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


 
              DOMESTIC ENTITLEMENTS AND THE FEDERAL BUDGET

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 15, 2006

                               __________

                           Serial No. 109-14

                               __________

           Printed for the use of the Committee on the Budget


                       Available on the Internet:
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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JIM RYUN, Kansas                     JOHN M. SPRATT, Jr., South 
ANDER CRENSHAW, Florida                  Carolina,
ADAM H. PUTNAM, Florida                Ranking Minority Member
ROGER F. WICKER, Mississippi         DENNIS MOORE, Kansas
KENNY C. HULSHOF, Missouri           RICHARD E. NEAL, Massachusetts
JO BONNER, Alabama                   ROSA L. DeLAURO, Connecticut
SCOTT GARRETT, New Jersey            CHET EDWARDS, Texas
J. GRESHAM BARRETT, South Carolina   HAROLD E. FORD, Jr., Tennessee
THADDEUS G. McCOTTER, Michigan       LOIS CAPPS, California
MARIO DIAZ-BALART, Florida           BRIAN BAIRD, Washington
JEB HENSARLING, Texas                JIM COOPER, Tennessee
DANIEL E. LUNGREN, California        ARTUR DAVIS, Alabama
PETE SESSIONS, Texas                 WILLIAM J. JEFFERSON, Louisiana
PAUL RYAN, Wisconsin                 THOMAS H. ALLEN, Maine
MICHAEL K. SIMPSON, Idaho            ED CASE, Hawaii
JEB BRADLEY, New Hampshire           CYNTHIA McKINNEY, Georgia
PATRICK T. McHENRY, North Carolina   HENRY CUELLAR, Texas
CONNIE MACK, Florida                 ALLYSON Y. SCHWARTZ, Pennsylvania
K. MICHAEL CONAWAY, Texas            RON KIND, Wisconsin
JOHN CAMPBELL, California

                           Professional Staff

                     James T. Bates, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 15, 2006................     1
Statement of:
    Hon. David M. Walker, Comptroller General, Government 
      Accountability Office......................................     5
    Douglas J. Holtz-Eakin, Ph.D., former Director, Congressional 
      Budget Office..............................................    16
    Isabel V. Sawhill, Ph.D., senior fellow, the Brookings 
      Institution................................................    22
Prepared statements of:
    Mr. Walker...................................................     8
    Mr. Holtz-Eakin..............................................    19
    Ms. Sawhill..................................................    24


              DOMESTIC ENTITLEMENTS AND THE FEDERAL BUDGET

                              ----------                              


                      WEDNESDAY, FEBRUARY 15, 2006

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 2 p.m., in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Crenshaw, Wicker, 
Garrett, Barrett, Diaz-Balart, Hensarling, Lungren, Bradley, 
Mack, Conaway, Chocola, Spratt, Moore, Neal, Baird, Cooper, 
Cuellar, Schwartz, and Kind.
    Chairman Nussle. Good afternoon, and welcome, everyone. 
This is a full Committee on the Budget hearing on domestic 
entitlements and the Federal budget. We have before us today 
three distinguished witnesses, the Honorable David Walker, who 
is the Comptroller General of the Government Accountability 
Office (GAO). He is back for a command performance on this 
topic. This is--at least every year that I have been on this 
committee, General Walker, you have been here to talk about 
this very important issue. Some years we make a little bit more 
progress than others. But we welcome you back to this committee 
and for this topic.
    We have the former Director of the Congressional Budget 
Office (CBO), and, sad to say, former Director Doug Holtz-Eakin 
did an excellent job, as far as I am concerned, on the 
committee. And I think that was something that was joined into 
with both a bipartisan--bipartisan comments upon your 
departure. And we welcome you back and miss your job that you 
did for us.
    And finally, we have Dr. Isabel Sawhill. Dr. Sawhill is a 
senior fellow at the Brookings Institution, and we welcome you 
to the committee for this purpose.
    As most of you all already know, this year has a 
particularly short window for holding hearings--we were just 
talking about that very issue up here at the rostrum--in order 
to provide us the information we need prior to the budget 
markup with only about 2 legislative weeks remaining before we 
have that task in front of us. I believe we have tried our best 
to make the most of our time and to do that by focusing our 
hearings on some pretty critical issues to our budget planning.
    Today we are here to discuss what has necessarily become a 
regular hearing topic, as I said, the current status and 
outlook for our entitlement and, as we call them, mandatory 
spending or autopilot spending. Clearly we have not called this 
hearing today because we need someone to tell us we have a 
mandatory spending challenge ahead of us. That really had 
better not be news to any of us. But after intense debates that 
we have gone through this past year, really just to get our 
foot in the door on this problem, just to take that first step, 
if you will, in addressing what is arguably one of the most 
important challenges of this Congress from a spending 
standpoint--I thought it was wise for us to use the committee's 
time to have this conversation again. So we have before our 
committee today the distinguished witnesses for that purpose.
    As I noted at last week's hearing on the President's budget 
request, our Nation's priorities have undergone certainly a 
major shift in the past several years. In addition to ongoing 
demands of critical domestic areas such as education, 
transportation, the environment, we could go on and on, we are 
now facing continuous threats of an international terrorism and 
growing pressures of inadequate domestic energy supplies. In 
addition, we continue to witness the unsustainable growth of a 
number of our government's largest and often the most important 
programs, and those are our mandatory entitlement programs.
    All of these needs certainly place greater demands on an 
already stretched Federal budget, and it doesn't get any easier 
from here. Getting control of the budget requires that we 
understand and manage the ongoing shift in this balance of 
these priorities.
    Last year we took another step in our long-term fiscal 
plan, a strategy to keep our economy growing strong, to create 
jobs, control spending across the board--and across the board 
in our budget--and continue our progress in reducing the 
deficit. Even as we adjusted for the challenges of the ongoing 
war and debilitating natural disasters, we have stuck with our 
fundamental plan, and we have done so for two reasons: First of 
all, because we believe in it; and second of all, because it is 
working. The economy last year grew at a robust 3.5 percent, 
and the forecasters estimate that future growth remains above 3 
percent as we look forward into the future.
    In January, payroll employment grew by 193,000 jobs. The 
unemployment rate dropped to 4.7 percent. We have created just 
in the last 3 years almost 5 million jobs, the lowest rate of 
unemployment at 4.7 percent in just these last 2 months, and 
that is the lowest since 9/11 as an example. We have had 29 
consecutive months of job growth and 4.8 million new jobs 
created.
    Because more people are working and earning more, they are 
certainly generating more in tax revenue--we know that. The 
Government took in about 15 percent more in revenue last year 
alone. This is happening as we maintain lower tax rates that 
were adopted in 2001 and 2003. We have also held our 
nonsecurity discretionary spending to a near freeze, tighter 
than last year's 1.3 percent growth, and a marked improvement 
from the 5-year average growth in our areas there in 
discretionary spending of a little over 6 percent. So we have 
made some progress there.
    And just last week the President signed into law the 
Deficit Reduction Act of 2005, which begins a process that 
frankly should have started even sooner than that, and that is 
an annual look at reforming our most important programs to make 
sure that they are delivering a quality product at a low cost. 
It is the first time that we have done this in almost a decade, 
and in this process we have saved the taxpayers about $40 
billion just in the next 5 years.
    So we are making some progress, but we are not finished. We 
must keep the economy growing strong, but we will not grow out 
of this problem, as General Walker has told us, as Dr. Holtz-
Eakin has told us, as we all, I think, will admit; we are not 
going to grow out of this problem. Growth is important, but it 
is not the end of the equation. We have to continue the work to 
restrain discretionary spending even as we respond to what is 
natural responses, whether it is the war, the hurricanes. But 
even as these things are critical, we must continue to meet 
this challenge of mandatory spending.
    This spending is growing at about 6 percent per year, which 
is faster than our economy. That is faster than inflation, and 
far beyond our means to sustain it. And with the first baby 
boomers turning 60 this year, medical costs skyrocketing, and a 
steady decline of the number of workers for each retiree, the 
problem only gets worse as you look further down the road.
    So these programs need to be reviewed not once every 
decade, but regularly. This should be a regular process. In 
fact, when we get out of that regular process, it becomes even 
more difficult to come back to it the way we did this last 
year.
    Again, the Deficit Reduction Act was an important step, but 
it was not something that is going to fix this problem or this 
challenge with one stroke. As we begin to craft this year's 
budget, I believe we need to determine the best course to 
further our effort to reform and find savings in these very 
important programs.
    And so, to that end, again, I welcome all of our witnesses. 
I am not expecting to find any particularly easy solutions 
today, or, for that matter, definite solutions. There are as 
many solutions as there are Members of Congress and as there 
are experts in the field. There are certainly many ways we can 
approach this. But I believe we need to set the commitment that 
we will continue a process to approach this on a regular basis.
    So with that, let me turn it over to Mr. Spratt for any 
comments he would like to make. Welcome, Mr. Spratt.
    Mr. Spratt. First of all, to our distinguished panel, 
General Walker and Dr. Holtz-Eakin, and Dr. Sawhill, we have 
heard of the revolving door in Washington before, but this may 
be a record. We are delighted to have you here and hope that 
this is the beginning of a beautiful relationship. We look 
forward to working with you further in a different capacity.
    Let me just echo to some extent what the chairman has just 
said and say that this kind of hearing is not only necessary to 
the process we are currently engaged in, but it should be a 
perennial as we bear down on this problem until we finally find 
solutions and get the results.
    The aging of our population is something that we should in 
a sense celebrate, but it is also a burden to provide for. It 
is going to put unprecedented pressure on our health and our 
retirement systems. And we need to be looking for solutions 
now, not when the pressure comes to bear.
    As you talk about long-term solutions today, I think you 
will all agree that you don't reach the long-term solutions 
until you deal with the short-term solution. As long as we are 
accumulating debt and stacking debt on top of debt, we are 
making it more and more difficult--not easier, but more and 
more difficult--to accommodate the demands that we know are 
coming for the widening wages of Medicare, Medicaid, and Social 
Security.
    For example, if we were able to eradicate most of the debt 
we are incurring, get rid of the deficit we have got today, we 
could substantially reduce debt service's percentage of the 
total Federal budget, and that could be used to accommodate the 
2 percentage points that will be necessary of GDP to take care 
of the solvency of Social Security in the future.
    We also would like for you to comment, if you will, on the 
fact that while these are problems we have got in the Federal 
Government due to the fact that we are heavily invested in the 
health care sector. We have got two major health care 
entitlements and other, smaller entitlement programs that are 
significant as well, Veterans Administration, military health 
care, and Federal employees health care. All of these make the 
Federal Government far and away the largest purchaser, consumer 
of health care in our entire economy. But this reminds us that 
the problem that we are talking about today is not unique to 
Medicare or Medicaid or any of the other health care programs. 
It is part and parcel of the problem of health care in our 
entire society.
    It is worth bearing in mind that last year the cost of 
Medicare and Medicaid went up by 6.8 to 6.9 percent 
respectively, which compares favorably with the cost last year, 
the cost increase last year, for private health insurance, 
which I understand was over 12 percent, 10 to 12 percent 
depending on the type of coverage you got. But we have a 
problem, but it is a social problem. It is a societal problem 
and affects all of these programs and not just Medicare and 
Medicaid. It affects those two because we are so heavily 
invested in them. But we would like your observations to about 
what to do about the overall social cost of these programs.
    We welcome your presence here today, and look forward to 
hearing your testimony, and look forward to working with you in 
the future to obtain solutions to these clearly serious 
problems. And if you would also have any comments about 
process, because this is a case where process may have a lot to 
do with whether or not we reach a solution, we would welcome 
those comments as well.
    Mr. Wicker. Gentlemen and lady, your written statements 
will, of course, be submitted for the record, without 
objection, and, I am told to begin left to right. So, General 
Walker, you are recognized first for any comments you might 
make in addition to those submitted into the record.

STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL, GOVERNMENT 
 ACCOUNTABILITY OFFICE; DOUGLAS J. HOLTZ-EAKIN, Ph.D., FORMER 
 DIRECTOR, CONGRESSIONAL BUDGET OFFICE; AND ISABEL V. SAWHILL, 
        Ph.D., SENIOR FELLOW, THE BROOKINGS INSTITUTION

                  STATEMENT OF DAVID M. WALKER

    Mr. Walker. Thank you, Mr. Chairman, Ranking Member Spratt, 
other members of the committee. It is a pleasure to be back 
before the House Budget Committee.
    Given the fact that my entire statement is included in the 
record, what I would like to do is with the assistance of the 
staff use PowerPoint to be able to make some points based upon 
the graphics that are contained within my statement. First one, 
please.
    The first graphic demonstrates, among other things, that 
our Nation is on an imprudent and unsustainable fiscal path. 
The status quo is unacceptable and unsustainable. Economic 
growth will not solve our problem. Tough choices on spending 
and tax policies will be required, the sooner the better, 
because when you are a debtor, the miracle of compounding works 
against you rather than for you. (Figure 1.)
    Mandatory spending reform, including entitlement reform, 
must be part of the overall equation looking forward.
    This shows you past trends and future projections from CBO 
with regard to mandatory spending, discretionary spending and 
net interest costs. And as I said, the past cannot be prologue.
    Next, please. I will show two long-range budget simulations 
by GAO, the latest ones we have done in January 2006. We rely 
upon our sister agency CBO for certain assumptions, but then we 
go out over a longer term than CBO's annual report. This is the 
first simulation I will show you, and it is based on CBO's 
baseline. (Figures 2 and 3.)
    I will restate for the record, there are four assumptions 
that CBO is required to make by law that are not realistic, 
and, therefore, provide a misleading view about where we are 
headed. CBO does a good job, but there are certain constraints 
put on them.
    First, no new laws will be passed, even if there is 
agreement on certain pieces of legislation. No. 2, 
discretionary spending will grow by the rate of inflation for 
10 years. No. 3, all tax cuts will sunset as specified under 
current law. And No. 4, the alternative minimum tax will not be 
``fixed.''
    This shows under those assumptions--and I would 
respectfully suggest none of them are realistic, much less all 
of them--that we have a large and growing problem starting in 
2015. (See Figure 1.) It is no wonder people say, don't worry 
about it, that is a long way off, I may not be here; there is a 
margin of error with the assumptions; or, don't worry, we will 
grow our way out of the problem.
    The next one.
    There are only two changes between this scenario and the 
last one. Discretionary spending grows by the rate of the 
economy, rather than the rate of inflation, for the first 10 
years; and secondly, that all tax cuts are made permanent. I am 
not saying that is good, bad, or indifferent. That is just how 
the math works. And, by the way, this is not interest-rate-
sensitive. (Figure 2.)
    We know that over time, if we keep borrowing at the rates 
that we have been, we are going to have to start paying higher 
interest rates, and that will start a vicious cycle that 
ultimately every American will pay a price for.
    Next, please.
    This shows you how Social Security, Medicare, and Medicaid 
are projected to grow dramatically in the future years not just 
as a percentage of the budget, but as this shows, as a 
percentage of the economy. (Figure 4.)
    To give you a sense: as of the end of fiscal 2005, which 
is, as you know, September 30, 2005, we would have had to have 
had $5.7 trillion invested at Treasury rates in order to 
deliver on the Social Security promises for the next 75 years. 
It is a bigger number for infinity, but 75 years is enough, 
$5.7 trillion invested at Treasury rates. We would have had to 
have about $30 trillion invested at Treasury rates to deliver 
on Medicare promises for the next 75 years, of which Medicare 
Part D is $8.7 trillion.
    Next, please.
    I think one of the things we have to keep in mind is that 
tax expenditures must be on the radar screen. They are 
currently largely off the radar screen. (Figure 5.)
    We spend $700 to $800 billion a year on tax preferences. 
They are not in the financial statements of the U.S. 
Government, they are not part of the appropriations process, 
they are not part of the periodic reexamination that sometimes 
occurs on the spending side. But in many cases, what happens is 
tax preferences are back-door spending, and since there are no 
current PAYGO rules effective for tax expenditures or tax 
items, then sometimes people will try to achieve through the 
Tax Code what they are not able to achieve through direct 
spending. That has an adverse effect on the bottom line.
    And so we need to look at both sides of the ledger. We are 
spending a lot of money here.
    The fastest-growing tax preference is health care. And if 
you add not only the exclusion from income, but also the 
exclusion from payroll taxes, it was estimated that the cost of 
the health care tax preference to individuals was $178 billion 
last year and growing very rapidly.
    Next, please.
    We issued a report within the last month about possible 
options for looking at controlling mandatory spending. As you 
know, 61 percent of last year's budget was on autopilot, and it 
is going up every year. That is a combination of mandatory 
spending and interest, which I would argue is mandatory 
spending.
    In our report we discussed the possibility of using 
triggers to force some type of action. There are two types of 
triggers. There are hard triggers where you automatically 
impose certain actions if the trigger is hit, and there are 
soft triggers where process would be invoked--which may or may 
not involve a commission, may or may not involve an agency like 
GAO or CBO or others--a process by which Congress would be 
provided certain information and would have to at least 
consider taking certain action in order to get us on a more 
prudent path. (Figure 6.)
    Last, please.
    I am sorry. There is one more after this.
    Health care is the big problem. There are three things 
driving our long-range imbalance. No. 1, we have a situation 
where spending is growing very rapidly, especially on 
entitlement programs. We have demographic trends, and we have 
lower Federal revenues as a percentage of the economy than 
historically has been the case, and yet we haven't hit the 
tidal wave of the baby boom generation. (Figure 7.)
    Mr. Spratt its exactly correct. Ultimately we are going to 
have to reform the entire health care system, but in 
installments over many years, because it is not only an issue 
at the Federal level, it is an issue at the State level. 
Medicaid is the fastest-growing cost for most States, and 
health care is also the single number one competitiveness 
challenge of U.S. business. It might take us 20 years to do it 
in installments, but we are going to have to do it. These are 
ideas for consideration by the Congress. One of the items that 
isn't on this list, but I think you need to think about, is 
revisiting Part D, $8.7 trillion, more than the entire debt of 
the United States outstanding since the beginning of the 
Republic, almost twice Social Security's unfunded balance.
    And then last, the way forward for your consideration. Not 
everybody will like these, but I say the same thing everyplace 
I go. Reimpose budget controls on both sides of the ledger, on 
both the spending side and the tax side of the ledger. PAYGO 
rules. Discretionary spending caps, and mandatory spending 
triggers. We need to improve our accounting and reporting and 
other metrics with regard to financial statements, with regard 
to consideration of the long-term cost, affordability and 
sustainability of both spending proposals and tax proposals 
before legislation is enacted into law or before it is renewed. 
We need a set of key national indicators, safety, security, 
social, economic, environmental, to understand how we are 
trending, how we compare to other nations to assess which 
spending programs and tax policies are working, and which ones 
aren't, and which ones need to be reengineered or eliminated. 
(Figure 8.)
    If the Members have not read this document, I respectfully 
request that you read it, and I have sent a copy to every 
Member on the Hill, and I will send you another one if you 
want.\1\ It raises over 200 illustrative questions that need to 
be asked and answered about government. Our government is 
largely based on the 1950s and the 1960s, and we need to bring 
it into the 21st century, especially given the fiscal 
challenges we face.
---------------------------------------------------------------------------
    \1\ GAO, 21st Century Challenges: Re-Examining the Base of the 
Federal Government, GAO-05-325 SP (February 2005).
---------------------------------------------------------------------------
    And last, we are going to have to reform entitlement 
programs, reexamine the base of all spending, including 
mandatory spending, and review tax policy, all three, because 
the gap is too great to do it on even two of the three. We are 
going to have to do all three. I look forward to working with 
this committee and others in Congress to try to help do that in 
the coming years.
    Thank you.
    Mr. Wicker. Thank you very much, General Walker.
    [The prepared statement of David M. Walker follows:]

Prepared Statement of Hon. David M. Walker, Comptroller General of the 
                             United States

