[Congressional Record Volume 150, Number 62 (Thursday, May 6, 2004)]
[House]
[Pages H2716-H2720]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
{time} 1730
TUTORIAL ON FEDERAL GOVERNMENT FINANCES
The SPEAKER pro tempore (Mr. Cole). Under the Speaker's announced
policy of January 7, 2003, the gentleman from Michigan (Mr. Smith) is
recognized for 60 minutes as the designee of the majority leader.
Mr. SMITH of Michigan. Mr. Speaker, this afternoon I am going to give
sort of a tutorial on Federal Government finances. This is the 195th
birthday of Abraham Lincoln and, in his famous Gettysburg Address, he
sort of indicated, can a Nation of the people and by the people and for
the people long endure? Of course, the challenge of the Civil War was a
huge challenge. But I would suggest, Mr. Speaker, that a challenge even
greater than the wars might be the willingness of the United States,
the House and the Senate and the President, to deal with real financial
problems and, of course, the financial challenge before us is
overspending and overpromising.
This is a pie chart of how we spend Federal Government money. We see
at the bottom piece of the pie is the 21 percent that is spent on
Social Security right now. Then, as we go around, Medicare is 12
percent. However, it is interesting that Medicare is expected to be a
greater piece of the Federal pie, if you will, a greater percentage of
total Federal spending than Social Security within the next 25 years,
because it is growing very quickly. Medicaid is 6 percent, also
growing, and that is growing with the increasing number of seniors that
are spending all of their savings, as they have spent $40,000 or
$50,000 or $60,000 per year on nursing home care, and then after all of
their finances have been depleted, then they go on Medicaid and the
Federal Government starts paying nursing home care.
Other entitlement programs, 10 percent. Entitlement means if you
reach a certain age, if you reach a certain level of poverty, you are
eligible for additional help. If you are a business or an industry or a
worker, you are entitled if you work, but do not make very much money,
you are entitled to an income tax credit. If you are a farmer and the
prices of the products you sell are low, you are entitled to a
supplement to build it up, that income, a little more for those farmers
to keep the farmers in business. This Congress and the United States
has been very generous with other people's money. In fact, so generous
that we are now facing the dilemma of a huge debt and huge promises
that I call entitlements, unfunded liabilities.
The domestic discretionary spending that goes in the appropriation
bills, along with defense, is 16 percent. Defense is 20 percent. With
the Iraq and Afghanistan war, it has gone from about 19 percent up to
20 percent, and then interest, interest, interest on this increasing
debt.
The interest cost for this country is now about $300 billion a year
to pay interest at a rate that is the lowest, almost the lowest in
history, but a very low interest rate. Alan Greenspan, the chairman of
the Federal Reserve, has now suggested that there is no question that
eventually interest rates are going to go back up again, and that,
compounded by the fact that we are increasing the amount of debt that
we have to pay interest on, it is anticipated that within the next 20
years, interest on the debt will be one of the largest pieces of pie.
What does that mean to future generations? What does that mean for
our kids and our grandkids. I am a farmer from Michigan, and the
tradition on the farm has been you pay off some of that farm mortgage
to try to give your kids a little better chance at a better life than
you might have had. But in this Congress, what we are doing is going
the other way. We are building up a debt, we are building up
obligations because, somehow, we think the problems we have today are
so great that it justifies us borrowing money from our kids and our
grandkids and making them pay for the overspending that we are pushing
on them today in this Congress.
Right now, we are in the midst of a budget decision in conference
committee with the House and the Senate, trying to figure out a budget
of what we are planning on spending for the 05 budget, that means the
05 fiscal year starting September 30, October 1 of 04, and going for 12
months until October 1 of 05, that is called the 05 fiscal year budget,
and that is what we are working on, that is what we are arguing about.
This year, the good news is it is probably the most lien budget that
we have had since 1996. But still, it is growing at between two and
three times the rate of inflation in terms of the increased expansion
of that spending, the increased size of government, taking money away
from the people that have
[[Page H2717]]
it and coming up with new programs and new entitlements and new
discretionary spending. That means that this year, we can anticipate in
04 we are looking at a debt that is going to be close to $600 billion.
Next year the debt is going to be approximately $530 billion. We are
spending more than what is coming in, and this just adds on to how much
interest we are going to be paying in the future.
