U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

54–578cc 1999

THE PRESIDENT’S BUDGET

SUBMISSION FOR FISCAL YEAR 2000

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, FEBRUARY 3, 1999

Serial No. 106–1

(

Printed for the use of the Committee on the Budget
(II)

COMMITTEE ON THE BUDGET

JOHN R. KASICH, Ohio, Chairman

SAXBY CHAMBLISS, Georgia,

Speaker’s Designee

CHRISTOPHER SHAYS, Connecticut

WALLY HERGER, California

BOB FRANKS, New Jersey

NICK SMITH, Michigan

JIM NUSSLE, Iowa

PETER HOEKSTRA, Michigan

GEORGE P. RADANOVICH, California

CHARLES F. BASS, New Hampshire

GIL GUTKNECHT, Minnesota

VAN HILLEARY, Tennessee

JOHN E. SUNUNU, New Hampshire

JOSEPH PITTS, Pennsylvania

JOE KNOLLENBERG, Michigan

MAC THORNBERRY, Texas

JIM RYUN, Kansas

MAC COLLINS, Georgia

ZACH WAMP, Tennessee

MARK GREEN, Wisconsin

ERNIE FLETCHER, Kentucky

GARY MILLER, California

PAUL RYAN, Wisconsin

PAT TOOMEY, Pennsylvania

JOHN M. SPRATT, Jr., South Carolina,

Ranking Minority Member

JIM MCDERMOTT, Washington,

Leadership Designee

LYNN N. RIVERS, Michigan

BENNIE G. THOMPSON, Mississippi

DAVID MINGE, Minnesota

KEN BENTSEN, Texas

JIM DAVIS, Florida

ROBERT A. WEYGAND, Rhode Island

EVA M. CLAYTON, North Carolina

DAVID E. PRICE, North Carolina

EDWARD J. MARKEY, Massachusetts

GERALD D. KLECZKA, Wisconsin

BOB CLEMENT, Tennessee

JAMES P. MORAN, Virginia

DARLENE HOOLEY, Oregon

KEN LUCAS, Kentucky

RUSH D. HOLT, New Jersey

JOSEPH M. HOEFFEL III, Pennsylvania

TAMMY BALDWIN, Wisconsin

PROFESSIONAL STAFF

WAYNE T. STRUBLE, Staff Director

THOMAS S. KAHN, Minority Staff Director and Chief Counsel
(III)

C O N T E N T S

Page

Hearing held in Washington, DC, February 3, 1999 ............................................ 1

Prepared statement of:

Hon. Kenneth E. Bentsen, Jr., a Representative in Congress from the

State of Texas ................................................................................................ 6

Hon. Bob Clement, a Representative in Congress from the State of Tennessee ............................................................................................................. 7

Hon. David E. Price, a Representative in Congress from the State of

North Carolina .............................................................................................. 7

Hon. George Radanovich, a Representative in Congress from the State

of California ................................................................................................... 8

Jacob J. Lew, Director, Office of Management and Budget ................................. 8

Charts:

The Budget Is in Surplus After Years of Deficit .................................... 9

Investing the Surplus for Our Future: Cutting the Debt By More

Than Two-Thirds ................................................................................... 11

Framework for Social Security and Medicare Reform With LongTerm Fiscal Discipline ........................................................................... 12

Sources of Unified Budget Surplus .......................................................... 13

Investing the Surplus for Our Future ..................................................... 14

Interest as a Percent of Outlays in 2014 ................................................. 15

Prepared statement of ...................................................................................... 16

Additional information supplied for Mr. Price ............................................... 47

Additional information supplied for Mr. Holt ................................................ 54
(1)

THE PRESIDENT’S BUDGET SUBMISSION FOR

FISCAL YEAR 2000

WEDNESDAY, FEBRUARY 3, 1999

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC.

The committee met, pursuant to notice, at 10:02 a.m., in room 210, Cannon House Office Building, Hon. John Kasich (chairman

of the committee) presiding. Present: Representatives Kasich, Chambliss, Shays, Herger, Franks, Smith, Nussle, Hoekstra, Bass, Gutknecht, Hilleary,

Sununu, Pitts, Knollenberg, Thornberry, Ryun, Collins, Wamp,

Green, Fletcher, Ryan, Toomey, Spratt, Rivers, Thompson, Minge,

Bentsen, Davis, Weygand, Clayton, Price, Markey, Kleczka, Clement, Moran, Hooley, Lucas, Holt, Hoeffel, and Baldwin. Chairman KASICH [presiding]. The committee is going to come to order.

What we are going to do first is the consideration of Mr. Crippen, and, as you know, June O’Neill is leaving the CBO, and Senator

Domenici and I have met with a number of candidates along with

Mr. Spratt and Senator Lautenberg, and, essentially, Senator

Domenici and I have come up with a recommendation who is Dan

Crippen.

Probably the single best thing about Dan Crippen is that he has

his Ph.D. from one of the finest universities in the world, Ohio

State University, and he has his M.A. from Ohio State also, so he

got it right there and his B.S. from the University of South Dakota.

He also is a principal in the Duberstien Group. He was Assistant

to the President for Domestic Affairs from 1988 to 1989 and Deputy Assistant to the President from 1987 to 1988.

We think he will be a good CBO Director. He is not the director

that Mr. Spratt or Mr. Lautenberg would have wanted, but this ultimately gets down to a decision that does get made by the majority even though this man has to operate not as a servant to the

majority, and I think it is pretty clear that Dr. O’Neill—she didn’t.

[Laughter.]

So, anyway, we would just like to make a motion and get this

approved. Mr. Spratt.

Mr. SPRATT. Mr. Lautenberg and I have met with Dr. Crippen

twice. Dr. Crippen has assured us that he will maintain the independence and professionalism of the CBO and its professional staff.

We met with Dr. Crippen not because we doubted his competence

but because he is in a sense cut from a different pattern than his

predecessors in his position. His background and experience are
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more distinctly partisan than anybody who has ever held this position before.

Dr. Crippen has assured us that he will work with Democrats

and Republicans alike on a nonpartisan basis, and, based on these

assurances, I intend to support his selection.

Mr. Chairman, I would just like to say that it has been 25 years

almost since Congress created the Congressional Budget Office. We

created them to be neutral, nonpartisan, to give an independent,

impartial estimate forecast. We haven’t always agreed with their

work, but I think we have respected their independence. They have

earned the trust that they enjoy with most of us in Congress. And

even if they haven’t always been right, they have been basically

honest and rigorous and professional in their work, and their virtues have served us well. The CBO has refused over the years to

help us forecast the deficit away, and the discipline that they have

held has helped us wipe out the budget deficit, and I simply hope

and trust that Dr. Crippen will fight to maintain those independent

goals.

Chairman KASICH. I would like to recognize Mr. Chambliss, the

gentleman from Georgia, for purposes of offering the necessary

unanimous consent request.

Mr. CHAMBLISS. Mr. Chairman, I ask unanimous consent that

pursuant to section 201(a)(2) of the Congressional Budget Act of

1974, the Committee on the Budget recommends to the Speaker

and the President pro tempore that Dr. Dan Crippen be appointed

as the Director of the Congressional Budget Office.

Chairman KASICH. Without objection, so ordered.

I want to, first of all, thank Mr. Spratt, his staff, and the Democrats for the way in which we have been able to proceed through

the rules package, and, frankly, we put something in the rule that

I think will serve the Democrats—or I shouldn’t say the Democrats—whoever would be in the minority for a period of time, and

I think it will serve them well. It will make sure that there is adequate protection for the minority. In terms of Mr. Crippen, you can

have a big fight over these kind of things, but they don’t really

serve us well. We are going to have enough to—hopefully, we won’t

have to fight, but we may have enough to fight about without having to look for one, and it is always nice to be able to have some

bipartisan agreements as we proceed through some of these which

I think are kind of formalities.

But let me welcome Jack Lew. I like that Jack’s a guy who as

Director of OMB he has made a heck of an accomplishment. I don’t

whether your mom—is your mom and dad still alive, Jack?

Mr. LEW. My mother.

Chairman KASICH. Your mom is? I mean, I don’t know if she realizes that really through shear persistence and obviously talent

Jack has been able to—it started with Leon isn’t that right?

Mr. LEW. It started with Speaker O’Neill.

Chairman KASICH. Up here—well, OK, but then you got with

Leon, isn’t that right, and you became really his top assistant, and

then when Mr. Panetta became the head of OMB, Jack went over

and was involved in a lot of the negotiations, and the interesting

story here is if you hang around long enough; if you have got talent

and persistence, you can end up getting the top job. So, I think it
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is very exciting, and I am excited for you, and I hope your mom

and your whole family—you know, a lot of times, they don’t what

the heck we are doing in this stuff, but I hope that sometime they

will come to be able to truly realize what you have been able to

accomplish being the Budget Director to the President of the

United States. That is not bad, Jack; that is pretty darn good work.

So, I want to welcome you here this morning, and point out that

5 years ago few of us would have conceded to the opportunity to

talk about surpluses, because when we were back in those days of

trying to negotiate the budget agreement over there in the Capitol

offices, we were struggling for literally every penny that we could

get. You know, the famous phrase there ‘‘Brother, can you spare a

dime?’’ because we didn’t know how we could make this all add up

to balance in 2002, and, low and behold, within a very short period

of time, here we are with surpluses which is really wonderful news,

because I think it gives us an opportunity to really leverage this

good news into more good news. Last week, the CBO of course projected that we could have almost a $2.6 trillion surplus over the

next 10 years. I suspect that maybe those numbers may even be

low.

I mean a $2.6 trillion surplus, that is just amazing, and, frankly,

I think it comes about for three reasons: one is I think that the

benefits of the business community becoming a lot more efficient

has allowed them to have higher levels of productivity without inflation, with minimal amounts of inflation, and, at the same time,

I think it also reflects the fact that a trade-oriented export policy

is very beneficial to a country, and, at the same time, it was just

like yesterday when Dr. Greenspan was here and said that if you

can put together a credible plan to balance the budget, the interest

rates can come down two points, and if there is anything we have

learned it is that interest rates are the driving engine of what happens with the economy; the lower they are, the better we do; the

higher they are the worse we do. And as a result of the hard work

that everybody did in 1995 and in 1996 and in 1997, we feel up

here and working with the administration we were able to put together a plan that dropped those interest rates down and has given

us the kind of economic growth that we would never have anticipated had any of us, Mr. Spratt or Jack or myself, been asked, ‘‘Is

it possible that in 1999 we will be projecting a $2.6 trillion surplus?’’ We would have said, ‘‘There is something wrong with you.’’

CBO also tells us that lower projected Medicare spending will extend the life of the trust fund by possibly 3 years until 2010. We

know we have a commission that is beginning to take a look at

what we can do to extend it even further, but all this good news

is the result in my judgment primarily of what we were able to do

in 1997, and that meant at that point we had to work together.

Now, I think we face three or four new challenges: first, the coming retirement of the baby boomers who will put enormous strains

on Social Security. We all know that the Social Security system is

a matter of demography. We have a lot of baby boomers paying for

our mothers and fathers; they are secure. The question is will the

baby boomers and their children, us—will we be secure along with

our children as the coming retirement approaches and the demographics start to work against us?
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We all know we need to improve the quality of education in this

country; that a trained workforce and smart kids are not only important to the economy but also, of course, those are the tools that

give our kids a chance to grow up like Ed Markey did and become

a Member of the United States Congress.

And we know we need to do these things while we have a growing economy that provides jobs and opportunities for everybody,

and I think we all know that the number one issue before us is

what can we do to make sure that the economy continues to grow,

because if the economy continues to remain strong, the news continues to be good, and we can take the good news and leverage it

for even more good news.

The President is looking at all these issues. Speaker Hastert has

indicated that these issues are issues that Congress will be focusing on. We are looking forward in areas where we can get some

things accomplished in a bipartisan fashion. Jack, I am interested

in your USA accounts. As you know, I called for something along

this line last year, and, in fact, I had suggested that we take the

surplus and we begin to divide it up among all the people who paid

payroll taxes, and I have with me today a passbook, and the passbook will be distributed to all the Members of the House to show

them how much money they would have in a personal savings account that they would be able to direct like Federal employees and

how that money could grow and what it can mean in terms of the

concept of personal savings accounts. I happen to believe with Social Security people ought to have 2 percent of payroll in an account, and they ought to direct it, and I don’t think we need any

political appointees to tell us where that money ought to go. I think

we can do it on our own, but until the day comes when we can get

to the 2 percent or 3 percent of payroll, the notion that people

ought to have these personal retirement accounts is one that I

think is very positive. It would get Americans to understand the

value of having personal retirement account and what that can do

to enhance their retirement security. That is an area, Jack, maybe

where we can reach some agreement in this year. I don’t know,

maybe we can do the whole deal, and we can get complete agreement, but, if not, it seems to me as though the retirement accounts

are a good first step.

But I am disappointed, naturally, in some of the things that I

found in the budget. Based on the count that we have made, this

5 year budget has about a $108 billion in new taxes and fees and

over—this is pretty amazing—over $200 billion in new domestic

spending; almost 40 new mandatory programs and almost 80 new

discretionary programs. I don’t know that Bob Clement would like

all those new Federal programs. He would probably like to get a

little bit more money back to Opryland, I don’t know, but that is

an awful lot of new spending, and the taxpayers will pay over the

next 10 years about $22 trillion in taxes to the Federal Government. I think people are paying too much in taxes, and over here

I believe that we will push and would like to see a very significant

tax cut. I don’t like the idea that we want to have governmental

appointees investing our payroll taxes in the market. We believe

that people ought to have the power to do that.
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We also don’t like the idea that we want to have control in Washington in terms of what we want to do with education, because we

think that people will do better, our schools will do better, out children will do better if we can control education through our communities and our neighborhoods and our local school houses.

However, we are approaching the end of the century. We have

certain obligations and responsibilities as we approach the new

century, and all of our actions should be based on some fundamental principles. We need to have a commitment to each other based

on our shared values. This will allow us to restore our society and

our American family, and we must maintain a commitment to individual freedom. I believe we have to trust in and believe in the creative genius of individual citizens. I think if we do these two

things, if we reach out to one another, we can have a great next

millennium. And, so I am excited that you are here, Jack. Maybe

there are some things we can do. Hopefully, as we go through the

debate this year, even if we don’t agree we can still be the friends

that we have been over the years, and I now with great pleasure

yield the podium to Mr. Spratt.

Mr. SPRATT. Thank you, Mr. Chairman. I want to join you in welcoming Jack Lew back to our committee. As you noted, he is no

stranger to this committee or to the House. He spent a good piece

of his career working for the Speaker of the House. He went to

OMB with Panetta; he stayed over as the Deputy Director with

Frank Raines, and now he has taken the reins from Frank

Raines—if I can mix a metaphor—without any break in stride.

He has done a commendable job of carrying on, and today he

comes to the Hill with a budget bound in black and white, the symbol of a new era. For the third year in a row, this budget is in surplus which is phenomenal. Mr. Chairman, that is a long way from

1992 when the deficit was $290 billion. In fact, if you look at the

economic report President Bush sent over here in 1993, you will

see that he projected a deficit this year over $300 billion if we had

continued course. We didn’t, so now we enjoy the fruits of our efforts. Because of the votes that we cast in 1990, 1993, and 1997,

we have virtually wiped out the deficit in the unified budget, and

we have come, as the President has expressed, to an historic juncture. The budget he is sending us rises to this occasion; it takes

a high road into the next century. It commits the surpluses that

we foresee coming to America’s future. Sixty-two percent would go

to make Social Security solvent for another 30 years; 15 percent

would go to make Medicare solvent until 2020; 12 percent for an

account, an idea that you yourself have proposed, Mr. Chairman,

a Universal Savings Account so that every American can have a

chance to save and invest and have a better retirement and so that

we can increase the net national savings and boost the economy in

the next century; and 11 percent, a modest 11 percent, would go

to defense and nondefense priorities, because this budget, in addition to being a disciplined budget, also has some heart and soul.