    Mr. Chairman, Representative Spratt, and members of the committee, 
I appreciate this opportunity to talk with you about the need to look 
at entitlement and other mandatory spending programs in light of our 
nation's long-term fiscal outlook and the challenge it poses for the 
budget and oversight processes.
    As I have said many times before, meeting our nation's large, 
growing, and structural fiscal imbalance will require a three-pronged 
approach:
     restructuring existing entitlement programs,
     reexamining the base of discretionary and other spending, 
and
     reviewing and revising existing tax policy, including tax 
expenditures,\1\ which can operate like mandatory spending programs.
---------------------------------------------------------------------------
    \1\ Tax expenditures result in forgone revenue for the Federal 
Government due to preferential provisions in the tax code, such as 
exemptions and exclusions from taxation, deductions, credits, deferral 
of tax liability, and preferential tax rates. These tax expenditures 
are often aimed at policy goals similar to those of Federal spending 
programs; existing tax expenditures, for example, are intended to 
encourage economic development in disadvantaged areas, finance 
postsecondary education, and stimulate research and development. See 
GAO, Government Performance and Accountability: Tax Expenditures 
Represent a Substantial Federal Commitment and Need to Be Reexamined, 
GAO-05-690 (Washington, DC: Sept. 23, 2005).
---------------------------------------------------------------------------
    Before I turn to the major driver of the long-term spending 
outlook--rising health care costs combined with known demographic 
trends--I'd like to step back and take a broader view of the need to 
reexamine and reconsider what the Federal Government does, how it does 
it, and who does it. We are in the first decade of the 21st century but 
the basis and design for many of the Federal Government's activities 
date from before I was born.
    In our report entitled 21st Century Challenges: Reexamining the 
Base of the Federal Government,\2\ we presented illustrative questions 
for policy makers to consider as they carry out their responsibilities. 
These questions look across major areas of the budget and Federal 
operations including discretionary and mandatory spending, and tax 
policies and programs. We hope that this report, among other things, 
will be used by various congressional committees as they consider which 
areas of government need particular attention and reconsideration. You 
will, of course, also receive more specific proposals, some of them 
will be presented within comprehensive agendas--the President's Budget 
released last week is just one very prominent example.
---------------------------------------------------------------------------
    \2\ GAO, 21st Century Challenges: Reexamining the Base of the 
Federal Government, GAO-05-325SP (Washington, DC: February 2005).
---------------------------------------------------------------------------
    Our report provides examples of the kinds of difficult choices the 
nation faces with regard to discretionary spending; mandatory spending, 
including entitlements; as well as tax policies and compliance 
activities. It is, I think, important to recognize that tax policies 
and programs financing the Federal budget can be reviewed not only with 
an eye toward the overall level of revenue provided to fund Federal 
operations and commitments, but also the mix of taxes and the extent to 
which the tax code is used to promote overall economic growth and 
broad-based societal objectives. In practice, some tax expenditures are 
very similar to mandatory spending programs even though they are not 
subject to the appropriations process or selected budget control 
mechanisms. As we reported last September, tax expenditures represent a 
significant commitment and are not typically subjected to review or 
reexamination.
    Mandatory spending programs--like tax expenditures--are governed by 
eligibility rules and benefit formulas, which means that funds are 
spent as required to provide benefits to those who are eligible and 
wish to participate. Since Congress and the President must change 
substantive law to change the cost of these programs, they are 
relatively uncontrollable on an annual basis. Moreover, as we reported 
in a 1994 analysis, their cost cannot be controlled by the same 
``spending cap'' mechanism used for discretionary spending.\3\
---------------------------------------------------------------------------
    \3\ GAO, Budget Policy: Issues in Capping Mandatory Spending, GAO/
AIMD-94-155 (Washington, DC: July 18, 1994).
---------------------------------------------------------------------------
    By their very nature mandatories limit budget flexibility.\4\ As 
figure 1 shows, mandatory spending has grown as a share of the total 
Federal budget. For example, mandatory spending has grown from 27 
percent before the creation of Medicare and Medicaid to 42 percent in 
1985 to 54 percent last year. (Total spending not subject to annual 
appropriations--mandatory spending and net interest--has grown from 56 
percent in 1985 to 61 percent last year.) Under both the Congressional 
Budget Office baseline estimates and the President's Budget, this 
spending would grow further.
---------------------------------------------------------------------------
    \4\ Similarly tax expenditures may limit flexibility on the revenue 
side; there is a tradeoff between tax rates and revenue lost through 
tax expenditures. In order to raise a given amount of Federal revenue, 
tax rates must be raised higher than they otherwise need to be due to 
revenue losses from tax expenditures.
---------------------------------------------------------------------------
  FIGURE 1: FEDERAL SPENDING FOR MANDATORY AND DISCRETIONARY PROGRAMS



Note: Projections assume discretionary spending grows with inflation 
after 2006.

    While the long-term fiscal outlook is driven by Medicare, Medicaid 
and Social Security, it does not mean that all other mandatory programs 
should be ``given a pass.'' As we have noted elsewhere, reexamination 
of the ``fit'' between government programs and the needs and priorities 
of the nation should be an accepted practice.\5\ So in terms of budget 
flexibility--the freedom of each Congress and President to allocate 
public resources--we cannot ignore mandatory spending programs even if 
they do not drive the aggregate.
---------------------------------------------------------------------------
    \5\ GAO-05-325SP.
---------------------------------------------------------------------------
    While some might suggest that mandatory programs could be 
controlled by being converted to discretionary or annually appropriated 
programs, that seems unlikely to happen. If we look across the range of 
mandatories we see many programs have objectives and missions that 
contribute to the achievement of a range of broad-based and important 
public policy goals such as providing a floor of income security in 
retirement, fighting hunger, fostering higher education, and providing 
access to affordable health care. To these ends, these programs--and 
tax expenditures--were designed to provide benefits automatically to 
those who take the desired action or meet the specified eligibility 
criteria without subjecting them to an annual decision regarding 
spending or delay in the provision of benefits such a process might 
entail.
    Although mandatory spending is not amenable to ``caps,'' that does 
not mean that mandatory programs should be permitted to be on autopilot 
and grow to an unlimited extent. Since the spending for any given 
entitlement or other mandatory program is a function of the interaction 
between the eligibility rules and the benefit formula--either or both 
of which may incorporate exogenous factors such as economic downturns--
the way to change the path of spending for any of these programs is to 
change those rules or formulas. We recently issued a report on 
``triggers''--some measure which, when reached or exceeded, would 
prompt a response connected to that program.\6\ By identifying 
significant increases in the spending path of a mandatory program 
relatively early and acting to constrain it, Congress may avert much 
larger and potentially disruptive financial challenges and program 
changes in the future.
---------------------------------------------------------------------------
    \6\ GAO, Mandatory Spending: Using Budget Triggers to Constrain 
Growth, GAO-06-276 (Washington, DC: Jan. 31, 2006).
---------------------------------------------------------------------------
    A trigger is a measure and a signal mechanism--like an alarm clock. 
It could trigger a ``soft'' response--one that calls attention to the 
growth rate or the level of spending and prompts special consideration 
when the threshold or target is breached. Two examples of soft 
responses that could be triggered include requiring the relevant agency 
to prepare a report analyzing why the trigger was tripped and/or 
requiring the President to submit a proposal to change the path or 
explain why he thinks it should remain unchanged. The Medicare program 
already contains a ``soft'' response trigger: The President is required 
to submit a proposal for action to Congress if the Medicare Trustees 
determine in 2 consecutive years that the general revenue share of 
Medicare spending is projected to exceed 45 percent during a 7-year 
period.\7\ Given the Each year the Social Security and Medicare 
Trustees test for program financial adequacy over the next 10 years. 
The results of the test are included in the respective Trustees' 
reports to Congress, in which they note that failure to meet this test 
is an indication that action is needed. A few Social Security reform 
proposals have taken this further by including language requiring 
Presidential and Congressional action if the Social Security Board of 
Trustees determines that the balance ratio of either of the Social 
Security trust funds will be zero for any calendar year during the 
succeeding 75 years.\8\
---------------------------------------------------------------------------
    \7\ For the purpose of the Medicare trigger, general revenue is 
defined as the difference between Medicare program outlays and 
dedicated Medicare financing sources. Dedicated Medicare financing 
sources are defined as Hospital Insurance (HI) payroll taxes, the HI 
share of income taxes on Social Security benefits, state transfers for 
Part D prescription drug benefits, premiums paid under Parts A, B, and 
D, and any gifts received by the trust funds.
    \8\ Recently, this provision was included in the Bipartisan 
Retirement Security Act of 2005, H.R. 440, 109th Cong. Sec.  14 (2005).
---------------------------------------------------------------------------
    Soft responses can help in alerting decision makers of potential 
problems but they do not ensure that action to decrease spending or 
increase revenue is taken. With soft responses, the fiscal path 
continues unless Congress and the President take action. In contrast, a 
trigger could lead to ``hard'' responses requiring a predetermined, 
program-specific action to take place, such as changes in eligibility 
criteria and benefit formulas, automatic revenue increases, or 
automatic spending cuts. With hard responses, spending is automatically 
constrained, revenue is automatically increased, or both, unless 
Congress takes action to override. For example, this year the 
President's Budget proposes to change the Medicare trigger from solely 
``soft'' to providing a ``hard'' (automatic) response if Congress fails 
to enact the President's proposal.\9\ Figure 2 below illustrates the 
conceptual differences between hard and soft responses of a budget 
trigger.
---------------------------------------------------------------------------
    \9\ The response now would include a sequester if the Congress did 
not act on the President's proposal. The proposed sequester would 
result in a four-tenths of a percent reduction in all payments to 
providers beginning in the year the threshold is exceeded. Each year 
the shortfall continues to occur the reduction would grow by an 
additional four-tenths of a percent. We have not yet analyzed how this 
would work.
---------------------------------------------------------------------------
    FIGURE 2: CONCEPTUAL DIFFERENCES BETWEEN HARD AND SOFT RESPONSES



    In our recent report on mandatory spending triggers, we discussed 
the kinds of responses that might be triggered and the importance of 
program-specific design. Proposed changes in underlying benefits 
structure and design of a mandatory program can be considered in the 
context both of the factors that drive the growth of that program and 
the specific goals and objectives of the program. For example, some 
mandatories are intended to have a countercyclical effect; any 
triggered response in these programs would have to be designed not to 
interfere with that function. Its design, therefore, would have to be 
sensitive to whether growth comes because the program is, in fact, 
working as an automatic stabilizer.
    Both near- and long-term perspectives should be considered in the 
design of triggers. For some programs, it might be appropriate to tie 
the trigger to historical data--for example, to see whether spending 
growth was greater than some historical average or path. For programs 
that expose the government to long-term commitments, it might be more 
appropriate to tie the trigger to projections of future spending. For 
``contributory'' programs that represent a long-term commitment of 
future earmarked resources, such as Social Security, one appropriate 
measure could be the actuarial projections of the 75-year outlook. Some 
similar approach might be used for programs like pension or health 
insurance.
    Any discussion to create triggered responses and their design must 
recognize that unlike controls on discretionary spending, there is some 
tension between the idea of triggers and the nature of entitlement and 
other mandatory spending programs. These programs--as with tax 
provisions such as tax expenditures--were designed to provide benefits 
based on eligibility formulas or actions as opposed to an annual 
decision regarding spending. This tension makes it more challenging to 
constrain costs and to design both triggers and triggered responses. At 
the same time, with only about one-third of the budget under the 
control of the annual appropriations process, considering ways to 
increase transparency, oversight, and control of mandatory programs 
must be part of addressing the nation's long-term fiscal challenges.
    Before I turn to the largest driver of our long-term challenge--
rising health care costs--let me note that the idea of triggers need 
not only apply to spending. The revenue side of the budget should also 
be addressed. If, for example, one option to cover the increased costs 
of a mandatory spending program was a premium increase or tax increase, 
it would serve to increase public visibility and could make the 
American people more aware of how much they are paying for services. 
More directly analogous to mandatory spending programs is the extensive 
use of tax incentives, rather than direct spending authority, to 
address various social objectives. As we reported in September 
2005,\10\ the sum of revenue loss estimates associated with tax 
expenditures--such as tax exclusions, credits, and deductions--was 
nearly $730 billion in 2004.\11\ Under the most recent estimates, this 
has risen to more than $775 billion in 2005.
---------------------------------------------------------------------------
    \10\ See GAO-05-690.
    \11\ Summing the individual tax expenditure estimates is useful for 
gauging the general magnitude of the Federal revenue involved, but it 
does not take into account possible interactions between individual 
provisions.
---------------------------------------------------------------------------
    Let me be clear that in suggesting application of this analysis to 
tax expenditures I am not addressing the appropriate level of taxation 
as a share of GDP. Whatever level of revenue is deemed appropriate, tax 
expenditures that seek to achieve programmatic or policy goals should--
like other Federal programs or activities--be reviewed to determine 
their effectiveness, continued relevance, affordability, and 
sustainability. Tax expenditures have a significant effect on overall 
tax rates--in that, for any given level of revenue, overall tax rates 
must be higher to offset the revenue forgone through tax expenditures--
as well as the budget and fiscal flexibility. They also contribute to 
the growing complexity of the Federal tax system. Many tax expenditures 
operate like mandatory spending programs and generally are not subject 
to reauthorization. Such tax expenditures are embedded in the tax 
system. They are not subject to a performance test and are off the 
radar screen for the most part. This is a concern from a budgetary 
standpoint because taxpayer dollars committed to fund these 
expenditures do not compete in the annual appropriations process and 
are effectively ``fully funded'' before any discretionary spending is 
considered. The analysis we have applied to spending would also be 
useful in examining tax expenditures.
   federal health care spending drives the long-term fiscal challenge
    Among mandatory spending programs--and indeed tax expenditures--the 
health area is especially important because the long-term fiscal 
challenge is largely a health care challenge. Contrary to public 
perceptions, health care is the biggest driver of the long-term fiscal 
challenge. While Social Security is important because of its size, 
health care spending is both large and projected to grow much more 
rapidly.
    Our most recent simulation results illustrate the importance of 
health care in the long-term fiscal outlook as well as the imperative 
to take action. Simply put, our nation's fiscal policy is on an 
imprudent and unsustainable course. These long-term budget simulations 
show, as do those published last December by the Congressional Budget 
Office (CBO),\12\ that over the long term we face a large and growing 
structural deficit due primarily to known demographic trends and rising 
health care costs and lower Federal revenues as a percentage of the 
economy. Continuing on this unsustainable fiscal path will gradually 
erode, if not suddenly damage, our economy, our standard of living, and 
ultimately our national security. Our current path also will 
increasingly constrain our ability to address emerging and unexpected 
budgetary needs and increase the burdens that will be faced by future 
generations.
---------------------------------------------------------------------------
    \12\ CBO, The Long-Term Budget Outlook (Washington, DC: December 
2005).
---------------------------------------------------------------------------
    Figures 3 and 4 present our long-term simulations under two 
different sets of assumptions. In figure 3, we start with CBO's 10-year 
baseline--constructed according to the statutory requirements for that 
baseline.\13\ Consistent with these requirements, discretionary 
spending is assumed to grow with inflation for the first 10 years and 
tax cuts scheduled to expire are assumed to expire. After 2016, 
discretionary spending is assumed to grow with the economy, and revenue 
is held constant as a share of GDP at the 2016 level. In figure 4, two 
assumptions are changed: (1) discretionary spending is assumed to grow 
with the economy after 2006 rather than merely with inflation, and (2) 
all expiring tax provisions are extended. For both simulations, Social 
Security and Medicare spending is based on the 2005 Trustees' 
intermediate projections, and we assume that benefits continue to be 
paid in full after the trust funds are exhausted. Medicaid spending is 
based on CBO's December 2005 long-term projections under mid-range 
assumptions.
---------------------------------------------------------------------------
    \13\ CBO, The Budget and Economic Outlook: Fiscal Years 2007 to 
2016 (Washington, DC: January 2006).
---------------------------------------------------------------------------
  figure 3: composition of spending as a share of gdp under baseline 
                                extended


    As these simulations illustrate, absent significant policy changes 
on the spending and/or revenue side of the budget, the growth in 
mandatory spending on Federal retirement and especially health 
entitlements will encumber an escalating share of the government's 
resources. Indeed, when we assume that all the temporary tax reductions 
are made permanent and discretionary spending keeps pace with the 
economy, our long-term simulations suggest that by 2040 Federal 
revenues may be adequate to pay only some Social Security benefits and 
interest on the Federal debt. Neither slowing the growth in 
discretionary spending nor allowing the tax provisions to expire--nor 
both together--would eliminate the imbalance. Although revenues will be 
part of the debate about our fiscal future, assuming no changes to 
Social Security, Medicare, Medicaid, and other drivers of the long-term 
fiscal gap would require at least a doubling of taxes--and that seems 
highly implausible. Economic growth is essential, but we will not be 
able to simply grow our way out of the problem. The numbers speak 
loudly: our projected fiscal gap is simply too great. Closing the 
current long-term fiscal gap would require sustained economic growth 
far beyond that experienced in U.S. economic history since World War 
II. Tough choices are inevitable, and the sooner we act the better.

     FIGURE 4: COMPOSITION OF SPENDING AS A SHARE OF GDP ASSUMING 
 DISCRETIONARY SPENDING GROWS WITH GDP AFTER 2006 AND ALL EXPIRING TAX 
                        PROVISIONS ARE EXTENDED



    Accordingly, substantive reform of the major health programs and 
Social Security is critical to recapturing our future fiscal 
flexibility. Ultimately, the nation will have to decide what level of 
Federal benefits and spending it wants and how it will pay for these 
benefits. Our current fiscal path will increasingly constrain our 
ability to address emerging and unexpected budgetary needs and increase 
the burdens that will be faced by future generations. Continuing on 
this path will mean escalating and ultimately unsustainable Federal 
deficits and debt that will serve to threaten our future national 
security as well as the standard of living for the American people.
    The aging population and rising health care spending will have 
significant implications not only for the budget, but also the economy 
as a whole. Figure 5 shows the total future draw on the economy 
represented by Social Security, Medicare, and Medicaid. Under the 2005 
Trustees' intermediate estimates and CBO's 2005 long-term Medicaid 
estimates under mid-range assumptions, spending for these entitlement 
programs combined will grow to 15.7 percent of gross domestic product 
(GDP) in 2030 from today's 8.4 percent. It is clear that, taken 
together, Social Security, Medicare, and Medicaid represent an 
unsustainable burden on future generations.
    Furthermore, most of the long-term growth is in health care. While 
Social Security in its current form will grow from 4.3 percent of GDP 
today to 6.4 percent in 2080, Medicare's burden on the economy will 
quintuple--from 2.7 percent to 13.8 percent of the economy--and these 
projections assume a growth rate for Medicare spending that is below 
historical experience! As figure 5 shows, unlike Social Security which 
grows larger as a share of the economy and then levels off, within this 
projection period we do not see Medicare growth abating. Whether or not 
the President's Budget proposals on Medicare are adopted, they should 
serve to raise public awareness of the importance of health care costs 
to both today's budget and tomorrow's. This could serve to jump start a 
discussion about appropriate ways to control the major driver of our 
long-term fiscal outlook--health care spending.

