[Senate Hearing 109-169]
[From the U.S. Government Publishing Office]



                                                      S.Hrg. 109-169
_____________________________________________________________________
 
                   MID-SESSION HEARINGS ON THE BUDGET

                            FISCAL YEAR 2006

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               ----------                              


     April 21, 2005--STRUCTURAL DEFICITS AND BUDGET PROCESS REFORM

 June 15, 2005--SOLVENCY OF THE PENSION BENEFIT GUARANTY CORPORATION--
            CURRENT FINANCIAL CONDITION AND POTENTIAL RISKS

  July 20, 2005--HEALTH INFORMATION TECHNOLOGY: THE FEDERAL ROLE AND 
                          BUDGET IMPLICATIONS

                                     
                                     


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                        COMMITTEE ON THE BUDGET

                  JUDD GREGG, New Hampshire, Chairman

PETE V. DOMENICI, New Mexico         KENT CONRAD, North Dakota
CHARLES E. GRASSLEY, Iowa            PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               PATTY MURRAY, Washington
MICHAEL ENZI, Wyoming                RON WYDEN, Oregon
JEFF SESSIONS, Alabama               RUSSELL D. FEINGOLD, Wisconsin
JIM BUNNING, Kentucky                TIM JOHNSON, South Dakota
MIKE CRAPO, Idaho                    ROBERT C. BYRD, West Virginia
JOHN ENSIGN, Nevada                  BILL NELSON, Florida
JOHN CORNYN, Texas                   DEBBIE STABENOW, Michigan
LAMAR ALEXANDER, Tennessee           JON S. CORIZINE, New Jersey
LINDSEY O. GRAHAM, South Carolina

                  Scott Gudes, Majority Staff Director

                      Mary Naylor, Staff Director


                            C O N T E N T S

                               __________

                                HEARINGS

                                                                   Page
April 21, 2005--Structural Deficits and Budget Process Reform....     1
June 15, 2005--Solvency of the Pension Benefit Guaranty 
  Corporation--Current Financial Condition and Potential Risks...    65
July 20, 2005--Healt Information Technology: The Federal Role and 
  Budget Implications............................................   203

                    STATEMENTS BY COMMITTEE MEMBERS

Chairman Gregg...............................................1, 65, 203
Senator Conrad...............................................6, 79, 204
Senator Feingold.................................................    63
Senator Murray...................................................   168
Senator Stabenow.................................................   186
Senator Bunning..................................................   178
Senator Enzi.....................................................   184

                               WITNESSES

Bradley D. Belt, Executive Director, Pension Benefit Guaranty 
  Corporation....................................................91, 95
Alan Greenspan, Hon., Chairman, Board of Governors of the Federal 
  Reserve System.................................................24, 55
Holtz-Eakin, Douglas, Director, Congressional Budget Office....131, 135
Michael O. Leavitt, Hon., Secretary, Department of Health and 
  Human Services...............................................214, 217

                    RESPONSES TO QUESTIONS SUBMITTED

Responses to Questions submitted by Senator Bunning to Douglas 
  Holtz-Eakin....................................................   192
Responses to Questions submitted by Senator Bunning to Bradley D. 
  Belt...........................................................   194
Responses to Questions submitted by Senator Conrad to Michael O. 
  Leavitt........................................................   254
Responses to Questions submitted by Senato Stabenow to Michael O. 
  Leavitt........................................................   254


             STRUCTURAL DEFICITS AND BUDGET PROCESS REFORM

                              ----------                              


                        THURSDAY, APRIL 21, 2005

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:01 a.m., in 
room SH-216, Hart Senate Office Building, Hon. Judd Gregg, 
chairman of the committee, presiding.
    Present: Senators Gregg, Domenici, Allard, Bunning, Crapo, 
Alexander, Graham, Conrad, Sarbanes, Nelson, Stabenow, and 
Corzine.
    Staff present: Scott B. Gudes, Majority Staff Director; and 
Dan Brandt.
    Staff present: Mary Ann Naylor, Staff Director; and Jim 
Klumpner.

            OPENING STATEMENT OF CHAIRMAN JUDD GREGG

    Chairman Gregg. It is a pleasure to convene this hearing 
and to have with us today the Chairman of the Federal Reserve, 
who has been such a force for fiscal responsibility not only in 
the United States but around the world, and who has had such a 
massive impact throughout his career in allowing for the proper 
and effective growth of the markets and making sure that 
capitalism moves forward in a positive and constructive way 
across the United States and across the globe. And so it is a 
great pleasure to have the Chairman here.
    I wanted to make a couple of opening comments just to try 
to put in context what I see as the concerns which this 
committee confronts, and then I will yield to my ranking 
member, and then we look forward to hearing from the Chairman.
    Because charts are the tradition in this committee as set 
by the ranking member, I have brought my charts. The problem 
which we have as a Nation was defined for us rather starkly by 
the Comptroller General of the country, who testified before 
this committee. He made the point--and this is a point which is 
rather startling but is accurate--that the unfunded liabilities 
which the Federal Government presently has on its books 
represent $44 trillion, which is this line on the left--$44 
trillion, that is with a ``t''--of unfunded liabilities using 
the actuarial life of these programs that we have put on the 
books already.

[GRAPHIC] [TIFF OMITTED] 22429.028


[GRAPHIC] [TIFF OMITTED] 22429.029


    To try to put that in context, the total amount of taxes 
paid into the Federal Government since the Revolution, since we 
created ourselves as a Nation, are $38 trillion. That is the 
line on the right. And the total net worth, if you take 
everybody's assets in this country--your cars, your houses, 
your stocks, your bonds--the total net worth of our Nation is 
$47 trillion. So we actually have on the books today a 
liability which we as a Government have put in place which 
essentially equals the net worth of the Nation.
    This liability is primarily driven by the fact that we have 
this massive generation known as the baby-boom generation, 
which is a demographic bubble of enormous impact, and has 
impacted our culture every time it has hit a generational 
event, whether it is adding schools in the 1950's or changing 
the culture in the 1960's. And it will have a massive impact 
when our generation, the baby-boom generation, retires 
beginning in 2008, peaking around 2030. And the primary driver 
of this unfunded liability is the health care costs which this 
generation will burden our children with in supporting us.
    In fact, the Comptroller General mentioned or cited a 
figure of $26 trillion of the $44 trillion as being health 
care-driven costs. And the question becomes: How do we address 
that as a Government?
    Some have suggested, well, you can raise taxes to alleviate 
the Social Security issue or the health care issue, but I want 
to show one last chart here which reflects the fact that you 
really cannot tax your way out of this problem.

[GRAPHIC] [TIFF OMITTED] 22429.029


    Traditionally, the spending of the Federal Government has 
been about 20 percent of the gross national product. By about 
the year 2030, three items of the Federal Government--Social 
Security, Medicare, and Medicaid--will absorb 20 percent of 
gross national product, if they are continued to be allowed to 
grow at their present growth rates. And we know this is going 
to occur because the people who are born, who exist, the baby-
boom generation, will drive these costs. And that number goes 
up.
    So no matter how much you raise taxes, you cannot tax your 
way out of this issue unless you are willing to absorb massive 
amounts of the economy in supporting and addressing this 
fundamental question and you are willing to burden our children 
and our children's children with huge tax increases.
    So we have to address these issues through policy that 
somehow manages better these entitlement programs. And I know 
that the Chairman has thought about this a lot and has given us 
counsel on this, and I hope that in today's testimony he will 
give us further counsel and direction on this. And it does come 
down to a large degree of incremental steps, in my opinion, and 
the first incremental step is to pass a budget which actually 
starts to put some controls on entitlement spending, which is 
why it is so important that the budget which we passed in this 
committee--regrettably, it did not pass the floor of the 
Senate--which began the effort of addressing one of the two 
major health care accounts, specifically Medicaid, be 
reinstituted and passed by the Congress so that at least one of 
the elements that are driving out-year fiscal costs, Medicaid--
the other two elements being Medicare and Social Security--will 
begin to be addressed.
    And with that, I will yield to the Senator from North 
Dakota.

        OPENING STATEMENT OF RANKING MEMBER KENT CONRAD

    Senator Conrad. I thank the chairman, and I thank the 
witness, Chairman Greenspan, for being with us as well today.
    I thought I would just go through a brief review of where I 
see our fiscal situation and where I see it headed. Let me just 
go to this. This is the history of the budget deficit since 
2001, and we can see now we are at a record $412 billion 
deficit in 2004. This graph shows some slight improvement. I 
wish it were so, but I do not believe it will actually occur.

[GRAPHIC] [TIFF OMITTED] T1173.225


    Let's go to the next. If we look back to 1980 and look at 
the relationship between spending and revenue as a share of 
gross domestic product, which I think most economists, Mr. 
Chairman, would tell us is the right to compare over extended 
periods of time.

[GRAPHIC] [TIFF OMITTED] T1173.226


    The red line is the spending line of the United States from 
1980 to today and then the dotted line projected going forward. 
The green line is the revenue line of the United States. We can 
see the spending as a share of gross domestic product has come 
down quite substantially from the levels of the 1980's and 
early 1990's, and, in fact, we got below 19 percent of GDP. We 
have had a tick-up now as a result almost exclusively of 
increases in defense and homeland security and aid for New 
York. And we see going forward basic stability with some 
increase, some slight further increase in spending as we go 
forward.
    The revenue line, we can see when President Bush came in 
revenue was a historic high as a share of GDP, but look at what 
has happened. The revenue side of the equation collapsed. And 
last year, revenue as a share of GDP was the lowest it has been 
since 1959.
    We see some slight improvement, but the projection going 
forward still leaves us at a revenue line that is far short of 
the traditional 20 percent that the chairman outlined in his 
opening remarks, leaving us with this substantial gap, very 
substantial gap between spending and revenue going forward.
    Let's go to the next. That gap is of special concern now 
because this is before the baby boomers retire. This is the 
Comptroller General of the United States in a speech that he 
made to the National Press Club in February: ``The simple truth 
is that our Nation's financial condition is much worse than 
advertised.'' I believe that. I think he has got it exactly 
right. I think the accounting system of the Federal Government 
misleads us. I think the language that we use about our 
financial condition misleads us, misleads the American people. 
I think it probably misleads our colleagues. Perhaps we even 
mislead ourselves.

[GRAPHIC] [TIFF OMITTED] T1173.227


    Let's go to the next. When the Comptroller General talks 
about the situation being worse than advertised, the President 
and his administration tell us that the deficit is going to get 
cut in half over the next 5 years. But the only way it gets 
there is he leaves out things. He leaves out war costs past 
September 30th. He leaves out the need to fix the alternative 
minimum tax, which is rapidly becoming a middle-class tax trap. 
He leaves out the cost of his Social Security proposal.

[GRAPHIC] [TIFF OMITTED] T1173.228


    When you add these things back in, the hashed red line is 
what we see happening going forward. He also only has the first 
5 years of making the tax cuts permanent when we all know that 
the second 5 years, the cost of that proposal explodes.
    Let's go to the next. So the harsh reality here is that our 
fiscal condition is not improving. The President told us back 
in 2001 that, ``My budget pays down a record amount of national 
debt. We will pay off $2 trillion of debt over the next decade. 
That will be the largest debt reduction of any country ever. 
Future generations shouldn't be forced to pay back money that 
we have borrowed. We owe this kind of responsibility to our 
children and grandchildren.'' And I agreed with that sentiment. 
I did not believe that he was right that his budget would 
actually wind up paying down debt to that degree.

[GRAPHIC] [TIFF OMITTED] T1173.229


    Let's go to the next and just match that prediction with 
what has actually happened, because instead of paying down 
debt, the debt is exploding. The debt was $3.3 trillion in 
2001, and we now anticipate a publicly held debt of over $9 
trillion by 2015. So debt is not being paid down. Debt is 
increasing dramatically, $9 trillion by 2015.

[GRAPHIC] [TIFF OMITTED] T1173.230


    Let's go to the next. When we look at the budget that is 
before us and we look at what it would do--this is the budget 
that was passed in the U.S. Senate, and these are the 
calculations of what it would do to the debt in each of the 
next 5 years. Debt goes up $675 billion in 2005, $651 billion 
in 2006, $643 billion in 2007, $644 billion in 2008, $635 
billion in 2009. This is not a budget that is improving our 
fiscal situation. The debt is going up each and every year 
under this budget by over $600 billion.

[GRAPHIC] [TIFF OMITTED] T1173.231


    Let's go to the next. The place where the chairman and I 
agree is that we face a demographic tsunami because here is 
what is going to happen to us. This is the people eligible for 
Medicare and Social Security, and it is going to go from about 
$40 million to $80 million. And it is going to fundamentally 
change everything.

[GRAPHIC] [TIFF OMITTED] T1173.232


    Let me just go to the next one, and then I will finish on 
that score. Comparing the long-term costs of Medicare and 
Social Security, the Comptroller General's report shows us that 
the 75-year shortfall in Social Security is $4 trillion; the 
75-year shortfall in Medicare, $29.6 trillion--more than 7 
times as much.

[GRAPHIC] [TIFF OMITTED] T1173.233


    You know, the sooner we get at dealing with these long-term 
fiscal imbalances, the better off our country will be. My own 
judgment is I have serious doubts about these forecasts, by the 
way. I think the notion that over 75 years the economy is only 
going to grow 1.9 percent a year, highly questionable to me. 
Over the previous 75 years, the economy grew at 3.4 percent. If 
the economy grew in the same way it has in the past going 
forward, 90 percent of the Social Security shortfall would go 
away.
    That does not mean we do not have a problem. And I think 
that is what is so hard to get across to people, because even 
if the projections are wrong, we have a serious budget problem. 
And we have a serious budget problem because those Social 
Security bonds have to be redeemed out of current income. And 
this demographic change is going to lead to enormous pressure 
on the budget, made much worse by the shortfall in Medicare and 
the size of the current deficits.
    So we have, even if these projections are wrong, which I 
believe they are overly pessimistic--but if we all just look 
back at the last 10 years, Social Security actuaries told us 10 
years ago we are going to run out of money in 35 years. Ten 
years later, they tell us we are going to run out of money in 
35 years. They underestimated economic growth. But even with 
that said, we have a serious problem, and the sooner we deal 
with it, the better.
    I thank the chairman.
    Chairman Gregg. Thank you. We do not call this the ``Dark 
Cloud Committee'' for nothing.
    [Laughter.]
    Chairman Gregg. Having heard those thoughts of optimism, we 
look forward to the Chairman shedding some more light on this 
situation, and we appreciate the Chairman taking the time to be 
here and to testify and give us his thoughts.

STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS 
                 OF THE FEDERAL RESERVE SYSTEM

    Mr. Greenspan. Thank you very much, Mr. Chairman, Senator 
Conrad, members of the committee. I am pleased to be here to 
offer my views on the Federal budget and related issues. In 
this regard, I want to emphasize that I speak for myself and 
not necessarily for the Federal Reserve.
    The U.S. economy delivered a solid performance in 2004, and 
thus far this year, activity appears to be expanding at a 
reasonably good pace. However, the positive short-term economic 
outlook is playing out against a backdrop of concern about the 
prospects for the Federal budget, especially over the longer 
run. Indeed, the unified budget ran a deficit equal to about 
3.5 percent of gross domestic product in fiscal year 2004, and 
Federal debt held by the public as a percent of GDP has risen 
noticeably since it bottomed out in 2001. To be sure, the 
cyclical components of the deficit should narrow as the economy 
expands and proceeds forward and incomes rise. And the recent 
pace of the ramp-up in spending on defense and homeland 
security is not expected to continue indefinitely. But as the 
latest projections from the administration and the 
Congressional Budget Office suggest, our budget position is 
unlikely to improve substantially in the coming years unless 
major deficit-reducing actions are taken.
    In my judgment, the necessary choices will be especially 
difficult to implement without the restoration of a set of 
procedural restraints on the budget-making process. For about a 
decade, the rules laid out in the Budget Enforcement Act of 
1990 and in the later modifications and extensions of the act 
provided a framework that helped the Congress establish a 
better fiscal balance. However, the brief emergence of 
surpluses in the late 1990's eroded the will to adhere to these 
rules, which were aimed specifically at promoting deficit 
reduction rather than at the broader goal of setting out a 
commonly agreed-upon standard for determining whether the 
Nation was living within its fiscal means. Many of the 
provisions that helped restrain budgetary decisionmaking in the 
1990's--in particular, the limits on discretionary spending and 
PAYGO requirements--were violated ever more frequently; 
finally, in 2002, they were allowed to expire.
    Reinstating a structure like the one provided by the Budget 
Enforcement Act would signal a renewed commitment to fiscal 
restraint and help restore discipline to the annual budgeting 
process. Such a step would be even more meaningful if it were 
coupled with the adoption of a set of provisions for dealing 
with unanticipated budgetary outcomes over time. As you are 
well aware, budget outcomes in the past have deviated from 
projections--in some cases, significantly--and they will 
continue to do so. Accordingly, a well-designed set of 
mechanisms that facilitate mid-course corrections would ease 
the task of bringing the budget back into line when it goes off 
track. In particular, you might want to require that existing 
programs be assessed regularly to verify that they continue to 
meet their stated purposes and cost projections. Measures that 
automatically take effect when costs for a particular spending 
program or tax provision exceed a specified threshold may prove 
useful as well. The original design of the Budget Enforcement 
Act could also be enhanced by addressing how the strictures 
might evolve if and when reasonable fiscal balance came into 
view.
    I do not mean to suggest that the Nation's budget problems 
will be solved simply by adopting a new set of rules. The 
fundamental fiscal issue is the need to make difficult choices 
among budget priorities, and this need is becoming ever more 
pressing in light of the unprecedented number of individuals 
approaching retirement age. For example, future Congresses and 
Presidents will, over time, have to weigh the benefits of 
continued access, on current terms, to advances in medical 
technology against other spending priorities as well as against 
tax initiatives that foster increases in economic growth and 
the revenue base.
    Because the baby boomers have not yet started to retire in 
force, we have been in a demographic lull. But this state of 
relative stability will soon end. In 2008--just 3 years from 
now--the leading edge of the baby-boom generation will reach 
62, the earliest age at which Social Security retirement 
benefits can be drawn and the age at which about half of those 
eligible to claim benefits have been doing so in recent years. 
Just 3 years after that, in 2011, the oldest baby boomers will 
reach 65 and will thus be eligible for Medicare. Currently 3-1/
4 workers contribute to the Social Security system for each 
beneficiary. Under the intermediate assumptions of the 
program's trustees, the number of beneficiaries will have 
roughly doubled by 2030, and the ratio of covered workers to 
beneficiaries will be down to about two. The pressures on the 
budget from this dramatic demographic change will be 
exacerbated by those stemming from the anticipated steep upward 
trend in spending per Medicare beneficiary.
    The combination of an aging population and the soaring 
costs of its medical care is certain to place enormous demands 
on our Nation's resources and to exert pressure on the budget 
that economic growth alone is unlikely to eliminate. To be 
sure, favorable productivity developments would help to 
alleviate the impending budgetary strains. But unless 
productivity growth far outstrips that embodied in current 
budget forecasts, it is unlikely to represent more than part of 
the answer. Higher productivity does, of course, buoy revenues. 
But because initial Social Security benefits are influenced 
heavily by economy-wide wages, faster productivity growth, with 
a lag, also raises benefits under current law. Moreover, 
because the long-range budget assumptions already make 
reasonable allowance for future productivity growth, one cannot 
rule out the possibility that productivity growth will fall 
short of projected future averages.
    In fiscal year 2004, Federal outlays for Social Security, 
Medicare, and Medicaid totaled about 8 percent of GDP. The 
long-run projections from the Office of Management and Budget 
suggest that the share will rise to approximately 13 percent by 
2030. So long as health care costs continue to grow faster than 
the economy as a whole, the additional resources needed for 
these programs will exert intense pressure on the Federal 
budget. Indeed, under existing tax rates and reasonable 
assumptions about other spending, these projections make clear 
that the Federal budget is on an unsustainable path in which 
large deficits result in rising interest rates and ever-growing 
interest payments that augment deficits in future years. But 
most important, deficits as a percentage of GDP in these 
simulations rise without limit. Unless that trend is reversed, 
at some point these deficits would cause the economy to 
stagnate or worse.
    The broad contours of the challenges ahead are clear. But 
considerable uncertainty remains about the precise dimensions 
of the problem and about the extent to which future resources 
will fall short of our current statutory obligations to the 
coming generations of retirees. We already know a good deal 
about the size of the adult population in, say, 2030. Almost 
all have already been born. Thus, forecasting the number of 
Social Security and Medicare beneficiaries is fairly 
straightforward. So too is projecting future Social Security 
benefits, which are tied to the wage histories of retirees. 
However, the uncertainty about future medical spending is 
daunting. We know very little about how rapidly medical 
technology will continue to advance and how those innovations 
will translate into future spending. Consequently, the range of 
possible outcomes for spending per Medicare beneficiary expands 
dramatically as we move into the next decade and beyond. 
Technological innovations can greatly improve the quality of 
medical care and can, in some instances, reduce the costs of 
existing treatments. But because technology expands the set of 
treatment possibilities, it also has the potential to add to 
overall spending--in some cases, by a great deal. Other sources 
of uncertainty--for example, the extent to which longer life 
expectancies among the elderly will affect medical spending--
may also turn out to be important. As a result, the range of 
future possible outlays per recipient is extremely wide. The 
actuaries' projections of Medicare costs are, perforce, highly 
provisional.
    These uncertainties--especially our inability to identify 
the upper bound of future demands for medical care--counsel 
significant prudence in policymaking. The critical reason to 
proceed cautiously is that new programs quickly develop 
constituencies willing to fiercely resist any curtailment of 
spending or tax benefits. As a consequence, our ability to rein 
in deficit-expanding initiatives, should they later prove to 
have been excessive or misguided, is quite limited. Thus, 
policymakers need to err on the side of prudence when 
considering new budget initiatives. Programs can always be 
expanded in the future should the resources for them become 
available, but they cannot be easily curtailed if resources 
later fall short of commitments.
    I fear that we may have already committed more physical 
resources to the baby-boom generation in its retirement years 
than our economy has the capacity to deliver. If existing 
promises need to be changed, those changes should be made 
sooner rather than later. We owe future retirees as much time 
as possible to adjust their plans for work, saving, and 
retirement spending. They need to ensure that their personal 
resources, along with what they expect to receive from the 
Government, will be sufficient to meet their retirement goals.
    Crafting a budget strategy that meets the Nation's longer-
term needs will become ever more difficult the more we delay. 
The one certainty is that the resolution of the Nation's 
unprecedented demographic challenge will require hard choices 
and that the future performance of the economy will depend on 
those choices. No changes will be easy. All programs in our 
budget exist because a majority of the Congress and the 
President considered them of value to our society. Adjustments 
will thus involve making tradeoffs among valued alternatives. 
The Congress must choose which alternatives are the most valued 
in the context of limited resources. In doing so, you will need 
to consider not only the distributional effects of policy 
changes but also the broader economic effects on labor supply, 
retirement behavior, and national savings. The benefits to 
taking sound, timely action could extend many decades into the 
future.
    Thank you very much. I look forward to your questions.
    Chairman Gregg. Thank you, Mr. Chairman, and you have 
certainly outlined a challenge to us, which is, I think, very 
appropriate. But the question is: How do we convert your 
challenge to action? And in a democracy, how do we actually get 
a Congress to act to be fiscally restrained when, as you have 
highlighted, the emphasis and the momentum is always toward 
expanding programmatic activity?
    You have mentioned one way to do it is to set up procedural 
mechanisms and reauthorizing the Budget Enforcement Act. The 
budget which we passed out of this committee had a large number 
of procedural mechanisms in it. They obviously were not by law 
because it was a resolution, not an act. But I guess my 
question to you is: This concept that you put forward of a 
mechanism that would review programmatic activity on a regular 
basis to see if it was affordable and appropriate, how would we 
do that relative to the entitlement programs, which are the 
drivers right now of Federal spending, representing 59 percent 
of Federal spending? I mean, I can see how we can do it to 
discretionary programs. Basically it is easy. But on the 
entitlement side, specifically Medicare and Medicaid, how do we 
do that?
    Mr. Greenspan. Well, I think that it would be difficult and 
probably unnecessary in Social Security because the elements 
that make up that particular program are very well defined, and 
we can calculate within very narrow ranges what the actual 
costs are. In that regard, it is, in fact, self-policing. The 
fact that we periodically go through evaluations--such as we 
did in 1993 and again most recently--suggests that, in fact, we 
do that for Social Security.
    Medicare and Medicaid are quite different. The actual 
numbers that are involved in the forecast, unlike the defined 
benefit structure of Social Security, are just plain economist 
forecasts. While there is some dispute on this question, the 
particular forecast which the trustees make of a gain in 
outlays per Medicare beneficiary moving faster by 1 percentage 
point of growth relative to per capita GDP growth is not a 
programmatic structure. Indeed, in my judgment, and I think in 
most people's judgment, to get to 1 percent probably requires 
significant actions which the Congress has not as yet taken.
    But in items such as that, what you need to define is a 
certain level of outlays or certain commitments of real 
resources which are effectively available to open-ended 
programs such as Medicare.
    Chairman Gregg. So you are essentially saying take any 
entitlement program and make it a hybrid, which is basically 
partially discretionary?
    Mr. Greenspan. In effect, that is what it comes down to.
    Chairman Gregg. Well, how would you deal with the fact that 
you would inherently be knocking people--under entitlement, a 
person has a right to it. You would inherently be knocking 
people out of the benefit if you set it up as a discretionary, 
hybrid discretionary.
    Mr. Greenspan. Well, this is the fundamental difficulty 
that you are confronted with. This is why I say that we have 
committed more than our economy can provide.
    Chairman Gregg. I agree.
    Mr. Greenspan. And so if you are going to restrain Medicare 
to some level the economy can afford, of necessity it means 
that there will be less medical care available than is 
projectable under current law, and even I suspect that it is 
very difficult to know what that particular figure is. But this 
is what law-making is all about. You have in front of you an 
economic outlook which throws off real resources within a 
relatively narrow range. And we have essentially said we are 
going to give out more than what we have. Unless the laws of 
arithmetic are somehow altered--or hopefully in this respect 
completely eliminated--you have no choice.
    Chairman Gregg. Well, unfortunately, there is another law, 
which is called the law of majority rules, which usually tends 
to give out more than it has got, which is a problem.
    Mr. Greenspan. Well, what this country has been able to do 
over the generations is confront issues like this, and our 
democracy has struggled. It has tried to get around the issues. 
Eventually, we seem to work it out.
    Chairman Gregg. And I hope we can.
    Senator Conrad.
    Senator Conrad. I thank the chairman. I thank Chairman 
Greenspan for being here as well.
    I think part of the frustration of many of us on this 
committee is convincing our colleagues that there really is a 
problem. And they are probably not going to be convinced unless 
the American people are convinced. And it is very hard to 
convince people there is a real threat to our collective 
economic security when the economy seems to be doing reasonably 
well.
    What would you say to the American people to convince them 
that there is a problem that requires action and that that 
action requires tough choices?
    Mr. Greenspan. I would first point out that the American 
economy is doing well, as you point out. We are in effect, as I 
said in my prepared remarks, in a demographic lull.
    Senator Conrad. A demographic lull.
    Mr. Greenspan. Yes. Everybody knows there is a very large 
blocK of people currently employed in the work force, producing 
goods and services for the whole community. With the inexorable 
turn of the calendar, they will retire and we will have an 
utterly unprecedented change in the society where a huge number 
of people will be retired, and be retired for a long period of 
time, as longevity continues to increase.
    Because of the very substantial shift out of the labor 
force into retirement and because of the fact that the 
generations subsequent to the baby boomers are much smaller, 
the number of people who will be working, producing goods and 
services for not only themselves and their families but for 
retirees as well will be much smaller. Remember, when we talk 
in terms of dollar amounts of Medicare or Social Security, we 
are talking about dollars and claims to real resources. But in 
real time, all of those real resources are being produced by 
that work force, which is growing very slowly. Unless 
productivity accelerates at a pace far in excess of what we are 
currently projecting, there are going to be fewer goods and 
services to be distributed over a larger population.
    Senator Conrad. Can I ask you--what you are saying is 
people's way of life is going to be affected negatively.
    Mr. Greenspan. Correct.
    Senator Conrad. Can I try to connect another dot here? 
Because you made reference in your testimony about a pressure 
on rising interest rates as a result of these collective 
deficits, buildup of debt, I assume you are including our trade 
deficit circumstance as well.
    Mr. Greenspan. No, I am just talking strictly in terms of 
the Federal budget deficit.
    Senator Conrad. Just in terms of the Federal budget 
deficit, that this is going to put upward pressure on interest 
rates.
    Mr. Greenspan. Yes.
    Senator Conrad. Can you help people understand what the 
effect of rising interest rates might be on the strength of our 
economy, on what it would mean for, for example, the housing 
market? I heard the other day, Mr. Chairman--the chairman of 
the committee--that a rise in interest rates, a relatively 
modest rise, might lead to a rather significant reduction in 
home values in parts of the country because there has been such 
a run-up in those values.
    Mr. Greenspan. Well, a rise in interest rates per se need 
not do that. What history tells us is that a rise in interest 
rates will, one, curtail new construction because the moneys 
that are borrowed from long-term assets--and homes tend to be 
long-term assets--are very sensitive to what long-term interest 
rates are. It is also the case that the turnover of existing 
homes is itself a function of interest rates.
    One would presume that to the extent that the turnover and 
construction falls--because demand is falling--prices will 
certainly slow from their very significant rate of increase. 
But it does not necessarily follow that they go down. They may 
but that is not clear from the data. However, clearly, if you 
talk about an extraordinarily large rise in long-term interest 
rates, then, of course, one would have to envisage such an 
event.
    Senator Conrad. I thank the chairman.
    Chairman Gregg. Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman.
    Mr. Greenspan, I want to thank you for your advice. I want 
to ask you a general question about structure of the budget, 
and I want to compare it to the experience I had when I was a 
Governor.
    What I felt then and what I still feel today is that there 
is an air of unreality about spending here, as we make spending 
decisions, as compared with the decisions I had to make as a 
Governor. For example, here we are about to increase spending 
in the Federal budget by about $100 billion. That is about a 4-
percent increase.
    In my experience, that is a big increase. Everybody here is 
gnashing their teeth and wailing about that. We tried to 
restrain the growth of Medicaid spending from 41 percent growth 
over 5 years to 39 percent over 5 years in growth. Everyone 
here is calling that a cut. I used to call that a big increase. 
And I was wondering why, when I get on the plane and fly from 
Nashville or Knoxville to Washington, suddenly it all changes. 
And why in correcting that attitude or environment in which in 
State capitals around the country, States are able to every 
year balance their budgets as one way of restraining things. 
The current Governor of Tennessee is trying to cut 323,000 
people off our Medicaid rolls, which is a big number out of a 
total of 1.4 million, because he does not have the money to 
provide Medicaid to that optional population and to provide for 
K-12 education. He would have already done it, the legislature 
would have already overwhelmingly approved it--he is a 
Democrat, by the way--except for the fact that he has to get 
permission from us in Washington and two Federal judges.
    So there seems to be in the State capitals a different 
attitude, and there are three parts of budget structure I 
wanted to ask you about that are different there than here. One 
is the requirement for a balanced budget. Two is the division 
of budgets into a capital budget and operating budget, and if 
you are going to do it here, you would add Social Security to 
that. The argument could be that if we did that here, instead 
of having this unified budget, we might more clearly see what 
we were doing. In other words, in a State government, you know 
you are going to borrow money for capital projects, so you go 
ahead and borrow it. But you limit your borrowing from the 
operating budget.
    So if everyone can see that here in Washington we have a 
Social Security budget, what goes in comes out of that; we have 
an operating budget, in and out; and then we have a capital 
budget, in and out. That would be more like the way States do 
it.
    And then the third would be something that I will let 
Senator Domenici talk more about, because he is the primary 
exponent of it, the idea of a 2-year budget, which about 40 
States used to have, about 20 States still do, and which, 
arguably, would provide more time for us to do authorization 
and oversight and more time to maybe be back home where people 
expect you to not spend very much more than comes in.
    I suppose one last thing--which would be a fourth thing, 
and it might be small--is this odd October 1 fiscal year we 
have. That is a bigger problem for most people, I think, than 
we think about. Nothing else in the world I know operates on 
such a year. It is confusing to me even to know what fiscal 
year we are in. And just that uncertainty and irregularity, it 
seems to me, creates the kind of confusion that permits all 
this extra spending to go on.
    So my question is: Balanced budget, or dividing the budget 
into capital, operating, and Social Security, 2-year budget, or 
maybe even the October 1 fiscal year--would any of those things 
help create an environment that would limit the air of 
unreality we seem to have here about excessive spending?
    Mr. Greenspan. Well, Senator, as you may recall, before we 
had the October 1st date, we had July 1st, and that was there 
largely because July 1st was the beginning of the crop year and 
where most revenues and outlays really mattered. So when you 
are looking at a fiscal year different from calendar year, it 
is wholly a historical accident, and one can very readily 
change it. We did, remember, change it not all that long ago 
from July 1st to October 1st.
    The basic issue of a balanced budget, of course, is which 
budget is being balanced, and we have several. In the context 
of what Senator Conrad was raising previously about broader 
budgets, the real interesting issue is how would the Federal 
Government look if we went to an accrual basis, which is 
essentially what private business does. We would know very 
rapidly the level of the commitments that we are making for the 
future because it shows up in current outlays. And, indeed, in 
that context, we would have a significantly larger deficit 
since it would be accruing a backlog of outlays for a number of 
entitlement programs. The surpluses that we had in the unified 
budget would not exist in the accrued budget. The unified 
budget is an excellent portrayal of the direct impact of the 
Federal Government on the private economy and the savings, or 
surplus, and deficit, or dissavings, in the unified budget 
corresponds to the savings flows in the private economy and, 
hence, is a very useful vehicle to understand the short-term 
immediate impact of Government in the economy.
    But more and more of our outlays are entitlements--or as we 
used to call them, ``uncontrollables''--they were very small 
back then when we called them that. The notion of the short-
term impact as the critical issue has gradually faded, and we 
are finding that the real critical impact of the Federal 
Government is the commitment to the future. If we were to go to 
an accrued budget, we would know what that was. Indeed, it is 
reflected in the chart which Senator Conrad showed previously, 
and specifically the chart which the chairman showed with 
respect to the $44 trillion, as I recall, of the aggregate 
amount of unfunded liabilities.