It has got some programs in here for education and community policing that we think work and that we think the American people

want.

Before I conclude and turn the podium over to our witness, let

me raise a word of caution. The surpluses that we foresee in the
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future stem from economists’ predictions. If we have learned anything over the last 15 years, we have learned that economists

sometimes make mistakes. Furthermore, the surplus they project

this year, next year, and the following year, is a surplus in the unified budget. If we back out the surplus in the Social Security trust

fund, there is, according to OMB, an on-budget deficit in 1999, in

00, and a mere surplus of $200 million in 2001. Not until 2002, 3

years from now, will both OMB and CBO see significant surpluses

appearing. So, I think we should bear that in mind as we take up

the budget and talk of bold tax cuts or big spending commitments,

either one. The watch words should be caution and restraint. Let

us not blow what we have accomplished. Thank you, Mr. Chairman, and thank you, Mr. Lew. We look forward to your testimony. Chairman KASICH. I ask unanimous consent that all members

who have opening statements, that those statements be permitted

to be placed in the record. Without objection, so approved. [The statement of Kenneth E. Bentsen, Jr., follows:]

PREPARED STATEMENT OF THE HONORABLE KENNETH E. BENTSEN, JR., A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

Mr. Chairman, I would like to take a minute to praise President Clinton for submitting another balanced budget—the third one in a row—and dedicating most of

the projected budget surplus to strengthening Social Security and Medicare by paying down the national debt. Reducing the $3.7 trillion national debt should be our

number one priority. We should pay down that debt while continuing the fiscal discipline Congress showed up until last year. As members of the Budget Committee,

we should carefully review proposals for spending increases and tax cuts to ensure

that they are fully paid for under Congressional budget rules. Because of the strong economy and tough deficit reduction plans enacted in 1990, 1993, and 1997, the Federal budget will be in balance for 2 years in a row for the

first time since 1957. The President has rightly proposed that we take advantage

of this historic opportunity to buy down the huge national debt and strengthen Social Security and Medicare for the retirement of the Baby Boom generation.

As we know all too well, the Federal debt held by the public quadrupled between

1981 and 1993; interest payments on the debt doubled as a share of the Federal

budget from seven to 15 percent.

Paying down the debt grows the economic pie and creates more wealth for all

Americans. As this morning’s Washington Post pointed out, there is a ‘‘shadow cost’’

to not paying down the debt. A tax cut or a spending increase, without offsetting

spending cuts or tax increases, would add more debt, create future obligations, and

create no assets new assets for the Trust Funds. A crushing Federal debt hinders

gains in productivity, creates higher tax rates, and increases the cost of borrowing

money. Unmanageable debt dampens economic growth.

In fact, a tax cut or large spending increase that resulted in more debt would

most likely result in rising interest rates. There would be less money to invest, the

debt’s value would decline, and there would be a greater squeeze placed on the Federal budget to come up with funds to pay for Social Security and Medicare. This

would also depress the value of the dollar, reducing its purchasing power and increasing inflation.

Finally, paying down debt will stop the government from eating up private savings. With less government bonds available for purchase, interest rates should decline and resources would shift to investments that are critical to improving productivity and raising our standard of living.

Public and private entities use debt to expand capital, but excessive debt squeezes

out productive uses of resources. Paying down the debt is a less sexy but more efficient way of shoring up Social Security and Medicare. This alone will not solve the

long term solvency issues of Social Security or Medicare, but it will certainly help.

The Administration’s budget for the U.S. Army Corps of Engineers’ Civil Works

program calls for over $1 billion in new fees to be collected from our maritime industry through the a new proposal called the Harbor Services Fund (HSF).

1. Does the Administration anticipate shippers who typically utilize waterborne

transport to move their products shifting to long-haul railroads in hopes ofoffsetting

the increased transportation costs associated with the HSF?
7

2. The Port of Houston, which is located in my Congressional district, has a very large bulk commodities handling facility. Will the HSF have any negative impacts

on our bulk cargo trade and in particular grain or coal? 3. What benefits does the Administration envision by abdicating its financial re- sponsibility for dredging by including the entire Federal share of new construction

projects under the HSF? 4. What studies has the Administration conducted regarding the possibility that international shippers may now try to divert their cargo through either Mexico or

Canada to avoid the HSF?

5. Administrator Lew, Can you please describe for me the Clinton Administra- tion’s proposal to provide limited reimbursements for Medicare cancer clinical trials.

As a the sponsor of legislation, H.R. 61, to ensure Medicare reimbursement for all

types of clinical trials, I am very interested in learning more about your proposal. 6. Administrator Lew, As the representative for the Texas Medical Center, the

largest medical center in the United States, I am very concerned about the Medicare

reductions in the Fiscal Year 2000 budget. In a time when we are already asking

our nation’s hospitals to absorb more than $115 billion in Medicare reductions that

were including the Balanced Budget Act of 1997, do you believe that these additional reductions are prudent and necessary?

[The statement of Bob Clement follows:]

PREPARED STATEMENT OF THE HONORABLE BOB CLEMENT, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TENNESSEE

Mr. Chairman, we have an historic opportunity. Instead of facing the $357 billion deficit that CBO projected in 1992, we are faced with our first surplus in three decades. The question we must now decide is what to do with it. Who should benefit

from this suplus? Where do we put our priorities? Should we dedicate part of this

surplus to a tax cut? If so, how much? Or should we conserve our resources to make

sure that we can meet our future responsibilities to the American people?

I have asked my constituents where they think our priorities should be. Over and over again, they tell me that we in Congress should be working on paying down the

national debt and on shoring up Social Security for the 21st century. This budget

that the President has presented us allows us to do both. We can extend the life

of the Social Security Trust Fund by 25 years and simultaneously lower the debtto-GDP ratio from its current level of 44% to 7.1% by 2014, its lowest level since

1917. Some have suggested an across-the-board tax cut. I am not opposed to tax

cuts. In fact, I have supported tax cuts and tax credits in the past. However, take

a moment to remember what happened in the early 80’s when we cut taxes but

failed to cut spending. Our deficit ballooned to all-time highs. Is this the course we

want to take? I think not.

I believe that the President’s budget represents a strong framework for paying down the national debt and extending the life of the Social Security and Medicare

Trust Funds. This budget is not a cure-all and it is not without its problems. There

are still many tough decisions to be made in the future, but these reforms are an

important first step.

Finally, I would like to commend the President for the courage and leadership he

has shown in putting these proposals before us. We live in a nation that was built

on ideas, and while we may not enact all of his proposals, the President has taken

significant steps toward ensuring this country’s continued prosperity.

[The statement of David E. Price follows:]

PREPARED STATEMENT OF THE HONORABLE DAVID E. PRICE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NORTH CAROLINA

Proposed Analog Spectrum Fee

I am concerned about a proposal in the President’s budget to impose an ‘‘analog

spectrum lease fee’’ of $200 million on television broadcasters. Television broadcasters already pay a number of Federal regulatory fees. In addition, there has always been an understanding among broadcasters that a ‘‘contract’’ exists between

them and the Federal Government under which they provide statutorily required

public service in exchange for use of the broadcast spectrum. What is the justification for this new fee, which according to the February 2, 1999 edition of USA Today

could cost an average station $164,000 per year?

Is part of the justification for the fee to encourage stations to transition more

quickly from analog to digital? Many of the smaller stations around the country already face a substantial financial challenge in meeting the deadline to convert to
8

a digital signal. As the bigger stations convert more quickly to digital, will the

smaller stations’ share of the overall fee rise proportionately?

[The statement of George Radanovich follows:]

PREPARED STATEMENT OF THE HONORABLE GEORGE RADANOVICH, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Chairman, thank you for scheduling this hearing today to allow us to review the President’s FY 2000 budget. I am particularly concerned with issues relating to

the Interior and natural resources. I would like for the administration to respond

to the questions below. I appreciate the opportunity to submit this testimony.

Lands Legacy Initiative

Under this proposal, you envision converting this funding to mandatory next year. Why do you want to do this? Will it not have the effect of reducing congressional

oversight? Will not this proposal result in significantly increased maintenance costs and therefore add to your backlog? National Park Service testified last year that its backlog alone was an estimated $6.1 billion in 1997, up from $1.9 billion in 1987. In light of this, what will be the

impact of such significant land acquisition on eliminating or greatly reducing current backlog at agencies like the Park Service?

PILT

The Federal ownership of land is a huge drain on local resources, without com- parable revenues as would occur with private ownership of land. One of the solutions is the PILT program. Why did you not increase Payments in Lieu of Taxes

to the levels authorized under law in your budget?

Cal-Fed Project

Mr. Lew, how many agencies at Interior and across the government are involved in working on the California Bay Delta project? What is the total spending requested by the Administration this year what is last year’s enacted level? What are the expected future costs of water storage in the watershed?

Mr. COLLINS. Mr. Chairman.

Chairman KASICH. The gentleman from Georgia.

Mr. COLLINS. Mr. Chairman, I agree with Mr. Spratt that we

have come along way since 1992, but I would like to amend that

we have come along since January 1, 1995 too, sir.

Chairman KASICH. Well, we are off to a good start here. [Laughter.]

OK, I now recognize the gentleman—where are you from, Jack?

Mr. LEW. From New York.

Chairman KASICH. The gentleman from New York is now recognized. Do you think the Knicks, anybody on that team is going to

pass this year?

Mr. LEW. I make predictions about the economy. I leave predictions about sports to others.

Chairman KASICH. All right, Jack, you have got the mike.

STATEMENT OF JACOB J. LEW, DIRECTOR, OFFICE OF

MANAGEMENT AND BUDGET

Mr. LEW. Thank you, Mr. Chairman, Congressman Spratt. I appreciate the very gracious and generous introduction. Coming back

to this committee is in a way coming home. I spent many years in

this room. I look around at the pictures on the walls, and I can’t

imagine how many years have gone by, and I don’t want to add

them up.

If I might before going into my opening statement, make a comment on the first order of business, your vote on Dan Crippen as

the head of the Congressional Budget Office. I have known Dan for
9

the better part of 20 years. He was a very good and able adversary

when I was in the Speaker’s office and he was in the majority leader’s office in the Senate. I look forward to working with him and

congratulate him on his nomination today.

I also understand that today his deputy was named—and actually his deputy, Barry Anderson, most recently the most senior civil

servant at OMB. He is first rate, and we miss him. We wish him

and Dan well at CBO.

If I may, Mr. Chairman, I would like to submit for the record my

formal statement and briefly summarize it in a few minutes. I

would like to start, if I could, by taking a look at where we have

come from and where we are going. This really is an historic opportunity, and I am proud to be here today to present the President’s

2000 budget.

It is a document that is more than 1 year’s budget. It really is

a document that will shape the debate for the next decade as we

go into the 21st century. The historic accomplishment of having a

surplus of $117 billion in fiscal year 2000 and projecting $4.8 trillion in surpluses over the next 15 years is really remarkable.

When you remember where we started out in 1993 when President Clinton took office, we were looking at a sea of red ink. We

were looking at deficits that would grow to $600 billion, $700 billion, $800 billion in a single year. There was a lot of fear in the

country, and it was legitimate fear. The question was how could we

run a deficit of $600 billion in a single year and meet all of our

obligations and pay our bills? It took tough action in 1993 and, yes,

in 1997 when we worked on a bipartisan basis to finish the job.

The outlook for the next 15 years is very strong because of the

tough decisions that we made.
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It is important to remember this history as we embark on the decisions that we have to make now. If we repeat the errors that we

have sometimes made in the past, we won’t have this kind of projection in the future. But if we continue the prudent decisions that

we have made over the last several years, we really could lay a

foundation for long-term economic growth.

Over this period it is important to note that the tax burden on

American families has actually come down and not gone up. The

success of balancing the budget has been by reducing the size of

government. A typical family of four, a family that earns $55,000

a year, is now paying a lower share of its income in taxes than anytime in 23 years. A family of four with half the median income,

roughly $27,000 a year, is paying the lowest share of income since

1965. Many, in fact most, are getting money back because of the

earned income tax credit. Even a family of four with twice the median income, $110,000, is paying less than the combined income in

payroll taxes than anytime since 1977.

And government has gotten smaller. Every year that President

Clinton has been in office, every budget he has submitted, the government has taken less of the economy than in the preceding year,

less of the economy than in either of the two preceding administrations, and that is no exception this year. The size of the government will fall from 19.7 to 19.4 percent of the economy.

The key element of reducing government has been to reinvent

government, and under the leadership of the Vice President, we

have seen dramatic strides in having a smaller government that

does more with less. The size of the Federal civilian workforce has

declined by 365,000. As a percentage of the total workforce, the

government is now the smallest it has been since 1931, and many

of our agencies are doing a much better job serving their customers

better than at any other point.

Before 1993, when we were looking at that red ink, the deficit

was going to consume a larger and larger share of the economy. It

was going to make it very difficult to have resources available for

the Federal Government to do very many other things. What we

have got now is the exact opposite with surpluses before us—and

if I can change to the next chart, I think this tells the story of why.
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This picture shows how the debt as a percentage of the economy

will fall if the President’s plan is adopted. When the President took

office, the debt had climbed to 50 percent of the economy. Under

the President’s plan over the next 15 years, the debt held by the

public will fall to 7 percent of the economy. This will bring the publicly held debt to the lowest percentage of the economy, 7 percent;

the lowest it has been since 1917 before the United States entered

World War I. The President proposes to do this with a framework

for Social Security reform and long-term fiscal discipline.

I want to begin by underscoring that the President’s commitment

last year and his commitment this year is fundamentally that we

must save Social Security first. A statement of good intentions is

not enough. We need to take action. The framework the President

has put forward lays out a plan so that after we save Social Security, the next steps are clear.
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And if you look at the green on this chart, the green shows both

what the next step is and why that is a good step to take. After

we have set aside 62 percent of the surplus for Social Security, the

President has proposed that the next 15 percent of the surplus

should go to Medicare. The reason it is green on that chart is that

just as putting money into Social Security will reduce the debt, so

will putting money into Medicare. And equally important, it will

put the money aside to keep the promises that we have already

made. The benefits are already due. It will put the money there to

keep the promise to pay the benefits that are due in the next generation.

After we fix Social Security and Medicare, the President proposes

a tax cut, and, as Chairman Kasich noted, it is the Universal Savings Account which I hope we can reach a bipartisan consensus on.

Our view is that tax relief is appropriate, and it should be designed

to encourage savings. It should be designed toward building retirement savings so that individuals can supplement Social Security

and pensions with their own personal savings. After we have put

12 percent into the tax cut plan, the Universal Savings Account,

the President has proposed that we put 11 percent of the surplus

into discretionary spending to meet our national defense and urgent domestic priorities. I think there is a lot of bipartisan consensus on many of those priorities. I think we agree on a bipartisan

basis that there is a need for more resources for national defense.

I think we agree on a bipartisan basis that there is a need for more

resources for education. If we are going to put more resources into

defense and if we are going to put more resources into education,

we are going to need to set aside some of the surplus to meet those

commitments.
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If we look at the next chart, I think it will help explain how the

plan works.

A lot of questions have been raised about the accounting of the

President’s plan, and a lot of the complexity really relates to how

we fund Social Security today and how we determine the unified

budget surplus today. Right now, the unified surplus comes from

two sources: every dollar that goes into the Federal Government in

excess of expenditure for general revenue goes into the surplus.

But just the same, payroll tax dollars in excess of benefits go into

Treasury bonds, and they go into the Treasury as part of the surplus. The real question is not where the unified surplus comes

from. The real question is what do we do with it?

Now, the President has proposed—and the next chart will make

this clear—that we have three very real choices as to what to do

with the unified surplus.
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We could give the surplus back as either a tax cut or additional spending, but that will have three effects, and I don’t think they

are good: it will create new obligations for the Federal Government

whether it is tax cuts or spending; it will add to the public debt;

and it won’t do a thing to extend the life of the Social Security or

the Medicare trust fund.

