[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE SAFE COMMISSION ACT (H.R. 3654) AND THE LONG-TERM FISCAL CHALLENGE
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HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 24, 2008
__________
Serial No. 110-36
__________
Printed for the use of the Committee on the Budget
Available on the Internet:
http://www.gpoaccess.gov/congress/house/budget/index.html
U.S. GOVERNMENT PRINTING OFFICE
43-148 PDF WASHINGTON DC: 2008
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COMMITTEE ON THE BUDGET
JOHN M. SPRATT, Jr., South Carolina, Chairman
ROSA L. DeLAURO, Connecticut, PAUL RYAN, Wisconsin,
CHET EDWARDS, Texas Ranking Minority Member
JIM COOPER, Tennessee J. GRESHAM BARRETT, South Carolina
THOMAS H. ALLEN, Maine JO BONNER, Alabama
ALLYSON Y. SCHWARTZ, Pennsylvania SCOTT GARRETT, New Jersey
MARCY KAPTUR, Ohio MARIO DIAZ-BALART, Florida
XAVIER BECERRA, California JEB HENSARLING, Texas
LLOYD DOGGETT, Texas DANIEL E. LUNGREN, California
EARL BLUMENAUER, Oregon MICHAEL K. SIMPSON, Idaho
MARION BERRY, Arkansas PATRICK T. McHENRY, North Carolina
ALLEN BOYD, Florida CONNIE MACK, Florida
JAMES P. McGOVERN, Massachusetts K. MICHAEL CONAWAY, Texas
NIKI TSONGAS, Massachusetts JOHN CAMPBELL, California
ROBERT E. ANDREWS, New Jersey PATRICK J. TIBERI, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia JON C. PORTER, Nevada
BOB ETHERIDGE, North Carolina RODNEY ALEXANDER, Louisiana
DARLENE HOOLEY, Oregon ADRIAN SMITH, Nebraska
BRIAN BAIRD, Washington JIM JORDAN, Ohio
DENNIS MOORE, Kansas
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
Professional Staff
Thomas S. Kahn, Staff Director and Chief Counsel
Austin Smythe, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, June 24, 2008.................... 1
Statement of:
Hon. John M. Spratt, Jr., Chairman, House Committee on the
Budget..................................................... 1
Additional submissions:
Statement of the American Association of Retired Persons
(AARP)................................................. 1
Statement of Hon. Barbara B. Kennelly, president and CEO,
National Committee to Preserve Social Security and
Medicare............................................... 7
Hon. Paul Ryan, ranking minority member, House Committee on
the Budget................................................. 11
Hon. Peter G. Peterson, chairman, Peter G. Peterson
Foundation................................................. 14
Prepared statement of.................................... 16
Hon. David M. Walker, president and CEO, Peter G. Peterson
Foundation, former U.S. Comptroller General................ 17
Prepared statement of.................................... 19
Robert Greenstein, executive director, Center on Budget and
Policy Priorities.......................................... 23
Prepared statement of.................................... 26
Henry J. Aaron, Bruce and Virginia MacLaury senior fellow,
the Brookings Institution.................................. 31
Prepared statement of.................................... 32
Alison Acosta Fraser, director, Roe Institute for Economic
Policy Studies, the Heritage Foundation.................... 37
Prepared statement of.................................... 39
THE SAFE COMMISSION ACT (H.R. 3654) AND THE LONG-TERM FISCAL CHALLENGE
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TUESDAY, JUNE 24, 2008
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:05 a.m. in room
210, Cannon House Office Building, Hon. John Spratt [chairman
of the committee] presiding.
Present: Representatives Spratt, Cooper, Schwartz, Becerra,
Doggett, Blumenauer, Boyd, McGovern, Tsongas, Scott, Etheridge,
Moore of Kansas, Ryan, Barrett, Diaz-Balart, Hensarling,
Conaway, Campbell, Tiberi, Smith, and Jordan.
Chairman Spratt. I will call the hearing to order and
welcome our witnesses.
Before we have opening statements, a few housekeeping
matters. One is to ask unanimous consent that we include in the
record for this hearing statements submitted by the AARP, the
American Association for Retired Persons, and the National
Committee to Preserve Social Security and Medicare.
Is there objection?
Hearing none, so ordered.
[Statement of the AARP follows:]
Prepared Statement of the American Association of Retired Persons
(AARP)
AARP appreciates the opportunity to present its views regarding
H.R. 3654, the Securing America's Future Economy Commission Act, or
SAFE Commission Act, which would create a bipartisan commission to
address our nation's structural deficit, encourage a higher savings
rate, lower our debt to foreign nations, and improve the congressional
budget process. We commend Congressmen Cooper and Wolf for their
commitment to addressing our nation's long-term deficit in a bipartisan
manner. Our nation's fiscal health has a direct impact on our economy,
our people, and our international standing. Solving the fiscal problems
that confront us is a daunting and, in many ways, thankless task that
will require enormous effort and cooperation. The choices we make
matter not only to the budget, but more importantly, to the long-term
health and economic security of the American people. Program and
revenue changes are more than just budget savings--they have a direct
impact on the lives of every American now and in the future.
Our fiscal challenge is to make sure that current and future
generations have health and financial security by maintaining the
integrity of Social Security and Medicare in a fair and fiscally
responsible manner. At the same time, AARP members understand that
deficit reduction is vital for the future of our children and
grandchildren. The solution to our structural deficits must be fair and
involve everyone: government, business, and individuals. AARP shares
the view that we must address the long-term budget deficit in a
bipartisan and balanced way, and dealing with it sooner will avoid more
dire consequences later. Prompt action means the options will be more
moderate and will provide for greater opportunity for people to prepare
for changes over time.
A necessary first step, proposed in this legislation, is a review
of the causes of our long-term deficits. AARP believes it is critical
to focus on the most significant drivers of our budget shortfall. We
strongly urge all policy makers to reject the misperception that often-
blamed ``entitlements'' are the chief cause of the Federal budget
deficit. Blaming all entitlement spending ignores the reality that
health care spending across all sectors is growing faster than other
spending. As a result, it is health care costs that are the biggest
drivers of our long-term budget outlook. Yet, reducing the rate of
growth of health care costs must be accomplished on a system-wide
basis, and cannot be achieved by focusing only on Medicare and Medicaid
because those programs merely reflect the rapid growth of health costs
throughout the economy. Failure to take a broad look at our health care
system will simply result in cost shifting to individuals, businesses
and other parts of government, and will further destabilize our already
fragile health care system with enormous consequences for health
security and the economy as a whole.
Deficit reduction policies should be balanced and the long-term
deficit should not be accomplished solely through spending reductions;
we must also have adequate revenue to finance our nation's priorities.
H.R. 3654 would be significantly improved if it acknowledged more
explicitly the role that revenue reductions play in our long-term
deficits. In addition to exploring the traditional revenue base, AARP
would recommend particular focus on tax expenditures, that--similar to
spending entitlements--confer direct benefits automatically, require no
advance appropriation under the law, and have a large impact on the
Federal budget.
Finally, we commend the legislation's goal of increasing the
national savings rate, and urge policymakers to acknowledge the
importance of measures that encourage greater personal savings and
extended working lives. Such measures can improve our economy and our
fiscal health and make the transition to an aging society more
manageable.
I. AN AGING POPULATION IS NOT THE MAIN CULPRIT
A call to reduce the deficit exclusively by cutting back on
entitlement spending, particularly for Medicare and Social Security,
reflects two fundamental flaws: it lumps all entitlement spending
together, and it overemphasizes the budget impact in dollar-and-cents
terms, rather than by the impact they have on the lives of individuals.
AARP believes that as a nation we can balance the advancements of
longer life spans with the pressures that longevity place on our
government and our society. While demographics play a role in increased
Social Security and Medicare spending, the real budget culprit is a
fragmented and disorganized health care delivery system, as the
Congressional Budget Office (CBO) has repeatedly pointed out in
numerous reports. The myth that an aging population is primarily to
blame for long-term deficits must be carefully examined and rejected or
we run the risk of developing ineffective solutions.
Demographic aging is not a sufficient explanation for either
current or projected future growth in entitlement spending. Chart 1
shows spending for Social Security compared to spending for the two
largest health programs, Medicare and Medicaid, as a percentage of GDP
from 1962 to the present and projected out to 2082.\1\ If demographic
aging were the main problem, we would see similarities in the growth of
Social Security and Medicare and Medicaid.\2\ Instead, we see a very
striking difference in the past and future growth patterns of Social
Security and Medicare and Medicaid. In 2007, Social Security accounted
for 4.3 percent of GDP, and Medicare and Medicaid together accounted
for only slightly more--about 4.6 percent of GDP. The Congressional
Budget Office projects that Social Security spending will increase to 6
percent of GDP in 25 years and will stabilize after that. Medicare and
Medicaid, in contrast, are projected to surpass Social Security and
grow to 12 percent of GDP by 2050 and to 19 percent of GDP by 2082. The
differences in growth illustrate that demography as an explanation
misses much of the story. Social Security's growth ``bump'' from 2010
to 2035 is due almost entirely to the retirement of the boomer cohort.
By contrast, according to a recent CBO report, more than half of the
growth in federal spending on Medicare and Medicaid is attributable to
health care costs per person growing more rapidly than per capita GDP.
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\1\ CBO projects spending for Social Security, Medicare, and
Medicaid through 2082 based on growth in beneficiary populations as
well as other programmatic assumptions. Other entitlements are simply
assumed to grow at the same rate as GDP.
\2\ Both programs do have a substantial share of beneficiaries who
are under 65.
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CHART 1: SPENDING FOR THE THREE LARGEST ENTITLEMENTS AS A PERCENT OF
GDP, 1962-2082
Source: Congressional Budget Office, The Long-Term Budget Outlook,
January, 2008
II. SKYROCKETING HEALTH CARE COSTS
Health care costs threaten our nation's fiscal well-being as well
as the economic health of patients and their families, and of business
and labor.
The facts are well known, but they remain compelling. After
flattening at around 14% of GDP from 1995--2001, health spending is
again increasing as a percent of GDP. It reached 16% of GDP in 2006,
and is projected to reach 20% by 2017. U.S. health care spending is
substantially higher than that of any other developed nation, despite
the fact that we are the only nation that doesn't assure universal
coverage for its citizens. In 2005, for example, health care spending
was 15.3 percent of GDP in the U.S. That was about one-third higher (32
percent) than spending in the next highest country, Switzerland, where
health care spending reached 11.6 percent of its GDP. The median
developed nation spent just 9 percent of its GDP on health care.
The high cost of health care must be viewed in the context of the
systemic quality problems in our health care system. Research from the
Institute of Medicine of the National Academy of Sciences has found
that the United States has reached a level of overall health care
spending in this country at which incrementally higher aggregate
Medicare spending does not appear to be associated with higher quality.
The health care studies group at Dartmouth Medical School, which have
conducted careful research using the Medicare database, have also
reached sobering conclusions about Medicare spending. The Dartmouth
research finds that there are substantial cost differences in Medicare
among different geographic regions around the country, even after
adjusting for all of the relevant demographic factors.
For example, after all of the adjustments, Medicare spending still
varies by about 61 percent from the regions in the lowest spending
quintile to those in the highest spending quintile in the country. And
the higher spending regions (and states) are NOT associated with higher
quality. In fact, they achieve lower quality/service scores.
What accounts for the differences? A key factor, accounting for
more than 40 percent of the difference in spending among regions of the
country, is the structure of the underlying health care delivery
system. The researchers find that the higher cost/lower quality areas
have more hospital beds per capita, more specialists per capita, and
fewer primary care physicians per capita. That leads to higher costs
and lower quality because it appears that providers in those
communities provide more ``supply sensitive'' care.
The good news is that there are areas of the country, and states,
in which beneficiaries get better quality and service outcomes, at
lower cost to Medicare, and lower total coinsurance for patients. The
bad news is that beneficiaries in the other areas get worse quality at
higher costs. And all beneficiaries and all taxpayers pay more for
premiums, cost-sharing, and taxes to pay for the high cost
inefficiencies. We can begin to address this problem more broadly in
Medicare under the right conditions--and in particular, if payment
incentives are better aligned.
Medicare and Medicaid are both participants and leaders in the
health care system. As participants in the health care system, the
programs are subject to the dynamics of the underlying health care
system in which it purchases care. As leaders, the programs have a
source of leverage for change in that system--for example, Medicare has
a long history of leadership and innovation, especially in payment
policy. It is critical to balance Medicare's participant and leadership
roles in addressing the cost and quality issues in the overall health
care system, and to re-establish the program's long-term solvency.
That calls for a clear policy framework to assure that short-term
changes to Medicare are supportive of long-term goals. There are a
number of key cost and quality policies to pursue, including:
A much stronger infrastructure of information technology
to support the clinical and cost decisions made by health care
providers and their patients.
A much more robust national program of comparative
effectiveness research.
Improving the efficiency of health care delivery by
encouraging coordination of care. Coordination of care is important for
individuals with multiple chronic conditions and especially as
individuals move across care settings.
Providing much better and clearer information about the
cost and quality of care for providers, patients, families, and
communities. Quality and service issues should be as transparent as
possible, since it will stimulate the improvement that both clinicians
and patients' desire.
Reshaping payment incentives across Medicare--provider
payments in the traditional program, and health plan payments and
competition in Medicare Advantage. All parts of Medicare must work in
parallel to provide incentives to restructure care to better serve
beneficiaries, and the public at large.
III. SOCIAL SECURITY
Social Security is one of our nation's most popular programs among
people of all ages. By providing a guaranteed standard of living,
Social Security is the hallmark of responsible society. It is financed
through workers' contributions that establish eligibility for
retirement and disability benefits for workers and eligible family
members, and survivor benefits for the loved ones that workers of any
age and retirees leave behind upon their death. Social Security has
reduced poverty among beneficiaries more effectively than any
explicitly anti-poverty program, and it gives countless millions of
Americans the freedom to live the lives they choose. We must continue
to ensure that the defined benefit promise is preserved and made
secure, and that benefits remain adequate.
Most Americans would not have a viable retirement without Social
Security, and given our nation's low savings rate and diminished
pension system, it will be an even more critical pillar of retirement
income in the future. Today, 3 out of 5 retirees rely on Social
Security for the majority of their income, and nearly 1 in 3 count on
it for at least 90% of their income. We need to make Social Security
financially strong over the long-term so that our children and
grandchildren can have the same rock-solid foundation on which to build
a secure retirement that current beneficiaries enjoy, and so that all
Americans can have greater peace of mind.
CHART 2: RELATIVE IMPORTANCE OF SOCIAL SECURITY TO THE AGED 65-PLUS
POPULATION, 2004
Source: Social Security Administration, Income of the Population 55
or Older, 2004, Table 6A.1.
Social Security does not require draconian changes or a major
overhaul. Unlike health care, it is not projected to drain the Federal
budget. In fact, Social Security spending is a smaller share of GDP
today than it was in Ronald Reagan's first term. By 2016, it will still
consume about the same share of the economy as it did when Reagan was
first elected president. Eventually, Social Security's costs will rise,
but its growth will largely reflect the eligibility of the boomer
cohort, which will occur between 2008 and about 2030. When the last
boomer has retired, Social Security costs will resume a gradual and
manageable growth path.
While Social Security faces no immediate crisis, it does face a
serious, though manageable, long-term financing problem. Viewed from
the perspective of the Social Security Administration actuaries, even
with no changes, Social Security can pay full benefits through 2040;
after that date, Social Security can pay over three quarters of
promised benefits for decades thereafter.\3\
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\3\ OASDI Board of Trustees, 2008.
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Of course, delay is not desirable. Social Security's long-term
solvency can be resolved by relatively modest adjustments if we make
them sooner rather than later. The first priority of Social Security
reform must be to strengthen the long-term solvency of this guaranteed,
defined-benefit program. As in 1983, the path to successful reform of
Social Security is likely to combine additional revenues with changes
to the benefit structure in a way that maintains the integrity and
adequacy of the program but also ensures its long-term viability.
Solutions must also be evaluated in the broader context of retirement
security so that tomorrow's retirees are not put at greater risk. This
context is important given the shortcomings of our retirement savings
system.
IV. REVENUE
Any meaningful examination of deficit reduction should include a
look at both traditional revenue sources and tax expenditures. While
taxes are visible to all of us, tax expenditures--often called tax
entitlements--are not.
The Federal revenue base has eroded over the past seven years.
Federal revenues dropped by nearly 5 percent of GDP in only four years
(between 2000 and 2004) and spending increased by 1.5 percent of GDP
\4\ sending the budget from a surplus of 2.4 percent of GDP in 2000 to
a deficit of 3.6 percent of GDP in 2004. Although revenues recovered
somewhat in 2005 and in 2006, they are still well below their peak of
2000, and below levels needed to finance our increasing domestic and
global commitments.
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\4\ Five percent of GDP in 2006 is about $650 billion, more than
twice the budget deficit for FY2006. This decline was from an all-time
high of revenues as a percentage of GDP, which reached 20.9 percent of
GDP in 2001.
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The tax code contains a multitude of tax provisions that
automatically convey benefits, similar to spending entitlements, but
they have very different distributional effects. Tax entitlements
entail significant amounts of foregone revenue and have a deficit
impact similar to spending entitlement programs. The benefits of tax
entitlements are generally skewed toward more affluent individuals.
Unlike Social Security and Medicare, which spread their benefits
broadly, tax entitlements are highly skewed to the most affluent 20
percent of the U. S. population.
V. BUDGET COMMISSIONS
Over the years, the growing Federal deficit, the long-term
financial problems in specific spending programs, such as Medicare and
Social Security, and the need for tax reform have resulted in the
creation of specific commissions and many more calls for them. The key
to success for any policy process, whether a Congressional debate or a
commission, is to properly define the fundamental nature of the problem
and to propose solutions that can garner political and popular support.
Successful commissions, such as the 1983 Greenspan commission on
Social Security, have a specific charge, are composed of key decision-
makers, are bipartisan, take sufficient time to deliberate, and allow
our elected officials the opportunity to make changes. The ultimate
success of the 1983 commission's recommendations depended on the
willingness of key Administration officials and Congressional leaders
to come together and finish the job the commission started.
Another successful commission was used for base closings and serves
as a model for the SAFE commission. However, the base closing
commission had a limited mission, and its recommendations had a high
impact on limited geographic areas. The importance and scope of
spending and revenue changes that would impact all Americans nationwide
do not lend themselves to the procedures that were used for closing
military bases or other more narrowly focused objectives.
Commissions are not a substitute for the willingness of our
nation's leaders to come together and solve problems. Bipartisan
membership--as the SAFE commission requires--is a solid first step, but
not enough to guarantee success. Finding solutions will also require
the engagement of the American people--raising their awareness, getting
their input, and winning their support. We commend the legislation's
requirement for public comment, but we caution that given that the
issues at stake in this legislation go to the heart of the health and
financial security of every American, greater opportunity for a full
and open congressional debate is not only important, but necessary.
VI. BUDGET TRIGGERS
Some have advanced the concept of a budget ``trigger'' as a way of
forcing action to deal with future budget deficits. H.R. 3654 includes
a provision that would allow a super-minority of the SAFE commission to
include an automatic stabilizer or trigger in the commission's
legislative recommendations. Closer examination of past experience with
triggers leads to the conclusion that this mechanism will not be an
effective budget tool. Too often efforts to avoid the trigger divert
attention from adopting more comprehensive solutions to the underlying
problems.
Triggers are flawed for several reasons. First, budget triggers are
generally premised on the notion of an arbitrary, across-the-board cut
in spending--a premise that frequently ignores the role revenues should
play in reaching deficit targets; Second, triggers rarely take into
account the resulting adverse impact on those harmed by the arbitrary
cuts. Third, triggers are based on a combination of uncertain economic
projections and assumptions about the actions of future Presidents and
Congresses. Fourth, triggers are intended to force action, not set
policy, and therefore generally avoid policy choices. Finally, the
operation of a trigger is assumed to be ``automatic''; the President
and/or Congress must act once the trigger is pulled.
A. BUDGET PROJECTIONS ARE UNCERTAIN
The inherent uncertainty of economic projections and models to
project spending and revenues accurately is widely recognized. CBO
routinely presents information on the range of uncertainty surrounding
its five year budget projections. For example, CBO's current projection
of the budget balance in 2013, five years in the future, shows a small
surplus--$70 billion. However, there is a 50 percent chance that the
actual balance will range from a deficit of $330 billion to a surplus
of $450 billion. Basing a ``hard'' trigger--one that requires automatic
benefit cuts or tax increases on projections that are subject to such
uncertainty would be unwise.
B. TRIGGERS CANNOT DEAL WITH THE CAUSE OF THE PROBLEM, ONLY THE
SYMPTOMS
Simply establishing targets for mandatory spending and revenues
will not reform the health care system or the tax code. Reducing
system-wide health care costs is the problem that must be addressed to
bring the budget on to a path that is sustainable for the long-term. In
fact, triggers may make this difficult to make much needed
investments--such as in Health IT and more evidence-based research--
that will save money in the long-term.
c. automatic mechanisms have failed to achieve their goals in the past
The history of the Federal budget in recent decades is replete with
examples of the failure of mechanisms that resembled triggers to force
action. When such automatic cuts in popular programs are likely,
Congress has usually shied away from allowing them to happen.
The Balanced Budget and Emergency Deficit Control Act of 1985
(Gramm-Rudman-Hollings or GRH) established ``fixed'' deficit targets
with the goal of balancing the budget. If projections showed that the
targets would be breached, automatic cuts to mandatory programs were
required by the law. It was generally acknowledged that these targets
were too optimistic and that proved to be the case. Only once were the
automatic cuts allowed to proceed, then the targets were ``adjusted''.
This experiment with fixed targets was tossed aside a few years later.
This discussion confirms that an automatic trigger rarely, if ever,
is an effective deficit-reduction tool, and often promotes budget
gimmickry to forestall politically unpleasant events. In this regard,
automatic triggers may actually be counterproductive to the goal of
addressing our structural deficit, by delaying real reform. AARP
strongly recommends that efforts to create a ``trigger'' in vital
programs like Social Security, Medicare and Medicaid be rejected.
Instead, we should focus on the necessary longer term solutions.
VII. CONCLUSION
The United States is reaching a tipping point with millions of
Americans concerned about their health and long-term financial
security. As policy makers seek to deal with budgetary issues, they
must do so in a way that addresses these issues of retirement and
health security that most people worry about everyday .
The debate over government spending and revenues, and especially
Medicare and Social Security, and their impact on the budget, has
focused primarily on projected costs, with less attention given to the
beneficial impact these programs have had on people's lives. The debate
has also failed to focus on the underlying problem of system wide
health care costs, which largely drives the increase in projected
entitlement spending. Finally, the debate often isolates revenues from
serious examination. The challenge is to improve the quality of
people's lives while finding ways to keep retirement, health care and
other systems affordable and sustainable. These are complex issues that
will require the involvement of every sector of society. Meaningful
solutions are the responsibility of all of us--governments, businesses
and individuals. Working together, with the right focus and framework,
we can ensure affordable quality health care and financial security for
current and future generations.
[Statement of Mrs. Kennelly follows:]
Prepared Statement of Hon. Barbara B. Kennelly, President and CEO,
National Committee to Preserve Social Security and Medicare
Mr. Chairman and Members of the Budget Committee, the National
Committee to Preserve Social Security and Medicare is pleased to have
the opportunity to submit testimony for your hearing on ``The SAFE
Commission Act (H.R. 3654) and the Long-Term Fiscal Challenge''.
The National Committee is made up of millions of senior citizens
around the country who are care deeply about Social Security and
Medicare and want to see them preserved and strengthened for future
generations. Unfortunately, much of the discussion in recent years has
not focused on increasing Social Security solvency but rather on using
Social Security's funding gap as a pretext for unraveling the program.