[GRAPHIC] [TIFF OMITTED] 22429.028


[GRAPHIC] [TIFF OMITTED] 22429.030


    That is merely what the accrual system throws off, and 
instead of having that as a contingent liability, which is 
really what we call it, it would be part of the actual debt, 
and we would learn a great deal about what we are doing when we 
are committing to the future, which I don't think we have a 
full understanding of at this particular stage.
    I have always advocated that we take Social Security off 
the budget as the only way to take the law seriously. If we do 
take the law seriously, we would actually create new savings, 
which we need to finance the real investments that are required 
to turn out the real goods and services which retirees will 
need in retirement.
    So that is a useful tool, but the critical issue gets to an 
accrued budget or one which is basically a private sector 
accounting system.
    The capital budget is a very tricky issue. The capital 
budget is something that the private sector uses because there 
are revenues that come from capital investments. Where revenues 
do come from capital investments in the Federal sector, there 
is a good argument for leaving them in a special category. 
Whether you call it on or off budget is not very important. But 
to take all of what we now consider investments, which include 
the military, is a very interesting and very debatable issue. I 
think I would prefer that we stay with the far more limited 
capital budget notion equivalent to what is basically in the 
private sector.
    With respect to the 2-year budget issue, I think there is a 
great deal of merit in it. It is more of a technical issue of 
how the Congress operates, and Senator Domenici is far more 
knowledgeable on that issue than I, and I would clearly defer 
to him on that question.
    Chairman Gregg. Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman. And welcome 
again, Mr. Chairman.
    As I listened to your thoughtful statement, which I 
appreciate very much, it appears to me the bottom line is we 
have more money going out than coming in, and there is a 
question on both ends, on whether it be spending as well as 
revenue. And when we look at where we are, I mean, the 2004 
budget deficit, $412 billion, which about equals everything we 
are spending this year that is nondefense. I mean, defense is 
about half the budget. Everything else, whether it be 
education, the environment, veterans' affairs, homeland 
security--everything else we do is about half the budget. So we 
could eliminate half the Federal budget, discretionary budget, 
to eliminate the deficit.
    And so it appears to me that it is more than just about 
spending even though spending obviously is a critical thing, 
and I supported the balanced budget agreement in 1997 when I 
was in the House, to limit that. But it is more than that. We 
obviously have to look at the revenue side in terms of the tax 
policy decisions we are making.
    When I look at your thoughtful comments about medical 
technology, I am drawn to the fact that this year we will spend 
less on the National Institute of Health to create new 
technologies, whether it is Alzheimer's or Parkinson's or 
juvenile diabetes, whatever those issues are that directly 
relate to people's quality of life for themselves and their 
families, we will spend less on NIH this year than those 
earning over $1 million will receive in tax cuts, $32 billion 
in tax cuts. Not to beat up on our wealthiest Americans, but it 
is just a values question in terms of what is most important.
    My first question to you relates to how we get this back in 
control, and back when we were doing the original tax cut, the 
determination was made to basically take all of the surplus in 
2001, rather than dividing it up among investments and 
strategic tax cuts and paying down the deficit, all of it went 
into basically the tax cuts, the majority.
    But Senator Bayh and Senator Snowe and I worked on an issue 
called a trigger, which I think is indirectly what you are 
speaking of, it appears, within the context of future 
decisions. And I wonder if you might speak to that. If we had, 
in fact, passed that trigger that we had spoken about in terms 
of not proceeding with each tax cut, each phase of it unless we 
could pay for it, or new spending unless we could pay for it, 
we would not be where we are right now. We would have had some 
balance there. And I wonder if you might speak to the notion of 
a budget mechanism, a trigger for the future.
    Mr. Greenspan. Well, Senator, if you go back to 2001, when 
we were all looking at these huge surpluses, everybody had an 
idea of how much we should cut taxes--and there were 
differences, but everybody was in favor of cutting taxes and 
increasing spending essentially--to get rid of the surplus.
    What was fascinating about that period is that even though 
there were a number of people who just looked at the size of 
the long-term surpluses and said this is extraordinary, it has 
never happened before, it probably will not happen now, the 
people who knew most about the projection--CBO, OMB, the 
Federal Reserve--who really went into the details, you would 
prod them and they would still say it is very difficult to come 
up with a forecast that does not have a chronic long-term 
surplus.
    But what a number of people were suggesting at that time 
was, why don't we have a contingency plan that in the event it 
isn't the case so that we could review it. In the testimony in 
which I was advocating significant tax cuts, there is also the 
notion of however we may be wrong, let's put a trigger in. It 
never passed. It never got any real interest. And as you point 
out, that is unfortunate because we would have found that a 
number of things would have occurred differently.
    But one of the real problems we have had was allowing PAYGO 
to lapse in September 2002.
    Senator Stabenow. I agree.
    Mr. Greenspan. Were we still under a PAYGO regime, which I 
thought worked very well, I think we would have fewer problems 
now. We would still have the longer-term problems. It is 
obviously not going to affect the trend of Medicare. But 
procedures and process do matter. They do not override an 
overwhelming desire on the part of the Congress to go in a 
certain direction. Congress will do what it perceives it should 
be doing. But it has been my experience that how you set up 
procedures does alter the rhetoric and does influence the 
ultimate outcomes.
    I did not believe that a budget act which passed in 1990 
with 51 percent of the vote could tie the Congress' hands as it 
did in subsequent years. You did not have what I thought would 
occur very readily, that as soon as you ran into pressure, 51 
percent of the Congress would say let's throw this out. You did 
not. The fact that you did not actually constrained what went 
on in the early part of the 1990's and through a goodly part of 
that decade. I think we would be far better off if we got back 
to that type of structure sooner rather than later.
    Senator Stabenow. Thank you, Mr. Chairman.
    Chairman Gregg. Senator Allard.
    Senator Allard. Mr. Chairman, I yield my time to Senator 
Domenici. He has got a very important meeting, and my 
understanding is that he would be next after me, anyhow. I 
would just trade places with him, if that is OK with you.
    Chairman Gregg. Sure.
    Senator Domenici. Thank you very much.
    Doctor, first, on the biennial budget and the biennial 
appropriation, I thank you for your comments regarding my 
understanding of it. And I might just say it is being 
introduced today, bipartisan, and has a much broader base of 
support. And whether it achieves what we are looking for here 
today or not, it seems to me to make an inordinate amount of 
sense from the standpoint of letting both the Executive and 
Congress have more time to do something other than just 
appropriating and budgeting.
    Having said that, Mr. Chairman, I look out there, and, you 
know, we do not have to do a whole lot of studying as to what 
is the long-term problem in terms of getting our fiscal house 
in order. Clearly, we have overpromised both in Social Security 
and in health care commitments, and both, depending upon time, 
both cannot be sustained in their current form indefinitely. 
The one that will bring about a breakdown sooner will be health 
commitments.
    I have been asking the question in my own mind: Will we be 
able to solve the problem, that is, make the policy decisions, 
in a timely manner? Or will we in America await a failure, a 
major failure in the health delivery system before we do 
anything?
    I will ask you two questions. One, am I correct in my 
assessment of the major components of fiscal--of current policy 
that we cannot fulfill that will, if we try to fulfill it, 
cause fiscal policy decay? And, second, how do you think we 
could solve the health care problem policy-wise without waiting 
for a crash?
    Mr. Greenspan. There is no question that the overwhelming 
problem confronting the fiscal situation in the years ahead is 
health care. Social Security is a problem, and it will have to 
be solved--even though nobody wants to solve it because it does 
require either an increase in taxes or a reduction in benefits, 
it is the only way it is going to happen to bring the actual 
system into balance. But it is a small issue compared to 
Medicare, largely because of the huge uncertainty about what 
the overall outlook is.
    Here I think there are several strains currently in play 
which I trust will work to our benefit. One is the fairly 
dramatic increase in information technology which is moving 
into the health care area. It is remarkable that physicians are 
like everybody else: They resist this type of thing. I may even 
say it is true of economists as well; A lot of us resist these 
newer technologies. Younger economists do not; younger 
physicians do not. But until you get a global system where you 
have encrypted records for each individual recipient, for 
example, of Medicare and Medicaid and have a full history, you 
will not truly be able to cut through one of the very critical 
issues of uncertain cost. When surveys are taken, we find that 
medical practice in the United States differs region by region 
and that the actual procedures employed and their outcomes are 
very different.
    If we were to get the information technology fully in play, 
it would readily become apparent which are the clinical best 
practices with respect to a variety of different ailments. 
That, of course, would improve medical care per se. But it is 
also likely to show the way to lower costs without cutting 
benefits. But at the end of the day, I do not see how we can 
avoid significant curtailment of benefits currently promised on 
a per beneficiary basis, especially as we multiply that number 
by essentially doubling the numbers of retirees over the next 
generation.
    Senator Domenici. So are you suggesting we might have to 
means test it? Is that what you are suggesting?
    Mr. Greenspan. I suspect that is clearly one of the 
critical issues that will be before the Congress because you 
are going to certainly want to protect those with lower income 
and lesser resources. You probably are going to want to have 
some form of catastrophic insurance. But at the end of the day, 
numbers of people are going to have very large copayments--and 
probably should.
    Senator Domenici. Doctor, on Social Security, you said it 
is a smaller problem. The fact that it is a smaller problem 
does not mean we ought not fix it. It seems to me if it is a 
smaller problem, we ought to fix it now.
    Mr. Greenspan. I thought that it was a smaller problem, 
could be fixed now, and could be fixed quickly. I was mistaken.
    Senator Domenici. Thank you.
    Chairman Gregg. Senator Corzine.
    Senator Corzine. Thank you, Mr. Chairman. And welcome, 
Chairman Greenspan.
    I thought I had heard some suggestions toward the Social 
Security discussion that we are having. First of all, I think I 
heard you say that you think it ought to be taken off budget in 
your remarks that you----
    Mr. Greenspan. Well, it is legally off budget, but we do 
not behave that way.
    Senator Corzine. But we ought to manage it as if it is off 
budget on a stand-alone basis so that the trust fund resources 
would stand on their own and not be mixed, OK. And then I 
thought I heard you say it will have to be solved in one of two 
ways or a combination: increase in taxes or reduction of 
benefits. Is that correct?
    Mr. Greenspan. That is correct, Senator.
    Senator Corzine. I will leave the unmentioned portion to 
whatever one wants to draw their conclusion on.
    Let me ask, you said accruals would have given us a greater 
ability to analyze and understand where we stood. In 2001, if 
we were using accrual accounting, would have we believed that 
we were in such an ongoing surplus situation that we could have 
committed to such long-term tax programs, setting aside the 
issue of triggers, which I think is an important concept, but 
would we have drawn the same conclusion if we had used accrual 
accounting, since we had all these contingent liabilities we 
knew existed, just did not bother to factor them into what we 
were doing.
    Mr. Greenspan. In 2001, on an accrued basis, the Federal 
budget would have been in deficit. Indeed, projecting it 
forward in the years from 2001, it would have remained in 
deficit. Indeed, at certain points it would be enlarging the 
deficit, as indeed we see in observing the path of so-called 
contingent liabilities, which are rising, which is another way 
of saying what the difference is between the outlays and the 
aggregate accrued requirements.
    Senator Corzine. Might have led to a different framing of 
the debate than what we had, or at least brought more caution 
to the debate.
    Mr. Greenspan. I suspect so.
    Senator Corzine. I actually agree that procedures and 
process have a lot to do with outcomes. Triggers, which I am 
not particularly keen on--and I will admit that--I think 
actually would have been a good thing. But PAYGO rules clearly 
worked to some large degree in the 1990's to their expiration.
    Do you think PAYGO rules should include both tax and 
spending decisions?
    Mr. Greenspan. I do, Senator.
    Senator Corzine. It is extremely difficult, at least where 
I come from, when you look at budgets where you do not talk 
about revenues and expenditures. And so I hope that if we are 
serious about PAYGO rules we are dealing both with spending and 
revenues as we go forward. I think I heard you support that.
    If we had had a trigger included in 2001, which you 
advocated, have you done any of the playing out of what those 
triggers would have done in the current environment with regard 
to the change in circumstances, and they are quite substantial, 
obviously. September 11th occurred, and lots of other things 
happen in life that are unpredictable.
    What kinds of policy changes would have occurred if we had 
had those triggers in place, as you had contemplated and 
recommended?
    Mr. Greenspan. Well, actually, in the period since then, 
perhaps the more important issue of altering policy was PAYGO, 
because even before PAYGO was allowed to lapse in 2002, we had 
extraordinarily large numbers of endeavors to get around it, 
and there were more unusual emergencies declared by Government 
than I ever thought existed.
    So PAYGO was effectively lost a couple of years earlier, 
but prior to then it was quite effective. Had it been in place 
and adhered to throughout that period, I think we would be in 
much better shape now.
    The trigger issue gets to the longer term and to the 
question of programmatic analysis of budget programs going 
forward. It is very clear that the record of forecast implicit 
in the preambles of most acts is notoriously poor, and that the 
biases invariably are on the up side, both with respect to 
taxes and spending. The result is that because of that bias, 
one has to presume that the trigger should have taken effect 
after a while in the adjustment process of what the actual 
expected costs were, and one presumably would get different 
results.
    So that the issue here is if you have a trigger, even if 
you do not do that, there is a certain whistle-blowing process. 
Essentially, it says that to the extent that Senators and 
Members of the House of Representatives voted for a bill on the 
basis or the presumption of certain costs going forward and 
that turned out to be wrong, then one might well presume that a 
number of people would like to change their votes or, if it is 
a generation later in the equivalent state, would look 
differently upon the particular program.
    We have no mechanism to do that, and because of the 
implicit bias in the system of evaluation of program costs----
    Senator Corzine. Program and tax.
    Mr. Greenspan. Yes.
    Senator Corzine. Tax programs as well spending programs.
    Mr. Greenspan. Correct, yes. Because of that particular 
bias, we are biasing the long-term outlook, and one should 
basically ask--I know you cannot do this in a vote, but say you 
vote in the Senate for a bill--you should ask the Senators, Is 
your vote contingent on the projection of the cost of what this 
program is? And if you want it to have a full exam, you could 
ask, What are your tolerable limits as to how you would look at 
it.
    Senator Corzine. Sunsets are a way to do that as well.
    Thank you.
    Chairman Gregg. Senator Allard.
    Senator Allard. Thank you, Mr. Chairman, and welcome, 
Chairman Greenspan. I value your expertise and your comments.
    I support the chairman of this committee in trying to put 
in some budget enforcement provisions. I think one of the 
potentially most effective budget enforcement provision we 
could have is a balanced budget amendment. Personally, I have 
supported a balanced budget amendment with the exception of 
war. And I think perhaps in today's environment we need to look 
at that. I am thinking that perhaps maybe we could have a 
balanced budget amendment except in cases of a major 
international conflict.
    I would like to hear your comments on the balanced budget 
amendment as to whether its time has come and gone, and what 
your views might be on what would be appropriate exception 
language in a balanced budget amendment.
    Mr. Greenspan. Well, Senator Alexander was raising the 
issue of what the States are involved with the obvious impact 
of what a balanced budget does. The real issue you are going to 
have to confront is what you do with entitlements. Let's take, 
for example, the commitments that are currently made, and 
assume at the moment we have a budget balance. If you project 
forward with the demographic changes that we are envisaging, 
you are going to run into a very significant widening of the 
deficit. The question is: What is the enforcement mechanism 
which then requires you to go back to the application of the 
balanced budget statute?
    It is one of many ways to come at the fact that we have, in 
fact, committed more than we have promised and committed more 
than we almost surely can deliver in the future. It is another 
way of saying that the budget deficit is going to open up 
inexorably. Having a balanced budget amendment without 
specifying how you get back to that--in other words, what 
budgetary procedures--risks a very serious breach in how 
Congress would behave. It is conceivable to me that you could 
have on the books a balanced budget amendment and an inability 
of both Houses to come to a conclusion on which programs they 
would change in order to restore balance as it moves away.
    So I am strongly in favor of any mechanism which will 
enforce this type of operation. But the mere passage of a 
balanced budget amendment in itself will not solve this 
particular problem unless it has elements which suggest how 
that particular balance will be achieved if you go off. In 
other words, if it is a balanced budget amendment to the 
Constitution, that is all it would say. But you would have to 
have specific ways in which the Congress is directed under 
statute to confront particular problems as they arose and 
adjust them.
    Senator Allard. Thank you for your comment. I want to move 
on to the value of the dollar. Milt Friedman, a well-known 
economist, I think, to both of us, always felt that--if I 
remember correctly, his position was that you do not mess with 
the value of the dollar. It is a commodity out there. It floats 
in the international market. It is beyond our borders and very 
difficult to control. And that if you start messing with the 
dollar value, then you start leading to policies that lead to 
trade restriction, and that is not good for our economy.
    And we now have a situation where China has apparently tied 
the value of its currency to the value of the dollar. Would you 
comment a little bit on the value of the dollar? I know it has 
helped our manufacturing sector in ways in which now because it 
is lower, goods are less expensive overseas, but yet I know 
there is some concern about the value of the dollar and the 
impact on the economy. I wonder if you could comment on that.
    Mr. Greenspan. Well, I think the first issue is that fixing 
the RMB to the dollar is beginning to significantly work to the 
detriment of the Chinese economy. There is no question that two 
things are happening. One is in order to sustain the value of 
the RMB relative to the dollar, the Chinese have been 
purchasing, as you know, very significant amounts of U.S. 
Treasury issues. In so doing, in order to prevent an 
inflationary money supply increase, they sterilize the purchase 
of foreign reserves, which are a reserve base for the expansion 
of the money supply. They do that by selling bank issues, bank 
liabilities, denominated in their domestic currency. So long as 
they do that, that tends to prevent purchases of foreign 
reserves from expanding the money supply.
    However, because there are interest rate caps in China, 
they are finding some difficulty in selling an adequate amount 
of domestic currency-denominated debt to absorb the excess, and 
that is creating imbalances, which suggests sooner rather than 
later that they are going to have to, for stability purposes, 
move their currency.
    Second, they are also, by holding their exchange rate down, 
creating a misallocation of resources in China by subsidizing 
the capital stock associated with very large numbers of 
workers. Because their concern is very clearly stability--that 
they are worried about large levels of unemployment--they are 
emphasizing the capital stock which is of lower technological 
state and, therefore, employs larger numbers of workers on 
average. But it also prevents standards of living from rising 
because their intellectual technical capabilities are rising. 
If the exchange rate began to rise, they would start to move 
capital into more efficient types of uses, which essentially 
would mean that output per hour would rise, which is what you 
would expect when you get an increase in the amount of capital 
stock per worker. Holding their exchange rate where they are is 
preventing the growth in the terms that will be most valuable 
for China in the decades ahead.
    As far as I am concerned, it is very much in their interest 
to move, and as you can well imagine, we in the U.S. Government 
have been in conversations with them to indicate that, in our 
judgment and in our experience, they should be moving sooner 
rather than later. There is also debate going on within China 
on this issue. I have no way of projecting when they will move. 
That they will move I am reasonably certain.
    Senator Allard. And so your bottom line is that you think 
they are headed for trouble with their current policies and 
they will pay the price in the future.
    Mr. Greenspan. The sooner they move off this fix, the 
better off for China's economy.
    Chairman Gregg. Senator Nelson.
    Senator Nelson. Welcome, Chairman Greenspan. I agree with 
you that the balanced budget amendment might be one component 
for us to address the problem, and it has been frustrating that 
the budget has been employed as a tool more than a fiscal 
document, a political document, even to the point that major 
things are left out. We are, as we speak, dealing with an 
emergency supplemental, and those all have their effects 
because it is billions and billions of dollars. The likelihood 
that we will address fixing the alternate minimum tax problem 
is not even a part of the budget.
    And so to enforce this discipline, you said that the 
balanced budget amendment might be one component that we could 
employ. But you said we need to specify elements in it of how 
Congress would address the imbalance.
    Can you elaborate, please?
    Mr. Greenspan. Well, as I said before, Senator, if we put 
in the Constitution a balanced budget amendment and left it at 
that, then the question is up to the Congress to adhere to 
that. Since the demographics going forward almost certainly 
indicate that we will be moving toward deficits, there is the 
danger that there will not be majorities in both Houses of the 
Congress to come up with a contraction in the deficit as 
required by the Constitution. That would be a very, very 
difficult political issue for this country.
    Therefore, if you move in the direction of a balanced 
budget amendment, you have to have in place default mechanisms 
that will actually do what is required to adhere to the law. It 
is by no means certain that in all cases you are going to get 
actions by both Houses of the Congress, including the signature 
by the President, which will adhere to the Constitution. 
Therefore, a balanced budget amendment to the Constitution will 
not in and of itself solve the problem.
    If it is part of a much broader program which comes to 
grips with the chronic movement toward increasing deficits, 
then I think you obviously look at it as you do other things. 
But it may very well turn out that if you do all the things 
that are required to adhere to the balanced budget amendment, 
you do not need the balanced budget amendment.
    Senator Nelson. Is part of that broader program that we 
ought to rethink the entire Budget Act? It started out in the 
1970's as a means of fiscal discipline to lower deficits. And 
then it was employed a few years ago as a means by which to 
lower taxes, which contributed to the huge deficits that we 
have now. What is your thinking there?
    Mr. Greenspan. Well, if PAYGO were in place all through 
this period, you would not have had the types of problems to 
which you are referring. I cannot say whether going back to the 
Budget Enforcement Act and revising it is going to solve a 
great deal. But I do think it is crucial for the Senate, and 
specifically this committee, to think through what has to be 
done, and it is hard to find a group more knowledgeable about 
how the American system works than this committee. After you 
have reached a conclusion, then you can define what statute is 
required to implement the policy. But just putting the Budget 
Act on the table and starting to play with it is not going to 
get you there. You have to decide how you are going to come to 
grips with the fundamental issue which was raised in this 
hearing. If you have promised more than we have, you are going 
to have to take back some of the things you have promised, and 
there is no way of getting around that conclusion.
    Senator Nelson. I see the red light is on, Mr. Chairman. I 
was just curious to find out what in the world are you going to 
do about rates. You raise the rates, you cause the economy to 
start slowing down. Are we headed to stagflation again?
    Mr. Greenspan. It certainly does not seem that way, 
Senator.
    Chairman Gregg. Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman, and, 
Chairman Greenspan, I appreciate your attendance yet again at 
one of these important hearings where we discuss these issues.
    I want to go first to the question of balancing the budget, 
and it seems to me that it is pretty obvious that there are two 
broad solutions: one is we can reduce spending; the other is we 
can increase revenue. And there are different ways to increase 
revenue. You can try to stimulate the economy, or you can just 
raise taxes.
    There are some who argue very strongly around here that we 
do not need to control the size of Government as much as we 
need to just try to increase revenue by increasing taxes to 
match the level of our spending. And many of them attribute the 
deficit or large portions of the deficit to the President's tax 
cuts of a few years ago and argue that we should allow those 
tax cuts to expire.
    The CBO has done a long-term projection in that context, 
and based on their projections, assuming that the growth in 
Medicare and Medicaid continues at its past rates and that the 
real bracket creep in the AMT continues and if we allow the tax 
cuts to expire, which would cause total revenues to reach 24.7 
percent of GDP in 2050, assuming that we just allow the tax 
cuts to expire but did not address the entitlement spending and 
the other aspects of the growth of Government, we are still 
unable to balance the budget. And the reason, as I understand 
it, is that we are not in that scenario getting a handle on 
entitlement reform, which we have discussed a lot here today.
    Would you agree that unless Congress begins to reduce 
entitlement spending, the financial future of our Nation is in 
jeopardy?
    Mr. Greenspan. I have testified that we are currently 
committed to making outlays in the next decade, which is on a 
slope of advance, much larger than we can afford.
    We can raise taxes, and I don't deny we probably at the end 
of the day will do that in order to get an ultimate resolution 
of this. But as I have said many times before this committee, 
as you raise taxes you reduce the rate of growth in the economy 
and, hence, the revenue base itself. As a consequence, you do 
not get a one-to-one revenue increase. At the end of the day, 
if you raise taxes high enough, you will find you have not 
increased revenues at all. And the deficit is still there 
because the spending is still there.
    Senator Crapo. Well, you may have already answered my 
follow-on question here by what you just said, then, because 
CBO's analysis indicates that under the scenario that they were 
analyzing, the effective marginal tax rate would rise from 32 
percent to 40 percent. And the question I need to ask you is: 
What impact would that have on our economy and on our ability 
to generate the revenue necessary to balance the budget?
    Mr. Greenspan. Well, as you raise taxes, especially at the 
margin, you very likely curtail capital investment and the 
underlying economic structure that is required to increase 
productivity and standards of living. So there is a significant 
dilemma here, namely, that in raising revenues, you can create 
a lower deficit as a consequence of that, but only up to a 
point; and so I conclude that there is no way you can bring tax 
rates up to the level that would be required to generate the 
revenues which would effectively solve the fiscal problem that 
we now have. From that I conclude that one of the significant 
parts, probably the largest part, of the adjustment is scaling 
back the promised benefits, say, from the year 2010 forward. 
Unless we have a huge increase in immigration, which I do not 
anticipate, we are locked into the arithmetic of what the 
population changes that we are about to experience are going to 
mean.
    Senator Crapo. Thank you.
    Chairman Gregg. Senator Graham.
    Senator Graham. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for coming. I have some specific 
questions about Social Security reform efforts, and I will try 
to be concise and get as much of it in as I can.
    There is a big debate--well, one, we have chosen to talk 
about Social Security because the President has chosen to talk 
about Social Security. I applaud his efforts to put it on the 
table. Maybe we should do Medicare first, but we are certainly 
going to do Medicare at some point. But when you talk about 
entitlement reform, whether it is Medicare or Social Security, 
people mention different time periods, whether it is 2017 when 
we pay out more in benefits than we collect in taxes, the 
estimate by certain people that we will have a benefit cut 
coming in 2041, others 2050. You said something to me privately 
that sort of struck me.
    Your belief--and I do not want to put words in your mouth--
is that if we do not start the reform process before the baby 
boomers slip into the retirement systems, it is too late. Could 
you expound on that.
    Mr. Greenspan. Well, I do not know whether I said it was 
too late, but if you wait you are going to have to start to 
adjust benefits to groups of people who are already retired, 
and that is not fair. And it is, in fact, extremely difficult 
to do politically, obviously.
    Since we are going to have a significant number of people 
starting to retire in 2008----
    Senator Graham. Right.
    Mr. Greenspan. Remember, half the people eligible to retire 
at age 62, and once you have started down the road, it is very 
difficult to start to change. So, in my judgment, it is far 
easier to come to grips with these issues before the baby-boom 
generation starts to retire in large numbers.
    Senator Graham. And that process begins in 2008. Is that 
correct?
    Mr. Greenspan. Yes, sir.
    Senator Graham. Now, solvency. We have talked a lot about 
personal accounts, but I would like to talk with you a moment 
about the solvency aspect of Social Security. In present 
dollars, it is about $3.7 trillion underfunded, short of the 
money to meet the promises. There is a concept floating around 
called index changes that if you went away from wage growth in 
terms of calculating your basic benefit to inflation, that that 
change alone with substantially bring about solvency.
    Do you agree with that? Would you like to comment on that?
    Mr. Greenspan. Well, actually it does. Current law takes 
the average of approximately a 40-percent replacement rate of 
Social Security, meaning the level of retirement benefits as a 
ratio to the wage income that one experienced just before 
retirement.
    Shifting from wage indexing, which is currently in law, to 
price indexing will bring the replacement rate down quite 
significantly in the process.
    I should add, however, that that replacement rate is going 
to come down in any event. It almost is built into the 
demographics that we are now looking at, so it is not as though 
we have the possibility of maintaining the 40-percent 
replacement rate. We can do so only by raising taxes at an 
inordinate level, as I was discussing with Senator Crapo.
    So the issue is, yes, that action in and of itself removes 
the $3.7 trillion, which is the present cost of the shortfall 
through the year 2075.
    Senator Graham. And if I may go a step further--and if you 
do not want to answer this, I totally understand.
    Mr. Greenspan. I am sorry, 2080.
    Senator Graham. Would you recommend such a change?
    Mr. Greenspan. I think that some such structure, if you are 
going to come to grips with this issue, is obviously on the 
table. But it is up to the Congress to decide which particular 
variation of a whole series of potential ways of solving this 
problem should be employed.
    Senator Graham. Are you familiar with longevity indexing?
    Mr. Greenspan. In the sense of making eligibility a 
function of longevity, life expectancy after age 65?
    Senator Graham. Yes, sir.
    Mr. Greenspan. I am.
    Senator Graham. Would you recommend that change? Do you 
think that would be helpful?
    Mr. Greenspan. I have always advocated that on the grounds 
that to have a stable system like Social Security, you are 
going to need to have the number of years in retirement as a 
ratio to the number of years working stable.
    Senator Graham. Mr. Chairman, have I used my time?
    Chairman Gregg. You sure have.
    Senator Graham. OK. Well, I apologize.
    [Laughter.]
    Chairman Gregg. But brilliantly, brilliantly.
    Senator Graham. OK. Well, I had a few more questions, but 
we will do it next time.
    Chairman Gregg. Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman. Thank you for 
being here, Chairman Greenspan.
    The report the Fed released yesterday indicated that energy 
prices were having an impact on inflation. How important is it 
to our economy that our country develop a strong energy policy?
    Mr. Greenspan. Well, Senator, it is a fact that the 
significant rise in the prices of gasoline and home heating oil 
as a consequence of the big rise in crude oil prices are 
significant components in the Consumer Price Index. Indeed, 
just looking at the level of prices, you can see the mirror 
image of these prices going up.
    The problem that we have is we do not produce enough energy 
ourselves. We actually produce more than most countries in the 
world, but we still import, as you know, well over half, close 
to two-thirds, of our petroleum requirements.
    Unless we find a means to consume very significantly less 
or produce significantly more, we are going to remain dependent 
on others to ship oil to this country to meet the demands that 
are part of our infrastructure.
    Senator Bunning. Well, we also are in a world economy now 
that other countries are competing and driving up the price of 
crude oil not only from the Middle East but other area. China's 
consumption of crude oil now has exploded. Ours has exploded 
from when we had our first oil boycott until the present time 
where 60 percent of all our crude is not domestically produced.
    But an overall energy policy would give us some guidance if 
we had an overall energy policy. By that I mean there has got 
to be alternatives to the current use of just crude oil to 
produce power, energy, drive cars, do everything that we use 
energy for.
    Mr. Greenspan. Well, there certainly is, Senator. Clearly, 
we could run electric power from nuclear plants, which, are 
still a fraction of the aggregate electric power we employ.
    There are a number of technologies out there--hydrogen fuel 
cells and a number of so-called exotic technologies. There may, 
however, be more in the way of exploiting natural gas 
possibilities in the sense that there is an awful lot of what 
we call natural gas hydrates out there. We have in the United 
States huge reserves, which is sort of a methane that is 
encased in ice crystals, and which we are now only beginning to 
look at.
    If we are capable of creating a significant increase in 
output from that source and the so-called newer technology of 
what they call gas-to-oil conversion, which is actually taking 
gas and putting it into a liquid form, it is conceivable we may 
find many years down the road significant alternate sources of 
types of fuel which we use today.
    Senator Bunning. But you are not disagreeing with me that 
we need an overall energy policy?
    Mr. Greenspan. I think that we better have one, because it 
is something which is integrated not only into our economic 
system, but into our national security systems as well.
    Senator Bunning. I agree. The last question. As an 
economist, can you comment on dynamic scoring? Do you agree 
with the President's Council of Economic Advisers that using 
dynamic scoring shows the true cost of a capital gain tax cut 
to be about half of the costs reflected by static models?
    Mr. Greenspan. Well, in principle, Senator, there is no 
question about the value of having full-blown models that 
evaluate not only the initial impact of a spending or tax 
program, but the secondary impacts as well. These impacts 
create, for example, changes in economic activity, revenues, 
and the net effect at the end of the day is different from 
static scoring, which, by definition, only endeavors to capture 
the initial effect.
    The trouble is that the nature of the dynamic scoring 
process rests very considerably on the specific structure of 
the model that is employed.
    We economists build models and explicitly indicate they are 
a very large abstraction of the real world with which we deal. 
If we all agreed on a single model, then dynamic scoring would 
unquestionably be the right way to evaluate all sorts of 
programs. But we have been unable to do that, and so we have 
all fallen back to static scoring, which is admittedly second 
best. Unless we can find agreement on which types of models to 
employ, you cannot get the staffs of these committees here and 
in the House and elsewhere to agree on what the results are. So 
that is the problem. It is not the issue of whether dynamic 
scoring is better than static scoring. It clearly is.
    Senator Bunning. Thank you, Mr. Chairman. Thank you.
    Chairman Gregg. Mr. Chairman, you have been very generous 
with your time. I know Senator Conrad had an additional 
question and Senator Graham had an additional question. I 
appreciate your generosity with your time. Do you need to head 
off?
    Mr. Greenspan. No. I can stay for a short while longer if 
you would like me to.
    Chairman Gregg. Well, why don't we go with one question 
from Senator Conrad, one question from Senator Graham, and I 
just have a simple question, which is: Why have we lost 
comparative advantage as a concept of why we are working as a 
Nation? But we will start with Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman.
    I go back to this chart that shows for a very long period 
of time the relationship between spending and revenue. And 
spending now is lower than it was through the 1980's as a share 
of GDP, through a good chunk of the 1990's as well. It is the 
revenue side of the equation that has really fallen out on us, 
and although we see some uptick, the projections going forward 
still leave us with this enormous gap.