There has been a lot of debate in the last several weeks about

debt reduction, and we applaud everyone who endorses debt reduction. We are for debt reduction. But it is important to note several

things about debt reduction: it is good because there are no new

obligations; it is good because it reduces the public debt. But on its

own, it doesn’t do anything to extend the life of the trust fund.

And, perhaps, something that we need to consider equally importantly, debt reduction has never been a very popular political strategy. It has never been something that has rarely prevailed when

compared to tax cuts or spending increases. We have come up with a third option that we think is superior

both in terms of its substantive detail and in terms of the likelihood of making the tough decisions and sticking to them. The

President has proposed that we save Social Security and Medicare;

we undertake no new obligations until we can pay for our old obligations; we reduce the public debt and get the benefits of a virtuous cycle instead of the vicious cycle that we have had for the last

decade. We increase the trust fund assets, and put the money in

the trust fund so that we can pay the benefits that people are now

earning and that are due to them. We think that that is the best

plan for using the surplus.

There has been a lot of discussion about the many initiatives in

the budget, and we are very proud of them. We are proud of the

initiatives that we have pursued over the last 6 years, and we
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think that they have made life better for the American people from

Head Start to child care to education to the COPS Program. We

have seen real effects in the investments we have made. We have

a lower crime rate; we have a better set of health participants; we

have better schools. We think that going forward we need to continue to make these investments, and, yes, we do need to make an

additional investment in national defense. We need to make sure

that going into the next century we continue to have the best fighting force in the world as we do today. Overall, the President’s fiscal year 2000 budget provides for im- portant priority initiatives by achieving savings in programs. Everything in the 2000 budget is fully paid for. The President has not

allocated a penny of the surplus for discretionary spending until

2001 to give us time to take action on Social Security reform and

to take action on a broad plan to allocate the surplus. It complies

fully with the current law spending caps, and it complies fully with

the current law pay-go rules. We have an historic opportunity for long-term prosperity if we rise to the occasion. By bringing down the deficit, balancing the

budget, running the kinds of surpluses we are now projecting for

the future, we have put our fiscal house in order. And if I might

show you one more chart, I think it will show you—the benefits

will be summarized very simply.

When the President took office in 1993, we were looking out to

2014—the 15th year of the plan that the President has put forward

this year—and we were projecting that interest would consume 27

cents out of every dollar of the Federal budget. The current budget

projects for the same year that interest will consume 2 cents out

of every dollar in the Federal budget. Now, the difference is striking. The difference will give us the ability to pay our bills. It will
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give us the ability to pay Social Security, to pay Medicare, and, yes,

to have some room for tax relief as the President has proposed.

What we must remember is that this didn’t happen by accident.

It happened because we took tough action in 1993 and 1997. We

have fiscal discipline, and we have to maintain the fiscal discipline

today in order to make sure that this projection becomes reality.

We look forward to working on a bipartisan basis, to going forward with a long-term policy of both fiscal discipline and investment in our future. We think that this is a once in a lifetime opportunity to for us to put down a marker for fiscal discipline and for

economic prosperity for generations, and we look forward to meeting the challenges.

[The prepared statement of Jacob J. Lew follows:]

PREPARED STATEMENT OF JACOB J. LEW, DIRECTOR, OFFICE OF MANAGEMENT AND

BUDGET

One year ago, President Clinton set the course of the Nation’s budget policy with

his charge to ‘‘Save Social Security First.’’ The President recognized that we were

entering a new era as we left behind the decades of large budget deficits. He was

building the foundation for budgeting in this new era of surpluses.

Fiscal progress has produced a strong economy

The year 1998 was one of the most extraordinary in modern U.S. economic history. We enjoyed the first budget surplus in 29 years the largest ever in dollar

terms, the largest as a percentage of the economy in more than 40 years. And this

budget surplus was not the result of a temporary wartime policy, as was the last

surplus in 1969. We will have a budget surplus again in the ongoing fiscal year at

an estimated $79 billion, larger than last year’s which will mark the first back-toback surpluses in more than 40 years. The budget I present to you today proposes

a third consecutive surplus the first time that will have happened in half a century.

And our 1998 budget surplus was the sixth consecutive year of improvement in the

U.S. fiscal position the first time that has happened in American history.

The private sector is the key to economic progress, but we have clearly seen in

the decade immediately past that the Federal Government can either hinder or promote economic progress. If the Federal budget deficit is high, so that the cost of capital is driven up and the financial future is uncertain, the private sector cannot

yield the progress of which it is otherwise capable. But if, instead, the Federal Government declares its intentions of responsible fiscal behavior, and lives by those intentions and if the Federal Government supplies the public investments that America needs then the economy is free to prosper. This is the path that this Administration has taken.

In 1998, we reaped the fruits of 5 years of fiscal responsibility. After the best sustained growth of business investment since the 1960’s, the U.S. economy fueled that

decades-absent budget surplus. And the economy itself defied the pundits, staying

on a pace of solid, above-trend expansion, in the face of an international financial

disruption that broke the stride of most other economies around the world. Unemployment and inflation both hit three-decade lows, with the lowest unemployment

rates for African Americans and Hispanics in the history of those statistics; real

wages continued to grow after more than a decade of stagnation, and a record percentage of adult Americans worked in those higher-paying jobs; the percentage of

Americans on welfare fell to a 30-year low; the 10-year Treasury bond rate reached

its lowest level in 30 years; and a higher percentage of Americans attained home

ownership than at any time in our history.

The President deserves a great deal of credit for the virtuous economic cycle that

we now enjoy. The announcement of a firm intention of fiscal responsibility in 1993

was greeted by a continued reduction of interest rates, which helped to trigger the

investment boom that has proved central to sustained strong, non-inflationary economic growth. The two other pillars of the President’s policy investing in our people

and our technology, and opening foreign markets to U.S. exports complete this winning economic strategy.

The 2000 Budget is a defining moment

This extraordinary budget-and-economic performance with the budget setting historical standards and the resilience of the economy setting global standards tells us
17

something. It tells us that we have developed a winning economic policy and that

we must not turn back. We must not discard the economic philosophy that got us

here, to this confluence of economic indicators that all sides now agree is the best

in modern memory.

So in one sense, our budget policy now clearly should be built on continuity. We

have achieved a sustained fiscal improvement, and we should continue to sustain

that improvement. We have an economy that achieved a record sustained peacetime

expansion, and we should continue to sustain that expansion.

But in another sense, we have stepped into a new world. Where our budget used

to be written in red for so many years that people came to take it for granted now

we are in the black. And this change has tempted some to throw away all of the

policy principles that got us here.

For two decades now, there has been much discussion about fiscal discipline, restraint, and deficit reduction. Since 1993, we have taken action; and far beyond the

expectations of even the most optimistic, we now have budget surpluses as far as

the eye can see. But now, as the first surpluses appear, it is important that we not

revert to the practice of cutting taxes and raising spending first, and thinking about

the fiscal consequences later.

As the President suggested in his State of the Union address 2 weeks ago, this

is a moment that will do much to determine the character of our country at the end

of the next century. We can build and strengthen the fiscal foundation that first

arose in these last few years. Or we can sweep it away, before it is firm and strong,

and set our economy to foundering again. The choice is clear and the President is

determined to pursue a balanced program of fiscal discipline and prudent investment for the future. This budget charts that course into an era of surplus.

Fiscal policy since 1993 was pivotal to our current good fortune

To see why fiscal responsibility matters, consider where this Administration started 6 years ago. In 1992, the budget deficit was $290 billion, the largest in the Nation’s history. Between 1980 and 1992, the debt held by the public, the sum of all

past unified budget deficits, quadrupled; it doubled as a share of our Nation’s production, or GDP from about 25 percent to about 50 percent.

These adverse trends showed every sign of accelerating. Both CBO and OMB projected that, without changes of budget policy, growing deficits would add to the Nation’s debt, and growing debt service costs would add, in turn, to the Nation’s deficits. OMB forecast the 1998 deficit, in the absence of policy change, at $390 billion,

or 5.0 percent of GDP; by 2003, we expected the deficit to be $639 billion, or 6.6

percent of GDP. And there was nothing in the forecast to indicate that this exponential trend would stop.

This threat was not turned back by accident. It required tough policy choices,

which the Administration and the Congress took in 1993 and 1997. The President’s

initial economic program cut spending and increased revenues in equal amounts.

Since that time, deficit reduction (and ultimately surplus increase) has more than

doubled the estimates for the President’s plan instead of the projected cumulative

$505 billion, deficits have fallen by $1.2 trillion. That is $1.2 trillion less in debt

that the American taxpayer must service forever.

And this deficit reduction has come as much from lower spending as from higher

revenues. Spending has declined to its smallest share of the GDP in a quarter of

a century. And thanks to the strong economy, receipts have grown beyond expectations, even though the tax burden on individual families is lower than it has been

for about a quarter century:

The typical family of four with the median family income of $54,900 will pay a

lower share of its income in income and payroll taxes this year than at any time

in 23 years. Its income tax payment considered alone will be the lowest share of

income since 1966.

A family with an income at one-half of the median level, $27,450, will pay the

lowest share of its income in income and payroll taxes since 1965. Its income tax

bill will be negative; it will receive money back because of the earned income tax

credit. That was never the case before 1998.

Even a family at twice the median income level, $109,800, will pay less in combined income and payroll taxes as a share of its income than in any year since 1977.

Taken alone, its income tax as a percentage of income will be the lowest since 1973.

Receipts have risen as a percentage of GDP not because of a heavier tax burden

on typical individual families, but rather because of the extraordinary growth of incomes of comparatively affluent Americans (including capital gains and stock options that are not included in measured GDP); and because of the rapid growth of

corporate profits.
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The historic bipartisan balanced budget agreement of 1997 has reinforced expecta- tions of Federal fiscal responsibility. This has had a favorable effect on interest

rates, and the economy at large. In the last 6 years, we have enjoyed an extraordinary economic performance be- cause our fiscal policy was responsible and sound. If we want to continue to enjoy

such strong economic performance, we must continue our sound fiscal policy. As the

experience of the last 20 years clearly shows, budget problems are very easy to

begin, and very hard to end. Reducing debt burden is as important to the Nation as it would be to a family. The Nation must service its debt. If we gratify ourselves today by collecting taxes

insufficient to cover our spending, and accumulate debt, our children and our grandchildren will have to service that debt. If, instead, we reduce our debt, our children

and our grandchildren will be freed of the obligation to tax themselves more heavily

in the future just to pay the interest on the debt they inherited. The President’s proposal will fully reverse the buildup of debt of the 1980’s and then go further. By 2014, the end of the 15-year horizon of the President’s program,

the combined effects of the President’s commitments to Social Security and Medicare

will reduce the Nation’s debt burden to an estimated 7 percent of GDP. This will

be the lowest ratio of debt to income that the Nation has enjoyed since before it

entered World War I. And as most experts would tell us, this will be one of the

greatest gifts that we could ever give our children, as we exercise our fiscal stewardship of these United States.

The President’s policy would devote more than three-fourths of future budget surpluses to reducing the Nation’s debt through contributions to Social Security and

Medicare; and would dedicate another 12 percent to household savings through Universal Savings Accounts. This is important to our economic performance for four

basic reasons: First, it increases the Nation’s savings rate, which is critical to productivity gains and economic growth. Second, it reduces the debt. Third, it improves

the fiscal position of the country, and puts it on a stronger footing for whatever uncertainties might arise. And finally, it improves the retirement security of all Americans.

The current challenge is to use the surplus prudently

In 1993, we faced the challenge of eliminating projected budget deficits of $4.3

trillion over 10 years. Today we face the enormous opportunity of projected surpluses of more than $4.8 trillion over the next 15 years. The challenge is to use this

surplus prudently to maintain our strong economic and budgetary performance.

We must save Social Security first. A statement of good intentions is not good

enough for the millions of Americans, retired and working today, who rely on Social

Security for their retirement security and for protection for their families against

disability and premature death. From the beginning, this Administration has kept

its eyes on the future, and taken policies that would benefit the Nation for generations to come. It has paid off. Saving Social Security first is precisely such a futureoriented policy.

The President’s FY 2000 budget symbolically, as well as financially, ‘‘in the black’’

continues firmly on that successful path. The budget maps a course for the Federal

Government after Social Security is reformed and makes its own policy recommendations for the beginning of the bipartisan Social Security reform process

that the President inaugurated last year. But the budget also draws a line that this

Administration will not pass without Social Security reform.

Thus, the FY 2000 budget is fully paid for within the existing budget law. Just

as in every previous year, the President has specified his own priority initiatives,

but has paid for all of them line by line, dime by dime with savings from elsewhere

in the budget.

The President’s policy calls for a bipartisan Social Security reform, this year. The

President has already committed 62 percent of our projected budget surpluses

enough to extend Social Security’s solvency almost an extra quarter century, to

2055. We hope that this will launch a bipartisan process to address long-term Social

Security solvency. We are gratified that several leaders from the Congress have already accepted this principle and hope that both parties, the President and the Congress, can follow through on this commitment and achieve sufficient additional reforms to extend the solvency of the trust fund at least through the traditional 75-

year actuarial horizon.

If we achieve that objective, the budget makes further commitments of the surplus to priority National objectives in the future. The President proposes to dedicate

15 percent of the surplus to extending the solvency of the Medicare trust fund. This

is a key element of the President’s program, because the financial security of Medicare will be threatened even sooner than that of Social Security. In 1997, the Presi-
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dent and the Congress, acting together, made Medicare financially sound through

2010. The President’s 2000 budget would extend that lifetime 10 years further, to

2020. We see the commitment of the surplus as a vital step to facilitate an environment in which a bipartisan effort including the current Medicare Commission can

go even farther; with the time horizon so short, even after the contribution of 15

percent of the surplus, we cannot delay Medicare reform. As the President stated,

he wants to consider, as a part of this reform process, expanding Medicare coverage

to include prescription drugs. The President also proposes using 12 percent of the surplus to finance his new Universal Savings Accounts ‘‘USAs.’’ This proposal includes seed money for Federal

contributions, plus additional funds for matching contributions if individual workers

contribute their own money. The matching contributions will provide a larger percentage inducement for low-wage workers. The goal is for all Americans to see the

rewards of saving building up in these USAs and with this introduction to the

power of compound interest, to begin to save further on their own. The President

believes that this program, with its Government seed contribution, has the potential

to reach even those who have failed to respond to the generous subsidies in the current-law Individual Retirement Accounts (IRAs).

The President wants a fiscally responsible tax cut. He believes that the USA is the right kind of tax cut targeted toward the future, and helping the many American families who have the most difficulty saving for their retirement. It strengthens

perhaps the most neglected of the figurative three legs of the retirement stool personal saving, to stand alongside Social Security and employer pension plans—and

for the many who have no employer plan, this initiative may be crucial. Most importantly, it is part of a plan that fixes Social Security first.

Finally, the budget proposes that the remaining 11 percent of the surplus be dedicated to other important priorities including education, National security, and

health care. In last October’s negotiations on the Omnibus appropriations for fiscal

year 1999, Congressional leaders argued that our National defense needs had outgrown the existing discretionary spending caps and, indeed, defense received the

largest share of the additional emergency funds made available in that legislation.

Likewise, the American people have recognized that the quality of their children’s

education will determine how they progress in life and also the strength of the future economy. The President’s budget is a sound, disciplined way to provide the additional resources for these priorities that both sides recognize will be needed if our

country is to survive and prosper in the next century.

The President’s framework for Social Security reform and long-term fiscal discipline

works

The President’s contribution of the surplus to Social Security will use many of the

existing financial management tools of the Federal Government. It will be in addition to the accumulation in the Social Security trust fund that would occur with no

change in the current law.

After the trust fund is credited for all of its own receipts, exactly as in current

law, the Treasury will be left with the unified budget surplus. Each dollar of that

unified surplus can be used only once for cutting taxes, increasing spending, or buying down the debt. The President has brought the debate right to the point: What

should we do with that surplus? Or to put it another way: If we were to look back

fifteen years from now, or at the end of the next century what would we want to

be able to say that we had accomplished with this opportunity? The President wants

to leave a legacy of building for the future: saving Social Security and Medicare; encouraging Americans to save for their own futures, build wealth, and prepare for

retirement; investing in education; ensuring our National security; and making

other key investments.

