interesting not 
to view this in a vacuum but to take a more comprehensive look 
at the true history and legacy of Social Security and the 
challenges that even FDR knew we would confront 1 day as a 
nation that grows and a nation that changes and a nation that 
evolves.
    In fact, let me read this into the record. In an address to 
Congress on January 17, 1935, this is what President Franklin 
Roosevelt said, quoting now, ``For perhaps 30 years to come, 
funds will have to be provided by the States and the Federal 
government to meet these pensions.'' But, after that, he 
explained, it would be necessary to move to what he called, 
quote, ``voluntary contributory annuities by which individual 
initiative can increase the annual amounts received in old 
age,'' close quote. So, President Franklin Roosevelt made a 
call in the establishment of Social Security directly 
anticipating today's reform agenda. Quoting again from 
President Roosevelt, ``It is proposed that the Federal 
government assume one-half of the cost of the old-age pension 
plan which ought ultimately to be supplanted by self-supporting 
annuity plans,'' close quote.
    Mr. Bolten, do you have any reason to doubt the 
authenticity of President Franklin Roosevelt's remarks made in 
1935?
    Mr. BOLTEN. No, sir. It actually comes as news to me, but 
very interesting and encouraging news.
    Mr. HAYWORTH. In the spirit of bipartisanship, do you 
welcome that account from the record?
    Mr. BOLTEN. I do, Mr. Hayworth, and I think it reflects 
that over time, and I would hope on a bipartisan basis, that we 
can recognize the importance that this country has always put 
on individual initiative, individual ownership, and the power 
of the marketplace to improve lives everywhere in this country. 
I think that is what personal accounts do promise.
    Mr. HAYWORTH. I thank you, sir, and I have no further 
questions. I thank the Chair and thank our Director.
    Chairman THOMAS. I thank the gentleman. The gentleman from 
New York indicates to me that he was there and he doesn't 
remember that quote.
    [Laughter.]
    Does the gentleman from Massachusetts, Mr. Neal, wish to 
inquire?
    Mr. NEAL. Thank you very much, Mr. Chairman. Mr. Bolten, at 
least ten times in your testimony, you have referenced private 
accounts. It was only when Mr. Lewis used the word personal 
account that you kind of came back to personal account. Which 
one is it, a private account or personal account?
    Mr. BOLTEN. We prefer the phrase personal account.
    Mr. NEAL. You prefer the phrase, but the idea is the 
private account?
    Mr. BOLTEN. It may be a question of vocabulary, but 
personal accounts, I think, is the right way to characterize 
them because these are accounts that are still part of a 
government system. The management would still be in the 
government. It is not, as some would have you----
    Mr. NEAL. Mr. Bolten, let me ask you, yesterday, Mr. Snow 
was here. He indicated that there were only two ways to balance 
the budget here. He said one of those would be to grow the 
economy and the other was to restrain spending. I think, as a 
group, I think you have come up with a third way, and that is 
not to include other costs within the budget. Are you familiar 
with Lawrence Lindsey?
    Mr. BOLTEN. I am.
    Mr. NEAL. Do you have a high opinion of him?
    Mr. BOLTEN. Very high.
    Mr. NEAL. Well, do you think he was accurate when he said 
the cost of the war was going to be between $200 and $300 
billion?
    Mr. BOLTEN. Well, I don't know exactly which reference----
    Mr. NEAL. Well, do you think he was accurate?
    Mr. BOLTEN. I don't know----
    Mr. NEAL. Are you headed toward $200 to $300 billion?
    Mr. BOLTEN. The costs of the war are probably headed in 
that direction.
    Mr. NEAL. Well, how come the administration chose to 
lowball the number.
    Mr. BOLTEN. I don't believe the administration----
    Mr. NEAL. Oh, they sure did. They said $40 to $60 billion, 
and, in fact, 40 to 60 days, we would be out of there. Where 
are we headed with the cost of the war, Mr. Bolten? Is that 
discussed at all? Are we going to continue to use supplemental 
requests from the administration so that we can masquerade the 
size of the cost of the war and then keep it off-budget?
    Mr. BOLTEN. We are going to continue to use supplemental 
requests for the cost of the war and that is the sound 
budgeting thing to do because if we do not operate on a 
supplemental basis, we find that those costs are entered into 
the base of the budget and never come out.
    Mr. NEAL. Mr. Bolten, we have discussed the idea of AMT 
since you were a child in Congress. Do you think there is a 
chance that that might be included in budget projections, as 
well? Is that something we are going to take up, do you think, 
in the near future?
    Mr. BOLTEN. The President has suggested that it be taken up 
in the context of fundamental tax reform.
    Mr. NEAL. Let me ask you this. Can you assure that 40-year-
old that might be listening today or watching today that there 
will be no benefit cut under your privatization plan of Social 
Security?
    Mr. BOLTEN. What I can assure that 40-year-old is that the 
current system is unable to pay the benefits----
    Mr. NEAL. Can you guarantee him that he is going to get and 
derive the same benefit down the road that the current Social 
Security system promises?
    Mr. BOLTEN. What I can guarantee him is that the current 
system can't pay the benefit----
    Mr. NEAL. Would you suggest, perhaps, that he not invest in 
Enron stock down the road?
    Mr. BOLTEN. I am not even sure whether Enron is still 
trading, but that----
    Mr. NEAL. Well, I am not sure that it is still trading, 
either, and that is the point. For those that did invest in 
Enron stock as part of their retirement savings----
    Mr. BOLTEN. Well, if you are suggesting that the personal 
accounts which are referred----
    Mr. NEAL. I am suggesting that retirement is a three-legged 
stool, personal savings, private pension, and Social Security. 
As it relates to Enron, only one of the three is probably 
secure, Social Security.
    Mr. BOLTEN. Mr. Neal, if I could finish the sentence, the 
personal accounts to which I was referring are----
    Mr. NEAL. Is it private or personal, Mr. Bolten?
    Mr. BOLTEN. It is personal.
    Mr. NEAL. Okay.
    Mr. BOLTEN. The personal accounts to which I was referring 
are ones that do not permit the individual to invest in 
individual stocks. It would be like the Thrift Savings Plan 
(TSP), which has index-based stocks and so on and over time----
    Mr. NEAL. I would say that is in addition to Social 
Security.
    Mr. BOLTEN. Historically, those are not risky investments.
    Mr. NEAL. That is in addition to Social Security. It is not 
as a replacement for Social Security.
    Mr. BOLTEN. Well, no, the personal accounts I am talking 
about would be part of a comprehensive Social Security plan.
    Mr. NEAL. When do you think we might anticipate seeing a 
plan here? Yesterday, if you were a Republican Member of the 
Committee and you asked the Secretary of the Treasury a 
question, you got an answer in the specific. If you were a 
Member on this side and you asked the Secretary a question, we 
were told there really wasn't a plan yet.
    Mr. BOLTEN. Well, my expectation is that the full details 
of a plan will depend in large part on the consultations with 
the Congress, including the Chairman.
    Mr. NEAL. Thank you, Mr. Chairman.
    Chairman THOMAS. The gentleman from New York doesn't 
remember the President saying we would be out in 40 days, is 
that right?
    [Laughter.]
    Mr. RANGEL. No, I just, in the spirit of bipartisanship, I 
just hope that the Budget Director would clarify what he meant 
when he suggested that the President would be presenting a plan 
after consultation with the Congress. Did you mean Republicans 
in the Congress or--because if we waited for him to get in 
touch with the Democrats, there won't be a bill.
    Mr. BOLTEN. The President, I know, will be open to working 
with Members of either party who want to participate in a 
comprehensive Social Security reform plan----
    Mr. RANGEL. Oh, you are so good. You are much better--it 
has been a much better day with you, I can tell you that. Thank 
you so much.
    Chairman THOMAS. I thank the gentleman. The President is 
willing to work with every live Member of the House and the 
Senate.
    [Laughter.]
    Does the gentleman from Missouri wish to inquire?
    Mr. HULSHOF. I thank the Chairman. To my friend, Mr. Neal, 
is the TSP a private plan or a personal plan?
    Mr. NEAL. I think it is--do you want an answer?
    Mr. HULSHOF. Sure.
    Mr. NEAL. I think it is quasi-private.
    Mr. HULSHOF. I think, reclaiming my time, as Mr. Bolten 
suggested----
    Mr. NEAL. Is that a satisfactory answer, or----
    Mr. HULSHOF. I think, obviously, the TSP, if, in fact, it 
is used as a model, is something that I think probably--I am 
not going to inquire of all the Members, but each Member of 
Congress has confidence in that type of model for a plan and I 
think, again, there are many ideas out there. In fact, my 
friend from North Dakota, Mr. Pomeroy, may recall--I am not 
sure if it was his last visit to the Show-Me-State of Missouri, 
but back in 1998, Mr. Pomeroy, in February, you and I shared 
the stage with the then-President of the United States in 
Kansas City, President Bill Clinton. It was styled as the first 
ever townhall debate on the future of Social Security. Our 
President at that time talked about the idea of getting a 
better rate of return. In fact, as Mr. Pomeroy probably 
remembers, as he and I were the only Representatives from the 
House of Representatives there, that the insistence was that we 
craft a solution sooner rather than later, I think the 
gentleman recalls. Of course, we had some interesting 
discussion about how to accomplish that.
    Then, I think, Mr. Bolten, I applaud the President. 
Something that really struck home on a personal note during the 
State of the Union last week was as the President talked about 
if you have a 5-year-old child, which we do, a 5-year-old and a 
2-year-old daughter, you would not wait until my daughter is a 
senior in high school before you begin to start thinking of, 
well, how are we going to afford college? You obviously want to 
look ahead and make those necessary decisions as a family. 
There is this discussion, which I think is a bit of a--kind of 
puts us in the wrong direction when we say, well, is it 2042 or 
is it 2052 and what sort of assumptions are being made. I have 
talked about what Chairman Thomas has brought up. The fact is, 
the baby boomer generation, what year do we generally designate 
as the first year of the baby boomer generation, Mr. Bolten? 
Born in what year?
    Mr. BOLTEN. I am not sure. I think it is 1948?
    Mr. HULSHOF. Nineteen-forty-six.
    Mr. BOLTEN. Forty-six. Thank you.
    Mr. HULSHOF. We never ask a question unless we know the 
answer. Early retirement age, even though for younger workers 
we have raised the retirement age, but still for those seniors 
who choose to opt out and take early retirement is what year? 
It is still 62. Here is a tougher question for you which I 
didn't know the answer to until the SSA actuaries gave us this 
number. Would you care to hazard a guess as to what percentage 
of senior citizens choose to opt out for early retirement? Do 
you want to hazard a guess?
    Mr. BOLTEN. No, I am going to kick that back to you, Mr. 
Hulshof.
    Mr. HULSHOF. Fifty-five percent. Fifty-five percent of 
senior citizens--again, this is obviously something very lawful 
and legal and it is their own choice to do--55 percent of our 
senior citizens choose the age of 62 to opt out of the 
workforce and then begin to rely upon retirement savings 
through Social Security. So, if my math is correct, not fuzzy 
math, but if take 1946 and you add the age of 62, we know that 
in 3 years, in the year 2008, over half of the senior citizen 
population, those that could be enlisted to help us craft a 
solution, are going to voluntarily choose to take themselves 
out of the workforce. Again, we can banter about the 
assumptions and whether money going out in 2018 as far as the 
money that comes in through payroll taxes. I agree with what 
President Clinton said in the Show-Me-State back in 1998. We 
have an obligation to act sooner rather than later.
    I have a technical question for you. My time is running 
short. I have a concern on a specific provision from the 
administration's proposal regarding power rates and the Power 
Marketing Administration that, with your permissions, Mr. 
Bolten, can I submit that to you in writing? There are over 
half of my constituents, over 400,000 of whom depend upon rural 
electric co-ops for their power source, and so I have a 
concern, but I will submit that in writing. Never one to 
relinquish time that remains, I also want to applaud the White 
House--oops--for the permanent repeal of the death tax. Again, 
I am honored our former colleague, Jennifer Dunn, passed along 
this effort to me as far as the complete repeal of the death 
tax and I applaud the White House for acknowledging that. Thank 
you, Mr. Chairman.
    Chairman THOMAS. The gentlemen's time has bountifully 
expired. Does the gentleman from Louisiana, Mr. Jefferson, wish 
to inquire?
    Mr. JEFFERSON. Thank you, Mr. Chairman. I want to make two 
statements before I ask a question. The first is that it seems 
terribly disingenuous to have remarks made when one states that 
expiring tax ought to be used for a certain purpose to say that 
it is a tax increase is being urged because it is about as 
nonsensical to say that as to say that those who voted for 
taxes to expire in the first place voted for a tax increase at 
the point of expiration. It absolutely make no sense. If those 
on the other side voted for a tax that is going to end at a 
certain time, they obviously voted for it to increase at the 
end of that period. I think we ought to have an open discussion 
about how we can get at this issue without distorting it with 
the points at hand.
    Mr. McDermott's point, also, I would like to kind of give 
him a defense. When he talks about using an expiring tax 
revenue and the retort is that it is a radical departure 
because we fund Social Security with payroll taxes, when the 
government goes to redeem the bonds in the Social Security 
trust fund that we are now borrowing from, we are going to use 
moneys from general revenues to pay for it. It is not any more 
radical a departure than Mr. McDermott is talking about.
    Now, let me ask two questions, because of all the things 
that aren't clear about the President's plan, there is one 
thing that is clear and that is that he does have a structure 
he has announced about the private accounts and one element of 
these accounts is the so-called offset or claw-back that would 
cut the Social Security benefits for those who refuse to open 
an individual account. That proposal has created a lot of 
confusion and misunderstanding and I want to clarify it if I 
can. As I understand it, this proposal would reduce your 
guaranteed Social Security benefit to reflect the smaller 
amount that you would be contributing to Social Security if you 
open a private account, is that correct?
    Mr. BOLTEN. I believe it is, Mr. Jefferson.
    Mr. JEFFERSON. Okay.
    Mr. BOLTEN. I think it would be pro rata.
    Mr. JEFFERSON. Right. Is it true, then, that the reduction 
would equal the monthly payments that could be financed if your 
private account had been invested at the Treasury rate, which 
is a real annual rate of return, which is to say it is adjusted 
for inflation, which is approximately 3 percent?
    Mr. BOLTEN. I don't believe that is the return that is 
provided in Social Security----
    Mr. JEFFERSON. It was just testified to by Secretary Snow 
that that was the amount.
    Mr. BOLTEN. All right.
    Mr. JEFFERSON. I think it is the amount, so let us assume 
that----
    Mr. BOLTEN. I will accept his answer as----
    Mr. JEFFERSON. All right. Does that mean that in order to 
come out ahead, then, that an individual who chooses to open a 
private account would need to earn a return at least at 
Treasury rate plus administration expenses? That would be 
correct, wouldn't it?
    Mr. BOLTEN. I think so, yes.
    Mr. JEFFERSON. Right. I am wondering, then, does the CBO 
believe that the expected--well, let me skip that question. I 
submit to you, then, that if an individual has to have a return 
of three percent, an adjusted rate of return of 3 percent, that 
he is going to end up at the end of the day with a benefit cut 
that is going to amount to around 70 percent of the benefits he 
would get if he left that money in the system and not invested 
in private accounts, and the only way he makes anything at all 
on it is that, somehow, he gets a return that is greater than 
3.3 percent, which is really what Treasury is. He has to get a 
return larger than that. If he only gets what Treasury is 
anticipating, that would be no benefit to the person and they 
will suffer a 7 percent reduction in their benefits. Do you 
disagree with that or agree with it?
    Mr. BOLTEN. I think I--I am not sure I am following, but I 
think I do disagree. I think the detriment that--well, that 
there is no detriment that the investor would suffer, that the 
individual beneficiary would suffer from the creation of the 
personal accounts unless the return from the personal accounts 
was below the return that Social Security provides, and let me 
just check with my folks and see if, in fact, it is the 
Treasury rate of return, because my impression is that it had 
been lower. Okay. Well, I am confirming that you were correct, 
that Secretary Snow was correct. But, what that would mean is 
that the personal account, in order to be basically a good deal 
for the beneficiary, would need to beat the Treasury rate of 
return, which I think over almost any period of 20 years in our 
history--in fact, probably every 20-year period of our 
history--you will find that investments in a blend of stocks 
and bonds would provide that return.
    Mr. JEFFERSON. The three percent would, in effect, be 
returned to the government, to the Treasury, and anything over 
that, the individual might be able to keep--would be able to 
keep. But, something about taking it out of the system, the 
benefit that the person would otherwise get is going to be 
reduced by seven percent because that is the difference between 
a return that--if you take the high rate of return that SSA is 
anticipating of 4.6 percent, only then do you get the seven 
percent. If you simply say that it is going to be the same as 
Treasury, that is no benefit to the individual and we incurred 
this transition cost with no benefit for the private accounts 