FIGURE 5: SOCIAL SECURITY, MEDICARE, AND MEDICAID SPENDING AS A PERCENT 
                                 OF GDP



    As noted, unlike Social Security, Medicare spending growth rates 
reflect not only a burgeoning beneficiary population, but also the 
escalation of health care costs at rates well exceeding general rates 
of inflation. The growth of medical technology has contributed to 
increases in the number and quality of health care services. Moreover, 
the actual costs of health care consumption are not transparent. 
Consumers are largely insulated by third-party payers from the cost of 
health care decisions.
    The health care spending problem is particularly vexing for the 
Federal budget, affecting not only Medicare and Medicaid but also other 
important Federal health programs, such as for our military personnel 
and veterans. For example, Department of Defense health care spending 
rose from about $12 billion in 1990 to about $30.4 billion in 2004--in 
part, to meet additional demand resulting from program eligibility 
expansions for military retirees, reservists, and the dependents of 
those two groups and for the increased needs of active duty personnel 
involved in conflicts in Iraq, Bosnia, and Afghanistan. Expenditures by 
the Department of Veterans Affairs have also grown--from about $12 
billion in 1990 to about $26.8 billion in 2004--as an increasing number 
of veterans look to Federal programs to supply their health care needs.
    The challenge to rein in health care spending is not limited to 
public payers, however, as the phenomenon of rising health care costs 
associated with new technology exists system-wide. This means that 
addressing the unsustainability of health care costs is also a major 
competitiveness and societal challenge that calls for us as a nation to 
fundamentally rethink how we define, deliver, and finance health care 
in both the public and the private sectors. A major difficulty is that 
our current system does little to encourage informed discussions and 
decisions about the costs and value of various health care services. 
These decisions are very important when it comes to cutting-edge drugs 
and medical technologies, which can be incredibly expensive but only 
marginally better than other alternatives. As a nation, we are going to 
need to weigh unlimited individual wants against broader societal needs 
and decide how responsibility for financing health care should be 
divided among employers, individuals, and government. Ultimately, we 
may need to define a set of basic and essential health care services to 
which every American is ensured access. Individuals wanting additional 
services, and insurance coverage to pay for them, might be required to 
allocate their own resources. Clearly, such a dramatic change would 
require a long transition period--all the more reason to act sooner 
rather than later.
    In recent years, policy analysts have discussed a number of 
incremental reforms that take aim at moderating health care spending, 
in part by unmasking health care's true costs. (See fig. 6 for a list 
of selected reforms.) Among these reforms is to devise additional cost-
sharing provisions to make health care costs more transparent to 
patients. Currently, many insured individuals pay relatively little out 
of pocket for care at the point of delivery because of comprehensive 
health care coverage--precluding the opportunity to sensitize these 
patients to the cost of their care.
  figure 6: selected reforms aimed at moderating health care spending
     Develop a set of national practice standards to help avoid 
unnecessary care, improve outcomes, and reduce litigation.
     Encourage case management approaches for people with 
expensive acute and chronic conditions to improve the quality and 
efficiency of care delivered and avoid inappropriate care.
     Foster the use of information technology to increase 
consistency, transparency, and accountability in health care.
     Emphasize prevention and wellness care, including 
nutrition.
     Leverage the government's purchasing power to control 
costs for prescription drugs and other health care services.
     Revise certain Federal tax preferences for health care to 
encourage the more efficient use of appropriate care.
     Create an insurance market that adequately pools risk and 
offers alternative levels of coverage.
     Develop a core set of basic and essential services with 
supplemental coverage being available as an option but at a cost. Use 
the Federal Employees Health Benefits Program (FEHBP) model as a 
possible means to experiment and see the way forward.
     Limit spending growth for government-sponsored health care 
programs (e.g., percentage of the budget and/or the economy).
Source: GAO

    Other steps include reforming the policies that give tax 
preferences to insured individuals and their employers. These policies 
permit the value of employees' health insurance premiums to be excluded 
from the calculation of their taxable earnings and exclude the value of 
the premium from the employers' calculation of payroll taxes for both 
themselves and employees. Tax preferences also exist for health savings 
accounts and other consumer-directed plans. These tax exclusions 
represent a significant source of forgone Federal revenue and work at 
cross-purposes to the goal of moderating health care spending. As 
figure 7 shows, in 2005 the tax expenditure responsible for the 
greatest revenue loss was that for the exclusion of employer 
contributions for employees' insurance premiums and medical care.

 FIGURE 7: HEALTH CARE WAS THE NATION'S TOP TAX EXPENDITURE IN FISCAL 
                               YEAR 2005



    Another area conducive to incremental change involves provider 
payment reforms. These reforms are intended to induce physicians, 
hospitals, and other health care providers to improve on quality and 
efficiency. For example, studies of Medicare patients in different 
geographic areas have found that despite receiving a greater volume of 
care, patients in higher use areas did not have better health outcomes 
or experience greater satisfaction with care than those living in lower 
use areas. Public and private payers are experimenting with payment 
reforms designed to foster the delivery of care that is proven to be 
both clinically and cost effective. Ideally, identifying and rewarding 
efficient providers and encouraging inefficient providers to emulate 
best practices will result in better value for the dollars spent on 
care. The development of uniform standards of practice could lead to 
ensuring that people with chronic illnesses, a small but expensive 
population, received more and cost-effective and patient-centered care 
while reducing unwarranted medical malpractice litigation.
    The problem of escalating health care costs is complex because 
addressing Federal programs such as Medicare and the federal-state 
Medicaid program will need to involve change in the health care system 
of which they are a part--not just within Federal programs. This will 
be a major societal challenge that will affect all age groups. Because 
our health care system is complex, with multiple interrelated pieces, 
solutions to health care cost growth are likely to be incremental and 
require a number of extensive efforts over many years. In my view, 
taking steps to address the health care cost dilemma system-wide puts 
us on the right path for correcting the long-term fiscal problems posed 
by the nation's health care entitlements.
    I have focused today on health care because it is a driver of our 
fiscal outlook. Indeed, health care is already putting a squeeze on the 
Federal budget.
    Health care is the dominant but not the only driver of our long-
term fiscal challenge. Today it is hard to think of our fiscal 
imbalances as a big problem: the economy is healthy and interest rates 
seem low. We, however, have an obligation to look beyond today. 
Budgets, deficits, and long-term fiscal and economic outlooks are not 
just about numbers: they are also about values. It is time for all of 
us to recognize our stewardship obligation for the future. We should 
act sooner rather than later. We all must make choices that may be 
difficult and unpleasant today to avoid passing an even greater burden 
on to future generations. Let us not be the generation who sent the 
bill for its consumption to its children and grandchildren.
    Thank you Mr. Chairman, Mr. Spratt, and members of the Committee 
for having me today. We at GAO, of course, stand ready to assist you 
and your colleagues as you tackle these important challenges.

    Mr. Wicker. Dr. Holtz-Eakin is recognized.

              STATEMENT OF DOUGLAS J. HOLTZ-EAKIN

    Mr. Holtz-Eakin. Thank you, Mr. Chairman, Congressman 
Spratt and other members of the committee. It is indeed a 
pleasure to be back in front of this committee.
    If I could, I would like to make two personal observations 
before I begin and the first is to say thank you to the 
chairman and Mr. Spratt and the members for the very gracious 
remarks that were entered into the Congressional Record when I 
left the Congressional Budget Office, far too gracious. And the 
second is that I want to say for the record, writing your own 
testimony is a lot of work. It is a pleasure to be back.
    I have a written statement, which I have submitted.
    Let me just say a couple of things, and then we can talk 
about this with your questions. The first is I am pleased that 
there is now a general recognition, at least in this committee, 
of the scale of the long-term problem facing the Federal 
Government, indeed the U.S. Economy. I believe that coming to 
terms with the scale of spending under current law for the 
mandatory programs is our most pressing policy issue. It is one 
that is at the core of maintaining the vitality of productive 
growth in the United States. It is at the core of maintaining 
our international competitiveness, and it is at the core of the 
issues in national saving and investment which will ultimately 
dictate our financial position versus the rest of the world. So 
I can't say that, my experience outside of this room, everyone 
recognizes the scale of this problem, but it is nice to see it 
acknowledged right up front and acknowledge that we can't grow 
out of it, that this is a policy issue.
    Second, I would say again that there are strategies for 
reform that are political in nature, but from a policy point of 
view, the right time to do it is now, and the sooner the 
better, because this problem is fundamentally demographic in 
nature, and the retirement of the baby boom is indeed upon us 
in any real sense. And so, to stay at this issue, beginning 
right now is essential.
    Over the long term, there will be a set of key policy 
issues that have to be addressed, and then hopefully budgetary 
mechanisms that can support those policy issues. I think the 
threshold question for this government and which the committee 
will have to grapple with is how large of a Federal Government 
will we like to have in the United States?
    The current spending places the United States on track to 
have a much larger Federal Government than it has in the past. 
That Federal Government would, of necessity, be financed by 
higher taxes than has historically been the case in the United 
States, and that combination will carry an economic cost. The 
economy will not grow as fast. It will have some detrimental 
impacts. And that trade-off is one that is crucial and one that 
should be made clear in the deliberations.
    In my written testimony, I talked about three things that--
three strategies which are not mutually exclusive that one 
might take in addressing the mandatory programs, and the first 
would be to think of the programs in their current incarnation 
and reform them on a program-by-program, stand-alone basis. So 
one could revisit Social Security, recognize that the core 
policy problem is that benefits promised are 2 percentage 
points greater than revenues dedicated for as far as the eye 
can see, and come up with a set of approaches that would narrow 
that gap, whether they be raising retirement ages, changing the 
indexation of benefits at initial award or in retirement, 
adopting different strategies for young versus old cohorts to 
allow greater prefunding. Whatever that mix might be, you could 
look at Social Security separately from the other programs. And 
if so, I would argue Social Security is the place to start 
because it is the best understood program, and it is the 
easiest analytically to both diagnose and fix. There is a large 
menu of solutions that involve both prefunding of individual 
accounts and without, so if that is the strategy, start with 
Social Security and make a budgetary allowance for that.
    Cutting--moving to health care would be much harder as Mr. 
Walker said. The changes necessary to fix the health care 
system which ultimately affect the growth rate of Medicare and 
Medicaid should be far more incremental in nature. It is a cost 
growth disease that is far harder to diagnose, and less obvious 
remedies are available. We can talk about some of the 
possibilities, but it is very different from Social Security in 
that regard.
    So one set of strategies is simply to do program by program 
in the existing fashion. An alternative would be to step back 
and recognize that the core question is what will be the 
commitment of taxpayer dollars to old age programs. And those 
old age programs are for retirement income, they are for health 
care, they are for long-term care and nursing home services. 
They are for a set of lifestyle in retirement support that come 
from many programs in the U.S. budget.
    One could revisit the policy and think about the degree to 
which there will be a commitment of resources to those programs 
and those needs, redesign them in a cohesive fashion, and then, 
having made that commitment, finance it in a sensible fashion 
over the long term.
    There, I think, the great lesson is in long-term care 
services. If one looks at the care of our most disabled in the 
United States, the majority of those who are even severely 
disabled received all of their long-term care from donated 
care, from family members who simply help them out. In the 
future we will have more such demand, and we will have fewer 
such family members as women are increasingly in the labor 
force. We will have to develop strategies that allow these 
services to be provided through market mechanisms. We will then 
have to decide whether they will be financed by the kids or 
prefunded and financed by the elderly themselves, and decide 
whether that prefunding will take the form of real reserves in 
a private insurance program or some other mechanism. And so, if 
one could come to terms with the appropriate design of long-
term care in the United States, that would be a great indicator 
for how to deal with health care and then retirement income.
    And then finally, the third possibility is to do something 
that will probably be necessary in either event, which is to 
each year come back to the reconciliation process, use the 
parliamentary procedures that allow addressing the mandatory 
programs. In doing that, I think the good news from this past 
year is that reconciliation on the spending took place. That is 
something that was not regular business in the U.S. Congress. 
This was the first time in 8 years. And I think it is good news 
that it was undertaken.
    We can debate at length whether the size of the spending 
reductions was at all significant given the scale of the 
problem. It really doesn't look that big.
    Going forward, it might be possible to use triggers of the 
type that Mr. Walker talked about to kick off the 
reconciliation process. One could imagine mechanisms that were 
close in spirit to the sustainable growth rate mechanism used 
for payments to Medicare physicians. In that Congress 
essentially dictated a level of growth that was acceptable. And 
you could do that for each of the mandatory programs, which 
have very different growth rates. Given that acceptable growth 
rate, you could then trigger either explicit policy actions on 
the part of the authorized committees to bring it down to that 
growth rate, so if you are above that growth rate, you must 
take action, and you are given reconciliation instructions to 
do so. That would be a soft trigger, in the words that the GAO 
used. Or you could have an automatic cut as the SGR does and 
have that threat of the automatic cut be the triggering 
mechanism that may cause reconciliation.
    I would argue that the track record of the SGR is not one 
of uniform success, and that a soft trigger controlled by the 
Budget Committee in the resolution might be a better way to go.
    But in any event, this is the future of this committee 
dealing with reconciliation on a regular basis. These mandatory 
programs are the pressing national concern. And I look forward 
to both answering your questions today and working with the 
committee as the need arises. Thank you.
    Mr. Wicker. Thank you very, very much.
    [The prepared statement of Douglas Holtz-Eakin follows:]

  Prepared Statement of Douglas J. Holtz-Eakin, Director, Maurice R. 
  Greenberg Center for Geoeconomic Studies, Paul A. Volcker Chair in 
         International Economics, Council on Foreign Relations

    Chairman Nussle, Ranking Member Spratt and members of the 
Committee, I am pleased to have the opportunity to discuss the topic of 
mandatory spending in the Federal budget. In my remarks, I wish to make 
the following four points:
    1. Mandatory spending is currently two-thirds of Federal spending, 
and will grow rapidly as the United States undergoes it demographic 
transition--especially outlays for Social Security, Medicare and 
Medicaid. These programs merit review and reform because:
     The demographic shift is a permanent change in the 
landscape in which these programs operate;
     Economic growth alone will not alleviate the burden of 
rising spending for these programs; and
     The demographic shift has arrived, so efforts to control 
their growth should begin soon.
    2. The amount of spending is the best measure of the size of 
government. Having made the commitment to spend funds, this commitment 
must ultimately be paid for in higher taxes in either the present or 
the future.
    3. The size and growth of the U.S. economy is the central source of 
the international standing of the United States, its ability to project 
power and influence international affairs, and to provide for domestic 
priorities. A central question in the decades to come will be the size 
of the Federal Government and the degree to which its budgetary 
activities diminish the potential for private sector economic growth.
    4. There are several alternative strategies to controlling the 
growth of future outlays.
     Fundamental reform on a program-by-program basis, such as 
reforms of Social Security or Medicare on a stand-alone basis;
     Cross-cutting reforms of programs that have a common basis 
in demographic shifts; or
     Incremental reform on a continual basis, such as would be 
accomplished by reconciliation instructions on an annual schedule.
    Let me brief discuss each point in turn.

                THE FUTURE GROWTH OF MANDATORY SPENDING

    It is useful to begin with the spending outlook.\1\ Left unaltered, 
over the next fifty years spending for Social Security will rise 
dramatically, increasing about 50 percent from its current level of 
just over four cents out of each national dollar. In the process, 
Social Security will be transformed from a cash cow that provides 
excess funds to the remainder of the Federal budget to a cash drain 
that will require annual infusions totaling over $300 billion (in 
today's dollars). The rise in Social Security spending is predictable--
most of these recipients are already in the labor force--and results 
from the permanent shift to an older population that will accompany the 
retirement of the baby boom generation. After this shift is completed, 
scheduled Social Security benefits will be roughly 7 percent of GDP, 
and rise slowly as longevity increases in the future.
---------------------------------------------------------------------------
    \1\ This testimony draws heavily on the projections by the 
Congressional Budget Office contained in The Long-Term Budget Outlook, 
December 2005. All interpretation, however, is strictly my own.
---------------------------------------------------------------------------
    In contrast, spending on Federal health programs, Medicare and 
Medicaid, will be driven not only by sure, steady annual aging, but 
also by health care spending that will outpace income growth. How fast 
will spending grow? Nobody can know for sure, but if the history of the 
past four decades repeats itself between now and 2050, Medicare and 
Medicaid spending will rise from a level comparable to Social Security 
(four cents out of each national dollar) to over 20 percent of national 
income. To put it another way, health programs alone will be as large 
as the entire current Federal Government. (Many believe this ``just 
can't happen,'' but that raises the question of how spending growth 
will moderate.)
    In any scenario, the demand for mandatory spending in Social 
Security and health programs swamps all projections of the future of 
the Federal Government. Fine-tuning the outlook for defense spending, 
international aid, education, worker-adjustment assistance and the 
myriad of other policy initiatives does not change the basics.

                    MEASURING THE SIZE OF GOVERNMENT

    The projected growth of spending is important. A good (if not 
perfect) measure of the ``size of government''--the economic burden of 
a government's programs--is spending. Spending on government programs 
diverts resources from the private sector--from consumption or 
investment--to the use of government. If the transfer replaces private 
consumption with government consumption, then the costs are felt 
immediately as lower private consumption. If the impact is to ``crowd 
out'' private investment, then the cost is slower growth in productive 
capacity. This loss persists into the future, ultimately lowering 
consumption at some future time.
    The means by which the Federal Government finances that spending--
either via taxes or borrowing--is the mechanism by which the resources 
are taken from the private sector. But the key is not the particular 
mechanism that is used, but rather the fact that the decision to spend 
itself imposes the burden. Because the use of dollars for one purpose 
precludes their use for another, government spending always has a 
burden. When Members are deciding whether to spend $1 billion for a 
Federal program, they are choosing such a burden--even without a 
discussion about taxes. Unless other expenditures are reduced, current 
or future taxpayers will be required to pay more and give up their 
income to cover the costs.

              THE IMPORTANCE OF SUPPORTING ECONOMIC GROWTH

    The United States must meet enormous challenges to its security, 
strategic influence and international competitiveness. Over the past 
100 years, annual growth of Gross Domestic Product has averaged 3.4 
percent, a pace that has permitted the U.S. to become the dominant 
global economic power. The American economy serves as the well of 
resources to meet defense needs, international assistance, and other 
policy goals. Similarly, the ultimate purpose of U.S. economic 
competitiveness is to provide sustained increases in our citizens' 
standard of living.
    How has the United States achieved this record? U.S. economic 
success is largely due to the strength of the private sector. The 
mirror image of reliance on private markets is commitment to a 
government sector that is relatively small (granted, ``small'' is in 
the eye of the beholder) and contained. Growth in spending of the 
magnitude promised by current laws guarantees a much larger government.
    Second, the small U.S. government has been financed by taxes that 
are relatively low by international standards and interfere relatively 
little with economic performance (the same caveat applies to ``low'' 
and ``little ''). Spending increases of the type currently promised 
guarantee higher taxes and impaired economic growth.
    Finally, a hallmark of the U.S. economy has been its ability to 
flexibly respond to new demands and disruptive shocks. In an 
environment where old-age programs consume nearly every budget dollar, 
to address other policy goals politicians may resort to mandates, 
regulations, and the type of economic handcuffs that guarantee lost 
flexibility. Why should the government book the costs of homeland 
security, or worker training, or new initiatives when it can demand 
that the private sector do it ``free''?
    Doing nothing is not an option. The United States is highly 
unlikely to ``grow its way out'' of the burden of the projected 
spending growth. To see this, consider the mix of budgetary and 
economic events necessary for ``business as usual'' to be sustainable 
(to maintain a steady ratio of Federal debt to GDP) over the long term. 
First, assume that long-term productivity growth remains at the trend 
experienced in the past decade--a period of rapid productivity 
increase. Next, assume that the Federal Government collects roughly 18 
cents on the national dollar in taxes--close to the postwar average. 
Third, permit Social Security outlays to grow as currently scheduled, 
but couple this with extreme discipline on discretionary spending and 
small mandatory programs--essentially frozen in real terms for the next 
five decades. Certainly, this sounds like a recipe for government of 
the same size as in the past. Will it work?
    The key is the growth of health care outlays. If, but only if, 
health care spending per beneficiary grows no faster than income per 
capita, then outlays and taxes will balance sufficiently that sustained 
growth will keep the debt-to-GDP ratio stable. The bad news is that 
over the past four decades, spending per beneficiary has annually grown 
2.5 percent faster than income per capita. Even a radical drop to 
spending that grows only 1 percent faster (or, equally miraculous, GDP 
growth that was 1.5 percent faster every year) leads to explosive debt 
growth.
    In short, the key is not to count on economic growth to eliminate 
pressures from spending. Instead, the challenge is to control spending 
sufficiently to permit adequate long-term growth. The central economic 
impact of rapid spending growth is to further tilt the nation away from 
saving for the future. Retirement income and health programs are 
intended to ensure that beneficiaries can consume goods, services, and 
health care. Taxes (or their moral equivalent, Federal borrowing) that 
finance Federal spending do not undo the damage by offsetting the 
increased consumption. The net loss of savings, in turn, slows the 
accumulation of funds needed to finance the foundations of sustained 
growth: the innovation and deployment of new technologies, the 
acquisition of skills education and skills, and the purchase of new 
equipment, software, and structures. While the U.S. builds from a 
position of economic strength--its sustained productivity growth is the 
envy of other advanced economies--the imminent growth of spending is 
potentially a self-inflicted threat to this foundation.
    An illustration of the potential impacts may be drawn from the 
experiences of the OECD countries. The figure below displays the 
relationship between the size of government and the average rate of 
growth in real GDP.\2\ Not only is the relationship negative, the long-
run impacts are quite significant. For example, raising the size of 
government by 10 percentage points--less than would be likely in the 
absence of changes in mandatory programs, would result in growth that 
is slower by 0.8 percentage points annually. Even such seemingly small 
changes accumulate over long periods of time. If growth was slower by 
0.8 percentage points annually, standards of living in the United 
States would rise by 30 percent less than otherwise.
---------------------------------------------------------------------------
    \2\ I thank Michael Boskin at the Hoover Institution for these data 
and analyses.
---------------------------------------------------------------------------
    It is desirable to change course immediately. The sooner the 21st 
century old-age programs are finalized, the sooner workers can make 
sensible retirement plans, and the sooner the economy as a whole will 
begin to benefit. Perhaps most importantly, immediate reform recognizes 
the demographic foundations of the problem: spending will rise with the 
retirement of the baby boomers; reform must beat the boomers to the 
retirement finish line.