Similarly, those who are philosophically opposed to Medicare have used
rising health care costs in the general health care system to promote
their proposals to privatize Medicare.
The National Committee is very concerned about the inflated fiscal
rhetoric surrounding Social Security and Medicare. Often the future
costs of these programs are inappropriately combined to generate an
enormous multi-trillion dollar number to advance the notion that
spending on entitlements is out of control. While Social Security and
Medicare, in combination, are designed to provide older Americans with
a sound foundation in their old age, they are in fact two very
different programs.
Contrary to some accounts, Social Security is not facing bankruptcy
but has a funding gap which is both modest and manageable. This gap is
based primarily on demographics. Medicare, on the other hand, is a
health care program. Most of its cost increases are being driven by the
inflation in overall health care, not demographics. The reasons for
these health care cost increases are many and complex and need to be
addressed in a larger context. Cutting Medicare benefits without
addressing this larger problem will only shift additional costs onto
Medicare beneficiaries.
The younger generation has been led to believe that the
demographics of the Baby Boomer generation will condemn them to a
desolate future. Nothing could be further from the truth. Baby Boomers
have been with us for a long time. The bulge produced by that
generation has been working its way through society ever since the Baby
Boomers were born. When they needed schools, this country built them.
When they needed homes, this country helped finance them. While some
would have us focus on the declining ratio of workers to retirees, the
more correct measure is the ratio of workers to the total number
dependents of all ages. That ratio remains the same as it was in the
1950s when the Baby Boomers were in school.
The millions of members and supporters of the National Committee
remain very concerned that the overheated debate on entitlement reform
will lead to privatization of Social Security. Thus, they are opposed
to the establishment of a commission or task force on entitlements that
offers a backdoor path to the enactment of private accounts.
Representatives Jim Cooper and Frank Wolf have introduced the SAFE
Commission Act (H.R. 3654) which would create a bipartisan entitlement
commission. The legislation would empower a small group of individuals
to write legislation on Social Security, Medicare, Medicaid and taxes.
The National Committee has several concerns about this proposed
process. The commission's legislation would be fast-tracked through the
Congress. No amendments would be permitted with the exception of
substitutes from specified officials. Moreover, committees of
jurisdiction, including those Members of Congress who are the most
familiar with the workings of these programs, would be effectively left
out of the process.
Most importantly, the National Committee strongly opposes any
commission which is allowed to consider privatizing Social Security
among its options. After a long national discussion when President Bush
offered his privatization proposal in 2005, Social Security private
accounts were soundly rejected by the American people. That is because
privatization would dismantle our nation's most successful retirement
security program and would do nothing to improve Social Security
solvency. Private accounts have no place in any conversation intended
to strengthen Social Security for future generations. Any commission
that does not specifically preclude private accounts will certainly be
interpreted by America's seniors as a surreptitious effort to resurrect
this failed initiative.
We believe that a commission that focuses on Social Security and
Medicare in the context of the federal budget, with little regard for
the critical role these programs play in the income and health security
of future retirees, would be inherently biased and would inevitably
result in a reduction in the standard of living of older Americans.
In this debate, we sometimes lose track of the reasons Social
Security was enacted in the first place. It is important to repeat a
few things about Social Security and its beneficiaries. Social Security
is the largest single source of income for older people. Among lower-
income people, Social Security is almost 85 percent of their income.
Social Security pays a monthly benefit that lasts as long as you live--
which is particularly important for women who live longer and find
their small assets dwindling. Social Security benefits are modest--the
average Social Security retirement benefit is only about $12,000 a
year. Social Security provides disability benefits for those who lose
wages due to a disabling condition, and it provides benefits to young
spouses and children if a worker dies. Finally, without Social
Security, over half of seniors would live in poverty.
Similarly, Medicare provides basic, affordable, universal health
care to a population largely shunned by private health care plans.
About 70 percent of Medicare beneficiaries have incomes under $25,000
and 85 percent have incomes under $40,000. Almost two out of three
elderly households have incomes under $20,000, and they are already
spending 30-50 percent of their income on health care.
Arbitrarily cutting Medicare without getting at the root of the
continuing upward trend of health care costs will have real impacts on
real people--most of whom have nowhere else to go for coverage and
limited options for increasing their resources.
The National Committee and it members and supporters care deeply
about the future. We favor balanced and responsible action to address
the funding gaps facing Social Security and Medicare. However, we are
dismayed by the overblown rhetoric about entitlements because we
believe that it stands in the way of real changes that would strengthen
these essential programs. We look forward to working with the Congress
to ensure the continuation of Social Security and Medicare for the
benefit of both current and future generations.
Chairman Spratt. In addition, Mr. Frank Wolf, Congressman
Wolf is to participate today. He is a cosponsor of the bill
before us, along with Mr. Cooper. I don't think Mr. Wolf is
here, but I would like to ask unanimous consent at least to
extend him the courtesy of sitting on the panel with us. He
would, of course, come last in order for questions.
Is there objection?
Hearing none, so ordered.
On the subject of the hearing this morning, there is really
little dispute our Nation faces grave fiscal problems in the
foreseeable future; and the sooner we address them the better.
Today's hearing centers on Cooper-Wolf, H.R. 3654, a bill
calling for a commission along the lines of the Base Closing
and Realignment Commission. Though I have concerns about this
bill, I have great admiration for its sponsors, our Budget
colleague Jim Cooper and veteran appropriator Frank Wolf. I
believe their bill is a genuine effort to address a serious
problem, and I salute them, but I am not sold on the vehicle
they are offering.
I acknowledge the precedent for a commission. The Greenspan
Commission in 1983 was a huge success, but its recommendations
did not bypass committees of long-standing jurisdiction, it did
not come to the floor in an up-or-down, take-it-or-leave-it
vote.
In the years afterwards, the initiatives to resolve the
deficits of the Reagan-Bush years all took the form of select
groups drawn from the leadership on both sides who hammered out
agreements with the prevailing administration. That was true of
Gramm-Rudman-Hollings in 1985, of the Bush Budget Summit in
1990, of the Clinton budget in 1993, and of the balanced budget
agreement in 1997.
Members of Congress working with the executive branch
produced these agreements. As a result, these core groups who
have been involved in the production of the agreement acquired
some equity in the outcome and became advocates for passage
through committee and onto the floor.
I am not at all convinced that this commission of 18
members, only four of whom are Members of Congress, will have
the traction needed to push unpopular reforms and entitlement
cuts through Congress and some real reservation about fast-
track procedures that bypass Ways and Means and Commerce and go
straight to the floor, more or less unamendable, vote it up or
down. I think a lot of members will look upon this as an
overdelegation of authority.
The commitment and the consensus needed to tackle these
problems starts with the President, with the leadership of the
Congress, and there is no substitute for it. We saw that
commitment in 1990, 1993, and 1997.
In 1997, for example, every time the four budget principals
met, every time we met, President Clinton had his first team on
the field. It could be one day Frank Raines, the next day
Erskine Bowles, but somebody was in the room every time we met
who had the President's proxy, and that commitment was not lost
on anybody who was participating.
There has been no such commitment during the Bush years,
certainly no effort to build or forge consensus. Unless there
is commitment among all the stakeholders, the most likely
outcome is that the commission's report will meet the same
forgotten fate as countless other reports from other
commissions.
The bill also has some oddities that we can cover with
questions when the time comes. One is it provides for dynamic
scorekeeping, which violates rule one of the Greenspan
Commission. In that famous anecdote, Greenspan announced to his
commissioners as they got started, everybody is entitled to his
own opinion, nobody is entitled to more than one set of facts,
and these are the facts.
I know that you will find it--be shocked, shocked to hear
it, but projections, economic projections can be manipulated
and dynamic scorekeeping is one way of skewing a forecast in
your favor, which is one reason mainstream economists are wary
of it.
Let me make a few other random observations and then turn
to Mr. Ryan for his statement.
This bill singles out entitlements but seems silent on
other cost drivers, as if entitlements were all of the problem.
They are certainly a big part of the problem. There is one
claim, for example, on the budget which is never called a
entitlement, though it is obligatory, and that is net interest
on the national debt. Interest is too large to be eradicated,
but we still have to mitigate or rein it in or else the efforts
to reduce entitlement spending will be overcome by the swelling
in another obligatory account, that for debt service. We will
reduce Medicare, Medicaid, only to have the reduction displaced
by the increasing costs of debt service if we do not first
balance the budget.
My colleagues on the Democratic side are unlikely to put
their middle-income constituents through the wringer with cuts
in Medicare and Medicaid only to have debt service keep rising
and eclipsing our other priorities.
One of the lessons learned in the 1990s is that the traffic
will bear politically only so much. Social Security reform came
in 1983, years before Medicare and Medicaid cuts of 1990, 1993
and 1997. It is hard for me to believe that Congress in one
fell swoop can cut all of the entitlements down to an
affordable size. It is also hard to believe that we can extend
the 2001 and 2003 Bush tax cuts, repeal the estate tax, repeal
the alternative minimum tax, then add a few more tax cuts to
the mix while we keep on increasing defense and funding other
deficits, infrastructure, innovation, education. It is hard to
believe that we can do all of the above and still solve this
equation.
One preferred way that I think we would all support if it
were entirely viable, one preferred way to make our
entitlements more affordable, is to make our people and our
economy more productive. For that reason, I think that a budget
reducing long-term liabilities should be discriminating when it
comes to the support of education and job training and
infrastructure and research and development and innovation, all
of which can become long-term assets.
Medicare and Medicaid are typically singled out in this
bill as the chief culprits, the fastest-rising accounts in the
budget; and over the long run they are clearly the biggest part
of the problem. But right now, the fastest-rising spike in the
budget post the year 2000 is national security. Since 2000,
national security has increased from 300 billion to between 6
and 700 billion this year. If we want to balance the budget, we
have to curb or cut discretionary spending; and since defense
constitutes well over half of discretionary spending, it, too,
has to be subject to constraints. This is the elephant in the
room which we seldom discuss, but it is still part of the
problem.
To rid the budget of deficits in the '80s and '90s
following the Reagan tax cuts and the defense build-up, it took
almost 15 years and four deficit reduction plans.
The good news is that we perfected the process. We sorted
out what would work: multi-year budgets, pay-as-you-go
entitlements, discretionary spending caps, and across-the-board
automatic cuts. The bad news is today the deficits are probably
more intractable due to the retirement of the baby boomers, war
in two theaters, increasing debt service, and may take even
longer and several more iterations before we ever get rid of
these deficits.
To resolve this problem is quite simple. Everybody needs to
be at the table, and everything needs to be on the table, and
all stakeholders for good-faith purposes should ante up, should
have some skin in the game. That was true the last time we did
such an agreement.
President Clinton led by offering $110 billion in Medicare
cost reductions. Scored later at $90 billion, he raised it back
to $100 billion. That was his earnest money. That was his ante.
That was the way we propelled and carried forward these
negotiations. And that precedent I think is a worthy one as we
consider how to do it again.
In the next few months, we will have a new President.
Whether it is President Obama or President McCain, let's hope
he will sit down with congressional leadership and decide how
we can move back to the path of deficit reduction and toward
the solvency of our major entitlements.
With a shared commitment--that is critical, shared
commitment, we can't do it either party by itself--we can move
the ball again, I believe, as we did in the 1990s. If the
Congress and the President do not have that sense of shared
commitment, that agreement to work together and consensus about
what needs to be done, I doubt that a commission can supply it.
We have today a distinguished panel of witnesses: Pete
Peterson and David Walker from the Peterson Foundation; Bob
Greenstein from the Center on Budget and Policy Priorities;
Henry Aaron from the Brookings Institution; and Alison Acosta
Fraser from the Heritage Foundation. That pretty well covers
the spectrum, and we look forward to a lively discussion.
Before turning to you, let's go to the ranking member, Mr.
Ryan.
Mr. Ryan. Thank you, Chairman. I appreciate your
indulgence, and I appreciate the fact that you are having this
hearing today.
I also want to welcome all the esteemed witnesses we have
today. Dave Walker, it is great to have you here again with us.
You are a very familiar face here with us, and we are glad to
see you here in your new capacity.
Just last week, Congressman Cooper and I had the
opportunity to participate in a bipartisan event right here in
this room, sponsored by the Brookings Institution, with the
sole purpose of discussing the entitlement challenge. It was 11
a.m. on Wednesday. We didn't have any coffee. We didn't have
any donuts. It was just Mr. Cooper and me doing our respective
PowerPoints on entitlement reform. And, you know, we actually
filled this hearing room; and I understand that Brookings even
had to turn people away because we ran out of seats.
I have probably given that presentation 50 times in the
past month or so, mostly back home in Wisconsin; and the people
keep coming because Americans know that there is a problem.
They are beginning to understand the magnitude of the problem,
and I can tell you from my own experience they are ready to
hear from their representatives about how we plan to solve the
problem. Now we just need to get Washington up to speed with
the rest of the country.
Now, Chairman Spratt, you are doing your part. He has
called more than a dozen hearings dealing with the entitlement
crisis and once again brings this issue before the committee.
And my friend Congressman Cooper, who requested this hearing
today, and who, along with Congressman Frank Wolf, who I think
is going to join us later today, has proposed this bipartisan
commission to look at ways to address this challenge. All of
these individuals ought to be commended for their efforts.
It should also be a major component of the campaign debates
this year. Because if the candidates--and I am talking about
every candidate running for Federal office--are going to talk
about the issues of importance to the American people,
entitlements had better be part of that discussion.
But I also believe it is time Congress gets onto the
business of doing what our constituents actually sent us here
to do, and that is to move beyond simply talking about the
problem and actually finding solutions to those problems.
Because I believe that, I introduced my own proposal. It is
called the Roadmap for America's Future. It addresses this
challenge in a very comprehensive way and achieves the
following three objectives: It fulfills the mission of health
and retirement security for all Americans, it removes the
massive debt burden for the next generation and ensures
American jobs and competitiveness in this 21st century global
economy.
I won't go through all the details. As you can see, it is a
pretty thick bill. It is hundreds of pages long, with a 70-page
report to go along with it. But, to be clear, it is a real plan
with real proposals, real numbers to back them up and actually
real legislation to implement it.
I don't expect everyone to agree with every aspect of it,
but I would ask you to take a look and leave your comments and
input. You can go to our Web site at Americanroadmap.org,
because we need all to be a part of this discussion.
Every expert Congress can find, from the GAO to CBO to the
Fed to Heritage to Brookings, they have all come to the same
conclusion. The entitlement crisis is real, it is serious, it
is not going away, and it is getting dramatically worse with
every year we fail to act.
Congress has already demonstrated what does not work.
Ignoring it doesn't work. Playing the demagogue doesn't work.
Pointing fingers at each other doesn't work. We have done all
of these here in Congress, both political parties; and every
time we find ourselves another year deeper in the hole.
Well, I have with me over here on my left shoulder my 6-
year-old daughter, Liza. I bring each one of my three kids up
here for a week with me during the summer break. By the time
she is raising her kids and when she is my age, on the current
trajectory the government will be twice the size that it is
today, twice the tax take. The debt will be insurmountable, and
we will for sure quantifiably be handing the next generation an
inferior standard of living if we do nothing.
So I ask everybody, look your 6-year-old in the eyes, your
daughter or your granddaughter, and ask yourselves here in
Congress, is this what we should be doing or should we come
together and fix this?
We have got to recognize that these problems aren't
Democrat problems--Democratic problems, excuse me, they are not
Republican problems, and neither are the solutions. We have got
to build bipartisan support for action, and we have got to move
beyond simply rehashing the problem to the politically
difficult but critical task of debating, implementing actual
solutions for the American people.
Chairman, I thank you for having this hearing, and I look
forward to our witnesses' testimony. Thank you.
Chairman Spratt. Thank you, Mr. Ryan.
And before going to our witnesses, let me recognize Mr.
Cooper, the co-author of this bill.
Mr. Cooper. Thank you, Chairman Spratt. I appreciate your
holding this hearing.
It should be stated for the record that this hearing was an
agreed compromise in return for Blue Dog votes for the budget.
You were kind enough to allow us this hearing. Whether this
bargain was worth it remains to be seen. I feel a little bit
like that t-shirt we see sold on the street that says my
parents got the vacation, all I got was this t-shirt.
Mr. Chairman, you correctly stated in your opening comments
that we face grave fiscal problems; and yet the status quo
lobby here in Washington is so awesomely powerful this Congress
will do little or anything about those problems. This hearing
is one of our few chances.
I wish it were a markup. A number of the comments that you
have made, Mr. Chairman, and that we will hear in testimony do
little more than create straw men and proceed to tear them
down. Frank Wolf and I are very open on the membership of the
commission. It can be anything you want. We are completely open
on the issues before the commission. Taxes are on the table.
And yet this bill has 40 or 50 Republican and Democratic co-
sponsors. Tax expenditures are on the table, contrary to what
you see in some of the testimony. Everything is on the table
because we need to deal with these problems now.
Mr. Chairman, you know that the Presidential candidates are
busy. They don't have time to focus on this. Members of
Congress are not as busy, but we are still not focusing. I wish
we could have a substantive hearing on Medicare reform,
Medicaid reform, health care reform, Social Security reform.
But where are those hearings? They are simply not happening.
I think the best way to put this is, Mr. Chairman, history
is watching; and they are seeing this Congress do virtually
nothing. And yet this could be the gravest issue of our time.
I asked a senior administration official--I won't embarrass
him publicly. He acknowledged there were terrible long-term
problems. And I said, well, sir, when does the long term begin?
He said January 20th, 2009. Well, that is a completely
irresponsible attitude. I hope that we don't go down in history
as the ostrich Congress, having sunk our heads under the dirt
when we knew danger was approaching.
I think the best way to show our love and commitment to our
seniors, to all of our family members of whatever age, and to
these vitally important American entitlement programs is to
prepare to meet the need, not to duck. So, Mr. Chairman, that
is what this hearing is really all about.
I want to commend Pete Peterson, David Walker, because they
have shown leadership on this issue for a long time. Books like
this, their continued efforts, I just hope that we can rise to
the challenge as the people's elected representatives to look
beyond the horizon, to prepare for what will otherwise be a
very tough, dismal future.
Thank you, Mr. Chairman.
Chairman Spratt. Thank you, Mr. Cooper.
STATEMENTS OF HON. PETER G. PETERSON, CHAIRMAN, THE PETER G.
PETERSON FOUNDATION; HON. DAVID M. WALKER, PRESIDENT AND CEO,
THE PETER G. PETERSON FOUNDATION; ROBERT GREENSTEIN, EXECUTIVE
DIRECTOR, CENTER ON BUDGET AND POLICY PRIORITIES; HENRY J.
AARON, PH.D., BRUCE AND VIRGINIA MACLAURY SENIOR FELLOW,
ECONOMIC STUDIES, THE BROOKINGS INSTITUTION; AND ALISON ACOSTA
FRASER, DIRECTOR OF ECONOMIC POLICY STUDIES, HERITAGE
FOUNDATION
Chairman Spratt. And now let's turn to our panel, beginning
with the senior statesman on the panel, Mr. Peter Peterson.
Mr. Peterson, thank you for coming; and the floor is yours.
We will make your statement part of the record so that you can
summarize it as you see fit.
STATEMENT OF HON. PETER G. PETERSON
Mr. Peterson. Thank you, Mr. Chairman and members of the
committee. I am pleased to be here today to talk to those of
you who have the opportunity to find sustainable, long-term
solutions to the problems facing the American economy. As you
alluded to with my senior statesmanship, I have been around a
long time, and it has been a long time since I have seen this
many problems of a long-term nature that I call undeniable,
unsustainable, and yet politically untouchable.
Permit me to start with one number. $53 trillion dollars in
today's dollars is what the country owes, is projected between
our future liabilities, our national debt, and our huge
unfunded promises for programs like Social Security and
Medicare. Social Security and Medicare are about 44 trillion of
this. It is significant that Medicare is projected to be about
35 trillion and Social Security is something on the order of 7
trillion. So Medicare is by far the largest fiscal problem.
Every American with this kind of debt is now burdened, most
of them unknowingly, with more than $175,000 in Federal
liabilities and unfunded government promises. Taxes would have
to more than double to pay for them. Slipping this huge check
of debts and taxes to our children should indeed be not only
unthinkable but immoral. And our unprecedented current account
deficits and levels of foreign debt, given our record low level
of savings, is downright dangerous.
Given our abysmal national and personal savings rate, we no
longer owe this debt to ourselves, we owe much of it to
foreigners. We simply must increase national and personal
savings. We are leaving this country vulnerable to economic and
geopolitical risk that no great country should be taking. And
ballooning health care costs, our number one fiscal problem by
far, threaten the very competitiveness of our economy.
In our lifetime, as you know, 78 million boomers will
retire, causing the cash deficits of Social Security and
Medicare, the foundation of America's social safety net. These
deficits happen long before the so-called and, in my view,
fictional trust funds are solvent. These programs must be
reformed to reflect the demographic realities, while also
making them solvent, sustainable, secure, and more savings
oriented.
The question, of course, is how to reform. Some would
suggest that we simply raise taxes. Beyond the thought that it
is unthinkable that we double taxes, I hear proposals that
eliminating the Bush tax cuts that is going to fat cats like
myself will go a long way to solve this problem.
Let's look at some melancholy realities. Let's suppose we
got rid of all the Bush tax cuts, and I hear few proposing
this. This would amount to something like 1 percent of the GDP.
The projected increase in entitlement spending is 9 percent of
the GDP.
On the other hand, particularly given the rapidly growing
inequality of incomes, I consider it inevitable that, at the
very least, taxes will be increased for the well off. The point
is, will they be combined with fundamental reform of these
programs?
Permit me to make one other rather obvious point. Spending
these unthinkable amounts on mandatory entitlement programs
means that other critical investments will be crowded out. I
mean crucial investments in our children, their health and
their education and research and development. Indeed, as I look
at the history, that crowding-out process has already begun.
I am here because I am committed to meaningful results in
my lifetime. As the Congressman indicated, this is an American
issue; and I am devoting a great deal of not just my energy and
my time but my financial resources to bring Americans together
to find lasting, long-term solutions.
Sadly, we have gone from being an optimistic and hopeful
society to one of great anxiety and increasing pessimism. For
the first time in our history, a majority of Americans believe
their children will not have a better standard of living than
they do. That, my friends, is simply unacceptable. We owe it to
the next generation to keep that dream alive and fully intact
the way our parents did.
Engaging America's youth is critical to this process. They
are the ones, after all, who will inherit this sobering future.
They are truly our greatest asset, which is why they must be a
fundamental part of any conversation about America's future and
the path they will take to get there. Through the Peterson
Foundation, we encourage Americans to make responsible choices
today, while providing opportunity for tomorrow.
This lack of sustainability will eventually begin to
cripple America and threaten the very foundation of not just
our financial system but our country. The time for action is
now. The greatest generation confronted challenges at least as
daunting as this one's. They fought and paid for the costliest
war in history in every sense of the word costly. Not only did
they repay debts far higher than today's, but they bought into
and paid for the GI bill, the Marshall Plan, and the huge
infrastructure highway program.
We have done it before, and I can see no reason we cannot
do it again. But the changes required must begin somewhere. I
see no better place than this room right now. So today it is
our mutual turn to do something.
Thank you.
Chairman Spratt. Thank you, Mr. Peterson.
[The statement of Peter Peterson follows:]
Prepared Statement of Hon. Peter G. Peterson, Chairman, Peter G.