is the ultimate point I make.
    Chairman THOMAS. I thank the gentleman for his time. The 
gentleman from Florida?
    Mr. FOLEY. Thank you, Mr. Chairman. Thank you, Mr. Bolten. 
Have you had a chance to look through the archives when Social 
Security was first created to look at the assumption tables 
that were made when they constructed the program?
    Mr. BOLTEN. I have not, but I would be interested and I 
have a suspicion that you have.
    [Laughter.]
    Mr. FOLEY. Well, I haven't. No, I haven't, but I am 
interested, because when you look at the longevity table back 
in 1935, the average age was expected to be 63.5 on your 
demise. Yet the SSA projected benefits either early at 62 or 
65. It would seem to me it wasn't probably a very good 
investment to pay taxes into a fund that it was highly unlikely 
you would have received any of your residual based on the 
likelihood you would have died before collection. When I try to 
figure out the assumptions, and now we are seeing people 
living--it is amazing to me, in the seventies, Willard Scott 
would have maybe one person a week that hit 100 and now there 
are five a day, which is the joy of medicine and it is the 
bounty of our scientific research. But, the bottom line is, in 
order to provide benefits, we have to devise a new system, is 
that correct?
    Mr. BOLTEN. Yes, I believe that is absolutely correct.
    Mr. FOLEY. Now, a lot has been made today about the tax 
cuts. Based on, and remember again 1999 and 2000, the dramatic 
decline in the stock market, the lack of investor enthusiasm, 
the stalling economy, coupled with September 11, had we not 
passed aggressive tax cuts, what would our budget look like 
today? What would our deficit picture look like today?
    Mr. BOLTEN. I couldn't give you an exact figure, but I can 
tell you I think our deficit picture would look substantially 
worse because what led us into the fiscal hole we found 
ourselves in at the beginning of the previous administration, 
from the beginning of the previous administration, was, in 
fact, rapidly declining receipts as a result of the bad 
economy. The tax cuts were instrumental in bringing us out of 
that recession and ultimately restoring growth to our revenues, 
which after three straight years of declining revenues, we 
finally got the revenue growth back in 2004. We are expecting 
even better in 2005. I think we would be in much worse fiscal 
condition were it not for the tax cuts having restored growth 
to the economy.
    Mr. FOLEY. So, it is safe to assume the people that got a 
per-child tax cut actually spent the money in the economy?
    Mr. BOLTEN. I believe economists will tell you that they 
did.
    Mr. FOLEY. It is safe to assume that the 15 percent capital 
gains structure has led to the Dow going back into the 10,800 
range again?
    Mr. BOLTEN. I think economists will tell you that the 
capital gains tax reduction and the dividend tax reduction have 
been crucial in promoting investment.
    Mr. FOLEY. As far as the tax cuts for the top 1 percent, it 
is fair to assume that if that was the policy enunciated by the 
other side, that we just roll back the taxes, those who pay the 
highest taxes and those who would be asked to pay more would 
not receive any additional benefits by their additional 
contribution to the Social Security trust fund, is that 
correct?
    Mr. BOLTEN. That is correct.
    Mr. FOLEY. So, they would be asked to fill in a blank using 
their pre-tax income to shoulder the burden, and yet not 
receive an additional amount of money for that additional 
contribution?
    Mr. BOLTEN. They would, Mr. Foley, and there is one other 
element I would add, and that is that as a result of the 
President's tax cuts, the top 1 percent pay a larger share of 
our total income tax take than they did before the tax cuts. 
Without the tax cuts, they would be paying 32.3 percent of the 
total income tax takes. That is just the top 1 percent in this 
country. After the tax cuts, that same group pays 33.7 percent 
of the total income tax take in this country.
    Mr. FOLEY. Thank you. Thank you, 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, and welcome, 
Mr. Director. Since January of 2001, our country has been 
borrowing real money, hard money, at the rate of about $700 
million a day. Publicly held debt has gone up $1.02 trillion, 
or thereabout. If you do the math, it is around $700 million a 
day. In this budget document you present, you anticipate 
another $1.3 trillion of publicly held debt accumulating for a 
total of over $2 trillion, $2.3 trillion in that timeframe. 
Would you agree with the statement that we are borrowing more 
money faster than at any time in our Nation's history?
    Mr. BOLTEN. I don't know whether that is correct, but I 
share your concern about that borrowing, which is why I think 
the spending restraint that is reflected in this budget is so 
important to pursue.
    Mr. TANNER. Well, this is your budget. I have heard that 
the Members say how strong the economy has been and how we are 
catching on again now, and yet in this budget document you have 
before us, you continue to borrow a little over $700 million a 
day for the length of this document.
    Mr. BOLTEN. There is, unfortunately, a need for continued 
borrowing, but absent the kind of economic growth that some of 
the other Members were referring to, the need for borrowing, in 
my judgment, would be substantially greater.
    Mr. TANNER. Well, it is your budget and you continue to 
borrow. If the economy is weak, how bad would it be? You say it 
is strong and growing and vibrant because of tax cuts, and yet 
you continue to borrow over $700 million a day for the length 
of this document.
    Mr. BOLTEN. Oh, I haven't----
    Mr. TANNER. When are we ever going to not borrow?
    Mr. BOLTEN. Mr. Tanner, I imagine that if the economy were 
weak, we would not be able to be on a path of reducing that 
deficit as a percent of our overall GDP, and so----
    Mr. TANNER. Mr. Director, with all due respect, if the 
economy is growing and things are so good, why do we have to 
project continuing to borrow $700 million a day? This is a 
budget document where you make decisions like this, isn't it? I 
looked at your 2003 budget. As a percentage of GDP, the 
forecast then for 2005 was a 0.5 surplus. For 2006, it was a 
0.7 surplus, and for 2007, a 0.8 surplus. 2 years later, in 
your 2005 budget submission, that had deteriorated from a 0.5 
plus to a minus three in 2005, from a plus 0.7 to a minus 2.1 
in 2006, and from a 0.8 to a minus 1.8 in 2007. You, by your 
documents, are going in the wrong direction if you see what I 
mean.
    Mr. BOLTEN. I----
    Mr. TANNER. If things are getting better, why is this 
picture deteriorating right in front of our eyes according to 
what you all give us?
    Mr. BOLTEN. I do, and precisely what those earlier budgets 
mis-estimated was the rate of growth in the economy. Those 
estimates were made at a time when the economy was projected to 
grow much better than it did. We ended up being in a much 
longer and stickier recession than was originally projected at 
the time those estimates were made We now do have growth coming 
back into the economy and that growth is crucial in restoring 
our fiscal health.
    Mr. TANNER. Let me get to what I really want to--if next 
year it deteriorates as much as it did between 2003 and 2005, I 
don't know, maybe we have got the wrong deal here. What is 
really, I think, a major concern, and it is right now, it is 
not years from now that we have been debating about, at the end 
of the last fiscal year, would you agree that foreign interest 
financed about 70 percent of last year's deficit?
    Mr. BOLTEN. I don't know if that is accurate. Let me----
    Mr. TANNER. That is pretty close. That is about right. 
Since October of last year, it is even higher than that. It is 
approaching 90 percent, foreign interest buying our publicly 
held debt. I can give you--that is about right, yes, sir. Now, 
in 2001, foreigners held about 30 percent of our publicly held 
debt. In 2003, it had risen to 37. It is now over 40, 
approaching 44 percent of our publicly held debt is held by 
foreign interests. Does that give you an immediate concern, and 
if not, why?
    Mr. BOLTEN. Well, part of that is a reflection of the 
strength of our economy and confidence in our economy. The----
    Mr. TANNER. Exactly.
    Mr. BOLTEN. What is very important, then, is that we 
sustain that confidence in our economy of both domestic and 
international investors, and the way we do that is by showing 
fiscal discipline in the short run and dealing with our long-
term unfunded liabilities in the long run.
    Mr. TANNER. Yet in your budget documents, the situation is 
deteriorating, not increasing. Are you aware that on January 
26----
    Chairman THOMAS. The Chairman indicates the gentleman's 
time has expired.
    Mr. TANNER. The Chinese minister said the U.S. dollar is no 
longer, in our opinion, a stable currency and that they have 
increased their holdings of our debt over 100 percent in the 
last 26 months? Let me tell you, that is the immediacy. You all 
can talk about Social Security in 2042 and I am telling you 
right now, this is an immediate problem. It could explode in 
our face anytime. Thank you, Mr. Chairman.
    Chairman THOMAS. The Chair would urge the gentleman from 
Tennessee to submit that question, if he would, in writing----
    Mr. TANNER. I will be glad to.
    Chairman THOMAS. And would request the Director to respond 
in writing so that we could have a fuller examination of the 
issue.
    [The information was not received at the time of printing.]
    Chairman THOMAS. With that, does the gentleman from Texas, 
Mr. Brady, wish to inquire?
    Mr. BRADY. Yes, Mr. Chairman. Thank you. I agree that the 
recipe the President is proposing for balancing the budget in 
getting back to where we can pay off our debt to keep this 
economy strong, because those two million-plus workers are now 
paying into Social Security, paying into Medicare, paying 
income taxes, helping us create new revenue.
    Then the second part of that recipe is restraining spending 
and Congress needs to do its part. I applaud you, Mr. Director, 
for with the President proposing a sunset commission. Twenty-
four States have similar Federal sunset--or sunset acts that 
look to abolish obsolete agencies and eliminate duplication. It 
is a very thoughtful, proven way to really create a situation 
where there are no sacred cows. Every agency has to prove and 
justify their existence and their results to America today, not 
just what their value was 100 years ago or 80 years ago, but do 
they deserve our precious tax dollars today. I am excited about 
that because here in the House, last fall, we showed there was 
strong bipartisan support for such law with over 270 votes in 
the House when taken to it. I think with the President's strong 
support, we have got a chance to put a proven tool to work.
    I am convinced in 8 years here, if Washington were a 
manufacturing plant, we would manufacture spending. That is 
what we are good at and designed to do. If we want to 
manufacture savings and efficiency, we have to retool the 
plant, and the sunset commission, the results commission, the 
line-item veto, I think are all tools to help us get to that 
point where we are making every buck really count for 
taxpayers. So, Mr. Director, I applaud you for that.
    Mr. BOLTEN. Thank you, Mr. Brady, and thank you for your 
leadership on the issue. Your work, especially on the sunset 
commission, was basically the template for the proposals that 
the President has put into his budget this year and we are 
looking forward to working with you and a lot of other Members 
in getting that enacted.
    Mr. BRADY. Right. Thanks. Same here, as well. In Social 
Security, there is some talk about just how urgent this is. I 
think we all recognize the baby boomers start to hit in 3 
years. After that, as has been said repeatedly, for 40 years, 
we borrowed money from the Social Security trust fund. They are 
in special Treasury notes. In 2018, we start paying back those 
notes.
    It seems to me there is some myth that that has no price to 
it. It seems to me in that first year, we start paying back 
about $18 billion or so, and then it quickly escalates to $100 
billion a year, then $200 billion a year, then to $300 billion 
a year, and that money doesn't come from just out of the blue 
sky. Those dollars will compete against health care and 
education and veterans' issues and all that. So, as we pay that 
back, there is a real price in priorities to pay.
    So, it seems to me we ought to heed the head of the CBO, 
Mr. Holtz-Eakin, who, while people freely use his numbers, 
forget his statement that it is very appropriate that Congress 
tackle Social Security right now because the problems become so 
urgent so fast and have a real impact on lives. Your comment?
    Mr. BOLTEN. It is a very important point, Mr. Brady, and 
something that is overlooked is that while benefits will 
continue to be paid, of course, once the system goes into cash 
deficit, currently projected at 2018, the government still has 
to pay for that, make up the shortfall. We see really our 
deficit situation deteriorating dramatically once we hit that 
inflection point. Therefore, the sooner we can get to that 
problem, get it addressed, the better. The problem just gets 
harder to fix every year that goes by that we don't address it.
    Mr. BRADY. Especially, as you said, at $600 billion a year. 
I know Congresspeople and Senators like to think our words are 
golden, but $600 billion a year is a little too expensive for 
my tastes. We should act this year. Thank you, Mr. Chairman.
    Mr. BOLTEN. Thank you, sir.
    Chairman THOMAS. Does the gentleman from California, Mr. 
Becerra, wish to inquire?
    Mr. BECERRA. Thank you, Mr. Chairman. Director Bolten, 
thank you very much for being here with us. Before I go into 
the line of questioning I would like to really explore, I would 
like to just ask you to reexamine the President's decision to 
eliminate funding for the scrapped criminal alien program, 
which reimburses States for the cost of incarcerating and 
holding for deportation immigrants who have committed crimes in 
this country. Without the money, the President's action will 
mean that it will require--the President will require cities 
and counties through local taxes now to absorb the cost of what 
is a failure of the Federal Government to enforce immigration 
laws until these folks can be deported who have committed 
crimes in this country.
    So, our local jails, our State penitentiaries will be 
filled with individuals who, because the Federal government did 
not enforce immigration laws, are now stuck in what are State 
and county facilities, the State and county paying for them, 
and the Federal government, under the President's proposal to 
totally eliminate funding, would thereby have to absorb the 
entire cost. I hope that you will reconsider that as we, in 
fact, are debating today immigration proposals on the floor of 
the House.
    I wanted to ask you if you will help me follow a line of 
thought I have. If I had a financial advisor, if I had enough 
money that I could pay someone to advise me on the health of my 
budget, my family's budget, I would think I would want that 
advisor to give me information about all the good and all the 
bad. But, as I look at your budget that you have proposed, and 
through the chart that you presented, you try to make a picture 
of what is today's economy look very rosy when, in fact, we 
have over the last several years accumulated the largest budget 
deficits that we have ever seen in this Nation's history. While 
the numbers may look good with some of those charts and some of 
those numbers, the reality is that we have never faced budget 
deficits larger than these.
    To not include in your budget proposal the cost of 
privatizing Social Security, to me is something that as a 
financial advisor, I would never want you to do for my family 
budget. For you to not include the cost of extending the 
President's tax cuts that are geared mostly to wealthy people 
that will cost trillions of dollars is something I would not 
want you to do if you were trying to help me with my family 
budget. To not include the $80 billion that the President has, 
in essence, said that he is going to be requesting for--
additional monies he will be requesting for Afghanistan and 
Iraq is something that I would never expect you to exclude as 
you talk to me about my family budget.
    To me, it seems kind of odd that we are asking the American 
people to believe a budget document that excludes all of these 
various costs and makes the picture of the economy look much 
more rosy than it is. The question I really wanted to get to 
was related to Social Security and this privatization proposal. 
My understanding, and please correct me if I am wrong, this 
coming year, the Social Security system will actually have a 
surplus--it will spend less than it takes in--a surplus of some 
$160 billion, correct?
    Mr. BOLTEN. That is correct.
    Mr. BECERRA. That continues to add up, and fortunately, 
that has been adding up, so that by 2018, the Social Security 
surplus will amount to over $5 trillion, correct?
    Mr. BOLTEN. I don't know if that is the correct figure, but 
there is a surplus building up in the Social Security trust 
fund, correct.
    Mr. BECERRA. That is what the actuaries tell us. It will be 
over $5 trillion. Any reason to not believe the actuaries?
    Mr. BOLTEN. I go with the actuaries' numbers.
    Mr. BECERRA. In fact, under the actuaries' assumptions and 
estimates, that surplus in the Social Security trust fund will 
continue to grow until about the year 2027 or 2028, until it is 
over $6 trillion. Now, this is the question I would like to 
pose to you. The President in his State of the Union Address 
said, in 2018, Social Security will be paying out more than it 
takes in, and in every year afterward will bring a new 
shortfall bigger than the year before. In the year 2027, the 
government will somehow have to come up with an extra $200 
billion to keep the system afloat. He thereafter uses the word 
collapsing to talk about Social Security. How can a system that 
in 2018, the year the President mentions, will have a 
shortfall--have a $5 trillion surplus be considered to be in 
shortfall, and how could a system that in the year 2027, when 
the President says will somehow have to find it to keep it 
afloat, will have over $6 trillion in surplus?
    Mr. BOLTEN. Well, the numbers that the President was 
referring to and--I think the right way to look at it is cash 
in and cash out.
    Mr. BECERRA. Okay. Then what you are saying is we should 
not take into account all the money that is coming in today 