         RELATIONSHIP BETWEEN SIZE OF GOVERNMENT AND GDP GROWTH



             STRATEGIES FOR CONTROLLING MANDATORY SPENDING

    Broadly speaking, there are three broad strategies--not mutually 
exclusive--for controlling the growth of mandatory spending. The first 
is to undertake fundament reform on a program-by-program basis. That 
is, one could undertake separate reforms of Social Security, Medicare, 
Medicaid, and other mandatory spending programs. If so, there is a 
strong argument to begin with Social Security.
    The underpinnings of growth in Social Security outlays are well-
understood. Moreover, there exist a wide variety of modifications to 
the basic program--increases in the normal and early retirement age, 
changes in the indexation of initial benefit awards, changes to the 
cost-of-living indexation during retirement, altering benefits to 
reflect longevity, and others--that would slow the growth of outlays. 
If undertaken quickly, such changes would resolve uncertainty about the 
future of the program, thereby benefiting workers in planning their 
retirement. Moreover, such changes would also likely raise household 
saving, especially if coupled with explicit pre-funding of future 
benefits, and provide a direct benefit to the accumulation of capital 
in the United States.
    In contrast, the growth in Medicare and Medicaid is largely driven 
by underlying trends in health spending, and these are less well 
understood. The key requires not only slowing the growth of outlays, 
but making sure that we get quality for each dollar of spending. Given 
the scale of the challenge, it is likely that there is no single reform 
needed, but rather a long series of adjustments to ensure that the 
United States does not overspend on health care.
    A second strategy would recognize that the problems of retirement 
income (Social Security), old-age health care (Medicare) and long-term 
care services (Medicaid) share a common demographic basis. Moreover, 
there is little to distinguish between home-based care services and 
either some outpatient health therapies, or the spending of retirement 
income to maintain a desired lifestyle. In short, there may be merit to 
rethinking these programs from the perspective of ensuring an adequate 
accumulation and foundation for old-age requirements in all three 
areas.
    Finally, it may be the case that mandatory spending in these areas 
requires continual adjustments. One way to undertake such controls is 
through proactive, regular implementation of the reconciliation 
process. However, it may be desirable to augment such procedures by 
augmenting the budget process with indicators of the need for such 
efforts. For example, in the current Medicare program, physician 
payments are governed by the Sustainable Growth Rate (SGR) mechanism, 
which limits cumulative payments. In the absence of changes by the 
Congress, the SGR automatically reduces payments and lowers the growth 
of spending.
    A broader set of SGR-like mechanisms could be used to set a 
``baseline'' level of mandatory spending growth--say at the rate of GDP 
growth. To permit faster-than-GDP growth, the budget resolution could 
specify allocations for authorizing committees that open the 
possibility of greater program expansion. In their absence, however, 
spending would have to be controlled to stay at the sustainable rate.
    An alternative approach is the use of triggering mechanisms to 
specify cuts--perhaps unpalatable cuts--automatically and thereby 
induce action to change mandatory programs. An example is the 
Administration's recent proposal for automatic reductions in Medicare 
if the program requires greater than 45 percent in general revenue.

                               CONCLUSION

    To summarize, controlling the future growth of mandatory spending--
especially that in old-age programs--is central to controlling the size 
of the Federal Government, fostering future economic growth, and 
maintaining a sustainable fiscal policy. Thank you for the opportunity 
to appear today, and I look forward to your questions.

    Mr. Wicker. Dr. Isabel Sawhill is senior fellow at the 
Brookings Institution, and we welcome you, Dr. Sawhill.

                 STATEMENT OF ISABEL V. SAWHILL

    Ms. Sawhill. Thank you, Mr. Chairman. I want to thank you 
and Mr. Spratt and other members of the committee for giving me 
the opportunity to be here today.
    I will quickly summarize my main points. Obviously we are 
more concerned about deficits. We do need to focus on 
entitlements. They are more than half the budget. They are 
growing very rapidly, especially the health care programs. We 
already talked about that.
    Mr. Wicker. Dr. Sawhill, would you check your speaker?
    Ms. Sawhill. Sorry. Is that better?
    I began simply by saying I appreciate the opportunity to be 
here, and that like everyone else who has already spoken, I 
think we need to be concerned about the growth of entitlements 
in the budget.
    And if we look out into the future, it seems to us, to 
those of us who worked on this at Brookings anyway, that there 
are only three choices. One is to restructure entitlements in a 
major way, the second is to eliminate most of the rest of 
government, and the third is to raise taxes to unprecedented 
levels.
    Now, obviously, realistically, we are probably going to do 
some of all three, but I think it is very important to not just 
muddle through and do some mix of those things that nobody ever 
intended or anticipated, and to instead have a longer-range 
plan.
    As long as entitlements are left off the table, and I think 
we all know that they are harder to address than some other 
parts of the budget, the pressure does fall more heavily on 
domestic discretionary programs, particularly at a time like 
now when we are at war. And that, I think, is likely to lead to 
underinvestment in the future and to an undermining of economic 
growth and competitiveness as a result. And it is also likely 
to lead to disproportionate cuts in programs for low- and 
moderate-income families.
    In my testimony, I support the appointment of a bipartisan 
commission on entitlement reform that the President called for 
in the State of the Union, but with the caveat that the 
commission needs to be viewed as highly credible and 
politically independent.
    I also argue that taxes will have to be on the table. It is 
not possible to solve our fiscal problems with suspending cuts 
alone, although those are surely needed.
    I also suggest a set of principles that might guide the 
commission's work, such as moving toward greater income 
relating of benefits, such as moving toward defined 
contributions and not justifying benefits in health and 
retirement programs. I am not, by the way, arguing for 
eliminating the current system of defined benefits as a core 
tier in, for example, the Social Security System, but rather 
for adding to that core tier a set of mandated individual 
accounts that would enhance retirement security.
    That said, I believe that it is going to take a very long 
time for the political system to enact any such set of reforms 
and longer still for them to take effect and begin to have an 
influence on our fiscal situation.
    For those reasons, like others here, today, I do talk about 
triggers. And I propose that the Congress consider a temporary 
suspension or partial suspension of indexing for inflation of 
both benefits and taxes. This suspension would remain in effect 
until a preset deficit reduction goal was achieved. The goal 
could be to enact policy measures that made steady progress 
toward halving the deficit within 5 years, as an example.
    While such a proposal would be difficult to enact, it would 
have a number of attractive features, in my view. First, it 
could be justified on the grounds that it would call for broad-
based sacrifice from the public to pay for the war and for the 
rebuilding after Katrina, but it would not affect any one 
family very much, especially if low-income programs were 
exempted.
    Second, it would reduce the deficit by roughly $150 billion 
over 3 years, which would be a good chunk.
    Third, like some earlier budget rules, it would provide a 
strong incentive for Congress to reform entitlements and taxes 
in ways that would reduce the deficit since the temporary 
suspension would remain in effect until certain goals were 
achieved.
    So I will leave it at that. I would add that I am also in 
favor of the bringing back the kind of PAYGO and discretionary 
caps that I think were very effective in the 1990s. I served in 
the Office of Management and Budget during the Clinton 
administration, and I had responsibility for the one-third of 
the budget that is devoted to social programs, and those, of 
course, were the President's highest priorities. And yet 
because we were operating under PAYGO, and because we were 
operating under discretionary caps, we had to make very, very 
tough decisions all the time. So those kinds of rules do help. 
But those rules, if we were to reinstate them, would prevent 
digging the hole any deeper. They would enforce the kind of 
action--difficult actions--that I think are needed in the 
future. So if I had to have my druthers, I would suggest both 
to you.
    Thank you very much.
    [The prepared statement of Isabel Sawhill follows:]

 Prepared Statement of Isabel V. Sawhill, Senior Fellow and Director, 
              Economic Studies, the Brookings Institution

    Mr. Chairman, Mr. Spratt, and Members of the Committee, I am Isabel 
Sawhill, Senior Fellow and Director of Economic Studies at the 
Brookings Institution. I am pleased to have this opportunity to testify 
but want to emphasize that my testimony represents my personal views 
and not those of the Brookings Institution or any of its other 
scholars, trustees, advisers, or funders. Let me begin by summarizing 
my testimony.

                                OVERVIEW

    In efforts to restore fiscal balance, it's important to focus on 
entitlements for a number of reasons:
     Entitlements are where the big dollars are.
     They are growing rapidly.
     Given the unsustainable deficits that this growth implies, 
there are only three possible options: restructure entitlements, 
eliminate most of the rest of government, or raise taxes to 
unprecedented levels.
     Sooner or later, entitlements will have to be addressed-
and sooner is much better than later.
     As long as entitlements are left off the table, all of the 
pressure will fall on discretionary programs.
     That pressure is likely to lead to underinvestment in the 
next generation and to cuts in programs for low-income families.
What might be done?
    In the long-run, new but politically contentious ideas should be 
considered and debated, such as:
     Moving toward income-relating benefits but in ways that 
protect the vulnerable
     Increasing the normal retirement age
     Moving from defined benefits to defined contributions in 
retirement and health programs
     Making the contributions mandatory
     Using public health programs to introduce greater 
efficiency and effectiveness into the entire health care system
     Raising existing taxes by broadening the tax base for both 
payroll and income taxes and adding a value-added tax to the mix
     In the short-run, Congress should consider a temporary 
suspension (or partial suspension) of indexing of both benefits and 
taxes that would remain in effect until a preset deficit reduction goal 
is achieved. I estimate that this would save $150 billion over 3 years 
(2007-2009).

                       WHY FOCUS ON ENTITLEMENTS?

    At present, 84 percent of the Federal budget is for entitlements, 
defense, homeland security, or interest on the debt. Any effort to 
achieve a reduction in spending by focusing on the remaining 16 percent 
is unlikely to be very effective. For example, a 1 percent cut in 
nominal non-security discretionary spending for 1 year reduces total 
spending by only 0.17 percent. Over 5 years, it reduces total spending 
by 0.89 percent.
    Entitlements, on the other hand, represented 53 percent of total 
Federal spending in 2005 with Social Security, Medicare, and Medicaid 
representing 41 percent of the total.\1\ These three programs are 
growing rapidly, and along with interest on the debt, will absorb all 
projected Federal revenues by the early 2030's (Figure 1).



    The reasons for this rapid growth include the aging of the 
population (greater longevity, in particular-not just the retirement of 
the large baby boom generation) and rapidly increasing spending on 
health care. Health care spending per capita has been growing at a rate 
that is 2.5 percentage points greater than GDP per capita for about 40 
years and given continuing improvements in medical technologies (better 
diagnosis, new treatments, and new drugs), no one expects this rate of 
increase to slow any time soon. For this reason, spending on Medicare 
is projected to grow 5 times faster than spending on Social Security 
between now and 2030 and is thus the major challenge to controlling the 
growth of entitlements.\2\ A variety of health care reforms-from 
greater use of electronic records to curtailing malpractice awards-
could reduce the level of spending somewhat, but are not likely to 
constrain spending growth very much, except perhaps temporarily.
    Last year I and my colleagues at Brookings published a volume 
entitled Restoring Fiscal Sanity, 2005: Meeting the Long-Run Challenge. 
The book concluded that projected deficits over the next 25 years are 
unsustainable and that, as a result, there are only three possible 
options: restructure entitlements, eliminate most of the rest of 
government, or raise taxes by one third or more.\3\ We and many others 
have emphasized that addressing the growth of entitlements sooner 
rather than later will be far less painful than if we wait until the 
day of reckoning has arrived. Not only will delay require sharp 
increases in taxes or major benefit cuts, but the intervening 
accumulation of debt will necessitate that a rising proportion of 
available revenues be used to pay interest on that debt. Under 
realistic assumptions, interest on the debt is currently slated to grow 
to around $466 billion in 2016. Thus, over one out of every four income 
tax dollars will buy nothing except the right of the Federal Government 
to continue to borrow.\4\
    Restoring Fiscal Sanity 2005 outlines and estimates the budgetary 
savings or revenue enhancements associated with a number of specific 
options such as increasing the retirement age for both Social Security 
and Medicare, changing benefit formulas in Social Security, imposing 
higher Medicare premiums on the affluent, introducing more market 
discipline or more rationing into the health care system, raising 
payroll or income taxes, and introducing a VAT.



    Because such fundamental reforms do not appear to be feasible at 
the current time, most of the downward pressure on spending resulting 
from efforts to restore fiscal balance are aimed at domestic 
discretionary programs. I recognize that Congress has made some efforts 
as part of the Deficit Reduction Act of 2005 to reduce spending on 
entitlements, but that restraint represents only three-tenths of 1 
percent of total spending over the 5 years, 2006-2010.\5\ In the 
meantime, non-security domestic discretionary programs as a proportion 
of GDP are at 3.5 percent and slated to shrink to their lowest level 
since we first began collecting the data.\6\ Moreover, this is only the 
beginning of a continuing squeeze on this part of the government.
    This squeeze will have two unfortunate effects in my view. First, 
it will threaten economic growth. Second, it will require too much 
sacrifice on the part of low- and moderate-income working families. In 
particular, programs serving the young will lose out relative to 
programs serving the old. As shown in Figure 2, per capita Federal 
spending on the elderly is about 4.5 times as great as per capita 
spending on children.\7\ These figures on per capita spending at the 
Federal level were much closer together back in 1970 but are slated to 
widen further by 2015, at which point spending on the elderly will be 
about five times as great as per capita spending on children (Figure 
3). To the extent that discretionary programs are frozen or cut in 
nominal terms, the resulting impact on children versus the elderly will 
be even greater.
    Not all Federal programs targeted on children are effective. 
Nonetheless, well-chosen investments in children are not only a 
sensible use of scarce Federal resources but can also have feedback 
effects on economic growth and revenues, similar to what is often 
discussed in the context of tax cuts. Retirement benefits and nursing 
home care for the elderly, by contrast, have no such benefits. As an 
example of such feedback effects, I and my colleagues William Dickens 
and Jeffrey Tebbs have recently completed a detailed analysis which 
shows that an investment in universal preschool for all three- and 4-
year-olds would initially worsen the deficit, but over the longer run 
would produce increased economic growth and additional revenues 
sufficient to more than pay for the program under a wide variety of 
assumptions about the various uncertainties involved.\8\



    I read that the Administration is planning to spend $513,000 to set 
up an office of dynamic analysis within the Treasury Department to 
determine how tax proposals affect economic growth.\9\ This type of 
analysis is fraught with uncertainty. Well-respected economists outside 
of government disagree about how to do it and whether the results are 
meaningful. According to CBO, a 10 percent reduction in tax rates would 
recoup between 1 percent and 22 percent of the lost revenue through 
economic growth effects in the first 5 years, and add as much as 5 
percent to that loss or offset as much as 32 percent of it over the 
second 5 years.\10\ However, it would be inappropriate to claim that 
such effects exist only on the tax as opposed to the expenditure side 
of the budget.
    A second reason for concern about the squeeze on discretionary 
programs is the likely impact on low- and moderate-income working 
families. Although many of the elderly, especially older women living 
alone, have low incomes, the rate of poverty among the elderly is far 
lower than it is among families with children.\11\ Thus, if we must cut 
spending, some of the burden should fall on older Americans and not 
just on younger families. These issues of fairness are especially 
salient in light of the fact that income inequality in the United 
States is at an all-time high and has been exacerbated by recent tax 
cuts.