Peterson Foundation
Thank you, Mr. Chairman and members of the committee. I am pleased
to be here today talking to those of you who have the opportunity to
find sustainable, long-term solutions to the problems facing the
American economy. I don't intend to talk only about facts and figures,
though some will be necessary to paint an accurate picture of the
daunting situation we're in right now.
To that end, I would ask that if you leave here remembering only
one number, let it be this one: 53 Trillion.
Fifty-three trillion dollars in today's dollars is what this
country owes between our national debt, future liabilities, and our
huge unfunded promises for programs like Social Security and Medicare.
It's an ugly number. It's unacceptable. And frankly, I believe it is
Un-American.
Our nation is sinking deeper and deeper into debt and unsustainable
promises while Americans are asking more and more from the government.
This is a vicious cycle that MUST be broken, before it breaks us.
That's exactly why it's time for all Americans to know what these
critical issues are, why they are important, and what we can do
together to fix them NOW--before it's too late.
These sustainability challenges are not new. They've been building
under the surface of America's social and economic policies for years.
More specifically, government obligations are reaching unthinkable, and
worse, unmanageable levels. Every American--even the youngest among
us--is now burdened, most of them unknowingly, with more than $175,000
in federal liabilities and unfunded government promises. Taxes would
have to more than double to pay for them. And that is unthinkable not
only economically, but morally. Slipping this huge hidden check of
debts and taxes to our children should, indeed, be declared immoral.
And, our unprecedented current account deficits and levels of foreign
debt, given our record low level of savings is downright dangerous.
Given our abysmal national and personal savings rate, we no longer owe
this debt to ourselves. We owe it to foreigners. We simply must
increase national and personal savings. We are leaving ourselves
vulnerable to economic and geopolitical risks that no great country
should be taking. And ballooning health care costs threaten the very
competitiveness of our economy.
In our lifetime, 78 million baby boomers will retire, causing huge
cash deficits of Social Security and Medicare, the foundation of
America's social safety net. These deficits happen long before the so-
called and, in my view, fictional trust funds are solvent. These
programs must be reformed to reflect the demographic realities and
longer life spans while also making them solvent, sustainable, secure,
and more savings-oriented.
With all of this in mind, I'm here today because I'm committed to
ACTION, to seeing real, meaningful RESULTS in my lifetime. This isn't
my personal issue; this isn't a Democrat or Republican issue; it's an
American issue. That's why I am dedicating so much of my energy, my
time, and my resources to bringing Americans together to bring about
lasting, long-term solutions to the shared challenges facing our
nation.
Sadly, we've gone from being an optimistic and hopeful society, to
one of great anxiety and unity and increasing pessimism. In fact, for
the first time in our nation's history, a majority of Americans believe
their children will not have a better standard of living than they do.
That, my friends, is simply unacceptable. It also means we're letting
the promise of the American Dream slowly slip away. We owe it to the
next generation to keep that dream alive and fully intact, the way our
parents did for us.
Engaging America's youth is critical in this process. They are the
ones, after all, who will inherit this sobering future. They are truly
our greatest asset, which is why they must be a fundamental part of any
conversation about America's future and the path we will take to get
there.
Through the Peter G. Peterson Foundation, we encourage Americans to
make the responsible choices necessary today, to ensure lasting
opportunity for tomorrow. Our goals certainly aren't easy, but neither
are the challenges before us. And these challenges, if ignored, will
only get worse until we are faced with the possibility of a complete,
system-wide failure. This lack of sustainability will eventually begin
to cripple America and threaten the very foundation of our financial
system. The time for words has passed. The time for action is now.
While the Greatest Generation faced a threat from abroad, this
generation faces a threat from within. I'm here before you to today
because I believe that, together, there truly are no challenges we
cannot overcome as a nation. By creating the Peterson Foundation, I
hope to motivate this generation of Americans to take action and create
a movement.
I hope that you will join the Peter G. Peterson foundation in our
mission, striving not only to reform America's out of control spending,
but also to rebuild our nation and ourselves. I do believe that if we
are willing to change, our best days are still to come. But, that
change must begin somewhere. I see no better place than this room,
right now.
Today, it's your turn.
Chairman Spratt. And now we go to your colleague, the
Honorable David Walker, formerly the head of the GAO, which is
the last iteration we knew him, and now the President and CEO
of the Peterson Foundation. Dave, welcome back.
STATEMENT OF HON. DAVID M. WALKER
Mr. Walker. Thank you, Chairman Spratt, Ranking Member
Ryan, members of the House Budget Committee. It is a pleasure
to be back before you, this time as a private citizen, with my
partner and boss, Pete Peterson.
Today, the Peterson Foundation is issuing a publication
entitled The State of the Union's Finances. This citizen's
guide provides a clear and compelling picture of the Nation's
true financial condition and longer-term fiscal outlook. Every
Member of Congress, every Senator, every Cabinet official,
every Presidential candidate and, yes, the President and Vice
President will receive a personal copy. It is also available on
our Web site, which is www.pgpf.org.
While the graphics and tables in this book look nice
visually, they present an ugly picture fiscally. As the cover
demonstrates, based on historical tax levels and absent
meaningful entitlement spending and tax reforms, the United
States will face debt burdens in the future that would make the
U.S. look like a third-world nation from a public finance
perspective.
What do we need to do? First, as I have testified before,
we need to provide more transparency in connection with our
current accounting and budgeting processes. Increased
transparency should involve some restructuring of the way the
current budget is prepared and presented to the Congress and
the President.
From a financial reporting perspective, among other things,
the government needs to recognize that the bonds in the so-
called trust funds should be deemed to be liabilities. You
can't have your cake and eat it, too. Either they are a
commitment of the United States or they are not. If they are,
they are a liability. And it should place more emphasis on
fiscal sustainability and inter-generational equity.
In addition, a summary annual report of the Nation's
finances should be issued each year, and a longer-range fiscal
sustainability report should be issued by our government every
4 years, as in the case of most industrialized nations who are
focused on the future.
I have included in Exhibit 1 of my testimony a summary of
the types of reforms that are needed.
In addition to the above steps, we need to reimpose tough
statutory budget controls on both the spending and the tax side
of the ledger. After all, both sides of the books contribute to
our Nation's bleeding bottom line.
In my view, the Congress also needs to consider adopting
biennial budgeting and appropriations processes, and it needs
to provide better recognition of the difference between capital
expenditures and operating expenses, while providing
appropriate safeguards to prevent mischaracterization.
Beyond the budget and appropriations processes, in my view
the regular order for addressing complex and controversial
reform legislation, especially entitlement reform legislation,
but not solely that, is not adequate to deal with the number
and magnitude of the reform efforts that we must address if we
expect to return to a more prudent and sustainable path in a
reasonably timely manner and before a real crisis hits. As a
result, I support the need to establish a capable, credible,
and bipartisan commission to address at least four issues:
statutory budget controls, comprehensive Social Security
reform, and round one of both comprehensive tax and health care
reform. Everything must be on the table.
The Securing America's Future Economy Commission Act, or
SAFE Commission Act, H.R. 3654, whose primary co-sponsors are
Congressmen Cooper and Wolf, is intended to do just that. H.R.
3654 is not perfect, and there are areas that could be
improved. But it now has over 90 co-sponsors on both sides of
the aisle.
One might argue that those who do not sponsor or co-sponsor
proposals for changing the status quo are tacitly sponsoring
the do-nothing plan. And the do-nothing plan will bankrupt
America, and it will not create a better future for our
country.
In the final analysis, while reasonable people can and will
differ, I believe that a commission will likely be necessary in
order to achieve timely action in connection with several major
reform efforts that lie ahead if we want to avoid a crisis. In
my view, we need an action-forcing event. We must remember the
Greenspan Commission was created at a time where the checks
weren't going to go out on time within a matter of weeks.
Believe me, that was an action-forcing event. We need another
action-forcing event that is not a crisis.
Given the greater public awareness that is needed here and
the need, frankly, for Congress to have some cover to make
tough choices that people may not otherwise like, in addition
to publishing The State of the Union's Finances, the Foundation
has decided to purchase and support the distribution of a
documentary entitled I.O.U.S.A. This film addresses four key
deficits facing America: our budget, savings, balance of
payments/trade, and leadership deficits. It will come out in
theaters in selected cities in August, before the Presidential
election. This will be one of many efforts that we will take in
order to increase the visibility of this issue and hope that it
will be a priority for the next President of the United States.
We also will have a private showing for Members of Congress
on Wednesday, July 9th, in the evening, at the Library of
Congress.
In closing, Mr. Chairman, thank you for the opportunity. I
do have a two-minute trailer that I would be happy to show if
you so desire and the members do of what the film is about. It
is staunchly fact-based, nonpartisan and nonideological,
because that is the only way we are going to do anything in
this foundation.
Chairman Spratt. Two to three minutes?
Mr. Walker. Two minutes. Two minutes and six seconds.
Chairman Spratt. Let's roll it then.
Mr. Walker. Thank you, sir. From the beginning.
Chairman Spratt. You just lost about 80 percent of the
audience.
[Tape played.]
Mr. Walker. Thank you, Mr. Chairman.
Chairman Spratt. Thank you, Mr. Walker.
[The statement of David M. Walker follows:]
Prepared Statement of Hon. David M. Walker, President and CEO, Peter G.
Peterson Foundation, Former U.S. Comptroller General
Chairman Spratt, Ranking Member Ryan and Members of the House
Budget Committee, I appreciate the opportunity to appear before you
again--this time as a private citizen and with my partner and new boss,
Pete Peterson. As you know, I've changed my position on the battlefield
for America's future; however, I'm still very much concerned about our
nation's fiscal future and the other serious sustainability challenges
that we face in my new position as President and CEO of the newly
established Peter G. Peterson Foundation.
Pete has already addressed his long-standing concerns regarding our
nation's current fiscal path, along with his hopes and plans for the
Foundation. I will address several specific issues that I believe will
be of interest to members of this Committee. However, before I do, I
would like to congratulate the Chairman and this Committee for gaining
passage of a budget resolution this year.
Today, the Foundation is issuing a publication entitled ``The State
of The Union's Finances''. This citizen's guide provides a clear and
compelling picture of our nation's true financial condition and longer-
range fiscal outlook. Every member of the Congress, the President, Vice
President, all Cabinet members, each of the major Presidential
candidates and selected other key officials is being provided with a
printed version of this guide. It is also available online at
www.pgpf.org.
While the graphics and tables in the guide look nice visually, they
present an ugly picture fiscally. As the cover points out, based on
historical tax levels and absent meaningful entitlement, spending and
tax reforms, the United States will face debt burdens in the future
that would make third-world nations look thrifty. And our related debt/
GDP ratios escalate dramatically after the 2040 date because we will
have passed a ``tipping point'' by then. Furthermore, as one table in
the guide notes and as Pete has stated, we are currently in a $53
trillion fiscal hole. This hole gets deeper by $2-$3 trillion a year on
autopilot. We need to start figuring how we are going to start climbing
out of that hole. The time is over for merely saying how one will pay
for new spending increases or tax cuts. It is critical that we not
continue to kick the can of tough choices down the road.
What do we need to do? First, as I have testified before, we need
to provide more transparency in connection with our current accounting
and budgeting systems. For example, steps need to be taken to provide a
fuller and fairer disclosure of where we stand financially and where we
are headed fiscally. The Congress needs to consider the affordability
and sustainability of major entitlement, spending and tax proposals
over the longer-term before they are passed into law. Congress must
never allow what happened in connection with the Medicare prescription
drug bill to happen again. That bill deepened our fiscal hole by over
$8 trillion, when Medicare was already underfunded by approximately $20
trillion at the time.
Increased transparency should also involve some restructuring of
the way the current budget is prepared and presented to the Congress
and the President. The current budget baseline that attempts to
approximate current law results in an incomplete and even misleading
picture, especially in the way that it treats automatic growth in
mandatory spending programs. For example, assume a 3-percent inflation
level, 2 percent real economic growth, and an annual health-care cost
growth rate at 7.6 percent. Under current budget rules, having
education grow by 2 percent in nominal dollar terms is referred to as
an ``increase,'' whereas having mandatory health spending grow by 5
percent is called a ``cut.'' This approach does not pass a straight-
face test on Main Street and outside the Beltway. It also serves to
provide an excuse for not revising mandatory spending programs that are
clearly unsustainable while not providing adequate funding for programs
that represent an investment in our collective future well being.
Federal financial reporting should, among other things, recognize
that the bonds in the so-called ``trust funds'' should be deemed
liabilities, and it should place more emphasis on fiscal sustainability
and inter-generational equity. In addition, a Summary Annual Report on
the nation's finances should be issued every year. A longer-range
Fiscal Sustainability Report also should be issued by our government
every four years, as is the case in several other industrialized
nations. I have included as Exhibit I of my testimony a summary of the
types of reforms that I advocated as Comptroller General. My views of
these issues have not changed just because I'm in a new position. These
reforms need to be aggressively pursued and acted on.
In addition to the above steps, we need to re-impose tough
statutory budget controls on both the spending and tax side of the
federal ledger. After all, both sides of the books contribute to our
nation's bleeding bottom line. Unfortunately, as we have seen in recent
years, Washington still has not learned the first rule of holes--``When
you're in a hole, stop digging!'' This must change, and the sooner the
better.
In my view, the Congress also needs to consider adopting biennial
budgeting and appropriations processes. And, it needs to provide better
recognition of the difference between capital expenditures and
operating expenses while providing safeguards to prevent
mischaractization of items. The sad but simple truth is that both the
budget and appropriations processes have not functioned well in most
years of our recent history. The Congress spends way too much time each
year dealing with minor issues and not enough time dealing with major
ones, frequently with very disappointing results. This is one of the
reasons that the public's view of the Congress as an institution is at
or near historic lows. In fairness, the same can be said of the current
President's ratings.
As you know, the federal government has enacted at least one
supplemental spending bill each year for a number of consecutive years.
This process can be used to address bona-fide emergencies and
contingencies in the future if the Congress moves to a biennial cycle.
Furthermore, several states have already proven that biennial
approaches can work.
Beyond the budget and appropriations processes, in my view, the
regular order for addressing complex and controversial reform
legislation, especially entitlement related legislation, is not
adequate to deal with the number and magnitude of the reform efforts
that we must address if we expect to return to a more prudent and
sustainable fiscal path. As a result, I support the need to establish a
capable, credible and bipartisan commission to address at least four
issues--statutory budget controls, comprehensive Social Security
reform, and round one of both comprehensive tax and health care reform.
The Securing America's Future Economy Commission Act (SAFE Commission
Act), or H.R. 3654, whose primary co-sponsors are Congressmen Cooper
and Wolf, is intended to do just that. How could anyone vote against a
bill with a name like that if they have a chance to vote, and provided
that its provisions are consistent with its name, which I believe they
are?
In my view, if properly structured and staffed, such a commission
could make at least a $10-$15 trillion down payment on our $53 trillion
federal fiscal imbalance. This would be a significant accomplishment in
addressing our nation's financial challenge as well as a positive step
that would help improve both the confidence in, and the credibility of
the Congress in the eyes of the American people. Why is Washington
waiting to bring up this proposal for a vote?
Among various budget options that the Commission should consider is
how best to address mandatory spending programs and existing tax
preferences. I have previously stated that the Congress should consider
establishing triggers that would force re-consideration and reforms of
mandatory spending programs. A recent group of fiscal experts from a
range of respected Washington think tanks, including the Foundation's
own Gene Steuerle, who was formerly with The Urban Institute, issued a
comprehensive report that contained a similar recommendation. I also
believe that the Congress must periodically review and reconsider all
major tax preferences and possibly adopt automatic reconsideration and
reform triggers for them as well. In my view, like spending programs,
tax preferences are not all created equal. In addition, tax preferences
represent ``back-door'' spending. The U.S. Government foregoes
approximately $1 trillion in revenue a year as a result of existing tax
preferences. As a result, they must get on the radar screen and become
part of our overall reform effort.
In the final analysis, I believe that a commission will likely be
necessary in order to achieve timely action in connection with several
of the major reform efforts that lie ahead. At the same time, I would
like to compliment Representative Paul Ryan on his recent decision to
put a comprehensive entitlement and tax reform proposal on the table.
Irrespective of what I and others may think about the details of his
proposal, it took courage to make it, and we need more leaders who are
willing to take such risks.
We must keep in mind that, while Washington is a ``lag indicator,''
political gridlock in Washington is not good when we face a range of
serious sustainability challenges that grow with the passage of time.
The truth is that there are a number of very disturbing parallels
between the factors that contributed to our recent mortgage-related
sub-prime crisis and our nation's federal finances. These parallels
have gone largely unnoticed; however, absent meaningful and timely
action, the probability that we will experience a serious economic
crisis continues to rise. Such a ``super sub-prime'' crisis would make
the current mortgage-related sub-prime challenge look like a bump in
the road.
The parallels between the mortgage related sub-prime crisis and our
federal financial sub-prime challenge include: 1) a disconnect between
the parties who benefit from current practices and those who bear the
risk; 2) a lack of adequate transparency and understanding regarding
the nature and magnitude of related risks; 3) a re-enforcement of the
importance of maintaining lender confidence and adequate cash flow, as
well as the limitations of credit ratings, and; 4) an illustration of
what can happen when there is a lack of effective oversight and action
to address large, known and increasing risks before a crisis occurs.
These parallels are real. What is Washington waiting for?
Given the importance of our sustainability challenges, we at the
Foundation believe that it is important to find new ways to communicate
the various sustainability challenges that we face as a nation. We also
believe that in this great nation, ``We the People'' are responsible
for what does or does not happen in capitals around the country. At the
same time, the people cannot be expected to act of they don't have the
facts, haven't been told the truth, or don't understand the
consequences of failing to act. Addressing these key factors is what
true leadership is all about.
This is a Presidential election year. Therefore, it's important to
state what we should expect the Presidential candidates to say
regarding our large, known and growing fiscal and related
sustainability challenges. In my view, a real leader would commit to at
least five things. First, acknowledge our current problem and commit to
making fiscal responsibility and inter-generational equity a priority
if elected President. Second, refrain from taking major reform options
off the table (e.g., the need for Social Security, Medicare, tax and
health care reform). Third, use the ``bully pulpit'' to state the
facts, speak the truth in order to help the American people understand
the need for timely action and the consequences of failing to act.
Fourth, commit to work on a bi-partisan basis to seek sensible and
sustainable solutions to our fiscal and other key sustainability
challenges. And finally, a real leader would support the need for a
commission along the lines of the SAFE Commission to help increase the
chances that we will take timely action in order to help ensure that
our collective future is better than our past.
Given the need for greater public awareness and action, in addition
to publishing the guide to ``The State of the Union's Finances,'' the
Foundation has decided to support the distribution of a documentary
entitled I.O.U.S.A. This film addresses four key deficits facing
America--our budget, savings, balance of payments/trade, and leadership
deficits. It also highlights the efforts of the Fiscal Wake-up Tour
that I and representatives of the Concord Coalition, the Brookings
Institution and the Heritage Foundation have been, and continue to be a
part of. This film will be released in August in selected cities around
the country, including the Washington, D.C. area. However, we believe
that the film's message is so important that the Foundation has decided
to fund a private showing of the film for members of Congress and other
invitees the evening of Wednesday, July 9, at the Library of Congress.
In closing, we at the foundation are committed to doing everything
we can to help promote responsibility and accountability today in order
to help ensure that every American has more opportunity tomorrow. This
was a longstanding tradition in this country until fairly recently.
It's time that we returned to this great tradition in order to keep
America strong, to help make sure that our collective future is better
than our past, and to be sure that the United States of America is the
first republic to stand the test of time.
Mr. Chairman, I have a DVD that includes a two-minute theatrical
trailer of the film and respectfully request that I be allowed to show
it. In any event, thank you again for the opportunity to testify. I
look forward to answering any questions that you or the other members
of the Committee may have.
exhibit i: transparency in accounting and budgeting
Exhibit I. GAO, Long-Term Fiscal Challenge: Additional Transparency
and Controls are Needed (Appendix I), Statement of David M. Walker,
Former Comptroller General of the United States, GAO-07-1144T
(Washington, DC: July 25, 2007)
APPENDIX I: TRANSPARENCY IN ACCOUNTING AND BUDGETING: LEGISLATIVE
RECOMMENDATIONS OF THE COMPTROLLER GENERAL
Supplemental Reporting in the President's Annual Budget Submission
Produce as supporting information to the budget an annual
Statement of Fiscal Exposures, including:
a concise list, dollar estimates, and descriptions of
exposures, including----
information from Consolidated Financial Statements of the
U.S. Government on total liabilities, contingencies, commitments, and
net present value of social insurance program payments, and
long-term cost (> 40 years) of major tax expenditures,
presented together with related spending or credit programs in the same
policy area , if appropriate
dollar estimate of the effect on these exposures of all
major spending or tax proposals
an assessment of methodologies and data used to produce
such cost estimates
a graphic presentation of the dollar amounts of exposures
presented as percentage of GDP for each year covered
Budget horizon expanded to cover 10 fiscal years
President shall include in the budget a statement of the
President's budgetary goals for a 10-year period in terms of surplus or
deficit and in terms of surplus or deficit as a percentage of GDP
Summary Financial Report for the General Public
Pursuant to OMB form and content guidance, Treasury shall
annually publish a summary financial report on the U.S. Government
derived from the information in the audited annual Consolidated
Financial Statements of the U.S. Government.
Report shall be in format and of length, content and
sophistication for general American public
Report shall include condensed summary of CG's audit
report on the CFS
First annual report due no later than January 30, 2008
[Note: This requires an amendment to GMRA (31 USC 331(e)(1)) to make
audited CFS due by January 15 each year and an amendment to the
Accountability for Tax Dollars Act (31 USC 3515(a)) to make agency
financial statements due by November 30 each year.]
Statement of Fiscal Sustainability
Pursuant to OMB form and content guidance, Treasury to
prepare and make public every four years an assessment of the long-term
sustainability of all major federal programs and activities. Statement
of Fiscal Sustainability shall include:
PV of projected receipts and outlays of federal programs
and activities for 75-year and infinite horizons, including separate
reporting for social insurance programs
Statement of annual cash flows for programs and activities
Reconciliation of changes from prior period Statement
Presentation of information using different measures of
sustainability and estimates of financial burden on different age
cohorts and other demographics
Explanation of assumptions used and sensitivity analyses
First Statement of Fiscal Sustainability due no later than
March 31, 2008
Additional Cost Information on Legislative Proposals before
Adoption
Before a Member of the House or Senate calls up for
consideration on the floor of either House a bill or joint resolution
or an amendment thereto that contains a proposal that would result in a
significant increase or decrease in revenues or in mandatory spending,
that Member shall obtain from CBO a statement of the long-term costs of
such bill, joint resolution, or amendment.
CBO and Budget committees to jointly define
``significant'' for each Congress
``Long-term costs'' are those financial costs over at
least a 40-year period
The statement from CBO shall be provided to the Members of
either House, as applicable, and shall be published in the
Congressional Record
GAO Report on the Financial Condition of the U.S. Government
The Comptroller General shall annually report to the
Congress his assessment of the financial condition of the U.S.
Government. Report shall include analyses of----
the Consolidated Financial Statement (CFS) and the Summary
Financial Report
results of GAO's latest long-term fiscal simulations
the President's Statement of Fiscal Exposures
the adequacy of information regarding long-term cost
implications of existing and proposed policies
the Statement of Fiscal Sustainability
statutorily-required CBO and JCT reports for the prior
fiscal year
First annual report due no later than January 31, 2009
[Internet address to ``The State of the Union's Finances,''
submitted by Mr. Walker, follows:]
http://www.pgpf.org/resources/PGPFCitizensGuide.pdf
Chairman Spratt. Let's go on with Bob Greenstein of the
Center on Budget and Policy Priorities.