that the President is planning to use out of Social Security's 
surplus for other than Social Security purposes.
    Mr. BOLTEN. No, no, no. The----
    Mr. BECERRA. Well, for----
    Mr. BOLTEN. That money is going into the trust fund.
    Mr. BECERRA. Okay. If it is there, why can't we count it in 
the year 2018? That is what it is supposed to be for, is it 
not?
    Mr. BOLTEN. Absolutely, and that is why----
    Mr. BECERRA. Okay. Then why not include it in that 
calculation?
    Mr. BOLTEN. If I may for the record, although if I may 
correct one thing, Mr. Becerra, at the outset, you suggested 
that our budget documents do not reflect the effects of the 
President's tax cuts or the $81 billion supplemental that is 
forthcoming. Our budget documents----
    Mr. BECERRA. You put it in the baseline, which hides the 
actual effects of the tax cuts----
    Mr. BOLTEN. Our documents----
    Mr. BECERRA. Which is a very clever way of trying to make 
the tax cuts look like they cost a lot less.
    Chairman THOMAS. The gentleman's time has expired.
    Mr. BECERRA. Thank you, Mr. Chairman.
    Mr. BOLTEN. The documents do reflect that, Mr. Becerra.
    Chairman THOMAS. The Committee will provide documents and 
perhaps the administration might oblige, as well, in focusing 
on the front-loading that began to occur with the increase in 
the payroll tax beyond the immediate needs in 1983. The paper 
that is out there that will begin to be redeemed in 2018, 
because the then-current income from the income tax is not 
adequate, that is the 2018 point. The 2042 is when the paper 
that needs to be redeemed will be exhausted----
    Mr. BOLTEN. Will all run out.
    Chairman THOMAS. Which was brought in to try to maintain 
the 100 percent payment, and that is why it kicks down to a 
determined less than 100 percent. That does need to be 
illustrated so people understand the current structure and the 
near future structure based upon decisions made in 1983, both 
to increase the payroll tax and to extend age. Does the 
gentleman from Wisconsin, Mr. Ryan, wish to inquire?
    Mr. RYAN. I do. Thank you, Mr. Chairman. Let me just follow 
up on that point. I think it sort of puts a false perception 
out there that in 2018, we are going to have $5 trillion of 
surplus sitting in a bank account somewhere. Let me just ask 
you this, Mr. Bolten. Will we have that $5 trillion? Where will 
that $5 trillion be?
    Mr. BOLTEN. It is in the form of----
    Mr. RYAN. An IOU.
    Mr. BOLTEN. Obligations from the Treasury. It is an IOU----
    Mr. RYAN. So, there is no cash sitting there in a vault or 
tradable bonds or stocks. We will have to either borrow more 
money, raise taxes, or cut spending to come up with that $5 
trillion surplus, correct?
    Mr. BOLTEN. Absolutely correct.
    Mr. RYAN. That is important to note. The idea that there is 
all of a sudden a big cash surplus to tap into is just not 
correct. I think a good way of looking at it is if I take money 
out of my right pocket, spend it, and then put an IOU to myself 
back in my left pocket, that is essentially what it is. I have 
money that is out there. I don't have any new purchasing power, 
and I just have an IOU that I will have to find more money 
somewhere else to pay for. So, the idea that all of a sudden we 
don't have to worry about this program collapsing for 37 years 
is really just not accurate.
    I want to get on to some budget reforms. Mr. Bolten, you 
and I have talked about budget process reform quite a bit in 
the last few years. I just wanted to see if you could explain 
or elaborate to me these new enforcement mechanisms you are 
talking about. Particularly how does the new enforcement 
mechanism to control long-term unfunded obligations work, and 
then how do you propose doing a line-item veto that meets 
constitutional muster?
    Mr. BOLTEN. I will start with the latter. The 
administration has proposed before a line-item veto that we 
believe would pass constitutional muster. It would be 
statutory. It would basically be a deferral of spending by the 
President that has been enacted by the Congress. There is no 
guarantee it would be constitutional. We believe it would pass 
constitutional muster and are interested to work with the 
Congress on its enactment or some other line-item veto 
mechanism. We are not stuck on that one in particular, but we 
do think it is important that the President have the authority 
to step into some of these big appropriations bills and take 
out some of the items that would not pass on their own.
    Mr. RYAN. Deferral in that you just won't send the money 
out.
    Mr. BOLTEN. Right.
    Mr. RYAN. You will just hang onto the money in the accounts 
and you will have the statutory authority to do that. What 
happens at the end of the year? It goes back? What happens at 
the end of the year in those accounts where you defer the 
money?
    Mr. BOLTEN. Then the money would just expire----
    Mr. RYAN. Okay.
    Mr. BOLTEN. So, the power would be effective.
    Mr. RYAN. Your lawyers are telling you that that ought to 
pass muster----
    Mr. BOLTEN. They believe it would pass constitutional 
muster. As I said, there is no guarantee of that and if 
somebody has a better idea, we would be happy to entertain it.
    Mr. RYAN. The one thing I think you ought to take a look at 
that we have discussed is just an enhanced recision power, not 
necessarily in place of this deferral idea, but maybe in 
addition to, which is an expedited procedure whereby the 
President can pull spending items out of a bill, send it back 
to Congress for an up or down vote, just like trade agreements 
where you have a trigger where you can require a vote that 
takes place in a certain fast period of time, where we have to 
vote on these individual projects that if we voted on these 
things alone, stand alone, probably wouldn't see the light of 
day, or a package of these things. So, I would encourage you to 
take a look at that.
    Mr. BOLTEN. A very interesting proposal and we would like 
to work with you on it.
    Mr. RYAN. The unfunded obligations, I am just curious, how 
does that work?
    Mr. BOLTEN. If I may, I will respond to you on the record 
with the details of that. The objective is one that I think you 
have been after for some time, which is to ensure that when 
Members make proposals and the Congress considers proposals 
that increase the long-term unfunded obligation, even though 
they are outside the budget window, if they are outside the 
budget window, they often escape budget enforcement rules. We 
want to propose a set of rules that captures those and charges 
the increase in the long-term unfunded obligation in the 
current budget.
    Mr. RYAN. In a present value form?
    Mr. BOLTEN. Yes.
    Mr. RYAN. Yes. Excellent. Thank you.
    Chairman THOMAS. Does the gentleman from Texas, Mr. 
Doggett, wish to inquire?
    Mr. DOGGETT. Thank you, Mr. Chairman. Mr. Bolten, I gather 
you agree with the President's estimate that the year 2018 will 
be the first year in which Social Security, under current law, 
will pay out more than it takes in?
    Mr. BOLTEN. That is the Social Security actuaries' 
estimate, yes.
    Mr. DOGGETT. If we adopt the privatization principles for 
Social Security that the President announced in the State of 
the Union Address, that date will be accelerated to the year 
2012, will it not?
    Mr. BOLTEN. I don't know what the acceleration might be, 
but the important part----
    Mr. DOGGETT. You haven't calculated that yet?
    Mr. BOLTEN. I have not.
    Mr. DOGGETT. Well, certainly if you take money out of the 
Social Security trust fund instead of putting money into it, 
you will certainly have this phenomenon of Social Security 
paying out more than it takes in occur at an earlier date, 
won't you?
    Mr. BOLTEN. It depends on how the money is accounted for, 
but the important thing----
    Mr. DOGGETT. I see. It depends on what accounting tools you 
use.
    Mr. BOLTEN. The important part of the personal accounts is 
that if they are part of a comprehensive system, they would 
prevent the ultimate--they would prevent the reaching of the 
ultimate insolvency date, which is the key element here.
    Mr. DOGGETT. Yes, sir. As far as the changes to benefit 
calculations that you feel are necessary by changing wage 
indexing, isn't that based on the basic premise that Social 
Security benefits are too high today and they are getting 
higher?
    Mr. BOLTEN. The administration has not adopted any specific 
reform that----
    Mr. DOGGETT. You support that though, don't you?
    Mr. BOLTEN. The administration has not adopted any specific 
form of----
    Mr. DOGGETT. Well didn't the President call that a good 
blueprint to use this wage indexing approach?
    Mr. BOLTEN. He mentioned it----
    Mr. DOGGETT. Yes, sir, he mentioned it----
    Mr. BOLTEN. As one of the possible ways----
    Mr. DOGGETT. He used the term ``a good blueprint'' to 
describe it and that is based on the assumption that the 
benefits that retirees are getting today from Social Security 
are too high and they are scheduled to go even higher.
    Mr. BOLTEN. Well, the important element here is that Social 
Security is currently promising benefits it cannot afford to 
pay.
    Mr. DOGGETT. So, the administration basically thinks Social 
Security benefits are too high today and are scheduled to go 
even higher and you want to reduce them. Let me ask you 
specifically, as it relates to this privatization plan, if you 
disagree with the statements that White House Senior Official, 
I guess it is Peter Wehner, made in his January 3 e-mail, that 
as you know has gotten a lot of attention, where he said if we 
borrow $1 to $2 trillion to cover transition costs for personal 
savings accounts and make no changes to wage indexing, the very 
thing I was asking you about, we will have borrowed trillions 
and will still confront more than $10 trillion in unfunded 
liabilities. This could easily cause an economic chain 
reaction, the markets go south, interest rates go up, and the 
economy stalls out. Do you agree with Peter about that?
    Mr. BOLTEN. I don't have a view on his remarks. I have 
not----
    Mr. DOGGETT. You don't have an opinion? You have heard this 
or you have read this before, you know about this----
    Mr. BOLTEN. Actually, I have not read it, but it actually 
was referred to by one of your colleagues----
    Mr. DOGGETT. I see. You don't have an opinion one way or 
the other on this?
    Mr. BOLTEN. Not on Mr. Wehner's----
    Mr. DOGGETT. The CBO, sometimes called nonpartisan, all 
appointed by Republicans, has come up with a risk-adjusted 
return that they say is the better approach to evaluate these 
privatization accounts. I guess the first question I would have 
for you is, the administration has done a lot of talking around 
the country about everything that people are going to get under 
this privatization account, but it has been pretty quiet about 
what they are going to lose. If someone gets a dollar put into 
a private account they lose a dollar in their guaranteed Social 
Security account, don't they?
    Mr. BOLTEN. Yes.
    Mr. DOGGETT. Okay. The question is do they come out better 
or do they come out worse? If you take the calculations that 
the CBO did about the risk-adjusted return, and you consider 
the administrative costs associated with these private plans, 
you would call it a claw-back, you can call it an offset, but 
actually the private account holder, according to CBO, actually 
comes out worse than if they stick with the traditional Social 
Security plan and a guaranteed benefit.
    Mr. BOLTEN. I haven't seen the CBO analysis, but I would be 
inclined, based on your description, to disagree with it, 
because I think that personal accounts do offer an opportunity 
for a much better return than can be offered by whatever 
Treasury bill----
    Mr. DOGGETT. If the nonpartisan CBO appointed by 
Republicans says otherwise, you just disagree with that?
    Mr. BOLTEN. If it is as you described, I do disagree with 
it and I think history disagrees with it, too, because there--
--
    Mr. DOGGETT. One quick non-Social Security question, in 
your budget, as you said, there are decisions that have to be 
made that are painful, but I gather one of the painful 
decisions this administration made, was that you are opposed to 
continuing the deduction for State and local taxes that is in 
this year's bill. It is not in your budget.
    Chairman THOMAS. The gentleman's time has expired. You can 
respond in writing if you wish to----
    Mr. DOGGETT. Just a yes or no?
    Chairman THOMAS. The Chair would indicate that the CBO has 
modeled the Social Security Commission Plan 2 that they used to 
make estimates off of, not the President's plan. There may be 
some similarities between the President's plan and the Social 
Security Commission Model 2, but they are not identical, so 
that the gentleman's statement is narrowly inaccurate. In terms 
of a general reflection, we will have to see, because I am 
quite sure someone will ask the CBO to do the President's plan.
    Mr. DOGGETT. Well, I am sure they will, and I believe that 
risk-adjusted return is what they do to evaluate Railroad 
Retirement and----
    Chairman THOMAS. I understand. But, the gentleman indicated 
the President's plan had been modeled by CBO and----
    Mr. DOGGETT. The concept in the President's plan, since----
    Chairman THOMAS. It was the Social Security Commission Plan 
2----
    Mr. DOGGETT. Doesn't have a plan, or the Secretary of 
Treasury.
    Chairman THOMAS. We have just got to keep the record 
accurate, that is all. The gentleman from Georgia, Mr. Linder.
    Mr. LINDER. Thank you, Mr. Chairman. Mr. Bolten, nice to 
see you again. Thank you for being here.
    Mr. BOLTEN. Likewise, sir.
    Mr. LINDER. You said that 34 percent of the top 1 percent 
of income earners are going to pay 34 percent of all the taxes 
after the tax cut?
    Mr. BOLTEN. Yes, sir, 33.7 percent.
    Mr. LINDER. Do you know what they paid 25 years ago?
    Mr. BOLTEN. I do not.
    Mr. LINDER. Seventeen percent, when the top marginal tax 
rate was 70 percent. It is becoming more and more progressive 
every time we cut taxes. There is something else to remember 
about 25 years ago. We are hearing a lot about all we need to 
do is tax those rich people and it can fix all the problems 
here today, but 25 years ago, the prime rate was 21 percent. 
Home mortgages were 17 percent. Inflation was 14 percent. 
Unemployment was double digits. The economy was $2.5 trillion. 
President Reagan dramatically reduced the tax burden.
    10 years after that, interest rates came down 125 basis 
points a year, mortgage rates were down, the economy had 
doubled in size, and the contributions to the Treasury went 
from $519 billion to $1.054 trillion. It seems to work. It 
worked in 1921. It worked in 1961. It worked in 1981. As John 
Kennedy said, a rising tide lifts all boats. You had more 
people working owing to a good economy. You had more money 
coming into the Treasury. I think you are on the right course 
and I look forward to helping you.
    I would like to make one other point. You and I have talked 
about the tax reform proposal that I have been working on. Had 
we had it in place for the last 4 years, we would have had 
increased revenues in 14 out of 16 of those quarters. Thank 
you, Mr. Chairman.
    Mr. BOLTEN. Thank you, Mr. Linder.
    Chairman THOMAS. I thank the gentleman very much for the 
time. We are attempting to move the Director out by 5:00. I am 
doing everything I can to assure that, but I want to make sure 
Members are heard if they so desire. Does the gentleman from 
North Dakota wish to inquire?
    Mr. POMEROY. I thank the Chairman. Mr. Director, you had a 
wonderful story here today, but then again, you always have a 
wonderful story. In fact, it has been kind of the trend of the 
administration. I had to actually quote from an address made by 
the President to the Congress, his first State of the Union, 
our joint session, I guess it was titled. ``To make sure 
retirement savings of America's seniors are not diverted into 
any other program, my budget protects all $2.6 trillion of the 
Social Security surplus for Social Security and for Social 
Security alone,'' unquote. Well, we know, of course, that every 
dollar coming in for Social Security is being spent on 
unrelated government programs, and, in fact, you as Director 
have been a record setter--the biggest deficit in the history 
of the country last year. In fact, the year before that was the 
biggest. You beat that record. This year, you beat your record 
from last year.
    Although you are telling us things are going to get better, 
there are some very notable omissions to the budget you have 
told us about, including you estimate holding discretionary 
spending at level levels. Among other things, you break the 
farm bill and so many other areas that I believe on a 
bipartisan basis will be rejected. You include no spending for 
Iraq and Afghanistan, even though you have admitted several 
times today you had $81 billion additional. That would push the 
total tab over $300 billion, none of which has ever been 
included in one of your budgets. You admit the cost of Social 
Security borrowing that you are going to have to do to 
privatize the system, even though you admit that that is better 
than three-quarters of a trillion dollars. You don't have any 
money in there for fixing the AMT, although you indicate that 
that is something certainly needing attention. So, I expect you 
are going to do her again. I expect you are going to break your 
own record on these deficits in light of the budget you have 
proposed with the liabilities that you have omitted. I would 
like to move to the discussion on retirement savings and----
    Mr. BOLTEN. Mr. Pomeroy----
    Mr. POMEROY. We were talking about----
    Mr. BOLTEN. Mr. Pomeroy, may I take a moment to correct----
    Mr. POMEROY. Well, regrettably not. Now, maybe the Chairman 
will give you additional leave, but I only have 5 minutes to 
work with.
    Mr. BOLTEN. Understood. I will correct for the record.
    Mr. POMEROY. We have been talking about the top 1 percent 
back at--and we will probably be talking about them a good bit 
more as time goes on, but I want to talk about from an income 
security and retirement standpoint the modest income 
households, the family of four making $40,000, $50,000, trying 
to save for retirement. We have a feature in the Code now, it 
is a savers' credit, and it gives them a matching credit, tax 
credit, for what they are putting into qualifying savings 
accounts. There have been five million new accounts established 
in families that make the qualification, the income 
qualification to use this.
    It is not included in your budget and it goes away at the 