                        WHAT MIGHT BE DONE? \12\

    This section of my testimony first outlines the kind of principles 
that might guide entitlement reform. But since real reform is unlikely 
any time soon, I later suggest a stopgap measure that would help to 
reduce the deficit very significantly over the next few years.
Principles of reform
    The President has called for a bipartisan commission on 
entitlements, a step that I think makes good sense given the current 
impasse on Social Security, the lack of clear solutions in the case of 
Medicare or Medicaid, and the need for fundamental reform. Such a 
Commission-if it had the trust of both sides in the debate and a degree 
of independence from the Administration-could perform a real service. 
It's challenge, as I see it, would be to establish certain principles 
to guide the process and then to suggest how those principles might be 
translated into specific policy proposals. What might such principles 
look like? Let me suggest a few, without in any way claiming that these 
are not controversial and thus in need of far more debate.
    First, I believe that health care and retirement benefits should be 
more related to income than they are at present. The President's 
proposal to raise Medicare premiums for those with incomes above 
$80,000 a year, and to leave the eligibility threshold unindexed, moves 
in the right direction. Progressive indexing of Social Security 
benefits would accomplish a similar goal. Tightening up on the transfer 
of assets to children in order to qualify for Medicaid funding of 
nursing home care is still another example.
    Second, the retirement age at which people qualify for full 
benefits under both Social Security and Medicare needs to be increased 
and indexed for longevity. Such an increase was accomplished in the 
Social Security system back in 1983 suggesting that it is possible for 
the political system to change these rules if adequate advance warning 
is given.
    Third, we need to move away from a system that guarantees health 
care and retirement benefits toward one that guarantees instead, what 
the government is willing to contribute-in short, from a defined 
benefit to a defined contribution system. This does not mean that the 
political system couldn't decide to increase the level of those 
contributions over time, but it would not leave its liabilities, as 
now, on automatic pilot. Nor does it mean that the level of 
contribution shouldn't be higher for those with lower lifetime incomes. 
However, individuals would be expected to contribute more to their own 
health care and retirement, consistent with their ability to do so. One 
model for such a system is the Federal Employees Health Benefits 
Program.
    Fourth, these contributions should be mandated by the government. 
If they were voluntary, too many individuals would fail to save for 
their own retirement or health care and thus become dependent on 
charity or the government as a last resort. There is abundant evidence 
that most people do not save enough for their retirement. For the first 
time since the Depression, household savings are now negative.\13\ And 
unless national savings is increased, we are unlikely to continue to 
enjoy the kind of economic growth we have had in the past.
    Fifth, virtually all experts agree that our current health system 
is inefficient and too often provides care that is not worth its cost. 
A greater emphasis on evidence-based medicine, on payment for 
performance, and on a more efficient delivery system in the big public 
programs (Medicare and Medicaid) could be used to leverage change in 
the entire health care system. This could help to constrain the health 
care spending increases that bedevil not only Federal and state 
budgets, but also private employers and their employees.\14\
    Sixth, taxes must be on the table. No commission on entitlements 
will get very far unless this is part of the deal. Just as it took 
Nixon to go to China, it will take more than token involvement by 
Democrats to revise the social contract with the elderly. And as the 
2005 debate on Social Security demonstrated, public sentiment on these 
issues is with the Democrats. Many Republicans, for their part, fear 
that any increase in taxes will slow economic growth or lead to a new 
burst of government activism. But these supply-side effects have been 
much exaggerated, in my view-especially in light of the fact that 
recent tax cuts were financed by borrowing, almost entirely from 
abroad, and are not on balance good for the country's future domestic 
prosperity. In addition, not all tax increases have negative effects on 
growth. Indeed, some would accomplish just the opposite. Consider, for 
example, the President's Tax Reform Commission's proposal to rein in 
the deductibility of health insurance premiums paid by employers. This 
would lead to a more efficient, pro-growth tax system and 
simultaneously slow health care spending, and reduce one of the largest 
hidden (tax) expenditures in the Federal budget. Or to take another 
example, it would be possible to raise the income cap on Social 
Security payroll taxes while simultaneously lowering the rate. And a 
new Value Added Tax might reduce reliance on income taxes while 
reducing the deficit in ways that would increase long-term growth.
An action-forcing proposal
    Because I am not optimistic that these issues will be resolved any 
time soon, I would like to share with the Committee an idea that was 
originally suggested to me by Robert Reischauer and which I believe has 
enough merit to bring to your attention.\15\
    The proposal involves a temporary suspension of indexing of both 
benefit programs and the tax system. Many benefit programs, the largest 
of which is Social Security, are indexed for inflation using the 
Consumer Price Index, and since 1981, we have also indexed individual 
income tax brackets, personal exemptions, and the standard deduction.
    The suspension would be put into effect immediately (FY2007) and 
would thus begin to stem the flow of red ink with savings in the 
neighborhood of $150 billion over 3 years (2007-2009). Its primary 
justification would be the need for broad-based sacrifice on the part 
of the American public to pay for the war in Iraq and the 
reconstruction costs associated with Katrina. Programs targeted on low-
income families might be exempted. But otherwise almost everyone would 
be affected. Both spending and taxes would be part of the solution, 
making bipartisan compromise on enacting the proposal a possibility.
    The suspension would be linked to the achievement of a deficit 
reduction goal. For example, Congress could enact a law calling for 
policy actions that would halve the deficit as a percent of GDP over 
the next 5 years with interim goals specified for each intervening 
year. In any year that the goal was not achieved (according to the 
CBO), indexing would be once again suspended for the following year 
(with a concomitant increase in the budgetary savings). In this 
fashion, the public would be brought into the process since their tax 
bills and Social Security checks would be affected if Congress failed 
to make serious progress.
    A related proposal would be to simply make a technical change in 
the CPI to better reflect some of its existing flaws. This is a problem 
that is well-known among experts and has been cited as badly in need of 
correction by Alan Greenspan among others.
    Conclusion. Short-term pressures to produce a budget resolution 
each year and to enact authorizing and appropriations bills may 
mitigate against finding long-term solutions to a budget deficit that 
is literally headed toward infinity, driven primarily by the growth of 
entitlements, especially health care spending. Thus, I want to commend 
this Committee for taking up the challenge and urge you to begin the 
process of discussing the kinds of principles that need to guide 
fundamental reform.
    Like many others, I worry that currently projected deficits are a 
grave threat to our economy and that further tinkering around the edges 
can only postpone the day of reckoning. Even if we escape a hard 
landing for the economy, large deficits are likely to undermine our 
national strength by reducing national savings and necessitate that an 
increasing proportion of our future incomes be earmarked to pay back 
foreigners for current borrowing.

                                ENDNOTES

    1. Office of Management and Budget, Fiscal Year 2007 Budget of the 
United States Government, February 2006, Tables 8.1, 8.3.
    2. Congressional Budget Office, ``The Long Term Budget Outlook,'' 
December 2005, Scenario 1.
    3. Alice M. Rivlin and Isabel Sawhill, editors, Restoring Fiscal 
Sanity, 2005: Meeting the Long-Run Challenge (Washington, DC: Brookings 
Institution Press, 2005).
    4. Alan J. Auerbach, William G. Gale, and Peter R. Orszag, ``New 
Estimates of the Budget Outlook: Plus Ca Change, Plus C'est la Meme 
Chose,'' January 31, 2006. Available at: http://www.brookings.edu/
views/papers/20060131galeorszag.pdf.
    5. Congressional Budget Office, ``The Budget Outlook: 2006-2017,'' 
January 2006, Summary Table 1; Congressional Budget Office, ``Cost 
Estimate, S.1932, Deficit Reduction Act of 2005,'' January 27, 2006.
    6. Office of Management and Budget, Tables 1.2, 4.1, and 8.1
    7. When state and local spending is included, per capita spending 
on the elderly is still almost twice what it is on children.
    8. William Dickens, Isabel Sawhill, and Jeffrey Tebbs, ``The 
Effects of Investing in Early Education on Economic Growth,'' Working 
Paper, January 2006. Available at: http://www.brookings.edu/views/
papers/200601dickenssawhill.htm.
    9. Robert Guy Matthews, ``White House Calls for New Tax-Cut 
Analysis Unit,'' Wall Street Journal, Feb. 11-12, 2006, p. A4.
    10. Congressional Budget Office, ``Analyzing the Economic and 
Budgetary Effects of a 10 Percent Cut in Income Tax Rates,'' Economic 
and Budget Issue Brief, December 1, 2005.
    11. The proportion of children under 18 living below 150 percent of 
the poverty line is twice as high (28 percent) as the proportion of 
those 65 or older (14 percent).
    12. This section of my testimony reflects my own view only and 
should not be attributed to other scholars at Brookings, our trustees, 
advisers, or funders.
    13. Bureau of Economic Analysis, National Income and Product 
Accounts, ``Table 2.1: Personal Income and Its Disposition,'' 2006.
    14. A more specific set of options for accomplishing these goals 
will be included in a Brookings volume being edited by Alice Rivlin and 
Joseph Antos to be published in early 2007.
    15. A description of my proposal will be found in an op-ed 
published by the Baltimore Sun on January 27, 2006. Although I want to 
give credit to Bob Reischauer for surfacing this idea at a general 
level, I do not want to implicate him in the details of the current 
proposal, some aspects of which he may not like.