Mr. Speaker, we are a country that is about, let us see, where are
we, 228 years old. In the first 200 years of this country, we were very
frugal and we have gradually accumulated a debt in that first 200 years
of $500 billion. Now we are going deeper into debt, over $500 billion a
year.
Now, how do we get the discipline? How do we get the intestinal
fortitude to say, look, we are going to quit playing politics and start
doing what is right for our kids and our grandkids in terms of the
overspending and the overpromising.
Let me just mention what happens to a Member of Congress when they go
home to their district. If they take home pork barrel projects, and
pork barrel projects, as far as the line items for pork barrel projects
that individuals take home: new libraries or new jogging trails or new
whatever, or new promises of new programs, or keeping some historic
monument in their hometown open, their chances of getting reelected are
greater, because they get on the front page of the newspaper, maybe
cutting the ribbon and they get on television.
So in pleasing a lot of the American population that is, in effect,
saying, give me more government, because it helps get some of these
Members elected, we end up with a lot of Members that tend to want to
make more promises, to solve more problems. But it is just so important
that we remember where government gets its money is two ways: We either
tax people that are now working and now earning money and take the
money away from them to start these new programs, or we borrow the
money and say, well, somehow, sometime, future generations are going to
have to pay it back. It is a challenge that somehow we must face up to.
That is one of the problems of overspending.
Now I want to discuss for a moment overpromising. Here is our main
overpromising programs, our entitlement programs. Medicare Part A,
which is the Medicare program that is mostly for hospitals. Medicare
Part B, the program that is mostly for doctors. Medicare Part A is an
unfunded liability of $21.8 trillion, Medicare Part B, $23.2 trillion.
The Medicare drug program that we passed last November is estimated,
and this is from Tom Savings, these figures, an actuary for both
Medicare and Social Security; he is estimating that Medicare Part D,
the prescription drug program, has an unfunded liability of $16.6
trillion.
It is hard to conceive how much $1 trillion is. But compare that to
what we are spending in this Congress, and right now we are looking at
a budget that is going to spend $2.4 trillion. But if we add Social
Security, about $12 trillion to the unfunded liability, it adds up to
$23.5 trillion unfunded liability. That means that we would have to
come up with $73.5 trillion and put it in a savings account today that
is going to earn in interest at least equal to inflation and what is
called the time value of money, pretty much the interest rates, to
accommodate the increased money that is going to be needed over and
above what people are paying in on their taxes to accommodate what we
promised in Social Security, what we promised in Medicaid and Medicare
to keep those promises. A huge challenge.
Why do we not pay attention to the obligation that we are passing on
to our kids and our grandkids? I think, number 1, it is such a huge
problem that it is easy to overlook it. It is easy for some people to
say well, if the economy would get better, maybe we could solve these
problems.
But let me just talk about Social Security for a minute. Our
retirement benefits are based on how much you are earning. So if you
are earning a lot now, that means eventually when you retire at 65, you
are going to get a lot more in Social Security benefits. So an expanded
economy, the way we have written the Social Security law, does not fix
the problem of Social Security.
The unfunded liabilities, and I am going to show my colleagues
unfunded liabilities, Mr. Speaker, in a different way, and that is at
what percentage of our total general fund budget is going to have to be
used to pay the difference between what is coming in in the payroll
tax, the FICA tax, compared to what is going to be needed to keep
promises.
In just 16 years, in 2020, it is going to use 28 percent. We are
going to need 28 percent of the general fund budget to accommodate the
unfunded liabilities, what we need to pay in addition to the FICA tax,
the payroll tax for Medicare, Medicaid and Social Security. By 2030, we
are going to have to come up with over 50 percent. About 53 percent of
the general fund budget is going to have to be used to accommodate
keeping the promises for those three promises, a huge challenge.
Let me say why I think it is so serious. That is because ultimately,
this overspending and overpromising is going to mean tax increases some
time in the future.
The equivalent payroll tax in France right now to accommodate their
senior benefit programs is over 50 percent. Now, what does that mean to
a business in France? It means they are either going to have to
increase the price of their product to accommodate that kind of
payment, or they are going to have to reduce the wages that they pay
those employees. I mean that is probably one of the major reasons why
it is difficult right now for France to compete in a world market on
much of their production. It is probably one of the reasons why there
is a lot of demonstrations in the street with farmers and workers
saying, I have to have more money, because you are taking too much out
of my paycheck.