We have got, Bob, 9 minutes and 4 seconds to go vote to
adjourn. But if you would take about 5 to 6 minutes to
summarize, I think we have got enough time to spare then, and
then we will leave quickly and come back. We have got two back-
to-back votes.
Bob Greenstein, thank you for coming.
STATEMENT OF ROBERT GREENSTEIN
Mr. Greenstein. Thank you. That trailer is a hard act to
follow.
I certainly agree, Mr. Chairman, with you, Mr. Ryan, Mr.
Cooper, Pete Peterson and Dave Walker that if current policies
aren't changed, the projected mismatch between revenues and
expenditures will grow over time and eventually lead to a debt
explosion. We need to start taking action soon to address it,
something our Center has been calling for for some time. As you
know, we issued budget projections last year, 50-year
projections that essentially tell the same story.
Having said that, I don't believe a law establishing a
commission would be advisable. This is not a philosophical
disagreement. It is a strategic judgment on how best to move
forward based in significant part on my experience as a member
of the last--as a commissioner on the last deficit reduction
commission, the Kerrey-Danforth Commission in 1994.
Unless the next President and the bipartisan leadership of
the House and Senate are committed to considering both program
reductions and revenue increases and system-wide health care
reform and working out compromises on these matters, I think
any commission will fail. A commission will only work, as the
Greenspan Commission did, when the President and congressional
leaders decide to work out a bipartisan compromise and use the
commission members as their negotiators. And if the President
and the congressional leadership are willing to commit to
negotiate a package, then they can go straight to the
substantive negotiations themselves, as they did in 1990 and
1997, without convening a commission.
Now they may decide that a commission would provide the
best forum for negotiating an agreement and educating the
public, but that is a decision that can only be made if the
President and the bipartisan congressional leadership have
reached a consensus that serious negotiations are desirable.
And if that is the case, a commission can be convened by
executive order without legislative action, as was done with
the Greenspan Commission.
My bottom line is that I believe a commission will not
force a consensus or a willingness to negotiate a bipartisan
agreement where one is lacking on the part of the President and
the congressional leaders. And that is why the 1994 Kerrey-
Danforth Deficit Reduction Commission utterly failed. It
couldn't even issue a majority report in favor of any specific
policy proposals. That occurred because the President and the
congressional leaders of both parties had no interest in having
that commission come up with a bipartisan plan. The signal was
clearly sent to the commissioners, and it all fell apart.
By contrast, the Greenspan Commission had a clear mission
set by the President and the bipartisan congressional
leadership to restore solvency to the Social Security Trust
Funds. It was a success because President Reagan, Speaker
O'Neill, and other congressional leaders of both parties used
it as a forum to negotiate a deal through proxies.
The Greenspan Commission was basically a mechanism for
President Reagan's top negotiator, Howard Baker, and the
Democrats top negotiator, Bob Ball, to hammer out a compromise
on behalf of their principals. It was understood in advance and
agreed to in advance that it would include both increases in
the payroll tax and reduction in Social Security retirement
benefits, and in this sense it succeeded. History underscores,
I think, the point that any successful major deficit reduction
exercise starts with the President of either party and must
involve the top leadership of Congress. And once the President,
Speaker O'Neill, and other leaders agreed to move forward, the
Greenspan Commission was established by executive order.
Given that the stars were moving into alignment, no time
was lost having arguments in committees and House and Senate
floors over how many commissioners, what would be the shape of
the table. It was formed by executive order, and it moved.
I would also note that a BRAC-type procedure was not used.
And a key provision of the 1983 Social Security Act, the one
that raised the normal retirement age for Social Security
benefits from 65 to 67, was not proposed by the Commission but
rather was added on a bipartisan basis on the House floor in
1983.
So it seems to me the real key here is how do we persuade
the next President, whether it be President McCain or President
Obama, to move after the election to reach out to the leaders
of both parties and to be willing to engage in serious
negotiations? If that occurs and the planets are aligned, a
commission shouldn't be necessary.
We had successful bipartisan deficit reduction negotiations
without a commission in 1982, 1987, 1989, 1990, and 1997.
Chairman Spratt. Mr. Greenstein, we are going to have to
stop right there if we can. We will come right back as quickly
as we can to pick up where we are leaving off. Thank you very
much.
[Recess.]
Chairman Spratt. Mr. Greenstein, you still have the floor.
You are free to wrap up as you please.
Mr. Greenstein. Well, let me, I just had a couple of more
points I will complete quickly.
I was going to say that I very much agreed with the comment
that David Walker made toward the end of his testimony, that
the effort to deal with our long-term fiscal problem needs to
be a comprehensive one. It will need to deal with Social
Security and Medicare. It will need to deal with revenues. It
will particularly need to deal, as I think he also mentioned,
with the health care system. As I think Henry Aaron will talk
about more in his testimony, the rate of beneficiary growth in
Medicare and Medicaid for the last 30 years has largely tracked
that of private sector health care. I don't think we can get
there from here in terms of the long-term fiscal problems
unless we can slow the rate of growth of health care
systemwide.
Revenues also need to be on the table. Pete noted that the
increase, say, 50 years from now or whatever in Social Security
and Medicare and Medicaid is significantly larger than the cost
of the tax cuts. This is true. It is also the case that, if you
look at the fiscal gap for the next 50 years, we estimate it is
about 3.2 percent of GDP, the cumulative gap over 50 years. And
the tax cuts cost 1.5 to 2 percent of GDP, or about half of the
gap.
The issue there is simply the following: The growing costs
of Social Security and Medicare grow gradually over time and
get bigger and bigger. The question of whether we pay for those
tax cuts that we extend after 2010 is a fiscal impact that is
felt fully and immediately starting in 2011, and therefore,
what we do, for good or for ill, has big compound effects over
time on interest payments on the debt. And as we all know, when
you look at the long term figures and the explosion over time,
what really triggers that explosion is when we get to the point
that the interest payments on the debt start compounding and
exploding, and we get a debt explosion; the interest payments
soar, and that takes everything out of whack.
The last point I would like to make is simply a brief
discussion of the base closing commission, which is sometimes
mentioned as an example of what we need to do here. It seems to
me, they are fundamentally different. In the case of BRAC, the
President and the bipartisan congressional leadership agreed
that the Nation had too many bases, and some needed to be
closed. They needed a commission to implement that agreement in
order to provide a way to surmount parochial, geographic
concerns from both sides of the aisle that might otherwise
prevent a bipartisan agreement among the President and the
congressional leaders of both parties that, in the aftermath of
the Cold War, there were more military bases than were needed
for the Nation's defense.
The BRAC process enabled the commission of experts to help
decide which and exactly how many bases to close. It was about
preventing purely geographic interests of individual Members
from undercutting a bipartisan leadership consensus over the
need to reduce the number of military bases.
In major deficit reduction, we have to address fundamental
questions about the trade-offs between taxes, defense,
education, health care, systemwide health care reform, issues
on the role of government and so forth. Decisions of, for
example, whether it is worth raising taxes and, if so, which
taxes. To provide for various levels of expenditure on health
care or education are of a fundamentally different nature than
which geographic bases to close.
So it takes me back to the point I mentioned before you
broke for votes on the Hill. I don't think anything can
substitute for starting with the next President exerting
leadership, reaching out to the bipartisan leadership of
Congress, trying to get an agreement, to negotiate a bipartisan
agreement that covers the big programs and taxes and systemwide
health care reform. And if that can be done, I would let the
President and the bipartisan leaders decide whether or not a
commission is the best way to implement that agreement.
[The prepared statement of Robert Greenstein follows:]
Prepared Statement of Robert Greenstein, Executive Director, Center on
Budget and Policy Priorities
Mr. Chairman and Mr. Ryan, thank you for inviting me to testify
today. My testimony will focus primarily on the general question of
whether a ``budget commission'' would be useful at this point as a way
to address the serious long-term fiscal problems the nation faces. I
would like to make three principal observations.
First, the Center on Budget and Policy Priorities agrees with the
many analyses showing that, if current policies are not changed, the
projected mismatch between expenditures and the revenues to pay for
them will grow over time and eventually lead to a debt explosion. This
cannot be permitted.
Second, we agree that policymakers should start soon to reduce this
long-term mismatch.
Third, we do not believe that a law establishing a commission is
advisable, at least not now. I say this based on experience as someone
who served as a member of the Kerrey-Danforth Commission on deficit
reduction in 1994. Unless the next President and the bipartisan
leadership of the House and Senate are committed to considering both
program reductions and tax increases to achieve deficit reduction--and
to working out compromises on these matters--any commission will fail
and be a waste of time and money. A commission will only work--as with
the 1982-1983 Greenspan commission--when the President and
Congressional leaders decide to work out a bipartisan compromise and
use commission members as their negotiators. Moreover, if the President
and the Congressional leadership are willing to commit to negotiate a
package of program reductions and revenue increases, a commission is
not really necessary--political leaders can go straight to the
substantive negotiations themselves, as they did in 1990 and 1997,
without convening a commission. To be sure, they may decide that a
commission would provide a useful forum for negotiating an agreement
and educating the public about its importance and desirability. But
that is a decision that can only be made if the President and
Congressional leaders have reached a consensus that serious
negotiations are desirable. And, if so, a commission could be convened
without legislative action, as was done in 1982-1983.
The key point is that a commission will not force a consensus--or a
willingness to negotiate a bipartisan agreement--where one is lacking
on the part of the President and Congressional leaders. That is why the
1994 Kerrey-Danforth commission on entitlement and tax reform failed.
I would add that the base-closing commission does not offer a
counter-example. There, the President and bipartisan Congressional
leadership agreed that the nation had too many bases and some needed to
be closed. The commission was designed to implement that agreement by
providing a way to surmount parochial geographic concerns that could
otherwise block action. But bipartisan consensus on the need to close
bases had already been reached.
I would like to elaborate now on these three points, with special
emphasis on the third.
PROJECTED DEBT EXPLOSION
Our projections of the long-term budget outlook show a ``fiscal
gap''--the difference over time between revenues and expenditures other
than interest payments--equaling 3.2 percent of Gross Domestic Product
from now through 2050.\1\ This is too high--it would lead to a
compounding explosion of debt. Specifically, under our projections, the
publicly held debt, which today stands at a relatively modest 37
percent of GDP, would grow to 42 percent of GDP by 2020, to 72 percent
by 2030, to 134 percent by 2040, and to 231 percent by 2050. The
Congressional Budget Office, in a recent letter to Mr. Ryan, estimates
that in about 40 years, the per-person growth of the economy would halt
and then begin to reverse. Such a situation would be untenable. This is
why nearly all analysts call the long-term budgetary projections of
existing tax and budget law ``unsustainable.'' (CBO also says that in
the real world, financial instability and periodic market crises could
occur before debt reaches such a level unless it becomes clear that the
public, and therefore policymakers, are willing to raise revenues and/
or reduce programs as necessary.)
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\1\ Both projected primary (non-interest) deficits and future GDP
are calculated on a ``present-value'' or discounted basis, which gives
higher weight to earlier deficits, because the sooner a deficit occurs,
the more years the nation must pay compound interest on it. Our
projections were issued in January 2007. We are in the process of
updating those projections, but they are not likely to differ
materially from our published results. See Richard Kogan, Matt Fiedler,
Aviva Aron-Dine, and James Horney, ``The Long-Term Fiscal Outlook Is
Bleak,'' at http://www.cbpp.org/1-29-07bud.pdf.
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EARLY ACTION IS DESIRABLE
Early action is desirable, because the earlier that the nation acts
to reduce projected deficits--and the sooner that we increase revenues
and reduce program expenditures from projected levels--the longer the
Treasury can earn compound interest on these budget savings. For
example, a policy that reduces projected deficits by 1 percent of GDP
in this and all future years would reduce the fiscal gap through 2050
from 3.2 percent of GDP to 2.2 percent, a reduction of almost one
third. In contrast, if the same set of policies were enacted five years
from now, they would reduce the fiscal gap by 0.86 percent of GDP; so
we would lose about one-seventh of the long-term budgetary value of
those savings. Put differently, waiting five years means that the
necessary revenue increases and program reductions would have to be 17
percent larger to reduce projected debt in 2050 by the same amount and
likely would be somewhat harder to enact as a result.
In short, delay has costs. To be sure, combating climate change,
addressing the foreclosure crisis, and dealing with global nuclear
threats are more immediately pressing. But sooner or later, the nation
must change budgetary course, and sooner is certainly better.
I would note that an attempt to eliminate the entire long-term
fiscal gap in one sitting would almost certainly fail. The lift would
be far too heavy. We believe that when the moment is ripe for
bipartisan compromise on deficit reduction, policymakers should
negotiate a package of permanent savings to take a noticeable and
permanent bite out of the long-term fiscal gap. We will need to do this
several times, until the matter is fully addressed.
If policymakers raised revenues and reduced programs by a
total of 3.2 percent of GDP in 2008 and each subsequent year, that
would indeed eliminate the fiscal gap through 2050; the debt in 2050
would be 37 percent of GDP, just as it is today. But such a sudden
change in fiscal policy could throw even a healthy economy into a
recession. And, the budget would run immediate surpluses, growing to
almost 3 percent of GDP by the end of the next decade and lasting a
quarter of a century. The debt would fall to zero and then below--the
U.S. Treasury would accumulate assets amounting to one-sixth of the
economy by 2030. Eventually deficits would return, and the assets would
be drawn down and then replaced with debt. But surely the public would
not stand for surpluses of this magnitude or duration. Much of the
public thinks of surpluses not as desirable ``saving for the future''
but as undesirable ``over-taxing'' or ``under-investing.'' Pressure
from the right and left to consume those surpluses would be
overwhelming.
Alternatively, Congress could eliminate the fiscal gap in
one sitting by enacting tax increases and program cuts that start small
but ramp up significantly over time. This would avoid the politically
untenable prospect of a quarter century of surpluses. Under this
alternative scenario, however, today's policymakers would not only be
deciding the appropriate trade-off between higher revenues and lower
benefits and services for today's voters but also be enacting a series
of future tax increases and future program cuts that would first take
effect 15 or 25 or 40 years from today. If a new trade-off between
taxes and benefits must take effect every decade or so, the voters and
policymakers at that time should have some role in deciding the
tradeoffs. In particular, we cannot know today the efficacy of health
care practices 30 years from now, so we cannot make final judgments of
much public financing they will merit. Nor can we know today whether
income inequality will continue to grow, whether our future relations
with China will be confrontational or cooperative, or whether new
technology will make energy cheaper or exploding demand will make
energy much more expensive and the need for public transportation much
greater. Such questions will influence how future voters view the role
of government.
At the same time, doing little and saddling future generations with
mountains of debt should be unacceptable. An appropriate balance needs
to be struck, and major action to shrink projected deficits--and to
start securing interest savings that will compound over time--should be
taken soon.
BUDGET COMMISSIONS
As noted, I do not favor a budget commission at this time. The
Kerrey-Danforth Commission could not even issue a majority report in
favor of specific policy proposals. This was not because the two
principals were not serious, the staff was not expert, or there were no
available options. Not at all; plenty of serious and thoughtful people
devoted much time and effort to the task.
No, the failure of the Kerrey-Danforth Commission was caused by the
fact that neither President Clinton nor the top Congressional leaders
were interested in negotiating a bipartisan deficit reduction plan.
There was no broad consensus on whether taxes should be raised and by
how much, nor about which programs should be cut and by how much.
This is my main point: without a pre-existing consensus that a
bipartisan compromise should be negotiated and what should be on the
table for negotiation, and without engagement in the negotiations--
through key commission members--of the President and the top
Congressional leadership, no commission will succeed.
Let's look more closely at the Greenspan Commission. It had a clear
mission, set by the President and bipartisan Congressional leadership,
to restore immediate and longer-term solvency to the Social Security
trust funds. That Commission was a success because President Reagan,
Speaker O'Neill, and top Congressional leaders of both parties wanted
it to be and used it as the forum to negotiate a deal (through
proxies). In this respect, the Greenspan Commission more closely
resembled the successful 1990 budget summit negotiations than the
failed Kerrey-Danforth Commission, because the Greenspan Commission was
basically a mechanism for President Reagan's top negotiator--Howard
Baker--and the Democrats' top negotiator--Bob Ball, the former
Commissioner of Social Security--to hammer out a compromise on behalf
of their principals. Furthermore, it was understood in advance that the
agreement would include both an increase in the payroll tax and a
reduction in Social Security retirement benefits. This history
underscores the point that any successful deficit reduction exercise
starts with the President and must involve the top leadership of
Congress. It is also worth noting that the Greenspan commission was
established by executive order, not through passage of a piece of
legislation. Once a consensus formed to move forward, no time was lost
in trying to move a commission bill through Congress and having
committee and floor debates and disputes over ``the shape of the
table.''
Given this history, enacting legislation now to establish a new
commission is not advisable, in my view. President Bush has little
interest in this subject. More importantly, we do not know if either of
the presidential candidates would be willing, after the election, to
enter into negotiations for lower program expenditures and higher
revenues.
Suppose, however, that the next President does decide after the
election that he would like to negotiate a serious deficit reduction
package with Congress. To begin with, he needs a willing partner. Most
likely, a serious President would first find out if the leaders of both
parties are willing to engage in serious negotiations.
If the planets are aligned and the new President and the bipartisan
leadership of Congress are willing to engage, a commission should not
be necessary, as successful bipartisan deficit reduction negotiations
in 1982, 1987, 1989, 1990, and 1997 proved. If the President and
Congressional leaders decide a commission could facilitate their
negotiations and help to secure public support for a deficit reduction
plan, they could establish a commission designed to accomplish that
goal and would not need the enactment of legislation to do so. As
noted, the Greenspan Commission was established by executive order
after consultation between the President and Congressional leaders.
Before concluding, I would like to make three additional points.
First, we should be aware of the law of unintended consequences.
There are some thoughtful deficit reduction ideas that have not yet
been firmly and unequivocally rejected by one or the other party. These
ideas could form part of a serious plan the next President and the
bipartisan Congressional leadership might negotiate if there is such a
negotiation. However, if a commission exists in the absence of such a
high-level, substantive negotiation and that commission propounds one
of these deficit reduction ideas, there is a risk that one or both
parties or some prominent political leaders will try to score political
points by loudly attacking the proposal. If, a few years later, the
planets realign and serious negotiations become possible, the previous
trashing could take what would otherwise be a useful option off the
table.
Second, I would like to elaborate on the point that I noted earlier
regarding the Base Closure and Realignment, or BRAC, process. The BRAC
model worked because there was overwhelming bipartisan agreement,
shared by the President and Congress and by both parties, that in the
aftermath of the cold war, there were more military bases than were
needed to provide for the defense of the United States. Despite this
consensus, it was difficult for individual Members of Congress to
support legislation that would close bases in their own districts or
states. So the BRAC process was established to allow a commission of
experts to do the work of deciding which and exactly how many bases to
close and to require Congress to vote up or down on the base-closing
package. The BRAC process is about preventing purely geographic
interests of individual Members from undercutting a bipartisan
consensus over the need to reduce the number of military bases.
Major deficit reduction, however, is different. Putting our fiscal
house in order involves fundamental questions about the tradeoffs
between taxes and the defense, education, health care, and other needs
of the nation. It may involve key questions about the role of
government. These are exactly the kind of decisions the framers of our
Constitution believed should be made by an elected President and
elected members of Congress. It is one thing to design a process like
BRAC that is aimed at overcoming the effects of the geographic nature
of our system of representation after elected policymakers have made
the fundamental policy decision. It is quite another thing to try to
design a process that reduces the ability of elected officials to make
the fundamental decisions themselves. Having a panel of military
experts decide which bases to close in order to implement a consensus
that our military bases need consolidation is not the same as having a
panel decide, for example, whether it is worth raising taxes to provide
better health care or education for American children, and if so, which
taxes should be raised and on whom and how the proceeds should be
allocated.
In contrast to the BRAC concept, I would like to point one final
time to the Greenspan Commission of 1983, which restored between about
60 years of solvency to the Social Security trust funds. The
recommendations of that Commission were marked up in the House Ways and
Means and Senate Finance Committees. Somewhat different versions of the
bill were reported in each chamber, many amendments were agreed to in
the Senate and in the House, and one especially important amendment--to
raise from 65 to 67 the ``normal retirement age'' for Social Security
benefits, a change that was not in the commission package--was adopted
and became part of the enacted legislation. All of this took
considerable floor time, but because everyone had a fair shot and the
normal legislative process was followed, the results were much more
widely accepted than might have occurred if Members of Congress had
been denied the right to offer amendments, and the results have stood
the test of time. From my point of view, either this type of approach
or the approach exemplified by the 1990 budget summit negotiations is
to be preferred.
As I just noted, Congress followed the normal legislative process
in enacting the Greenspan Commission's recommendations. A variation
would be to use the reconciliation process, as was done with the
policies agreed upon in the 1990 budget summit. The reconciliation
process has both advantages and disadvantages. The Byrd Rule keeps out
much extraneous material, for instance, but might also preclude the
inclusion of material that is technically extraneous but nevertheless
important to the deal, such as the creation of process rules to enforce
the deal over its negotiated lifetime. In addition, the reconciliation
process cannot include Social Security legislation, and a long-term
agreement might include a Social Security component. On the other hand,
reconciliation speeds the process and--most importantly--prevents
Senate filibusters from killing legislation that the President,
majorities in both houses, and a majority of the public may support.
Because it is a close call whether the reconciliation process or the
normal legislative process should be used, it is better to let the
President and the Congressional Leadership resolve that tactical issue
at the time, rather than having enacted legislation pre-determine the
legislative procedure that would be used.
In summary, I do not see advantages to enacting legislation to
establish a deficit-reduction commission. History suggests that formal
commissions are not necessary to enact major deficit reduction
packages. And there are potential disadvantages in establishing such a
commission. The most likely is that a commission would waste time,
talent, and money in circumstances when there is no prospect for a
major deal. It also could cause delay and unneeded acrimony if the time
were propitious for major, substantive deficit-reduction negotiations
but the existence of a statutory commission made it easier for
lawmakers to make excuses to wait for the commission rather than to
move ahead with real steps to reduce the deficit. Finally, arguments in
Congress over provisions in commission legislation related to the form
that a commission would take and the Congressional rules that would be
used for consideration of its product could dissipate some of the
goodwill that an initial high-level agreement to undertake serious
negotiations would generate.
APPENDIX
Specific aspects of H.R. 3654 that raise concerns
This appendix raises some specific concerns or observations about
certain aspects of H.R. 3654. (As the body of this testimony indicates,
I do not favor legislation such as H.R. 3654 to establish a commission,
but if such legislation were moved, I would recommend some changes in
it.)
H.R. 3654 says that one of the Commission's purposes would
be to ``improve the budget process to place greater emphasis of long-
term fiscal issues'' (emphasis added). Allowing a Commission to draft
changes in the budget process is an invitation for the Commission to
avoid difficult substantive decisions about program design or the tax
code and instead substitute budget process changes. The failed Gramm-
Rudman-Hollings law of the 1980s is an example of why process should
never be a substitute for substance. To quote former CBO Director Rudy
Penner, ``The process is not the problem; the problem is the problem.''
H.R. 3654 speaks of reforms that ``limit the growth of
entitlement spending.'' Entitlements in general are not the problem.
There are serious issues related to the costs and growth rate of
society-wide health care spending, and Social Security faces a long
term deficit that must be closed. But other than Medicare, Medicaid,
and Social Security, entitlement programs have been a shrinking share
of GDP for the last 30 years, and under current law, they will continue
to grow more slowly than the economy for the indefinite future. As a
result, there is not a general entitlement problem, as distinguished
from a problem related to Medicare and Medicaid that is largely a
problem of rising health care costs systemwide, and to a much lesser
extent, problems related to Social Security's long-term imbalance.