    Mr. Wicker. Well, thank you very much, and thank you all 
for some very thought-provoking testimony. I expect that most 
of us will want to get questions in, so I will try to be as 
brief as I possibly can.
    Let me ask a question of General Walker and Dr. Holtz-Eakin 
first. With regard to Medicare, from this fiscal year to the 
next, how much of a percentage of growth will there be in 
Medicare in that fiscal year, and the same for Medicaid? Can 
you tell me that?
    Mr. Walker. Mr. Chairman, I don't have it off the top of my 
head.
    Mr. Wicker. We are going to need that.
    Mr. Walker. I can provide it for the record. I will be 
happy to.
    Mr. Wicker. And also I asked staff to put a chart up, so go 
ahead and do that.
    Well, Dr. Holtz-Eakin, are you able to tell us?
    Mr. Holtz-Eakin. If he keeps stalling, I will look it up.
    Mr. Walker. This is a percentage of the economy which I 
used in my presentation that is different than the dollar 
amount. The dollar amount is what I don't have off the top of 
my head, which is what I understand you were asking for.
    Mr. Wicker. Well, let's stipulate that it will grow 
substantially more--that both of these programs will grow 
substantially more quickly than will the economy. Can we 
stipulate to that?
    Mr. Walker. There is absolutely no question about that.
    Mr. Wicker. Now, you mentioned three things driving our 
long-term imbalance, but if you could, let's just focus on the 
factors driving this much more rapid increase in the cost of 
Medicare and Medicaid.
    Is that a function of the cost of medical care; for 
example, are medical procedures in the rest of the economy 
growing at substantially the same rate as Medicaid and 
Medicare, or is it more of a function of the number of 
eligibles coming in?
    Mr. Walker. There are a variety of reasons why health care 
costs are growing much faster than the rate of the economy.
    Mr. Wicker. Health care costs in general?
    Mr. Walker. Health care costs in general. Frankly, Medicare 
and Medicaid costs are also growing faster. One is the covered 
population, another is demographics, another is utilization--
utilization of health care services, and another is intensity, 
the intensity of the types of services that are being used.
    Under our current fee-for-service system, the incentives 
are to do more, more, more, more for two reasons. No. 1, you 
generate more revenue; and, No. 2, you are likely to reduce 
your litigation risk, because if you have done more, then you 
are less likely for somebody to be able to successfully sue you 
to say that you didn't do enough.
    So part of the problem we have under our system is we don't 
have the right type of incentives, transparency and 
accountability mechanisms. I would respectfully suggest, Mr. 
Chairman, that the $178 billion in tax preferences for health 
care are fueling health care cost increases.
    Mr. Wicker. Dr. Holtz-Eakin, would you care to expand on 
that?
    Mr. Holtz-Eakin. I think those are some of the key 
elements. Within the programs themselves, the beneficiaries pay 
only a small fraction of the overall costs in the form of 
premiums, and so if there is a large subsidy, and subsidies 
generally lead to a greater use of any economic item, the 
incentives for physicians are exactly as described where on a 
fee-for-service basis there is a clear incentive to raise the 
utilization even when you cut the fee for service. So we have 
seen many times where you cut reimbursements, that utilization 
goes up to offset and keep revenue high.
    There will be more beneficiaries with baby boomers 
retiring, and we are expanding the coverage with the outpatient 
drugs, the Part D benefit, and we are mixing the low-income 
dual-eligible seniors into the Medicare program. So that is one 
reason I am more nervous this year versus next year in growth 
rate because of the way we are changing huge pieces, but over 
the long term both these programs grow faster than the economy, 
and that is characteristic of the health care system as a 
whole.
    I think the key elements that everyone sees who studies 
this problem carefully is that cost growth is associated with 
new technologies. Some people say technologies drive cost 
growth. I don't think that is quite right, but the incentives 
that are set up for the innovation, the adoption, the diffusion 
and usage and then the utilization rate for new technologies, 
that is where the costs are associated. That is not a U.S.-
specific problem. That is global. Everybody faces the same kind 
of ramp-up in their health care costs.
    And I think for the U.S. to be successful, we will have to 
find a way for health care to act like another industry where 
not every technological innovation is automatically adopted and 
used so intensively. In some cases you can look at innovation 
and say, no, it is not worth it. And that doesn't happen in 
health, and so costs go up.
    Mr. Wicker. I do notice on the chart which General Walker 
supplied to us, he has Medicare increasing at a much larger 
rate in the outyears than Medicaid. Medicare increasing at a 
larger rate than Medicaid. And I wonder what the reason for 
that would be. Eligibles?
    Mr. Walker. That and Part D. To answer your question, 
between 2005 and 2006, an estimated 17 percent increase in 
gross Medicare costs between those 2 years in large part 
because of Medicare Part D, but not solely because of that, and 
a 5 percent cost increase between 2005 and 2006.
    The biggest change over the recent years in the estimated 
growth and cost of Medicare has been the addition of the 
Medicare Part D benefit.
    Mr. Wicker. I appreciate that.
    And let me just ask you one more quick question, General 
Walker, with regard to Social Security. It looks kind of flat-
lined there, but I understand from your testimony that actually 
the cost of Social Security will grow from 4.3 percent of GDP 
to 6.4 percent of GDP by 2080, a substantial growth in the 
percentage of GDP. Is that correct?
    Mr. Walker. That is correct, but most of that growth occurs 
between now and 2035, and then you get somewhat of a level-off 
after that.
    Mr. Wicker. And Dr. Holtz-Eakin, my final question is this. 
There has been a mention of triggers--a certain level of growth 
would trigger the need for Congress to adopt reconciliation or 
something like that.
    We have been beating down these programs based on 
reimbursement rates when we could. What other options do we 
have? What are the very real, hard decisions that this Federal 
Government is going to have to reach to level off these very 
frightening graphs that we see in front of us?
    Mr. Holtz-Eakin. Well, there is a long list. I think the 
track record of cutting back provider payments, whether it be 
physicians with the SGR, or any of the other annual attempts to 
fine-tune payments, is really quite unimpressive. Most of the 
savings--savings that were found in the BBA 1997 have since 
been given back over the subsequent years, and so that doesn't 
seem like a strategy that is very durable over the long term.
    Mr. Wicker. I think you are right.
    Mr. Holtz-Eakin. And so I think the alternative then is to 
rethink the system in a way that there is somebody who has both 
the decisionmaking power and the cost consequences 
simultaneously, and that is a hard thing to choose. We have 
tried that to some extent once before. We gave it to HMOs in 
the United States. People didn't like that very much, but that 
was a--you know, they were making care decisions, they had the 
cost consequences, and that was a strategy.
    And if you don't do that, you could try doctors, capitated 
payments, take care of the care, will we be comfortable with 
that, and will we get the outcomes we want? And you can do it 
by making the same kind of commitment to families, make 
families the locus of decisionmaking, give them capitated 
amounts of some sort, budgets to make those decisions based on 
in whole or in part and see if that can bring some of the 
decisionmaking closer to slower growth.
    But in doing any of that, we will have to address other 
pieces of the health care system that will make that possible 
to be successful. We don't know enough right now in making 
those care decisions. We don't know what constitutes high-
quality care versus low-quality care. We don't know why 
practice patterns differ across the country. So we can't really 
do this in the standard fashion where you let people make the 
decision, because they don't know enough to make the decision 
at present. So we have to improve other aspects of the health 
care system in order to really get this to work in any dramatic 
way.
    Mr. Wicker. General Walker, and then I will quickly yield.
    Mr. Walker. Mr. Chairman, the next to last slide that I 
showed includes a number of items that I think this Congress is 
going to need to consider at some point in time. Some are more 
dramatic and challenging than others.
    As I said, I would add to this slide relooking at Medicare 
Part D. But, ultimately, I believe that one of the things this 
Nation is going to have to do, and the Congress is going to 
have to decide on, is a fundamental redivision of 
responsibilities for health care in this country between 
employers, individuals, and the Government.
    We are going to have to have a debate along the lines of 
the last bullet that is up there.
    Arguably, every American, no matter what their age is, no 
matter what their income is, no matter what their geographic 
location is, needs to have access to a set of basic and 
essential--and I underline--I put those in quotes--``basic and 
essential'' set of health care services that would be available 
to them and that they know they could count on; things like 
inoculations against infectious diseases, certain types of 
wellness services that not only help them individuals, but also 
help to constrain costs, and provide protection against 
financial ruin due to unexpected catastrophic illness. 
Financial ruin obviously varies depending on your status. 
Guaranteed ability to purchase additional insurance if you want 
to, but either you are going to have to pay for it, or your 
employer is going to have to pay for it, and you may have some 
tax incentives through the Tax Code in accumulating funds to do 
that.
    I think the biggest problem we have right now is----
    Mr. Wicker. That would be a tax preference, wouldn't it.
    Mr. Walker. Well, I think what you could be talking about 
is a fundamental redefinition of responsibilities over many 
years as the Government assumes more of a responsibility for 
this basic and essential type of services to the overall 
population because you want to spread the risk as broadly as 
you can, and the Government can create the biggest pool to 
spread that risk. All right? But then you provide mechanisms 
where people can get more than that if they want, but they are 
either going to have to pay for it themselves, or they are 
going to have to get it through their employers.
    Frankly, this is something that I think will probably take 
us 20 years to transition to, but we need to start thinking 
outside the box because the types of things we have been doing 
lately are basically trying to put Band-Aids on a system that 
will never be fixed with modest changes. We are going to need 
dramatic and fundamental reforms.
    Some of the other items that I listed are things that could 
be done without those dramatic and fundamental reforms. For 
example, consider national practice standards, depending on 
where you live, the type of procedure that is going to be 
performed on you for the same type of malady is very different, 
and the cost and the outcomes vary widely based upon geographic 
location. If we could work to develop a set of national 
practice standards that would serve as a basis for determining 
what should be done, these standards could provide a safe 
harbor against malpractice litigation risks, could help us 
assure more consistency, and increase quality as well as help 
reduce litigation risk.
    There are a lot of things that we can do that we just 
haven't done. Consider case management. In both the public and 
the private sector a lot of the most expensive costs for health 
care are attributable to a fairly small percentage of people, 
but in Federal programs we are not doing much case management. 
The private sector has been doing it for years. We are not 
doing it. In some cases not doing case management results in 
significantly higher costs and, frankly, poorer outcomes for 
individuals.
    So there are things we can and should do, but ultimately we 
are going to have to dramatically reform the entire health care 
system, including a potential fundamental change in the 
division of responsibilities between government, employers, and 
individuals.
    Thank you, Mr. Chairman.
    Mr. Wicker. Tough options ahead.
    Mr. Spratt.
    Mr. Spratt. Thank you, and thank all three of your for your 
excellent presentations, and provocative.
    Let me ask you if you do agree with something I said at the 
outset, and that is that looking in the realm of what is 
practical, what is attainable in the near term, in the short 
run, isn't and shouldn't a nearly balanced budget be an 
imperative right now? Shouldn't we be moving toward balancing 
our accounts now so that we quit accumulating so much debt in 
light of the fact that you, as you look at that pie, everywhere 
in the medical care entitlements and retirements entitlements 
is widening, we would at least make room for and accommodate 
some of the widening of those ledgers, which is inevitable and 
won't be pared back by any number of reforms? Would you agree 
that the most sensible first step is to move as quickly as we 
can to a balanced budget?
    That is a question to all three of you. Flip a coin and see 
who goes first.
    Mr. Walker. I absolutely, positively believe we need to 
move toward a balanced budget. It is one thing if our deficit 
is attributable to a recession or a war, but the deficits that 
we are running are largely unattributable to the conflict in 
Iraq, Afghanistan and the homeland security costs, and we are 
not in recession and we haven't been since 2001.
    The real risk is not what we are doing today. The real risk 
is we face an unprecedented demographic tidal wave that starts 
in 2 years, when the first baby boomer reaches 62 and is 
eligible for early retirement under Social Security. What will 
happen on a status quo scenario is that will build over time. 
So we face large and growing structural deficits. We need to 
get our deficits under control, the sooner the better. But we 
are going to have to reform entitlements and do other things in 
order to deal with the longer-term problem.
    Mr. Holtz-Eakin. I would say it differently. I would say 
the No. 1 problem is the long-term spending, and that is the 
thing that should be the top priority.
    The No. 2 problem is putting in place a tax system that the 
U.S. Government will be comfortable to use to finance whatever 
is ultimately put on the table in the way of spending. We are 
not comfortable with the tax system we have.
    And number three would be the near-term path of deficits. 
Most projections over the next 5 years have debt to GDP roughly 
stable, deficits that look somewhere between 2\1/2\, 3\1/2\ 
percent of GDP. I don't love those, but I believe they are far 
less pressing issues than are these long-term ones, which are 
just absolutely threatening the economic health of the country. 
So top problem, top priority.
    Mr. Spratt. Dr. Sawhill.
    Ms. Sawhill. I think it is very important to set a goal of 
balancing the budget over a reasonable period such as the next 
10 years. And we are not headed in that direction at all right 
now, as you know.
    I think that there are several reasons why we need to make 
greater efforts to achieve that kind of goal; first of all, 
because the longer we wait, the more drastic the changes will 
be needed in both benefits and taxes, and the harder it will be 
to make these kind of reforms and restructurings that we have 
been discussing, and the more likely it will be that we will 
simply keep the current programs and current revenue system and 
reduce benefits and raise taxes probably with more of the 
emphasis on tax increases, because, of course, there will be 
political resistance to cutting benefits.
    So the sooner we get started on this, particularly 
reforming the big entitlement programs, the more likely we can 
do it in a way that is not so painful.
    Secondly, the longer we continue on our current path, the 
more debt we are accumulating, and the higher interest payments 
we are having to carry as part of each year's spending. Right 
now, we are spending close to $250 billion a year on interest. 
That is slated to go almost to $500 billion, if we stay on our 
current path, within 10 years. That is far more than we spend 
on all of the investments that the Federal Government is making 
right now in R&D, in education, in training, even in physical 
infrastructure, if you look at the projections here.
    So I think that this is money that would be better spent on 
investing in the future, on reforming these programs, perhaps 
on making room for some tax cuts if that is where people's 
priorities are. But I think to continue as we are and to 
cumulate these kinds of debt servicing costs is very much to be 
avoided.
    Mr. Spratt. Well, let me ask you something else, if I can, 
because time--I want everybody to have an opportunity to ask a 
question.
    But, General Walker, you mentioned in your testimony 
amongst the long laundry list of things that could be done 
particularly in the near term, leverage the government's 
purchasing power to control costs for prescription drugs.
    Now, Dr. Holtz-Eakin's last employer, CBO, undertook a 
study of that and decided they could not--they could not 
certify that any savings were likely in that realm. You 
apparently have a different position.
    Mr. Walker. I know what VA has done, and I know the savings 
they have achieved.
    Mr. Spratt. Well, typically when you--and I lean toward 
your position, but typically when you make that comparison the 
answer is VA is a health care provider itself. It buys 
medicines for its own account, it puts them in its own 
warehouse, and it distributes them. And Medicare doesn't work 
that way, and so you can't assume that the two will achieve the 
same results.
    Mr. Walker. I wouldn't say that they are directly analogous 
to each other, but I do believe--and we have done some work on 
this in the past without coming up with numbers, because CBO is 
the one that has to come up with the numbers. Our view is that 
there may be potential to achieve savings that way, and we have 
discussed this option in issued reports.
    Let me also mention one thing, Mr. Spratt, which is very 
important--numbers matter. I have a package for you that I gave 
to the chairman that has some numbers in it. You were talking 
about do we need to balance the budget? Part of it is how bad 
out of balance are we. We keep our budgets on largely a cash 
basis. Last year, our budget deficit, unified budget deficit, 
went down about $90 billion on a cash basis. Our net operating 
cost--the accrual-based budget deficit--went up $140 billion-
plus, to $760 billion, in large part because of the fact that 
you have mandatory spending programs like pensions, and health 
care that we are not paying for today but we are accruing, and 
there has been a tendency on behalf of Congress to sweeten some 
of these benefits, especially on the military side, which 
ultimately we are going to have to pay for. Therefore our 
deficits are getting worse, not better, on an accrual basis.
    Mr. Spratt. Let me ask you one further question about 
another GAO study, and that was concerning what we pay per 
capita per patient to HMOs and other preferred providers, 
managed care providers, under the Medicare program. It has been 
GAO's finding, as I understand, that we pay more for those 
patients than should be paid by a significant margin, maybe as 
much as 15 percent.
    Mr. Walker. I don't recall the numbers off the top of my 
head, but I do recall the studies and the fact that in many 
cases we thought we were going to save money. In fact, it 
hasn't for various reasons.
    Mr. Spratt. If that is the case, then, the solution for 
health care generally is to have more managed care, less fee 
for service. Can we be assured that that is going to achieve 
the savings that you foresee and predict, or is it----
    Mr. Walker. I believe that you need to consider multiple 
actions, because the imbalance is so great, you are going to 
have to do a number of things. One of the things that is going 
to have to happen is that we are going to have--in the short 
term we are going to have to look at the perverse incentives 
that are created by our current fee-for-service system and the 
fact that about 85 percent of health care costs are paid for by 
third parties--players who don't benefit from the services. The 
people who do benefit from the services don't even see what is 
being billed for, they have no idea what is being billed for, 
and we are further desensitizing individuals to the cost of 
health care because it is not on your W-2 and it is not on your 
tax return. We just have a number of fundamental disconnects as 
far as transparency that create perverse incentives in the 
health care area.
    Mr. Spratt. Dr. Holtz-Eakin.
    Mr. Holtz-Eakin. This is a very difficult problem, so the 
notion of what would you do to fix health care underneath 
Medicare and Medicaid, you are going to get a cacophony of 
suggestions.
    I think there are a couple of rules of thumb that would be 
useful to keep in mind. The first is to separate the decisions 
about care from decisions aboutinsurance. And one of the things 
we do in the United States is we intermix care and insurance in 
ways that I think gets us all muddled up.
    Insurance is about the financial consequences of bad 
health. Care is about doctors' decisions and providers' 
decisions on the appropriate therapy, and the benefits of that 
therapy relative to the cost. So we need to make the care 
market work more like a market, and so there is a real benefit/
cost calculation done. And if we spend more, then it will be 
worth it. And we may. Everyone knows that. We will be older and 
richer, and we can spend more. We just don't want to overspend 
and waste it.
    On insurance, we intermix chronic care, which is 
uninsurable, because insurance only works if you pay a premium 
and don't file a claim every single year. So we intermix 
chronic care, which is expensive, with acute care that is 
expensive, and not all the dollars are equal.
    We have to find a way to separate out the chronic care, 
which is uninsurable, so the insurance market will work. Things 
like that will be beneficial steps, getting that cleaned up a 
little bit. To sit at this table and to ask how many dollars an 
HMO should get in Arkansas to take care of a patient reveals 
how messed up we are. None of us have a clue.
    Ms. Sawhill. It seems to me it is very important to focus 
not only on the fact there is a lot of third-party payment 
going on that reduces incentives, but also a point that Doug 
Holtz-Eakin made earlier which is, what is driving costs here 
is not so much these market forces, but just the increase in 
medical technologies that are available nowadays--better 
treatment, better drugs, better diagnostic techniques--and 
everybody wants to take advantage of those. And it is not 
surprising that spending, therefore, is increasing because 
people want the better health and the greater longevity that 
that brings.
    And when you look at those charts that we saw earlier, the 
reason that Medicare is growing about five times faster than 
Social Security has nothing to do with the aging of the 
population. Both groups' beneficiaries are growing at the same 
rate. The difference is that per capita spending on the health 
programs is growing so much faster because of this increase in 
the availability of treatment.
    I also think that we should be careful about not 
attributing too much to what could be done through improved 
incentives, although those are surely needed. We have to 
remember that if we are talking about, for example, high 
deductible plans that would give people more of an incentive to 
be discerning consumers of their own care, most of the 
expenditures on health care aren't for routine care; they are 
for the more serious kind of things that are above the 
deductible limits and therefore aren't going to be affected by 
bringing market forces to bear in that way.
    We also have a very complicated problem of fragmenting the 
insurance market so that high-risk people are left in the 
existing traditional employer-based system and other people are 
outside of that system; and costs go up in the traditional 
system even though there are some savings in the new, more 
individually oriented system.
    So I just want to caution us about thinking that that can 
do a whole lot.
    Mr. Spratt. Thank you. Nothing further.
    Mr. Crenshaw. Mr. Mack is recognized.
    Mr. Mack. Thank you, Mr. Chairman. Thank you for holding 
this important hearing today to take a proactive look at 
entitlement spending in the Federal budget. This much-talked-
about, looming problem has arrived and will only get worse. I 
also want to thank our guests with us today for providing their 
insight on this topic. I appreciate you all being here, and 
before I get to my question, I wanted to make a brief point 
about the subject.
    Mr. Holtz-Eakin has in the past highlighted just how much 
an effect the size of government spending can have on numbers 
of areas, and I believe he is right. As he has stated, the 
Government is over-extending itself in the areas of spending. 
This spending diverts precious resources, which could be used 
in other ways, to keep by the people to pursue private 
alternatives. Simply put, we take too much, we spend too much 
and we regulate too much.
    It is time for us to take a look at ourselves in this 
Chamber and find ways to reduce spending. And I mean real 
reductions, not just holding the line or holding the rate of 
growth.
    I believe last year was an important first step in this 
direction to lower spending, but we can surely do better. We 
owe it to the American people who put us here to reform the 
spending and budgeting process, make it more transparent and 
accountable. All aspects of the budget should be examined to 
make sure that the American people are receiving the services 
they need at a price they can afford. So my question goes to 
each one of you.
    President Bush has correctly laid out a vision for an 
ownership society, and I could not agree with him more. In that 
spirit, last year I came up a proposal known as the Lifetime 
Prosperity Act, which would allow parents, family and friends 
to contribute to a 401(k) account for their children, thereby 
allowing our Nation's youngest citizens a chance to begin 
saving for their own retirement.
    Studies have shown that if a thousand dollars is placed in 
a Roth IRA every year beginning at birth, that person would 
have over $2 million in savings by the time they retired, 
assuming the historical 8 percent rate of return.
    If we are to truly save Social Security and return it to 
its original intent as a personal retirement supplement, I 
believe Congress is going to need to look at outside-of-the-box 
solutions such as this.
    If a plan like this or a similar plan were passed by 
Congress, would this help to relieve some of the burden on 
individuals and help to curtail some of the mandatory spending? 
And what are some of the down sides that you may see?
    Mr. Walker. First, let me start by saying as a former 
trustee of Social Security and Medicare from 1990 to 1995, 
Social Security was not intended to be a supplement, it was 
intended to be a foundation, a foundation which one would 
supplement, hopefully, with private pensions--only about 50 
percent of American workers have a private pension--and with 
personal savings.
    I think you are right, Mr. Mack, to note that one of the 
other deficits that this country has, in addition to a budget 
deficit and others, is a savings deficit. And we had a negative 
saving rate last year, the first time since 1933, the depth of 
the Depression, and we need to do something about that.
    With regard to potential savings vehicles for young people, 
obviously to the extent that you do that, the miracle of 
compounding can work for you because you are talking about a 
number of years. At the same point in time, we also have to 
recognize that that will impact the budget deficit. I mean, to 
the extent that we are giving additional tax preferences, we 
need to understand what that is going to do for us from the 
standpoint of economic policy and social policy, but we also 
have to understand what it is going to do to the bottom line of 
the budget deficit, and it obviously would end up exacerbating 
the deficit.
    I think it is meritorious to think about what can be done 
to stimulate additional savings at as early an age as possible 
because with savings, the miracle of compounding works for you; 
when you are a debtor, it works against you. So whatever we can 
do to try to change that, I think would be helpful.
    Mr. Holtz-Eakin. I confess I don't know the details of your 
proposal, but I think, No. 1, you want definitely to focus on 
those things that would raise the national savings. That is a 
key issue. Make sure the economy remains growing at an adequate 
rate.
    No. 2, I think that the way in which you integrate any such 
savings programs with the mandatory spending programs is 