In Germany right now, the payroll tax to accommodate senior citizens
has just gone over the 40 percent mark. That means it is going to be
tougher if we do not deal with these programs in the United States, if
we put the solution off, number 1, the longer we put off the solution,
the more drastic the solution is going to be; and number 2, if we have
to start taxing our businesses, it is going to put them at a
competitive disadvantage that much more than what it already is with
other countries.
Now I am going to talk about Social Security. The Social Security
program was started in 1934 by Franklin Delano Roosevelt, after the
Great Depression, when people, old people were going to the poor house.
The President said, look, let us start a program where we have a law, a
requirement that while you are working you put some of that money aside
to make sure that you will be more socially secure when you retire. So
we passed the Social Security Act in 1934. It started in 1935.
Here is how Social Security works. Benefits are highly progressive
and based on earnings. So the more you earn, the more you will get out
in benefits when you retire. At retirement, all of a worker's wages up
to the tax ceiling are indexed to present value using wage inflation.
{time} 1745
Well, what that means is we have continued to raise the ceiling on
how much we charge the 12.4 percent Social Security tax on and
currently that is $89,000. So when I say up to the ceiling, that is
$89,000. And when I say indexed at present value, that means that we
have a wage inflation factor. So what you have earned over the last 35
years, what you were earning, for example, 15 years ago, and if wage
inflation doubles every 15 years, that $20,000 job 15 years ago would
be added on in terms of determining what your benefits are on, that
$20,000 would be up to $40,000, what that job is paying today.
That is how we figure Social Security benefits. The best 35 years of
earnings are averaged. If you only work 30 years, there are 5 years
that are thrown in at zero.
The annual benefit for those retiring in 2004, here is how it is
progressive. Ninety percent of earnings up to the $7,344. So if you are
a very low-income wage earner, you get 90 percent of what you were
making back in Social Security benefits if that was your average for 35
years. Over the 7,300 you get 32 percent of the earnings between the
7,300 and the 44,268. And over the 44,000, you get 15 percent of
everything over that 44,000 level.
So that is progressive in benefits to the extent that if you are a
very high-
[[Page H2718]]
income worker, you will be getting back maybe 15 or 16 percent of what
you paid in; and if you are a very low-income worker, you will get 90
percent of what you pay in.
Early retirees receive adjusted benefits. If you decide to retire at
age 62, the actuaries have figured out on average how long you are
going to live. So if you are very healthy and you think you are going
to live longer, then you are better off to wait until you are 65 to
retire. If you do not think you will live very long, it will probably
be better to retire early at 62.
I added this last blip because, as I have given speeches across
Michigan and across the United States, a lot of people say, well, there
is a lot of cheating going on with supplemental security income paid
out by the Social Security Administration. Well, it is paid out by the
Social Security Administration, but it does not come out of the Social
Security trust fund. It comes out of the general fund. It is a program
for low-income people with some kind of disabling problems that becomes
a program to help low-incomes with problems, like a welfare program,
but it does not come out of Social Security.
I am going to go rapidly through some of these charts. This chart
demonstrates why we are in a problem now with the PAYGO program. I
chaired the bipartisan Social Security Task Force in Congress made up
of Democrats and Republicans. And after almost a year of hearing
testimony, we all agreed that something has to be done, and the sooner
the better, to correct Social Security. Otherwise, we are going to be
in huge problems of insolvency in the near future.
This represents the problem of a Social Security program that was
developed in 1934, saying that current workers pay in their taxes that
are immediately sent out to current retirees. So it is a challenge of
having enough workers to pay in a FICA tax, a pay roll tax, to
accommodate the number of seniors. And of course what is happening is
the birth rate has been going down and the length of years that a
person lives has been going up. In fact, in 1945 we had about 34 people
working paying in their taxes for Social Security for every one
retiree. By the year 2000, it got down to three people working. This is
because people are living longer because the birth rate is going down.