[GRAPHIC] [TIFF OMITTED] T1173.226


    And I agree with you, longer term the entitlements have to 
be dealt with. I do not see it happening without a mix of 
spending and revenue. This revenue last year is the lowest 
since 1959 as a share of GDP.
    When we look at revenue, I have been saying to my 
colleagues, before we talk about any tax increase to get 
additional revenue, we ought to focus like a laser on the tax 
gap. The tax gap, the Revenue Service now tells us, is over 
$330 billion for 2001. I believe, based on my experience, that 
that tax gap is very significantly understated.
    Mr. Greenspan. I am sorry. Are you referring to the fact of 
what we do not collect?
    Senator Conrad. Yes.
    Mr. Greenspan. OK.
    Senator Conrad. The difference, the tax gap being the 
difference between what is owed and what is being paid. And 
while the vast majority of Americans pay what they owe, the 
vast majority of companies pay what they owe, there are some 
who do not. And that amount of money has grown very 
significantly. And you know well the schemes that are out there 
across America to dodge taxes. Every kind of aggressive 
accounting move that people have conjured up over the years is 
in play. I have friends that are in major accounting firms. 
They tell me the culture has changed. And the Revenue Service's 
numbers show that this tax gap has grown significantly.
    This is not going to happen just on the spending side of 
the equation. It is just not. I personally believe that most of 
the adjustment or a very significant part is going to have to 
occur on the spending side because the numbers do not lie. The 
number of people eligible for Social Security and Medicare is 
going to grow dramatically, and it would not be good for the 
economy to do this all on the revenue side of the equation. I 
do not think it could be done all on the revenue side. That 
argues, as you have argued here this morning very clearly, much 
of this must be done on the spending side.
    But I also believe there are not going to be any agreements 
around here unless the revenue side of the equation is also 
addressed. And I believe the first place we ought to look is 
this tax gap.
    Would you comment on that basic notion?
    Mr. Greenspan. Senator, I have a firm belief that all legal 
obligations need to be paid, and enforcement is required to 
sustain the law. Part of the problem, obviously, is there is 
sometimes lack of clarity in what the legal obligations are, 
and this is where you get this sort of vague notion between tax 
avoidance and tax evasion. That legal line is not drawn as 
sharply as it should be.
    But there is no question in my mind that if it is a legal 
obligation, the law needs to be enforced.
    Chairman Gregg. Senator Graham for one question.
    Senator Graham. Thank you. It goes to the personal account 
debate about Social Security. It is my understanding that you 
support the concept of personal accounts for a portion of FICA 
taxes for younger workers. Is that correct?
    Mr. Greenspan. I do, Senator.
    Senator Graham. I have been told that people born after 
1980 as a group receive about a 1.4-percent rate of return on 
their FICA taxes. Is that fairly accurate, do you think?
    Mr. Greenspan. I do not have the specific numbers, but I 
have no reason to doubt your numbers.
    Senator Graham. So is it your firm belief that as a Nation 
we could take, let's say, a $1,000 account, structure it 
correctly, get a better rate of return than 1.4 percent? You 
feel like that is a very--is that doable?
    Mr. Greenspan. Well, it is a tricky question as to what 
rates of return are because you can very clearly increase the 
rate of return on Social Security or, by carve-outs, the rate 
of return on a private account. But you have to be careful that 
in the process you do not also reduce the rates of return on 
other private sources of retirement. So there is a tricky 
question here which often gets pushed aside.
    Senator Graham. Well, I will be glad to talk to you about 
how to accommodate that. One of the down sides of the account, 
in my opinion, is the effect that setting the accounts up would 
have on the deficit. I have asked the following question, that 
if you made the tax cuts permanent with AMT relief, and if you 
borrowed the transition cost of a personal account plan like I 
have proposed, $1,300, the deficits in 2014 would be about $650 
billion; that if you made the tax cuts permanent that we 
propose to do, and if you borrowed the money to set up an 
account of $1,300, the deficit in 2014 would be $650 billion.
    If that is true, what effect do you think that would have 
on the economy?
    Mr. Greenspan. The problem here is that most unified budget 
analysis is pretty clear-cut. When you have an appropriation 
and spend money or cut taxes, you borrow and you spend. So it 
is fairly clear what the change in resources are in the United 
States.
    When you essentially borrow for a carve-out, you have 
effectively a forced saving account, which essentially says 
that the amount of debt that is issued by the Treasury is 
offset by a demand of an equivalent amount--and one would think 
that that should be a wash in the marketplace. So in an 
accounting sense and saving sense, it does not affect national 
savings. But what we are not clear on is whether the financial 
markets read the increase in marketable debt by the Federal 
Government as a wash and, hence, not an issue of concern.
    If I were convinced that the financial markets would look 
at those increased elements of the Federal debt as being 
essentially offset by private savings and, hence, not respond 
in driving interest rates up, then I would be very comfortable 
with the issue.
    My problem is I really do not know how they are going to 
behave. One of the reasons I have argued to do this type of 
account very gradually and in very small amounts is you would 
be able to judge whether, in fact, there is a market effect 
here from a system which does not effectively change national 
savings.
    Senator Graham. One last question----
    Chairman Gregg. I thank the Senator. No, I am afraid we are 
going to have to move.
    Senator Graham. OK.
    Chairman Gregg. Senator Sarbanes, I think you have the last 
5 minutes here.
    Senator Sarbanes. Well, thank you. Thank you very much, 
Chairman Gregg, and, Chairman Greenspan, I am pleased to 
welcome you to the committee.
    In a somewhat lighthearted fashion, I sometimes read 
editorial cartoons that appear in the newspaper. Sometimes they 
seem to make a point and make it very well, and this morning I 
am going to cite the one by Tom Toles in the Washington Post 
that appeared last month. It shows you reading a book entitled 
``The Independent Fed'' by G.W. Bush. And then the quote from 
the book says, ``...but then without warning, after the tax 
cuts solved the surplus problem, massive deficits somehow 
appeared. We must address these, I've concluded, by reforming 
Social Security right now, with private accounts, as it 
happens...''.
    Now, I don't know what the book went on to say from there, 
but I use that to set the context for the question I want to 
put to you. You say in your statement this morning, ``Our 
ability to rein in deficit-expanding initiatives, should they 
later prove to have been excessive or misguided, is quite 
limited. Thus, policymakers need to err on the side of prudence 
when considering new budget initiatives. Programs can always be 
expanded in the future should the resources for them become 
available, but they cannot be easily curtailed if resources 
later fall short of commitments.''
    And I take it when you make reference to budget 
initiatives, you are talking about tax cut initiatives as well 
as spending program initiatives. Would that be correct?
    Mr. Greenspan. That is correct, Senator.
    Senator Sarbanes. Now, that, of course, raises the question 
about how prudent the advice was that we were given in January 
of 2001 when the prime issue before us was the Bush tax cuts. 
You said then, ``The time has come, in my judgment, to consider 
a budgetary strategy that is consistent with a preemptive 
smoothing of the glide path to zero Federal debt or, more 
realistically, to the level of Federal debt that is an 
effective, irreducible minimum.''
    And I said to you at the time that it would not be far off 
the mark for the press to carry the story on the basis of your 
testimony that morning, ``Greenspan takes lid off of punch 
bowl,'' because your position in the past has consistently been 
that the surpluses should be devoted to reducing the debt. When 
drawn into, the question of wheteher we should have tax cuts or 
spending increases, you have generally remained out of that 
debate, although you have indicated a preference for tax cuts 
ahead of spending increases. But that was not really relevant 
because your first line was always to reduce the deficits.
    And so the question I put to you is: Didn't the Bush tax 
cuts of 2001 and 2003 fail the test of prudence that you set 
out this morning in your statement when considering new budget 
initiatives?
    Mr. Greenspan. Well, Senator, let me answer you by 
expounding on what else I said in 2001 at the same hearing. 
Everybody at that particular point in time was forecasting very 
significant surpluses as far as the eye could see. Indeed, all 
of the technicians who knew most about the issue of revenue 
estimation and budget estimation were coming up with 
significant surpluses.
    If you literally believed what they were saying--and I 
checked very closely with all of the technicians in our 
operations and elsewhere--there is no way you can get around 
this question unless you make several different assumptions.
    If that is indeed the case and we run policy on the basis 
of information, then what we would be looking at there was a 
very dramatic decline in the level of debt, which would have 
come to effectively zero. This would have required, in order 
not to reverse fiscal policy dramatically, a huge increase in 
private assets held by the Federal Government, which for 
reasons I outlined at the time, I thought was a very 
undesirable policy.
    So I advocated tax cuts, but I also advocated triggers in 
the same testimony. The testimony essentially indicated that if 
indeed, despite all of the optimism with respect to the levels 
of surplus, it did not turn out that way, we needed a mechanism 
to reverse course. And the failure to reverse course has not 
only been the result of an issue of the trigger, it has also 
been the result of allowing PAYGO to dissipate and finally be 
eliminated in September 2002.
    So it is the case that I did believe that the forecasts of 
surpluses were real and, indeed, the Federal Reserve embarked 
upon a very extensive program to determine how we would operate 
Federal open market policy, the policy of purchases and sales 
of U.S. Government securities, when the level was disappearing. 
So it was not an issue of just the forecast that did not mean 
anything. We took action on the basis of that forecast, and all 
I am saying is we were wrong on that forecast. But I did say 
that were we wrong--and this is in the same testimony which you 
are citing--we should have a mechanism to deal with it.
    Senator Sarbanes. I recall it was at the end.
    Mr. Greenspan. That is correct.
    Senator Sarbanes. But it came at the end, once the punch 
bowl lid was off. Paul O'Neill----
    Mr. Greenspan. But let me say, the question is: Is the 
statement about the punch bowl accurate? In other words, 
reading the flow of testimony, there is a question not only of 
whether somebody said the punch bowl lidwas being taken off. 
The issue is: Is that an appropriate evaluation of the full 
testimony? Unless you say that people only heard half of what I 
said.
    Senator Sarbanes. Well, given the dynamic of the process in 
the Congress, which, after all, you are quite familiar with----
    Mr. Greenspan. Partly.
    Senator Sarbanes [continuing]. It seems to me that giving 
any sort of green light to tax cuts--or spending increases, for 
that matter, if you are concerned about the deficit problem and 
the reduction of the debt--is a very tricky proposition.
    Mr. Greenspan. Senator, the same----
    Senator Sarbanes. And the consequence, of course, is that 
we have now gone deeply into deficit and deeply into debt with 
no prospect of working out of it.
    Mr. Greenspan. Yes, but, Senator----
    Senator Sarbanes. As one looks ahead.
    Mr. Greenspan. As you remember certainly as well as I, 
first of all, I did not support a specific tax cut. People 
assumed that I did, but you will not find anywhere in the 
public record that I supported a specific tax cut. Indeed, the 
Democratic leadership tax cut would have solved the problem 
that I was raising with respect to reducing the level of the 
debt outstanding too quickly. If you look at the combination of 
both the President's program and the Democratic leadership 
program, including spending, you would be hard pressed to find 
really significant differences about the reduction in the issue 
of debt outstanding.
    So there is a question of context back there, and I will 
admit that I was wrong, like everybody else, on the issue of 
surpluses. But I think it is, frankly, unfair to read half of 
my testimony and discard the remainder.
    Chairman Gregg. Well, with that bit of----
    Senator Sarbanes. I think what is fair----
    Chairman Gregg. Senator, Senator.
    Senator Sarbanes. I will just close with this observation, 
Mr. Chairman. I think what is fair is to consider how your 
message would be taken, and it clearly was taken the way I have 
suggested in terms of providing a green light. I can put 
together----
    Mr. Greenspan. I plead guilty to that. If indeed that is 
the way it was interpreted, I missed it. In other words, I did 
not intend it that way, and that certainly, if that was indeed 
the case, was not my intention.
    Chairman Gregg. I would just submit for the record there 
are those of us who think that moving forward with the tax cuts 
was good policy, and we think we can defend that policy with 
the economic recovery that has occurred and the shallowness of 
the recession which resulted as a result of those tax cuts.
    But that is history. We are trying to look forward here. 
And we appreciate your advice as to how we should look forward 
at what are the big issues coming out, which specifically are 
the entitlement accounts and health care. And the advice and 
guidance you have given us today I am hopeful we can convert to 
some specific legislative language. So thank you, Mr. Chairman, 
for your time.
    Mr. Greenspan. Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Greenspan follows:]

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    Chairman Gregg. The hearing is adjourned.
    [Whereupon, at 12:05 p.m., the committee was adjourned.]

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    SOLVENCY OF THE PENSION BENEFIT GUARANTY CORPORATION - CURRENT 
                FINANCIAL CONDITION AND POTENTIAL RISKS

                              ----------                              


                        WEDNESDAY, JUNE 15, 2005

                              United States Senate,
                                   Committee on the Budget,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 9:52 a.m., in 
Room SD-608, Dirksen Senate Office Building, Hon. Judd Gregg, 
chairman of the committee, presiding.
    Present: Senators Gregg, Allard, Enzi, Bunning, Conrad, 
Murray, Byrd, and Stabenow.
    Staff Present: Scott B. Gudes, Majority Staff Director; and 
Mary Ann Naylor, Staff Director.

            OPENING STATEMENT OF CHAIRMAN JUDD GREGG

    Chairman Gregg. Since we have our witnesses and myself and 
Senator Conrad here, I thought we might just as well get 
started because we do have a vote at 10 o'clock, and this way 
Senator Conrad and I can make our statements, go vote, come 
back, and then start with your testimony, if that is agreeable 
to you folks, even though it is a little early by our own 
standards. But that is good. Congress should be early. We are 
usually late. It is about time we were early.
    You will note that we have these big screens. This is an 
attempt to move our committee into the 20th century. We do not 
expect to catch up with the 21st century on technology in this 
committee. But we have felt great solace and concern for the 
staff of Senator Conrad and their need to hold posters and 
billboards and charts all the time. So in order to try to 
relieve that stress on his staff, we have put in these fancy 
screens and we are going to go electronic.
    My hope actually had been to have these screens like the 
House has. They have quite spectacular video capability in 
their hearing rooms. However, the Senate does not move with 
such alacrity, and so we have this structure here, which 
hopefully will work. It is going to be a test, and I suspect 
there will be some glitches. But Dave is down there working for 
us, and Senator Conrad has his folks down there. So hopefully 
this will all work out, and we can put our charts up in an 
electronic way. If that does not work, I am sure there is some 
back-up system.
    The hearing today deals with the Pension Benefit Guaranty 
Corporation, and we are fortunate to have the Executive 
Director, Brad Belt, and the Director of the Congressional 
Budget Office, Dr. Holtz-Eakin, with us today in order to talk 
about the issues which are confronting us in this area.
    In my opinion, if we look out into the out-years of what 
our Government is confronting in the area of fiscal issues, we 
have a major crisis looming. We have talked about a lot on this 
committee, both myself and Senator Conrad. The crisis is driven 
in large part by demographics and the entitlement programs 
which we have created within the Government to assist people 
and to benefit people who are retired--obviously, Social 
Security, Medicare, and Medicaid being three of the largest 
ones. But if we are looking at contingent liabilities that are 
out there, potential liabilities, the PBGC is the fourth 
largest concern for us as a Government after those three major 
entitlements. And that is a function of the fact that we face a 
huge unfunded liability within defined benefit pension funds 
and the PBGC fund, and that is what we are going to talk about 
today.
    The pension incomes of Americans are dependent on two basic 
sources. One is obviously the public pension system, which is 
Social Security, and for people who are in the lower-income 
brackets, that makes up about 83 percent of their income. You 
can track Chart 1 and Chart 2 here. We will see if we can get 
those up. And the second is for people in the middle- and 
higher-income brackets, private pension benefits--and that 
would be Chart 2--of which defined benefit plans make up a 
large amount.

[GRAPHIC] [TIFF OMITTED] T1173.234

    The number of participants in these programs, which would 
be the next chart, has been rising in the defined benefit 
plans, which are PBGC approved. But the number of plans have 
actually been dropping, which is an interesting fact and 
something which reflects, I think, the fact that most people, 
many employers, are moving towards contribution plans versus 
defined benefit plans. And the PBGC is finding that it now has 
fewer plans to participate in their system, which has an impact 
on their solvency to a significant degree.

[GRAPHIC] [TIFF OMITTED] T1173.235


[GRAPHIC] [TIFF OMITTED] T1173.236


    The defined benefit insurance program as set up by Congress 
30 years ago is, regrettably, grossly underpriced right now and 
broken, and that would be the next chart, which is a rather 
dramatic reflection of the fact that we basically do not have 
enough money coming in and we have got a lot of money going 
out, or potential money going out. And the next two charts also 
reflect this, and so let's move on to those.

[GRAPHIC] [TIFF OMITTED] T1173.237


[GRAPHIC] [TIFF OMITTED] T1173.238


    The plans basically are giving people a false sense of 
security as to what they are going to receive in pension 
benefits because essentially the promises exceed the assets. 
And as we start to draw down assets in these plans, especially 
if we look at the projected drawdown of assets, we see that the 
insolvency accelerates significantly, and that would be the 
next chart, so that by 2025 we are projecting insolvency of $91 
billion in the PBGC.