So the President started by committing 62 percent of the surplus to save Social

Security first. Most of the share committed by the President to Social Security will

be used to buy down the publicly held Federal debt through the periodic debt

refundings of the Treasury Department, in exactly the same way as debt was retired

last year. That same amount will be credited to the Social Security Trust Fund, in

the form of Treasury securities. This same procedure will be followed for the President’s contribution to the Medicare trust fund.

This commitment will significantly extend Social Security solvency. At the end of

1999, the currently estimated combined balances of the OASDI trust funds is about

$850 billion. Through 2014, we estimate that additional contributions to the trust

funds under the current law, including interest, will total about $2.7 trillion, leaving

a total balance of about $3.5 trillion. The President’s program would contribute an

additional $2.8 trillion to the trust funds over the next 15 years. Taking into account additional interest earnings, that would leave a balance in the trust funds of
20

more than $7 trillion instead of the approximately $3.5 trillion under the current

law. The President’s program will more than double the balances in the trust funds

over the next 15 years—without accounting for higher earnings on the portion of

the surplus invested in corporate equities.

Because the President’s plan will reduce the public debt, the total obligations of

the Federal Government will not increase. We are already committed to paying benefits beyond 2032, when the trust fund is now expected to be exhausted. The President’s proposal would deposit assets in the Social Security trust fund to pay these

obligations, and reduce by an equal amount the debt borrowed from the public. Interest payments will go to the trust fund, to cover future Social Security benefits,

rather than to banks, individuals and other investors in Government bonds.

A small portion of the President’s commitment to Social Security (21 percent of

the commitment) will take the form of holdings of corporate stock. Because the Social Security trust fund will need that amount of the cash surplus to purchase the

shares, this contribution will not reduce the public debt. However, it will improve

the Federal Government’s implicit balance sheet to the same degree, but in a different way. While the reduction of debt will reduce the Federal Government’s liabilities, the corporate shares will increase the Federal Government’s assets. The salutary effect on the Government’s balance sheet will be the same, but it will appear

on the other side of the balance sheet.

Thus, the President’s policy in no way increases the total obligations of the Federal Government. In fact, by retiring part of the public debt, it strengthens our economy in exactly the same way that reducing the budget deficit, and avoiding the accumulation of debt, has helped the economy over the last 6 years. The President’s

program does shift the Federal Government’s commitments to Social Security, however, and in that way improves Social Security’s solvency for the next century. This

will give Social Security a first call on the economic benefits associated with longterm reductions in publicly held debt.

The President believes that budgeting in an era of surpluses requires a focus firmly on the future. We must put money aside against our current obligations before

we incur any new obligations. The President’s program does that, by retiring debt

and accumulating assets against the Social Security commitments that we already

have.

We must balance fiscal discipline with prudent investments for the future

In addressing these priorities, the FY 2000 budget builds upon the investments

in our people and our technology that were set in motion by past budgets.

Last year’s budget implemented the Balanced Budget Act of 1997, maintained fiscal discipline reserving the surplus until we save Social Security first and provided

a strategy of targeted investments to help sustain economic growth. For example,

last year’s budget provided resources for:

The first year’s investment to reduce class size by hiring 100,000 new teachers.

Smaller classes ensure that students receive more individual attention, a solid foundation in the basics, and greater discipline in the classroom. In this year’s budget,

the President proposes investments in this area, ultimately to reduce class size in

the early grades to a national average of 18.

Investments to protect our economic interests at home by responding to international economies in turmoil. The disruption in financial markets last year lead

to economic dislocation in Asia, Latin America and the Soviet Union. This, in turn,

hurt American exporters, farmers and ranchers, who found that markets overseas

were beginning to dry up. With President Clinton’s leadership, Congress approved

nearly $18 billion for the International Monetary Fund, a stabilizing force in the

world economy.

A guaranteed, record-level investment for the next 5 years in the Transportation

Equity Act for the 21st Century to continue rebuilding America’s highways and

transit systems, which are essential to continue the growth of modern commerce.

This legislation also funds programs for highway safety, transit and other surface

transportation, while safeguarding air quality, and helping former welfare recipients

get to their jobs.

Over the past 6 years, the President also worked with the Congress to establish

and build upon significant investments in education and training, the environment,

law enforcement and other priorities to help raise the standard of living and quality

of life for average Americans both now and in the future. For example, the President’s commitment to fund key domestic investments has:

Advanced cutting-edge research, putting the National Institutes of Health on a

path to doubled funding for research including intensified work on diabetes, cancer,

genetic medicine, and the development of an AIDS vaccine.
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Established the children’s health care initiative, the largest investment in health

care for kids since Medicaid was created. Last year, 47 states began programs designed to provide meaningful benefits to as many as five million uninsured children.

Increased Head Start’s ability to provide greater opportunities for disadvantaged

children to participate in a program which prepares them for grade school. Last

year, a boost in Head Start funding put 835,000 children into the program, making

further progress toward the President’s goal of putting a million children in Head

Start by 2002.

Invested in public schools to help States and communities raise academic standards, strengthen accountability, connect classrooms and schools to the information

superhighway, and promote public school choice by opening 900 charter schools.

Protected and restored some of the Nation’s most treasured lands, such as Yellowstone National Park, and the Everglades; provided the funds to conserve others; and

accelerated toxic waste clean-ups.

Built the COPS program to support community policing. This year COPS will

reach the goal of putting 100,000 more police on the streets of America’s communities. COPS has helped reduce violent crime for six straight years. The 21st Century Policing Initiative proposed in this budget will expand on the number of police

and provide other law enforcement tools to the community.

This year’s budget builds on the President’s efforts to invest in the skills of the

American people. It continues his policy of helping working families with their basic

needs raising their children, sending them to college, and expanding access to

health care. It also invests in education and training, the environment, science and

technology, law enforcement and other priorities, to help raise the standard of living

and quality of life of Americans.

Families and Children: For 6 years, the President has sought to help working

families balance the demands of work and family. In this year’s budget he proposes

a major effort to make child care more affordable, accessible and safe by expanding

tax credits for middle-income families, and for businesses to expand their child care

resources; by assisting parents who want to attend college meet their child care

needs; and by increasing funds with which the Child Care and Development Block

Grant can help more poor and near poor children. The budget proposes an Early

Learning Fund, which would provide grants to communities for activities that improve early childhood education and the quality of childcare for those under age five.

Education: The President has worked to enhance access to, and the quality of,

education and training. The budget takes the next steps by continuing to help

States and school districts reduce class size by recruiting and preparing thousands

more teachers and building thousands more new classrooms. The President proposes

improving school accountability by funding monetary awards to the highest performing schools that serve low-income students, providing resources to States to help

them identify and change the least successful schools, and ending social promotion

by funding additional education hours through programs like the 21st Century

Learning Centers. The budget also proposes further increases in the maximum Pell

Grant to help low-income undergraduates complete their college education, and

more funding for universal reemployment services to help train or find jobs for all

dislocated workers who need help.

Environment: This Administration proposes a historic interagency Lands Legacy

initiative to both preserve the Nation’s Great Places, and advance preservation of

open spaces in every community. This initiative will help address sprawl and air

and water pollution, through land acquisition, preservation efforts, environmental

protection and local growth management. The Administration also proposes a new

financing mechanism, Better America Bonds, to further creation of open spaces in

urban and suburban areas. The Better America Bonds initiative is an example of

our use of targeted, paid-for tax cuts to achieve the Nation’s priority goals. In addition, the budget would restore and rehabilitate national parks, forests, and public

lands and facilities; expand efforts to restore and protect the water quality of rivers

and lakes; continue efforts to double the pace of Superfund clean-ups; and better

protect endangered species.

Defense: The President is committed to maintaining world military leadership to

provide for the safety of American citizens and the primacy of American Armed

Forces. To ensure America’s Armed Forces are fully prepared to meet the challenges

of the next century, the President proposes a long-term, sustained increase in defense spending to enhance military readiness, improve recruitment and retention,

and provide the most modern and effective weapons. In addition, these resources

will reinforce the ability of the Defense Department to counter emerging threats

such as terrorism, reduce threats from weapons of mass destruction, maintain the

nation’s nuclear deterrent, and provide humanitarian and disaster assistance.
22

Health Care: The President has worked hard to expand health care coverage and

improve the Nation’s health. The budget gives new insurance options to hundreds

of thousands of Americans aged 55 to 65, and it advocates bipartisan national legislation that would reduce tobacco use among the young. The President’s budget proposes initiatives to help patients, families and care givers cope with the burdens of

long-term care; and it helps reduce barriers to employment for individuals with disabilities. The budget also enables more Medicare recipients to receive promising

cancer treatments by participating more easily in clinical trials. And it improves the

fiscal soundness of Medicare and Medicaid through new management proposals, including programs to combat waste, fraud and abuse.

Embassy Security: The bombings of U.S. embassies in Kenya and Tanzania highlight the dangers faced daily by Americans who work in U.S. facilities abroad. The

budget proposes an increase to the State Department’s operating budget to ensure

protection of embassies and other facilities, and the valuable employees who work

there. The budget also includes a request for $3 billion in advance appropriations

for a multi-year security construction program.

The 2000 Budget saves the surplus until we fix Social Security first

The President’s FY 2000 budget is fully paid for, in compliance with the discretionary caps and the pay-as-you-go budget rules. The budget allows for appropriations for important domestic and national security priorities by limiting other discretionary spending and achieving mandatory savings. Offsets to discretionary

spending include the President’s tobacco policy (which would reimburse the Federal

Government for tobacco-related discretionary health care costs), FAA user fees,

health care savings, Superfund receipts, student loan savings and the recall of additional Federal fund reserves at lending guaranty agencies, and reform of the existing harbor maintenance excise tax. With the use of these offsets, in keeping with

longstanding budget practice, the 2000 budget complies with the discretionary

spending caps.

The budget provides targeted tax reductions, financed by the elimination of tax

loopholes, and inefficient or obsolete tax subsidies. Important tax cuts and incentives, in addition to the President’s USA retirement savings program, include the

tax credit for long-term care needs, the public school construction and modernization

bonds, the expansion of the child and dependent care tax credit, the new Better

America Bonds, extension of the R&E tax credit, the work opportunity tax credit,

the welfare-to-work tax credit, and the tax incentives for reductions of carbon emissions that cause global warming. Important mandatory initiatives include child care,

the Medicare buy-in, disability and cancer clinical trials programs, and extension of

health-care programs to immigrants. Taking all of these policy steps together, the

budget complies with the pay-as-you-go rules, and the tax cuts and mandatory initiatives are fully paid for.

We need adequate resources for a strong defense and critical domestic priorities

For future years, the budget includes the discretionary resources contemplated as

a part of the plan for Social Security reform. While these funds will only be available if Social Security reform is enacted, the Administration’s policy is categorically

defined including those resources. Social Security reform is one of the President’s

highest priorities for this year and we must work on a bipartisan basis to accomplish this important goal. The comprehensive framework for allocating the surplus

will also provide these critical discretionary resources.

The President believes that his discretionary priorities are important to economic

growth, and to the Nation’s well being and quality of life. Some have disagreed, and

have argued that Federal spending in general is too high. This debate requires some

perspective.

First, and perhaps most fundamentally, consider the record. Over the years 1980-

98, Federal spending averaged 21.9 percent of GDP. But Federal receipts averaged

only 18.5 percent of GDP. Thus, the Federal budget averaged a deficit of about 3.4

percent of GDP. When this Administration set out to cut the budget deficit that we

inherited, our original plan called for roughly equal spending cuts and revenue increases (with spending cuts in fact slightly larger). While the results of this plan

have been far beyond what we ourselves anticipated with the deficit falling by more

than twice as much as our original estimates they did maintain the balance between

spending cuts and revenue increases.

In balancing the budget, this Administration has controlled Federal spending well

beyond the record of its predecessors. As a percentage of GDP, spending in every

year for which President Clinton submitted a budget has been lower than in any

year of the two preceding Administrations. In every budget year from 1994 through
23

1998, Federal spending as a percentage of GDP fell. Spending as a percentage of

GDP in 1998, at 19.7 percent, was the lowest in almost a quarter century. Some argue that ‘‘Federal spending is still going up.’’ In the simplest terms—total dollars with no discounting for inflation, no allowance for the growth of the economy, and no allowance for the growth of the population government serves—that

is true. But even in this format, the analysis tells a great deal about the record of

Federal spending under this Administration. From 1993 through 1998, 31 percent of the simple dollar increase in Federal out- lays came because more elderly people retired on Social Security benefits, and prior

retirees received cost-of-living increases; 26 percent arose because of additional

beneficiaries and higher costs under Medicare; 18 percent arose because, even with

a rapidly declining budget deficit and by 1998, a budget surplus there was more

debt to service, and so net interest costs went up; and 10 percent came from increased costs under Medicaid, more than two-thirds of which went for the expenses

of the indigent elderly, blind, disabled, and mentally retarded, many of those in

long-term care. Thus, there has been almost no spending growth in programs other than Social Security, Medicare, Medicaid, and net interest. Spending of the entire remainder of

the Federal Government over 1993 to 1998 shrank by 5.4 percent in inflation-adjusted dollars, and fell from 11.5 percent to 8.8 percent of the Nation’s GDP. This shrinking of core government operations cannot go on forever if government

is to accomplish the missions assigned to it. We all take for granted the obligation

to maintain critical core functions like the FAA, the FBI, and the administration

of Medicare. As we consider how to budget in this era of surpluses, we must consider carefully the resources available for these 1often-anonymous functions that the

Nation has a right to expect its government to perform well.

A key element in the Administration’s ability to expand strategic investments,

while balancing the budget, is the reinvention of government doing more with less.

Efforts led by Vice President Gore’s National Partnership for Reinvention have

streamlined government, reduced its workforce, and focused on performance to improve operations and delivery of service. And these efforts, by reducing the cost of

government operations, have improved the bottom line and contributed to our strong

economy.

Since 1993, the Administration, working with Congress, has evaluated and eliminated hundreds of unnecessary programs and projects. The Administration has cut

the size of the Federal civilian work force by more than 365,000 people, creating

the smallest work force in 35 years and, as a share of total civilian employment,

the smallest since 1931.

The Administration, however, is working to create not just a smaller Government,

but a better one a Government that best provides services and benefits to its ultimate customers, the American people. It has not just cut the Federal work force,

it has streamlined layers of bureaucracy. It has not just reorganized headquarters

and field offices, it has ensured that those closest to the customers can best serve

them.

For 2000, this Administration once again is turning its efforts to the next stage

of ‘‘reinventing’’ the Federal Government. It plans to dramatically overhaul 32 Federal agencies to improve performance in key services, such as expediting student

loan processing and speeding aid to disaster victims. It also plans to tackle critical

challenges, such as ensuring that Government computers can process the year 2000

date change, and making more Government services available electronically.

Under the 1993 Government Performance and Results Act, Cabinet departments

and agencies have prepared individual performance plans that they will send to

Congress with the performance goals they plan to meet in 2000. These plans provided the basis for the second Government-wide Performance Plan which is contained in this year’s Budget. For the first time in 2000, agencies will submit to the

President and Congress annual reports for 1999 that compare actual and target performance levels and explain any difference between them.

We have an historic opportunity for long-term prosperity if we rise to the moment

There is much to be proud of in America today. By balancing the budget, we have

not just put our fiscal house in order; we have left behind an era in which the budget deficit, as the President said recently, ‘‘came to symbolize what was amiss with

the way we were dealing with changes in the world.’’ Today we have risen to the

challenge of change by preparing our people through education and training to compete in the global economy, by funding the research that will lead to the technological tools of the next generation, by helping working parents balance the twin demands of work and family, and by providing investment to our distressed communities to bridge the opportunity gap.
24

If the deficit once loomed over us as a symbol of what was wrong, our balanced

budget is proof that we can set things right. Not only do we have well-deserved confidence, we have hard-earned resources with which to enter the next century.