end of this year. You are recommending to Congress that we, in 
essence, let the modest household retirement savings effort 
lapse. On the other hand, you offer something quite different, 
these lifetime savings accounts, and retirement savings 
accounts on top of that which would allow $5,000 per individual 
after tax to go in the lifetime savings accounts for every 
Member of the family. Put it in, pull it out whenever you want. 
Retirement savings accounts, $5,000 on top of that. A family of 
four could conceivably tax shelter nearly $50,000 annually if 
they had that kind of aftertax income.
    So, in my view, the modest income household, the one that 
is having the hardest time saving, they may say to you, but we 
can't afford to save. We don't have any discretionary savings 
left, income left. You say, don't worry. Now you can save 
$5,000 in lifetime savings accounts per individual, $5,000 in 
retirement savings. It is, as you know, a savings tool that 
will be beneficial to affluent households, not at all 
beneficial to modest income households. To have you allow the 
lapse of the credit that helps modest income households while 
advancing this other one is, I believe, absolutely upside down 
retirement policy.
    If there is only one thing more that you could do to screw 
this up, you advance it with your Social Security plan, because 
Social Security offers a guaranteed retirement annuity. It is 
going to pay every month for life. It is going to adjust for 
inflation. The average Social Security check is $834. Now, how 
much risk do you want to add to an amount that is basically 
subsistence household income, and that is the average, so for 
some, it is lower. Instead, you move into that. You reduce the 
inflation adjustment and you add risk into Social Security. For 
the modest income household, no additional help in savings and 
less by way of protection with Social Security.
    Chairman THOMAS. The gentleman's time has expired.
    Mr. POMEROY. I yield back.
    Chairman THOMAS. That may be a request for a written 
response or rhetorical, I don't know which. Do you want a 
written response?
    Mr. POMEROY. However the Director would like to respond.
    Chairman THOMAS. Great. Does the gentleman from Colorado, 
Mr. Beauprez, wish to be recognized?
    Mr. BEAUPREZ. Thank you, Mr. Chairman. It is good to see 
you, Mr. Bolten. You have been accused of a lot of things here 
today, in fact, recently. I will accuse you and the 
administration of something else, and that is for doing a 
pretty darn good job. My recollection is you inherited a 
recession that was well underway and deepening, Severe Acute 
Respiratory Syndrome, an event on 9/11/2001, that frankly, I 
believe, would have crippled and probably collapsed most any 
other nation in the world. Here we sit debating over what is 
the rate of recovery and how much recovery and on and on and 
on. The fact that we are in recovery is a tribute to the 
policies, however accidental or on purpose you have managed to 
put them in place. I think a job well done needs to be passed 
on to the administration, and I will tell you, my folks back 
home in the Seventh District in Colorado recognize that we are 
on the right track and are glad of it. So, my compliments to 
all in the administration, and since you are the one in front 
of us today, to you specifically.
    We have heard today and also yesterday a lot of torturing 
of words. Whether it is personal or private, problem or crisis, 
insolvent or bankrupt, whether the system is awash in cash or 
maybe just fine, thank you, we have heard is it 2042 or 2052, 
all of those are probably going to be debated for a long, long 
time. As a former banker, I will tell you a couple of things 
that I think are pretty clear, though. When I hear unfunded 
liability, you get my attention, and that is exactly what we 
have. We hear all this pretense that somehow we are not going 
to pay benefits. We are going to pay. We have promised that to 
not only this generation, but future generations, and they have 
got a right to expect it. The challenge in front of us is how. 
How do we meet that large of a liability?
    I kind of focus-grouped this back home with four people I 
know pretty well, my four children. They are all going to 
retire right around that 2042 year, just before it or just 
after it. They are quite concerned. They understand the concept 
of an unfunded liability and they know very well that the money 
that went into the trust fund, of which they are paying right 
now in their wages, isn't there. Their name is not on any of 
it. It is a promise from the Federal government, a promise they 
would like to see fulfilled, but they don't understand exactly 
how that is going to happen because they heard the same thing I 
heard from the SSA, that the system as it currently exists is 
unsustainable. That is the challenge in front of us, is it not?
    Mr. BOLTEN. It is, indeed.
    Mr. BEAUPREZ. So, what do we do about it? I think there 
ought to be generational fairness. I think what my mother is 
currently enjoying, receiving a check every month from Social 
Security, I think we ought to be able to promise that to the 
current generation--mine. I think we ought to also be able to 
promise that to my children's generation and my grandson's, for 
that matter, and those that come after. So, how do we do it? We 
just heard a little bit ago that apparently Einstein had it 
wrong. The compound interest isn't the greatest force in the 
world, that somehow by setting up these personal accounts and 
doing the obvious, investing them in very low-risk, sound, safe 
investments, that somehow it isn't going to work. It does work, 
doesn't it?
    Mr. BOLTEN. It does indeed, sir.
    Mr. BEAUPREZ. In fact, we have got a whole lot of proposals 
floating around the Hill right now, and we will see which one 
or ones or combinations thereof end up becoming the bill we try 
to pass, but if I were to suggest that a relatively low-income 
worker making about $20,000 a year could put away a decent 
little amount, part of what they are putting away right now in 
an account at a predictable rate of interest, like four or 4.5 
percent, and perhaps exceed their promised Social Security 
benefit on a monthly basis by 75, 80 percent, that would seem 
to me to be pretty substantial. My children, their generations 
get that. I commend you, Mr. Bolten, and the President for 
bringing this forward. I look forward to working with you to 
make it happy. Question, simply, how powerful is compound 
interest? Einstein is dead and gone. We will ask the living.
    Mr. BOLTEN. I can't improve on Einstein, just to quote him, 
saying it is, in fact, the most powerful force we know, and----
    Mr. BEAUPREZ. Wouldn't that be the--the challenge is, where 
is the money going to come from to pay this promised benefit? 
The money will come from increasing the earning power, creating 
the wealth to pay the benefit.
    Mr. BOLTEN. A substantial part will come that way, and even 
beyond that, just allowing people to own some of their own 
retirement, pass it on to their heirs, and also put it in a 
place where it is not easy for the government to get at it and 
spend it----
    Mr. BEAUPREZ. Very well said. That is why my immigrant 
grandfather came here for, was to own something.
    Chairman THOMAS. The gentleman's time has expired.
    Mr. BEAUPREZ. I yield back. Thank you, Mr. Chairman.
    Mr. BOLTEN. Thank you, Mr. Beauprez.
    Chairman THOMAS. Does the gentlewoman from Ohio wish to 
inquire?
    Ms. TUBBS JONES. Thank you, Mr. Chairman. Sir, how are you? 
Good. Let us pick up where he just left off. People want to own 
some of their own retirement. The privatized accounts that are 
being proposed by the President of the United States, as 
currently proposed, will be required to be placed into an 
annuity and the only way I could access it is if I meet a means 
test, correct?
    Mr. BOLTEN. You know----
    Ms. TUBBS JONES. That is the testimony of Mr. Snow 
yesterday, just in case you----
    Mr. BOLTEN. All right, but I----
    Ms. TUBBS JONES. Want to be consistent with it.
    Mr. BOLTEN. I think that is upon retirement, yes, that----
    Ms. TUBBS JONES. Correct. But, prior to retirement, you 
have no entitlement to it, sir. All it is is on a piece of 
paper saying that it is money that you have in an account. So, 
what I am talking about is upon retirement, I then have to 
place my money in an annuity unless I can meet a means test, is 
that correct?
    Mr. BOLTEN. Some of the proposals I have seen have said 
that, yes, you would----
    Ms. TUBBS JONES. Right, and you have----
    Mr. BOLTEN. In order to ensure that you take it out over a 
reasonable period of time.
    Ms. TUBBS JONES. I understand the concept, but the reality 
is it must be put into an annuity because you don't believe 
that people can take a lump sum and invest it and have money 
down the line. You are not sure that they are capable of doing 
that, and to assure that they have a retirement account, you 
are forcing them into an annuity, is that correct, sir?
    Mr. BOLTEN. Some of the proposals I have seen have had that 
element, yes.
    Ms. TUBBS JONES. Yes. You and your colleagues have been 
good at trying to compare this program, these privatized 
accounts, to a TSP that Members of Congress and other people 
who work for government have access to, is that correct?
    Mr. BOLTEN. Most people have suggested that the private 
account--the personal accounts, sorry----
    Ms. TUBBS JONES. I like the word----
    Mr. BOLTEN. Be structured--yes, I understand----
    Ms. TUBBS JONES. Similar.
    Mr. BOLTEN. But that the personal accounts be structured in 
a way similar to the TSP.
    Ms. TUBBS JONES. The Thrift Savings Accounts, when I 
retire--in fact, I don't have to wait until I retire. I can 
take my Thrift Savings if I take a penalty. But, assume I wait 
until I retire. I am not required to put that money into an 
annuity, sir, am I?
    Mr. BOLTEN. I don't believe so.
    Ms. TUBBS JONES. I would suggest that you stop 
representing, you and the President and everybody else in favor 
of these accounts, representing that they are similar. In fact, 
with a Thrift Savings Account, there is no means test. My name 
is on it and I can pick it up anytime I want to or at 
retirement, correct, sir?
    Mr. BOLTEN. I believe so.
    Ms. TUBBS JONES. Okay. Thank you. Let me also--I am so 
pleased that so many people are worried about working 
Americans. I am worried about the people in my Congressional 
district who are not working. The conversation is there is 5.5 
percent unemployment. There are areas in my Congressional 
district where the unemployment rate is at 13 percent, and all 
of those people who are unemployed would love to have a job 
where they could pay taxes and raise their children. In fact, 
all the people in my Congressional district are looking at the 
budget, and you are part of this budget, or you can represent 
some of the budget that the President just came out with the 
other day, right? I am noting for my seniors in Ohio, there are 
cuts of $45 billion to Medicaid. You are aware that many States 
are struggling to pay their share of Medicaid, are you not, 
sir?
    Mr. BOLTEN. I am aware that States are struggling and that 
is the reason why we are proposing some very fundamental 
reforms to Medicaid that would give governors more flexibility 
in using the Medicaid dollars----
    Ms. TUBBS JONES. But, the budget cuts $45 billion, does it 
not?
    Mr. BOLTEN. The budget seeks savings in the net range of 
$45 billion, reducing the growth----
    Ms. TUBBS JONES. You call it savings in the net range and I 
call it cuts. Let us move on. It also freezes----
    Mr. BOLTEN. Ms. Tubbs Jones----
    Ms. TUBBS JONES. Child care funding for 5 years. It also 
will cause a termination of 300,000 low-income children by 2002 
[sic]. It also eliminates the TRIO's program's Upward Bound, 
Talent Search, Gear Up, and there is one focused on veterans a 
la TRIO. It lowers Pell grants that had been raised and now 
lowered and lowers the eligibility of young people. All of this 
programming that would help people who want to go to work, who 
want to get out of poverty to be a part of a private account 
are struck by the budget--and that is not the budget, but you 
have the budget--that has been proposed over the next 10 years 
for people in America.
    All I am saying to you is, you need to speak truth. You 
need to represent to the American people that with tax cuts and 
with various spending on the war in Iraq and the war in 
Afghanistan, the dollars that are available to do programming 
to keep the safety net going for folks on Social Security, even 
those that are going to be 54, 11 months, and 29 days who are 
locked out of your retirement program, as you propose it, are 
going to have a problem. Thank you, Mr. Chairman.
    Chairman THOMAS. The gentlewoman's time has expired and the 
Chair would indicate to the gentleman from Connecticut and the 
gentleman from Indiana that the gentlewoman from Pennsylvania 
has the remainder of the time prior to the Committee adjourning 
unless she wishes to share it with anyone. The Chair recognizes 
the gentlewoman from Pennsylvania.
    Ms. HART. I am actually tempted to allow the director to 
use all my time to answer the questions that my colleagues on 
the other side of the aisle didn't allow him to answer, if you 
would like to use the first 30 seconds.
    [Laughter.]
    Mr. BOLTEN. I would gladly take those 30 seconds to say a 
couple of things. First of all, when Ms. Tubbs Jones talked 
about Medicaid, we need to understand that this is a program 
that is growing at a rate of 7.4 percent per year in our 
projections, and what we are proposing to do is reduce that 
rate of growth down to 7.2 percent. But, the most important 
thing is that we reform the program so that the Governors have 
the flexibility to make effective use of all that additional 
money we are, in fact, putting out.
    Ms. HART. Are you satisfied?
    Mr. BOLTEN. No, but I think----
    [Laughter.]
    Ms. HART. Okay.
    Mr. BOLTEN. But, I will have an opportunity to be satisfied 
in the record, I am sure.
    Ms. HART. I am glad to hear that. I appreciate you being 
here and doing this marathon thing with us and I appreciate the 
time from the Chairman. I will have some time that I will give 
to Mr. Chocola, so I am going to go into my statement-slash-
question pretty quickly, and that is, first of all, the one 
phrase that I have not heard, or maybe I missed it today, is 
nest egg. I keep hearing suggestions that people can't get into 
that nest egg that would be their Social Security personal 
retirement account any time they want, but if you have a nest 
egg, I certainly hope you don't want to break into it any time 
you want because it is still growing. Isn't the goal of having 
a nest egg or a personal retirement account to wait until you 
are retired?
    Mr. BOLTEN. It is, indeed, and it is supposed to be used 
for retirement, which is why there are the--many of the 
proposals have the provisions that Ms. Tubbs Jones was 
referring to.
    Ms. HART. The last time I looked, a couple of my retirement 
accounts actually have a penalty if I withdraw early for that 
very reason. The goal is to incentivize all of the people who 
are in these programs to leave the money there so it grows. 
That is the whole point. The money that would go into Social 
Security as it is currently wouldn't be able to be accessed 
either before retirement, right?
    Mr. BOLTEN. True.
    Ms. HART. So, we wouldn't be changing anything at all as 
far as a person, a worker's access to that Social Security 
money if we----
    Mr. BOLTEN. Well, actually, we would be changing something 
very important, because if a worker today dies before they 
retire, they lose all of that money that they have been paying 
into Social Security, whereas a personal account that is in the 
ownership of that person, they can pass that on to their heirs.
    Ms. HART. So, it is actually way better in that your name 
is on it. All of those dollars you pay in over all those years 
are yours.
    Mr. BOLTEN. It is a real ownership interest and the 
government cannot spend it.
    Ms. HART. I am very pleased to hear that, and actually, 
since I am sort of on the cusp of the people who might not get 
any money, I am really happy to hear about this. Not only that, 
just one quick thing. I was in the airport coming here the 
other day and a 60-year-old Transportation Security 
Administration worker stopped me and said, ``Make sure you get 
that personal retirement account passed.'' I will now yield my 
time to Mr. Chocola.
    Mr. CHOCOLA. I thank the gentlewoman for yielding. Director 
Bolten, thanks for being here. Very quickly, in the spirit of 
having the opportunity to answer questions that you were not 
given the opportunity to answer, you were asked previously 
about the difference between the personal and private, and I 
think you were going to explain why you don't think this is a 
private program and I would be interested in your answer.
    Mr. BOLTEN. Thank you for giving me that opportunity. A 
private account would be one that is simply an investment that 
you control on your own. This is a part of your fundamental 
retirement. Therefore, the TSP that I was discussing with some 
of your colleagues is the right kind of model in which the 
government is actually managing your account and ensuring that 
the investments are made in what are broadly considered safe 
and secure investments and that you can't be using the money to 
gamble or something like that. So, it is not a privatization of 
the Social Security system. It is merely within that system the 
creation of a personal account that you can own and you can 
direct it toward one of several approved options.
    Mr. CHOCOLA. I see we are running out of time. I thank the 
gentlewoman again for yielding, and Mr. Chairman, I yield back.
    Chairman THOMAS. If the gentlewoman would yield the 
remainder of her time, the Chair would thank the Director and 
indicate--the gentleman from New York wishes to make a comment.
    Mr. RANGEL. Yes. I want to thank the Director. You really 
acted like you enjoyed being here today and that makes it 
easier for us.
    [Laughter.]
    Mr. BOLTEN. It is always an honor to appear before you, 
sir.
    Chairman THOMAS. The Chair thanks the gentleman for the 
gracious time. Except for the intervention of the bills, we 
would have been able to have every Member inquire. That is 
always the Chair's goal. If there are no further questions, the 
Committee stands adjourned.
    [Whereupon, at 5:00 p.m., the hearing was adjourned.]
    [Questions submitted from Mr. Hulshof, Mr. Stark, Mr. 
Cardin, Mr. McDermott, and Mr. Doggett to the Honorable Joshua 
B. Bolten, and his responses follow:]