[GRAPHIC] [TIFF OMITTED] T1173.239


    This is a huge number, and the problem here is that it is 
almost faster than Social Security, as we understand it. We 
actually have an insolvency right now of $23 billion, and 
because of the way the system works, as we start to draw down 
assets in the plan to pay current liabilities, we end up 
basically eating the seed corn which would theoretically grow 
the benefits for people in plans trustd by the PBGC who are 
going to retire in later years, which is why this accelerates 
so dramatically, leaving us with a huge out-year problem.
    I would compare it to the savings and loan problem that we 
had in the late 1980s, early 1990s, which brought down the 
banking industry, especially in the Southwest and in the New 
England States. It is that type of an issue in that, 
theoretically, at least, the Federal Government is on the line 
for a whole lot of this. But that is only theory, I think. We 
have to acknowledge the fact that if we have this type of a 
meltdown in our defined benefit structure, clearly the Federal 
Government is going to be drawn into this. People would expect 
that.
    So what do we do? What do we do? Well, I think there are a 
number of suggestions which we should pursue, and let me just 
read a few of them.
    First, we have to require that we have valid information 
about the security of these benefit plans. We cannot keep 
misleading people. We really actually have to have more 
transparency and more accuracy as to what these plans' benefits 
are, and participants need to know that. They need to know if 
their plan is in jeopardy and to what extent it is in jeopardy 
so that they have that information.
    Workers must be assured that the law does not allow and 
even encourage hollow promises, that we do not have a system 
where employers and union leaders are making and offering rank-
and-file members benefit increases that cannot possibly be paid 
for. And this has been a huge issue. Promises have been made 
here in order to settle negotiations, which clearly people 
should have understood were not going to be able to be 
fulfilled, and that continues and it should not continue and we 
should change the law so it cannot happen.
    The law must place a tangible price on all defined benefit 
plans' underfunding to limit the moral hazard of shifting risks 
to the beneficiaries, to PBGC, and other companies paying 
premiums. Accounting schemes that paper over massive funding 
shortfalls must be outlawed. Interest rate policies and funding 
targets must be straightforward to administer and be consistent 
with each plan's liability payouts.
    These are just a few of the things which need to be 
changed, but what we do know is that the PBGC already has a 
serious deficit and a cash crisis looming with a clock that 
will toll within 20 or 30 years sooner than when the Social 
Security problem hits us. And so we need to get on this issue. 
In fact, our window of opportunity is even narrower, in my 
opinion, than it is with Social Security because of the way 
this system works and the fact that we will be using up assets 
to pay liabilities, which assets really are not coordinated 
with those liabilities.
    Under the current law, the remedies for this broken system 
do not include the full faith and credit of the United States 
Government. I think this is an important point. The PBGC is 
only authorized to borrow up to $100 million from the U.S. 
Treasury. This amount pales in comparison to the projected 
shortfalls in the amount that would be needed to pay out the 
current projected levels of insured benefits. If we do nothing, 
employers left standing will pay even higher premiums than we 
have proposed in the Budget Resolution which we passed, and 
workers and retirees will be faced with significant reductions 
in insured benefits.
    We have got to learn from the history, especially the 
history of the savings and loan crisis, that you cannot wait to 
act on something like this. The most important thing we should 
all have to learn is that the longer we wait, the costs of the 
remedy will become higher, and there is another chart that 
shows the comparison--number 8, I think it is--of this problem 
to the S&L crisis.

[GRAPHIC] [TIFF OMITTED] T1173.240


    We are going to hear today that the PBGC deficit is 
projected to be $23 billion. Fortunately, PBGC payments are 
generally not made on a lump-sum basis, unlike withdrawals from 
a savings and loan. Nevertheless, the pension insurance fund 
will first run short on cash in just 5 years, and it will take 
roughly another 15 years to liquidate all remaining assets in 
the fund, which at that point there is nothing left and it is 
over. There are no more pension benefits. People who have 
pensions at 15 years out, we will have nothing to pay them if 
they are in the PBGC system. So that is the crisis we confront.
    But we have the opportunity to get it right, and the Budget 
Resolution attempted to try to start that process, and what 
this hearing is about today is whether or not the Budget 
Resolution went far enough or went too far and what needs to be 
done in the area of raising premium and in the area of making 
the increases in premium responsible enough so that we do not 
force companies to tip over into bankruptcy and draw more 
people into the PBGC. This is the conundrum we face, which is 
that as we try to make the system solvent, we do not want to 
make more companies insolvent, which in the end makes the 
system less solvent.
    So we appreciate the fact that we have got two expert 
witnesses with us today to talk about this, and at this point I 
would yield to the ranking member, Senator Conrad.

        OPENING STATEMENT OF RANKING MEMBER KENT CONRAD

    Senator Conrad. Thank you very much, Mr. Chairman, and 
thank you very much for holding this hearing. We have seen an 
outpouring of concern on this issue since the United default. 
Let's go to that first slide, if we can.
    The Washington Post ran this story on the human toll of a 
pension default, and they told the story of the family of a 
young United pilot who died in the disaster of September 11th. 
And that young pilot's widow now faces a cutting in half of her 
pension benefits because of the United default.

[GRAPHIC] [TIFF OMITTED] T1173.241


    We know that some 120,000 employees of United are going to 
absorb the $3.2 billion of that default not covered by the 
PBGC. These are people earning pensions over $45,000 a year, 
and I know myself, I grew up with a young guy in North Dakota, 
a very dear friend who wound up becoming a United pilot after a 
distinguished career in the military. And he was in town just 
recently and told us he has lost a significant majority of his 
pension benefits.
    That story is repeated over and over in this story that was 
in the Washington Post. Those who were counting on a retirement 
that they thought was assured, certainly one that was promised 
to them, now find the rug pulled out from under them.
    Let's go to the next slide. We know that PBGC has 
experienced a dramatic reversal of fortunes in recent years. In 
2001, PBGC reported a cumulative surplus of $7.7 billion--a 
surplus. Now we see a current PBGC liability of $23 billion, as 
the chairman indicated, growing to an estimated PBGC liability 
of $91 billion in 20 years. That is an incredibly serious 
matter for all of those who are in danger of having their 
pension benefits reduced from what they thought was assured.

[GRAPHIC] [TIFF OMITTED] T1173.242


    At that rate, assets in the PBGC fund will have been 
exhausted, and without serious reform PBGC may pay only pennies 
on the dollar each year to beneficiaries. Director Holtz-Eakin, 
you have warned of the risk to beneficiaries, stating that an 
insolvent PBGC would necessitate a drastic reduction in 
benefits, perhaps in excess of 90 percent.
    Let's go to the next slide, if we could. The maximum 
pension insured by the Pension Benefit Guaranty Corporation now 
is $45,614. If that has to be reduced by 90 percent, that would 
be only coverage of $4,561. Can you imagine the extraordinary 
hardship that would impose on people who, once again, are 
counting on these pension benefits? And, you know, when you 
have reached retirement age, what are you going to do to catch 
up? What are you going to do to make this all work? That is the 
very serious threat facing people.

[GRAPHIC] [TIFF OMITTED] T1173.243


    The chairman asked the question: What do we do? That is 
precisely the question we ought to ask and try to answer.
    One thing we know is that there are things that could be 
done here that make the situation worse. Again, Director Holtz-
Eakin, you warned the Finance Committee that changes in policy 
that require augmented pension funding would impose new costs 
on sponsors, probably increasing the chances for further 
bankruptcy filings. So the first thing we have got to do is 
make sure we do no harm, that we do not dig this hole deeper.

[GRAPHIC] [TIFF OMITTED] T1173.244


    As part of this year's budget resolution--let's go to the 
next slide--the HELP Committee, which oversees the Pension 
Benefit Guaranty Corporation, must approve savings proposals of 
$13.7 billion over 5 years, some of which is assumed to come 
from PBGC. The HELP Committee has the largest instruction of 
any Senate committee, higher than even the Finance Committee, 
and equal to just under 40 percent of the $34.7 billion of 
projected savings. There you can see the HELP Committee has by 
far the biggest instruction in terms of savings, and they have 
got responsibility for PBGC.

[GRAPHIC] [TIFF OMITTED] T1173.245


    Congress clearly needs to act, whether as part of 
reconciliation or in some stand-alone legislation. I am 
interested in hearing more from Mr. Belt about the 
administration's proposals.
    Let's go to the next slide. As I see it, there are really 
four components to the administration's proposal. Number one, 
increase premium income, and these are really two elements to 
that: increase fixed premium from $19 to $30 per plan 
participant, and, second, apply variable premiums to every 
dollar of plan underfunding.

[GRAPHIC] [TIFF OMITTED] T1173.246


    The second major element of the administration's proposal 
is to reform minimum funding levels, to reform how companies 
calculate the minimum funding levels that are needed for their 
pension plans.
    Third, prevent companies that have underfunded plans from 
worsening the situation by further increasing pension benefits.
    And, fourth, improving the transparency of the financial 
status of pension plans for employees, pensioners, and 
investors, and other stakeholders.
    This is at least my attempt to summarize, Mr. Belt, the 
proposals that you are making.
    My own conviction is we need to provide a practical path 
for employers who have established defined benefit plans, to 
maintain those valuable plans for their employees and retirees. 
Termination should be an extraordinary step for a plan sponsor, 
not merely another financial option. Employees and retirees are 
relying on these promises, and we should not let them down.
    It is also clear to me that some of the requirements that 
we have had in the past really do not make much sense. We have, 
in fact, restricted companies on what they could put in in the 
good times to their pension plans. And then, of course, when 
the bad times come, the downturn occurs, they are in no 
position to catch up. So I think that is one of the things that 
require our review as well.
    Senator Gregg has notified me that there is a vote now on 
an amendment in 10 minutes. He has asked me to recess the 
committee, and we will then return to hear the testimony of our 
witnesses. Senator Gregg had another committee responsibility. 
That is why he is not here at the moment. He had to go, I think 
to provide a quorum perhaps there. And then we have this vote 
scheduled very shortly on the floor, and he feels the best way 
to conduct our business would be to recess the committee at 
this moment, for us both to go and vote, and then return and 
hear the testimony of the witnesses.
    I apologize to the witnesses for this. This vote was 
perhaps as you know, only scheduled late yesterday, so we did 
not know of it when we had scheduled this hearing. So I 
apologize for that, and I apologize to those who are here to 
listen to the testimony as well. We will attempt to reconvene 
in approximately 10 or 15 minutes.
    With that, we will recess the committee.
    [Recess.]
    Chairman Gregg. I apologize for the break. I appreciate 
Senator Conrad taking over. I appreciate Senator Byrd being 
here. But we did have a vote. And so we shall proceed to 
testimony.
    Mr. Belt, I guess we will start with you.

   STATEMENT OF BRADLEY D. BELT, EXECUTIVE DIRECTOR, PENSION 
                  BENEFIT GUARANTY CORPORATION

    Mr. Belt. Thank you, Mr. Chairman.
    Chairman Gregg. Try to bring that microphone a little bit 
closer.
    Mr. Belt. I will certainly do so. Chairman Gregg, Senator 
Byrd, thank you for the opportunity to testify on the financial 
condition of and risks facing the Federal pension insurance 
program. Let me begin by making a few general observations that 
I hope will help frame the policy choices facing this committee 
and Congress.
    First, the key issue facing policymakers is not really the 
solvency of the PBGC per se. When underfunded pension plans 
terminate, it is not the PBGC that loses. We are merely a 
passthrough for the very stakeholders in the defined benefit 
system. In reality, there are three important constituencies 
who stand to lose when underfunded pension plans terminate. 
First, workers and retirees may lose promised benefits because 
of statutory limits on PBGC's insurance coverage. Second, other 
companies that have responsibly met their pension obligations 
may be required to pay higher PBGC premiums. And, third, U.S. 
taxpayers may ultimate be called upon to bail out the insurance 
fund if it cannot honor its commitments.
    Nevertheless, we continue to hear the criticism that the 
administration's comprehensive pension reform proposal is 
focused on saving the PBGC. These criticisms seem intended to 
obfuscate the real issues at stake in this debate. The 
administration's pension reform proposal has three goals: to 
protect the pension benefits that workers and retirees have 
earned; to protect responsible companies from paying for the 
broken promises of their corporate brethren; and to protect 
taxpayers from a costly bailout of the pension insurance fund.
    There is no question that the administration's reform 
proposal is the strongest measure put forward to get pension 
plans funded and to put the insurance program on a stable 
footing. In fact, I would suggest that the administration's 
proposal should be the benchmark against which all such 
proposals are measured. Simply put, stronger funding rules mean 
better protection for workers, responsible companies, and 
taxpayers. Weaker funding rules mean less protection for these 
three constituencies.
    Consider a real-world example of what happens when 
underfunded pension plans terminate. United Airlines is 
defaulting on nearly $10 billion of unfunded benefit promises. 
The pension insurance program will cover roughly $6.6 billion 
of the shortfall. That means the workers and retirees stand to 
lose more than $3 billion in benefits they have earned that 
were promised to them but never funded by United Airlines. It 
also means responsible companies are on the hook for $6 billion 
that under current law will have to be covered with higher 
premium dollars. And, finally, further large losses increase 
the chances that the pension insurance fund will need a costly 
Federal rescue at some point in time.
    Indeed, with about $40 billion in assets but more than $60 
billion in liabilities, the pension insurance program is 
already in a deep hole. And without needed changes in law, as 
recommended by the administration, the hole could get much 
deeper.
    Last year, we reported that the universe of PBGC-insured 
pension plans was underfunded by more than $450 billion, with 
almost $100 billion of that shortfall in plans sponsored by 
financially weaker companies. Further losses will depend on 
numerous variables that are inherently uncertain and difficult 
to predict, such as changes in equity prices, interest rates, 
raw material prices, inflation, and general economic 
conditions.
    But without needed changes in law, large losses are likely. 
And there are several useful methodologies for analyzing and 
pricing the risk to the pension insurance program. One tool 
used by PBGC is a stochastic model that provides a range of 
possible outcomes, depending on different economic scenarios. 
The options pricing model used by CBO which adjusts for market 
risk is another useful analytical tool, and an independent 
think tank has published a deterministic cash flow model that 
provides policymakers with yet another way to assess the scope 
and magnitude of the potential cost of providing Federal 
pension insurance under current law.
    Each of these approaches shows that losses will grow 
substantially under current law, and there are several 
indicators that the risks to the pension insurance program are 
growing rather than abating. The most recent source of 
information on the financial status of pension plans comes from 
the reports filed with the PBGC by companies with pension plans 
underfunded by more than $50 million. The latest reports show 
that pension underfunding has grown by 27 percent compared to a 
year ago, from $279 billion to $354 billion. And the average 
funded ratio of the plans was just 69 percent.
    In addition to greater levels of underfunding, market 
indicators show that the risk of default on the part of several 
companies sponsoring large pension plans has risen appreciably 
in recent months. Meanwhile, PBGC's premium revenues are not 
keeping pace with the growing losses and exposure. PBGC's flat 
rate premium of $19 per participant brings in only about $600 
million each year. The variable rate premium has averaged only 
about $300 million per year over the past decade. At current 
levels, premiums are clearly inadequate to close the pension 
insurance program's $23 billion accrued deficit, let alone 
cover future expected claims.
    The administration has put forward a comprehensive pension 
reform proposal that accomplishes three critical objectives.
    First, it strengthens the pension funding rules so that 
companies set aside enough money to fill their pension promises 
while using real measures of assets and liabilities, not 
measures of liabilities and assets based upon years past.
    Second, it fixes the premium structure to better enable the 
PBGC to meets its commitments to more than 1 million Americans 
in failed pension plans.
    And, third, it opens up the non-public pension underfunding 
reports filed with the PBGC so that workers and retirees can 
know if their benefits are at risk.
    This is the right approach, and it is a balanced approach. 
Under current law, the PBGC receives no taxpayer money, as you 
noted, Mr. Chairman, and its obligations are not backed by the 
full faith and credit of the United States Government. In other 
words, premium payers are responsible for the obligations PBGC 
has assumed from terminated plans. If premiums are not 
sufficient to cover past or future losses, then Congress will 
have to address the question of who pays. When the PBGC runs 
out of money, should participants in terminated pension plans 
expect to stop receiving their benefit checks or will pressure 
build to ask the taxpayer to restore the insurance program to 
solvency?
    The administration believes there is a better approach: fix 
the funding rules now to require companies to fully fund the 
promises they have made to their workers. That is the best 
insurance policy for plan participants, premium payers, and 
ultimately taxpayers.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Belt follows:]

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    Chairman Gregg. Thank you, Mr. Belt.
    Dr. Holtz-Eakin?

   STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Holtz-Eakin. Chairman Gregg, Senators, thank you for 
the chance to be here today to talk about this important and 
timely issue.
    In our written testimony we walk through all of the 
comments that I am going to make, but I thought I would focus 
my oral remarks on four key points, the first being, how large 
is the commitment represented by pension insurance for defined 
benefit pension plans? How much of that commitment will be 
picked up by the U.S. taxpayer? What are effective ways to 
improve the conveyance of information to this committee and to 
other members of Congress so as to more carefully monitor the 
financial condition of the PBGC, and what would be the impacts 
of policy options, particularly those relevant to the 
reconciliation process on the economic and budgetary challenge 
that is pension insurance?
    Beginning with the size of the pension problem, the caveat 
I would like to put at the outset is that the numbers I am 
about to discuss are a work in progress. They represent ongoing 
work at CBO to more accurately measure the economic cost of 
insurance provided on the Federal budget. The goal of this 
particular exercise is to essentially estimate the size of the 
check that one would have to write to modern financial markets 
in order to have them provide such pension insurance, and as a 
result, the CBO exercise is really a three-step process which 
is the same process that any financial market analyst would 
undertake to look at the PBGC and the insurance it provides.
    Step one would be to estimate the probability that any 
pension plan sponsor might enter bankruptcy, and to examine the 
assets and liabilities and ongoing business operations for that 
probability.
    Step two is to estimate the potential range of underfunding 
for any plan that might arrive at the PBGC as a result of a 
bankruptcy, and at that termination estimate the check that 
will have to be covered.
    And then Step three is to value this underfunding at market 
prices. Markets are especially conscious of the time at which 
money has to be paid out. Money paid out at bad times is more 
expensive than money during good times. And unfortunately, 
volatility is a key aspect of providing insurance, and pensions 
tend to arrive at an insurance agency at the same time the 
economy dips and thus cash flows are weak, at a time when the 
stock market is down and thus asset values are reduced, and at 
a time when interest rates are lower, and as a result, 
valuations of liabilities increase.
    So at the same time that the insurance is most likely to 
arrive, it is at a time when markets will place the greatest 
price tag on it, and as a result, incorporating this market 
risk as an ongoing part of valuing the insurance is an 
important aspect of what we do.
    If we go to the first slide, you can see that undertaking 
this exercise reveals some magnitudes of the market valuation 
of the insurance provided to defined benefit pension plans, and 
there are really two kinds of costs displayed on the slide. The 
first and the one that is segregated at the bottom is what is 
labeled the ``sunk costs.'' These are the costs for those plans 
that are in actuality or in effect already under water and have 
arrived at the PBGC or are quite likely to do so.
    There, as Mr. Belt mentioned, the real issue is who will 
pick up the tab? Will it be workers and retirees? Will it be 
firms and their shareholders, or will in fact some of this cost 
be picked up by the American taxpayer?
    The remaining costs are prospective costs, likely insurance 
that would be paid out over different horizons, rising from 48 
billion over the next 10 years to 68 billion over a 20-year 
horizon, and it is those costs that can be changed by policy 
and that the deliberations of the Congress are most important 
in thinking about.
    Step two is to ask what is the current taxpayer exposure to 
these costs? And there the answer is quite simple. As the 
chairman noted, under current law the explicit liability is 
zero. I think you refer to this as a theoretical zero, but 
there is going to be clear pressure on a cash flow basis as the 
PBGC shows annual deficits and ultimately exhausts its on-
budget and off-budget assets. There will be pressure for the 
Congress to contemplate providing more of the taxpayers' 
resources to this problem, and there the question is, how much, 
and how will this decision be made? Is it the case that there 
should be an ongoing subsidy to provide low-cost insurance to 
defined benefit pensions as a matter of policy, and in doing 
so, how will the Congress recognize those costs on both the 
outlay side as well as on the revenue side, where the 
implications of all pension reforms will affect tax liabilities 
of firms?
    The next step, if we go to the next slide, is trying to 
provide information to this committee and to the Congress so as 
to better monitor the current and any changed condition in the 
insurance for defined benefit pension plans.
    There are really two vehicles for this, the annual budget 
statements, and also the financial statement of the United 
States Government, and under current law the budget shows a 
very incomplete and partial snapshot of the PBGC's financial 
condition, showing only the on-budget aspects of the 
operations, and the cash flows, premiums coming in, benefit 
payments going out, and this has permitted the budget to 
reflect the PBGC as a profit center, when in fact in any 
economic measure it has been losing money for a sustained time.
    The financial statement currently shows the $23 billion in 
the liability which includes probable terminations, but also 
has broader measures in the note disclosure about possible 
terminations that could get as large as an additional $96 
billion.
    Now, possible alternatives going forward would be to leave 
the current statements unchanged, or to move both the budget or 
the financial statement toward presentations that are more 
reflective of the economic cost. One could imagine putting on 
the budget the accrual cost of additional exposure including 
the market value of the risk. Those would be numbers quite 
similar to the type that I presented at the outset, or you 
could take a more limited approach and simply identify the 
annual equivalent subsidy, the pricing below market of the 
pension insurance provided to firms, and place that on the 
budget to reflect the Government's subsidy to this enterprise. 
And on the financial statement one could imagine moving to a 
full accrual cost using market values as a way to inform the 
Congress better about the ongoing financial condition of the 
system.
    Let me close with a few thoughts about policy options that 
appear to be under consideration at the moment, broadly broken 
into two categories, those which would affect premiums and 
those which would affect funding rules and reporting 
requirements.
    Under premiums, it is clear that there are aspects to 
improve policy on pension insurance fund. The first would be to 
overall raise premiums so as to lower the subsidy present in 
the insurance system and to have as a result firms more 
accurately reflecting their decisions to provide compensation, 
the true cost of making sure that that compensation, which is 
promised at one point in time, will actually be paid at a later 
point in time regardless of what economic circumstances might 
transpire in between it, the firm or the industry or even the 
economy-wide level.
    It would be desirable to move the premiums toward ones that 
reflected risk in a more comprehensive fashion. This would 
provide better incentives and also lead to lower subsidies from 
low risk to high risk sponsors in these kinds of plans, and one 
could do that by linking the risks to the plan's assets or by 
linking it to a sponsor's financial status at investment grade 
or below investment grade, for example, or a variety of other 
methods that we outline in the testimony.
    Now, overall, to change the economic problem, the $48 
billion of the likely cost that we identified at the outset, 
would require a five-fold increase in premiums as currently 
charged. At the moment we are collecting about $1 billion in 
premiums per year to meet the reconciliation kind of 
instruction that has been debated on the order of 6 to 7 
billion dollars over the budget window, would require only 
doubling those premiums between 2006 and 2010. The five-fold 
increase would eliminate the economic cost. Merely doubling 
would reduce it.
    If it was done via strictly the flat rate premium, that 
would require raising it to about $60 from $19 at the moment, 
and that would have an economic impact of reducing the cost by 
only $7 billion to $41 billion. If one chose instead to focus 
exclusively on the variable rate premium, the $9 per $1,000 of 
underfunding, that would require an increase to about $27 from 
$9. This would have much more dramatic incentive effects, and 
lower that prospective cost by $18 billion. However, it would 
most likely provide incentives for some sponsors to terminate 
or freeze their plans at the same time.
    The second broad category of changes are those in funding 
rules and reporting, where it would be desirable to more 
closely price assets and liabilities to their market value. The 
essence of insurance is to capture the volatility so that when 
bad times arrive it is recognized that they are present. Market 
values are most reflective of those situations. In doing so it 
would be desirable to match more closely the characteristics of 
assets and liabilities, provide, as a result, hedges, so that 
when liabilities go up, assets go up at the same time, and vice 
versa. This is a substitute and a complement to providing 
greater funding overall to make sure that the net positions 
move in the same way.
    Finally, it would be desirable to consider all the costs in 
measuring liabilities. As has been made vivid by several recent 
examples, it is often the case that what appears to be a funded 
plan arrives in bankruptcy severely underfunded because of 
shut-down benefits, lump sum cash payouts in the pension plans, 
having liabilities more reflective of all those costs so that 
we get--better funding would be desirable. In doing so, it 
would improve the transparency of the pension system. This 
would allow both workers and markets to more carefully monitor 
it and provide incentives to either fully fund, and thus bring 
the resources to the future on the part of the firm, or to 
purchase appropriately priced insurance from the PBGC and 
provide the resources in that fashion.
    In all cases, I just remind the committee that in moving 
either funding rules or moving premiums, there will be not only 
outlay consequences but also potential revenue consequences 
which are important in thinking about the net impact of these 
changes on the exposure of the taxpayer and the overall budget 
process.
    The CBO thanks you for the chance to be here today and we 
look forward to your questions.
    [The prepared statement of Mr. Holtz-Eakin follows:]