H.R. 3654 speaks of making tax laws ``more efficient and
conducive to economic growth.'' While it is hard to argue against
efficiency, CBO has pointed out that the economic harm done by deficit-
financed tax cuts generally outweighs any efficiency gains that those
tax cuts may generate (and, of course, many tax cuts add complexity and
reduce efficiency). It is undesirable to include language that can be
used by supply-side ``true believers'' to argue against some or any tax
increases when additional revenues are likely to be a necessary
component of any major bipartisan deficit reduction package.
H.R. 3654 speaks of ``generational equity.'' It should be
noted that future generations are projected to be substantially
wealthier than we are (in the aggregate). As a result, asking them to
pay a bit more in taxes would still leave them with much higher after-
tax income and standards of living than current generations enjoy. It
should not be assumed that generational equity implies constant tax
rates or a constant revenue/GDP ratio.
H.R. 3654 would have the Commission draft the legislation,
bypass real mark-ups by the committees of jurisdiction, and in general
avoid either the normal legislative process or the reconciliation
process under the Congressional Budget Act. We do not favor these
special processes or the removal of Committees and Members from
legislating. Moreover, tactical decisions that would enhance the odds
that a deficit reduction package would pass the House and Senate floors
cannot be known in advance. We should let the negotiators decide how
best to move a package through Congress, not impose a pre-determined
procedure that could reduce the prospects for its passage.
Under H.R. 3654, the Secretary of the Treasury and
Director of OMB would be the President's two designees on the
Commission. The President should be able to pick her own designees.
We disagree with the concept of alternative cost estimates
that are estimating methods developed by a minority of members of the
Commission. The major purpose of such a commission would be to try to
develop bi-partisan consensus between the President and Congress.
Allowing a minority faction of the commission to force alternative
estimates to those that the commission itself believes best is a recipe
for undermining consensus and for delay. If a commission member desires
both a cost estimate of his or her proposal and a discussion of its
possible economic consequences, CBO and the Joint Committee on Taxation
can be asked to provide those.
We disagree with the provision in H.R. 3654 that allows
the Commission to include triggers or ``stabilizers'' to enforce
spending and revenue targets. The last thing we need to do is enact a
75-year version of Gramm-Rudman-Hollings and automatic sequestration.
Such an effort would very likely fail just as the GRH law did.
Chairman Spratt. Thank you, Mr. Greenstein.
We now turn to Henry Aaron, an economist for Brookings
Institution and a recognized expert in the area of these
entitlement programs, Social Security and Medicare.
Mr. Aaron, thank you for coming. The floor is yours, and
you can offer your statement to be included in the record and
summarize it as you see fit.
STATEMENT OF HENRY J. AARON, PH.D.
Mr. Aaron. Thank you very much, Mr. Chairman, Mr. Ryan,
members of the committee. I do appreciate the offer to have my
statement included.
With respect to the composition and functioning of the
proposed commission, I agree with many of the comments that Mr.
Greenstein just made. I am going to confine myself only to one
comment in that area, and that is with respect to the comments
that Representative Cooper made in his opening statement. I
think that statement carried a correct and admirable
inclusiveness in the range of issues that he called upon such a
committee, or a commission to address. My testimony, however,
was based on the draft bill, not on Mr. Cooper's introductory
comments, and the draft bill is not similarly inclusive, but
does focus only on some of the issues that he raised in his
comments. I hope that later versions of this bill incorporate
the range and comprehensiveness of the comments that he made
initially.
I would like to focus my remarks, however, on some numbers.
I think the beginning of dealing effectively with what every
member of this panel agrees is a significant long-term fiscal
problem is understanding the nature and source of that problem.
I believe that it is incorrect to characterize it as emerging
largely from entitlements for a number of reasons, and I have
two slides that I would like to use in order to illustrate the
point.
The first slide, which you now see up on the screen, is
simply a graphical representation of what we economists call
the primary budget deficit as projected by the Congressional
Budget Office in its recently released long-term projections,
where they actually released two projections, one based on what
they called their adjusted baseline, and the second, based on
an alternative scenario that I believe probably all of us on
this panel would agree is a more realistic indication of the
magnitude of the long-term budget challenges. The baseline
includes a number of assumptions which the CBO is required to
adhere to in its baseline because it is following statutory
policy, even where the indications are very strong that statute
will not be followed because of a track record of Congress in
making adjustments.
What this chart shows is that over the period between now
and 2050, very much as Mr. Peterson, Mr. Walker and Mr.
Greenstein and I, and I am sure Ms. Fraser, would agree, the
total of projected government spending grows considerably
faster than the total of projected government revenues.
May I have the second chart. What I have done in this chart
is subtract from projected total spending and projected total
revenues, expenditures specifically on Medicare and Medicaid,
as projected by the Congressional Budget Office, all earmarked
revenues dedicated to those programs and a share of the general
revenues currently allocated to those programs measured as a
share of GDP. The projection assumes that the same percentage
would continue to be allocated to these programs. That is
clearly not enough to cover the projected growth in spending.
So, the black bars that you see show the projected deficit,
according to Congressional Budget Office's long-term
projections, essentially excluding the impact of Medicare and
Medicaid.
The story that emerges from this chart, I think, is simple
and straightforward. The budget, projected budget shortfalls,
derive exclusively from projected increases in Medicare and
Medicaid spending. Apart from the growth of those two programs,
there is no projected long-term deficit. And I want to stress
that those black bars include every penny of spending under
Social Security called for under current law with no reductions
at all. Or to put it more directly, if we were able to deal
with the projected growth in health care spending, current
total government revenues are sufficient to cover projected
growth in all discretionary spending and all entitlement
spending other than those they are spending on Medicare and
Medicaid.
I draw three conclusions from these numbers: We do face
projected long-term fiscal challenges. The source of those
challenges is exclusively the projected growth of government
health care spending. And third, I believe all health care
experts agree that, as a practical matter, it is quite
impossible to deal with just Medicare and Medicaid apart from
general reform of health care financing. The bottom line,
therefore, is that the Nation faces long-term health care
financing problem. That constitutes the fiscal challenge or
creates the fiscal challenge that we face as a Nation. And what
it means, I think, is that if we wish to deal with the long-
term fiscal challenge, the place to start is are reconstruction
of our health care financing system.
I have said this on a number of occasions, and people have
then responded, okay, well, how would you fix the system, the
health care system? It is a fair question, but it is not one
that I believe is central to this particular issue. And the
reason it is not central is I believe strongly that there are
liberal or conservative reforms of the overall U.S. health care
system that are capable of bringing into balance the revenues
that we dedicate to those programs and the amounts we spend on
them. That is the crucial debate that needs to take place
across the political spectrum on how we wish to reform health
care spending. We should address that issue, and if we do so,
the fiscal challenge that has been, I believe, not correctly
characterized as an entitlement problem, which casts it as a
public problem exclusively, the fiscal problem would be
resolved.
[The prepared statement of Henry Aaron follows:]
Prepared Statement of Henry J. Aaron, Bruce and Virginia MacLaury
Senior Fellow, the Brookings Institution
Mr. Chairman, Mr. Ryan: Thank you for your invitation to testify
today on H.R. 3654, which would establish a federal budget commission
to `reform tax policy and entitlement benefit programs and ensure a
sound fiscal future.' My testimony will develop the following themes:
The premise of the bill is correct in part; the United
States faces daunting projected fiscal deficits. Early action to
prevent them, while not urgent, is desirable.
The bill mischaracterizes the source of these deficits.
They derive entirely from projected increases in national health care
spending, not from problems peculiar to government health care or
entitlement spending.
Materially slowing the growth of Medicare and Medicaid
apart from general health system reform is impossible, unless the
nation reneges on its commitment to assure the elderly, disabled, and
poor health care roughly comparable to that available to the rest of
the nation.
The specification of `issues to address' and `policy
solutions' in section 3 of H.R. 3654 is unbalanced. For example, the
draft bill specifies as a `policy solution' limits on entitlement
spending, but does not mention as a `policy solution' curbing in tax
expenditures that putatively serve the same general objectives as
direct spending, but benefit different groups.
The draft bill virtually invites `game playing,' as
policymakers could avoid hard choices by manipulating long-term
projections with artful assumptions, scoring methods, or other tactics
for avoiding hard choices. Such practices were used extensively to
subvert the Gramm-Rudman-Hollings targets in the 1980s. H.R. 3654 could
actually obstruct desirable action to address projected long-term
budget deficits.
Commissions never solve complex problems unless members of
Congress are prepared to address the underlying source of those
problems.
I
The Congressional Budget Office has issued projections of long-term
spending and revenues twice in recent years, under the directorship of
Douglas Holtz-Eakin, who was selected by a Republican Congress, and
under the directorship of Peter Orszag, who was selected by a
Democratic Congress. 1 Their projections differ in detail,
but both foresee the emergence of excessive budget deficits in future
decades.
All deficit projections depend on the difference between two
projections of much larger estimates of spending and revenues, each
subject to large errors. Seemingly small differences in projection
methods, assumed growth rates, or baseline conditions have huge effects
on whether and when deficits emerge and on how large they will be.
Demographic projections one or two decades into the future
contain much useful information because most who will be alive are
already born, and because mortality rates evolve slowly.
Longer-term demographic projections and economic
projections of almost any duration are subject to large errors, because
birth rates and economic growth are hard to forecast.
Long-term projections of health care spending are little
better than guesses because most of the projected increase in
healthcare spending arises from future discoveries, which, by
definition, we currently don't know.
Past health care advances have boosted per person spending, and
currently anticipated advances seem likely to do so as well. But many
scientists expect medical advances eventually to reduce spending per
person. Our ignorance of the directions of future health care
discoveries means that projections of health care spending more than a
very few decades into the future are virtually devoid of useful
information. And, as I shall show, that uncertainty renders budget
projections highly suspect.
Figure 1 (next page) indicates the projected size of so-called
primary deficits--the gap between all government spending (other than
interest on the debt) and revenues. It is based on recent CBO
projections, using their `alternative scenario' for revenues and
expenditures. 2 Deficits, shown in zebra-striped bars, are
projected to grow to unmanageable size.
This projection raises two practical questions. What causes those
deficits? What can be done about them? Perhaps the shortest and most
frequently heard answer to the first question is that the cause is:
entitlements, which is shorthand for Social Security, Medicare, and
Medicaid. This answer is misleading for three reasons.
Entitlement (or mandatory) spending includes many programs
other than the `big three.' Collectively, the `smaller' entitlements
account for as much federal spending as Medicare and more than
Medicaid. 3 As a group, entitlements other than `the big
three' will claim a declining share of gross domestic product. In fact,
the share of GDP going for Social Security and the entitlements that
CBO groups as `Other Mandatory Spending' is projected to remain roughly
constant over the next decade, even as the baby-boom generation is
beginning to retire.
Nearly all of the projected growth of federal budget
deficits is traceable to added spending on Medicare and Medicaid in
excess of earmarked revenues and general revenues as a share of GDP
currently allocated to these programs. As shown by the black bars in
figure 1, CBO's long-term projections indicate that apart from the
fiscal impact of Medicare and Medicaid, the federal budget will remain
in approximate balance through the year 2050--and that projection
includes every penny of Social Security benefits promised under current
law. 4
Finally spending on Medicare and Medicaid is driven mostly
by forces that are outside these two programs.
The most important of these forces is the projected growth
of per person health care spending. Growth of Medicare spending per
person has closely tracked growth of per person spending on health care
in general. That parallelism simply reflects the central purpose of
Medicare and Medicaid: to assure that the elderly, disabled, and poor
receive care similar to that available to the general population.
Increases in spending per person account for about three quarters of
projected increases in Medicare and Medicaid outlays. Holding growth of
per person spending on Medicare and Medicaid below that for the general
population would imply the gradual abandonment of the national
commitment to assure the elderly, disabled, and poor standard health
care.
Growth in the number of Medicare and Medicaid enrollees
accounts for less than a third of projected spending increases. The
only ways to offset this source of growth would be a) to increase the
age of eligibility for Medicare or b) to tighten the already stringent
income and asset tests for Medicaid eligibility. Increasing the age of
eligibility for Medicare has a surprisingly small effect on outlays
because the young elderly are relatively inexpensive. My estimate is
that raising the age of Medicare eligibility from age 65 to 67 would
reduce spending about 2 percent; raising it to age 70 would reduce
spending about 9 percent. Furthermore, until and unless American
workers can be encouraged to retire at later ages than they now do,
raising the age of eligibility for Medicare would exacerbate an already
serious problem--the gaps in insurance for those who lose employment-
based coverage before they are old enough to qualify for Medicare.
The forgoing numbers carry three clear implications:
America does not face an entitlement crisis; it faces a
health care financing problem.
The health care financing problem is a total system
problem, affecting private as well as public spending, not a problem
just of government programs.
The solution to the fiscal challenge posed by increasing
health care spending hinges ultimately on overall reform of health care
financing.
II
Even though projected budget shortfalls derive almost entirely from
forces that equally affect private and public health care spending,
general measures to slow the growth of budget outlays or increase
government revenues can defer the onset of those deficits and reduce
their size. To be regarded as fair, an examination of possible measures
should include all government spending, not just entitlements. And on
the sound, conservative principle that we should pay for what we buy,
the search should include tax expenditures that erode the tax base and
measures to boost tax rates. I invoke fairness because entitlement
programs provide basic support for low- and moderate-income households,
while tax expenditures disproportionately benefit those with
comparatively high incomes.
Consider the two largest tax expenditures--the exclusion of
employer-financed health insurance and the mortgage interest deduction.
Both flow disproportionately to upper income tax filers for two
reasons. First the value of an exclusion or deduction rises with one's
marginal tax rate. Second, upper-income households typically carry
larger mortgages than lower-income households do and are covered by
more generous health plans. Thus, an effort to cut Social Security
benefits on the ground that they are unsustainable while ignoring tax
expenditures would represent an ideologically biased agenda that
favored the well-to-do in the name of fiscal responsibility. Calling
for cuts in Social Security in the name of fiscal balance while
embracing extension of all of the 2001 and 2003 tax cuts is also
unbalanced. The estimated seventy-five year cost of the 2001 and 2003
tax cuts just for the top 1 percent of filers with incomes of $450,000
or more exceeds the entire projected Social Security shortfall over
that period.
III
The key to dealing with long term deficits is substantive agreement
on legislative changes that either curb net spending or raise net
revenues, or both. Actually cutting spending or raising taxes is hard
work. Setting numerical goals and procedures is easy. Dealing with
projected deficits by specifying procedures or numerical targets is a
virtual invitation to avoid or delay the hard work and instead to fall
back on easy gimmicks to comply with numerical targets.
Two elements of H.R. 3654 illustrate this problem. First, the draft
bill would explicitly authorize three methods of estimating the cost of
legislation: the methods used by the Congressional Budget Office and
two others that could have the support of fewer than one-third of the
membership of the proposed Commission. Rather than forcing the
Commission to agree on how to price policy changes, this provision
virtually guarantees that there will be three estimates of everything.
It would, thereby, divert discussion and commission attention from
discussion on real policy to bickering over estimation techniques. I
interpret this provision as an attempt to appeal to those who persist
in believing that so-called `dynamic scoring' will transform revenue
losing tax cuts into revenue gainers. The continued belief in the
transformative power reflects a tenacious faith, but is contradicted by
careful studies of dynamic scoring by the Congressional Budget Office
under both Dan Crippen and Douglas Holtz-Eakin and by President Bush's
Department of the Treasury. These studies have shown that dynamic
scoring techniques variously cause tax cuts to appear less or more
costly than conventional techniques do but never make much difference.
Second, the life of the Commission would end whenever Congress
enacted legislation that the Comptroller General certified that
legislation would reduce the fiscal gap by 1 percent of gross domestic
product measured over twenty-years and 2 percent of gross domestic
product measured over fifty years as estimated by the Comptroller
General.
However, the draft bill leaves undefined what the term fiscal gap
means or how it should be computed. Another point should be made here.
Projections of what revenues and spending will be half a century hence
are highly speculative; no one has a good idea of how complex measures
undertaken today (such as national health care reform) might affect the
economy, revenues, and spending fifty years hence. How, for example,
would budget estimators in the Eisenhower Administration have estimated
the impact on today's fiscal gap of the interstate highway system
established during their term? 5
Quite apart from the impossibility of intelligently estimating the
impact on the fiscal gap so far in the future, this provision means
that Congress could do absolutely nothing that materially affects
either spending or revenues for many years yet comply technically with
these targets. How? One way would be to shift spending responsibility
to the states. A second would be to back-load tax increases or spending
cuts that members would be confident that future Congresses would
reverse.
Those who believe that the good consciences of elected officials
would deter them from such phony fiscal probity need only look back at
the truly comical avoidance mechanisms adopted to comply with Gramm-
Rudman-Hollings requirements of the 1980s. Or they could look at the
sunset provisions of the 2001 tax legislation, which the Administration
advocated with straight faces, thereby low-balling estimates of long-
term revenue loss and avoiding need for a super-majority for passage in
the Senate under the Byrd rule. Or they could look at the 1997 Medicare
legislation, which delayed insolvency in part A by the device, entirely
bogus from the standpoint of budget balance, of shifting spending to
part B. Furthermore, the triggers in H.R. 3654 introduce yet a fourth
possible method of estimation, as the Comptroller General would not be
duty bound to use the methods employed by the Congressional Budget
Office or by either of the five-member Commission factions that could
under this bill insist on estimation methods of its own.
IV
Finally, the most fundamental point is that projected long-term
budget deficits result from specific policies. Until such time as the
Administration and Congress, with the backing of the American people,
are prepared to modify the policies that generate those deficits,
Commissions are an avoidance mechanism, not a solution. Some observers
demur from this negative appraisal of commissions, pointing to the 1983
National Commission on Social Security Reform (known better as the
`Greenspan Commission'), which recommended a combination of tax and
spending changes to prevent imminent insolvency and to restore close
actuarial balance to Social Security.
In fact, the Greenspan Commission illustrates a quite different
truth. Although President Reagan had inveighed against Social Security
during his pre-presidential years, as president he recognized--as did
Congressional leaders--that allowing exhaustion of the Social Security
trust funds to force capricious benefit cuts was intolerable and that
immediate action was necessary to forestall that event. All of the key
leaders in Congress and in the administration, Republicans and
Democrats, as well as key outside groups--including the elderly,
insurance companies, organized labor, and large businesses--wanted to
make sure that Social Security was sustained. The consensus was solid,
and it was generally recognized that a deal would have to include both
benefit cuts and tax increases. The Greenspan Commission served as
political cover for action to avoid results that no one wanted but that
would otherwise have occurred in a few months. No such budgetary cliff
exists today. We are not in a situation comparable to that in 1982,
when President Reagan and Congressional leaders of both parties agreed
to try to work out a bipartisan compromise involving both Social
Security benefits and Social Security taxes, and to use a commission as
the mechanism through which the White House and Congressional leaders
would negotiate the deal. In the current circumstances, a commission
likely would only provide an appearance of doing something. And
creating that appearance could reduce the likelihood that real action
would be taken.
ENDNOTES
\1\ Congressional Budget Office, The Long-Term Budget Outlook,
December 2005; Congressional Budget Office, The Long-Term Budget
Outlook, December 2007.
\2\ The alternative revenue scenario assumes that 2007 personal
income tax law remains in effect and that the AMT is indexed for
inflation, that estate and gift taxes are a constant share of GDP, and
that corporation income taxes, payroll taxes, and other revenues follow
current law except that other revenues remain a constant share of GDP
after 2017. The alternative expenditure scenario is based on the
assumption that Medicaid and Social Security follow current law, that
Medicare spending follows current law except that physician payments
grow with the Medicare economic index, and that other spending other
than interest remains a constant share of GDP.
\3\ The largest `other mandatory spending' programs civilian and
military retirement pay, the earned income tax credit, supplemental
security income, unemployment insurance, and food stamps. All of these
programs qualify as `entitlements.'
\4\ If one uses CBO's `extended baseline' projections, subtracting
the impact of Medicare and Medicaid leaves large and growing projected
surpluses in the rest of the budget.
\5\ The question is important for two reasons. First, advocates of
increased spending or reduced taxes that might be classified as
`investments' or `pro-growth' would doubtless argue that short term
costs would lead to improved long-term outcomes. What looked to be
deficit increasing over a few years, it could be argued, would be
deficit reducing in the long run. Second, actually doing the analysis
to substantiate or refute such claims is impossible to do reliably.
Critics of the interstate highway system would have pointed to the
unfunded liabilities for highway maintenance that would boost future
deficits of the states. The road-builders of the Eisenhower years could
have claimed--with considerable legitimacy as events turned out--that
those unfunded liabilities would pale beside the economic innovation
and growth that would result from a revolution in the transportation of
goods and the associated investments. Were an analogous undertaking to
be enacted to day, should the Comptroller General under H.R. 3654 count
it as raising or lowering future deficits?
Chairman Spratt. Thank you, Mr. Aaron. I was thinking that
you were going to go ahead to build the structure. I was
waiting for the next shoe to drop.
Mr. Aaron. Well, if you will hold a hearing on health care
financing reform, I will be glad to testify, too.
Chairman Spratt. Now, to be the clean-up hitter, Ms. Alison
Acosta Fraser from the Heritage Foundation.
STATEMENT OF ALISON ACOSTA FRASER
Ms. Fraser. Thank you very much, Mr. Chairman, Mr. Ryan and
members of the committee.
I appreciate being asked to speak to you today and to be
your closer. The challenge always with being the closer on a
large panel is coming up with something a little bit different
to say, so I hope I have some new things to share with you that
other panelists have not. By and large I agree with just about
everything that was said earlier, with some few distinctions.
But let me circle back to the entitlement challenge that we
face. I believe that entitlement spending is a threat to the
Nation's growth. It is a threat to our prosperity and to our
ability to perform in a global economy. This problem is not a
partisan one. Indeed, it threatens priorities for the right and
for the left as less and less room is left each year in the
budget.
According to CBO, in a recent letter to Congressman Ryan,
total Federal spending will grow from about 20 percent of GDP
today to 42 percent by 2050. And this surge is driven by
entitlement spending for Medicare, Medicaid and Social
Security. So, to be specific, total entitlement spending will
grow from 8.4 percent of GDP to 18.6 percent, more than
doubling, by 2050. That is before my three teenagers will be
ready to retire.
Entitlement spending alone will also exceed the historical
level of taxation of about 18.3 of GDP. So clearly this
spending is unsustainable. The thing that is also interesting
and important to point out, that this same CBO letter explains
and lays out the harsh economic consequences of not tackling
the entitlement problem.
So why the SAFE Act, and why a commission? Solving
entitlements, as you all know, is very difficult and there are
many, many considerations. Tough choices will have to be made.
And as you know, as well, the normal budget and legislative
process for bills and proposals, means that any time a new one
is dropped, every stakeholder, every special interest and their
lobbyists walk the halls of Congress. They visit you with two
things in mind, either being held harmless by any legislation
or to seek out a gain from legislation. So we really need
something that is going to change the dynamics in order to make
the tough choices necessary to rein in entitlements, one that
will examine the problem holistically, balancing the needs of
younger generations and older generations.
So why is this really necessary?
Now, setting aside Mr. Ryan's sweeping reform proposals,
all other current legislative steps to rein in entitlement
spending this year are quite likely to be overridden. We have
the doc fix, which would result in savings on payments to
physicians. Whether you like it or not, it is something that is
on the table. We have regulations tightening loopholes and
abuses of the Medicaid Federal matching system for States. And
there is a competitive bidding for durable medical equipment
which would result in substantial savings to Medicare. All of
those things are facing very tough votes indeed.