By 2000 we had three people working paying in their increased tax
now, because that is what we do every time we run into problems: we
increase the taxes. Now three people are working for every retiree. The
estimate by the actuaries is by 2025 there will only be two people
working, paying in their increased tax for retirees. There are 78
million so-called baby boomers, the babies that were born right after
World War II from 1946 to 1966. Seventy-nine million of what are the
high-income workers now, mostly paying in the maximum Social Security
tax, are going to be retiring and drawing out the maximum Social
Security benefits. And that is why the insolvency is coming very
quickly.
The insolvency on Social Security will be here some time between 2016
and 2018 according to the actuaries' report. Insolvency is certain. We
know how many people there are, and we know when they will retire. We
know when people will live longer in retirement, and we know how much
they will pay in and how much they will take out. So we know that
Social Security is insolvent. We know that it is going to take $12
trillion in today's dollars, put into a savings account to accommodate
what we need to pay out, promised benefits, over and above what is
coming in in the pay roll tax.
So do we start using the income tax to pay Social Security benefits?
Do we change Social Security into a welfare program where we say that,
oh, if you have been lucky enough to be successful in America, then we
will not pay you Social Security even though we have made you take
money out to save for retirement? The general feeling is that there
would be some danger in a lack of support. In fact, the unions have
suggested that we do not make it into a welfare program because America
is a place where we started with our forefathers writing a Constitution
sort of designing our economic system, in effect saying that those that
study and learn and use it, those that work hard and save end up better
than those that do not.
Now, we have been in sort of a system of dividing the wealth and
saying pay in according to your ability and the government will provide
services according to your need. There has got to be, for lack of a
better word, maybe a golden mean to still have that kind of incentive,
to do what has made America great in the first place, and that is to
work hard.
A young couple that decides to work two shifts or both mom and dad
work so they can earn more money to have a better life for their kids,
we now not only say, well, if you are going to earn more money, we are
going to tax you more. But if you earn more money, we will even tax you
at a higher rate than if you just worked as a single parent or just
worked on one 8-hour shift instead of doing two 8-hour shifts.
Social Security benefits are indexed to wage growth. So when the
economy grows, workers pay more in taxes but they earn less in benefits
when they retire. Growth makes the numbers look better now, but leaves
a larger hole to fill later on. And that is why when I introduced my
first Social Security bill in 1994, it was much easier to achieve
solvency than it is today. And the estimate in 1994 was Social Security
was going broke in 2012. Now the new estimate is that Social Security
probably is going to last until 2018, 2017 or 2018, because there is
more money coming in, but eventually there is going to be more money
going out.
Social Security has a total unfunded liability of over $12 trillion.
The Social Security trust fund contains nothing but IOUs. And to keep
paying promised Social Security benefits, the payroll tax will have to
be increased by nearly 50 percent or benefits will have to be cut by 30
percent.
Social Security is not a good investment. And so one way to fix
Social Security is getting a better return on the money made in. And
that is why many people, including President Clinton, including
President Bush, including myself and other Members have suggested let
us look for a better way to get a better return on the money that
people pay in on their payroll taxes. The average return is 1.7 percent
for retirees on Social Security. If you are a minority, because black
young men have an average age of death at approximately 63 years old so
many of them do not collect benefits, but if you compare the average
retiree return at 1.7 percent for the average Social Security
recipients, compare that to what has happened for equity investments,
and even the Wilshire 5,000 actually earned 11.86 percent after
inflation over the last 10 years ending January 31, 2004. And that is
even through some downer years after the bubble broke on the stock
markets.
So even with those downer years, you have an average equity return on
those 5,000 stocks of over 11 percent, and that compares to the 1.7
percent on Social Security. Is there some way to accommodate both sides
so that there is some concern that we do not want to have private
investments so wild that individuals can invest in things where they
might go broke and still come back on the government?
But the other side of the coin is, is it reasonable to have a worker-
owned account that is their property, that if they die early it passes
on to their heirs? Some kinds of structures such as Federal employees
have in the Thrift Savings Account is what I have structured into my
Social Security bill to essentially try to limit it to safe
investments.