As the President said, what we do now after having balanced the budget will

shape the character of the next century. We can build upon our newfound firm economic foundation; or we can squander it.

The President has brought the debate right to the point: What should we do with

the surplus? Or to put it another way: If we were to look back fifteen years from

now, or at the end of the next century what would we want to be able to say that

we had accomplished with this opportunity?

The President wants to leave a legacy of building for the future: saving Social Security and Medicare; encouraging Americans to save for their own futures, build

wealth, and prepare for retirement; investing in education; ensuring our National

security; and making other key investments.

There is no more pressing issue facing us as a nation than the need to guarantee

that Social Security will be there for generations to come. And there is no better

time to act than now while the system is still strong. This is truly an exceptional

moment in America the economy is prosperous, the budget is in balance, and the

President’s commitment to national dialogue has created conditions for constructive

action. We must seize this moment.

Chairman KASICH. Mr. Lew, let me—thank you for your testimony—let me just get in just two quick areas because there are

members that have questions, and I don’t want to—I had a chance

to make a long opening statement. Alan Greenspan, when he was

asked about the board that you want to create investing in the

markets—first of all, the notion that we can use the capital markets to be able to solve a large portion of the problem for the baby

boomers, I believe is right on target. The question is, of course, who

gets to control it? Do we have a board of smart people or do we

just let—you know, we call smart people—I know I could never get

appointed to a board like that—or do we let individuals be able to

manage their own retirement? I tend to think, Jack, that as much

as I like you that you worry about your retirement a lot more than

I worry about your retirement, number one, and so I think you

ought to have the maximum control to invest your payroll taxes

rather than I getting on a board and investing your money for your

retirement, because I think you care about it more than I do. It is

kind of like what Federal employees get to do. We don’t have any

smart persons board that invests the Federal employees’ money; we

invest it ourselves, and I think everyday Americans are just as

smart as Federal employees when it comes to planning for their

own retirement. But Greenspan said in the notion of having a political board investing in the market, he said, ‘‘Even with Herculean

efforts, right, I doubt it would be feasible to insulate over the long

run the trust funds from political pressures, direct and indirect to

allocate capital to less than its most productive use.’’ In other

words, this board would be subjected to political pressures, and so

somebody would be making—some board would be making a political decision about our retirement when we don’t get the return we

ought to get because they are considering political pressures of political concerns. Wayne Angel, Bear-Stearns, warned that the proposal ‘‘enlarges the role of government dictating to the private

economy to a degree that many of us would find unacceptable.’’

Jack, what is wrong with the notion that individuals, you and

me, should have control over our payroll taxes to be able to direct

those payroll taxes into investment opportunities that provides for

our retirement? Why do we need to give this opportunity to some
25

board who get appointed by a President? What is the thinking

there?

Mr. LEW. Mr. Chairman, I hope we agree more than we disagree,

and we begin with the notion that Social Security is the foundation

for retirement and that individuals should be guaranteed benefits

as they are today. They shouldn’t be subject to the risks that if

market were to somehow fall the day they retire that they would

be penalized for the rest of their retirement, but there should be

that foundation where we have a shared societal——

Chairman KASICH. Everybody agrees on that.

Mr. LEW [continuing]. Everyone agrees on that. We think that investing the Social Security fund to a very modest extent in equities

is a good idea. We think it gives the Social Security fund the upside potential that all private pension plans and State and local

government pension plans have today. What we have suggested—

and we took very seriously the considerations that Chairman

Greenspan discussed with you—is that it be a truly independent

board that is insulated from political pressure.

We suggested that it should not be picking and choosing. We do

not want any branch of government picking and choosing what equities to invest in. We want to have a broad market basket of investments with a little bit of everything, where there is an independent board, private managers, the same people who manage

money market funds, putting these assets into literally the entire

stock market. That means that we will not be picking and choosing;

we won’t be making the kinds of markets decisions that we agree

the government should not make.

The risk that Chairman Greenspan has pointed out is one that

I think we do have to take seriously. The plan we have put forward

we believe meets the criteria that he set out. The question is would

we stick to our guns 5 years, 10 years, 15 years from now to resist

the temptation to change the plan? I have confidence that the same

way we have left the Federal Reserve Board as independent as it

is because that is the right thing to do, we would leave this independent board independent for its entire life. That would be the

right thing to do, and that is what we are proposing.

As far as individual choice goes, the Universal Savings Accounts

give individuals the ability to make decisions on their own retirement. We wouldn’t be telling individuals how to invest that money.

They would have choices. We need to work through the administrative detail, because there is a little bit of a tradeoff. Total free

choice has very high administrative costs. In our Federal retirement plan, we have modified choice. We have limited options that

dramatically reduce the administrative costs. What we hope to

work through as we work on the Universal Savings Account is a

way to give individuals choice with the lowest possible administrative costs.

Chairman KASICH. Right, well, why wouldn’t individuals be able

to have the same limited choice, nevertheless choice, to direct their

own money? Why should Federal employees have that right, but

yet I don’t have that right if I am not in the Federal Government?

Mr. LEW. What we are proposing for the Universal Savings Accounts——
26

Chairman KASICH. I am talking about—no, I am talking about

for the payroll taxes.

Mr. LEW [continuing]. Well, the problem with the payroll tax

being handled that way is that markets go up and markets go

down. They don’t always do it at times that are convenient for an

individual person’s retirement. If it is a small part of the total Social Security trust fund, we can handle those kinds of fluctuations

in a way that an individual could not handle it. Our concern is if

you take out an annuity on a day when the stock market went

down 10 percent, you are losing 10 percent of the value of your savings for the rest of your retirement. That is something where if you

waited a month, if you waited a week, certainly, if you waited long

enough it would rebound. And if we share those risks, then we are

protecting individuals from having the bedrock of their retirement,

their Social Security benefit, fluctuate.

Chairman KASICH. But an investment made by a board is subjected to the same changes in the economy as if I am controlling

it. In other words, a Federal employee has that option. They get

to an invest in a series of risk managed accounts, and what you

are saying is—and the other thing is, of course, we are not talking

about people putting their money in an annuity tomorrow and taking it out the next day. We all know that the power of investing

in the American economy is that over a significant period of time,

over decades, the economy is going to return you about 6, 7, or 8

percent as compared to a government bond. So, we are not talking

about in and out.

But let me just ask you this, Jack, to get to the bottom line: Is

there any way that this administration over the next 2 years would

permit the individual to be able to direct their—you know, the 2

percent of payroll—the way that they see fit in a government-approved account without this board? Is there any way that we could

reach agreement on that or do you think that that is impossible?

Mr. LEW. Well, we have made very clear that keeping the current

payroll tax to fund the current benefit system is key. We think that

it would be risky to do anything other than that, but we have

opened the discussion on giving the individuals the choice on how

to invest for their own retirement with the Universal Savings Accounts.

Chairman KASICH. Right, but, in other words, the notion that we

take 2 percent of payroll and allow the everyday American to be

able to direct it in some board-approved accounts like Federal employees do, we cannot reach agreement on that in this Congress,

is that correct? This is a very important point.

Mr. LEW. It is an important point, and what I want to be very

clear about is that we are very committed to the current structure

of a guaranteed benefit.

Chairman KASICH. OK, the answer is no.

Mr. LEW. And the guaranteed benefit sounds to me perhaps to

be incompatible with what you are suggesting. I would like to look

at a specific proposal before giving you a clear answer.

Chairman KASICH. Well, you know specifically what we are talking about, the Feldstein proposal. I mean, any one of them, Domenici; any of them, I mean, where you get 2 percent of payroll, and
27

you get to direct it. You would not want the individuals to be able

to do that, is that correct?

Mr. LEW. A lot of these proposals have had many lives, and the

reason I am reluctant to give you a blanket answer is that I don’t

know exactly which one you are referring to. To the extent that

some of these proposals spend the surplus to give these options and

don’t take the money out of the current payroll tax, it may be more

like our Universal Savings Account and it may be a tax cut.

Chairman KASICH. No, we are talking about taking it out of the

current payroll.

Mr. LEW. And I think you understand our view on that.

Chairman KASICH. That is what I was afraid of, the answer

would be no, so that all these people walking around saying, ‘‘I

think we can get the administration to go along with an agreement

that individuals ought to be directing some of their payroll taxes’’

isn’t going to happen, and I think we need to know that, because

that then tells us how we are going to look at Social Security and

how we are going to look at other parts of the surplus.

Mr. SPRATT. Mr. Chairman, they are proposing exactly what you

yourself were proposing last year.

Chairman KASICH. What you have to understand, Mr. Spratt, is

that is a weigh station. What I suggested is if can’t go to 2 percent

of payroll because there is paranoia about the fact that everyday

Americans can’t figure out how to invest their own payroll taxes,

then what I would like to do instead of that is to give some of this

surplus to individuals to put it in an account above and beyond Social Security so they can realize what gains they can make through

market-oriented investments. But that isn’t my solution. My solution is that 2 percent to 3 percent of payroll was that we can direct

in government-approved accounts that can give us a growth of 7 or

8 percent that can get us out of this problem. So, I am just looking

for an interim step, something that we can all agree upon that can

use the magic of the American economy to be able to get us into

a better position.

One last question, Mr. Lew, I know that the President in his

speech in Buffalo—the Washington Post, one of my favorite newspapers—and we have got one of their great reporters here today—

has quoted the President as saying of the surplus ‘‘we can give all

back to you and hope you spend it right. The conclusion being that

we can’t take a chance on that; therefore, we have got to have all

these targeted tax programs, because if we give it to you, you

might not spend it the way we want you to spend it.’’ Doesn’t it

make sense to give people broad-based tax cuts and allow them to

direct it toward what their needs are rather than to have all the

targeted tax cuts so that we force people to go through a maze in

order to get their money once they come out the other side?

Mr. LEW. Mr. Chairman, we think there is a very clear choice.

We think that we have gotten a fair amount of bipartisan agreement that putting 62 percent of the surplus aside for Social Security is a good idea. We may have differences to what it means to

put 62 percent of the surplus aside, but I think we have a general

agreement that that is the first step.

When you go beyond that, we think the next step is Medicare.

We have current commitments to Medicare and over the next 10
28

years we will put $350 billion aside of the surplus to keep the commitments we already have. On the question of putting that money

into a tax cut, I think one has to ask about the alternative. If there

is an alternative plan that would extend the Medicare trust fund

to 2020 that could reach bipartisan consensus, we would like to see

it. We think that it is very difficult to cut benefits, it is very difficult to reduce payments to providers, and it is very difficult to

come up with an alternative plan for Medicare that is attractive

and meets with quick bipartisan approval.

So, the choice is not just a choice between a tax cut and nothing,

it is a choice between a tax cut and putting the money aside to

meet our commitments to Medicare. We think that is the right

choice. It is a debate that we understand we are going to be having, and it will be a heated debate. We look forward to the debate

because we think that is the right kind of debate to have when we

have a surplus. Our view is that we have to be able to pay the bills

for the commitments that we have today before we undertake new

commitments——

Chairman KASICH. Yes, I am not talking about Medicare; I am

talking about your targeted tax cuts as opposed to the notion that

they ought to be broad-based and let people make their own

choices.

Mr. LEW [continuing]. As far as the choice between the Universal

Savings Accounts and an across-the-board tax cut, I think that that

is a debate that we should have. We think that the right way to

get tax relief is to encourage savings, to help people build the important leg on the retirement stool—personal savings. They now

get Social Security. Some get a pension. They should also have savings. The alternative could be an across-the-board tax cut. We

think that the distribution of a Universal Savings Account would

help working people put money aside for their own retirement. We

think that the benefits of an across-the-board tax cut would tend

to go to higher income, wealthier people. This is the kind of debate

that we could have reasonable disagreements on. We think those

are choices that we should make. Our view is that Universal Savings Accounts are the right way to give tax relief, and we would

welcome within the framework where 12 percent is allocated to a

tax cut having that debate.

Chairman KASICH. Thank you, Director. Mr. Spratt.

Mr. SPRATT. Jack, let me just read from the record what Alan

Greenspan said: ‘‘The President’s approach to Social Security reform is a major step in the right direction, because it would ensure

that the large surpluses projected over the next 15 years would be

a positive contribution to national savings.’’ I think it would be useful if you picked up where you left off in your testimony and took

us step by step through how you propose to take the trust fund for

Social Security from around $800 billion today to eventually over

$6 trillion.

Mr. LEW. I would be happy to, Mr. Spratt.

Chairman KASICH. Even though the natural accumulation is

probably half that amount. How do you do that and at the same

time that you build up the assets in the trust fund how you would

buy down the national debt from $3.7 trillion held by the public to

$1.3 trillion?
29

Mr. LEW. Mr. Spratt, I think that we have to begin by reminding

ourselves what happens in the trust fund if we do nothing. If we

do nothing over the next 15 years, the trust funds will accumulate

$2.7 trillion in additional assets. Those assets sit in the trust fund

in the form of Treasury bonds which have the full faith and credit

backing of the Federal Government just like a series-E bond or a

bond bought by a corporation or a bank does. What we are proposing is to put more assets into the trust fund and have the increase

go from $2.7 trillion to $5.5 trillion, doubling the additional assets

in the trust fund over the next 15 years. And, as you pointed out,

there is already almost a trillion dollars of assets in the fund. It

would bring the total to over $7 trillion.

The question really is, what happens when those bonds come

due? How do we pay the bills? When we came in in 1993, looking

at the year 2012, when the Social Security Trust Fund was going

to start to redeem the bonds to pay benefits, everyone was worried.

They were worried because we were looking at a deficit in 2012,

not at a surplus. The question was: if you can’t pay your bills in

2012, how are you going to pay back the bonds? Well, we’re not

looking at a deficit in 2012 anymore; we’re looking at a surplus.

And because we have a surplus, if we lock in the surplus, we will

be able to pay those bills in 2012 through 2055. And the point I

made earlier about interest—perhaps a useful way to think about

it is that a dollar of interest paid on a Treasury Bond that’s held

by a bank, or a private investor, is a dollar that goes from the

Treasury outside. A dollar of interest paid to the Social Security

Trust Fund is passed along in a benefit. So the dollar of interest

has a very different end if you’re paying off debt held by the public

than if you’re paying off debt held by the Social Security Trust

Fund in the form of assets. We’re saying that those dollars should

be preserved so that we can pay our Social Security benefits without having to make drastic reductions in benefits, without needing

a big tax increase.

We think it’s prudent. We think it’s only common sense. Unfortunately, government accounting is complicated, so it does take a little while to explain and to understand. But we think it is the most

prudent way to carry forward the fiscal policy that’s brought us the

remarkable results that we’re now enjoying.

Mr. SPRATT. What happens today with payroll taxes received by

the Treasury is that the Treasury ends up holding the cash and the

Social Security Trustees end up holding a special government

bond?

Mr. LEW. That’s correct.

Mr. SPRATT. What you’re proposing is to take the cash that the

Treasury holds and buy outstanding debt with it, and, in effect,

transfer that debt in addition to the Treasury special bonds so that

you will augment the Trust Fund twice?

Mr. LEW. That’s correct. And instead of having that money go out

in the form of either spending or a tax cut, let it build up.

Mr. SPRATT. Then, we build up to nearly $7 trillion; that includes

the earnings on the money invested in the market and the earnings

booked to the Treasury Bonds, and around 2020 we need to start

drawing down that debt. At that point in time, instead of having

several trillion dollars in outstanding debt held by the public, the
30

Treasury will owe maybe $1.3 trillion, according to your projections. Debt service will have fallen from 13 percent of our budget

to 3 percent of our budget, and the Federal Government will be in

far better fiscal condition to redeem these bonds so that the Social

Security Trustees can meet the obligations of the beneficiary. Is

that the scheme?

Mr. LEW. That is exactly right. And the choice we make today

in terms of writing down the public debt is the key. If we let the

public debt go back up, then our interest payments will go back,

and we will lose the benefits that we’ve now projected for the future. We need to lock in what we are calling a virtuous cycle; it

gives us the compounding effect of reducing debt to replace the vicious cycle that was eating us alive from 1981 to 1993.