And I believe that SAFE Act would transcend these current
legislative logjam dynamics in two key ways: by building public
support for change and to forge bipartisan momentum action.
In the SAFE Act, I think there are two important elements
of the defined mandate that will make this commission, or would
make this commission, a success. That is: to consider and
propose reforms to limit the growth of entitlements while
strengthening the safety net to ensure that every American's
basic needs, especially for health care, can continue to be
met; and for tax reforms, to make the system more economically
efficient and to improve economic growth.
So we heard a lot of talk earlier about everything needing
to be on the table. I think this covers the gambit when it
comes to entitlements. But I think there is one very, very
important key feature of this commission proposal, and that is
the feature of public engagement, so rather than sort of, you
know, closed-door negotiations, and this important element
would hear the concerns of ordinary Americans across the
country about the entitlement situation and be able to consider
the changes that Americans are actually willing to make
themselves in their lives to leave things better off for next
generations.
And to build on that, I would like to depart a little bit
from what my preceding panel members have discussed, and talk
about my experiences in speaking on entitlements as a member of
the Fiscal Wake Up Tour. The Fiscal Wake Up Tour is sponsored,
as you probably know, by the Concord Coalition, with
participation from the Heritage Foundation and the Brookings
Institution, and of course featuring my fellow panelist, former
Comptroller General David Walker. We spent over 2 years
traveling the Nation talking with ordinary Americans from all
walks of life about entitlement and the problems that could
arise from them if we don't tackle them. And we've been
privileged to see some extraordinary lessons in how the Nation,
how these everyday Americans outside Washington view the
problem and what they are willing to do about it.
And the first thing that I really want to share with you is
that each one of our audiences, no matter what city we go to,
appreciates our respectful and frank bipartisan discussions
that we hold with them. They appreciate different points of
view and the steps that we have taken to work together towards
a common goal. They are also stunned when they hear how high
tax rates would have to be raised to pay for this spending. And
they view this problem really more as a moral one, of leaving
things better for the next generations like our young person
back there in the back, and less as an economic crisis. They do
not feel that it is right. We heard Mr. Peterson talk about the
$175,000 burden. They don't think it is right to leave that to
our children and our grandchildren, so that when they are
presented with the facts and the options for reform, these
Americans are open to actions and change that we would normally
think of as being off limits.
So I think there is tremendous potential for change.
Americans, in every experience that I have been on in the
Fiscal Wake Up Tour and other experiences speaking on
entitlements, Americans want Washington to fix this problem. So
I believe SAFE Act would build and capitalize on these
experiences.
The entitlement problem must be dealt with sooner rather
than later. As David Walker says, and we have been on many,
many speaking engagements together; we could give each other's
speeches, so I am going to borrow a line from him, ``every year
we wait will cost trillions of dollars.'' And the younger
generations have to pay those trillions of dollars.
So I believe that SAFE Act would change the legislative
dynamics in a bipartisan way to create public support, which is
essential for changes in entitlements, something, programs of
this nature, and also create the legislative momentum necessary
for action.
Thank you.
[The prepared statement of Alison Acosta Fraser follows:]
Prepared Statement of Alison Acosta Fraser, Director, Roe Institute for
Economic Policy Studies, the Heritage Foundation
My name is Alison Acosta Fraser. I am Director of Economic Policy
Studies at The Heritage Foundation. The views I express in this
testimony are my own and should not be construed as representing any
official position of The Heritage Foundation.
Thank you for the opportunity to speak to the committee on this
most important issue.
ENTITLEMENT TSUNAMI CHALLENGE
Entitlements will cause the budget (without interest) to
soar from 18.8 percent of GDP today, to 35.3 percent by 2082.
With interest included spending will soar from 20 percent
of GDP to 75 percent by 2082 if current tax policies are kept in place.
Maintaining current tax policy will result in revenues
rising above the post World War II average of 18.3%.
The gap between future benefits and funding committed for
Medicare is $36 trillion, Social Security nearly $7 trillion more.
When other liabilities like the national debt are added in
this is the equivalent of a $175,000 mortgage for every man, woman and
child in American--only without the house to go with it.
The SAFE Commission ACT is a bold way to build public
support for change and forge bipartisan agreement for action.
Entitlement spending on Medicare, Medicaid, and Social Security is
a tsunami heading toward our budgetary and economic shores. Experts
across the ideological spectrum agree that entitlements threaten the
nation's priorities.
Entitlements are not budgeted in the same manner as most other
federal programs. Though there are strong reasons for this approach,
this means that entitlement spending grows virtually unchecked from
year to year. This approach to budgeting makes it exceedingly difficult
to tackle entitlement spending, but it does not diminish the need to do
so.
The Congressional Budget Office's latest analysis projects that
spending on these three entitlements will cause the budget (without
interest spending) to soar from 18.8 percent of gross domestic product
to 24 percent by 2030, 28.3 percent by 2050, and 35.3 percent by 2082.
Maintaining current tax policy\1\ and with tax levels rising just above
the historical average of 18.3 percent of GDP, total spending including
interest skyrockets from 20 percent of GDP in 2007 to 75.4 percent in
2082.\2\
Clearly, this is an unsustainable budget path, and it is one that
is driven by entitlement spending. Social Security and Medicare have
promised $42.9 trillion more in benefits to senior and disabled workers
than the programs will be able to pay, according to a new report.
Social Security's long-term unfunded obligations are $6.6 trillion;
Medicare's are $36.3 trillion. When other liabilities and obligations
are factored in, this is the equivalent of $175,000 for every man,
woman, and child in America--nearly the equivalent of a mortgage, but
one without a home to go with it.
According to the CBO ``Ryan letter,'' if entitlements are left
unchecked, spending will cause huge deficits that will begin to extract
a tremendous toll on the economy, causing GNP not only to stop growing,
but also to contract. In out years, ``project deficits would become so
large and unsustainable'' that CBO's models simply cannot calculate the
impact on the economy. Moreover, the estimates ``greatly understate the
potential loss to economic growth.'' \3\
The spending problem is so massive that federal tax rates would
have rise to stagnating--even confiscatory--levels to close the gap.
CBO estimates that today's income tax rates would have to more than
double:
[Percentage]
------------------------------------------------------------------------
Tax Rates Necessary to Pay for
Today's Rates Entitlements
------------------------------------------------------------------------
Individual
10 25
25 63
35 88
------------------------------------------------------------------------
Corporate
35 88
------------------------------------------------------------------------
This is calculated without any economic feedback. Such tax rates
would come at a tremendous cost to the economy and create other
problems as well. According to the CBO, revenues would likely fall
materially short of their projections and thus are not feasible.\4\ The
U.S. Corporate tax rate is already one of the highest among the
industrialized nations. In order to remain competitive in the global
economy, our tax rates should be going down, not up.
WHY A COMMISSION
Representatives Jim Cooper (D-TN) and Frank Wolf's (R-VA) Safe
Commission Act (H.R. 3654) would create a vehicle for action that could
break the entitlement legislative logjam. This legislation would
achieve both public acceptance for solutions to the entitlement tsunami
and bipartisan action to put these solutions into law. Since many
experts feel that entitlement spending is the greatest economic
challenge facing the nation, the need to tackle it is vital.
Legislation moving through Congress frequently takes steps
backward, not forward to rein in the soaring costs of entitlements. It
is politically difficult for most Members to talk about meaningful
reform. The legislative and budget processes only aggravate that
dynamic.
The entitlement tsunami is driven by huge increases in future
federal spending on retirement programs for middle-class retirees:
Medicare, Medicaid, and Social Security. It is not driven by falling
tax levels.
The reality of today's politically deadlocked environment means
that many lawmakers may insist that revenues must be considered if
reductions in popular entitlements are to occur. Conservatives resist
the idea of raising taxes for several reasons: Taxes are not the
problem, future spending growth is; and raising taxes would threaten
the economy, compounding the harm from higher levels of government
spending. Moreover, increasing taxes would likely reduce the pressure
on Congress to curb spending, or could even increase spending in other
areas
The Cooper--Wolf bill provides a rational solution to this
political quagmire. It creates a bipartisan commission with a mandate
to address the ``unsustainable imbalance'' between federal commitments
and revenues while increasing national savings and making the budget
process give greater emphasis to long-term fiscal issues. While the
commission could consider a range of approaches, the bill places
emphasis on two:
Reforms that would limit the growth of entitlements while
strengthening the safety net, and
Tax reforms that would make the tax system more
economically efficient and improve economic growth.
Focusing on slowing the growth in entitlement spending, along with
changes to strengthen assistance for the needy, the commission's
proposal should appeal to those who worry that surging middle-class
entitlement retiree spending will crowd out spending on other
priorities. On the other hand, focusing on pro-growth tax reforms that
improve economic growth (and also lead to an increase in revenues, just
as the 2003 tax changes produced increases in revenues) is a critical
issue for those who worry about escalating tax levels. Combining both
of these areas of concern into a reform package is necessary in this
polarized political environment to achieve changes that can be
acceptable across the political and ideological spectrum.
Public engagement is another vital feature of this commission. This
commission would not create a backroom deal and drop the results on the
nation. Rather, it would hold public hearings to discuss the long-term
entitlement challenge. This essential first step would consist of
public ``town hall''--style meetings across the nation to speak frankly
about the long-term fiscal challenge and the tough options for fixing
it.
Taking this first step would help to build public acceptance of the
need to fix entitlements and support for ultimate plans to modernize
the programs. These discussions would require balancing the worries of
the young and the elderly. This up-front guidance and buy-in from
Americans of all walks of life would help to guide the commission in
creating detailed recommendations that would receive much broader
support and understanding than proposals crafted solely inside the
Beltway.
In today's political environment, it is extremely difficult and
uncomfortable for many, if not most, Members of Congress to explicitly
discuss the colossal fiscal challenge that entitlements present. The
highly partisan environment often seeks to push discussions further and
further from real action on these tough problems. The end result is
that succeeding Congresses merely kick the can down the road. The
Cooper--Wolf SAFE Act would change these underlying dynamics so that
entitlements can be tackled and a huge economic disaster prevented.
FISCAL WAKE-UP TOUR
I have been a partner in the Fiscal Wake-Up Tour, sponsored by the
Concord Coalition with The Heritage Foundation and the Brookings
Institution and featuring former Comptroller General David Walker. The
Fiscal Wake-Up Tour has traveled the nation for over two years,
educating Americans on the problem and possible solutions.
Americans trust the data that are presented in the Fiscal Wake-Up
Tour, and they are prepared to discuss, accept, and sometimes even
demand solutions to entitlement spending that most politicians assume
would be unacceptable to the public. Moreover, they view the budget
crisis primarily as a moral issue, centered on the huge debt--that
$175,000--facing the younger generations, often their children and
grandchildren, not as just an economic crisis.
Americans are ready to have this conversation and often wonder why
there is not more being done in Washington to solve the problem.
LEGISLATIVE ACTION
The entitlement problem has been well known for years. Experts from
the right and the left agree that entitlements are fiscally
unsustainable and a threat to the economy, as indicated earlier. Many
budget and fiscal policy experts have written extensively to warn of
the entitlement problem.\5\ Audiences appreciate the respectful and
frank bipartisan nature of these conversations.
Representative Paul Ryan (R-WI) has proposed a bold legislative
road map to rein in entitlements--and without raising taxes. This plan
is a collection of bold, comprehensive, and sweeping reforms covering a
broad spectrum of issues. He has laid out his vision for reforming
entitlements and challenges others with different views to present
them.\6\
Sadly, legislative action in Congress to achieve tough first steps
toward solving this problem, Ryan's road map and the SAFE Commission
Act notwithstanding, has not been forthcoming. Worse, efforts to rein
in costs are frequently stymied even by those who view entitlements as
a legitimate threat.
When tough legislation is proposed, every conceivable special-
interest group--and their lobbyists--will work diligently to ensure
that their particular interests are protected or receive even more
favorable treatment. With programs like Medicare and Medicaid, there is
an astonishing array of stakeholders: doctors, hospitals, drug
companies, durable medical equipment providers, to name just a few who
will want to be held harmless. The legislative result is predictable.
Legislation to curb entitlements this year seems likely to meet a
dismal fate.
The Medicare trigger law in the Medicare Modernization Act
of 2003 (MMA) requires the President to submit legislation to the
Congress for consideration when Medicare's general revenue funding
becomes excessive. That trigger was pulled this spring and is an
important step for Congress in addressing Medicare's perilous
spending.\7\ The deadline for the House to act is June 30, yet no
positive action to bring Medicare spending under the trigger level is
being planned as of this writing.
A moratorium to prohibit the Administration from
increasing the integrity of Medicaid's federal matching rules is
included in the current war supplemental funding legislation. The need
to overhaul federal matching fund rules has been noted for decades,
including a strong critique from the Government Accountability Office.
These administrative changes would make it more difficult for states to
use inappropriate or questionable techniques to maximize their federal
matching rate, but this moratorium would eliminate a good first step
toward reining in Medicaid's soaring costs.\8\
The MMA also authorized Health and Human Services, which
runs Medicare, to require direct competition for durable medical goods
by the companies that provide them. If the program is allowed to grow,
savings could be as high as $1 billion a year. This would also directly
translate to savings for Medicare retirees since they typically make a
20 percent co-payment on this equipment. But these steps sadly are
being sidelined by legislation pending in Congress.\9\
Despite a series of warnings about the economic and
intergenerational harm from the entitlement tsunami, action from
Congress seems increasingly difficult and unlikely without bold changes
in the legislative dynamics, as these three examples show. The SAFE
Commission Act would transcend this type of legislative paralysis.
MEDICARE REFORMS VS. HEALTH CARE REFORMS
Part of Medicare's problems stem from the fact that medical
spending has outpaced the economy for decades. This doesn't mean,
however, that there are not real steps that should be taken to rein in
Medicare costs. A major portion of Medicare's spiraling costs in the
next two decades is a result of the number of beneficiaries nearly
doubling. Growth in each retiree's health care costs is certainly a
large part of Medicare's spending problem, even the largest, but the
increasing number of retirees in the system sorely exacerbates the
trajectory of spending increases, with serious economic consequences.
Since Medicare accounts for roughly 20 percent of the nation's
health care bill and other federal programs account for an additional
13 percent, Congress can and should revisit Medicare's structure to
determine a way to make the program more affordable for future
generations while ensuring that the basic needs of older Americans
continue to be met.
CONCLUSION
Americans understand the entitlement problem and the consequences
of inaction. They are ready for a national debate and anxious for
Washington to work together to find solutions. Representatives Cooper
and Wolf recognize that the nation's budgeting system is ill equipped
to tackle the entitlement problem and that the political environment
will not lead to a sustainable, responsible long-term federal budget.
This is a sound proposal that could fundamentally change those tensions
to achieve actioin and lead to a better future for younger and older
generations alike.
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Heritage Foundation or its board of trustees.
ENDNOTES
\1\ Key features: maintaining the 2001 and 2003 tax cuts and
indexing the alternative minimum tax (AMT).
\2\ Peter R. Orszag, letter to Honorable Paul Ryan, Ranking Member,
Committee on the Budget, U.S. House of Representatives, on ``The Long-
Term Economic Effects of Some Alternative Budget Policies,'' May 19,
2008, at http://www.cbo.gov/doc.cfm?index=9216.
\3\ Ibid., p. 4.
\4\ Ibid., pp. 8, 9.
\5\ Stuart M. Butler Ph.D., Alison Acosta Fraser and others,
``Taking Back our Fiscal Future'' Heritage Foundation White Paper 9999,
March 31, 2008, at http://www.heritage.org/about/staff/
alisonfraserpapers.cfm#2007Research
\6\ J.D. Foster, ``Courageous Reforms in Ryan's Entitlements Road
Map: Where Is the Democratic Response?'' Heritage Foundation WebMemo
No. 1958, June 19, 2008, at http://www.heritage.org/Research/
SocialSecurity/wm1958.cfm.
\7\ Robert E. Moffit, Ph.D., and Alison Acosta Fraser, ``Washington
Must Pull the Trigger to Contain Medicare Spending'' Heritage
Foundation WebMemo No. 1796, February 4, 2008, at http://
www.heritage.org/Research/Budget/wm1796.cfm.
\8\ Nina Owcharenko, ``The Medicaid Regulations: Stopping the Abuse
of Taxpayers' Dollars,'' Heritage Foundation WebMemo No. 1911, May 2,
2008, at http://www.heritage.org/Research/HealthCare/wm1911.cfm.
\9\ Robert E. Moffitt, Ph.D., ``Medicare: Congress Is Poised to
Block Savings for Taxpayers and Seniors Alike'' Heritage Foundation
WebMemo No. 1959, June 18, 2008, at http://www.heritage.org/Research/
HealthCare/wm1959.cfm.
Chairman Spratt. Thank you.
And I will yield to Mr. Cooper to begin the questions.
Mr. Cooper. Thank you, Mr. Chairman.
I appreciate the testimony of the witnesses. There are a
lot of vitally important issues to cover, but let me begin with
Dr. Aaron's suggestion that perhaps we have a hearing on
comprehensive health care reform financing. I would welcome
such a hearing. I hope that this Congress, in its waning days,
could start that debate.
I personally am for the so-called Wyden-Bennett bill, a
bill that has 14 Senate cosponsors, seven Democrats, seven
Republicans. It has been scored by CBO. It actually pays for
itself. Now, this is a controversial bill, but at least it is
the start of a debate, and it is bipartisan, and it is paid
for. That is a pretty good place to begin the debate. But
wherever we begin the debate, let's have the debate.
The thing that has amazed Frank Wolf and me more about our
bill than anything else is all we are asking to do is for a
commission, which is essentially Congress to punt on this
issue. And this Congress is so timid, we are afraid to punt. It
is a remarkable thing because I think we have amazing think
tank consensus. We have had the Fiscal Wake Up Tour. We have
Brookings and Heritage in an unusual alliance.
And today before us, we have two of the few think tank
people left in Washington who disagree with the commission
approach or the need to deal with it urgently. Dr. Aaron says
in his remarks that early action is not urgent but desirable.
Well, I would like to ask Dr. Aaron, what early action do
you propose?
Mr. Aaron. Let me begin by correcting a reference to
Brookings and other organizations endorsing these positions.
What has happened is that specific scholars at the Brookings
Institution, by no means all, have participated in these
events, but as an institution, Brookings has not endorsed the
positions of the Fiscal Wake Up Tour or any other specific
provisions. Very respected and senior scholars have done so,
but not everyone at the Brookings Institution necessarily
agrees with that.
In fact, you will note at the bottom of my statement, as
should occur at the bottom of every statement by anybody at
Brookings, these views do not necessarily reflect those of the
trustees, officers or other scholars at the Brookings
Institution.
Now, with respect to specific actions, let me suggest one
which comes from a calculation that was done through the Urban-
Brookings Tax Policy model, and that is, if we did not extend
the tax cuts for the top 1 percent of the income distribution,
over the next 75 years, the revenue from that one tax change
would exceed the entire projected long-term deficit in Social
Security over the same period. That is a specific measure that
would deal with one of the entitlement issues, often lumped
together with health care, misleadingly, in my opinion, because
Social Security, admittedly, does face a projected long-term
deficit but one of relatively modest size and one that is
easily closed. This is one particular way that we could, in a
responsible, fiscally responsible way, deal with that
particular problem.
The problems posed by Medicare, Medicaid and private health
care spending are exceedingly difficult, vastly more
complicated and have orders of magnitude larger financial
stakes.
Mr. Cooper. Dr. Aaron, so your early action that you are
recommending is that we go ahead in this Congress and repeal
the Bush tax cuts?
Mr. Aaron. I said the Bush tax cut, if you simply allow the
Bush tax--no, actually what one would do is allow current law
to remain in effect for the top 1 percent of the income
distribution.
Mr. Cooper. But you referred to early action in your
testimony.
Mr. Aaron. Yes.
Mr. Cooper. We are not going to wait until 2010 to allow
the tax cuts to expire. We should go ahead----
Mr. Aaron. I would be content if it was done in 2010.
Mr. Cooper. But that doesn't sound like early action.
Mr. Aaron. It does to me. Given the fact that there are
current moves to repeal--to, pardon me, make permanent those
tax cuts, I think a clear statement by Members of Congress that
the tax changes for the top 1 percent of the population were
going to be allowed to expire as called for under current law
would be an important first step.
Mr. Cooper. It is my understanding that the opportunity
cost of delay is several trillion dollars a year. Even USA
Today had a headline a couple of weeks ago saying that a 1-year
increase in the fiscal gap is $2.5 trillion. The consequences
of that are terrifying for our young people. So even a delay,
if you are willing to accept 2010, I am not. This is 2008.
Surely there is something we could do sooner.
Mr. Aaron. If you think you can get a majority of both
Houses of Congress to act on that currently, that would be an
admirable first step.
Mr. Cooper. The trouble is no one is proposing anything,
with the exception of our friend Mr. Ryan. You know, that is
why we need a commission is to get folks, and whether it is all
Members or no Members or some Members, but to get people, on a
bipartisan basis, thinking about these issues.
With all due respect to my friend Mr. Greenstein, you raise
a number of small procedural points that are really not worthy
of you or your outstanding organization. I have never heard
such deference to the current President, especially from you,
that we have to rely on the President to start the process.
Well, when we have a bad President, that means that for 4 or 8
years, Congress can't act?
We are a coequal branch. We should come up with proposals
and initiatives of our own. And yet I am not hearing that from
your testimony. These are such urgent problems. We need to do
something now.
Mr. Greenstein. You know and I know, Mr. Cooper, that
nothing is going to happen between now and November.
Mr. Cooper. How do we know that? If you were to get fully
behind it, could something happen? There is enough time to
vote.
Mr. Greenstein. No. Nothing is going, in fact in the Senate
at this point, you almost can't move anything on the Senate
floor that doesn't have unanimous consent between now and the
election.
Mr. Cooper, let me say, I am not at all disagreeing with
the analysis that you have set forth of the problem or the need
to get going. I think--I am hoping that you are not conflating
my view that moving ahead now into a commission, in my view,
strategically is not the best way to go. I am trying to be
realistic. I don't think anything will happen between now and
November. I think the first goal is to try to get, persuade the
next President, whoever it may be, to make this a priority. I
don't want to saddle that next President with a commission. I
want to increase the chance that the next President will want
to do something. If the President thinks a commission is the
way to go, great. If the President wants to do something
without a commission, great.
Mr. Cooper. We are an equal branch of government. You are
ceding an incredible authority to the executive here.
Mr. Greenstein. In the real world, every significant, every
big deficit reduction package that we have had in recent
decades, whether it be the 1983 Social Security package, the
1990 package, the 1993 package, everything started with the
President.
Now, let me be clear. I have, and if you want to, I will go
through them. I have a whole list of things I would do the
sooner the better in Medicare, in health care, in taxes, in
Social Security, in inflation indexing. But I am not sure any
of them can pass up here if we don't have a larger process that
includes the President. I am just trying to be realistic about
how we get there from here.
Mr. Cooper. Mr. Greenstein, let's not give up in June. They
sure can't pass if we don't try. We are sworn to uphold the
Constitution and the laws of the land. The Constitution gives
us equal priority with the President. Let's give it a shot.
Let's let the Constitution work. Let's uphold our job
description. Let's not give up in advance.
The candidates are busy. We can have hearings such as Dr.
Aaron was suggesting on comprehensive health care reform. Where
are those hearings? They are simply not happening.
Most Members of Congress really can't tell you the
difference between Medicare and Medicaid when you get down to.
That is like many are confused about Sunni and Shia. We should
do our homework. We should solve these problems. We should earn
our pay, and that is simply not happening today. So at least a
commission could happen. But you are even against a commission.