actually an important consideration. You don't want to set it 
up in a way that if you save more and you cut the benefits off, 
it is an implicit tax that undoes the idea to begin with.
    So how that gets done and whether it would really curtail 
spending in a way that is desirable is a detail that matters a 
great deal.
    Number three, the risk associated with investment accounts 
is real and has to be taken into consideration. I wouldn't 
compound these at 8 percent, I would compound them at the 
Treasury rate because that is the market's recognition of risk 
associated with this, and that is real risk to the taxpayer. If 
the accounts don't pay off and the person ends up on whatever 
the backstop program is, and that happens for, say, a large 
group because of either an equity market downturn or bad 
economic period, that is a serious risk to the taxpayer who 
will have to, at a bad time in the economy, come up with the 
money to finance the backstop program.
    So I think you ought to place the risk explicitly from the 
word ``go,'' because you can't get rid of it. You can't get 
around it. Those are considerations.
    Finally, some detailed assessment of how this fits across 
the income and age distribution is important. For old people 
there is not much time to catch up before retirement. For 
someone like myself, nearing the magic age of 50, but quite 
frankly not poor, I could probably manage it. But others are 
not in the same position. You have got to figure that out.
    Ms. Sawhill. I pretty much agree with what has been said. I 
would simply add, a lot of the tax preferences that we provided 
for savings haven't had as much impact as had been hoped for 
and yet they do lead to less national saving through their 
impact on the deficit.
    The second thing is that in the whole issue of how to get 
people to save more there is increasing emphasis on the need to 
provide some kind of mandate, or at least a default which 
favors being in an IRA or 401(k), because people seem to be 
quite irrational or incapable of making long-term decisions 
about this thing. If the default is to be in the system rather 
than out, they will by very large numbers stay in the system 
and save more than they would have if they had to actually opt 
into the system.
    Mr. Walker. Can I mention, Mr. Chairman, real quickly, I 
have been on two Social Security reform panels in the past that 
put forward reform plans. One recommended a mandatory saving 
element, in the form of an individual account. I would 
respectfully suggest that is not a tax increase; it is forced 
savings, but it is the people's money, who are saving it and 
will get it back with earnings. You can think of a concept like 
that potentially as part of Social Security reform or otherwise 
and also think about the Federal Thrift Savings Plan as a 
model, with limited investment options, which frankly I wish 
the Congress had thought of in designing Part D of Medicare, 
recognizing that you can't give people too many choices or else 
you are going to overwhelm them.
    Mr. Mack. Thank you, Mr. Chairman, and thank you for your 
answers.
    Mr. Crenshaw. Mr. Moore is recognized.
    Mr. Moore. Thank you, Mr. Chairman, and thanks to our 
witnesses for being here.
    General Walker, I heard you talk earlier just now about 
Medicare Part D and the choices that seniors have under the new 
prescription drug plan, and you cited a figure in your first 
testimony, and I didn't write it down, about the cost over 
several years of this Medicare prescription drug benefit. Do 
you recall?
    Mr. Walker. $8.7 trillion invested at Treasury rates as of 
January 1, 2005, to deliver on the promise for the next 75 
years.
    Mr. Moore. On January 31, 2005, my friend, Ms. Emerson, who 
is on the other side of the aisle, and myself filed a bill 
called the Meds Act, H.R. 376.
    This goes back to what you said earlier too, sir. Back in 
1992, I believe, the Congress passed a law that gave the 
Secretary of Veterans Affairs the authority to negotiate a 
group discount with the pharmaceutical companies. This bill 
would give specific authority to the Secretary of Health and 
Human Services to negotiate the same kind of discount. The 
veterans I have talked to are very pleased with their benefit.
    The seniors are very confused about this new law and very 
concerned that they are not going to get what they hoped to get 
under this law. I think this would greatly reduce--and I am not 
saying it is going to go all the way to $8 trillion--but would 
greatly reduce the cost of the Medicare benefit being provided 
right now and would give a similar benefit the veterans have 
had and enjoyed for several years.
    Any comment, General Walker?
    Mr. Walker. Sir, I would have to take a look at the bill, 
and I plan to do that. We have done work, as I mentioned 
before, on the VA's program; and I understand it is not 
directly analogous to Medicare, but I do think savings can be 
achieved through leveraging purchasing power.
    Mr. Moore. I have another bill that I filed in February of 
2005, and this is a bill called the Social Security Truth in 
Budgeting Act. What this would do is take Social Security 
receipts, funds, taxes out of the unified budget.
    I talked to a friend of mine across the aisle and said, I 
have heard you talk about fiscal responsibility; I know you 
believe that and you want that; you should sign this bill. He 
said, There is a problem; it will make our deficits look even 
larger.
    I said, That's calling the truth to the American people.
    I want to give a copy to each of you too.
    Finally, last thing, the President and Members of Congress 
have talked about permanent repeal of the estate tax. I tell my 
folks back home, it doesn't have to be all or nothing. We talk 
all the time about trying to protect small business and the 
family farm, and I filed a bill on this that would have, 
instead of permanently repealing the estate tax, raised the 
exemption to $3.5 million which would, I understand, protect 
over 98 percent of the estates in this country. And I 
understand, also it would cost $200 billion less over 10 years 
than total repeal.
    So I ask my friends across the aisle to take a look at some 
of this. It doesn't always have to be all or nothing. We can 
protect a great, great majority of people and estates in this 
country without bankrupting our country or putting our country 
more in debt.
    General Walker.
    Mr. Walker. I think one of the things Congress needs to 
definitely consider, given not just our current deficits, but 
our projected, long-range, growing structural deficits, is to 
target better, not just with regard to issues like the estate 
tax, but also with regard to issues like, should all health 
care coverage be excluded from taxation or only up to a certain 
amount? Should entire home mortgage interest be deductible or 
up to a certain level?
    I think we are going to have to start thinking about some 
of those concepts, given the hole that we are in and the rate 
that we are digging.
    Mr. Moore. Thank you.
    Any comments from any other witnesses?
    Dr. Holtz-Eakin.
    Mr. Holtz-Eakin. I can't resist picking up the comparison 
of the VA to the Part D benefit. This is something I have 
looked at pretty carefully. The VA is very different. It is a 
large provider that does a lot of training, has the ability to 
promise pharmaceutical companies that they will train docs 
using their drugs, and that is a tremendous appeal, allows them 
to negotiate great bargains.
    It has a very restrictive formulary, and it is take it or 
leave it, and only one in six takes it from the VA. So they 
have got a select population taking that particular formulary 
which is delivered at a very low cost because of their unique 
position.
    Mr. Moore. Let me stop you just 1 second. The last day he 
was in office, Secretary Tommy Thompson said when he was asked 
if he had any regrets, he said, I wish I had had the 
opportunity to negotiate for a group discount.
    Mr. Holtz-Eakin. That may be, but I think the key here is 
that the Medicare population is very different and it is not a 
select population, so you really can't do this comparison that 
way. The VA is, in fact, one of the reasons why I think the 
general competition in Part D is effective. It looks like one 
of these big nationwide folks; not everyone has to go to it, 
but if there are a bunch competing, you get this pressure to 
have both the tools, the formularies and the incentive, the 
profits, to keep prices down. That has been the logic from the 
beginning.
    I think, given that, you want some choices. Choices are a 
good thing. I would remind everybody that this benefit is a big 
expansion in the program, for better or worse, and it is a 
couple of months old. It is going to take a little while for 
this to shake out, and that is just a fact.
    Finally, the big design issue, I think, in the Part D 
benefit is that there is a line between outpatient therapy 
called ``seeing the doctor'' and outpatient therapy called 
``taking your meds,'' and those ought to be on a level playing 
field. What is the difference between a therapy which is done 
through pharmaceuticals and done another way?
    We need to get rid of those kinds of artificial walls so 
that therapies compete on the basis of their merits. That would 
be something to think about.
    Mr. Crenshaw. Mr. Chocola is recognized.
    Mr. Chocola. Thank you, Mr. Chairman.
    It seems to me, in order to solve problems, we have to 
define. I haven't been in Congress that long, but we are a 
reactionary or responsive body. We tend to focus on things we 
hear our constituents talking about at home.
    I don't hear this issue come up at home very often. In 
fact, I hear the opposite. I don't hear we have got to find a 
way to reform entitlements. We have to expand entitlements for 
many of my constituents. We don't see it on the evening news. I 
would venture a guess that if the Federal Government was a 
public company and it had the financial challenges that our 
government has, it would be on the news every single day.
    So my question is, even though there are various government 
reports that outline this problem, what kind of tools can we 
use, what kind of communication methods do you think we can use 
to get the American people to understand the magnitude of this 
problem and start talking to us about it in our town hall 
meetings, to make sure we address it and they hold us 
accountable if we don't sooner rather than later?
    General Walker.
    Mr. Holtz-Eakin. I want to do one thing. I went and gave a 
speech in Dallas just before I left CBO to a great group, civic 
leaders, very concerned about the problem. I told them, and 
they said, Why isn't anyone saying anything? I said, That is 
all I do.
    So it is absolutely true, the people haven't heard it and 
you have in front of you two of the leading experts in trying 
to get the message out. I will let them explain it.
    Mr. Walker. Let me tell you what is being done right now 
and some other things I think need to be done, because you 
can't solve a problem until a majority of the people believe 
you have a problem that needs to be solved and it is prudent to 
solve it sooner rather than later.
    We are talking about a problem that is so huge that very 
painful choices are going to have to be made that will not be 
politically popular, and therefore my view is, given that fact 
and given the fact that most people in Congress want to come 
back after the next election, then the ground has to be tilled, 
not just within the beltway, but more importantly outside the 
Beltway to help the American people understand where we are, 
where we are headed and what the adverse consequences are for 
our country, for their children and grandchildren if tough 
choices aren't made sooner rather than later.
    Now, in that regard, Isabel Sawhill and I, and a number of 
others have come to form what I call the Truth Squad, which has 
been conducting town hall meetings in different cities around 
the country to go directly to young people, to go directly to 
seniors, to go directly to business leaders and others to help 
them understand where we are and where we are headed.
    We have been to four cities already--the latest was 
Atlanta. We have eight others scheduled. We have about 15 
others on the waiting list who want to be part of it. More and 
more groups are becoming part of this coalition every day.
    It includes an interesting mix of partners. For example, 
the Concord Coalition, Association for the Advancement of 
Retired People (AARP), the American Institute of Certified 
Public Accountants (AICPA), the Heritage Foundation, the 
Brookings Institution, the Committee for Economic Development, 
and the Committee for a Responsible Federal Budget. Many major 
colleges and universities around the country are part of this. 
That has to happen.
    Another thing that has to happen is, I think some of the 
things that I have suggested on the last slide that I gave you 
need to happen, but we also need to have a summary annual 
report for the U.S. Government. We did this when I was a 
trustee of Social Security and Medicare from 1990 to 1995, and 
I have been talking with the Secretary of the Treasury, John 
Snow, who is chairman of the board of the Social Security and 
Medicare trustees, and Josh Bolten.
    I am the auditor of the financial statements--GAO is, and I 
sign it. What I would like to see ideally, for this next year, 
short, plain-English charts and graphs, bottom-line documents 
like we have been doing for Social Security and Medicare since 
the early 1990's that could receive broad-based distribution, 
that could be used to help people where we are and where we are 
headed. We are not going to solve the problem until you have 
over 50 percent that believe it needs to be solved, and it is 
prudent to do it sooner rather than later.
    Ms. Sawhill. I won't repeat what David Walker has just 
said, but we are working hard on getting the word out to the 
public. I think that we have also done some efforts to look at 
what brought Congress together in the past when we had other 
kinds of fiscal crises, whether it was Social Security in 1983 
or tax reform in 1986, or the various budget agreements in 
1990, 1993, and 1997.
    If you look at that history, what you find out is that 
several things were always required. One was, you had to have 
leadership from the White House. Secondly, you had to have 
bipartisanship, although in 1993 we did not, but in most of 
these cases we did. Thirdly, you had to have the public 
concerned for one reason or another.
    Ross Perot put this issue on the table in 1992 that 
required that Clinton address it when he became President, 
given how well Perot did with the issue in that election.
    And I think that a lot of us are concerned that what it is 
going to take is an economic or financial crisis of some sort, 
and we are trying to get the public to attend to this before 
that happens, but it may not. And I think there is a real 
threat to the economy.
    When we talked earlier about why should we be focusing on 
reducing the deficit now rather than later, the major reason, 
in addition to some that we talked about earlier, is because 
this could lead to a crisis.
    Foreigners are lending us basically all of the money, 
almost all of the money that we need right now to cover these 
deficits on an incremental basis, and at any time they could 
decide not to lend us those dollars and that could lead to very 
severe consequences for the economy. Everyone has talked about 
that, in addition to the three people up here. Alan Greenspan 
is, I think, increasingly concerned about this, as are many 
others.
    So I like your question. I think it is very important that 
we get the word out, and I hope all of us can do that together.
    Mr. Chocola. Thank you. I wish you luck on your tour. I 
offer my help in any appropriate way, and I look forward to a 
town hall meeting, that I have several hundred people screaming 
that we need to reform our entitlement systems now rather than 
later.
    Mr. Chairman, I yield back.
    Mr. Crenshaw. Mr. Neal.
    Mr. Neal. There will be screaming, and as long as you can 
keep it general, you will survive.
    Mr. Eakin, I listened to your analysis of the budget 
challenge on Fresh Air. You did a great job and it is always 
nice to have panelists on the other side, free of the day-to-
day political pressures that many of us feel.
    And forgive me if I am a bit skeptical of the tour, largely 
because of timing; I think that timing is going to be critical 
to this dispute.
    While we are on that topic, let's give credit to Bush One. 
I was here when we cast a pretty tough vote--the Republican 
leader of the House helped to get the votes to get it done--and 
two successive achievements by the Clinton administration where 
people said it couldn't be done.
    Not only did we get it done, there was unparalleled 
economic growth. Nothing in the last 5 years comes close to 
that, during those years, after many naysayers said it couldn't 
be done.
    But there was something interesting in one of the small 
newspapers over the last couple of days. There was a member of 
the House very upset that his request for earmarks had been, as 
he deemed it, ``leaked.'' he said that they had been leaked. 
Some of us would say, Look, if you don't want to be known by 
the spending, then don't request it. That is the easiest way to 
resolve this issue rather than what has happened around here 
where friends on the Appropriations Committee on both sides 
tell me frequently that the people who make the most aggressive 
requests for spending--and, by the way, hold the most anger for 
the longest period of time--are frequently hollering and 
screaming about spending.
    I think Mr. Nussle and I discussed this in the past; the 
easiest way to get it done is to have everybody's letters 
published and their requests for spending. Mr. Nussle said, 
Look, we all know you can't grow your way out of this problem.
    $257 billion for defense during the middle of the Clinton 
administration, the cuts had begun during the end of the Bush 
administration with the collapse of the Soviet Union.
    Now we are at $439 billion. Homeland security, $40 billion; 
the prescription drug bill, $740 billion after we were all 
assured it was going to be $400 billion of spending; Hurricane 
Katrina; two wars where everybody knows we are going to be 
there for a long period of time; and the $60 billion suggested 
by Mitch Daniels really doesn't stand up under analysis.
    But my point is this. If we are going to do this, you can't 
have commissions that are appointed where certain things can't 
be on the table. That is not going to be a discussion. I would 
advise Democrats, don't participate if everything is not going 
to be on the table. And instead we are being told that the 
confines of the debate are limited to certain prescriptions 
offered only by the administration in some sort of a litmus 
test.
    Let me ask the three of you this. I assume, based on your 
comments today, that most of you--your comments on that show, 
Mr. Eakin--you really don't support the notion that tax cuts 
actually increase revenue.
    Mr. Holtz-Eakin. No, I don't think tax cuts pay for 
themselves. I mean, tax cuts--not all tax cuts are created 
equal. I am nervous when people talk about tax cuts blankly. 
There are clear economic responses to good tax policy. They 
offset some of the static revenue loss, but they don't fully 
pay for themselves; and I think that one of our challenges in 
the years to come is to have a tax code that we can use to pay 
the bills.
    The current Tax Code is riddled with so many inefficiencies 
that I sense no one trusts to use it. We really do need to fix 
it.
    Mr. Neal. Any other panelists?
    Mr. Walker. I think people get confused. Not all tax cuts 
stimulate the economy. Some are economically driven, some are 
socially driven. Very, very, very few tax cuts pay for 
themselves.
    I have said this many times before: If we are bleeding on 
the bottom line, we need to consider both sides of the ledger 
as it relates to future legislation.
    Now, by not considering the potential costs and 
consequences on the tax side, including tax preferences, that 
leads to very perverse actions such as back-door spending 
through the Tax Code because you can't do it through the front 
door.
    Let me just say about the proposed commission, whether or 
not that commission would be successful depends primarily on 
two things: First, who is on it; they have to be people that 
are capable and credible, not just on one side of the aisle, 
but both sides of the aisle. And, number two, no preconditions 
about what is on or off the table.
    If you don't meet those two conditions, and I can probably 
come up with others, then it is probably a waste of time.
    Mr. Neal. Dr. Sawhill.
    Ms. Sawhill. I would very much agree with what was just 
said. Just as it took Nixon to go to China, I think it is 
actually going to take, primarily, Democrats to make the kinds 
of changes in the big entitlement programs that are going to be 
needed in the future. So this has to be bipartisan, and it has 
to be a trusted process.
    On the tax issue, I think that the structure of the tax 
system is every bit as important as the level of taxes. Earlier 
we talked about tax expenditures, hidden subsidies, hidden 
expenditures, or ``back-door spending,'' I think they were 
called.
    Think about the amount of money we are spending on health 
through the tax system in terms of exemptions for individuals 
and employers in the current system, and that is a lot of 
money; and that helps to drive up health care spending and add 
to the problems we talked about earlier.
    The President's tax reform commission proposed to cap that 
tax preference. The current administration seems to be going in 
just the opposite direction.
    So this is an interesting issue that I think you all ought 
to look at. This is very big dollars and part of the health 
care spending problem that we discussed earlier.
    Mr. Neal. Thank you, Mr. Chairman. That has been very 
useful.
    Mr. Crenshaw. Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman.
    Thank you, panel.
    Just going back to an opening comment by Mr. Spratt with 
regard to the need for a balanced budget, this reminded me of a 
conversation where I had a family who said, they have not seen 
their family income go up for the last couple of years--no 
raises and what have you--and the question came up, if the 
Federal Government operated that way, froze everything--not 
just discretionary, froze everything across the board, how long 
would it take us to actually get to a balanced budget.
    Do you have a number that I can go back to them on? I have 
heard around 3 years, around 3 years if you froze everything 
across the board. Probably not a realistic goal for considering 
we try to use mandatory by less than 1 percent and we got into 
a lot of trouble for that.
    Ms. Sawhill. But consider that the proposal that I 
described earlier does something less draconian than that, but 
has similarly large effects and might be considered fair.
    Mr. Garrett. Might be fair but goes back to your comments 
about getting the other side to do it. Because as soon as we 
talk about reducing benefits not for current recipients, but 
recipients potentially down the road, I can tell you it was not 
necessarily well received in some quarters.
    Mr. Walker. I can tell you for sure that irrespective of 
what the number--probably three to five, off the top of my 
head, back of the envelope--one, you know that would be 
extremely difficult, if not impossible, to do; but secondly, it 
doesn't deal with our long-run structural imbalance because it 
doesn't really start--in earnest until 5 years from now when 
the first baby boomer reaches 65 and is therefore eligible for 
Medicare.
    And that is the real problem. It is not the short term. The 
short term is a problem, but the real problem is the large and 
growing structural imbalance.
    Mr. Garrett. On the short-term side, I heard you make the 
comment, if you wanted to solve it on the taxing side, we would 
have to see an unprecedented increase in the level of taxation.
    Now, I have also heard in debates on the floor that all we 
really have to do is go back to our tax rates of the prior 
administration before the GOP came in. If we went back to those 
rates, across-the-board rates would go up. Would that solve our 
problem if we raised the rates prior to this administration?
    Mr. Walker. No.
    Mr. Holtz-Eakin. Not close.
    Ms. Sawhill. No, it would not.
    Mr. Garrett. Thank you.
    Next question: I come from----
    Ms. Sawhill. Depends on the time frame. But if you are 
talking, looking out to 2030 or something like that----
    Mr. Garrett. I come from the great State of New Jersey 
where we consider ourselves a donor, State and by that, I mean 
at the end of the day we send out more to Washington than we 
ever get back. This has been the history of New Jersey for a 
long time.
    On the upside, we are an affluent State and generous State, 
although I am waiting for thank-you notes from the other 
States.
    My question is, if we were to get entitlement reform in one 
shape or another, is this good for my State and can I say we 
are not paying out as much money or that we are not subsidizing 
the rest of the country as opposed to some of my constituents, 
and say, Don't cut any of my benefits?
    How does it impact a State such as New Jersey?
    Mr. Holtz-Eakin. I think the key here is, regardless of 
whether you are a donor or recipient State, that is a measure 
for which I have relatively little sympathy, quite frankly. 
This ship will go up or go down, and if you don't fix 
entitlements, it is likely to really damage the overall 
economy. New Jersey will be damaged right along with it.
    So you should tell your constituents, If we would like, 
regardless of our donor status, to continue to have the 
capacity to donate at all, you have got to fix entitlements.
    Mr. Walker. Another way to look at it is, if you look at 
one of the graphics that I showed about the long-range 
imbalance, under the second scenario you would have to more 
than double Federal taxes alone, in order to deliver on the 
promises that government has already made in about 2030-2040. 
You would have to increase it; but by that point in time you 
would have to more than double them. That would have a 
tremendous adverse effect on economic growth, on disposable 
income, et cetera, et cetera.
    That is the one I am talking about there, (Figure 3) by 
2040. The way I get there is, look at the bar, which is 
spending as a percentage of GDP, and then look at the line, 
which is revenue as percentage of GDP. If you said we are just 
going to tax, we are not going to change anything, just tax, 
then the line has got to match the bar if you are going to 
break even. That is more than two times higher. That doesn't 
count State and local taxes.
    On the other hand, if you cut back government to everything 
that is only literally referenced in the Constitution--
literally not arguable, literally referenced in the 
Constitution--and you did it soon enough, you might be able to 
get there.
    That is not realistic either; that is why I say three 
dimensions: entitlement reform, restructure both discretionary 
as well as other mandatory spending, and tax policy. You want 
to minimize taxes for economic growth, disposable income, 
competitiveness, and a lot of reasons, but you are not going to 
get there without, over the long term, having a higher 
percentage of revenues as a percentage of the economy than we 
have right now.
    The great debate is going to be, how much can you get from 
entitlement reform, how much from spending restructuring 
restraint, and what is the plug. Hopefully, the plug is as 
small as possible, because over the long term you have got to 
be able to pay your current bills and deliver on your promises, 
and we are not anywhere close to being able to do that.
    Mr. Garrett. Do you do an analysis of whether we are within 
the confines of the Constitution on all the items that you 
cover in your report?
    Mr. Walker. Some of the items in discretionary spending are 
in the Constitution but some mandatory programs are not.
    Mr. Crenshaw. Ms. Schwartz.
    Ms. Schwartz. Thank you very much.
    I did want to ask a little bit about Medicare Part D which 
we are in in its first few months and you talked about both 
short- and long-term costs. But I am interested in whether my 
constituents and seniors are getting what we are paying 
companies to provide them.
    I am sure you are aware--I think this is mostly a question 
for General Walker, but aware of the fact that there have been 
some serious problems in the initial implementation of Part D. 
Some were concerned about long-term problems, but the immediate 
beginning, I certainly won't speak for other Members of 
Congress, but I have heard from my constituents--particularly 
individual seniors who had to pay out of pocket and then were 
told they would get reimbursed, or hope to get reimbursed, 
heard from pharmacists who provided needed medication and are 
hopeful of getting reimbursed; and, of course, the whole issue 
of the States and whether they will actually be reimbursed.
    So my question really is, we are paying companies to 
provide this benefit and there have been real problems in 
people not getting medications, seniors not getting this 
medication. Just this week Secretary Leavitt said that, in 
fact, it is not going to be the responsibility of the 