 Question from Representative Kenny C. Hulshof to the Honorable Joshua 
                               B. Bolten

    Question: Director Bolten, thank you for your testimony today. 
After reviewing the President's budget submission, I am concerned that 
the Administration's proposal relating to Power Marketing 
Administrations, specifically the Southwestern Power Administration, 
will adversely affect over 400,000 of my constituents that reside in 
Missouri's Ninth District. The rate increases that could result from 
these changes would undoubtedly be passed on to consumers. While I 
understand the Administration's motives, I fear that power consumers in 
rural areas of my district will be unduly burdened by this change. 
Could you please elaborate on this proposal and hopefully alleviate my 
fears regarding the impact this could have on those I represent in 
Congress?
    Answer: The budget proposes to very gradually, over several years, 
increase customer rates closer to what other wholesalers in the region 
charge for their power. The proposal's effect would be moderate 
because, in most states where power wholesalers buy PMA power, less 
then five percent of their total power is bought from a PMA. The PMA 
power is blended with other power either generated or purchased by the 
customer and in turn sold to the retail consumer. The blending of the 
power has the effect of diluting the impact that a rate change might 
have on the retail consumer. In addition, because the PMA power sold is 
typically such a small portion of the total retail power sold, the 
impact of a change is further limited. As a result, most households 
served by a customer receiving PMA power would see an increase of about 
$0.08 per month in 2006 and $0.38 per month in 2007.
    I also should mention several other points about the 
Administration's proposal. The intent is to allow rate changes only 
when existing contracts can be modified. Under conditions where 
contracts have not expired or do not allow for a change, no changes 
would be made. In addition, under the proposal, the rates would change 
very gradually and as fairly as possible to avoid some consumers but 
not others bearing an undue share of the change. Finally, the 
Administration in no case would allow rates to increase by more than 
20% in a year. In the instance of your constituents, because about five 
percent of the power sold in Missouri is from a PMA, I do not believe 
rate changes would be near the 20% limit. Given the modest proposed 
increase that would gradually recapture some of the subsidies extended 
to PMAs over the years, and the overriding need to reduce the deficit, 
I was disappointed that the recent Budget Resolution did not assume the 
proposal.