Mr. SPRATT. Now, these USA Accounts are not strictly related to

Social Security. They are supplementary to Social Security. The

would be paid for, at least in part, by voluntary contributions and

by government inducements that particularly moderate income citizens would enjoy. You have not yet defined all of the details, but

don’t you anticipate allowing each individual holder of one of these

accounts at least the choices that Federal employees now have—either put it in a bond fund or a government bond fund or a corporate bond fund or a stock market index fund?

Mr. LEW. Yes, Mr. Spratt. First of all, it’s independent from Social Security, and that’s a point we really want to underscore. We

don’t think it should be mingled with Social Security.

We’re working on the details and we’re very concerned that as

we define the details, we have as many good consequences as possible. We want to encourage current pension plans to continue to

provide pensions. We want to encourage individuals who are currently saving to add to their savings, not just replace their savings.

And we want to give them options, but we want to make sure we

balance unlimited options with the cost of unlimited options.

One concern we have is that administrative costs can grow if

there’s unlimited option. The current Federal system gives us, all

of us who are putting our retirement savings into it, a limited

range of options, where we can put our retirement savings into a

bond fund, into an equity fund, or into a government bond fund.

We probably will want more options than that.

One of the things we hope to work out as we go through this legislative process is thinking through the consequences and how to

draw the line in the right place. I don’t think it’s magic. I don’t

thing three options is magic. Unlimited options equally is not

magic. Somewhere in the middle is the right balance, and I think

we need to work together to try to define it so that individuals get

the benefit of having the maximum return on their dollar go to

their retirement and not go toward administrative expenses.

Mr. SPRATT. Thank you very much. One last question for clarification on another subject. Some of the press coverage of the budget yesterday and some of the criticism made of it by our colleagues

across the aisle has indicated that there are significant tax increases in this particular budget, which seems odd at a time when

we are looking forward to significant surpluses down the road.

As I look through the budget, I see a redistribution of tax benefits, from largely corporate taxpayers, who are enjoying what you
31

call unwarranted tax benefits, over to individuals such as mothers

and fathers who have children, with a dependent care day care

credit; and mothers and fathers who have parents who are elderly

and homebound—there will be a credit for them too—a thousand

dollar credit for their long-term care requirements. It’s a redistribution there of about $33 billion.

The New York Times yesterday included the recoupment from

the tobacco recovery—a recoupment of what the States will be getting—$19 billion as a tax increase, but that’s not a tax increase.

You’ve got the reinstatement of a Superfund tax, which is just the

renewal of the tax. You do have a $5 billion item for recasting the

way we charge for using the airlines and the airways and the airports. But other than that—and, of course, your tobacco tax, which

may or may not be a starter. I’ve got my doubt that it will go anywhere, but in any event, other than the tobacco tax is there any

significant tax increase in this particular budget?

Mr. LEW. Mr. Spratt, I think you’ve got it exactly right. We have

proposed a variety of revenue raising provisions to pay for a variety

of tax cuts. We think that closing loopholes for sham transactions

is something that we can agree is good policy. There are always

people who benefit from those loopholes who oppose it, but that’s

the kind of normal battle we have to try to make the tax code work

right.

What we’ve proposed in the form of tax cuts, we think are very

important benefits—whether it’s for long-term care or for building

schools in our inner cities, or for providing for environmental bonds

to be issued. These are all important investments that we think

warrant the difficult choices in terms of closing loopholes.

Now with regard to the tobacco tax—we do have a tobacco policy

in our budget. I know that it is a policy that not all of us agree

on, but we feel very strongly that, first and foremost, it’s good public health policy.

Last year, the President put forward a tobacco policy that was

designed to increase the price of smoking to reduce teen smoking.

Every day, 3,000 kids start smoking. Half of them develop tobaccorelated illness. Our goal is to raise the price so that we will reduce

in half the number of kids who start smoking every day.

And we are not imposing a burden in a vacuum here. Today, tobacco-related illness is imposing a burden on the Federal Government. We spend $8 billion a year in discretionary programs—the

veterans’ health program, the Department of Defense health programs, our own Federal employee health program, and a bunch of

other smaller programs—to treat tobacco-related illness.

We would get $8 billion in excise taxes from the tobacco proposal,

and it would just pay us back. The tobacco companies would pay

us back for what we’re spending as a Federal Government on discretionary spending for tobacco-related illness. We think it’s only

fair that that burden should be borne through the tobacco tax and

not by the general taxpayer; that it shouldn’t go to corporate profits, and it shouldn’t go toward the benefit of the companies that are

selling cigarettes.

The policy is controversial. We understand that, and we readily

acknowledge in the budget that this makes it easier for us to fund

other health priorities and other important programs. But what
32

we’re doing is we’re getting back the money that we’re now spending on tobacco-related illness, which we think is only fair.

Mr. SPRATT. Thank you very much.

Mr. CHAMBLISS. Mr. Lew, I thank you for being here this morning. As a new member of this committee, I look forward to working

with you as we go through this process and hopefully reach an accord on this budget. I think it’s interesting though that you say

that there are no new taxes other than a tobacco tax when, in fact,

as I look at your numbers, you are looking at increased fees for

Coast Guard navigational services, $701 million; fees on international travelers, $1.6 billion; Medicare processing fee, $495 million, which doctors will pay when they process a Medicare claim,

which means our Medicare patients will pay; FAA user fees, $7.1

billion; Federal Railroad Administration, $440 million; FDIC, $458

million; FCC fee, $1 billion, and on and on and on. That’s about

$11 billion over 5 years. If that’s not a new tax, I don’t know what

it is.

I want to talk to you about a couple of different areas. On the

first one, you know agriculture has always been the backbone of

the economy of this country, and ag folks all across this country are

in trouble right now. Nineteen ninety-eight was truly a disastrous

year.

We need to make some solid, long-term changes in agriculture

policy. The best way that we can do that, and certainly I think the

President agrees with us based upon what he said in his State of

Union Address, is to come up with a good, solid crop insurance program. In order to do that, we’ve got to basically throw out what

we’ve got in place right now and start over with a new program.

The President said in his State of the Union that he wanted real

crop insurance reform this year. Unfortunately, when I looked at

this budget, I see absolutely zero dollars in the President’s budget

to be applied to crop insurance reform. Would you address that

question, and tell me exactly how you plan to reform crop insurance and not pay for it?

Mr. LEW. Congressman, the budget, as the State of the Union

does, acknowledges the very important need to revisit our crop insurance program and to reform crop insurance this year.

As you noted in your question, changing the current system is

part of what one will have to do to create a new crop insurance system. Our experience in looking at this is that it is necessary to engage in a bipartisan discussion. We propose to engage in that discussion over the year, to make some of those tough choices, which

are tradeoffs within the agriculture community and between different priorities of the agriculture community. The budget is a

tight one. The fees that you described are the kinds of fees that

we’ve been proposing for several years now in order to enable us

to make the important investments that we need to make in areas

like agriculture. The fees we’ve proposed in agriculture haven’t all

been accepted, which does make it difficult to provide the resources

for new programs. I think we need to work together. We need to

look at what our options are, and we need to make some touch

choices. It’s clear, the President made very clear in the State of the

Union, and we made very clear last year in our response to the agricultural crisis last year, that there was a need for action. But
33

these are tough choices, and they are choices that I think really are

better made in a process where we’re working together than when

we’re just putting competing plans out.

Mr. CHAMBLISS. Well, I still don’t understand why you’re not

willing to fund crop insurance reform, but, be that as it may, it’s

interesting that one of the user fees that you’re talking about is a

fee that’s going to be put on livestock processors. Now, when Mr.

Nussle’s hog farmers take their livestock to market, what’s going

to happen is that his farmers are the ones who are going to wind

up paying that livestock processing fee. So, instead of helping agriculture in that respect, you are going to be reducing income to

farmers across this country by the increase in the livestock processing fee.

The second area that I want to cover with you is in the area of

national defense. I think we all agree that we’ve not been spending

enough money in this area, and even the President in the State of

the Union said that he wanted to spend additional monies in defense. He has come up with a figure of $12 billion, which, frankly,

is a lot of smoke and mirrors—about $8 billion of that I think you

would agree is just a redirection of current funds and a change in

projection for inflation. So, we’re really talking around $4 billion.

Of that $4 billion, if we’re talking about a pay increase of 4.4 percent, we’re looking at roughly two and a half billion dollars. If you

pay for Iraq and Bosnia out of that, you’re talking about another

$3 billion, so you’re already over that $4 billion in new money that

the President is willing to put into defense.

Now, when the service chiefs testified before the Armed Services

Committee they said that in order to bring every service branch up

to par, not put us where they’d like to be, but to bring us up to

par, it would take seventeen and a half billion dollars this year, not

including the two and half billion for the pay increase. Why in the

world, if the President wants to make a real commitment to defense, doesn’t he listen to his service chiefs, who say we need $20

billion just to bring our services up to par?

Mr. LEW. Congressman, the President has listened to our service

chiefs. We’ve been meeting regularly over the last year. From the

moment that they identified a growing readiness problem, we took

it very seriously. The President took it very seriously. He met with

the service chiefs back in September and listened to what was really a very different kind of message than he had gotten before. It

was a message that said things were changing. They were changing quickly. And it really required a response.

We worked very hard from September until we put this budget

out first to add resources in the appropriations bill last fall to get

a head start, and then to put together a plan that would take care

of the highest priorities and all of the immediate needs that they

identified.

Yesterday, Secretary Cohen testified at the Armed Services Committee at length on this issue, and I won’t try to repeat all the details he went through. But I think it’s fair to say that in his testimony and General Shelton’s testimony, they agreed that what

we’ve put forward in this budget is the program that we need to

make sure that we take care of the immediate problems in terms

of retention of personnel and in terms of readiness.
34

With regard to the arithmetic on the increase, I would beg to differ with your analysis of it. The inflation savings are very real savings. In a normal year, when the Defense Department sees inflation coming down, the funds that they are going to use go down

because they are not spending a total number of dollars. They are

buying a certain mix of goods and services. And if the cost of buying a helicopter goes down, then that money would not stay in the

Defense Department budget in an ordinary year. By leaving that

money in the Defense Department budget, we are permitting them

to buy more—to buy more helicopters, to give a bigger pay raise.

It’s very real money.

In the out years, there is an element of projection here, and, as

Secretary Cohen testified yesterday, we think the projection is a

fair one, a reasonable one, and it reflects a commitment to policy.

But we will follow it on a year-by-year basis. We’re committing

here to a program, a policy level, and if the inflation estimate for

the future changes, we will have to reconsider the total resources

required.

As far as the composition of our increase goes, a quarter of the

increase in 2000 goes to personnel. That’s to pay raises and to retirement benefits for the most part. The rest of the 75 percent really goes into readiness in the first year—spare parts, things like

that. The procurement budget builds up as we go through the 5-

year period. It’s a very aggressive program. It’s the largest defense

increase in decades. We welcome the debate about the composition

of it. We have gone through a process with the Pentagon and with

the chiefs that has been a very, very important in terms of making

sure that we give the best armed forces in the world the resources

they need to remain the best armed forces in the world going into

the next century.

Chairman KASICH. In the order in which people come in is how

we recognize them, and the gentleman from Nashville is recognized.

Mr. CLEMENT. Thank you, Mr. Chairman.

Jack, good to have you here today, and I want to say to you on

behalf of the American people, I think everyone appreciates very

much the Clinton administration being bold and courageous in putting a lot of new ideas and new initiatives on the table. I just

hope—and I really say this in all fairness to all the Republicans

and the Democrats—I think we should give it every consideration—

those ideas and new initiatives. And let us not have it dead on arrival simply because President Clinton proposed these new ideas,

because people are concerned about the future of Social Security,

the future of Medicare; about new incentives on savings, a stronger

national defense, reducing the debt, education—all these are critically important.

Now I had the opportunity last week to speak with Chairman

Greenspan, and I asked him about the tax cuts. And I know there

are many that want tax cuts, substantial tax cuts. And I’ve sure

voted for them in the past, and I am sure I’ll vote for them in the

future.

But I asked him about the tax cuts, about the timing of it, about

right now. He responded to me, ‘‘Congressman, I am a Republican.

Republicans like tax cuts. But our forecasts haven’t been real good
35

in the past. As a matter of fact, we should be still running hundred

billion plus deficits rather than surpluses. I think we should pile

those surpluses up for the future.’’ You respond?

Mr. LEW. Congressman, when Chairman Greenspan testified, we

actually were very heartened by his comments, because we viewed

them as being really an endorsement of the basic approach that

we’ve taken, which is, buy down the debt first. The best thing that

we could do would be to buy down the debt and to be able to pay

the bills for Social Security and Medicare that we’re already going

to owe for benefits that people have already earned.

Now, I think when he was asked the question as between tax

cuts and spending increases, he gave the kind of answer that you

described. But he was very clear: the best thing to do would be to

buy down the debt.

By putting the money into Social Security and Medicare, we

think that that’s the best way to lock the surplus up, to lock it in

for a good future, for an economic future and budget future, that

we all will be proud in 15 years to look back and say we contributed to.

Mr. CLEMENT. Jack, last year we had some major wins for TVA,

and our Chairman of the TVA Caucus, Zack Wamp, and Van

Hilleary, who’s on this budget committee, too—but the fact is we’ve

been zeroed out, and a lot of us don’t understand why because if

you’re on the Ohio river system, the Mississippi river system, Colorado river system, Missouri river system, you get taxpayer dollars

for flood control and navigation. And, yet, here we’re in the Tennessee Valley Area, and we’re not going to get a penny. We rate

payers are going to have to pay that.

Now I know there’s a misconception that other parts of the country are subsidizing our power rates, but nothing could be further

from the truth. Why should we be zeroed out in the Tennessee Valley Area?

Mr. LEW. Congressman, last year when we addressed the question of the Tennessee Valley Authority in the Omnibus Budget bill,

there was a long-term policy decision made which we think gave

lasting benefits to the Tennessee Valley Authority, which made it

unnecessary to have a direct appropriation. There was a conversion

of debt that the TVA owes to the Federal Government that permits

the Tennessee Valley Authority to pay less interest because it

rolled over loans that were at a higher interest rate to be repaid

at a lower interest rate. If you look at the benefit over the period

of time, it year by year replaces the appropriation. And, in a sense,

it gave TVA benefit at least for the next 10 years, so that it

wouldn’t be subject to the year to year appropriations process. It

was not actually meant to be zeroing out the TVA; it was more of

a conversion of the form in which the assistance to the TVA is delivered.

Mr. CLEMENT. My last question pertains to Medicare, and I know

your proposal is transferring 15 percent of the unified surplus into

the Medicare Trust Fund. In order to further extend the life of the

Trust Fund, the budget includes additional cuts in Medicare payments amounting to $9.5 billion over 5 years. I don’t know about

the rest of the country, but in Tennessee, 38 of our 127 hospitals

lost money in 1997. It appears that 45 hospitals will lose money
36

in 1998. And the Balanced Budget Agreement of 1997 hasn’t even

been fully implemented yet. What is the reasoning behind these

cuts? Are they really necessary?

Mr. LEW. Congressman, the Medicare savings fall into two categories. A number of them are proposals that we’ve made in the

past to deal with some problems that we tend to generally call

fraud and abuse. They are to clamp down on overpayments and

things like that. I don’t think that’s the portion of our savings that

you are referring to. I think what you are referring to are the reductions in the provider payments, which are about half to twothirds of our saving.

Nationwide, hospital profit margins have been very high, even

after the Balanced Budget Agreement. We understand that there

are pockets in the country—some rural areas and others—where

that hasn’t been the case. We need to look at what the impact of

our proposals would be and to make sure that as we work through

the policy, we don’t have unintended consequences. It really was an

attempt to put savings in the program so that we don’t have Federal reimbursement resulting in higher profit margins than before

the BBA, but at the same time, to put resources back into

healthcare programs, to increase benefits so that people can buy

into Medicare between age 62 and 65, to make sure that HCFA has

the kind of reform and stable funding stream so that we can run

a good Medicare program into the next century.