administration to demand or expect that the companies we have 
sent taxpayer dollars, to provide this benefit to reimburse 
seniors, that it will be up to individual seniors to seek 
reimbursement. They are completely on their own.
    I am outraged by that on behalf of my seniors. I think my 
seniors will be outraged. And, again, I am not even talking 
about the pharmacists or States. The administration has 
indicated they may, in fact, take new tax dollars because they 
are not going to insist companies pay for benefits that they 
should have.
    The interesting thing about that is not only my outrage and 
the fact seniors will be out some money, but the fact is that 
just 4 days ago, or 4 days before Secretary Leavitt made this 
pronouncement, his own Department put out a regulation that 
said, in fact, we would be insisting on overpayments.
    We have paid the companies to provide the benefit. If they 
are not, in fact, fairly reimbursing or paying for that 
benefit, there must be a process, as regulations say it--I have 
it in front of me if you haven't seen it yourself--that, in 
fact, those companies have to have a process of doing this.
    So he is already saying he is not going to hold these 
companies to account for his own Department's regulations. That 
is really unacceptable that we are not only spending a lot of 
money, but in fact, are not going to hold those companies 
accountable for providing those benefits to seniors.
    Could you speak to the role the GAO will play in making 
sure that the administration holds the Department--these 
private companies accountable for these tax dollars to be 
paying benefits to seniors? And how quickly will you be doing 
some oversight to make sure that that is happening so that we 
are getting what we pay for, and most importantly, the seniors 
on the street, trying to get their medications that they need?
    I think most people are not taking medications they don't 
need. They are paying out of pocket.
    Mr. Walker. First, let me say that there are three primary 
problems with Medicare Part D. One is design, another one is 
administration, and the third one is fiscal, we can't afford 
it. I expect that we will be doing work on this.
    At GAO we are way oversubscribed for work in our health 
care area, way more demand for work than we have supply to do 
it. But given the concerns that I have heard, including the 
ones you have mentioned, I have little doubt we will be doing 
work in this area.
    At the same point in time, we want to coordinate what we do 
with the other accountability players. For example, HHS has a 
very large inspector general operation, if you will, and I 
would want to make sure whatever we do is coordinated with what 
they are going to do.
    So let me find out whether or not we have had any requests, 
anything under way, and I will get back to you.
    Ms. Schwartz. Do you need a request in order to take some 
action on this?
    Mr. Walker. We need a request from the committee with 
jurisdiction over the matter, typically, Chair and/or ranking 
member because of our supply and demand imbalance.
    Ms. Schwartz. I am neither of those, but the letter that I 
have addressed to Secretary Leavitt about the fact that this is 
of deep concern that he would make such a statement, that he 
would not demand this performance.
    I would also ask you, in my 4 seconds left, to take a look 
at, similarly, the concern that I have that there might be 
companies that actually might scam seniors. Hopefully, we 
haven't seen that yet, but I have introduced some legislation 
that would call on your office to actually help make sure that 
we do not have seniors being offered by companies that don't 
exist, or offering the benefits. There are so many options out 
there that I think this is ripe for that kind of scamming.
    So if you could, put that on your list of concerns to take 
a look at as we go forward.
    Mr. Walker. I can tell you, in addition to our normal audit 
evaluation capabilities, we also have a special investigations 
unit; and I fully expect that they will be doing work with 
regard to Medicare Part D, whether or not we get a request.
    Ms. Schwartz. That I appreciate. Thank you.
    Mr. Crenshaw. Mr. Conaway.
    Mr. Conaway. Thank you, Mr. Chairman.
    And thanks everybody for being here today. Appreciate that.
    By professional background, I am a CPA, spent about 30-plus 
years helping taxpayers comply with an incredibly complex code; 
and I agree with all the comments about, it is unworkable. I 
would like the challenge, though--and this is my observation, 
and I don't necessarily need a response back. But this concept 
of ``tax expenditure"--words mean things, and in the real 
world, those don't.
    Inside the beltway they have great meaning and everybody 
understands it, but when I sit down with taxpayers and prepare 
their tax return and I have shown them a difference between 
what their tax would have been under particular circumstances, 
whether they took advantage of a particular piece of the Code 
or whatever, it would never occur to them that the Government 
owned that money, first, that everything they made, all the 
earnings off the sweat of their brow, was actually theirs and 
that the Government was trying to take a part of it and that 
because the Code got changed and the Government didn't take a 
piece of it, that somehow the Government was owed that money 
under some empirical system that said everything we do and all 
the hard work we generate, the Government owns it and we are 
going to leave you a little piece of it.
    So to the extent you want to defend tax expenditures under 
that concept, you will have to tell real taxpayers everything 
they earn and all the sweat of their earnings belongs to the 
Government, first, and that in our graciousness, we will leave 
them some of it.
    David, you and I had a conversation about total debt. You 
may have mentioned it earlier, but give us a magnitude. Last 
number was like $44 trillion. What is the current number?
    Mr. Walker. The total liabilities and unfunded commitments, 
this is just for 75-year costs, came to $46.4 trillion as of 
September, 30, 2005.
    Mr. Conaway. Is that impacted by the accrual-based deficit 
we ran, or in terms of an all-in number on a balance sheet, the 
liability side of a balance sheet; is that the number?
    Mr. Walker. The accrual-based number would even be worse if 
we considered Social Security and Medicare, because they are 
not in there. That accrual-based number, the reason it is so 
much higher than the cash-based number is for things like 
civilian and military pensions and retiree health care.
    Mr. Conaway. These are numbers that aren't make believe. 
These are actuarially assigned debts and liabilities. Where 
they have a private company or pension plan you would have to 
account for them as actual expenditures.
    Mr. Walker. These appear in the annual report, but you have 
to go to the MD&A, the financial statements, and the footnotes 
and pull the numbers from several different places; and that is 
one of the things that we need to change in this summary annual 
report. Bring it all together, make it concise, make it clear, 
translate it into terms Americans understand, like $156,000 a 
person, $375,000 per full-time worker.
    Mr. Conaway. As an aside, would somebody in the government 
be as responsible for signing those statements as a CEO, CFO of 
a publicly traded company?
    Mr. Walker. The CEO doesn't sign these statements; that 
would be the President of the United States.
    Mr. Conaway. That was a rhetorical question.
    Mr. Walker. I understand that.
    Mr. Conaway. We hear an awful lot, and Ms. Sawhill 
mentioned it as well--I used to be in the banking business in a 
prior life, and the old adage, If you owe the bank a thousand 
bucks, the bank owns you; but if you owe them a million bucks, 
you own the bank.
    Which is more of a concern to us, the actual level of debt 
of this country or who owns that debt? Which would be a bigger 
issue with you, any of the three of you?
    Ms. Sawhill. Well, I think they are both important, but I 
think the fact that so much of this is now owned by
    foreigners is a new concern that we haven't seen in the 
past and the growth in the amount of the debt, or the 
proportion of the debt owned by foreigners, has been going up 
very rapidly, and this can begin to impact not just our economy 
but also potentially our foreign policy and our relationships 
with other countries.
    Mr. Conaway. Why would these countries not operate in their 
own best interest, the way investors would operate who weren't 
countries?
    Ms. Sawhill. I think they, most of the time, will operate 
in their self-interest, but their interest may include such 
things as making sure that, in the case of China, they have 
strong export markets because that is the way they produce jobs 
domestically. And so they have the same kind of political 
pressures, so to speak, that we do to make sure that their 
domestic population is employed, that their exports are strong; 
and that creates a different incentive than would exist for a 
private investor.
    Mr. Conaway. It would not be in their best interest, or 
would be, to have a major devaluation of that debt? That would 
be in their best interest to make that happen?
    Ms. Sawhill. No.
    Mr. Holtz-Eakin. I don't think that is the scenario to 
worry about. I think the concern really isn't about the current 
level of competition; it about the prospective growth in this 
debt and the fact that largely that would accumulate outside 
the United States. That has consequences for flexibility from a 
pure financial point of view. It has consequences from the 
point of view of standards of living.
    I don't think there is a scenario in which a self-
interested foreign entity would dump U.S. securities in a way 
to try to cause a crisis. That doesn't appear plausible to me. 
It does seem to me that it remains a concern because of the 
fact that if you are in that position and something else 
happens, whether it be an international price move or something 
like that, you are going to have more trouble. That is the main 
concern.
    Can I take a shot at the other two things? I think you 
should not--I argue with him usually. I think it is nice to 
bring in these measures as a complement to the basic budget, 
but the cash flow budget is a management tool. Discretionary 
budget authority is the way you control what the government 
does. Mandatory budget authority could be controlled in the 
same way. That shouldn't be lost in this discussion about 
disclosure of the financial condition, with which I have some 
sympathy.
    On the issue of tax expenditures, it is not about take the 
labeling out of it; but it is not really an issue of how much 
dollars, it is about how effectively they are raised. And by 
leaving things out of the tax base, you are forced to have high 
rates elsewhere, in many cases on things that you don't want to 
tax if you want to grow effectively.
    So the notion should not be as raising revenue, but 
broadening the base to have a better tax system. That is the 
key.
    Mr. Walker. Words matter and tax expenditure is a 
Washington, DC, term and not one I used when I practiced as a 
CPA for many years.
    To answer your question on debt, that is probably the most 
important factor to keep in mind, not just where we are, but 
more importantly, where we are headed.
    Secondly, the foreign dimension is a different one. 
Obviously, you don't expect for investors, including holders of 
our debt who might be foreigners, to act in a way that is 
adverse to their interest.
    Here is my concern. We have gone from a relatively small 
percentage of our debt being held by foreign players to almost 
half. Within the last couple of years foreign players have 
purchased an amount almost equal to all of our new debt. Now--
one of the reasons being, we had a negative saving rate last 
year and we had one of the worst household saving rates of any 
major industrialized nation on earth. So we have to rely on 
foreign players to fund our deficit.
    My point is this. Let us just suppose that because of a 
simple principle of diversification, which we are all familiar 
with in investments and other concepts, they decide that they 
are not going to dump it or not going to buy it, but they are 
not going to buy it in the same relative volumes that they have 
in the past. That in and of itself could cause a problem. Where 
are we going to get the money and at what interest rate are we 
going to pay?
    Mr. Conaway. My time is up, but that is the level of debt 
that is the ongoing issue.
    Thank you all very much. I appreciate it.
    Mr. Crenshaw. Thank you.
    Let me ask before we go to the remaining two members--let 
me ask you a question about the difficulty of this whole 
entitlement reform. Everybody--for any number of reasons, we 
know how hard it is. It is complicated. People don't understand 
it, and we don't do it very often. We tried it in 1997, last 
year; and it was very, very difficult. We achieved some reform.
    And so there is a school of thought that believes that 
maybe if we try to do reconciliation every year, maybe in a 
smaller piece, not just undertake an overall reform, but pick 
and choose, it seems to me, number one, it might help educate 
the world out there that aid you in your efforts and all our 
efforts to say, we have got a problem. And when we talk about 
deficit reduction, we begin to get the picture.
    But even doing smaller amounts every year seems to be--that 
inherent problem, medical programs might need more refinement 
from time to time. 
    Can you comment at all on just the question of maybe we 
begin to direct our efforts to this difficult problem on a--
just from an educational standpoint, maybe for members to kind 
of get in the habit of remembering how much we have to do and 
begin to do it little by little, every year, instead of waiting 
every 8 or 10 years and then trying to take on something that 
doesn't really do much good? Can you comment on that?
    Mr. Walker. First, I think we have to educate both within 
the beltway and outside the beltway about the magnitude of the 
overall problem and the consequences of inaction. But then from 
a practical standpoint, I think we are going to have to deal 
with it on an installment basis. There is no question about 
that. The problem is too great. This is not just the Budget 
Committee. It is also the authorizing committees, the oversight 
committees, and the appropiations committees.
    One of the biggest problems we have, as I mentioned before, 
a vast majority of Federal Government policies, programs, 
functions and activities and even its organizational structure, 
classification compensation systems are based on the fifties 
and sixties, and we need to start looking at these and to 
reengineer them, reprioritize them for the 21st century, and I 
would argue that every committee of Congress ought to be doing 
that for the policies and programs that are under their 
jurisdiction. They ought to set their agenda as to which ones 
are the most important and to start ticking them off a little 
bit at a time toward achieving an overall goal.
    Last thing on Social Security: Social Security is simple to 
reform. The primary reason the reform effort failed was because 
the process was fundamentally flawed. For any major 
transformation effort to succeed, whether it is inside an 
organization or a public policy, you have to have three things. 
You have to have principles that frame the discussion of the 
debate and help people see the way forward. Secondly, you have 
to have players who are viewed as being credible within the 
population and on both sides of the aisle. You have to involve 
both opponents and proponents to try to determine what an 
appropriate solution is. Thirdly, ultimately you have to have a 
proposal that can be considered for action.
    While I think the President deserves a great deal of credit 
in recognizing that it is better to reform Social Security 
sooner rather than later, and he spent a lot of his personal 
time and effort as others did, the process failed on all three 
points.
    He didn't have the right portfolio of principles, he didn't 
have the right players, and he didn't ever generate a proposal. 
As a result, there was not going to be action. If you look back 
on what happened in 1983 with Social Security reform, you met 
those criteria.
    Mr. Holtz-Eakin. That is a really hard question. No 
question about the difficulty of doing this. I don't think you 
should pick. I think one should recognize that this committee 
and the budget process in general is an exercise in 
implementing underlying policies and that fundamentally these 
policies have overpromised over the long haul, and so it will 
be necessary to rethink the scale of those promises and how we 
do it. And then the budget process will implement whatever new 
policies we may ultimately adopt.
    In the interim, doing reconciliation every year will 
educate people. If you look at the scale of effort, which 
simply cannot be understated, that went into cutting under 1 
percent of mandatory spending over the next 5 years was 
enormous, and I think the members in this committee know far 
better than I do what they went through. Their constituents 
need to learn that really, despite all that was said, nothing 
has changed, and that education process every year would be 
important. But you won't get there just doing that, I don't 
think. If it is done that way, it becomes just a budget cutting 
exercise.
    That sounds unpalatable to the ears of the constituents. 
They need to understand that there is a policy that will work 
for the long run, not that you are just going to keep taking 
something away without any particular guidance as to why. So I 
would do both, but reconciliation is here to stay as near as I 
can tell.
    Mr. Crenshaw. Ms. Sawhill.
    Ms. Sawhill. I very much agree with what Mr. David Walker 
said. I would be worried about putting too much emphasis on 
doing this year by year as part of reconciliation. It seems to 
me that that is a political death by a thousand little cuts, 
and it is very difficult to make very much substantive 
progress.
    The reconciliation bill that Congress struggled with this 
year that cut $40 billion over 5 years, that is three-tenths of 
1 percent of total spending. So it sounds good when the media 
writes about it, but it doesn't really put more than just a 
tiny nick in the problem if you are worried about spending.
    So it seems to me you have to begin the process of 
fundamental reform of these systems, and that is going to 
require bipartisan agreement. And Social Security I agree is 
the place to start. There have been many ideas put on the 
table, and I think a compromise is possible there. All we need 
to do is just do it. I understand that is politically hard. It 
is not as if the policy ideas aren't there to do it.
    Mr. Crenshaw. Thank you. It is kind of discouraging to hear 
that Social Security is the simple one. I don't know where the 
hard ones are. But Mr. Cooper, you have----
    Ms. Sawhill. Medicare.
    Mr. Cooper. I apologize for having to step out, but the 
meeting I went to was on the budget as well.
    You all come from different walks of life, but we have 
before us today three of the most talented and capable public 
servants our Nation has ever seen. I just wish there was more 
of us to listen to your message and take it to heart. Because 
here we are the Budget Committee. There are a handful of good-
hearted members present. I think we have 6 legislative days 
left until we draft and pass a budget for the United States of 
America.
    As I understand it, if our biggest problem is Medicare, we 
will not even hear testimony from the Secretary of HHS or the 
head of CMS prior to our drafting our budget proposal this 
year. It will probably be acrimonious as usual when it 
shouldn't be because we should all be working together for the 
good of the country.
    It is shocking how the budget process has deteriorated and 
how probably they are not 30 Members of Congress who could give 
even a ballpark estimate of what it would take to fix Medicare 
or pay for AMT relief or some of the other questions that we 
should be dealing with.
    So I appreciate your willingness to be the Paul Reveres of 
your age. I just worry that people aren't really taking the 
message to heart. I want to ask three questions. I think we 
would be better able to warn the public if CBO numbers were 
more realistic.
    We heard David Walker talk earlier about an accrual budget 
or deficit estimate that he came up with in the $700 billion 
range. I think we all lulled ourselves into overconfidence when 
we have foisted on the CBO unrealistic guidelines.
    That is one proposal. Another is, is there any possible way 
to quantify the cost of delaying, tackling these giant problems 
like Social Security and Medicare? And then perhaps allocating 
that for every Member of Congress and Senator so that we feel a 
personal responsibility, because as I understand it, it is not 
just interest costs that are accumulating. There are other more 
fundamental risks to the stability of our Nation, and that is 
not overstating it.
    Michael Mandelbaum has just came out with a book called the 
Case for Goliath, in which he says the greatest risk we face 
isn't so much China or a resurgent Russia, it is our own 
Medicare program, and here is one of the leading foreign policy 
experts saying we are at risk of internal decay.
    And our chairman is not here. He is running for Governor of 
Iowa, and that is fine. But look at the membership, you know, 
and I was here at the start of the hearing too, there were 
barely more members here then. We are barely giving our budget 
a lick and a promise. We passed last year's budget, the Senate 
conference report, in 2 hours from receipt from the Senate to 
final passage on the floor of the House. There are not three 
members of this committee who knew what was in it. We are doing 
a disservice to the people of our Nation when we behave this 
way.
    And I want to be polite and nice and friendly and 
everything, but--and I am willing to fault both parties. But 
the hour is late for us to work together to save our country.
    So thank you for carrying your important message. I am 
willing to hear any comments that you might have.
    Mr. Walker. First, there are three reasons that the number 
goes up every second of every day. We are continuing to run 
deficits, demographics are working against us, and interests 
costs are compounding. But to give you a sense, the total 
liabilities in unfunded commitments that I referred to earlier, 
$46.4 trillion, they went up a little over $3 trillion in the 
last year.
    Mr. Cooper. So I could divide it out by day.
    Mr. Walker. It is a big number.
    Mr. Cooper. Every member of this--certainly this committee 
certainly should feel that urgency, and then we should 
communicate that to our colleagues and then to the folks back 
home. And that task, that essential task, is simply not being 
done.
    Mr. Walker. By the way, $3 trillion is more than the 
proposed budget for next year.
    Mr. Crenshaw. Thank you.
    Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Let me start out 
with some apologies to our panel. One, I understand I am the 
last thing standing between you and daylight. Second of all, I 
was tardy to the proceedings today, so we may have to replow 
some old ground, but I, not unlike my colleague on the other 
side of the aisle, was attending a meeting on this particular 
subject.
    Let me hearken bark to a line of questioning that my 
colleague from New Jersey had. I have noticed that in these 
budget debates, that although the numbers change a lot of the 
rhetoric and debate points do not change. So clearly one of the 
things we hear from folks on the other side of the aisle is 
that really all the fiscal challenges we are facing today is as 
a result of tax relief that has been enacted under the Bush 
administration.
    If that were true, and ignoring the fact that we have more 
tax revenues today than we had prior to that tax relief, but 
using static analysis, even if we let all of these tax 
provisions expire, Mr. Walker, if I have this right, I am 
looking at page 9 of your testimony, and I am just eyeballing 
this here, I think you have a model that shows the tax relief 
provisions expiring, and just eyeballing it, and am I seeing 
that maybe spending in one generation would increase from 
roughly 20 percent of GDP to almost 30 percent of GDP?
    Mr. Walker. That is correct. In other words, that won't 
solve the problem and it is not the only reason that we are 
where we are. Even when we had surpluses, we knew we were going 
to face large and growing structural deficits in the outyears 
due to known demographic trends and rising health care costs.
    Mr. Hensarling. What would it take to grow our way out of 
this dilemma?
    Mr. Walker. It would take economic growth rates that we 
have never seen before in the history of our country. I think 
one of the numbers I heard was double-digit real GDP growth 
every year for a long time.
    Mr. Hensarling. Again assuming that we allow the tax relief 
provisions to expire, in one generation if we don't reform 
entitlement spending, give me the--I guess it was Yogi Berra 
who once said when you find a fork in the road take it. I am 
not sure we want to take this fork in the road, but if we don't 
reform this entitlement spending and if we can't grow our way 
out, then we are looking at either some type of tax increases 
or cutting the rest of government.
    Of what magnitude would the tax increase be at 2040 to 
solve the problem and bring us into balance? Do you know?
    Mr. Walker. Looking at this graphic (Figure 3), by 2040 you 
would have to increase Federal taxes alone more than two times 
compared to what they are.
    Mr. Hensarling. This particular chart, though, this assumes 
that tax relief is made permanent, correct? I was looking at 
your figure 3 as opposed to your figure 4.
    Mr. Walker. The tax relief is extended and made permanent, 
that is correct. It does assume that. That is correct.
    Mr. Hensarling. Well, if we could go to your figure----
    Mr. Walker. To go back to the other one?
    Mr. Hensarling. Yes.
    Mr. Walker. Go back to the old one.
    Mr. Hensarling. Figure 3, I am trying to see what type of 
magnitude of tax increase would be necessary on the next 
generation to balance the budget.
    Mr. Walker. Under this scenario you are talking about by 
2040 the Federal tax increase would have to be to more than 
twice today's level.
    Mr. Hensarling. Ms. Sawhill, I don't wish to put words into 
your mouth, but I caught a part of your testimony. Let me see 
if I have captured it fairly. I believe I heard you say 
something along the lines when it comes to entitlement 
spending, not unlike Nixon going to China, that ultimately the 
Democrats are going to have to lead and reform entitlement 
spending. Is that a fair assessment of what you said? What did 
you say? Can you repeat it for me?
    Ms. Sawhill. I said something along those lines. My point 
was that it is not going to happen unless Democrats are 
comfortable with what is done, and Democrats aren't going to be 
comfortable with this unless revenues are also on the table. I 
mean that is obvious, it seems to me.
    And we I think are not seeing the kind of structural 
reforms we have all been talking about because the political 
system is not, for various reasons, producing the kind of 
compromises and the kind of bipartisan work that is needed.
    Mr. Hensarling. Thank you. Mr. Walker, did you have a 
comment on that?
    Mr. Walker. I just want to clarify one point if I can. If 
none of the tax cuts are extended, and all of them are allowed 
to expire, then even under that scenario, under this long-term 
simulation, you would have to increase Federal taxes in 2040 by 
about 50 percent.
    Mr. Hensarling. Thank you. With that my time is up, and I 
appreciate your testimony.
    Mr. Crenshaw. Well, I think it was----
    Ms. Sawhill. Can I add something on that?
    Mr. Crenshaw. Certainly.
    Ms. Sawhill. I think it is important to understand here 
that, you know, you pick a particular year, and then you get a 
mechanical almost increase in taxes. It is going to be required 
to fill the gap in that particular year. But what is happening 
by the time you get out to 2040, 2050, in these outyears, is 
the whole process becomes explosive. There is no tax increase 
that would do the job because the debt begins to feed on 
itself. So we are never going to get there. It is kind of 
hypothetical.
    Mr. Walker. By the way, the model that we run in that 
second scenario blows up between 2040 and 2045.
    I mean, in other words, it is a meltdown scenario. You 
can't allow that to happen.
    Mr. Crenshaw. Well, thank you all very much. I think Yogi 
Berra also said that it is hard to make predictions especially 
when they involve the future, but I think the predictions that 
you make certainly are very clear to all of us and they are 
relatively grim in terms of where we are heading, and so we 
thank you for kind of bringing that news to us.
    We recognize how difficult some of these reforms are going 
to be, but we need to hear it from objective folks like you all 
that kind of cut through all the politics to say we have got a 
real problem on our hands, and so we thank you for that message 
and we thank the members for their attention today. Thank you 
so much.
    [Whereupon, at 4:15 p.m., the committee was adjourned.]

                                  
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