Mr. Greenstein. I am all for more public hearings. I am
interested in seeing the movie when it comes out. I am for
things that increase the chance of action in the next Congress,
but I am not persuaded that a commission is one of those
things; that is all.
Mr. Cooper. So for you and Dr. Aaron, there is commission,
no matter how drafted, that you think would be positive and we
should pass this year?
Mr. Greenstein. I would not pass a commission this year. I
would wait until after the election, and I would look for what
is the approach--it might be a commission; it might not be--
what is the approach that gets us the key? The key is a
commitment on the part of the President and the bipartisan
leadership of both parties to put everything on the table and
try and negotiate agreements.
Mr. Cooper. If a commission were formed, would you serve on
such a commission?
Mr. Greenstein. If I were asked to, certainly, as I did in
1994.
Mr. Cooper. Even though you are opposed to a commission,
you would still serve on it?
Mr. Greenstein. I think my record is pretty clear in
rolling up my sleeves and trying to help and basically,
normally, when we were talking about this during the break, my
roll has sort of been, whenever an effort comes along, to try
to help bring people who are more philosophically policymakers
where I am to agree to changes that might need to be made in
various programs in return for larger changes in other areas,
revenues and so forth.
Mr. Cooper. So you will join in the debate, but you won't
help start it.
Mr. Greenstein. I like to think that what the Center on
Budget and Policy Priorities has been doing for years and is
doing now, including issuing reports warning about the dire
long-term problem, is contributing to that debate.
Chairman Spratt. Mr. Cooper, we have got to move on.
Mr. Aaron. I just wanted to say, I think that what the
position that I would support is precisely the one that you
have articulated, that you and the President are coequal
branches of government and that, for that reason, both need to
act together for effective action.
Chairman Spratt. Mr. Ryan.
Mr. Ryan. I thank the chairman.
First of all, thanks for doing this hearing.
And Mr. Cooper, I enjoyed your line of questioning.
When I took this seat back in the beginning of this
session, I decided to work with this brilliant staff we have
here to just try and come up with a plan to fix it. No one has
really done that around here, and so I thought I would just
take this sort of novel approach of getting into the weeds and
getting into the numbers and meeting with the actuaries and the
trustees and all the experts around town, listening to folks
around the country, and actually trying to come up with an
actual plan that scores out as fixing this problem.
Now, every time you do that, and this took us 14 months to
write this, you have to make a lot of decisions, and they are
not necessarily popular decisions. And my purpose in going
through that exercise was to simply try and get people around
here to do that. I am not going to sit here and pretend that I
have got it all figured out and we have got the best ideas in
our bill. I simply want to say that, let's come together and
have everybody else bring their ideas so that we can get on to
the business of actually fixing it.
I really want to commend Mr. Cooper and Mr. Wolf for
attacking this problem and coming up with it. My own personal
view is this is what we should do. This is what we are elected
to do here in Congress, and this is why people send us here, to
fix problems, to change laws. And so I just want to roll up my
sleeves and go do it. I serve on the Ways and Means Committee,
which has jurisdiction over most of these entitlement programs,
and we serve here in the Budget Committee, which sets the
architecture up. And so I for one would just like us to
actually just do it.
So now we find ourselves with this political system we have
today, this political gridlock, and like Winston Churchill
said, democracy is the worst possible form of government,
except for all other forms of government. So the question I
guess we have is, how do we get ourselves off the dime, and how
do we get moving on this stuff?
So that is the frustration. But I think by throwing plans
out there, we can probably advance the ball. Welfare reform is
one of those issues I look at, which back in the early 1990s
was considered just undoable, impossible. In Wisconsin, we
started it in 1992; it became a success story. In 1996, we got
welfare reform. People may disagree with whether that was the
right thing to do or not, but it was a huge change to
entitlement law.
I liken the moment we are in today to maybe perhaps that
moment we were there then, that if we begin to come up with
ideas and work on these things, propose solutions, enough of us
bringing our solutions to the table, and perhaps we will
actually start solving problems.
So let me direct my questions to each person based on their
testimony. And I will start with you, Mr. Peterson. You
mentioned, obviously you have been writing about this challenge
for at least two decades. And you are now dedicating most of
your life and a lot of your resources to trying to educate the
public to act, to get Congress to act on this. What is the
plan? What is the secret? What is the idea? What is, in your
opinion, with all of your experience, what do you think it is
going to take to get us here in Congress to actually act and to
work on this and get this done?
Mr. Peterson. Well, I think, from actual experience, I know
what it is not going to take.
I served with Bob Greenstein on the Kerrey-Danforth
Commission. And I found it immensely sobering that, even though
we had a bipartisan staff, 20 Members of the Congress and 11 of
us in the private sector, and at the end of looking at the
problem, without getting to reforms, there was, Bob, I believe,
unanimity, quote-unquote that the entitlement programs were, A,
unsustainable, and by the mid '20s, as I recall, would consume
all or most of the budget, that and interest. You would have
thought that having said it was unsustainable, we could get
some agreement on what to do about it. The two chairmen, you
may recall, Bob, put off the reforms until after the election,
rather than before. That is my recollection. We could not get
agreement I don't think, except for Chairman Kerrey, for any
specific proposals by the sitting Members of Congress.
Is that correct?
Mr. Greenstein. Yes.
Mr. Peterson. And all of the agreement was from people like
himself and myself. That was a very sobering experience that I
had there.
Now, we are starting out on a very daunting task. I was
presumably educated at the University of Chicago, and we had a
Nobel Prize winner named George Stiegler who once said, if you
have no alternative, you have no problem.
Mr. Ryan. He did the seminal work on the barriers to entry,
as I recall.
Mr. Peterson. What?
Mr. Ryan. He did the seminal work on the barriers to entry.
Mr. Peterson. He did.
I thought about having all this money and being deeply
concerned about the future of this great country and doing
nothing. So our first task, I think David would agree, is to do
everything we can to educate the public because if the public,
for example, really believes that the Social Security system,
to take one example, is solvent for 40 or 50 years, we can't
expect them to take this issue separately. And of course,
Medicare is a much more urgent program.
So as with the film, as with major efforts among the young,
we are going to try to figure out how to motivate these people,
but first, they have to understand the problem. So we are going
to spend a lot of time on educating.
Once they are educated, we hope we can figure out ways of
getting these people to do something about it, to get organized
because, I hope I am not being unpleasant to the Congress, but
I had an experience way back on the Peter Grace Commission of
looking at the indexing system that was used on, of all things,
congressional and public retirement plans, which were far more
generous than was true in the private sector. I went to visit a
Congressman who was a leader in the Budget Committee at that
point, and I laid out what the problem was and the proposal,
and he says to me, calls his assistant in, and said, Shirley,
why don't you bring in all the letters that we have gotten that
propose leaving the current indexing system the way it is?
And this person said, you mean all of them?
He said, yeah, just bring in the most recent ones.
She comes in with an armful of letters.
And then he says, I wonder if you could bring in for Mr.
Peterson letters supporting the proposal that we change the
indexing system.
And the assistant said, we never get any letters like that.
So, in our naive view, you might say, until those of you in
Congress are exposed to some public education and public
support with a lot of letters and a lot of voting and a lot of
lobbying or whatever you call it, it is going to be very
difficult to make any progress. So we are going to spend a
great deal of money and time trying to educate and activate the
public, putting major, major emphasis on young people because
it is their future.
Mr. Ryan. I appreciate that. That is my view as well. Most
Members of Congress, speaking just myself, a political
observer, don't want to do something that risks losing their
job, and so, therefore, they don't propose these kinds of
changes. And until it becomes risky to lose your job by not
reforming these things, then the reforms probably won't occur.
David, obviously, you have done the Fiscal Wake Up Tours.
You are coming to Milwaukee next week. Give us the sense of the
price of delay, the cost of delay. What happens if we just kick
the can down the road 1, 2, 3, 5 years. Give us--why the sense
of urgency and the price of delay?
Mr. Walker. As a certified public accountant, among other
things, I am reasonably proficient at math. And when you look
at discounted present value dollar numbers, which is the way
that a CPA would look at something, economists typically look
at percentage of the economy. Actuaries might look at
percentage of payroll. We are in a $53 trillion hole as of last
September 30th, 2007. And by the way, that is in the financial
statements of the United States Government, and by the way,
that is in here. That hole is primarily comprised of unfunded
obligations for Medicare, $34 trillion, and somewhat less than
$7 trillion for Social Security. That $53 trillion grows by $2
to $3 trillion a year by doing nothing.
And in my opinion, the biggest deficit this country has
today is a leadership deficit. And the simple fact of the
matter is that Washington is dysfunctional. And based upon my
experience going around country, more than half the States and
40 to 50 cities, the people are tired of the status quo. And
the fact is, it is unacceptable. It is unsustainable. It is
threatening the future of our country and our families. And the
simple fact is, if you don't propose a plan, whether the plan
is a plan like yours or the plan is a commission, which is more
of a process--and I agree with Bob, by the way, that it would
need to be implemented next year with the support of the
President and bipartisan support of the Congress if we are
going to have it for it to work. If you don't support
something, you are tacitly supporting the do-nothing plan. And
the do-nothing plan threatens the future of our country and our
families. It is as simple as that.
Mr. Ryan. Bob, you have been here many times. Your group
advocates certain kinds of spending, domestic spending.
Wouldn't you agree that if we do not address this issue of the
large entitlements, that it crowds out all the other kinds of
spending programs that you so passionately advocate for here?
Mr. Greenstein. Let me say several things.
First, I certainly agree, as I testified, that the sooner
we get going, the better. I wanted to clarify one of number
that is being used. This notion that there is a couple of
trillion dollar cost for each year that we don't act, as David
mentioned, that is a net present value, 75-year number. The net
present value, 75-year size of the economy is $500 trillion. In
other words, we need to be careful not to compare the $1 or $2
trillion cost per year of not acting to the current GDP of $14
trillion. It has to be compared to the total net present value
GDP over the next 75 years.
Mr. Ryan. Would you not agree that the proportion of the
increase is on an accelerating slope?
Mr. Greenstein. It is definitely on an accelerating slope.
Basically, it is not that big a deal whether we act this year
or next year or even a year after that. But if you start
saying, what if we wait 10 or 15 or 20 years, that is a huge
deal.
Mr. Ryan. Are you saying that because the Boomers haven't
really begun to yet retire and we have this massive retirement
generation? Or it just the accumulation of speed and health
spending?
Mr. Greenstein. No, it is because if you look at the
projections that we have all talked about what happens by 2050,
2075, whatever, what happens is you get to a point somewhere in
the 2020s where you start into the debt explosion and, so--but
I think the point is not this $1 or $2 trillion. It is simply,
the longer you wait, the larger the program changes or tax
increases have to be to address it. And that may make it even
harder to deal with politically.
But let me get to your main question.
Mr. Ryan. And just fairly briefly if you can, so I can get
to everybody else.
Mr. Greenstein. Yeah, let me be clear that, at the Center
on Budget, we favor increased investment in some domestic
areas. We favor significant savings in other spending areas.
And the key, I think, is we are not going to make progress on
this problem, Congressman, I think, until, as in every past
successful major deficit reduction package, 1983, 1990, 1993,
we have to have both the program side and the revenue side on
the table. I am for adopting virtually all the MedPAC
recommendations. Medicare Advantage and others. I think we
ought to look seriously at proposals from your side of the
aisle on raising premiums in Medicare for more affluent
beneficiaries. I think we ought to look at the way we index
both Social Security, other benefit programs, and the Tax Code.
There are a variety on price supports. I am very much for
looking at things on both sides.
Could I just say in that regard that I am actually
concerned about whether the plan you put forward moves us
forward or maybe moves us backward. What I mean by that is the
following: As I understand your plan, it basically roughly
doubles the size of the Bush tax cuts. The Tax Policy Center
estimate indicates that, even under dynamic scoring, its cost
is $5 to $6 trillion over 10 years, and that the average tax
cut for the top one-tenth of 1 percent of the population is
over half a million a year.
Now, when you do that, your hole gets bigger.
Mr. Ryan. Let me get you there.
First of all, that is an inaccurate analysis, I would say,
number one. Number two, it presumes the baseline with the AMT
going into it that would go into the 24 percent of GDP on
revenues, and anything shy of that is a big, quote-unquote tax
cut. It is a different type of logic stream that I just don't
share.
Mr. Greenstein. If you want to use the base line that
assumes all the tax cuts are made permanent, it is still
several trillion over that baseline, and the average tax cut of
$545,000, according to the Tax Policy Center, for the top one-
tenth of 1 percent, the AMT has almost nothing to do with it
because people in the top-tenth of 1 percent don't pay the AMT.
My point though, I don't want to argue the specifics. Here
is my larger point: Under your plan, because the tax cuts are
bigger, the spending cuts have to be bigger. You have about a
70 percent reduction by the 75th year from baseline in Medicare
and Medicaid, and most striking, for everything outside Social
Security, Medicare and Medicaid----
Mr. Ryan. Okay, let me get you there----
Mr. Greenstein. Here's my bottom line.
Mr. Ryan. Yeah, go ahead.
Mr. Greenstein. We are going to make progress when people
on your side of the aisle put out plans that include increases
in revenues and people on this side of the aisle put out plans
that make changes in Medicare and Social Security.
How would you feel if the other side of the aisle put out a
plan that doubled Social Security benefits and then closed the
entire gap through tax increases? So that is my concern. We
have to move closer together and put everything, revenue,
Social Security, Medicare and the health care system on the
table.
Mr. Ryan. All right.
Since you kind of get after my plan, I am going to have to
defend it for a minute because I want to get to these two, and
we are taking up too much time as it is.
My goal, using Treasury's model, OTA, static analysis, not
dynamic scoring, was to plug the loopholes in our Tax Code,
which go to the top tax bracket payers themselves; broaden the
tax base; and clean up the way we tax ourselves, so that we can
win in this era of globalization, in this era of a global
economy.
What I propose is to keep our tax burden on the American
economy roughly what it has been over the last 40 years, 18.5
percent. You have a problem with that. I understand that. We
have a disagreement on that. It is my belief that if we start
exceeding up, going above 20 percent of GDP, that there is a
wealth of empirical data that shows that economic growth
dissipates; that standards of living begin to go down. You
don't agree that. I understand that. But it is my intention to
keep our revenues roughly where they are today.
And I am not talking about cutting taxes. I am talking
about keeping them where they are as it relates to our
economy's ability to pay it, but taxing ourselves more
intelligently so that we can do well in the 21st century, so
that we can get the next generation a higher standard of living
and good positive economic growth. I would argue that the way
we tax ourselves is very unintelligent. It is literally
shifting jobs and capital overseas. We need to reverse that.
But yes, we do have to attack the spending side. It is the
spending side of the ledger that is the biggest culprit here.
You simply can't tax your way out of this. Don't ask me, ask
the Congressional Budget Office, ask the GAO, ask any other
nonpartisan, non-ideological institution, and they will tell
you spending is the biggest culprit here. That is why I
borrowed a lot of ideas from Democrats to put this bill
together: means testing, social safety nets, high-risk pools,
all ideas not from my side of the aisle, from the other side of
the aisle, in an attempt to try and bridge this gap.
So I think you might want to take another look at our plan.
But let me move on just very briefly.
If you could, Dr. Aaron, give us just one, you know, real
fast, what would be a good way to tame the inflation in health
care? What would be one of the things we could do to address
the root cause of health inflation?
And then, Alison, I will just ask you one real quick, quick
question, if you could. Budget process. You are an expert on
budget process reforms. Give us just one or two very fast ideas
on what we ought to do to the budget process here to bring more
integrity to it and more discipline to it.
Thank you.
Mr. Aaron. I would like to say just a very few words about
the question that was on the table before. I think there are
three things that are necessary for us to begin to make
progress overall. The first is what Mr. Peterson stressed,
education. That education does include measures to improve our
understanding of what works and what doesn't in the health care
area. Our ignorance is appalling. Our failure to invest a small
percentage of what we spend on health care in discovering what
works and what doesn't is a criminal dereliction of
responsibility.
If you are looking for something to do right now, Mr.
Cooper, that would be as important a step as one could take.
The second step that is necessary for progress is
Presidential leadership. This is not an issue on which
significant progress will be made with the best intentions in
Congress without Presidential cooperation.
Mr. Ryan. Give us a best idea on attacking the root cause.
Mr. Aaron. I will.
And I want to say there are two things that I think Members
of Congress have to do to make things happen. The first would
be, on the Republican side of the aisle, every Member should
rescind the pledge not to vote for any tax increases. And on
the Democratic side of the aisle, every Member should rescind
what may be an implicit pledge not to cut spending on
entitlements.
Mr. Ryan. I want to be deferential to my colleagues here,
so if you could please answer the question very quickly, I
would appreciate it.
Mr. Aaron. The specific step, I already did. I believe the
most important step to be taken right now is to invest 1 or 2
percent of health care spending in an aggressive effort to
determine what works and what doesn't in the way of health care
spending. Until that information is available, no organizer,
private or public, is going to have the basis for saying we are
doing too much of this to a physician who believes strongly in
the desirability of those actions. We have historically set up
difference agencies, told them to go out and do exactly what
I've just said, and as soon as they have done it, various
pressures have been brought to bear which have undermined the
continued investment in those studies. We have to discover that
it doesn't make sense to do commonly practiced forms of
diagnosis or therapy in specific cases. If we have that
knowledge, insurance companies, businesses and Medicare and
Medicaid will be in a position to say, this is too much; it is
the wrong thing to spend money on.
Mr. Ryan. Alison.
Ms. Fraser. Thank you very much.
Just very quickly, I don't think that we can solve this
problem in one fell swoop. I think it is going to require
changes made over very many years, as you yourself know from
tackling your plan, that there is a lot of complexity here.
So the biggest change that I would like to discuss for the
budget process is actually to put entitlements on a long-term
budget. I know that this is really almost a travesty to many
people, but consider this: Budgets right now are in essence on
auto pilot. And what I would propose to do, indeed, what many
of my colleagues have proposed to do is to put them on a long-
term budget that would set targets for entitlement spending and
reexamine the spending trajectory, along with the dedicated
revenue trajectory on a regular basis and make changes to keep
these programs operating within levels of fiscal sustainability
over those years and build in hard triggers, so that if action
isn't taken, that there are automatic steps that will begin to
take place that will rein in spending, if that is the issue and
it likely is, to maintain or to achieve sustainability for the
entitlement programs.
I have been working with about 12 other colleagues across
the ideological aisle, and we have a paper that is published
both by Brookings Institution and the Heritage Foundation
called, ``Taking Back Our Fiscal Future.'' We have three former
CBO directors who are a part of that effort, and I very much
appreciate the opportunity to discuss it.
Mr. Ryan. Thank you, Ms. Fraser.
I yield.
Chairman Spratt. Mr. Doggett.
Mr. Doggett. Thank you very much.
Mr. Walker, is it your belief that the only effective
solution to the economic and budgetary challenges that you have
outlined will involve some reduction in either the amount of
entitlements or the accessibility to entitlements?
Mr. Walker. I believe it involves several elements: number
one, tough budget controls; number two, restructuring
entitlements, which will include reducing the current
commitments in some way to make them affordable and sustainable
over time; and also targeting taxpayer subsidies. We have
middle- and upper-class welfare in Medicare. We have middle-
and upper-class welfare in our tax system with regard to the
exclusion of the value of employer paid health care from income
and payroll taxes. I also believe it is going to take spending
reprioritization and constraint outside of entitlements
programs, and I also believe it is going to take comprehensive
tax reform in ways that will generate more than 18.3 of GDP.
Mr. Doggett. Is a permanent extension of the Bush tax cuts
a part of your plan to address these challenges?
Mr. Walker. No. We haven't gotten to that level of detail.
Mr. Doggett. Would that be harmful and counterproductive to
attempting to address the budgetary and economic challenges
that you have outlined?
Mr. Walker. Well, first, I don't know, I believe there is
broad-based agreement to extend portions of the Bush tax cuts,
but, frankly, we haven't gotten to the level of detail that--we
are focusing on a more fundamental issue.
Mr. Doggett. I am just reflecting on the chart you brought
from your prior job to this committee showing what the effect
that those tax cuts have already had in adding to our national
debt, and really extending all of them would be
counterproductive to the objectives you have outlined, wouldn't
it?
Mr. Walker. It you look at the math, that is true. I think
what we need to do, though, frankly, is to step back and re-
look at our entire tax system. I prepare my tax return every
year by hand, not because I am a masochist, but because I want
to be able to tell every Member of Congress and challenge them
to do the same thing. And I am a certified public accountant.
It is an absolute outrage, our system. We need to broaden the
base, keep rates as low as possible, maintain a progressive tax
structure, and we have got to have a system, frankly, that not
only is competitive, but it generates enough revenues to pay
our current bills and deliver on the promises we intend to
keep. We are short now. We are going to be a lot shorter later.
Mr. Doggett. And we can't do that, as you said in earlier
response, if we set an arbitrary target of 18 or 19 percent of
GDP for revenues.
Mr. Walker. I believe it is going to take more than 18.3 or
19 percent of GDP. I do, however, believe that you cannot solve
the problem through taxes alone. I don't think there is support
for it. I think it would be a serious adverse effect our
economy.
Mr. Doggett. Let me ask Mr. Greenstein a question.
If I understand, you are not opposed to the idea of some
commission, you just don't believe that a commission can be
effective unless it has the wholehearted support of a new
President and a new Congress.
Mr. Greenstein. That is correct. I think the key is not
whether you do or do not have a commission. The key is whether
there is a commitment on the part of the President and the
leaders of Congress to reach bipartisan compromise. If there
is, then if they think a commission is the best way to achieve
it, I would use a commission. If they think the best way is, as
in 1990, to go to the Andrews Air Force base or some other
venue and negotiate directly without commissioners, I would do
that.
Whatever works the best to effectuate a commitment and
agreement on the part of the President and the congressional
leadership to act.
Mr. Doggett. You touched a little bit with Mr. Ryan on his
``Roadmap for America's Future.'' What would tax cuts look like
under that plan? What would Medicare look like under that plan
if it were adopted?
Mr. Greenstein. Well, we seem to have a somewhat different
analysis of Mr. Ryan's plan than Mr. Ryan does.
Mr. Ryan. I used the Treasury analysis.
Mr. Greenstein. Ours is based on the Brookings-Urban
Institute Tax Policy Center analysis of the tax provisions of
the plan and the information CBO has made available on the
spending part of the plan.
Based on that, our understanding is the Tax Policy Center
estimates that, over the next 10 years, the cost of the tax
cuts would be $6 trillion to $7 trillion under regular
analysis, $5 trillion to $6 trillion if you use certain dynamic
scoring assumptions; with the average tax cut for the top one-
tenth of 1 percent of the population, those with average
incomes of $4.2 million a year, would be $545,000 in 2012; that
Medicare and Medicaid would be reduced by the 75th year about
70 percent from baseline.
But the figure that strikes me the most is that the plan
has an overall expenditure cap. And if you look at where it
takes Social Security, Medicare and Medicaid, what it means is
for everything else other than interest payments on the debt,
everything else other than interest payments, is today 9.8
percent of GDP. Under Mr. Ryan's plan, in 2082 it would be
reduced from 9.8 to 3.1 percent of GDP. Now, that is less than
we spend just on defense today. He would have to fit within the
3.1 percent defense and everything in the entire Federal budget
other than Social Security, Medicare and Medicaid. To me, this
is an illustration that, as David Walker just said, you can't
get there from here with revenue at 18.3 percent of GDP. I
think his plan ultimately takes it lower.
I have one other quick point. Yes, 18.3, 18.4, 18.5,
somewhere in there, is the average for the last 30 years or so.