We look forward to a debate on these issues. And I would underscore that it is separate from this proposal on the 15 percent of the

surplus. Regardless of what we do on the proposals for immediate

change in Medicare, we think it’s necessary to put the 15 percent

of the surplus in because if this is an indication of how difficult it

will be to make the program savings necessary to put $500 billion

back into Medicare, it means we better save the surplus, and we

better use the surplus to try and shore up the Trust Fund, because

we’re talking about the concerns raised with $9 billion of savings.

Imagine what the concerns would be if we have $500 billion of savings.

Mr. CLEMENT. Thank you, Mr. Chairman. Thank you, Jack.

Mr. LEW. You’re welcome.

Chairman KASICH. Mr. Hoekstra.

Mr. HOEKSTRA. Thank you, Mr. Chairman. Good morning. There

are a couple of areas I’d like to ask some questions in. In the State

of the Union speech, the President talked about the $15 billion that

the Federal Government invests in our public schools, and he also

talked about the need to support what works and to stop supporting what’s wasted.

In your budget proposal, have you outlined specific areas where

you believe we have been wasting Federal education dollars and

how we would reallocate those funds?

Mr. LEW. Congressman, the budget sets forth a general statement of policy. We will be sending forward an Elementary and Secondary Education Act legislative package that will be more detailed.

What we have tried to do is put together a package that would

encourage schools to end the process of social promotion. We put

a lot of money into after school and summer programs. We need
37

to create an alternative to the current cycle where there’s no choice

but to either leave the kid back or to have a social promotion, because they don’t have an option that helps them catch up and stay

in grade.

We’ve tried to put incentives in for schools to encourage the

kinds of performance and excellence that I think we all agree

should be universal in the schools. Sometimes our Federal programs help move things in the right direction. Sometimes they

don’t. We’ve put a package forward, and, as you know, the ESEA

proposals will come forward in much more detail very shortly.

Mr. HOEKSTRA. And that will include an analysis of the programs

and the types of approaches that have not worked in the past so

that we can better learn from those programs and influence what

we should be doing in the future?

Mr. LEW. Well, I think I’ve noted one of the major concerns we

have. We think social promotion has been a very big problem. We

think that the job of the schools is to make sure that we promote

kids and that they are able to perform at grade; and when they

graduate, they are able to go into the workforce and take jobs. I

don’t think we disagree on the goal. We may disagree on the mechanisms and that’s what we hope to work through in the process of

ESEA reauthorization.

Mr. HOEKSTRA. Well, that’s what I am trying to get at. I am wondering if you’ve taken a look at the entire Federal role. One of the

things that we are concerned about is the multitude of programs

and the number of different agencies that are dealing with the area

of education. I am wondering whether the administration has

taken a look at whether creating a number of new programs with

additional strings is the most effective way to improve education.

At other times, the administration has talked about more flexibility

for local schools and more discretion as to what they can do with

Federal dollars. I am just wondering as to the administration—

which way are you going to go—more programs with more strings

or fewer programs with more dollars and more flexibility back at

the local level?

Mr. LEW. Congressman, this year is a little different than other

years because of the reauthorization of the major education programs. And I think we will be proceeding both with the funding of

the initiatives that we have worked very hard on, from charter

schools to after school programs; and working on the basic programs, to make sure that the basic programs are reformed or

changed in a way to make the education dollars that we’ve put out

more effective.

I think the question of either/or isn’t the way we look at it. We

have a number of goals. We have specific goals that we accomplish

through these individual programs, and we have broader goals in

terms of the very large dollars that we’ve put out through the basic

education programs, which the school districts themselves mostly

control. And we’re going into that debate with the goal of preserving the independence of the local schools. This is a partnership.

This is not a case where the Federal Government comes in and

tells States, cities, and local school districts exactly how to run

their schools.
38

But it is fair, when so many billions of dollars of Federal money

are going into the schools, for us to ask some tough questions, and

for us to challenge the schools to do better in certain areas.

We hope to do this in a cooperative way. We don’t view this as

the Federal Government coming in and taking over. It’s a question

of getting the balance right.

Mr. HOEKSTRA. I think that is exactly right: getting the balance

right. And our experience would say that there are many at the

local level who believe we might be getting out of balance.

On a different front, have you included a projection of the level

of the gross Federal debt over the budget window in your budget

proposal. I mean, is the debt, the gross debt going to increase or

decrease?

Mr. LEW. We do have projections of both debt held by the public

and the gross debt. This gets into an area that is complicated, and

I apologize for using language that’s more technical than I like to.

But the debt subject to limit is a larger number than the debt held

by the public, because all of the dollars that are in the Social Security Trust Fund in the form of Treasury bonds are subject to limit.

The existing accounting rules are confusing because we save money

and we call it debt subject to limit.

The important measure for the purpose of the economy is the

debt held by the public. The question of whether or not the Federal

Government is crowding out private investment really has to do

with what’s happening to the debt held by the public. We will be

reducing the debt held by the public from 40 percent to 7 percent

of GDP over the next 15 years, which means we’re freeing up dollars for private investment and to lower interest rates. And we

think that is a very good thing for the economy.

Mr. HOEKSTRA. I am interested in the gross debt. I mean a debt

owed to Social Security is not necessarily a lot different than a debt

owed to the public. You and I may disagree on that, so the gross

debt does go up?

Mr. LEW. It does, but Congressman, the reason it is different is

that the benefits that Social Security owes—that’s the real debt.

We have that debt today. It’s not debt subject to limit. But it’s a

moral debt. It’s a promise that we’ve made, and I believe it’s a

promise we will keep.

When we put assets in the Trust Fund and the debt subject to

limit goes up, the only reason it’s going up is that we’re putting

money behind the promise to pay the benefits that people are already entitled to.

Mr. HOEKSTRA. But it’s still debt?

Mr. LEW. Yes, technically, those Treasury bonds are debt.

Mr. HOEKSTRA. This budget still has gross debt increasing during

the time frame of your budget proposal, is that correct?

Mr. LEW. It’s correct, but it’s increasing for a good reason, because we’re holding on to those assets.

Mr. HOEKSTRA. Good.

Mr. SMITH. Will the gentleman yield?

Mr. HOEKSTRA. Thank you. I’ll yield for a minute, yes.

Mr. SMITH. Just noting that I noticed CBO in their estimate

didn’t have an increase in total debt.
39

Chairman KASICH. A compassionate man like I am. The

gentlelady from Oregon is recognized for 5 minutes.

Ms. HOOLEY. Thank you, Mr. Chair.

Chairman KASICH. For 5 minutes and 15 seconds.

Ms. HOOLEY. Thank you, Mr. Lew, for your presentation.

I want to go back to Medicare. We’ve talked a lot about Social

Security. I mean, I’ve read a lot in the paper about it seems there’s

some agreement that we’re going to put 62 percent into Social Security. Medicare is a much more immediate problem, and where

we’re going to run out of money much quick in Medicare. And I,

too, am concerned about some of the cuts that are proposed in

there. I mean, again, I was talking to some of our hospital people

yesterday and some of the small hospitals because of the reduction

they are already facing in a 6-month period ended up being in serious trouble. So I am concerned about that.

But I am also concerned about what do we do if we don’t put this

15 percent into Medicare. What’s our next step if that doesn’t happen? Do we increase payroll taxes? Do we decrease benefits? What

are some of the alternatives without that 15 percent?

Mr. LEW. Congresswoman, that is the important question, because what we’re proposing today is a budget that has many

choices in it. When we say put the surplus aside for Medicare,

we’re looking at the alternatives. The alternatives are very large

increases in payroll taxes or very large reductions in benefits.

Ms. HOOLEY. Tell me what you mean by large increases? What

are we looking at?

Mr. LEW. Just the Medicare portion of the payroll tax, which is

currently 2.9 percent. It would have to be 3.4 percent starting in

fiscal year 2000. That means raising payroll taxes by .5 percent

just to provide the kind of additional resources that we’re talking

about here. That’s an 18 percent increase. We would be doing a bad

thing to the economy if we put that kind of a tax increase in place

right now. No one has proposed it, but if we don’t set the money

aside from the surplus, we have to be honest with ourselves about

the choices. The choices are those kinds of payroll tax increases or

benefit cuts or reductions to providers.

And, as I said to Congressman Clement, we understand that $9

billion of savings forces us to make tough decisions. It forces us to

ask questions about whether your healthcare providers are being

treated fairly or not, and we certainly do want to treat them fairly.

To come up with $500 billion would require choices that are just

enormously difficult. We saved $130 billion in the Balanced Budget

Agreement. This is much bigger than that. And we think before we

make any new commitments, whether it’s to a tax cut or to large

spending increases, we have to pay the bills that we owe. And

that’s why we put this plan forward.

Ms. HOOLEY. Thank you.

Chairman KASICH. But let me ask you a question. You can make

no programmatic changes in Medicare, none, if you don’t raise the

payroll taxes. You don’t reduce benefits. What you do is put a

bunch of bonds in and say you’ve extended the live of Medicare,

isn’t that correct?

Mr. LEW. Well, we have put more assets in the Trust Fund.

There’s only three ways to extend the life of the Trust Fund. You
40

can raise taxes, you can cut benefits, or you put more money. And

we are putting more money in. We think that’s the right thing to

do.

Chairman KASICH. You can put more money, but you put more

bonds in, which draws against the public. I mean you didn’t put

any money in there. You put the bonds in there. We have to honor

Social Security. But we didn’t put any money in there. That’s a

bookkeeping entry.

Mr. LEW. What we’re saying is that those bonds have first call

on Federal revenues, and that’s the right thing to do. It’s the right

thing.

Chairman KASICH. Right. But you’ve made absolutely no programmatic changes in Medicare at all that would control any of the

spending. You just say we’re going to have more bonds in here, and

so that can be drawn down on our kids. I mean——

Mr. LEW. Mr. Chairman, we agree that there’s a need for serious

programmatic reform. What the President said in the State of the

Union and what he will be saying today again is we need to start

by putting 15 percent of the surplus aside. We then need to go

through the process that the Breaux Commission is going through.

We will need to go through together to make the kinds of tough

choices. And as we make those tough choices, we need to find savings. We also need to look at some real problems in terms of the

benefit package. We need to have that kind of a discussion. But

this will only make it easier. Any alternative has the burden of

coming forward and answering the question, how would you extend

it for 10 years if you don’t save 15 percent of the surplus.

Chairman KASICH [continuing]. Right. But my only point is you

presume that there is an infinite drawing down on our paychecks.

And you have done nothing to make one single change in the Medicare program. You’re just saying I am going to put bonds in here

that our kids are going to pay, and we’re going to pay. And we got

all these bonds in there on Social Security that we’re going to pay

and we’re going to draw down on. I don’t know if the Democrats

understand this, but there is no guarantee we’re going to have

enough money to pay all these things down.

Mr. LEW. Mr. Chairman.

Chairman KASICH. But to say we’re going to put more IOUs in

an account, and that extends the life of the program. I mean that’s

what we’re talking about. We’re not talking about one single choice

that changes one crossed T or dotted I in the program. We’re just

saying there’s more obligations to Medicare. And I agree with you,

Jack, we’re going to have to get the point where this commission’s

going to have to come through. But to say that we got more bonds

in this fund, that should make us more all feel better is—I don’t

think that’s leveling with folks.

Mr. LEW. Mr. Chairman, the real choice is what we do with the

projected surpluses. If we, for example, have a large tax cut, that

large tax cut will reduce revenue in the future. We’re saying that

rather than reduce——

Chairman KASICH. Of course, now that’s a matter of opinion.

Mr. LEW [continuing]. Well, that’s what most economic analysis

shows: when you give a tax cut, you have less revenue.
41

Chairman KASICH. Well, that’s not what is shown on capital

gains. It’s actually generated a heck of a lot more revenue. In fact,

that’s one of the reasons why we’ve had the big spurt in Treasury

collections.

Mr. LEW. The choice that we’re suggesting is that rather than

have the revenue first be given back to a tax cut, we should put

the money aside so that the first call on the surplus is to pay these

bills.

Chairman KASICH. Right. Right.

Mr. LEW. And that is a choice. We understand there’s a choice.

It’s the kind of debate we should be having.

Chairman KASICH. It’s a first call, but it’s not the money. Show

me the money. I’ll recognize the gentleman from New Hampshire,

Mr. Sununu.

Mr. SUNUNU. Thank you very much, Mr. Chairman. Thank you

for being here, Mr. Lew. I appreciate your taking the time. I know

it’s not easy. You follow in distinguished footsteps. Mr. Raines, I

think always was very willing to enjoy the give and take and be

forthcoming with information, and I think you’ve done the same.

You were very candid about the user fees and the tax increases

that are part of this budget proposal. And you talked a little bit

about some of its targeted tax relief, the very narrow targeted tax

relief. The summary that I’ve seen—the total is for those taxes that

are increased—it’s about $82 billion in tax increases; about $26 billion in user fees over 5 years. I think the tobacco tax increase is

one of the bigger of the tax increases. What is the 5-year total of

the tobacco tax increase?

Mr. LEW. The 5-year total on the tobacco increase is about $33

billion.

Mr. SUNUNU. OK. So, $33 billion in tobacco——

Mr. LEW. Excuse me, $34.5 billion.

Mr. SUNUNU [continuing]. Thirty-five billion in tobacco tax increases is obviously a big chunk of the total tax increase. And the

ranking member of this committee doesn’t think that tax increase

is going to go anywhere. Now, I am sure the administration feels

very good about its ability to change minds, but I submit that when

the ranking member of the Budget Committee doesn’t think that

the biggest part of your tax increase proposal is going to go anywhere, then you might have problem moving this budget package

forward. What’s your reaction to that?

Mr. LEW. My reaction to that is really to go back to what the

purpose of the tobacco policy is. We feel very, very strongly that the

tobacco policy is the right policy for the country. If we want to reduce smoking, if we want to improve public health, we know that

the most effective way to do it is to raise the price. We also know

that the tobacco companies have been raising prices on their own

and increasing their profits, and that that’s wrong. We shouldn’t be

raising the price for the benefit of the producers of cigarettes. We

understand it’s a debate that is going to be tough, but we’re anxious to get into that debate. We think it is the right debate to have.

And we think the American people will be well served if we prevail.

Mr. SUNUNU. You think you’re going to win. You think you’re

going to be able to increase tobacco taxes this year.

Mr. LEW. We’re going to try hard.
42

Mr. SUNUNU. You also included some money from the tobacco

settlement with the States. I take it, you’ve run that idea past the

States’ governors?

Mr. LEW. Well, we were very careful with regard to the States

to try and lay out a framework for working together with the Congress and with the States. There’s nothing in the fiscal year 2000

budget that presumes an agreement on our proposal for using the

Federal portion of the States’ settlement. What we’ve said is we

want to work with the States and with the Congress to identify a

list of common Federal and State priorities so that we will identify

Federal costs that the States would pick up as part of the settlement. Now, obviously, that would reduce the burden on the Federal

Government, and it would free up resources for other purposes. We

think that that’s only fair. Medicaid is a Federal Program. Half of

the Medicaid dollars are Federal dollars. The tobacco settlement

gave all those dollars back to the States. We understand it’s going

to be tough, but we think it’s the right thing to do.

Mr. SUNUNU. Once again, I think you’re going to have a very

tough time getting the support of the Nation’s governors who I

think have taken the lead on this issue; but, moreover, probably

feel very strongly about keeping those funds to spend or to invest

locally. And certainly, we’ve seen that a lot of local governments,

States, municipalities tend to be more efficient than the Federal

Government in whatever kinds of investments they make.

Mr. LEW. I should point out, though——

Mr. SUNUNU. I don’t have much time. It’s just a comment. That’s

not a question. And I would like to talk about the user fees, because you’ve got a few, quite a few.