Just quickly on this chart, again trying to represent and convince
that Social Security is not a good investment. If you retired in 1980,
you have to live 4 years after retirement to break even on Social
Security. By 2005, next year, you are going to have to live 23 years
after retirement to break even. And then you see what happens after
2015. You have to live 26 years after you retire to break even.
Well, here is what we have done in the past. Every time we have
gotten into trouble, we either increase taxes or reduce benefits or a
combination. And of course, in 1983 under the Greenspan Commission that
is what we did; we said we are going to increase the retirement age to
67, gradually, so that is going to gradually happen. That started 2
years ago on so many months per year. But mostly it has been increasing
taxes.
[[Page H2719]]
In 1940, we went from 1 percent up to 2 percent. It was 2 percent of
the first 3,000. In 1960 we raised it to 6 percent of the first 4,800.
In 1980 we raised it to over 10 percent to over 25 to almost 26,000. In
2000 we raised it to 12.4 percent of the first 76,000. In 2004 it went
up to 87,000. Today it is up to 89,000. So you pay your 12.4 percent
tax on your first 89,000.
If you are self-employed, of course, you pay all of it. If you are
working for somebody, then the company says, well, I am going to in
effect reduce wages to pay my 6.2 percent. So I really think it is fair
to assume that the whole 12.4 percent comes out of the worker's pocket
even though the worker only actually sees on his pay check stub the 6.2
percent coming out of his pocket. The other 6.2 the employer pays. But
here is what happens: now 78 percent of families pay more in the
payroll tax than they do in the income tax. Huge challenge.
And what this also means is back to our starting point of
overpromising government programs and overspending and going in debt,
today 50 percent of the adults in America pay about 1 percent of the
total income tax. And so you can see that there are some parts of our
population that have little to lose if they say, give me more
government programs.
So there is that kind of pressure with lobbyists coming in and
saying, well, we represent this program or that program. In my 12 years
in Congress, my experiences have been that if new programs can last 2
years, then the interest groups to try to continue that spending are in
visiting all of our offices saying how important their program is. And
so the momentum of 2 years and 3 years almost becomes an entitlement
program, even though we call it discretionary spending, that goes
through the appropriations process.
{time} 1800
Here are six principles that I have in my five Social Security bills
that I have introduced. All have been scored to keep Social Security
solvent. The six principles I have used is protect current and future
beneficiaries, allow freedom of choice, preserve the safety net, make
Americans better off, not worse off, and create a fully funded system.
I think it is really important not to have any tax increases on
workers.
I am just going to go through some of the highlights of my Social
Security bill. Number one, it is scored by the Social Security
Administration to restore long-term solvency to Social Security. There
are no increases in the retirement age, no changes in the COLA, that is
the cost of living index every year, and there are no changes in
benefits for seniors or near seniors. Solvency achieved through higher
returns from worker accounts and slowing the increase in benefits for
highest earning retirees.
Remember, Mr. Speaker, I had the chart that had the bend points of
the 90 percent, the 32 percent and the 50 percent. I add another bend
point of 5 percent which has the effect of slowing down the increase in
benefits for high-income retirees. That is how I pay for the transition
to allowing a worker to take 2.5 percent of their income and putting it
in an account they own, even though government limits where they can
invest that money.
Social Security trust fund continues. Voluntary accounts would start
at 2.5 percent of income and would reach 8 percent of income by 2075.
The 8 percent would be bringing in much more money than they ever would
have received with the existing Social Security program. Investments
would be safe, widely diversified. Investment providers would be
subject to government oversight. The government would supplement the
accounts of workers earning less than $35,000 to ensure that they build
up a significant savings, too. Actually, I sort of copied this from, I
think, the USA account that President Clinton proposed that says for
low-income workers, let us start adding to their savings and let the
magic of compound interest build up their accounts, so even an average
income worker can retire with millionaire-type benefits.
All worker accounts would be owned by the worker and invested through
pools supervised by the government, sort of like our Thrift Savings
Account for all government employees and Members of Congress. That is
how they save. Sort of like the regulations would be instituted to
prevent people from taking undue risk. Workers have a choice of three
safe indexed funds with more options after their balance reaches
$2,500.
Accounts are voluntary, so you do not have to go into this system of
investing part of your money in private accounts if you do not want to
and you can stay with the traditional program. But what we can do
because the actuaries have scored that the investments on these types
of limited investments will make more than the 1.7 percent Social
Security pays you, we can guarantee workers in their personally-owned
accounts will have as much return on that portion of their retirement
income as they would have on the fixed Social Security system. You
still would get your Social Security benefits, but to the extent that
your traditional Social Security benefits are going to be reduced
proportionally by the 2.5 percent of your earnings that you put into
this savings account, so you will end up getting both the return in
investments from the savings account as well as the fixed payments from
the traditional Social Security.