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    Chairman Gregg. Thank you, doctor. Would you send us a memo 
as to how we should change the budget accounting rules so that 
we more accurately reflect this, so we could maybe incorporate 
that in our rules next year?
    Mr. Holtz-Eakin. We would be happy to work with you on 
that.
    Chairman Gregg. We did in the reconciliation instructions 
direct Finance and the HELP Committee, the HELP Committee 
having primary jurisdiction here, to do $6.6 billion of premium 
increases in this area. I guess my initial question to Mr. Belt 
and to you, doctor, if you wish to comment on it, is what 
effect does this have on the PBGC if we were to pursue the 
reconciliation instructions?
    Mr. Belt. As Doug noted, the size of the accrued deficit is 
$23 billion. We can also expect significant future claims. 
Those claims will be large or smaller depending on how strong 
the funding rules are that are finally implemented. Clearly, 
the $6.6 billion is well insufficient to fill the current hole, 
let alone cover future expected claims, so that does then raise 
the question, if it is not going to be the premium payers that 
either the hole for the sunk costs or are not fully covering 
expected future claims, then who does do that?
    Ultimately, from PBGC's perspective, you either have to end 
up, as you noted, Mr. Chairman, assets drained down, and at 
some point in time we would not be able to honor the 
commitments we have taken on to a million plus participants, 
and that number is growing and growing unfortunately for all 
the wrong reasons, or the resources would have to come from 
somewhere else, general revenues, which under current law are 
not available to us, and the taxpayer would be called upon to 
rescue the program. There is no magic number. We know what the 
size of the current hole is. We can project, using various 
methodologies, as CBO has done, what the future expected costs 
are, and then it is a question of who covers those costs.
    Chairman Gregg. The current hole of $23 billion is over 
what period of time do you expect to have to pay that down, I 
mean you would cover that?
    Mr. Belt. That is the size of the current deficit. That is, 
we have taken--
    Chairman Gregg. Assuming you were to cover it.
    Mr. Belt. We have assets of a little over $40 billion now. 
We have taken on pension promises that have a net present value 
in excess of $23 billion more than that, in excess of $60 
billion. As you noted, in contrast to the S&L crisis, we are 
not facing a liquidity problem right now. Currently we are 
paying out about $3-1/2 billion, or this year we will pay out 
about $3-1/2 billion in benefit payments, and that number is 
going to steadily increase. But we have sufficient resources on 
a cash basis to cut benefit checks, subject to the maximum 
guarantee limit, for a number of years yet, but it is not a 
sustainable business model.
    The hole is deep, and every day it gets deeper. When we 
take on United Airline pension plan, we take on $7 billion in 
assets in that pension plan. That is two years worth of benefit 
payments. The problem is we have also taken on $17 billion of 
promises associated with that, and ultimately the question is, 
how do we make up that gap?
    Chairman Gregg. Let me phrase my question another way. We 
know that 15 years from now you are not going to have any 
assets under the present projection to pay any benefits. So 
anybody that ends up in your fund is going to get zero on their 
pension. With these reconciliation instructions, does that take 
it out to 17 years, to 20 years?
    Mr. Belt. I believe our modeling shows--and of course it is 
dependent on a host of factors looking forward--that it 
actually does not improve our position. It lessens the 
deterioration of our financial position, but it does not 
improve our financial position.
    Chairman Gregg. So how much more would we have to do? And 
when is the tipping point? In other words, if we go to 12 
billion do we put more people in your fund than we actually 
protect the fund with assets?
    Mr. Belt. Perhaps I can approach that in a slightly 
different way. Ultimately, behavioral changes are difficult to 
model, but I think we can put the premiums in perspective that 
will be helpful in framing the policy debate. The total premium 
revenue collected under the flat rate premium now is about $600 
million a year, and the total premiums we have collected are a 
billion a year. We are talking about, under the Budget Act 
reconciliation instructions, an additional $6 billion. The 
amount of money that companies would have to put in the plan to 
close the gap and exit the system, if they chose to do so, 
would be $450 billion, substantially more than that extra $300 
million proposed under the flat rate or the extra, the little 
over a billion dollars a year relative to current law, in the 
reconciliation instructions.
    So it is really a drop in the bucket. Take the example of 
the largest pension plan out there, General Motors, which I 
think has about 700,000 participants. The proposed increase in 
the flat rate premium from $19 to $30 would mean their pension 
insurance cost would go up with respect to that component about 
$8 million a year, certainly significant, but the company has 
revenues of excess of $150 billion a year. Its health care 
costs are $5 billion a year. The premiums need to be put in 
perspective. It is a cost. There is no question about that, but 
it has been underpriced, as Dr. Holtz-Eakin noted, for a 
substantial period of time.
    I do not know what the tipping point is. It is going to 
vary from company to company. From a systemic standpoint 
premiums are very, very small, even under the Budget Act and 
even if you substantially increase those relative to the needed 
cash contributions to the pension plan to make up the funding 
gaps.
    Chairman Gregg. Thank you.
    Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman.
    Mr. Belt, as I understand it, under the administration's 
plan, if an employer's bonds go to junk bond status, that would 
then trigger a requirement for new pension contributions and 
additional premiums. Does that not further threaten the 
viability of the enterprise?
    Mr. Belt. What the administration's proposal is trying to 
do, first and foremost, is make sure that we begin in a very 
measured way to fill the gap. We have an extraordinary amount 
of underfunding, chronic underfunding on the part of pension 
plans, that when plans terminate it results in workers and 
retirees losing their hard-earned benefits. As noted with 
respect to the case of Ms. Sarasini, potentially half or more. 
It is a tragic situation. There is a very human toll. What we 
are saying is ``Let us make sure that there are sufficient 
assets on the pension plan to cover the promises made, and then 
also, as the chairman noted earlier, to not make new hollow 
promises when they cannot afford to pay the old promises."
    We are also trying to reflect the fact that there is risk 
in the system, and as in any properly designed insurance 
system, you want to encourage appropriate behavior and 
discourage risky behavior. That is not the way the current 
system is constructed. We want to start moving in that 
direction.
    With respect to credit ratings, I would note--and we just 
pulled up the Standard & Poor's data, looking at average 
default rates--the default risk for non-investment grade 
companies is 20 times higher than that for investment-grade 
companies over a 5-year period, not 20 percent higher, 20 times 
higher.
    Senator Conrad. 20 times higher. Let me ask you this 
question. I do not see anywhere in this proposal a changing of 
the limitation that we currently have on companies' 
contributions when things are going well. Is that not part of 
the problem? I mean I have had so many companies tell me, 
``Gee, we have been frustrated because there is a limitation on 
what we can put into the fund when things are going well.'' 
Then as the system, as it has been described to me, when things 
get tough, when the economy falters, when it becomes clear that 
they are underfunded, then the requirements increase. It is 
almost like we have got it upside down and backwards.
    Mr. Belt. Actually, Senator, the administration proposal 
does propose that companies be given additional flexibility 
beyond current law to increase the amount of tax-deductible 
contributions into the plan in any given year.
    Senator Conrad. How do you do that? I am glad that you have 
got that as part of the plan. I did not see it as I went 
through the--
    Mr. Belt. It is a core element to actually provide them to 
be able to make tax-deductible contributions up to 130 percent 
of their funding target. So that is a substantial increase 
relative to current law. Obviously, that has revenue 
consequences, and it is usually anathema to tax policy to allow 
people to control the timing of their losses--
    Senator Conrad. I understand. I understand. That has got an 
effect on the Federal revenue, right?
    Mr. Belt. Yes.
    Senator Conrad. That is going to reduce Federal revenue to 
have them be able to make further contributions.
    Mr. Belt. The administration is supporting and providing 
that additional flexibility. Having said that, the argument 
that the maximum contribution limit has materially contributed 
to the current level of underfunding is unfortunately not 
wholly correct.
    Senator Conrad. And why not?
    Mr. Belt. We analyzed that. We looked at the data. And in 
some years 80 percent of the companies could have contributed 
more during the good times and did not do so. That is, they did 
not bump up against the maximum contribution.
    Senator Conrad. They could have done more even under 
current law, but did not.
    Mr. Belt. Yes, even under as I said, the worst of years, 
more than half the companies could have contributed more, that 
is, they would not have bumped up against the maximum 
contribution limit, but they did not. It has not been a 
material contributing factor to the current funding gap.
    Senator Conrad. I am running out of time. I want to get 
this question in to you. You know, in business school, we often 
talked about the 80/20 rule. 20 percent of your clients do 80 
percent of your business. The 80/20 rule just seems to follow 
in many, many applications. That is, a small percentage of the 
entities out there are the biggest part of your problem, and 
the biggest part of your opportunity.
    If we would be looking for the element that is contributing 
most of the problem, what would that be?
    Mr. Belt. Well, there is a combination of factors. 
Companies have been taking on substantial investment risk in 
their pension plans, and the consequences of taking on that 
risk were borne out beginning in 2000 when--
    Senator Conrad. In what way were they taking on--
    Mr. Belt. They have a mismatch, a fundamental mismatch 
between their assets and liabilities. Their liabilities are 
very bond-like in nature. The assets were disconnected from the 
bond-like nature of those liabilities. So they had exposure 
both to changes in equity prices as well as interest rates.
    Senator Conrad. So they were taking out-sized risks?
    Mr. Belt. I do not want to characterize it as out-size. 
They were taking risk. And there was--
    Senator Conrad. Well, it did not turn out.
    Mr. Belt. There was substantial duration risk. And what you 
saw then is the asset prices were falling, the liabilities were 
increasing in value because of lower interest rates at the same 
time, and in some cases companies were making new pension 
promises, and liabilities were accruing ordinarily in any 
event. In addition, because of smoothing mechanisms built into 
current law and which the administration proposed to eliminate, 
this was hidden from view. In addition, because of another 
mechanism under current law called credit balances, companies 
were able to avoid putting cash in during these years, 
notwithstanding the fact that the gap was widening during this 
period of time.
    We would also propose to eliminate credit balances, again, 
making sure that we have meaningful asset and liability 
measures, and a meaningful funding target.
    Senator Conrad. My time has expired.
    Chairman Gregg. Thank you.
    Senator Allard.
    Senator Allard. You mentioned the 450 billion total 
liability on the companies and I was not clear as to over what 
time period that was, Mr. Belt.
    Mr. Belt. That is the current size of the hole when you 
look at measuring those assets on a market basis, the entire 
assets in the system relative to the current market price of 
those liabilities discounted back, the net present value of the 
promises they have made. So that is the current size of the 
hole.
    Senator Allard. I see. Now, in your view is this problem 
something that can be solved now without putting an undue 
burden on the participants on the guaranty fund?
    Mr. Belt. That is certainly the objective of the 
administration's proposals, to address the problem now so that 
we avoid having situations like United Airlines in the future, 
where not only do the participants--the workers and retirees--
lose a substantial amount of the benefits that were promised to 
them, but companies that have acted responsibly then are called 
upon to pay higher premiums, whether it is $6.6 billion or some 
other number, or if Congress decides not to put it all ont 
premium payers, then where else are the monies going to come 
from? Are we going to stop cutting checks to the participants 
or are we going to ask the American taxpayer to step in?
    Senator Allard. There was some discussion that other 
airlines might follow, since you mentioned United, there was 
some discussion that other airlines may follow up and do what 
United had done. What do you view as the likelihood of that 
happening?
    Mr. Belt. Ultimately that depends on market conditions and 
their own unique business needs. The situation with respect to 
the legacy carriers that are now in Chapter 11 is different, 
each one is different from another.
    Senator Allard. Let me put it this way. Is there a concern 
of the administration that other airlines will likely follow 
United?
    Mr. Belt. There is certainly a concern that, given the fact 
that the CEOs of each of the other legacy carriers have 
indicated publicly that they would feel competitive pressure to 
at some point potentially enter Chapter 11 and seek to 
terminate their pension plans. Given the fact that those 
pension plans are substantially underfunded by an excess of $20 
billion, there is no question we are concerned about that.
    Senator Allard. With the administration's plan that you 
have now, when do you think that you could get the pension fund 
back on solid footing financially?
    Mr. Belt. The administration's proposal is to require 
companies to fully fund their pension plans over a 7-year 
period.
    Senator Allard. So you think in 7 years we could be--
    Mr. Belt. You are always moving towards 7 years. There is a 
new amortization schedule established each and every year, and 
as long as you are still taking investment risks, the assets or 
liabilities may be greater or lesser during that period of 
time.
    But I also want to note that that 7-year time frame that 
the administration proposed is trying to be fairly measured and 
responsible when it is compared to current law. Current law has 
multiple time periods for funding deficits--as little as 3 
years if you are captured by the Deficit Reduction Contribution 
Rule. So under current law, you may have to make up that 
funding gap in as little as 3 years, which is the case for the 
airlines.
    Chairman Gregg. Senator Allard, may I?
    Senator Allard. Follow up, Mr. Chairman.
    Chairman Gregg. Just so we are all on the same page here, 
you are talking of the administration plan, which is $12 
billion more than what the reconciliation instructions in the 
budget were, right?
    Mr. Belt. Well, I was not talking specifically about--
    Chairman Gregg. You are talking the--
    Mr. Belt. --specifically about the premium aspect of it. I 
was talking more about the funding rules portion of it. Again, 
the emphasis in the administration proposal is not to have 
monies coming into the PBGC, although clearly we need to figure 
out how to fill the hole. The emphasis of the administration's 
proposal is making sure there are sufficient assets in the 
pension plan to cover the promises that are made so we do not 
have to worry about losses occurring to a pension plan down the 
road.
    The weaker the funding rules are, the more we are going to 
have claims, and that is going to necessitate higher premiums. 
There is a direct connection between the two.
    Senator Allard. Thank you, Mr. Chairman.
    Chairman Gregg. Senator Byrd.
    Senator Byrd. Thank you, Mr. Chairman. Thank you, Mr. 
Conrad.
    Dr. Holtz-Eakin and Director Belt, we remember in West 
Virginia a great union leader, John L. Lewis. He spoke of those 
who supped at labor's table and who are sheltered in labor's 
house. Many of the workers in my State sacrificed their wages 
to ensure higher pensions in retirement. And they view those 
pensions as much their entitlement for a day of labor, as their 
Friday paycheck. These workers are outraged that companies can 
escape their pension and health care obligations through escape 
clauses. They escape their pension and health care obligations 
through bankruptcy.
    In West Virginia it has happened in the coal industry, it 
has happened in the steel industry, it has happened in the 
aluminum industry and in the special metals industries. 
Businesses, rightly or wrongly, file for bankruptcy, and 
workers, through no fault of their own, find themselves 
stranded, too young to collect Social Security, too old to find 
a new job.
    Congress, Director Belt, recently passed legislation 
cracking down on individuals who abusively shed their debts in 
bankruptcy. What further reforms are necessary to ensure that 
companies do not abusively shed their pension obligations in 
bankruptcy? And what changes to the corporate bankruptcy laws, 
as they relate to pensions, should the Congress consider?
    Mr. Belt. Senator, I would be delighted to take the first 
crack at that. There is no question that under current law the 
interaction of ERISA, the Employee Retirement Income Security 
Act, and the bankruptcy code leads to bad outcomes, and 
multiple losers. All the stakeholders lose, workers and 
retirees. You have companies, responsible companies, and they 
would be on the hook for higher premiums. Not only that, but 
they may face the prospect of having to compete against a rival 
that now has the Federal Government subsidizing its labor cost 
on an ongoing basis.
    In addition, it exposes the taxpayer to risk down the road. 
That is current law. Current law does allow companies a method, 
a mechanism for filing Chapter 11 and seeking to have their 
pension plans terminated under so-called distress termination.
    PBGC has a very limited role in that process. That is 
ultimately a determination made by a bankruptcy judge under the 
Bankruptcy Code, if they find that the company would be unable 
to emerge from Chapter 11 successfully if it had to maintain 
one of more of its pension plans. Certainly, we have seen that 
happen, we have seen it happen in too many instances.
    What was particularly troubling to us--and the 
administration has a specific proposal to address this--is a 
situation that arose with respect to United Airlines last 
summer, when it had a legally required contribution that it had 
to make under ERISA of $70 million last summer. It said it 
elected to defer that contribution even though there is no 
concept of election or deferral under the law. And there was 
ultimately no consequence to their not only missing that 
legally required contribution or other subsequent contributions 
because of the operation of bankruptcy code.
    If they had not been in Chapter 11, a lien arises 
automatically under the operation of law, and PBGC would have 
the ability to enforce that lien. In bankruptcy, however, 
although the lien arises, the automatic stay provisions of the 
bankruptcy code kick in and we can not take any action. So as a 
result there was no practical consequence to United of simply 
not making a legally--
    Senator Byrd. But what reforms are necessary to ensure that 
companies do not abusively shed their pension obligations in 
bankruptcy? What changes to the corporate bankruptcy laws as 
they relate to pensions should the Congress consider?
    Mr. Belt. The only other--perhaps Dr. Holtz-Eakin has some 
thoughts on that. I would note that part of the 
administration's proposal is to address the issue that arose 
last year, is to make sure that PBGC would have the authority 
to enforce a lien in bankruptcy, which we think is one 
critically important change.
    Senator Byrd. Dr. Holtz-Eakin?
    Mr. Holtz-Eakin. A different way to think about this is 
that pensions are just like wages. They are compensation that 
is given to workers, and it is earned at the time the work is 
done. That is over once the work is finished. And it should not 
be affected by any reorganization in bankruptcy or outside of 
it as a result of competitive pressures. And so the challenge 
is to make sure that the compensation that has been earned is 
carried forward in time and paid to the workers upon 
retirement. That can be done either internally with better 
funding rules to make sure the resources are actually there, or 
externally by paying an appropriate price to someone like the 
PBGC to deliver those resources at the time the worker retires.
    But it is not necessarily a bankruptcy problem. Bankruptcy 
is about economic reorganizations. It is about making sure that 
firms make adequate preparation internally or externally to 
provide that compensation that has already been earned.
    Senator Byrd. My time is up, but is what you say--I say to 
both--is what you say enough to prevent companies from 
abusively discharging in bankruptcy their pension obligation to 
workers?
    Mr. Holtz-Eakin. Director Belt is more familiar with the 
rules than I am, but to my knowledge, no one is accused of 
abusing rules. They are following the rules. So the key will be 
to write rules which strengthen both the internal and the 
external funding for these pensions.
    Mr. Belt. The only other point I would note, Senator, in 
that regard, is that bankruptcy is at the end of the process--
and PBGC historically--once we are in bankruptcy as a general 
unsecured creditor, receives about 5 to 7 cents on the dollar 
in claims recovery.
    The focus really should be on the front end. There is 
nothing that we can, in my view from a governmental 
perspective, do to change the business cycle. Companies are 
occasionally going to go out of business. What we can and 
should do something about is, if they sponsor a defined benefit 
plan, making sure that there are sufficient assets in that 
pension plan to cover those promises, so everybody is getting 
100 cents on the dollar. We are not at the very end of the 
process, worrying about getting a nickel on the dollar.
    Senator Byrd. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Gregg. Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    I want to go back and get some figures corrected. $450 
billion was mentioned. Is that the overall number of all 
pensions that all companies have, whether it be a defined 
pension program? In other words, is that whole world we are 
looking at?
    Mr. Belt. It is defined benefit plans. It is the amount--
    Senator Bunning. That has nothing to do with 401(k)s, it is 
just the defined benefit plans?
    Mr. Belt. Correct, Senator.
    Senator Bunning. One of the--
    Mr. Belt. I am sorry. Just one clarification about the 
private sector defined benefit plans. That does not include 
public sector defined benefit plans. That is a whole other 
issue and an even bigger gap.
    Senator Bunning. One of the solutions would be to freeze, 
until made whole. In other words, I ask this question because 
there is usually a 30-year rule that if you start a defined 
benefit plan and you have promised your employees X amount of 
dollars, and you are the corporation, you have 30 years to fund 
that pension. Is that incorrect or correct?
    Mr. Belt. That is one of the funding elements, yes. There 
are 30-year amortization periods under current law.
    Senator Bunning. Obviously, business cycles and many other 
things take hold, particularly those who were funding their 
pensions with their own securities. I know we made some changes 
there, but for a while the only thing that went into a pension 
program, if you were a Procter and Gamble, was Procter & Gamble 
stock, and if the stock went down the company's assets went 
down. The defined benefit program went down, so it was not good 
if you had a down cycle.
    I do not know what United and Delta and Northwest and all 
of these legacy airlines are doing, but I think they started 
out with pension programs that invested in their own stock, or 
that was part of. Would that be a good rule, that you should 
not be able to put your own stock? I mean we have it to a 
certain point now.
    Mr. Belt. There are severe restrictions under current law, 
Senator, on non-cash contributions.
    Senator Bunning. But that is just recent.
    Mr. Belt. It has been in place for a while now. There is a 
process that one can go through, and it is under Title I, and 
the Employee Benefit Security Administration administers that, 
not PBGC, where a company if it wanted to put something other 
than cash into the pension plan, would have to get a prohibited 
transactions exemption from the--
    Senator Bunning. It sure would stop management from over 
promising if there was a shorter period of time for funding. In 
other words, if you had a 7-year window to fund a benefit plan, 
you surely could not go out and promise 50 percent of wages for 
a 20-year, 25-year employee, because you could not possibly 
fund that kind of benefit in a shorter window of 7 years, say, 
rather than 30 years. So there are a lot of little things that 
can be done--and I do not think the administration has covered 
all of them in their proposal--to make whole the employee in 
the future. And for God's sake, we have to change the escape 
clause that the corporations now have of dumping their 
employees on the PBGC in bankruptcy. This Pension Guaranty 
Trust Fund was not ever set up to do what it has been asked to 
do.
    CBO's, the number $450 billion, there is no way, there is 
absolutely no way we will ever get there unless taxpayers foot 
the bill. And with the restrictions on PBGC as far as return, 
maximum return to those people who deserve and have earned 
those benefits, because that was part of their compensation 
package, we are not going to get to that number unless we get 
taxpayers' money involved. Is there any other suggestions that 
we can stop the hemorrhaging? I am asking.
    Mr. Holtz-Eakin. I think a couple of thoughts on it. Number 
one, 450 billion is unlikely to be the number that would show 
up at the PBGC. Our estimates suggest that something more 
modest, $100 billion over the right horizon would be the cost. 
But your general point is well taken.
    Number two, some of that you cannot change. It is a matter 
of picking up the bill one way or another. That is the $23 
billion number for sure. The remainder is--
    Senator Bunning. 23 billion is not going to break the 
Federal Government. 450 billion added on to what we already owe 
just piles debt onto debt.
    Mr. Holtz-Eakin. And the remainder is about improving 
incentives, either for better funding, the funding rule 
changes, or by paying if you do not fund, which is higher 
premiums too, and insure like the PBGC. And your point that 
sometimes you are going to have to fund this and make clear the 
cost of a promise you made to workers, if that is clearer, if 
the transparency is improved, shareholders are going to see the 
nature of that promise as well, and they are going to know that 
that money is going into the pension, not coming back as 
dividends. That will improve incentives as well, so it all fits 
together. There are a variety of things that Congress can do.
    Senator Bunning. Thank you, Mr. Chairman.
    Chairman Gregg. Thank you, Senator.
    Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman. I want to thank 
you for holding this meeting. I think this is one of the most 
critical issues confronting all of the families that we 
represent, and appreciate both of you being here today.
    I want to first just indicate that I think it is important 
to stress what has been said by colleagues, and also with you, 
that we are talking about pensions that are part of wages that 
people have earned throughout their lives. This is about 
creating the American dream, and really creating the middle 
class of America that has been the economic engine for us. You 
work hard, you pay into a pension. You may not take the pay 
increase that you would otherwise. But you are paying into a 
pension, and you are also getting health care. We have a whole 
generation of families now that are counting on this and have 
worked hard for this all their lives. So this is pretty serious 
business, pretty serious discussion we are having--but I think 
we all are interested in knowing how best to address this right 
now.
    I think it is also safe to say, and looking at this CRS 
report, that we are really talking about something that has 
happened just in recent years. In 1996 the PBGC showed a 
surplus for single-employer programs for the first time in its 
history, and it peaked in 2000, and is now, as a result of the 
economy, and this is now saying particularly steel and airline 
industries, we have large deficits. And multi-employers had 
surpluses for 20 years and are now looking at deficits.
    I wish, frankly--hindsight is always 20/20, but I sure wish 
we had been having this discussion three or four years ago, 
frankly. Every year we wait on this has caused deep, deep 
problems for American families and American workers.
    But my question really relates to how we move forward now 
in a way that does not unduly hurt those businesses that are 
already in serious trouble, being pressured on many different 
angles, obviously General Motors in Michigan, and what is 
happening in terms of the auto manufacturers and other 
manufacturers is critical. They did the right thing. They have 
paid their employees well. They provided pensions. They 
provided health care. They have done all that they were asked 
to do in terms of doing the right thing in corporate America.
    And now my concern is that we see, just as they are being 
pressured with high health care costs, exploding health care 
costs, issues of illegal trade practices, both of which I would 
hope we will address together in a bipartisan way because I 
think these are the larger, long-term issues that are pressing 
these companies. But now we are seeing a proposal for a five-
fold increase in premiums, and I understand why.
    But my concern is--and Mr. Belt, I would first ask you. I 
mean how do we shore up the pensions without driving the less 
healthy companies right now into bankruptcy, which I think is a 
serious, serious issue for us right now. Putting the majority 
of the costs, majority of the increases onto those that are 
already struggling with legacy costs, already struggling at the 
ends, seems to me to be placing them in an even more dangerous 
situation for employees, as well as the business.
    Mr. Belt. It is a very good question, Senator. I would make 
a couple of observations in that regard. First, the last thing 
we want to do as a policy matter and the last thing I want to 
do wearing my business hat, I think, as the PBGC, is exacerbate 
the problem or drive the good actors out of the system. The 
defined benefit plans are good things for employees, for 
workers and retirees. We want those to be maintained. If we 
drive people out of the system, that means my revenue base from 
a business standpoint is eroded and that is the last thing we 
want to have happen.
    I think we need to recognize that there is a steady erosion 
under the current law from the defined benefit system. We have 
got to figure out how to stabilize that system and hopefully 
turn the corner. We also have to recognize under current law 
that there are these huge risks, losses have already occurred 
and risks of future losses, and we have not yet solved the 
problem of who pays for those. Under current law it is the 
premium payers. It is the GM and everybody else that sponsors a 
pension plan that are on the hook for the losses of United 
Airlines, US Airways, Wheeling Pitt, LTV, Weirton, PanAm, 
Eastern, et cetera, et cetera. I do not believe that--we had 
this discussion a little bit earlier--that an increase in 
premiums in and of itself is going to require or necessitate a 
systemic exit from the system. Again, relative to the funding 
gaps in the pension plans, that $450 billion in single-employer 
plans, plus another $150 billion in the multi-employer program, 
and the $100 plus billion of exposure we have to companies that 
are non-investment grade, at higher risk of default, that $6.6 
billion of premium increases proposed under the Budget Act is 
fairly modest, as would the $18 billion proposed under the 
administration's budget submission. That was over 5 years.
    Also, even though it is a voluntary system, companies do 
not have the unilateral ability to freeze or exit the system if 
they are covered by a collective bargaining agreement, as you 
well know. That has to be negotiated.
    The consequences of leaving in the status quo flexibility--
some would characterize this as flexibility, I would 
characterize it as loopholes--is that we are going to continue 
to end up with terminated pension plans that are substantially 
underfunded and everybody loses. So we have got to do something 
to address that.
    We believe the administration proposal provides ample 
incentive for companies not only to maintain their pension 
plans, but hopefully create a dynamic such that they can make 
an economically viable decision to start new pension plans. We 
greatly simplify the rules. Plan sponsors have long complained 
about the complexity of the rules, and they are absolutely 
right. They have asked for a permanent corporate bond rate to 
discount their liabilities, rather than the old Treasury rate. 
We are proposing that.
    The earlier point, giving them greater flexibility to fund 
up during good times, they have not really used that much in 
the past. We hope that they will do so in the future, and will 
give them that greater flexibility.
    We also support resolving the issues with respect to cash 
balance plans. Congress needs to address that because if there 
is a future to defined benefit plans it is in hybrid 
structures. There have been issues with respect to conversion 
that need to be addressed, but that type of plan is critically 
important. We believe we have to stop the hemorrhaging, have to 
stop the hole from getting deeper, and the only way to do that 
is through stronger funding rules implemented in a responsible, 
measured way over time. We have proposed 7 years, which is in 
contrast to the 3 to 5 years that some companies have to face 
under current law.
    Senator Stabenow. I appreciate that, and I certainly, as 
you raise the issue of bankruptcy, as well support what you are 
talking about in terms of getting around the ability to move 
into bankruptcy and to be able to move your pension plan into 
the PBGC.
    Just quickly if I might, Mr. Chairman, just one other quick 
question. I am wondering at this point in terms of employees 
and economic impact of employees, when a system moves into the 
PBGC, what is the typical percentage right now of the promised 
pension payment that can be expected by an employee?
    Mr. Belt. The average pension benefit I believe--I am not 
sure we have this data. It is in our data book and I may be 
wrong on this. It is less than $10,000 a year is the average 
pension received under a DB plan by--
    Senator Stabenow. But what percentage now--when you are 
talking about dollar for dollar, how much for every dollar that 
somebody has paid in their pension plan would they expect to be 
able to receive?
    Mr. Belt. It totally depends on the individual and the 
construct of their plan and the benefits that are promised. The 
guarantee covers up to a limit established by Congress, an 
annual benefit of more than $45,000 a year for somebody taking 
an annuity at age 65. So historically the vast majority of 
participants in the system have not been hit by the maximum 
guarantee limit. They have gotten all the benefits that were 
promised under the plan, the basic benefits. That does not mean 
they are not losers when pension plans terminate because they 
are no longer accruing future benefits, and they may lose some 
early retirement subsidies. But in terms of that basic benefit, 
the vast majority of participants have not been impacted by 
that, but there certainly are too many cases in which they 
have.
    Senator Stabenow. Thank you.
    Thank you, Mr. Chairman.
    Chairman Gregg. Now we turn to the man with the magic 
wand--
    [Laughter.]
    Chairman Gregg. --the Chairman of the HELP Committee, 
Senator Enzi, going to straighten all this out.
    Senator Enzi. Thank you, Mr. Chairman. Thank you for 
holding this hearing.
    Director Holtz-Eakin, two months ago, my staff directed a 
fundamental scoring request to CBO, and that was what are the 
savings if we repeal the full funding exemption as it applies 
to the PBGC's variable rate premium? Now, the answer to that 
one question affects all the other decisions that the HELP 
Committee makes in reaching its budget reconciliation 
instruction. Now, I know that dozens of other scoring estimates 
related to pensions have been issued from your office, some of 
them to my staff, many more to other committees. For my 
purposes none of them are as important as the one question that 
we asked 8 weeks ago.
    You do not need to explain why it has taken so long. I only 
want to know when the HELP Committee will get this critical 
question answered?
    Mr. Holtz-Eakin. Knowing it is the most important thing you 
need to know, sir, as fast as we can. Thank you for letting me 
know.
    Senator Enzi. Okay. Thank you. Another question. In your 
testimony you speak of implied Federal guarantees that underlay 
the Federal insurance program of PBGC. You talked of the costs 
of pension failures being borne potentially by taxpayers. We 
can all imagine the scenario where your prophecy would be self-
fulfilling it is mentioned enough.
    I join Senator DeWine, who is the Retirement Security 
Subcommittee Chairman, in asserting that a taxpayer bailout is 
not an option. I know that Chairman Boehnert in the House, and 
I feel certain that Chairman Grassley on the Finance Committee, 
shares that view that a taxpayer bailout is not an option.
    That being said, my question is this: Are you willing to 
assert here today that your prophecy of a taxpayer bailout is a 
certainty based on the budget numbers you have seen and 
considering all other options that are available to us, or are 
you just trying to get people's attention?
    Mr. Holtz-Eakin. Well, certainly not. It is a matter of the 
Congress's decisions. What is certain is that there exists 
large scaled underfunding in defined pension system as a whole, 
that the current rules are such that many of those claims which 
show up at the door of Mr. Belt, and that in the future some of 
those claims will arrive at a door which has no resources 
behind it. And the question then will be: Who pays? Will it be 
the case that it will be the workers and retirees, or will it 
be some other mechanism? But that much we know.
    Senator Enzi. And if Congress takes some action, some 
decisive action, it is possible to avert all of those 
prophesies?
    Mr. Holtz-Eakin. Yes.
    Senator Enzi. Some people are kind of confused with the 
savings & loan bailout that we had before, compared to PBGC. 
And I hope that people are helping to emphasize the fact that 
that was cash that people lost at that point, that that loss 
that they got immediately, as opposed to a pension which is 
over a number, a period of years, as they are supposed to earn 
it. There can still be some similar problems, but it is a much 
longer cash flow problem than the others, and I hope everybody 
will--I will have some questions in writing dealing with that 
one.
    We are working on a fix, and I think it is almost 
historical that the Finance Committee and the HELP Committee 
are working together to come up with a solution. There are kind 
of two ways that we can go. We can start fresh, which some 
people would say would be throwing out the baby with the bath 
water, or we can tinker around the edges. Now, hopefully there 
is a third way that will be a little bit more comprehensive 
than that, but the approach that--this is for Brad Belt--the 
approach that you propose and the administration has proposed 
kind of falls in that first camp, throwing out the existing 
rules and trying something new.
    what are the likely consequences if you are wrong, and the 
dictates of mark to market asset valuations and a near spot 
rate yield curve causes such volatility and unpredictability, 
that the strong plans terminate and the weak plans collapse? 
What happens then?
    Mr. Belt. A couple points in that regard, Senator Enzi. 
First, it is not the administration's proposal that is causing 
any volatility. That risk and volatility is inherent in the 
pension plan itself. It is wholly a function of the business 
and investment decisions made by the company. They are taking 
on that risk and volatility through their decisions. What they 
are asking us to do is pretend it is not there and hide it from 
view. We are simply saying: ``Let us expose that". Companies 
have full ability under current law, and they would have full 
ability under the administration's proposal, including some 
additional incentives, to lower that risk and volatility should 
they choose to do so. If they want to volitionally bear that 
risk and volatility, that is up to them, but let us make sure 
those risks are understood and transparent and priced.
    To the point about whether we would drive them out of the 
system, I have heard that argument made. There are a couple of 
issues in that regard, and I pointed this out in response to 
Senator Stabenow's question. The cost to exit the system for 
all the system stakeholders would be $450 billion. Whether they 
have those resources to be able to do that, to go out and buy 
annuities on behalf of all the participants is another question 
all together, but that is what the cost would be relative to 
what we are saying, which is some additional premiums, a 
measured way to fund up to get to fully funded, and numerous 
incentives, tax-based incentives and otherwise, to be able to 
contribute to their pension plan.
    Senator Enzi. Your argument suggests that all the companies 
ought to just invest in bonds to avoid volatility and I do not 
think that is going to be the answer to it too.
    Could I have just another minute?
    Chairman Gregg. Sure.
    Senator Enzi. I know that there have been some reference 
before to consider smoothing rules to be lies. Are they frauds 
on the American people? I ask these questions because some of 
the rhetoric we are hearing is that unless we throw out the 
current law, try something completely different, that we will 
be attacked as liars and do-nothings. If we do what you are 
asking, we will be attacked as dead set on killing the defined 
benefit system.
    So just so we know where you stand, do you believe that 
tightening the smoothing rules, as we have done in the 
Boehnert-Thomas bill in the House, is tantamount to lying to 
the American people?
    Mr. Belt. We believe, Mr. Chairman, that you need accurate 
measures of assets and liabilities at a point in time, market-
based measures of assets and liabilities. Smoothing is not 
market-based. That is not accurate as of a point in time. That 
is saying what happened three or four years ago is relevant to 
today, but that is not the way that markets work.
    We believe that in order to best protect the benefits 
earned by workers and retirees, as well as best protect the 
American taxpayer, you need to have accurate measures of assets 
and liabilities, market-based measures of assets and 
liabilities, and a meaningful funding target.
    Chairman Gregg. Senator Murray.
    Senator Murray. Thank you very much, Mr. Chairman, for 
holding this really critical hearing. I do have an opening 
statement I would like to submit for the record.
    Chairman Gregg. Of course.
    [The prepared statement of Senator Murray follows:]