So if you go back over the last 30 years, and you say, in how
many years was that average level sufficient to avoid a
deficit, the answer is that in 29 of the last 30 years that
level left you with a deficit. Well, if it left us with a
deficit 29 of the past 30 years, imagine what it is going to
leave us with in the decades to come.
I am not for doing the whole thing on the tax side. That is
not my position at all. What I am saying is we are going to
need ultimately not only major reform of the health-care
system, put Social Security back in long-term balance, reforms
in Medicare starting with the MedPAC recommendations, and
ultimately significant increases in revenue. If you don't do
all of those, I don't see how you get there from here.
Mr. Doggett. Thank you very much.
Chairman Spratt. Mr. Campbell from California.
Mr. Ryan. Mr. Campbell, if you will just yield for 10
seconds?
I don't want to go do the tit-for-tat. But, Mr. Doggett, I
just want to kind of give you an answer.
I could respond to all of those things, but we need to have
this debate, we need to have this conversation. I am glad you
are bringing these debates to the table. So I am glad of this.
One of the ideas I took was from this Heritage and
Brookings paper to have budget discipline, caps on spending. I
think you are going to have do that, going forward. You are
right, because expenditures have exceeded revenues, we have to
have a better system here to prevent that from happening in the
future. That is why I think you need to have some hard caps,
hard decision-making being forced upon Congress as time goes
on. And that is why the cornerstone of this plan are the budget
reforms proposed by the left and the right, that coalition that
Brookings and Heritage put together.
Thank you, Mr. Campbell.
Mr. Campbell. Thank you, Mr. Ryan. And I share that
viewpoint.
And, Mr. Walker, there is one other certified public
accountant--that would be me--in the room, so I share your view
of these things in terms of number-crunching.
But let me say this. If this is a football game, and if we
define a touchdown as we have solved the problem, right now we
are losing ground. We are running plays, and we are losing two
or three or four yards a play. And it is not just because we
are not doing anything; we are actually, in fact, moving away
from the problem.
One of the things that isn't being talked about very much
right now is that it looks like our deficit for this fiscal
year in which we are currently engaged is going to be
perilously close, if not over, half a trillion dollars--half a
trillion dollars.
The Appropriations Committee last week released 12
appropriations bills that increased spending by 7.7 percent. If
you then take the entitlement growth, projected at 5.2 percent,
and the fact that revenue right now is flat because of economic
doldrums, we could be looking at a $700 billion deficit next
year--not 20 years from now, not 30 years from now, next year.
So with all of the entitlement things looming, right now
what we are doing in this Congress and what we are doing around
here is actually making the thing even worse day by day. We
would almost be better to do nothing than what we are doing,
because we are continuing to make things worse and worse.
And one thing, Mr. Greenstein and Mr. Aaron, when you talk
about Presidential leadership, as big a problem as this is
right now, both the deficit--add the looming entitlement crisis
to the deficit, are the Presidential candidates talking about
this? I don't see a lot of, from either of the Presidential
candidates, forget the current occupant of the office. But we
are all taking about like things are going to change in 2009.
Well, I don't see either one of them out there doing it.
Now, I support Mr. Ryan's American Roadmap. And, Mr.
Greenstein, you may have problems with it, but I tell you what:
Right now, if we want to stop going backwards, the first thing
we have to do is legitimize, in this Congress and in this
political system, legitimize proposals to deal with this,
comprehensive proposals. They are all going to include some
things that a lot of people don't like. But we have to first
engage, I think, and make it okay to have the debate. I would
love to be sitting here debating these things with the other
side, at least with an agreement that we have to do something
about it and that we have to move the thing forward.
So I guess--and most of this has been a lecture from me I
guess, but I would like to hear from Mr. Peterson and Mr.
Walker just about, I guess, more--you have talked about getting
the public to move. But, I mean, I really think we are in a
hole here right now, and we almost have to get out of the hole
first. We have to legitimize the debate.
Mr. Peterson. Well, it may be presumptuous to make this
suggestion to you people who have had much more experience than
I, but I find something very ironic.
We passed the Sarbanes-Oxley bill that required
corporations to have full disclosure of their liabilities on
their balance sheet and to charge off in a given year whatever
the earnings implication would be. I find it very ironic that
nowhere in the current budget do we see any reference to what
it would cost to fund these programs. So I have kind of
wondered, if it is okay to require public corporations to fund
their pensions over, I believe, a maximum of 30 years, is it,
under ERISA, why wouldn't the same thing apply to the people
that instituted that legislation?
And if you were to do that, I think you add about $1.5
trillion or more to the annual budget deficit. And were you to
do that, it would help achieve the education that I am talking
about. Because, at the present time, the public doesn't
understand the implications of these long-term unfunded
promises.
Mr. Campbell. And, sir, I couldn't agree with you more.
And one other thing to mention is this problem is not
limited to the Federal Government. In my home State of
California, we have a number of local agencies, school
districts, water districts, cities that are actuarially
bankrupt if you were to use what is required of private
companies in accounting to account for their unfunded and
unrecorded pension and health-care liabilities.
Mr. Walker?
Mr. Walker. A couple things.
Mr. Campbell. And then my time is up.
Mr. Walker. First, the deficit is actually worse than you
said, because if it is over $500 billion, that is just the
unified deficit. Add another $185 billion for the Social
Security surplus that is gone, is spent, and has been for
years. And this is before boomers retire.
Last thing: In addition to trying to educate the public, we
have a number of specific efforts targeted toward the
Presidential candidates. And we have been in touch with the
Presidential candidates' economic advisers. We intend to do a
number of things that are designed to raise visibility and
enhance accountability on a nonpartisan basis to both of the
major Presidential candidates on these issues.
Mr. Campbell. Thank you.
Thank you. My time is up.
Chairman Spratt. We are just debating here what to do,
because we have two votes on the floor right now, one with 4
minutes and 19 seconds.
Could I ask our panel if you could stay with us? If anyone
needs to leave--I hate to impose upon you our crazy schedule,
but it is the nature of this operation. If anyone needs to
leave, please, thank you for coming, we very much appreciate
your participation.
Otherwise, Xavier, will you come back?
Mr. Becerra. I won't be able to.
Chairman Spratt. Okay.
Dennis?
Mr. Moore of Kansas. I will come back.
Chairman Spratt. You will come back.
Mr. Hensarling, did you want to ask questions?
Mr. Hensarling. I will be back.
Chairman Spratt. Is that agreeable with the panel?
Thank you very much for your forbearance.
[Recess.]
Chairman Spratt. Thank you for your patience and
forbearance.
And we will wrap up as quickly as possible, going first to
Mr. Moore of Kansas.
Mr. Moore of Kansas. Thank you, Mr. Chairman.
And I thank the panelists for being here today.
And I want to address a question to Mr. Walker, but any of
the other panelists are certainly welcome to comment if you
have any ideas that either agree or disagree with what Mr.
Walker answers.
Mr. Walker--and I apologize if this question has already
been asked and/or answered, but I was at Financial Services and
some other stuff this morning, so I didn't hear everything--do
you have any specific recommendations for reducing
entitlements? You talked about that being needed.
And I just said to Mr. Hensarling, you know, this can't be
about, should not be about Democrats and Republicans. We are
all in this together. We have to look at both sides of the
equation, not just reducing entitlements but also whether there
is going to be any tax increases as well.
But do you have specific recommendations for reductions in
Social Security, Medicare or Medicaid? And if you have answered
that, again, I apologize. And do you have any specific
recommendations for where maybe the best place to increase
revenues would be?
Mr. Walker. Well, first, as part of the Fiscal Wake-Up
Tour, the primary purpose has been to help people understand we
have a problem, we need to make changes. But we now have
started to get into some potential options. And, in fact, the
foundation is going to fund phase two of the Fiscal Wake-Up
Tour, which is going to be solutions-focused.
Let me address one of the things that you mentioned as an
example. I have road-tested a framework for comprehensive
Social Security reform that gets broad-based support out in the
real world. And that involves the following: For people that
are currently retired or close to retirement, you make little
to no changes with regard to their promised benefits because
they don't have time to make any adjustments. One possible
exception to that would be possibly a modest modification of
the cost-of-living adjustment so, that way, everybody would
give something, all right, but they wouldn't give much. All
right.
Secondly, to gradually increase the normal retirement age
and, I would argue, the early retirement age, as well, at a
faster rate than the current schedule is, and to index it to
life expectancy.
Thirdly, to reduce the replacement rate--there are lots of
ways that you can do it--for middle- and upper-income workers
so they get somewhat less than otherwise they would under the
COLA system, but to strengthen the benefit for people that are
near the poverty level, so you actually make it, you know, more
progressive.
In addition to that, to consider an increase in the taxable
wage base cap, not to eliminate the taxable wage base cap, but
to consider an increase in the taxable wage base cap in order
to moderate the impact on benefit reductions and in order to
try to get a political agreement, if you will.
And then last, but certainly not least, to have an add-on
supplemental automatic savings element payroll deduction that
goes into a real trust fund with real investments with real
fiduciary responsibilities and liabilities that would be a
supplement to the defined benefits. So it would give a
preretirement death benefit, a supplemental retirement income
benefit, and something to pass onto your heirs.
There is broad-based support for some type of a framework
like that, including among a lot of key stakeholder groups as
well.
And the only reason I would say--I would agree with Dr.
Aaron that the problem is much greater for health care--
Medicare, as well as health care overall. But Social Security
is a lay-up. Health care is a five-point play from under the
opposite basket. You know, it would be nice if we could end up
doing a lay-up and then start taking steps towards dealing
with, I agree, the much greater problem, but the much more
difficult, complex, emotional problem of health care.
Mr. Moore of Kansas. Do any other panelists have any
comments?
Mr. Greenstein. Sure. In the area of health care, I think
the starting point is what Henry Aaron mentioned, an institute
that really gets us solid information on comparative
effectiveness, with the idea of moving over time, in both the
public and private sectors, to limiting payment for less
effective but costly procedures.
In the area of Medicare, you have the Medicare Payment
Advisory Commission which has a lot of proposals, particularly
overpayments in Medicare Advantage, but they have proposals
relating to other providers as well.
I think there is some room to do some increases in Medicare
premiums for affluent beneficiaries. I wouldn't do it exactly
the way the President proposed it.
In the area of Social Security, there are two books that
set forth plans. An earlier one was by Henry Aaron and Bob
Reischauer. It has kind of a menu of options, not so much a
specific plan. The best balanced, specific plan I have seen is
a book that came out maybe 4 or 5 years ago from CBO Director
Peter Orszag before he was at CBO and MIT economist Peter
Diamond called ``Saving Social Security,'' a balanced package
of revenue and benefit and eligibility changes that would
produce long-term balance in Social Security.
I would look at a report the Joint Committee on Taxation
issued in 2004 or 2005 that outlines an array of ineffective or
unproductive or, in some cases, unintended tax expenditures and
other problems in the tax code.
I think you have to deal with the 2001 and 2003 tax cuts,
which are not affordable unless paid for. And, in particular,
you will need to move, I think by 2009, to resolve the estate
tax issue. I would ideally make the current parameters
permanent, but I would go no farther. I wouldn't spend more
money to making the 2009 parameters permanent, under which 997
of every 1,000 people who die would owe zero on the estate tax.
I would look at the way we index both benefit programs and
the tax code. We use the regular CPI. There is an alternative
CPI that the Bureau of Labor Statistics publishes that most
analysts across the political spectrum believe is a more
accurate measure of inflation. It rises a little more slowly
over time. That saves a lot of money. I would look at reforms
in farm price supports.
But ultimately, as Henry Aaron and others here on the panel
have indicated, the bottom line over everything else is health-
care costs. And we are going to have to make a judgment on what
health care is affordable and what we want to provide for
people. We are going to have a trade-off between health care
that improves breakthroughs in the future, that improve health
and lengthen life but cost a lot of money.
And to the degree that we want that health care, we will
have to pay for it. I think ultimately, not in the next 2
years, but ultimately we may have to consider some additional
revenue, perhaps a modest value-added tax or something like
that to pay for the rising cost of health care that results
from increases in technology that really improve health care
but that cost money.
And we will have to make a society-wide decision on what to
do. But whatever we want, we have to pay for it.
Mr. Peterson. If I may, on one specific thought on health-
care reform, to refer to something that Dr. Aaron said, there
are some practices in Medicare that cost us an enormous amount
of money that wouldn't be tolerated for a moment in the private
sector.
We have something in corporations--and I used to run one--
you call best practices. And you look at costs and you look at
benefits, and you decide, ``This is appropriate.'' And then you
apply it throughout the entire corporation.
We have this anomalous system where there are variations
not only in cost but in treatments that are utterly
inexplicable. I was talking with Henry a little earlier. You
know, there are certain counties and States in which there are
six times the back operations that there are in others and six
times the prostate removals. Now, I know we have red States and
blue States, but I rather doubt that we have bad back and bad
prostate States. But we have a perverse incentive system, where
the bigger the cost, the bigger the plus.
And I think there are going to be enormous savings if we
could install some kind of notion of best practices. And I
assume, Henry, that was what you were leading to, trying to
come up with such a system.
Mr. Aaron. Yes, it was.
I do want to emphasize, however, that the problems to which
Mr. Peterson has just referred, which were first documented in
the United States about 30 years ago by a Dartmouth medical
professor, John Wenberg, and have been amplified and shown over
and over again throughout the United States, those problems are
about as serious today as they were 30 years ago, and they are
about as serious in the private sector as they are in the
public sector.
The variations, for which it is very difficult to conceive
of any medical justification, that have just been mentioned,
those variations are remarkably stubborn, and there are in the
current health-care financing system remarkably few levers for
dealing with them.
And even if there were levers, as both Bob and I have
emphasized, we don't have solid research knowledge that good
administrators could use to level down the excesses and bring
up the areas of insufficient provision. The start is knowledge,
but applying that knowledge is eventually going to require a
root-and-branch change in the way in which we pay for health
care. Without that--I mean, if one wanted to design a health-
care system immune to effective cost control, you really
couldn't do better than what we have done in the United States.
Mr. Cooper. Would the gentleman yield for a moment?
Mr. Moore of Kansas. Absolutely.
Mr. Cooper. This discussion of the Dartmouth data is so
important, but there are things that we can act on immediately,
because, as they point out, the same doctor doing the same
procedure in Minnesota is paid one-third of what he or she is
paid in Miami. There is no justification for that. So you can
have some variation, but not a historical 30- or 40-year
variation. And yet we, as a Congress, are doing nothing about
that.
So you don't have to get into treatment modalities. Same
procedure, same work, different pay just due to geographic
variation. Congress has never touched that.
Chairman Spratt. I don't think that is quite accurate, is
it?
Mr. Cooper. I believe it is.
Chairman Spratt. If you have never dealt with that, there
have been formulas proposed and I think adopted trying to even
out the regional disparities.
Mr. Aaron. I think the bulk of the regional disparities
arise in total spending. And the variations in total spending
across counties are close to three to one. They are really very
large. I think the maximum county per capita spending for
Medicare is in the $11,000 to $12,000 range, and the minimum is
in the $5,000 range or $4,000 range.
But the bulk of those variations are due to use of
procedures, I think, more than to variations in price. There
are price variations, but they interact in addition with
variations in use. There are very high use areas down in
Florida, for example.
Mr. Cooper. But this is exactly the sort of discussion
Congress should be having to be up to speed on the data.
Shannon Brownlee has a new book called ``Overtreated,'' which
relies heavily on the Dartmouth data, illustrates problem after
problem. And most Congressmen are simply unfamiliar with this,
these two- and three-to-one variations for the same work.
And see, Medicare has the best data, because Medicare has
been a single payer for many years, so the data are much more
accessible. And Medicare also has a leadership role in the
payment system, being one of the largest payers, if not the
largest payer.
So I relish an opportunity for Government to lead the way,
instead of following. Medicare and Medicaid could be the
pacesetters, as the VA system has been, which provides,
according to many experts, the top quality care in America,
even according to the Mayo Clinic and folks like that, at, by
the way, the lowest cost, at half the price of Medicare. So if
we could just encourage more people to use the VA system, we
would be getting more value for our dollars.
But while the VA has been leading, the rest of health care
has been lagging, including our friends at Medicare and
Medicaid. So all I am wanting is to restore that role. And when
we wait for overall health-care reform, we are letting the best
be the enemy of the good.
But I know I have already trampled the gentleman's time too
much.
Mr. Moore of Kansas. I thank the panelists.
And I yield back, Mr. Chairman. Thank you, sir.
Chairman Spratt. Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman.
The first thing I want to do is acknowledge the reason that
we are here and salute the gentleman from Tennessee. Sometimes
we disagree on policy, but we do not disagree on principle. And
this is a serious piece of legislative work. He has been an
outstanding leader in our Congress on the issue of dealing with
entitlement spending. And I have observed, in my career here, a
man who takes a number of courageous votes. So I appreciate the
work of Mr. Cooper and that of my colleague, Mr. Wolf of
Virginia, in helping bring us here today.
In the latest round of questioning dealing with the
Dartmouth study, if I recall--and I think perhaps I was first
introduced to the study by our CBO director, Dr. Orszag--if I
recall right, his takeaway was that the study evidences, at
least puts forward the proposition that you could actually keep
the quality of your current health care and, with the right
policy changes, save as much as 30 percent.
Is my memory serving me correct? And I see the gentleman
from Tennessee saying so.
So I assume from what I have also heard from the panel, in
various policies that are being discussed, the very simple
proposition that it is possible, it is possible to get superior
health care, superior retirement security at a lower cost than
currently projected.
Is that a safe takeaway, Mr. Walker?
Mr. Walker. One, over time, not magically wishing that it
would be the case. Secondly, quality is not acceptable. So I
think we need to do better than current quality. And thirdly,
for Medicare alone we are in a $34 trillion hole.
So, you know, yes, I mean, yeah, we can do a lot better
than we are doing, and we ought to take steps to try to do
that. But let's don't wish away our problem. We are going to
have to make some more fundamental reforms than just try to
look at best practices.
Mr. Greenstein. Could I just say, my understanding is Dr.
Orszag has said, in theory, we can get this 30 percent savings,
but today I think he would say we don't have the knowledge
today to know how to do them. I know he has particularly talked
to Members about the importance of this comparative-
effectiveness research. The goal should be to get those savings
you mentioned. But we need a lot of research and we need a lot
of things in order to be able to get them.
One other quick point is, one does want to distinguish here
between Medicare and the private system and Medicaid. Medicaid
pays providers way below both Medicare and the private system.
And it would be a mistake to think that there are comparable
levels of savings in Medicaid.
Mr. Hensarling. Mr. Walker, not unlike Mr. Moore, I missed
much of the testimony due to a markup in another committee, so
you may have covered this in your testimony. But I am curious
about how you judge the success of your Fiscal Wake-Up Tour.
I am somewhat under the impression that probably over half
of America have heard of the ``Bridge to Nowhere'' and they
greatly disapprove of it. But my sense is not one in 10,
perhaps one in 100, understand the entitlement spending crisis.
So I am curious about, how did you judge the success of
your tour? And when people learned about the entitlement
crisis, what were their reactions?
Mr. Walker. Well, first, our experience has been that the
American people are a lot smarter than people give them credit
for. That when you state the facts and speak the truth to them,
they get it. That they are willing to make trade-offs; they are
willing to accept some shared sacrifice. But they don't have a
whole lot of confidence that whatever sacrifice they might give
would be honored.
And, therefore, one of the things we believe we need to do
is to go to a broader audience and to use the Internet, use
documentaries, use other types of means and mechanisms to get
this message out to many, many more millions of people than
otherwise you can do through the Fiscal Wake-Up Tour. And that
is what we intend to do.
What is important is the Fiscal Wake-Up Tour resulted in,
among other things, a ``60 Minutes'' broadcast, which has now
resulted in a commercial documentary, which has now resulted in
a number of other networks being interested in doing things.
And so, over time, believe me, it will make a difference.
Mr. Hensarling. Ms. Fraser?
Ms. Fraser. If I can elaborate on that, I am one of the
partners in the Fiscal Wake-Up Tour. I haven't been to as many
as Dave; nobody has. But I have done it for nearly 3 years now.
And I can say that, in the beginning, our experience was that
Americans didn't know about this problem. And we started this
tour on the heels of the Social Security debate, and people
knew about Social Security but they didn't know about the
broader problem. So, at first, they were stunned. They didn't
know why they didn't know about it. They didn't know why
Congress wouldn't tell them about it.
But over the ensuing year and a half or so, I think we have
made significant progress as a Nation and that there is a much
broader understanding of this entitlement problem, sort of writ
large, holistically speaking. People know about it; they are
concerned about it. And they do really want Washington to take
action. They don't know why Washington is waiting.
So we have really had some, in my mind, some very
invaluable experiences on the road. And our successes are that
Americans are engaged. They want to talk about solutions. They
don't want to blame.
And, you know, I have had a number of people--I didn't get
to offer up some of the things that I would do to solve this
problem, but one of them is to target benefits more to those
who need them the most. And I have had a number of people come
up to me in these different forums and say, ``You know, this is
really a big problem, and I would be willing to give up some of
my benefits. I don't need all of the Social Security benefits I
get. I don't need all of the Medicare benefits I get. But I
want to make sure that they do go to the younger generation so
they are better off than they would be otherwise.''
Mr. Aaron. I hope you told them that they are able to do so
even now, by voluntarily returning them to the Government, for
which they would receive a charitable-contributions deduction.
Ms. Fraser. But I don't know if they have the confidence it
would go to where they want it to.
Mr. Hensarling. Mr. Peterson, you spoke earlier about--I
suppose what you were stating is that Congress ought to
practice what it preaches. And you alluded to Sarbanes-Oxley
and the type of disclosure, transparency in accounting that is
now the new level which is required upon corporate America.
If corporate America practiced baseline budgeting and did
not account for its long-term obligations, what would happen to
those who did that? And what can we learn from that on the
Federal level?
Mr. Peterson. Well, the failure to disclose, of course,
that is the problem metastasized, because people aren't aware
of it. And then you end up with the worst-case kind of
situation of pension plans that are so underfunded that the
companies get into bankruptcy or near-bankruptcy.
Now, I don't know that that analogy is perfect, but I don't
think there is any question that full disclosure of the amount
of funding that it would require to take care of these problems
would be a critical part of educating the public as to how big
they are.
Mr. Hensarling. Thank you, Mr. Chairman.
Chairman Spratt. Mr. Cooper, you want one final shot across
the bow? We have tried the patience of our witnesses for over
3\1/2\ hours now.
Mr. Cooper. Very quickly. At this point, we don't even,
today, acknowledge on the Federal balance sheet the health-care
and retirement liabilities of our own employees. That would be
a criminal offense in the private sector. You know, it is
outrageous.
Mr. Walker. Actually, Mr. Cooper, we do. We do have
unfunded obligations for pensions and retiree health care for
civilian and military. What we don't acknowledge, which I think
you may have been referring, these bonds that are in the so-
called trust funds that are backed by the full faith and credit
of the United States Government, they are guaranteed as to
principal and interest, and I believe they will be honored,
they are part of the total debt--subject to the debt ceiling
limit, they are not deemed to be liabilities of the United
States. The Government is trying to have its cake and eat it
too, and that is wrong.
Chairman Spratt. Thank you very much for your testimony,
all of you. You have helped our understanding of this issue.
And we very much appreciate your coming. And I appreciate your
patience and forbearance today.
As a matter of housekeeping, I would ask unanimous consent
that members who didn't have the opportunity to ask questions
be given 7 days to submit questions for the record.
In addition to that, any member who so wishes, by unanimous
consent, may add a statement for the record at this point in
the record.
Thank you once again for coming. Thank you for your
contribution.
[Whereupon, at 1:09 p.m., the committee was adjourned.]