Government benefits would be offset based on the money deposited into
their account, not on the money that you might earn from that account,
and workers could expect to earn more from their account than from
their traditional Social Security.
Here are some provisions that are interesting, Mr. Speaker. It is
what I call fairness to women. To be politically correct, probably you
would call it fairness to spouses. Actually I was told that there were
more females that graduated from college last year than males, so maybe
eventually the women will be the high-income workers. What I have said
is for married couples, account contributions would be pooled and then
divided equally between husband and wife. So if one spouse earns a lot
more than the other spouse, you add the two incomes together, what they
are allowed to invest in their personal retirement savings account, and
you divide by two. So each spouse has the identical amount invested in
their personal retirement account. It would increase surviving spouse
benefits to 110 percent of the highest earning spouse.
One challenge that we have in the increased cost of Medicaid is
people moving out of their homes. And now even with 100 percent of the
higher spouse's earnings, when one spouse dies, and the projection is
for the males to have about 3 years' shorter life span than the
females, so you have a widow that is trying to get by on 100 percent.
Often that is not enough to accommodate the fixed costs of staying in
their own home. So in several ways in this bill, I try to encourage
staying in their own homes instead of going into a nursing home. This
is a bipartisan bill sponsored by both Democrats and Republicans. The
way I do this is increasing the minimum to 110 percent instead of the
existing 100 percent. And then stay-at-home mothers with kids under 5
would receive a retirement credit for a certain number of years.
If you are a mother staying home with your kids, then we will give
you the high average earnings to fill in some of those years because
you have to have 35 good years. So it seems reasonable for those
mothers that are probably working as hard as their spouse, anyway,
staying home with their kids, that you give them credit for those years
that they are staying home with those kids under 5 years old. But I
limit the number of kids and limit the number of years.
Here is the last sort of sheet that I have done. This does a couple
of things. We have one of the lowest savings rates in the world right
now. Where our savings rate used to be as high as 6 percent, now it is
actually about 1 percent. This whole mood of buy now and pay later, the
mood of this Congress, in fact, that tends to say, well, a little
borrowing now might improve something later on, so we are going deeper
and deeper in debt. Likewise in the unfunded liabilities, we make more
promises. So we sort of tried to look at a system that is going to
allow encouragement to increase savings. We increase contribution
limits on IRAs and 401(k)s and pension plans. We include in our
legislation a 33 percent tax credit for the purchase of long-term care
insurance up to $1,000, $2,000 if you are a married couple, per year.
Low-income seniors would be eligible for a
[[Page H2720]]
$1,000 tax credit for expenses related to living in their own home or
if the seniors live with their kids or somebody else, that tax credit
would be eligible for that particular family.
In conclusion, overspending is dangerous for the economy. It is
dangerous for our kids and our grandkids. In fact, it makes us more
susceptible to international pressures. It makes us vulnerable. If one
were to guess, Mr. Speaker, how much of our deficit this year is being
financed by foreign countries, foreign investments, what would you
guess? Seventy percent. Foreign investment is picking up 70 percent of
the money that we have to borrow this year for overspending.
Right now, foreign investments lend to the United States Government
33 percent of our debt in this country. A huge challenge. Our trade
deficit of now over $500 billion means that some countries have decided
that they would prefer to keep those dollars and invest them by buying
our businesses, by buying our equities, by buying our Treasury bills
rather than buying the products that we make in this country. China, of
course, is a huge challenge. I just recently returned from China.
China's trade deficit with the United States, our deficit, has gone up
to $125 billion. That means China takes these $125 billion and buys
part of our Treasury bills, buys some of our equities. That results in
us being more vulnerable to trade negotiations. If they say, well,
look, United States, you're not being fair with us, we might just have
to pull our money out of your Treasury bills. With foreign investments
borrowing 30 percent of our money, tremendously vulnerable, it would
put us at a huge disadvantage. Not only is this overspending and
overpromising a burden on our kids, it is a tremendous challenge to our
future economy.
____________________