    [GRAPHIC] [TIFF OMITTED] T1173.309
    

    Senator Murray. And let me just say off the top that it is 
pretty clear to anybody who reads the newspapers today knows 
that our current set of pension laws and rules do not 
adequately protect the retirement savings of our workers, and I 
believe to protect defined benefit pension plans we do need a 
stronger commitment to greater regulatory oversight of the 
investment service community and those responsible for the 
administration of pension plans across the country.
    I think it is just unrealistic to expect workers to 
adequately be able to protect themselves against reductions in 
benefits for themselves and their families because of the lack 
of timely information about their pensions that is currently 
provided to them, and it just appears to me that the current 
system is sort of stacked against workers and heavily skewed to 
corporations that can play fast and loose with inadequate rules 
and regulations, and I do not think the Federal Government 
ought to condone poor management decisions and pass the costs 
of corporate missteps onto loyal workers and the taxpayers.
    But having said that, I am hearing the numbers that you are 
giving us today and looking at the pension insurance data book 
that was recently released. A serious decline in numbers over 
the last four years, and I am kind of mystified by the fact 
that when you look at this, $38 billion in PBGC losses over the 
last 3 years alone. Why did this agency not face those kinds of 
deficits in the past? You know, from 1985 to 2002 the PBGC had 
a cumulative surplus of over $25 billion. Why was the agency 
able to remain in surplus during those times even when there 
were economic recessions during those times?
    Mr. Belt. I would have to check the records, look at the 
data book. I do not believe we have ever had a surplus of that 
size. I believe our record cumulative surplus was, in about 
2000, a little over $9.7 billion.
    But to the broader point, I think what has happened is that 
we have had pension plans grow substantially in size over the 
last 30 years. Simply the size of the pension plans, both the 
assets and liabilities, is much, much greater than it was. And 
then what you had was, coming into 2000, companies had been 
taking advantage of very robust market returns to avoid putting 
any cash into the pension plans for several years. They were 
able to ride asset gains. That all changed beginning in 2000. 
Asset prices fell by 25 to 30 percent over a 3-year period. 
Interest rates also fell at that point in time, which increased 
the value of the liabilities.
    At the same time, companies were taking advantage of the 
rules--not breaking the rules, simply taking advantage of the 
loopholes in the rules--to in some cases make new benefit 
promises, notwithstanding the fact that they may have been in 
financial difficulty and the funding gap in the pension plan 
was increasing, to take advantage of things like smoothing, 
referred to by Senator Enzi, that hid from view the fact--hid 
from the workers and retirees as well as the markets--the fact 
that this gap was there and growing. And they were also able to 
use mechanisms like credit balances, which pretended that the 
previous value of assets was still there even though these were 
long eroded to avoid making any cash contributions into the 
pension plans. And it was the combination of those factors over 
a 3- or 4-year period that caused not only PBGC's deficit to go 
from $3.6 billion to $23 billion, but the underfunding gap to 
grow so precipitously to $450 billion, and the amount of 
reasonably possible claims to increase from $10 billion to $100 
billion.
    It has just been a fairly dramatic change in a fairly short 
period of time, and what this has really done is disclose the 
problems, the structural problems in the pension rules.
    Senator Murray. The $25 billion that I referred to was 
cumulative over those years, 1985 to 2002. But having listened 
to what you just said, has Congress failed to provide adequate 
oversight during the last 3 years?
    Mr. Belt. The administration proposed and my predecessor 
and then Under Secretary of Treasury as well as the Assistant 
Secretary of Labor proposed in the summer of 2003 many of these 
reforms that we have before us now. We have gone much further, 
and Congress has not yet acted on those. We would hope that the 
Congress would move forward as soon as possible to enact these 
reforms so that the problem does not get even deeper in the 
intervening time.
    Senator Murray. Do you think that Congress should provide 
the PBGC with a stronger enforcement model, maybe something 
like the new and expanded authority that the SEC was given 
under Sarbanes-Oxley?
    Mr. Belt. I am not sure that the Sarbanes-Oxley model 
dealing with governance issues is quite appropriate for the 
PBGC, but there is no question--and we have talked about this 
before--that the PBGC has a limited set of tools available to 
it to enforce the provisions of Title IV. I would just simply 
contrast some of the tools available to the Federal Deposit 
Insurance Corporation, another Federal insurance entity.
    We have used the tool set that we have as aggressively as 
possible and as responsibly as possible to avoid losses and to 
enhance recoveries. But there certainly are limitations, and as 
we noted earlier, we have bumped up against the fact that--the 
positions we take consistent with ERISA are often trumped by 
what happens in the bankruptcy court.
    Senator Murray. Mr. Chairman, if I could ask just one 
really quick question, I have heard from a lot of United 
workers who live in my State who are obviously very, very upset 
about what is happening to their pensions system, especially 
the older flight attendants. Some of them are now saying, ``We 
are going to have to fly until we die.'' They do not believe 
they are ever going to have a pension. I think that is a 
serious concern for all of us.
    But I would like to ask you: Should the PBGC provide 
stronger financial protections for low-wage earners or those 
wage earners who are close to retirement, so if you are 50 and 
you expect to retire in a few years, you have, a much shorter 
amount of time to be able to recover from impacts like this?
    Mr. Belt. That is obviously a policy decision for the 
Congress to make. That is not anything we have current 
authority to do. The only point I would make is that if you 
raise the maximum guarantee limit or you somehow provide a 
mechanism providing additional benefits beyond those 
contemplated by current law, it simply raises the price tag of 
the insurance program. And then the question we have been 
discussing this morning is ultimately who pays for that.
    Senator Murray. Thank you very much, Mr. Chairman. I 
appreciate the hearing.
    Chairman Gregg. Thank you.
    I would like to try to put in context the way I see this 
problem, and tell me where I am wrong. Defined benefit programs 
guarantee a return. They say you are going to get X amount, and 
that is the difference between other programs. A 401(k) you 
invest, and if your investment does well, you get what the 
investment return is; if it does poorly, you get less. A 
defined benefit plan says you are going to get a certain amount 
back. And, therefore, the assets should match to generate that 
return, and it is totally predictable from the standpoint of 
actuarial accounting. And if it were an insurance fund which 
was being monitored by a State and the assets did not match the 
risk of the insurance, which was actuarially predictable, the 
State government would step in and say you, insurance company, 
must correct your fund to match.
    So I sort of look at this issue in that context, and 
looking at it in that context, it seems to me that what we need 
are rules that say, A, that the companies that make promises to 
their employees and the employees who seek those promises 
through collective bargaining negotiations have to be honest 
that the assets are going to match the promises that are going 
to be put into the fund; and that you as the PBGC and the 
Government should have rules which require companies and the 
unions which support the contracts to put those assets in, and 
that the assets should be predictable. And it gets to the point 
that Senator Enzi was making, which is: Is it equities or is it 
bonds? But whatever it is, it should not be speculative and it 
should not be risk based. It should be predictable return on 
assets to match the benefit.
    Where we disconnected was that in the 1990s with the market 
doing so well, many defined benefit plans decided to move into 
the risk business and position themselves like contribution 
plans where because they were getting such a good return on 
their investment and they thought that they could basically 
pursue it that way, rather than effectively matching with 
predictable returns assets which had long-haul return rates 
which would match their benefit structure.
    And so my sense is that as we try to correct this, we have 
got a two-level problem: first, we have to fix what we know is 
the issue, the $23 billion; and, secondly, we have to 
restructure the way companies fund the defined benefit plans 
for the future so that there is transparency, so that people 
know what the benefit is they are going to get, and so that we 
know that there are assets behind those benefits to support 
them which are predictable and have long-term returns.
    Is that an incorrect way to see this issue?
    Mr. Belt. I think it is a very thoughtful and thorough 
analysis, Mr. Chairman, and it is actually a point that Federal 
Reserve Chairman Greenspan made just the other day as well in 
his testimony before the Joint Economic Committee.
    Chairman Gregg. Well, I did not hear that testimony. I wish 
I had. I would not have understood it, anyway.
    [Laughter.]
    Mr. Belt. Congress can decide what limitations it wants to 
put on. I think the important point to note is that there is 
risk. And how is that risk reflected and how is it priced? 
Whether you want to have assets matched against liabilities or 
allow companies the flexibility to take additional risk, as 
long as that risk is understood, transparent, and priced, may 
be the appropriate policy tradeoff. You can dictate or you can 
allow flexibility, but understand that if you are 100 percent 
funded but you are taking a lot of risk, there is risk there. 
You may not be 100 percent funded the next day. Unless you 
adopt--
    Chairman Gregg. The employee needs to understand that. I 
mean, they need to understand if that is the type of defined 
benefit plan they have negotiated or joined, they may get 
nothing at the end of the day if that is going to be a risk-
based plan as versus a traditional defined benefit plan, which 
gives them a guaranteed return with guaranteed assets 
underneath it that support that, right?
    Mr. Holtz-Eakin. And the mirror side of that is the 
employer needs to appropriately reflect that risk in their 
decisionmaking. And you can either hedge the risk internally, 
your strategy, or you could pay for that risk, either 
internally by overfunding the plan so that if things go bad, it 
is there, and the shareholders have given up those dividends 
and they are in the pension plan; or you can pay Mr. Belt more 
for the insurance, but you reflect the price of that risk 
somewhere in the decisionmaking.
    Chairman Gregg. What we need is a set of rules that 
accomplish that, and we do not have them right now.
    Mr. Belt. It is interesting how, if you talk to any CFO of 
any industrial company, they are making these kinds of 
decisions every day with respect to raw materials, prices, 
currencies, and other things. They are making a decision: Do I 
want to stay exposed to price changes next year, 2 years down 
the road, or do I want to hedge those risks today? That is an 
issue that the airlines are facing with respect to fuel cost. 
Southwest, the reason it is doing relatively better than its 
brethren, is it hedged its fuel price cost. It decided it did 
not want to see what prices were going to be down the road. It 
said, ``I want to lock those in today.''
    You have the ability to do the same thing with respect to 
pensions.
    Chairman Gregg. Thank you.
    Senator Conrad, did you have any further questions?
    Senator Conrad. I do. Just briefly, if I can, Mr. Chairman.
    Chairman Gregg. Yes.
    Senator Conrad. I want to go back to this credit balance 
problem because it really is stunning when I look at what has 
happened. Mr. Belt, you said in your testimony, ``Funding rules 
allow companies with unfunded pension liabilities to take 
funding holidays or reduce their required contributions. Under 
current law, companies can build up a credit balance by 
contributing more than the minimum required or by favorable 
investment performance of pension assets. They can then treat 
the credit balance as an offset to the funding requirement for 
the current year. This allows a plan to take a contribution 
holiday without regard to whether the additional contributions 
have earned the assumed rate of interest or have instead lost 
money in a down market, and regardless of the current funded 
status of the plan.''
    You go on to say, ``The result is some sponsors are able to 
avoid making any contributions to plans that may be hundreds of 
millions or even billions of dollars underfunded.'' And you 
then cite a GAO study: ``On average, 62 percent of the 100 
largest plans each year received no cash contributions, 
including 41 percent of plans that were underfunded.''
    Why, you talk about an absolutely bizarre system, this is 
it. You talk about a system designed to fail, this is it.
    Bethlehem Steel made no contributions to its plan for the 3 
years immediately preceding plan termination. US Airways made 
no contributions for the 4 years immediately before 
termination.
    First of all, Mr. Belt, thank you for providing this in 
your testimony. Second, what do we do to stop this charade? 
What an absolutely bizarre system that allows people to not 
make contributions when they are substantially underfunded 
based on some notion of a credit balance that has no connection 
to reality. What is your sense of how we stop that?
    Mr. Belt. Enact the administration's proposal, which would 
do away with credit balances. But if I may make one additional 
point in that regard, the critics of the administration's 
proposal to eliminate credit balances will argue that if you do 
not allow credit balances, they have no incentive to put in 
more than the minimum.
    Senator Conrad. And that was the notion of credit balances 
to begin with, that this was going to incentivize companies to 
make additional contributions.
    Mr. Belt. That is correct.
    Senator Conrad. What went wrong?
    Mr. Belt. Well, multiple problems, but they took advantage 
of the situation to avoid putting in cash when it was most 
needed. We believe there are ample incentives under the 
administration's proposal to put in more than the minimum. 
Number one, you shorten that 7-year amortization period. Just 
like when you make an extra contribution when you are paying 
your mortgage, the mortgage lender does not allow you to skip 
next month's payment. It shortens the 30 years.
    Secondly, dollar for dollar under the administration's 
proposal, you would reduce the amount of variable rate premium 
you would have to pay since it is tied to underfunding. The 
more you fund up, the lower the funding gap, the less you would 
pay in premiums.
    And, third, we provide, again, as we talked about before, a 
substantial additional tax incentive relative to current law to 
fund up your pension plan beyond the minimum because you get to 
shelter current income.
    So we believe that there are substantial incentives in 
place, apart from the question of whether any incentive should 
be needed to prudently fund the pension plan.
    Senator Conrad. Dr. Holtz-Eakin, Director Holtz-Eakin--both 
apply--what is your reaction to what you have just heard here 
with respect to this credit balance circumstance, the 
administration's recommendation, anything that CBO can add to 
this discussion or understanding?
    Mr. Holtz-Eakin. This is one of a whole series of issues 
that comes under what we hope to cover under pricing things to 
market. Revealing the market value of the assets and the 
liabilities is very important. I know there is concern about 
volatility when one does that, but I think it is important to 
distinguish between the volatility in those assets and the 
volatility that any premium payments might have as a result.
    In a homeowner's policy, there is a lot of volatility. The 
house is either there or burned down. That does not mean the 
premiums are $100,000 or zero. So what you want to do is 
reflect the value of the assets and show the status of the 
plan, and then have a premium stream that reflects the risks 
associated with that. And there could be quite stable. But this 
is part of really reflecting the valuation in the assets.
    Senator Conrad. Thank you.
    Chairman Gregg. Senator Enzi, did you have any follow-up 
questions?
    Senator Enzi. Thank you, Mr. Chairman. I really appreciate 
the brief summary that you gave on how all this works.
    Chairman Gregg. I did not understand it.
    [Laughter.]
    Senator Enzi. Oh, I think you did. One of the things that 
happens with investments, yes, executives do make decisions on 
a daily basis on what is going to happen in all of the markets 
that they deal in. Some of the markets are more predictable 
than the investment market. And if they go into just a system 
of bonds, they know that that is a very limited return. And the 
market has been extremely good in other investments, and 
everybody changed to other investments instead of bonds and 
were considered pretty stupid if they stayed just with bonds. 
Now, bonds are predictable, but I think they made normal 
business decisions based on those investments, and those 
investments paid off for a long time. They were generating 
enough revenue in additional value that kept the fund solvent. 
That is why people did not make additional contributions to the 
plans. They were showing, at least on paper, a sufficient 
return that they were funding their plans well and were pleased 
that they were able to do that, and that also allows them to 
put some of their other assets into productive things within 
the business so that the business can continue to expand and 
grow and pay the kind of dividends that will make people want 
to invest in their business.
    I asked about the smoothing earlier, and I am still 
concerned about the fact that if we eliminate all of the 
smoothing, the strong plans will terminate and the weak plans 
will collapse. And I think it is a lot of weak plans that make 
up that $450 billion that we are talking about. Not all, but a 
lot of that.
    So can't smoothing also provide a transition between two 
asset values as we go from one system to virtually a brand-new 
system, Mr. Belt?
    Mr. Belt. Senator Enzi, I would distinguish between what I 
characterize as the inputs, understanding the value of assets 
and liabilities, versus your contribution requirements, the 
outputs. If the concern is about contributions maybe bouncing 
around because of what is happening on the asset and liability 
side and you do not want to impose any strictures on how you 
invest assets, let's just understand what the risks are. Let's 
understand what the value, the market-based value, of assets 
and liabilities is at any given point in time. If you want to 
put some Governors on the contribution side, that is, the 
contributions requirements may not spike by 100 or 200 percent 
in a given year, I think that is a reasonable discussion or 
conversation to have.
    What I would find troubling is to look back in time and say 
that the market and economic conditions that existed 2, 3, or 4 
years ago are at all relevant to where we are today in the 
decisions that need to be made in the future. So that is why we 
feel very strongly that you need to price assets and 
liabilities on a current market basis; otherwise, you are just 
simply not going to have an understanding of what the risks are 
in the system and how to deal with those appropriately on a go-
forward basis.
    Senator Enzi. Thank you. I will shift gears here pretty 
quickly. Dr. Holtz-Eakin, could you discuss how CBO scores 
premium increases? Your previous testimony indicates that the 
administration's proposal to raise the fixed-rate premium per 
participant from $19 to $30 per year within indexing would 
reduce 10-year economic costs by $3 billion. However, 
preliminary scores from various policy options my staff have 
requested from CBO saves money over 5 years, but actually 
reflect a cost in years 5 through 10. Can you give a little 
explanation?
    Mr. Holtz-Eakin. There are two different conceptual bases 
for those calculations. One are the scores that you receive 
from the CBO for purposes of marking up legislation. They are 
done on a traditional cash flow budget basis, and those are 
distinct from the economic valuations that we presented today 
for the kinds of pricing of overall markets risks and exposure 
to pension underfunding that are really underneath our 
financial market writing a check for pension insurance. Those 
are conceptually different, and they are numerically different 
as a result. And everything that you will get for your 
committee will be traditional budget scoring, absent market 
risk, done on a cash flow basis.
    Senator Enzi. Thank you. My time is up.
    Chairman Gregg. Senator Byrd, you have been very patient.
    Senator Byrd. Well, thank you, Mr. Chairman. I want to 
thank you for conducting this hearing. It is obvious from the 
questions that have been asked there are great concerns here, 
and I want to thank our two witnesses for their very helpful 
responses.
    If I may very briefly ask a question, I think about the 50-
year-old steelworker who has earned a pension that was supposed 
to pay $3,600 a month, and when his company filed for 
bankruptcy, that worker was forced to accept a $1,200-per-month 
pension, one-third of what that worker had expected. And these 
workers--we have plenty of them who are in this kind of 
situation--as well as their families and communities, pay a 
terrible price when their companies shed their pension 
obligations.
    What additional protections should the Congress consider to 
further protect those workers whose pensions are assumed by the 
PBGC? And, furthermore, what happens if those reforms do not 
work?
    Mr. Belt. Senator Byrd, the administration believes that 
promises made to workers should be promises kept, so we want to 
make sure that we have a funding and premium and transparency 
regime in place that makes sure that there are sufficient 
assets in the pension plan to cover the liabilities so you do 
not get to the point where there is this risk of losing hard-
earned benefits. That is not acceptable.
    And if there are issues with respect to the health of the 
financial sponsor or the pension plans, it is important that 
workers and retirees, that investors in the company, and 
regulators have information, relevant, timely information on a 
market basis so we understand those risks. Ultimately it is a 
question of tradeoffs. And I think Dr. Holtz-Eakin has outlined 
extraordinarily well the policy tradeoffs, the choices facing 
Congress. Who pays for the promises when these promises are not 
kept? We believe that the starting point is let's strengthen 
the funding rules, let's make sure that there are sufficient 
assets in there to cover the liabilities so we do not have 
these problems because, otherwise, you have workers and 
retirees losing benefits. Responsible companies that have 
honored their promises are on the hook, and the taxpayer may be 
on the hook. We do not want that to happen. As I indicated in 
my oral statement, we think that is the best insurance policy 
for everybody.
    Senator Byrd. What happens if your reforms do not work? 
What happens if the company leaves the system? What is the 
safety mechanism for workers?
    Mr. Belt. Hopefully the company will honor its pension 
promises to workers and maintain its pension plan, in which 
case if they maintain the pension plan, then workers are 
receiving all the benefits that were promised to them. When 
PBGC assumes responsibility for a pension plan, under current 
law we are required, as established by Congress, to impose a 
maximum limit on guaranteed benefits, and that is $45,000 a 
year for somebody retiring at age 65, just like in Social 
Security; if you retire earlier than then, your benefits are 
actuarially adjusted downward, if you are still under 65 when 
the plan terminates.
    So there is no question that in some cases workers in the 
steel industry, in particular, have retired at an earlier point 
in time, and that actuarial reduction downward from age 65 down 
to age 50 is dramatic. That is the law that is currently in 
place.
    If it were otherwise, if you paid them all the benefits 
they had accrued and did not have the actuarial cutback, which 
would be a policy change Congress could put in place, it should 
be noted that the $23 billion hole would not be $23 billion. It 
would be much, much greater than that, and ultimately it does 
come back to the question who pays for that.
    Senator Byrd. What safety measures should the Congress 
consider to further protect workers' pensions in such 
circumstances--circumstances in which the companies are forced 
to contribute more to their pensions and businesses as a result 
decide to shed their pension obligations in bankruptcy or 
through other means?
    Mr. Belt. Senator, I can only go back to the earlier point, 
which is let's make sure that we have strong, robust funding 
rules in place. Let's make sure we have transparency throughout 
the system so everybody understands what the costs and risks 
are at any point in time, and let's have a premium structure in 
place that encourages good behavior, discourages risky 
behavior. And we believe that adopting those core principles, 
we will get to where we need to be, that is, protecting the 
benefits that have been earned by workers and retirees.
    Senator Byrd. Thank you, Mr. Belt. I think you have been a 
very fine witness. And thank you, Dr. Holtz-Eakin.
    Thank you again, Mr. Chairman.
    Chairman Gregg. Thank you, Senator.
    We thank you very much, gentlemen. I found this extremely 
informative, and I know that Senator Enzi intends to 
aggressively pursue reform in this area, and I certainly 
appreciate the Chairman's participation in this hearing. And we 
look forward to working with you to try to make sure the reform 
accomplishes the goals that you have outlined, which is that 
fewer pension funds end up in your account, Mr. Belt, and that 
workers who have worked hard get their pensions.
    Thank you, and the committee is adjourned.
    [Whereupon, at 11:58 a.m., the committee was adjourned.]

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 Responses to Senator Bunning's Written Questions for Douglas 
                          Holtz-Eakin

    Question 1.
    With the recent upswing in the economy, the markets have 
been recovering to some degree. How will this recovery affect 
plan underfunding levels?

    Answer. Given the heavy investment in equities by many 
pension plans, a rising stock market will reduce underfunding. 
However, the substantial allocation of fund assets to stocks 
also means increased underfunding when the markets fall.

    Question 2.
    One proposal of the Administration and the PBGC is an 
increase in premium payments. Has anyone tried to determine if, 
and if so, how many, companies might drop their pension plans 
altogether if those premium increases go into effect?

    Answer. Although it is extremely difficult to predict how 
sponsors might react to changes in premiums, the proposed 
change in the fixed premium from $19 to $30 per participant per 
year would increase pension labor costs by less than 1 cent per 
hour worked. Changes of that magnitude seem unlikely to affect 
the decision to retain or drop a pension plan. Increases in the 
variable-rate premium, however, could be quite costly for plans 
that are underfunded.

    Question 3.
    The current budget resolution calls for approximately $6 to 
$7 billion in savings from the PBGC. What mix of policy 
proposals do you think can be implemented and that the market 
can absorb in the next five years to meet this target?

    Answer. CBO estimates that higher premiums, a limit on the 
share of pension plan investments allocated to equities (rather 
than bonds), accelerated correction of underfunding, and a 
reduction in the discount rate used to calculate pension 
liabilities could produce that level of savings.

    Question. While $7 billion is not enough to meet the PBGC 
deficit, do you believe it will buy more time for the Congress 
to act? Or, have we already reached the tipping point where 
much more dramatic changes are required?

    Answer.  PBGC's shortfall consists of an accumulated 
deficit (about $23 billion) and prospective net costs over the 
next 10 years that are more than double that amount. 
Prospective net costs are potentially avoidable through changes 
in the terms of the insurance. Thus, urgency is more likely 
warranted on the basis of avoiding losses rather than the 
threat of a collapse of the defined-benefit insurance system.