   Questions from Representative Fortney Pete Stark to the Honorable 
                            Joshua B. Bolten

    Question: The budget spends $51 billion/10 on tax breaks for health 
proposals that primarily benefit people with higher incomes (i.e., the 
deduction for high-deductible policy premiums and credits to small 
business owners), while cutting $60 billion in Medicaid funds that 
serve the most poor and vulnerable people. How do you justify this 
reverse Robinhood action?
    Answer: The tax policies you mention benefit individuals of all 
incomes, not just those at the upper end of the income range. In 
addition to these policies, the 2006 Budget includes a Health Insurance 
Tax Credit of $74 billion over 10 years targeted to low-income 
individuals and families that would make health insurance more 
affordable and accessible. This also includes $4 billion over 10 years 
in grants to states to encourage the development of purchasing pools to 
make coverage more accessible.
    The Budget includes $15 billion over 10 years in new Medicaid and 
SCHIP spending to extend coverage. The reductions that you mention 
refer to the Medicaid program integrity proposals included in the 
Budget. The FY 2006 Budget includes a broad package of program 
integrity proposals designed to restore the credibility of the Federal/
State matching system and address other payment concerns. These 
proposals reduce payment inefficiencies, promote personal 
responsibility for long term care expenses, and curb questionable 
financing practices that have been used by a number of States to avoid 
the legally determined State matching funds requirements. Even with 
these changes, Medicaid and SCHIP's future spending is expected to 
increase at a robust growth rate of over 7 percent over 10 years.
    Question: Can you show me where in the budget the 10-year estimate 
is for Medicare spending for Part D (the new drug coverage that starts 
next year)? There is a five-year number ($344.5 billion) on page 395 of 
``Analytical Perspectives.'' What is the ten-year number? It seems to 
me that this is what happens when the pharmaceutical industry is given 
a blank check from which to draw taxpayer funds. Are you comfortable 
with this level of spending for such a meager benefit? What, if 
anything, would the Administration support to lower drug prices?
    Answer: The Budget does not report 10-year estimates for the 
Medicare prescription drug benefit or any other program, but does 
reflect $343.3 billion in spending for the Medicare prescription drug 
benefit and transitional drug assistance program from 2006 to 2010. The 
Administration is working assiduously to implement the drug benefit on 
January 1, 2006, and expects that private prescription drug plans 
participating in the program will be successful in ensuring that 
Medicare and its beneficiaries get the best prices available for 
prescription drugs. We have seen no evidence that further federal 
government intervention will likely produce additional savings.
    The five-year (2006-2010) net cost of the drug benefit (as on p. 
395 of Analytical Perspectives) is $343.3 billion. The figure of $344.5 
billion is actually a six-year cost, as it includes the years 2005-
2010. The Office of the Actuary at the Centers for Medicare and 
Medicaid Services (OACT) originally estimated the total net cost of the 
new Medicare drug benefit at $511 billion for the ten-year window of 
fiscal years 2004-2013.
    OACT recently re-estimated the cost of the drug benefit, both for 
the 2004-2013 period and the FY 2006-2015 budget window. OACT's current 
estimate of the FY 2004-2013 cost is very similar to its original 
estimate: they found the FY 2004-2013 net cost to be an estimated $518 
billion. The net cost from FY 2006-2015 is estimated to be $724 
billion. The table below lays out the original MMA estimates and 
current estimates for the FY 2004-2013 and FY 2006-2015 budget windows:

Medicare Prescription Drug Benefit Outlays Comparison of MMA Scoring to 
           2006 President's Budget Estimates ($ in billions)

                                            MMA Estimates FY 2006 PB

                                                                                     Estimates

                                                                     2004-2013       2004-2013       2006-2015

Gross benefit outlays                                                        820             849           1,192
Premium receipts                                                            -102            -102            -145
Receipts from States                                                         -85             -97            -134
Net Medicare Rx outlays                                                      634             650             913
Net Medicare cost                                                           -123            -132            -189
Net Rx benefit outlays                                                       511             418             724

Source: CMS, Office of the Actuary

    The new, voluntary Part D benefit offers assistance to all Medicare 
beneficiaries who wish to enroll. The benefit targets extra assistance 
to low-income beneficiaries, many of whom will pay no premium and face 
only nominal cost-sharing. In addition, the Part D benefit ensures that 
every beneficiary who enrolls is protected against very high drug 
spending. We would also note that the Medicare Modernization Act 
includes incentives for employers to continue offering drug coverage to 
their retirees. For these reasons, the Administration thinks it is 
inappropriate and inaccurate to refer to the Medicare drug benefit as 
meager.
    The Administration believes that the structure of the Part D 
benefit--where private health plans will compete to offer affordable 
drug coverage to Medicare beneficiaries--is the best way to moderate 
drug prices.
    In a January 23, 2004 letter to the Senate Majority Leader, the 
Congressional Budget Office said that striking the non-interference 
provision (the one that prohibits the Secretary from negotiating 
Medicare drug prices) would:

       have a negligible effect on federal spending because CBO 
estimates that substantial savings will be obtained by the private 
plans and that the Secretary would not be able to negotiate prices that 
further reduce federal spending to a significant degree. Because they 
will be at substantial financial risk, private plans will have strong 
incentives to negotiate price discounts, both to control their own 
costs in providing the drug benefit and to attract enrollees with low 
premiums and cost-sharing requirements.\1\
---------------------------------------------------------------------------
    \1\ Congressional Budget Office, Letter to the Honorable William H. 
Frist, M.D., January 23, 2004.
---------------------------------------------------------------------------
    Question: Most of the President's health agenda seems to be through 
the Department of the Treasury, yet neither the Treasury nor the 
Department of Health and Human Services can explain the net effect of 
the President's budget proposals or the assumptions behind them. As a 
representative of the only cross-cutting entity, I hope you will be 
able to provide answers to the following questions:

      Estimated take-up rate for each program and cumulatively 
by AGI and/or tax bracket.
      Estimates of newly insured for each proposal, as well as 
the cumulative effect and the data source for these estimates.
      Estimates of the drop in employer-sponsored coverage for 
each proposal and cumulatively.
      Estimated out-of-pocket costs, in dollars, for 
individuals participating in these programs.
      Estimated out-of-pocket costs as a percent of net income 
for each income bracket.
      The tax benefit at each income bracket for each proposal, 
as well as the cumulative tax benefit of these proposals for 
individuals in each tax bracket.

    Answer: The scoring of tax-related policies included in the Budget 
is done exclusively by the Department of Treasury. Questions about the 
detailed assumptions used in the scoring are best directed to the 
office of the Assistant Secretary of Tax Policy at Treasury.
    Question: 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/$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?
      What do you estimate the mean and median out-of-pocket 
costs will be for individuals and families with high-deductible health 
plans?
      How are these out-of-pocket costs taken into account in 
your estimated take-up rates?