    Question 4.
    To what extent do you believe underfunded pensions are 
product of the weak stock market of the past few years?
    Answer. The decline in the stock market played a 
significant role in the rise of underfunding in defined-benefit 
pension plans. However, so long as pensions plans are heabily 
invested in equities, the system will continue to be vulnerable 
to market disturbances. Stock market declines and bankruptcies 
by sponsors tend to occur at the same time in response to the 
same economic changes. Thus, PBGC is likely to see an increase 
in plan termination precisely when underfunding is most 
prevalent.

    Question. Do you think that as the stock market continues 
to recover, we will see a decrease in the number of underfunded 
pensions insured by PBGC?

    Answer. Yes. But future declines in the stock market are 
also likely. A continuously rising stock market is not a 
reliable solution to the financial difficulties of the defined-
benefit pension system.

    Question 5
    I understand that the CBO recently made projections about 
the possible deficit of the PBGC in 10 and 20 years.

    Answer. To clarify, CBO's projections of the net costs of 
federal pension insurance are not projections of PBGC's 
deficit. Rather they are measures of the estimated market price 
to insure all covered benefits of currently operating plans 
under current premium and funding rules over a specified 
period. The estimates do not correspond to a projected deficit 
for PBGC because the agency does not purchase insurance at 
market prices.

    Question. Can you tell us what assumptions went into that 
estimate of a $71 billion deficit over the next 10 years?

    Answer. CBO's projections require numerous technical and 
economic assumptions. Most of those are described in detail in 
the CBO paper The Risk Exposure of the Pension Benefit Guaranty 
Corporation (September 2005).

    Question. How did you determine which plans you thought the 
PBGC might take over?

    Answer. CBO projects the bankruptcy probabilities of 
sponsors of defined-benefit pension plans. CBO assumed that 
PBGC would take over all plans of bankrupt sponsors.

    Question. How can you make accurate predication with so 
many unknowns?

    Answer. CBO attempts to project the most likely direction 
of change in costs under current policy rather than a precisely 
accurate prediction. Nonetheless, CBO has subjected the 
estimates to a variety of checks for robustness. For example, 
the agency's projections of bankruptcies by sponsors are 
consistent with historical failure rates for firms of each 
major credit rating.
Responses to Senator Bunning's Written Questions for Bradley D. Belt

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HEALTH INFORMATION TECHNOLOGY: THE FEDERAL ROLE AND BUDGET IMPLICATIONS

                              ----------                              


                        WEDNESDAY, JULY 20, 2005

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m., in room 
SD-628, Dirksen Senate Office Building, Hon. Judd Gregg, 
chairman of the committee, presiding.
    Present: Senators Gregg, Allard, Enzi, Ensign, Conrad, 
Murray, and Stabenow.
    Staff present: Scott B. Gudes, Majority Staff Director; and 
Mary Ann Naylor, Staff Director.

            OPENING STATEMENT OF CHAIRMAN JUDD GREGG

    Chairman Gregg. We will convene the hearing of the Senate 
Budget Committee.
    We are honored today to have joining us the Secretary of 
Health and Human Services. The Secretary has a long and 
extraordinary career of public service, as we all know, and has 
focused the Department on a lot of critical issues to our 
Nation, but none more critical than delivering better health 
care, and as part of that exercise, of course, the issue of how 
the health care delivery system of our country uses its 
information is critical, and especially information technology.
    Information technology has been discussed at a variety of 
different hearings that we have held, and has been discussed at 
considerable length in a number of different arenas, received a 
lot of attention from the President of the United States, and 
also during the Presidential campaign. It is I think generally 
admitted, agreed to, that if we do a better job of developing 
and managing information, using technology, that we can 
significantly reduce the overhead cost of the health care 
community and delivery of health care.
    There have been representations that up to 20 percent of 
the overhead of the health care community could be dramatically 
reduced if we were able to get better technology in place. We 
know that during the campaign Senator Kerry was fond of using 
the example of how he would go to have his car fixed, and be 
able to go to any number of dealerships and have the 
dealerships call up the history of his car and what the 
problems were and have an instant response, and yet when he 
went in to get health care he had to fill out a bunch of paper 
forms and nobody knew what his history was. In other words, it 
would have been much easier to have people carry around a 
credit card with their information on it. That is just one 
example of how technology could significantly impact health 
care.
    So we are looking forward to hearing from the Secretary 
today as to the advances that the Department has been making in 
the area of bringing the health delivery system into the 21st 
century relative to technology and the application of 
technology, and we appreciate he has taken the time to come 
testify.
    I would turn to the ranking member of the committee, 
Senator Conrad.

        OPENING STATEMENT OF RANKING MEMBER KENT CONRAD

    Senator Conrad. Thank you, Mr. Chairman.
    Thank the Secretary very much for being here. This is a 
critically important subject.
    Back in the 1990's I co-founded the Telehealth Caucus here 
in the Senate. We have been very active ever since, and we have 
also focused on the whole question of information technology 
and the opportunities that presents.
    I would like to just go through a couple of slides quickly, 
kind of setting the context for this discussion if we can, and 
then have a chance to hear from the Secretary.

[GRAPHIC] [TIFF OMITTED] 22429.042


    This is what is happening to health care expenditures in 
the United States. They continue to rise. We are now, last 
year, 15.4 percent of gross domestic product, by far the 
biggest percentage of our national income going to health care 
of any of the industrialized countries.

[GRAPHIC] [TIFF OMITTED] 22429.043


    This is what the chairman and I are, I think it is fair to 
say, most concerned about, and that is the trend line for 
Medicare and Medicaid expenditures. As we see going forward--we 
are looking out to 2050--and the long-term outlook according to 
the head of the Congressional Budget Office, according to the 
head of the General Accounting Office, we are headed for a 
circumstance, if current tend lines continue--and I want to 
emphasize that--we would be spending 21 percent of GDP just on 
two programs. That is more now than we spend on the total of 
the Federal Government. This is the enormous challenge that we 
face.

[GRAPHIC] [TIFF OMITTED] 22429.044


    This to me is one of the things that requires us to focus 
like a laser. 6 percent of beneficiaries are using 51 percent 
of the money. At times it has been 5 percent using 50 percent 
of the money. And who are they? They are the chronically ill. 
They are people who have multiple conditions, and that is what 
presents us, I believe, with our biggest opportunity. This is 
where we can get the biggest bang for the buck in terms of 
savings for Medicare and Medicaid. It is also the place where 
we can most dramatically improve health care outcomes. So I 
think we really need to rivet our attention on this statistic 
and the reality of people's lives behind those statistics, 
chronically ill, people who have multiple conditions. Their 
care is not being well coordinated now. As a result, they are 
subjected to multiple tests. They are also taking many too many 
prescription drugs, many times actually making them less 
healthy rather than more healthy.

[GRAPHIC] [TIFF OMITTED] 22429.045


    The administration's framework for IT infrastructure 
emphasizes electronic health records, computerized treatment 
options and best practices easily accessed by doctors, 
computerized health assessment and treatment recommendations 
from doctors, electronic health information, patient data 
exchange. I think the administration has been quite right to 
focus on those areas of opportunity.
    As I have talked to health care providers around the 
country, as I have talked to people running major health care 
companies, they tell me they think there is an enormous cost 
multiplier here, cost savings multiplier, by using best 
practices, and it is simply not happening. There are huge 
management opportunities, places where we can save substantial 
sums of money and improve the efficiency of health care.

[GRAPHIC] [TIFF OMITTED] 22429.046


    What are the benefits of information technology and health? 
Reduction in medical errors. We have just seen a national 
survey on medical errors, really quite stunning, the number of 
errors that are occurring in some of our very best facilities. 
And we all know how it happens, you know, charts that cannot be 
read, charts that are not available at the key location at the 
right time.
    Improvement in access to health care, improvement in 
coordination of care. And I want to emphasize the last one if I 
can, improvement in coordination of care. I have said this to 
my colleagues many times. I will say it again. I truly believe 
one of the biggest opportunities we have is with the small 
percentage of those who are eligible for Medicare and Medicaid, 
roughly over time 5 percent who use 50 percent of the money. We 
need to better coordinate their care.
    We did a pilot with some 21,000 patients, and we found out, 
when we put a nurse practitioner in every one of their cases, 
first thing they did was go into their homes, lay out all the 
prescription drugs they were taking. All too often they found 
they were taking 16 or 17 prescription drugs, and half of them 
they should not have been taking.
    It happened with my own father-in-law. I went into his 
house, laid out all the prescriptions he was taking. He was 
taking 16. I got on the phone to the doctor. I went down the 
list. About the third drug I mentioned, he said, ``My God, 
Kent, he should not be taking that. He should not have been 
taking that the last 3 years.'' I went further down the list, 
and with two drugs he was taking, he said, ``He should never 
take those drugs together.'' I said, ``Well, doctor, how does 
this happen?'' He said, ``It is very easy how it happens. He 
has a lung specialist, a heart specialist, he has an orthopedic 
doctor. He has me as his family practice doctor. He is getting 
medications at the hospital pharmacy, at the corner pharmacy, 
at the pharmacy down at the beach, mail order several 
pharmacies. Nobody is coordinating it.''
    Chairman Gregg. He was probably buying in Canada.
    Senator Conrad. He probably was. The problem was nobody is 
coordinating. He was sick and confused. His wife was sick and 
confused, and that is how it happens. We have to do a better 
job of making certain that this care gets coordinated because 
we will get better health care outcomes and we will save money.
    With that, I thank the Chair.
    Chairman Gregg. Thank you, and your points are absolutely 
well taken, and we look forward to the Secretary telling us how 
we are going to make some progress in this area.
    We turn to the Secretary for a statement.

STATEMENT OF HON. MICHAEL O. LEAVITT, SECRETARY, DEPARTMENT OF 
                   HEALTH AND HUMAN SERVICES

    Secretary Leavitt. Thank you, Mr. Chairman, and also, Mr. 
Conrad, thank you members of the committee.
    My prepared opening statement is somewhat redundant to what 
has been said, and so I would just like to submit it for the 
record and just reemphasize a couple of points if that would be 
permissible.
    Chairman Gregg. Whatever was you want to approach it.
    Secretary Leavitt. That is what I would like to do.
    What I have heard you say basically between the two of you 
is that this is really about lower cost, it is about fewer 
medical mistakes, it is about better care, it is about patients 
having less hassle in addition to it.
    I would just add one more to the list, and that would be it 
is about having a more secure Nation as well. There are quite 
profound implications with respect to our preparation for 
bioterrorism events as well as pandemic events that we are now 
working to prepare ourselves for as a country.
    Senator Conrad mentioned the need for laser focus. I would 
like to suggest that the place for our laser focus is on 
interoperability of systems. We do have to deal with the issue 
of how we provide access of adoption among the broad medical 
community. That is clearly part of the discussion. But until we 
have developed a means of being able to allow our systems to 
speak together, to talk, to be interconnected, we will not get 
the profound benefit that is available.
    Another point I would make is that we have now in place a 
very clear strategy to achieve interoperability. We have 
deployed recently the American Health Information Community. I 
would like to describe for you what our strategy is in simple 
terms. The national Government agencies, the programs that you 
referenced, as well as some others, if you take Medicare, 
Medicaid, the Veterans Administration, DOD, the Indian Health 
Service and, if you add the Medicaid component in the States, 
among that group, we fund publicly about 46 percent of all 
health care in this country.
    Our strategy is very simple. Let us bring together all of 
the Federal agencies and have them begin operating with a set 
of common standards, recognizing that we will move the market 
when we do that. We have gone to the private sector and said, 
``We need you to help us develop these standards.'' Over the 
course of the next several months we will develop the 
standards, and believe at that point in time, once the 
standards are in place for interoperability, we will begin to 
see quite profound progress and some specific breakthrough 
projects.
    I can see a time where the medical clipboard will be a 
thing of the past. When you walk into a clinic, the first thing 
they hand you is a clipboard, and over and over and over again, 
you fill out the same information. The whole idea of medical 
mistakes--we have all had experiences with this--we can 
eliminate them.
    I would also like to just add that many of the other issues 
that we deal with together will be affected by this. The 
profound growth of Medicaid and Medicare will not ultimately be 
stemmed until we are able to get controlled health care costs, 
and information costs are a major part of it. The whole idea of 
physicians' reimbursement is an issue that we will, I am sure, 
talk about today, one that is of great concern to the medical 
community. A big part of that, in my judgment, is the capacity 
to begin paying physicians and providers on the basis of their 
performance and their outcomes as opposed to just treatment. 
All of this is about a major shift from treatment to health.
    One of the concerns I mentioned earlier--I will just 
highlight it--is bioterrorism. Currently, as we exercise on 
bioterrorism events, it becomes quite evident that a 
significant problem in the early part of any incident is 
determining if an incident has occurred, how broadly it has 
occurred, and what it is.
    One of the early benefits of an interoperable health IT 
system will be linking together emergency rooms so that we have 
information very early in those incidents to determine where 
they are. The same will be true for pandemics.
    If I could make one direct appeal to you today, it would 
be, as this committee deals with this issue, that we recognize 
that the important laser focus has to be on achieving 
interoperability. Yes, we need to deal with adoption, and we 
will, but until we have achieved those standards, dramatic 
expenditures on health information technology will not achieve, 
in and of itself, the vision that I have heard many of you 
espouse.
    [The prepared statement of Secretary Leavitt follows:]