    Answer: The scoring of tax-related policies included in the Budget 
is done exclusively by the Department of Treasury. Questions about the 
detailed assumptions used in the scoring are best directed to the 
office of the Assistant Secretary of Tax Policy at Treasury.
    As is the case with conventional health plans, the high deductible 
health plan will be responsible for communicating the specifics of 
their coverage to beneficiaries.
    Question: The President claims that HDHPs will control costs, but 
evidence suggests otherwise. Please answer the following questions:

      What are your underlying assumptions for this policy and 
what data are you using to support these assumptions?
      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 are your estimates of necessary vs. unnecessary 
spending by individuals currently? How do you define unnecessary 
spending?
      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)

    Answer: The scoring of tax-related policies included in the Budget 
is done exclusively by the Department of Treasury. Questions about the 
detailed assumptions used in the scoring are best directed to the 
office of the Assistant Secretary of Tax Policy at Treasury.
    The Budget does not project a decrease in aggregate health 
spending. The Administration believes that providing consumers with 
greater choice and responsibility for their health care will create 
incentives for them to purchase services more prudently. This, in turn, 
will lead to lower health care costs.
    Question: 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?
    Answer: The scoring of tax-related policies included in the Budget 
is done exclusively by the Department of Treasury. Questions about the 
detailed assumptions used in the scoring are best directed to the 
office of the Assistant Secretary of Tax Policy at Treasury.
    Question: 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. 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?
    Answer: The Administration believes the deduction will encourage 
individuals to purchase high deductible health plans and health savings 
accounts and to become more active participants in purchasing health 
care services. The deduction provides individuals taking advantage of 
these innovative products the same tax benefit that individuals with 
employer-sponsored health insurance enjoy. In this way, the 
Administration believes the deduction levels the playing field between 
employer-sponsored insurance and insurance purchased in the non-group 
market.
    Question: The President is once again calling for Association 
Health Plans (AHPs) in the budget. This proposal is said to provide for 
less expensive pooling options because AHPs are exempt from state 
insurance regulations. However, this also means that they are exempt 
from consumer protections such as guaranteed issue, rate setting, and 
limitations on pre-existing condition exclusions. Given these facts, 
please answer the following:

      Which state regulations do you feel health plans should 
be exempt from and why?
      Do you anticipate issuers using medical underwriting to 
refuse to sell an HDHP?
      Will they be able to 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?
      How does this effect your enrollment assumptions?
      How do the grants to states to operate pooling 
arrangements interact with AHPs?

    Answer: The detailed legislation/regulations to implement this 
policy have not been developed. It is important to the Administration 
that consumer protections are maintained while providing small 
employers and other groups the opportunity to access more affordable 
health insurance. The Administration looks forward to working with 
Members of Congress to form the specifics of this proposal.
    Question: The budget mentions a proposal to regulate health 
insurance across state lines, yet state regulations for insurance 
products differ considerably.

      What standard is the President proposing for inter-state 
insurance regulation?
      Your documents suggest that you support consumer 
protections, but no specifics are given. Which protections do you 
propose to drop? Maintain?
      How will the Administration protect consumers from a 
``race to the bottom,'' where states are forced to accept policies 
approved in places where consumer protections are much less strong?
      Which department would have responsibility for this 
program--Treasury, HHS or Labor?
      How does this new policy affect your enrollment 
estimates?

    Answer: The detailed legislation/regulations to implement this 
policy have not been developed. It is important to the Administration 
that consumer protections are maintained while providing small 
employers and other groups the opportunity to access more affordable 
health insurance. The Administration looks forward to working with 
Members of Congress to form the specifics of this proposal.
    Question: Does the budget include any savings from malpractice 
reform? How were these savings calculated and what sources support 
these assumptions?
    Answer: The Administration remains committed to enactment of 
medical liability reform. While these changes will have significant 
positive economic effects and will reduce government expenditures, 
current scoring practices prevent OMB from reflecting them in the 
budget. Therefore, the budget does not include savings associated with 
malpractice reform.

Question from Representative Benjamin L. Cardin to the Honorable Joshua 
                               B. Bolten

    Question: Under the proposal that the Administration is 
considering, you have stated that individuals over 55 can expect to see 
no reduction in their benefits. How much of a reduction do you 
anticipate in the benefits for individuals under 55 who choose private 
accounts? How much of a reduction do you anticipate in the benefits of 
those who do not opt for private accounts? What effect will your 
proposal have for surviving spouses and children and for disabled 
beneficiaries?
    Answer: The President has stated that disability benefits will not 
be affected by reform.
    Under the President's proposal, retirement benefits would grow 
relative to today's levels. Future generations of seniors would receive 
benefits that are at least as high as seniors receive today, even after 
adjusting for inflation. The Pozen proposal referenced by the President 
would allow for faster overall long-term benefit growth than can be 
paid by current-law Social Security, with lowest-income Americans 
getting the fastest benefit growth of all, significantly faster than 
inflation. Medium-wage earners would also receive benefit growth faster 
than inflation, and the Social Security actuary's analysis of the plan 
found that low, medium, and high earners under the Pozen plan would all 
receive benefits that are higher than the current system can pay. All 
of these figures exclude income from personal accounts. SSA figures 
show that expected benefit growth would be even greater for those who 
choose to participate in voluntary personal accounts.
    Under the President's proposal, Social Security would for the first 
time enable workers to leave a bequest at the time of their death. 
Workers choosing a personal account could pass the balance on to their 
spouse should they die before exhausting the account. These inherited 
account balances can significantly increase the benefits received by 
widows. Under current payable benefits, in 2050 roughly 3.9 percent of 
widows would live in poverty. Under progressive benefit growth plus 
personal accounts, this would be reduced to just 1.1 percent, lifting 
over 180,000 widows out of poverty. This poverty rate is even lower 
than under currently scheduled benefits, which are not affordable. 
(Data from SSA Office of Policy MINT model).

Questions from Representative Jim McDermott to the Honorable Joshua B. 
                                 Bolten

    Question: It seems likely that any number of media consultants, 
public relations firms, copy writers and others must be involved in the 
effort to communicate the President's views on Social Security to the 
American people. We know from news reports that the Administration pays 
B that taxpayers are paying B these kinds of firms, and sometimes even 
journalists, to spread the Bush Administration's message.
    Where do I find this in the budget?
    Secretary Snow says that this budget is transparent. He mentioned 
it several times at a recent hearing in the Committee on Ways and 
Means. Where do I look to find the names of the Public Relations firms 
that have been hired and how much they're making?
    I would like a full accounting of the amount of money that the Bush 
Administration spent or plans to spend on public relations efforts in 
FY 2004 through FY 2006. Please detail the purpose of each expenditure 
and to whom contracts were awarded.
    Answer: In his State of the Union Address, President Bush outlined 
for the nation his vision to strengthen and save Social Security.
    The President's plan calls for reforms that would keep Social 
Security's promises for today's seniors and those near retirement; 
solve the financial problems of the current system once and for all; 
and make Social Security a better deal for younger workers by allowing 
them to set aside part of their payroll taxes in voluntary personal 
retirement accounts.
    Thanks in large part to the President's leadership and courage, the 
national discussion is now focused on the serious problems facing 
Social Security. Americans understand that the current system won't be 
there for their children and grandchildren. They understand that action 
needs to be taken now to keep the promise of Social Security alive.
    The Social Security Information Center (SSIC), which is part of 
Treasury Department's Office of Public Affairs, communicates both the 
current demographic challenges facing Social Security and the 
President's proposals to permanently fix this important system for 
future generations. The SSIC supports the Department's strategic goal 
of promoting economic opportunity and ownership and supporting the 
Secretary in his role as Managing Trustee of the Social Security trust 
funds.
    The FY 2005 costs for the Center will be approximately $275,000 to 
support five government employees. The Center was not planned during 
the development of the FY 2005 budget and thus was not included in the 
FY 2005 materials. The current estimates for the FY 2006 costs, based 
on December 2005 wind down date, are $125,000. No funds have been used 
for outside commentators, consultants, or paid advertisements of any 
kind.
    Question: If Social Security is dismantled and replaced with a 
system that relies on private accounts to fund retirement benefits, as 
the President has proposed, will the Social Security Administration 
(SSA) be able to send a statement that shows an exact dollar figure 
that individuals can expect to receive in retirement (as SSA does now), 
or will the statement show a band B a range B of potential benefit 
levels? Will there be a disclaimer anywhere that says that the benefit 
level is an estimate based on the expected returns of private accounts? 
Lastly, how accurately can one predict investment returns 40 or 50 or 
60 years into the future (please give examples of such accurate 
predictions)?
    Answer: While I disagree with the premise that the President has 
proposed dismantling Social Security, the President has proposed 
allowing younger workers the choice to voluntarily invest a part of 
their Social Security taxes in personal accounts. These accounts offer 
workers increased ownership and control, the ability to build a nest 
egg, and the opportunity to receive higher rates of return than 
traditional Social Security. The accounts will be managed in a similar 
way to the Thrift Savings Plan (TSP) Records will be maintained by a 
central administrator and participants will receive periodic account 
statements. The combination of the traditional benefit and the personal 
retirement accounts will give younger workers the opportunity to be 
better off.
    The Social Security Administration's independent Office of the 
Chief Actuary's makes projections of the expected return for personal 
accounts based on historic patterns for equities and corporate bonds 
and taking into account future expected patterns in equity and bond 
pricing. The actuaries project the long-term average annual real yield 
for the stock market will be6.5% in the future. This estimate is 
similar to the Congressional Budget Office's estimate of the long-term 
real return of 6.8%. This return compares to historical returns of 6.8% 
since 1871.
    Projections over extended periods of time always carry a degree of 
uncertainty. This is true for long-term investment returns as it is for 
the finances of the underlying Social Security system. To account for 
this uncertainty, the Social Security Trustees, as well as the office 
of the actuary, show a range of possible outcomes. Even under a wide 
range of outcomes, however, certain trends are relatively certain. For 
example, the Trustees found that there is a 95%chance that the current 
Social Security program will enter permanent cash deficits at some 
point between 2013 and 2023.Thus, while there is uncertainty 
surrounding the precise details of the projection, there is 
considerably less so about the fundamental long-term direction of the 
program. Similarly, with stock return projections, there is uncertainty 
over the precise numerical projection, but there is not uncertainty 
over the fundamental projection that stocks will continue to earn 
higher long-term returns than the Treasury bond rate, which in turn is 
higher than the internal rate of return that future workers will 
receive from the traditional Social Security program.

 Question from Representative Lloyd Doggett to the Honorable Joshua B. 
                                 Bolten

    Question: The Administration's budget does not include continuation 
of the deduction for state and local sales taxes. Does the 
Administration oppose continuing the deduction?
    Answer: The Administration does not support continuing the 
deduction for state and local sales taxes. However, the Administration 
recognizes there is a question of fairness in allowing State and local 
income and property taxes to be deductible while sales taxes are not 
deductible. The Administration believes the inconsistency of the 
respective tax treatments can and should be addressed in the context of 
fundamental tax reform.

    [Submission for the record follows:]
   Statement of Eduardo Ferrero, Embassy of Peru to the United States
    House of Representatives Ways and Means Committee, Hearing on the 
President's Fiscal Year 2006 Budget
    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 Counterdrug 
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 antidrugs 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.

                                  
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