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    That concludes my opening statement, Mr. Chairman.
    Chairman Gregg. Thank you very much, Mr. Secretary. We have 
this issue of interoperability at a lot of different levels in 
the area of homeland security. We cannot get the State police 
to talk to the local city police in most of our States in this 
country. So I guess my question is, how do you get over this? I 
was talking to the head of my largest hospital, not my largest, 
but one of my larger hospitals, just so he is not designated. 
And they do a lot of things. They have a long-term care 
facility. They have a heart center. They have a cancer center. 
They have a center for battered women. And he was saying that 
one of his biggest problems is that his computer systems within 
his own hospital cannot communicate with each other.
    So how do you ever--when we cannot even get the police to 
agree on a bandwidth to deal with spectrum, how do we get the 
health community, which is a matrix of incredible complexity, 
to come up with simple protocols to allow, for example, a 
single way to develop pharmaceutical requests or a single way 
to present the basic health care information that everybody has 
such as blood type? How do we do that?
    Secretary Leavitt. Senator, let me just indicate I have 
experienced the difficulty that you reference with respect to 
bandwidth. While I was Governor of Utah, we were preparing for 
the Olympics. We had 7 years to prepare to get our radio 
communications to all be on the same system. It took us all 7 
years to get there. World War II was fought in half that time. 
We can do better, and we have to do better on this subject.
    Here is our strategy. We recognize that it is going to 
require--we recognize this is a place for some Federal 
leadership. Between Medicare, Medicaid, Indian Health Service, 
VA, DOD, we pay for about 35 percent of all health care in the 
country. If you add State Medicaid and other Government 
programs, we are 46 percent of the market. So the strategy is, 
step one, to in essence bring all of the Federal programs 
together and say we are going to adopt standards of 
interoperability.
    Chairman Gregg. Can I interrupt? For example, are you going 
to have a standard that every doctor who executes a 
prescription under Medicare or in the veterans facilities or in 
an Indian health facility, that prescription has to be typed 
out as versus being handwritten?
    Secretary Leavitt. We are moving toward an e-prescribing 
standard. We are not going so far as to say every one of them 
has to be handled that way. We are using it in a more voluntary 
adoption basis, but very shortly, we will put forward e-
prescribing standards that will allow the systems of various 
medical providers to integrate so that there is a tremendous 
advantage.
    Over time it will I am sure create lots of incentives for 
people to do that. So the answer is that is precisely the 
direction we are following, and it is a good example.
    If we can bring together the VA, the DOD, Medicaid, 
Medicare, and say, ``Here are the standards we are going to 
adopt, and in time we are going to expect all who do business 
with us to adopt the same interoperable standards.'' We know we 
will move the market.
    We want to do it in the proper way, so we have invited the 
vendors, the medical providers, the entire private sector by 
saying, ``Help us develop these standards.'' We are moving in a 
rapid way now to develop standards that will ultimately be 
deployed both in public but also then in private settings.
    Chairman Gregg. A secondary issue here is that as you move 
to these standards you get into questions of sharing patient 
information, and error information within hospitals, and 
physician delivery systems. Now, we, last year, passed 
something called the Patient Safety Act. It has passed Senator 
Enzi's committee already, and the House, I understand is 
actually going to mark it up this year--they stopped it last 
year. But do we not have to have some sort of an understanding 
of protocol, an understanding so that this information, when we 
create these data bases that are going to try to be universal 
and address issues like errors, are protected from being abused 
or used overly aggressively so that there is a chilling effect 
on them by the trial bar.
    Secretary Leavitt. Confidentiality, privacy, and security 
need to be first principles of this effort. Those are problems 
we are dealing with in many aspects of our society, but in no 
place is it more sensitive than it is with information, with 
health information technology.
    HIPAA was an important step forward with respect to health 
information. The Congress provided that States could have more 
stringent standards. We now have more than 30 States who have 
adopted different standards. So one of the elements of creating 
interoperability is not just the technical aspect of being able 
to get the computers to talk together, it is getting the people 
to work together too by harmonizing the standards and having 
ways in which we can accommodate all of those different 
standards of privacy. So you are absolutely correct.
    And, we have recently put out an RFP, inviting the States 
to help us find the differences so we can harmonize in that 
effort. It is a first priority.
    Chairman Gregg. Senator Conrad?
    Senator Conrad. In this area you want us to focus like a 
laser on, interoperability, I have had legislation that would 
create what we would call a National Emergency Telemedical 
Communications Act, and it would provide $150 million for three 
State consortia to set up networks that could connect CDC in an 
interoperable way with major hospitals and major clinics, and 
law enforcement. So that if we, God forbid, had a bioterrorism 
event, we would have a communications network that has been 
tested and vetted and was interoperable.
    I would hope very much that the administration would 
support that legislation, or comparable legislation. The 
important thing here is that we really go down this trail and 
go down it quickly.
    One of the things we learned on September 11th, if you go 
back and look at the analysis of what happened at the Pentagon, 
the No. 1 problem was the lack of interoperability of 
communications. So the first responders--and the Chairman had 
it just right--they could not talk to each other. You had 
police, you had medical, you had those who were to deal with 
hazardous toxic situations, all responding, fire as well. They 
could not talk to each other. It created a massive confusion.
    It seems to me the way to address this is to begin with 
manageable sized groups and link them, and put the money into 
running tests. The reason we came up with the idea of having 
three different consortia was to test different methods, put 
them in competition. I think that is what we ought to do with 
all these things, test and compete. And that was the idea here. 
Let three groups go out there and test systems and compete 
against each other, and see which one works best before we try 
to lay it out nationally.
    I think every time we have gone and tried to lay something 
out nationally without testing it, we have wasted a lot of 
money. So I hope very much that we will pursue that.
    I also wanted to ask you very specifically, as we try to 
focus on this question, do you have some other idea of how to 
actually create networks that are interoperable, that test the 
theory?
    Secretary Leavitt. Senator, we are currently engaged in a 
project we call BioSense. We have identified the 36 most 
sensitive cities from a bioterrorism standpoint, where we 
believe the risks are the highest. We are beginning to work, I 
might add, aggressively to link up what I believe are 421 
emergency rooms, starting with development of standards of 
interoperability. One of the dilemmas of interoperability is 
not just, as I indicated, finding ways to hook up the wires. We 
have to learn to define things in the same way. The glossary of 
terms that we use to describe things has to be similar. We will 
have a number of hospitals linked this year for trial. We 
expect to have dramatically more the next year, and it is our 
ambition, in a relatively short timeframe, to have all 36 major 
cities and all 400 plus emergency rooms operating on an 
interoperable basis.
    This not only has value in terms of our near-term 
bioterrorism needs, it is also driving the decisions that need 
to be made that can be used in e-prescribing and could be used 
in an electronic medical record. Once we have established the 
basic decisions on the standard we are adopting, this will 
begin to grow in its proportion rapidly.
    Senator Conrad. Let me just very quickly turn to another 
subject, because we are about to face the roll-out of Medicare 
prescription drug plans, and I tell you, it is very much on the 
minds of people in my State. People have already approached me, 
very concerned that there is going to be confusion, and if 
there is confusion, that will reduce sign-up and that will 
reduce participation. Can you give us some insight on what you 
are doing to roll this plan out in a way that people understand 
it and are not confused by it, and that we do not have so many 
plans circulating out there that people cannot reach a 
decision?
    Secretary Leavitt. Senator, yes. I am spending at least 2 
days a week--I will be leaving again tonight to go out to visit 
local communities throughout the country. We are in the first 
phase of our roll-out. The first phase of our roll-out is to 
meet with local community groups. I must tell you, I am quite 
heartened by what I am feeling and seeing. We will see roll-out 
over the course of the next 10 months, a national conversation, 
a national conversation that will include literally tens of 
millions of different venues.
    It will be as simple as a daughter sitting down with her 
aging parents to say to them, ``Mom, Dad, I need to help you 
assure that you have made a decision on this prescription drug 
plan.'' It may be a pastor who organizes a committee at his or 
her church to help the members. It will be a pharmacist at a 
store counter dealing with a customer, who has a trusted 
relationship. It may be a doctor dealing with a patient, or a 
nurse at a community health center or a senior center. And we 
are seeing groups, seniors organizations, community groups, 
mayors, county commissioners, State Departments of Health, all 
who are rallying to help a common constituency of seniors to 
make this decision.
    I feel a sense of real optimism, that while it will not be 
perfect in its execution, and while it will not be without 
complexity, at the end of the period of time we will see 
between 28 and 30 million people who will have enrolled in this 
remarkable new health benefit. It is in fact among the most 
significant events in health care in a half century.
    Senator Conrad. Can I invite you to North Dakota?
    Secretary Leavitt. I would love to come to North Dakota.
    Senator Conrad. We are asking the churches across our State 
to get involved in a very meaningful way, and we would love to 
have you come.
    Secretary Leavitt. I have been in little Havana at a senior 
center, I have been at a Southern Baptist church in South 
Carolina, I have been at an arboretum in Alabama. It is 
actually very heartening to see these groups come together. The 
partisanship is gone now. This is out in the community. People 
are rallying for a particular cause. This is a moment, I 
believe, in our history where people are going to unify to 
deliver it.
    Now, I do not want to create an expectation that there is 
not going to be a decision to make for people. There is. We 
will have multiple plans that they can choose from in a way 
that will allow them to pick a plan that is best for them, and 
seniors are going to want to hear this over and over and over 
again, as we all would.
    Senator Conrad. Can I just say to you, you have not lived 
until you have gone to a Lutheran Church basement lunch.
    [Laughter.]
    Secretary Leavitt. Senator, I have lived, on that basis I 
have lived.
    Senator Conrad. We will have the Jello there for you and 
the bars and----
    [Laughter.]
    Chairman Gregg. Senator Ensign.
    Senator Ensign. I have not lived yet.
    Chairman Gregg. Maybe he is going to go to Las Vegas.
    Secretary Leavitt. We are coming to Las Vegas.
    [Laughter.]
    Senator Ensign. People always make fun of my town, and I 
always tell them that those are your people acting crazy in my 
town.
    [Laughter.]
    Senator Ensign. Secretary Leavitt, thank you for being here 
today. We just held a markup in the HELP Committee, thanks to 
Senator Enzi's leadership on the issue of health information 
technology. As you know, I held at the Commerce Subcommittee on 
Technolgy, Innovation and Competitiveness on this issue. I 
really believe that health information technology is one of the 
more important issues that we are dealing with in health care 
today. Health information technology does provoke careful 
thought and discussion. It is difficult to determine for the 
electronic exchange of health information.
    We have a lot of experience with individual information 
systems and how bad they can be, how they over promise, and how 
they under deliver. For example, I remember when I was first 
running for Congress in Nevada and I spoke with the person who 
oversees all the welfare programs. The person had developed 
proprietary software with the assistance of outside help. This 
software was going to completely computerize their whole 
system, and make it much more efficient. They finally got it 
online in late 2000 at about three times the cost of what it 
was originally supposed to be.
    A lot of us have had negative experiences with information 
technology. As a veterinary practitioner, we were always over 
promised and under delivered on what software was going to do. 
A lot of individual physicians have experienced some of the 
same things. Consequently, there is some trepidation in the 
health care community, especially for those people on the front 
lines. And, as we learned in our Commerce Subcommittee hearing, 
a lot of the information technology related benefits of 
improved efficiency and quality of care accrue to the payer and 
patients, but not to the providers who bear most of the 
implementation costs.
    I think interoperability is a critical aspect in our 
discussions on health information technology. There is no 
question about it. If you think you are buying a system that is 
not going to work with other systems, you are not going to 
invest in a system and put your capital at risk. It is critical 
that we facilitate the widespread adoption of interoperable 
health information technology.
    The Internet has worked because standards are in place that 
enable communication, commerce, and information to flow freely. 
I am glad that you are focusing on the issue of 
interoperability. Could you please address the front line 
physician or health care provider who says, ``Why should I 
invest in health information technology when I would receive 
very little of the benefit?''
    Secretary Leavitt. Senator, thank you for your question, 
and I am delighted about the markup. I want to express, as you 
did, a compliment to Senator Enzi and the remarkable leadership 
he has shown in his committee.
    There is little question that one of the dilemmas we face 
is that oftentimes the benefit, the economic benefit, does not 
flow to the same party to whom the investment is required and 
that there will be a transition as we help people work through 
this adoption process.
    There are a number of ways in which I believe that can and 
will occur. One I mentioned earlier, and that is the pay for 
performance, being able to identify methods of responding to 
payment that are not simply on the basis of how much treatment 
is given, but the quality of treatment that is provided. If we 
are able to say to a physician--if you can demonstrate that a 
number of different--or if you can demonstrate that a high 
enough percentage of your patients have been treated in a 
particular way, we know we will save money; and as a result, we 
will share that with you and help you with your adoption costs 
through some kind of pay for performance. That is one way.
    There have been a lot of discussions about exemption to the 
Stark amendment that would in the proper context, when we have 
achieved interoperability, allow systems of health to begin 
developing networks.
    Over time it has been my observation that it is rarely the 
technology that limits us. It is almost always the sociology 
that limits us. And, I believe this is just such a 
circumstance. If we can begin to work together, we can create 
the interoperability, and I believe the economic model will 
follow.
    Senator Ensign. Thank you for your response. What you have 
just expressed is what came out of our Commerce Subcommittee 
hearing. I appreciate your comments regarding pay for 
performance initiatives and the idea of best practices. Driving 
best practices down to the lowest level is absolutely critical. 
BY encouraging the use of best practices, you can achieve 
better outcomes that we are all talking about.
    Thank you, Mr. Chairman, for holding this hearing.
    Chairman Gregg. Thank you.
    Senator Murray?
    Senator Murray. Thank you very much, Mr. Chairman, and 
thank you, Mr. Secretary. And while I have the opportunity, let 
me just thank you for working with us on the nomination of Dr. 
Crawford to head FDA. I was, as you know, very frustrated on 
the planned BOTC application and the fact that, despite the 
overwhelming scientific and clinical data, there wasn't a 
decision made and PDUFA deadlines have been missed, and I 
really appreciate your July 13th letter and working with us to 
assure that FDA is going to finally act on this application. 
And I wanted to just take this opportunity to publicly thank 
you for that.
    Secretary Leavitt. Thank you, Senator.
    Senator Murray. This is a very important issue, and I think 
it is critical for us, looking at cost savings and numerous 
other things. But you raised in your testimony when you spoke 
an issue that I think this has direct impact on, and that is 
the Medicare reimbursement. It is an issue I have been long 
frustrated at, that Medicare rewards inefficiency, basically, 
and overutilization. It hurts States like Washington that are 
very efficient. We have one of the lowest per beneficiary cost 
in the country, and so we are very much at a disadvantage in a 
system that does not reward doctors' being more efficient. And 
I wanted you to comment on your written testimony where you 
talk about the Medicare management performance demonstration 
and how we can make sure that when we structure this new health 
IT effort in Medicare, we do it without providing more 
disincentives in reimbursement rates that could just cause more 
problems and more costs in the future.
    Secretary Leavitt. The subject of Medicare reimbursement 
rates is one that I am constantly having conversations with 
Members of Congress about, particular conversations relative to 
their area, whether they feel that the reimbursement levels in 
their area are fair or not fair. And we are working to respond 
to those on a situation-by-situation basis to do our best to be 
fair and responsive.
    The subject on a global basis or macro basis is very 
complex and one, frankly, that we are going to be dealing with 
very shortly as you deal with the budget. We are under 
obligation statutorily to continue to move forward with what 
will be a 4.3-percent reduction in Medicare reimbursement 
rates. There have been many who believe that is not reasonable. 
Nevertheless, it is the statute, and we are moving toward 
implementation of it.
    That is one of the reasons that the topic of pay for 
performance is so integral to the conversation we are having on 
health information technology. We will never achieve a more 
rational way of paying and incenting providers without being 
able to accomplish interoperability and a national system that 
will allow us to gather information and measure outcomes and 
then compensate, at least in part, on that basis.
    So having these two conversations linked is a very 
appropriate response.
    Senator Murray. I agree, and I think we all want to work 
with you toward that goal.
    I had the opportunity a short while ago to visit a hospital 
in Spokane, Washington, with the Inland Northwest Health System 
that was doing something very innovative in IT, and that was 
providing pharmaceutical and pharmacy access to rural hospitals 
through their technology at that hospital linking up with rural 
communities in eastern Washington and doing the pharmaceutical 
prescriptions for patients there. And I think there is a lot of 
really exciting opportunities.
    But as I hear all this talk about technology, I hear a lot 
about how it helps doctors, how it helps hospitals. I want to 
make sure it helps patients, and I think patients' having 
access to their own records will provide tremendous savings for 
us as well.
    Senator Conrad talked about his own father and all the 
medications he took. Sometimes I think patients can be the best 
savers if they actually have records and their own information. 
People too often go and get a diabetes test or an osteoporosis 
test, never go back and ask what the results were, so they do 
not know what they can be doing for their own health and 
actually cost savings.
    How can we make sure that in this effort we make sure that 
patients have access to their own records through IT?
    Secretary Leavitt. Patients do need to both own and control 
their own records. Most of all, we need to have a way in which 
they can access them.
    I have experienced recently this dilemma on a very personal 
basis. I went to the hospital to have one of those over-50 
tests that we all look forward to so much. And I was handed a 
medical clipboard as I walked in the door, a ritual in American 
medicine. I spent the next hour filling out my name and my 
address and my insurance information over and over and over 
again.
    Finally, I got to the point of the test, and the physician 
sat down with me one more time to say, ``Now, let's ask you 
some questions. Have you had a reaction to prescription 
drugs?'' I mean, we have all been through these questions 
before. And then he said, ``Do you have any serious medical 
problems?'' I said, ``No, I have no serious medical problems.''
    Well, just by coincidence, I guess, or at least I was 
prompted to say, ``Well, I do have sleep apnea.'' He said, ``I 
need to know that because I am going to put you under an 
anesthetic for this, and that is a very important piece of 
medical information.'' That was a medical mistake. It was my 
mistake. He asked me the questions. I did not answer them. Had 
I had an electronic medical record, that would have very 
clearly been there. It would have saved me the hour that I took 
filling out my name and my address and my phone number and a 
health history that I could not properly remember. That is the 
way it will benefit patients.
    There are many ways. I have a colleague who indicated she 
needed to take a half a day off work. I asked her the next day, 
``How did it go?'' She was going to the doctor. She said, ``I 
spent most of the day being a medical courier. I went from 
doctor's office to doctor's office picking up brown envelopes 
to deliver them to a doctor's office.'' That could have and 
should have been done with the click of a mouse. Think of the 
half-day of unproductivity that it cost her--and, I might add, 
her employer.
    This is about lower costs. It is about less hassle. It is 
about fewer medical mistakes. This is about transforming 
medicine as we know it today. It is about being able to deal 
with Medicare, Medicaid, national defense. This is a very 
significant undertaking that we are about.
    Senator Murray. I agree, but I just think we cannot lose 
sight, as we work through this issue, that the patient having 
access to their own medical records is an important part of 
technology and that patients will actually make better 
decisions. I know there is this fear in this country that, you 
know, doctors have to keep the information and we should not 
maybe know everything we should know about ourselves. But I 
think we will actually find that if patients know themselves 
what their tests show and what they are taking, they can do a 
better job of preventive medicine.
    And, Mr. Chairman, preventive medicine is what we all need 
to be focused on to save dollars in the long run in the health 
care system.
    Chairman Gregg. We will next hear from the man who is going 
to straighten all this out, the Chairman of the HELP Committee, 
Senator Enzi. I apologize for the duplication of this hearing 
with your markup, but the Secretary asked that we set it up.
    Senator Enzi. I think it is outstanding that we are having 
this hearing. I am just so excited today. I love numbers and I 
love technology, and bring it all together at one time. I want 
to congratulate the chairman for the extensive work that he has 
done on this. I remember being on a task force that he led a 
year and a half ago when we talked about ways to solve medical 
crises in the United States. And I am doing 18 bills that you 
brought up at that time, and this is one of them.
    Chairman Gregg. That is why I left.
    [Laughter.]
    Senator Enzi. It is keeping us busy, I want you to know. 
This is probably the key one to all of the rest because 
everything builds on information, patient information and their 
access to it and what can be done to follow chronic illnesses. 
There are just so many possibilities with it that we need to 
tap and we need to tap right away. And I want to thank you for 
getting that started last year.
    I want to thank the Secretary for being here. He and I have 
had numerous meetings. In fact, we have had numerous meetings 
for several years, because he has been deeply involved in 
technology, in computers, and, in fact, was key in starting the 
Western Governors University, which I think was the first 
online degree-granting university probably in the world, and he 
put that together. So I have seen his capability of being able 
to understand technology and to work with technology and, 
probably even more importantly, to bring other people along in 
understanding it. He has a tremendous gift for making things 
very clear and simple enough that even I can understand them. 
That is a gift. He has a great example of train tracks that he 
did not get to use this morning, but he has been using it 
across America as he puts all this together.
    Now, I share your concerns and those of Chairman Gregg and 
Senator Ensign about spending wisely on IT. I am certain that 
we will work to make sure that we are filling the financing 
gaps. And I am pleased that we were able to pass the bill this 
morning in markup, and what it does is give express 
authorization to Health and Human Services to do the work that 
Health and Human Services has been involved in for a couple of 
years, but is now coming to a head and I am sure will get on 
track and completed in a very short period of time under your 
leadership.
    We wanted to make sure those specific areas of 
authorization were there, and I do want to commend you for 
taking the helm at HHS and moving quickly to implement the 
President's vision that everyone in America have electronic 
health records by the middle of the next decade. And I think 
under your leadership we can exceed that.
    Senator Grassley and Senator Baucus intend to move their 
legislation through the Finance Committee to build the pay-for-
performance measures into the Medicare program. What else do 
you think Congress can do to assist you to make this shared 
vision a reality?
    Secretary Leavitt. That is an appealing question. Thank 
you. May I just respond that I have now been serving as 
Secretary of Health and Human Services for almost 5 months, and 
it was very clear to me quickly that this subject was right at 
the heart of nearly every aspect of my mission. Medicare, 
Medicaid, in order to get costs contained where they are 
sustainable, this is at the heart of it. The responsibilities I 
have for drug safety, right at the heart of it. The 
responsibility I have for bioterrorism, this is right at the 
heart of it. So this was an easy decision for me to put as much 
time as I am on it because it is so critical to every element 
of the way we deal with cost containment in our country.
    And may I just answer directly your question. The most 
important thing from my standpoint is that we are using what 
Senator Conrad referred to as a laser focus and that we use it 
on interoperability. If the Congress wrote a $1 trillion check 
today for health information technology and everyone went out 
and bought systems, we would probably get some good systems. 
But we would not have achieved the vision that you have spoken 
of where we are able to reduce costs because of better 
practices to be able to have lower costs, fewer medical 
mistakes, better care, and less hassle. We would not achieve 
that even if we wrote a check for $1 trillion today. We have to 
get interoperability and then begin to work very deliberately 
on solving the problem referred to before by Senator Ensign 
with respect to adoption.
    Both are significant problems. Interoperability is the 
first one we have to solve, and then we have to deal with the 
adoption issue.
    Senator Enzi. I particularly want to thank you for page 9 
of your testimony. It shows how you focus in on and prepare and 
do a project, and that is where it lists the four RFPs that you 
have already arranged for, and I think it is pretty remarkable, 
since you have only been on the job for 5 months, that you 
already have this underway and have taken it to the Nation.
    I see that my time is about to expire.
    Chairman Gregg. Thank you, Senator Enzi.
    Senator Stabenow has some views on interoperability.
    Senator Stabenow. Well, thank you, Mr. Chairman.
    I first want to thank you, Mr. Secretary, for your work 
with your other hats, with the EPA and the work that we did on 
the Great Lakes. I appreciate your leadership there. Positive 
things are happening as a result of bringing people together.
    Secretary Leavitt. I am optimistic about that.
    Senator Stabenow. And we thank you for your leadership and 
look forward to the same kind of bringing people together and 
moving forward on this issue.
    I could not agree more with the comments that have been 
made about this being at the heart of our ability to move 
forward, both for cost savings not only for the Federal 
Government but for private businesses as well. And also we save 
lives by doing this. So I cannot think of anything more 
positive than to be focusing on this.
    I do want to speak, though, because I have a slightly 
different view in terms of how we need to move forward or the 
extent to which we focus on interoperability alone or making 
sure that hospitals and physicians and so on are beginning to 
purchase equipment, do training, move along so that they are 
ready for interoperability, they are ready for the efforts that 
are so important.
    When I think about the U.S. Senate--in fact, when I was in 
the U.S. House, we did not wait for interoperability before 
everybody got PCs, before we trained people. Right now we still 
are not totally interoperable in the U.S. Senate. And yet we 
have certainly benefited from e-mail, even when it was our own 
individual e-mail system. And look how long it has taken to be 
able to do that. And if we had waited for interoperability, we 
still would not be on a system. People would not be able to 
talk to us. We would not be able to do our work.
    So I tend--and I just want to share with you, the Center 
for Information Technology Leadership has estimated $44 billion 
annually in savings from the use of health IT in independent 
settings. And that does not in any way negate what you are 
saying. I totally agree with what you are saying about 
interoperability. But we also, according to them, are told that 
we would reduce medical errors by 50 percent by the use of 
stand-alone electronic prescribing systems--50 percent. So the 
question that I have for all of us is: Why wouldn't we want to 
be working on that at the same time?
    I congratulate Senator Enzi for his leadership, and I was 
pleased to testify with Senator Enzi before Senator Ensign's 
subcommittee. But I think Senator Ensign really has a very 
important point that I agree with, and this is what I hear from 
hospitals and physicians and so on. We cannot wait to begin to 
get them online, to get the equipment and so on. And so I would 
urge you--and I will be working with colleagues on this--to 
look at not only pay for performance, which I agree with, but 
pay for use as an important part of that in terms of 
incentives. And Senator Snowe and I have introduced a bill that 
goes right to heart of that would allow expensing, accelerated 
depreciation, like we do for many, many other things, for 
private physicians and so on to be able to buy the equipment, 
to be able to get going on this.
    We have in other areas allowed dollars to be spent from 
Medicare, MRIs, other things, where we knew it would save money 
by allowing purchases of equipment. Our legislation would allow 
that for hospitals and nonprofits to be able to begin to 
purchase.
    I think it is absolutely critical that we move, Mr. 
Chairman, on a several-track front if we want to meet the goals 
that you are talking about. And then I would just add that if 
we really want to be able to have the performance standards 
that we all want, in order for clinicians to be able--for us to 
accurately measure their performance or outcomes, they have to 
have systems in place. So we cannot do that, any of that, all 
of which we want to do, if they do not have systems in place, 
people are not trained, and so on.
    Also, we have to be able to look at whether we are paying 
them fairly or unfairly, rewarding them, disincentives, and so 
on. And as Senator Ensign said earlier, unfortunately in this 
process the payer, meaning us, gains the savings, and it may 
not be--where the cost is incurred by the physician or the 
other health care provider, the hospital and so on. And we have 
to, I believe, provide incentives in grants in order to be able 
to do that.
    So I hope, Mr. Chairman, that--because I think this is a 
wonderful bipartisan effort. We have people all across the 
Senate and the House and the administration that want to do the 
right thing. I am very hopeful that we will not just talk about 
interoperability when there is so much more that has to be done 
in order to get this done.
    Again, I will just close by saying that, again, if we can 
save $44 billion a year through health IT in independent 
settings and have 50 percent fewer medical errors now, while we 
are doing the important work that you are doing, I hope that we 
will not underestimate that. And I honestly believe that we can 
move ahead on the legislation, and I am hopeful we can add 
legislation that will allow us to be able to provide those 
incentives so that they are ready for the interoperability and 
that we are not in the end doing the good work you are doing 
and then waiting another 10 years while they get themselves up 
to speed in terms of equipment.
    Thank you.
    Secretary Leavitt. Senator, let me just reinforce the fact 
that I subscribe to what you have suggested with respect to the 
adoption of health IT being an important continuing priority. 
We are seeing substantial investment on health information 
technology within the health sector. It tends to be 
concentrated more in the large practice and large hospitals.
    One of the worries I have, I was in a major city recently 
and attended a meeting at an academic health center, a medical 
school. Across the street there was a large county-owned 
hospital. And just down the street there was another hospital 
that was a children's hospital. All three of them were major 
medical centers. They shared faculty at the medical school, a 
lot of the same patients. Each of them had purchased a 
different system. Each of them had spent nearly $100 million in 
bringing their hospital IT system up. And I am sure they are 
doing great things within those hospitals and that they are 
making progress. But none of the three could talk to each 
other.
    We are moving with some dispatch, for example, to develop a 
new e-prescribing rule that will have an exception to the Stark 
amendment, which will allow hospitals, for example, to begin 
sharing technology with smaller providers. That will begin 
immediately to deal with adoption issues.
    We are working aggressively with pay for performance. We 
would like to be able to say-let's create funds and created 
savings and use part of that savings to help small providers 
with adoption of technology.
    You are absolutely correct when you say we need to move 
down a parallel track here. My advocacy for the ``laser focus'' 
on interoperability is to acknowledge the fact that until we 
solve that problem, our investment should be focused there 
because many of the benefits that you have alluded to will come 
only when that has occurred.
    Senator Stabenow. I would only add one thing, and that is, 
we are facing the same thing in Homeland Security. I have been 
working on issues of interoperability for communications, and 
police and firefighters have not stopped creating their own 
systems while we are trying to get interoperability. And so it 
does need to be done together, and there are now new kinds of 
technology, software that is being created in Michigan. We have 
a company in Michigan that is able to bring together through a 
common software all of these different communications systems 
to be interoperable for much less cost.
    So I think it is just very important that--if our police 
and fire were waiting, you know, they would not be talking to 
each other even in their own communities. So there is a benefit 
to moving on a parallel track.
    Chairman Gregg. Senator Allard?
    Senator Allard. Thank you, Mr. Chairman. I feel honored to 
be here with a lot of expertise as far as health care and what-
not and a lot of brain power, and a lot of thought has been 
going into all these ideas.
    But I do have a hospital in Colorado that is trying to 
bring everybody online with the same technology as far as 
communications is concerned. And they are trying to communicate 
with the Health Department, communicate with individual 
doctors' offices that use their hospital, and to communicate 
within the hospital, and any other agency that might be there 
that would have some health records. And they are having a hard 
time doing it because there are a lot of issues involved.
    My question to you is: Are you looking at individual 
circumstances like that and visiting with them to see how these 
theories get applied in sort of a practical way? I would like 
to hear your comment on that.
    Secretary Leavitt. Yes, in fact, I think this adds to the 
last answer I gave. We are actually funding a lot of adoption 
to help people----
    Senator Allard. I think this hospital may be getting some 
of your funding.
    Secretary Leavitt. Yes, and we are working with many 
different models around the country where we are working with 
different hospital groups and working with them to see what can 
be learned. And, the combination of establishing national 
standards plus being able to deal with what we are learning 
from those individual situations is the key.
    Senator Allard. Now, the Veterans Administration, I know 
that they are developing some systems where there is a lot of 
communication within the system. And so you are going to have 
the Veterans system. Then you have each hospital with their 
doctors and everything else. I can see a problem when you go 
and try and--now you have these entities that have sort of--
they have formed kind of a cluster built around the technology 
of that hospital, or maybe built around the technology of an 
agency. It seems to me like the real challenge will be to take 
the next step and get the technology of the Veterans 
Administration to begin to merge into maybe the technology 
around some hospital. Because for either one of those entities, 
now these clusters, to change--they have built around a certain 
amount of technology. Then to get each one of them to come, the 
cost even gets horrendous if they have to make changes to their 
system, and they are going to resist that, it seems to me.
    Have you thought a little bit about where the second and 
third step might carry you?
    Secretary Leavitt. I have thought a lot about this because 
that is the dilemma and really the reason we have to achieve 
interoperability. The Veterans Administration has a brilliant 
system. If you are in a Veterans hospital system, you have an 
electronic health record that will include virtually every 
aspect of your medical involvement.
    The problem is if you go to a doctor outside that system, 
it is not populated with that information. And the same is true 
that the doctor outside does not have access to the 
information. So we have to be able to create this sense of 
interchange in information.
    If you go to Kaiser Permanente in California, you see 
brilliant electronic health records. If you go to the Cleveland 
Clinic, you see brilliant use of electronic technology. If you 
go to the Montefiore Hospital in New York or InterMountain 
Health Care within our region, you see all kinds of brilliance 
that is being created in individual regional areas. The problem 
is none of them can talk to each other.
    Senator Enzi referenced a favorite story of mine. I have 
become fond of studying railroads. As we built the railroad 
network in this country, we had one major dilemma, and that is 
that the rail gauges did not line up. They had some that were 
4-foot-8, some that were 5 feet, and some that were 5-foot-3. 
And through some good leadership, they standardized that.
    I told a friend of mine about this. He said, ``Well, I had 
an uncle in 1960 that went to Australia to help them solve that 
problem.'' I was intrigued by that, and I put into a search 
engine ``Australian railroad gauge.'' And up popped a whole 
series of articles about this dilemma they have in Australia 
today. They are trying to solve the fact that they have three 
different rail gauges. And if you want to go from Point A to 
Point C, at Point B you get off the railroad and get on a 
different railroad.
    Well, we are doing the same thing in health care in the 
United States. We have these pockets of brilliance, but we have 
rail gauges that do not line up. And so when I emphasize the 
need for interoperability along with adoption, the reason is 
because in order to get the long-term vision that we are 
talking about and the serious benefits, we need both.
    Senator Allard. Well, I appreciate your railroad analogy, 
but to get back to the medical side of it, when we standardize 
everything, we are going to--and on the cost, I have my doubts. 
I am a little skeptical about that. On the patient care, I am 
really optimistic about that because I think there will be a 
lot of medical mistakes that will not happen. But, on the other 
hand, if a medical mistake does happen, it is going to be big, 
you know, because it is going to be built into the system, and 
it could impact a lot.
    So we have to give some thought about that, and the other 
thing is on, as we move forward with this technology, we need 
to have sort of some latitude in there, which I never expect to 
happen through a bureaucracy, and we are going to have more 
bureaucracy. I do not see any way around it. It is for 
innovation. There will be some doctors that will have different 
ideas, some different approaches on treatment and what-not, 
which probably in the long run will be better, and they are 
going to have to work themselves through a bureaucracy that 
will not want to change because it is built into the system. 
And I hope somehow or the other we can keep that needed 
flexibility as we move forward in trying to standardize 
treatments and standardize information protocols.
    Chairman Gregg. Those are excellent points. You are 
obviously the big elephant in the room, and you can set the 
gauge. And so we look forward to working with you. If you need 
legislative authority to help you on this, you have the man 
right here. And we want to work with you to make sure this is 
successful.
    I know that Senator Conrad had one followup request 
relative to a report he would like to try to get, which I think 
is a good idea.
    Senator Conrad. Let me ask, if I could, could you help us 
get a report on CDC's ability to communicate in real time with 
major health care providers around the country? Let me tell you 
what my concern is.
    The group that I mentioned before, the Telehealth Caucus, 
we have previously done a lot of analysis on bioterrorism. What 
would happen if, God forbid, there were an event somewhere in 
the country? What is our ability to respond in real time? What 
is the ability to analyze what it is and communicate with those 
who would be the first to confront the victims and confront 
providing care to victims?
    Our assessment is we are not in good shape there, and what 
I would request directly is that--and we can talk about what is 
a reasonable amount of time. I would hope in 30 days that we 
could get a report on what is the ability of CDC to communicate 
in real time with major health facilities across the country in 
the case of a bioterrorism event, in the case of a pandemic. 
Those two I think are the great potential threats that are out 
there, and we should know with great certainty how well 
prepared we are to have our major institution that can deal 
with analysis and diagnosis communicate in real time with the 
major health care institutions across the country. That may be 
an absolutely critical matter. We know certainly with the case 
of a pandemic being able to respond quickly and in the right 
way can make a massive difference in the outcome.
    And so that is a request I would make. Would 30 days be 
reasonable?
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    Secretary Leavitt. Senator, we will be responsive. Perhaps 
we could talk offline about the timeframe. Thirty days does not 
seem unreasonable to me as I speak, but I should confer with my 
colleagues.
    I will tell you that we are exercising constantly on this 
exact point. Our capacity does not meet our aspirations. We 
have to improve here. We have project that I referred to 
earlier called BioSense. It is an active, aggressive effort on 
our part to take information technology and to use this project 
to move our capacity forward rapidly. We have identified 36 
cities that contain, I believe, 400-plus emergency rooms. Our 
intent is to have them interoperable and able to deliver the 
information you have talked about in a relatively short 
timeframe. We are not there now.
    Senator Conrad. OK. I think it is just very important that 
we know here exactly where we are today, where we are headed. 
Are there steps that we need to take that would help? Because, 
you know, I think this is a major vulnerability for the 
country, and we need to make very, very certain that we are 
focused on this as well.
    One other point I would like to make, and this is my 
concluding point, Mr. Chairman. I have become absolutely 
convinced, after 19 years here, that anytime we are doing these 
kinds of major efforts that we test and compete. And what I 
mean by that is that we do not just go down one road, that we 
go out there and we try variations and we get different groups 
to try different approaches and that we put them in 
competition.
    I am very, very worried in Homeland Security, for example, 
that we are going to roll out a big program on border security 
without having tested it and without having competed it. And we 
have had this conversation with the Homeland Security Director. 
The same thing applies here. Let's not do something that we 
have not tested and competed because that is what helps prevent 
major, major malfunctions and major wastes of money.
    Secretary Leavitt. Our effort is to develop an architecture 
upon which many innovations can be found and lots of testing 
and competing can be conducted. I subscribe to the philosophy 
you have articulated.
    Chairman Gregg. I want to join Senator Conrad. In fact, 
when we did Project BioShield 2-1/2 years ago, we had extensive 
discussions with Dr. Gerberding about her concerns that she did 
not have real-time capability to communicate. I know efforts 
have been made in this area, and I think it is appropriate that 
we get an update as to how successful those efforts have been, 
because it is a critical issue. I know she is very concerned 
about it--or I am sure she is still very concerned about it. 
She was then.
    Senator Enzi had a followup question and then Senator 
Stabenow.
    Senator Enzi. Just briefly, to end on a very positive note. 
I feel compelled to mention three Wyoming inventions that 
answer some of the questions here, but there is this problem of 
information in the United States. There is technology out there 
that we do not even know about that we are going to find out 
about from this project. For instance, a fellow at the 
University of Wyoming has invented a little thing that looks 
like a little speed gun. It is a little bit smaller than that. 
You point it at any substance, pull the trigger on it, and in 
the PalmPilot you can find out what that is in a matter of 
seconds.
    Not only that, the PalmPilot then tells you what to do 
about the incident. You know, right now we collect samples 
around this building. We haul it out to huge vans that we put 
this stuff in. There is a handgun that would make that 
technologically faster. And there is a PalmPilot that was used 
in 9/11 events that told them what to do with the different 
kinds of chemicals and things that they came across. That was 
also a little Wyoming invention.
    And then, third, there is one for doctors that is used by 
our submarines that, again, is a PalmPilot technology, that 
kind of a computer that they put in symptoms of a sailor and 
they can come up with a confirmation of their diagnosis. 
Without that, they used to have to surface the submarine. Some 
of those are under the polar ice cap. The Federal Government 
anticipates that saves $600,000 a year. And rural doctors can 
use that same sort of thing to confirm their diagnosis.
    So there are some very positive things out there. I do 
remember, though, that I am still trying to get permission to 
take my laptop on the floor of the Senate. So this is not the 
best place to talk about technology.
    [Laughter.]
    Chairman Gregg. Submarine technology in Wyoming, that is 
creative.
    Senator Enzi. Yes. We have a Powder River Navy.
    But we are going to have to be more positive on this 
interoperability or, as I prefer it, the standards 
harmonization. Regardless of what computer you have, what 
software you have, you can now e-mail anybody in the United 
States that also has a computer. And you do not have to know 
how it got there or much about how to do it. And you can also 
search the Web from virtually any computer, and you do not have 
to know much about that either. That is interoperability of 
information, and that is what we are talking about now for 
health care. What we have to throw in, of course, is the 
privacy and the security so that the data for the person just 
goes to the people that person authorizes. But I still see the 
day when a person walks into the doctor's clinic, takes a 
little fob off of their key chain, waves that by their 
computer, and then releases whatever level of data they want to 
whatever health care provider that is. And it will reduce 
mistakes.
    So I thank you for holding this hearing, and I thank you 
for your efforts on this. You are doing tremendous work on it, 
and I have confidence that we will get it done.
    Chairman Gregg. Senator Stabenow?
    Senator Stabenow. Thank you, Mr. Chairman.
    Speaking of technology, I want to brag about Michigan. I 
cannot let Senator Enzi brag only about Wyoming. Talking about 
those fobs, my new vehicle, which Senator Conrad has seen, 
which is a Cadillac STS, made in Lansing, Michigan, does not 
have a key. It has what is called a fob. You just get within 3 
feet of the automobile. You can turn it on. I never take that 
out of my purse. There is no key. We would be happy to have 
that fob become the health IT fob for the kind of thing that 
Senator Enzi is talking about.
    I share Senator Enzi's enthusiasm and excitement about the 
opportunities. I have one comment and one question.
    The comment would be that the kinds of things we are 
talking about today, those individual items that Senator Enzi 
talks about, they cost money. And it is separate from 
interoperability. It is about whether or not the hospital or 
the doctor can afford to do those things at a time when we are 
cutting Medicaid, we cut back on their resources.
    If we do not take seriously providing tax incentives and 
resources, even though it saves money, it is going to be tough 
for a lot of folks to do that.
    And I would also say on your railroad connection that they 
were, in fact, using those railroads across States even though 
they did not connect all the way across the country and 
probably benefited from using that.
    And so, again, there is a lot of mysticism around all this 
stuff, and I certainly am not an expert. But I do know it is 
just about software in order to be able to make these 
connections, and that right now every vendor is including in 
their contract something called backward compatibility so, in 
fact, they can become interoperable. So this is not that they 
cannot use the equipment. It is not that the people who are 
trained cannot--you know, this is about software. And so I 
welcome the fact that you are doing that, but it does not take 
away from the other things that have to happen in order to make 
it happen.
    A question. I know there has been a lot of progress 
regarding standards, and I know that the Consolidated Health 
Informatics initiative that was begun by your predecessor has 
made a lot of standards available. They have been adopted for 3 
years now. And I am wondering if you can tell me which Federal 
agencies or programs are currently using those standards 
internally and what their relationship is with health care 
providers.
    Secretary Leavitt. We did adopt a group of standards, and 
the next logical step is full Federal implementation. That is 
one of the reasons we have set up this American health 
information community to be able to achieve full adoption by 
Federal agencies.
    Senator Stabenow. Do we know at this point how many----
    Secretary Leavitt. I am not able to give you off the top of 
my head which agencies have adopted which standards. They have 
been adopted, for example, at HHS, and we are beginning to roll 
them out. But adoption of the standards is going to be a 
critical part of it, there is no question.
    Senator Stabenow. Absolutely. Thank you.
    Thank you, Mr. Chairman.
    Chairman Gregg. Senator Conrad for the last thought.
    Senator Conrad. Let me just say, not to be outdone, in 
North Dakota----
    [Laughter.]
    Senator Stabenow. I move to adjourn.
    [Laughter.]
    Chairman Gregg. In North Dakota, they are doing aircraft 
carrier technology.
    Senator Conrad. In North Dakota, we are working on a fob 
that would start your car and give you your health care 
records.
    [Laughter.]
    Chairman Gregg. Thank you, Mr. Secretary. We appreciate 
your time and your courtesy.
    [Whereupon, at 11:15 a.m., the committee was adjourned.]

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