And Mr. Chambliss began to read through the list, but I think

it bears repeating because it is a lengthy list. There was a suggestion earlier that the tax increases in this budget represent a redistribution of wealth. And I think that’s accurate. I suppose the assumption is it’s a redistribution of wealth from the good taxpayers

to the bad taxpayers; or, from the bad taxpayers to the good taxpayers. And that suggests I guess that some people, Americans,

wouldn’t be affected by the tax and fee increases. And I’d like to

read through those user fee increases that are in your budget proposal: food safety inspection fees; animal-plant health inspection

fees; grain inspection fees; Forest Service fees; navigational fees;

fisheries management fees; patent and trademark fees; trade promotion fees; healthcare financing fees; Food and Drug Administration increased user fees; physician fees; managed care fees; provider certification fees; claim submission fees—all of these are user

fees of the Medicare program—bankruptcy filing fees; alien certification fees; Coast Guard fees; hazardous material transportation

safety fee—we’re all for safety; customs air and passenger fees; customs access fees; commercial accident investigation fees; rail safety

inspection fees; pesticide registration fee; analog spectrum fee; Social Security claimant fee; Federal Aviation fee. This is an interesting one. We changed the harbor fee to a harbor tax; or, rather a

harbor tax to a harbor fee. I am not sure what the impact there

is. We have bank exam fees, and finally Medicare premiums.

Have we left anyone out? It seems there can’t possibly be anyone

in America that’s not impacted in one way or another from an in-
43

crease in a user fee on an activity that they might rely on weekly,

monthly, or everyday of their life.

Mr. LEW [continuing]. Let me, if I can, distinguish between three

different categories. There are certain loophole closers which—I

don’t want to use ther terms ‘‘good’’ and ‘‘bad’’—are closing down

loopholes that shouldn’t be there. I don’t think that we would have

a disagreement if we identified a sham——

Mr. SUNUNU. These aren’t loopholes.

Mr. LEW [continuing]. No, no, I understand.

Mr. SUNUNU. These are all user fees to be clear.

Mr. LEW. I am just trying to identify the different categories. I

don’t think any of us would want a tax incentive for a sham transaction. We do have the tobacco tax——

Mr. SUNUNU. I didn’t mention the tobacco tax, either. These are

all user fees.

Mr. LEW [continuing]. I am trying to separate——

Mr. SUNUNU [continuing]. These are not taxes.

Mr. LEW. I am trying to separate the categories.

Mr. SUNUNU. They are not loopholes.

Mr. LEW. The user fees—which I think you have sort of merged

with these other proposals in terms of the total numbers you’ve

used—are really different in kind. And we believe that when the

Federal Government provides a service, whether it’s at a port of

entry or at a food inspection station, that the industry that gets the

benefit of the service should pay for it.

You use the example of the harbor fee. I realize that no one who

represents a port city will be grateful that there’s a harbor service

fee proposal. But the Supreme Court struck down the former harbor fee that Congress passed because it was technically flawed.

What we’ve put forward is a proposal that is technically not flawed,

which reflects the policy that was already there. They are not all

new fees. That’s one of the larger ones. Many of the ones you used

as an example are very, very small. That one is quite large. User

fees are not popular by the users. Users would like to get services

for free. Industries would like to get corporate subsidies. Chairman

Kasich has taken the lead in identifying the need to close corporate

loopholes and to do all that we can to make the government not

provide unwarranted benefits.

The user fees mostly fall into that category. And, when you take

them one by one, I think we probably could agree on more of the

policy than we could the politics.

Mr. SUNUNU. Well, I appreciate your answer very much. I’ve

tried to be clear, and the user fees there represent $26 billion. And

you are right to distinguish that from the tax increases that are

separate and above that $26 billion. Thank you very much. Thank

you for your patience, Mr. Chairman.

Chairman KASICH. You’re very welcome. The gentleman from

Pennsylvania is recognized for 5 minutes. Mr. Hoeffel, yes. That

would be you.

Mr. HOEFFEL. Thank you, Mr. Chairman.

Chairman KASICH. Where are you from in Pennsylvania?

Mr. HOEFFEL. I am from the suburbs of Philadelphia, which is

what I want to ask my question about. Many of us from the suburbs are interested in the livability proposal that the administra-
44

tion has come forward with. Some say that the proposed spending

would be helping social planners save or get involved with buying

up open space. And the critics of the program seem to think that

it’s not an effective way of managing resources, controlling growth,

or actually improving economic opportunities. Could you address

some remarks to how the funding mechanism, which seems to be

a Federal tax credit for investors in local and State bond issues

that would generate the funding, would be used for open space and

growth management programs. Could you address how that’s going

to actually improve the quality of life in the suburbs and improve

the economic growth in the suburbs?

Mr. LEW. Congressman, we have a number of initiatives in the

area of lands, what we call the Lands Legacy and the Livability

Agenda. The green bonds that you are referring to are one component which would provide additional access to capital at a lower

rate for environmentally sensitive investments, both in preserving

open spaces and in improving the use of existing spaces that are

not open spaces. We think that if you look at the combination of

the initiatives in terms of preserving large public spaces, the Lands

Legacy, encouraging the process of local planning to preserve open

spaces, and providing access to capital so that the preservation of

open spaces and the cleaning up of spaces that are currently used

really answers a need that many Americans feel strongly about as

we enter the new century.

Around the country, there is a growing concern that we’re living

in pretty good times right now. We have an obligation to take a

view that’s a little bit longer, and ask what are we going to do to

leave behind cleaner waters, more open spaces, cleaner air. And

we’ve tried to put together a program that’s not big government;

that doesn’t say we’re going to come in and tell local communities

what to do. We’re not going to come in and tell industry what to

do. But we’re going to give mechanisms, broad mechanisms, so that

the grassroots movement, which is very strong—this is us responding to the American people, not the American people responding to

us—has the tools to do more of what they are doing already.

And we’re hopeful that this is an agenda that will have bipartisan support. It does seem to me to respond not just to the interest

of suburban Americans, but urban and rural Americans as well.

Mr. HOEFFEL. You seem to be addressing the problems of sprawl,

of unregulated growth that sort of leapfrogs out from the urban

centers and replicates new infrastructure and new schools and new

highways. And we keep building and building further and further

out without reinvesting in the already populated areas, and, in the

process, we use up a lot of open space and farmland and spend a

lot of time in traffic gridlock.

This has never before been viewed as a Federal problem, and I

applaud the administration for recognizing the role that the Federal Government can play in promoting some funding mechanisms

but also elevating the problem to a national level.

Mr. LEW. You’ve actually pointed out one element that I left out,

which is using our transportation programs to encourage the kind

of planning that really is important. We have to be able to get to

and from the places we need to do business and live without encroaching on our remaining open spaces.
45

Mr. HOEFFEL. On another subject, just quickly. You mentioned

Chairman Kasich’s proposal for corporate welfare reform in the last

Congress. And I recognize the administration has identified unwarranted tax benefits in this budget proposal. I used a number of the

Chairman’s proposals in my campaign. I thought they were right

on target. Have you reviewed what he called for, and is there some

common ground there?

Mr. LEW. Well, we’ve had more ability of reaching agreement on

the concept than on the details. [Laughter.]

There are some items on that list that I think we do agree on.

There are other items where I think we consider it important investments in technology, where he would put it on the list as a corporate subsidy. There are important questions to ask. If you look

at our user fees, if you look at the loophole closers, I think there’s

a shared objective of trying to make sure that we don’t squander

government resources with subsidies for private interests that don’t

need them. The devil is in the detail.

Mr. HOEFFEL. Right. OK. Thank you very much. Thank you, Mr.

Chairman.

Chairman KASICH. Just for the information of the committee, we

do intend to have a hearing on corporate welfare before we do anything with the budget. It will be coming up, and it should be interesting. I don’t know who all will be there, but I know that Mr.

Nader will be there, so it should be interesting. And I’ll bet we will

have a few press people in attendance for that one. Jack, you can

come, too, if you want.

Mr. LEW. I’d be delighted.

Chairman KASICH. OK. Anyway, my—I think one of my heroes,

Jim Ryun, is recognized for 5 minutes.

Mr. RYUN. Thank you, Mr. Chairman. I want to go back to a subject that was discussed a little bit earlier, but I’d like to get into

it in a little more detail with regard to national security. I appreciate the President’s interest in increasing pay as well as the benefits. And yet, I want to read a quote from the House Armed Services Committee regarding the military personnel and their concerns. Two top reasons that they are leaving: number one, I am

tired of working extended shifts due to lack of help; and I am tired

of being away from my family. Now, while we recognize that there’s

a need for pay increases—just this morning General Reimer recognized that he needs as much as $5 billion, but he’s going to do well

to have $2.4 billion. And part of the reason he needs that money

is that a lot of these people have left; a lot of his NCOs have left,

and it’s weakened our military forces. In part, I want to send a

message to the President to urge him to consider increasing the

amount of money that is being set aside now for military, especially

recruitment, because we are at a point where retention is very,

very difficult.

But part of my question is going to go back to base closures. Robert Bell said earlier this year that he felt that there could be billions of dollars saved as a result of base closures, and yet the DOD

has indicated that it would actually be a net cost of roughly $2.4

billion. Does this administration really think that they can save

money through base closures that would contribute to the budget

in some way?
46

Mr. LEW. We very much believe that base closures do contribute

to long-term savings. The problem in terms of bringing the budget

and the policy together are that in the short term base closures

cost you money. In the long term, they save you money.

If we start with the premise that when the military identifies resources they don’t need—bases that are not serving a useful purpose—we all worry about the dislocation, and whether we will need

those resources in the future. We need to go through a careful process to balance these considerations. But once the decision has been

made—once a BRAC-like process has concluded that a facility is no

longer needed—if we spend the money to do it right in a short

term, 10 years from now, the savings will be very substantial. Defense is not a 1-year kind of budget. The defense budget is done

over 6-year periods of time. They take very seriously the year to

year and multi-year impact of the decisions. There are only about

three or four places in the government where multi-year planning

is so important. I think because of that, looking at BRAC not as

a contributor to savings this year or next year but perhaps as a

cost and as a contributor to savings for the next decade for the first

decade of the next century is really the right way to do it. By 2008

or 2010 the savings are very real.

Mr. RYUN. I am not totally convinced of that because if we are

already in a spot, in a real problem with the number of people that

we’re sending out, we’re deploying so often our troops are weary—

if we’re going to reduce the number of bases, and I am still not convinced it’s going to be savings. I would just like to simply express

my concern over that and ask the President to reconsider that. Mr.

Chairman.

Chairman KASICH. Well, I want to thank you, Mr. Ryun. I wanted to let you know, I want to congratulate you on being the second

American to break the 4-minute mile. I was actually the first one.

I did it in a school-yard behind my house. Mine wasn’t ‘‘finalated.’’

I just didn’t tell anybody, Jim. [Laughter.]

OK. Oh, Mr. Price from North Carolina is now recognized for 5

minutes.

Mr. PRICE. Thank you, Mr. Chairman. Mr. Lew, let me add my

welcome and ask you to elaborate on a couple of aspects of your

testimony.

In some ways, this first question picks up on the line of questioning Mr. Hoekstra was pursuing. It has to do with the debt reduction, which I think most people agree is one of the strongest features of your proposal—the great strides that you’re proposing to

make in paying down the publicly held debt, from $3.7 trillion to

$1.2 trillion, or from 42 percent of GDP to 7 percent by 2015, under

current assumptions.

Why have you chosen the mechanism that you have of transferring 77 percent of the surplus over the next 15 years to these trust

funds—to the Social Security and Medicare Trust Funds—in order

to accomplish this purpose? Why do you choose that? I understand

that part of the reason is the political appeal, of course, of addressing the long-term trust fund shortfalls, but I think we do need

some elaboration on exactly how this is going to work, because you

are essentially moving that debt into the trust funds. As you said,

the debt subject to limit is going to remain, but I also understand
47

you to say, and now your—the last chart you showed a moment ago

about the implications, those two kinds of debt have very different

implications for annual interest outlays and thus for our capacity

in the future to meet those obligations to those trust funds when

those bonds come due. So could you elaborate on that, because I

do think there’s some confusion on the point of exactly what this

debt reduction entails.

Mr. LEW. Congressman, I would be happy to elaborate. Usually

I start with the substance, and then I go to the politics. But I think

in this case, it may make sense to start with the politics.

It’s very important that we actually accomplish the debt reduction. The notion of reducing the public debt is a difficult concept,

but a very important one. And in the past, when the choice has

been presented to pay down the debt held by the public or spend

money on a tax cut or on other popular programs, it has been very

hard, very, very hard, to sell debt reduction as a policy against a

tax cut or a spending increase. So the politics is very much connected to the substance. To get to the debt reduction, I think we

need more than just a passive debt reduction. We need to have a

reason to do it.

The substance is very important as well. Debt reduction doesn’t

really do anything to extend the life of the trust fund. Yes, it

means that we can pay the trust funds what they are currently

due, and that’s very important because it really is the first part of

our plan—to make good the promises we’ve already made, the

Treasury bonds that are in the trust fund now will be paid more

easily just by simple debt reduction. But we want to increase the

assets in the trust fund. We want to say that come 2020, there

should be more Treasury bonds in the trust fund, and there should

be more dollars being committed to Social Security rather than losing those dollars to a tax cut or spending increases. That is a substantive difference of great importance. That’s why our plan goes

from 2032 to 2055 in terms of trust fund solvency. The Social Security actuaries have looked at it. They’ve written a letter, which I

would be happy to submit for the record; that it has that effect;

that our plan would extend solvency to 2055. And that would not

be true of simple debt reduction. Debt reduction is not bad, but we

think that what we propose is better.

[The letter referred to follows:]

OFFICE OF THE DEPUTY CHIEF ACTUARY,

SOCIAL SECURITY ADMINISTRATION,

Woodlawn, MD, January 26, 1999.

HARRY C. BALLANTYNE,

Chief Actuary

LONG-RANGE OASDI FINANCIAL EFFECTS OF THE PRESIDENT’S

PROPOSAL FOR STRENGTHENING SOCIAL SECURITY—Information

The President’s proposal, presented in the State of the Union address on January 19, would require that transfers be made from

the General Fund of the Treasury of the United States to the OldAge, Survivors, and Disability Insurance (OASDI) trust funds for

each year 2000 through 2014. The amount of transfer for each year

would be specified in law as a percentage of the OASDI effective
48

taxable payroll. In each year 2000 through 2014, 21 percent of the

transfer would be used to purchase stock and 79 percent would be

used to purchase special interest-bearing obligations of the Treasury. All dividends would be reinvested in stock until the market

value of all stock held by the OASDI trust funds reached 14.6 percent of total OASDI trust fund assets. Thereafter, the percentage

of total trust fund assets that is held in stocks would be maintained at 14.6 percent.

The proposal would extend the estimated year in which the combined OASDI trust funds would become exhausted by 23 years,

from 2032 to 2055. It would reduce the size of the estimated longrange OASDI actuarial deficit by over one half, from 2.19 to 0.76

percent of taxable payroll. (Due to interaction among provisions, a

complete elimination of the actuarial deficit will require additional

OASDI changes that would reduce the present law deficit by up to

1.0 percent of taxable payroll.) These estimates are based on the

intermediate assumptions of the 1998 Trustees Report and other

assumptions described below.

If transfers were invested only in government bonds, the estimated year of trust fund exhaustion would be extended by 17

years, from 2032 to 2049. The estimated long-range OASDI actuarial deficit would be reduced from 2.19 to 1.20 percent of taxable

payroll. This result also provides an indication of the sensitivity of

the estimates to variation in the expected yield on stock. If, for example, the actual yield on stock over the next 50 years is no greater than the expected yield on government bonds, the estimated

year of trust fund exhaustion would be extended from 2032 to

2049, rather than to 2055 with expected stock yield.

Stock investments would be managed by several brokerage firms,

selected by competitive bid. Stock investments would be required

to reflect the composition of all publicly-traded stock in the United

States (for example, the composition of the Wilshire 5000 index).

Transfers from the General Fund of the Treasury would be made

each year 2000 through 2014. The estimated amount of transfer for

each year is shown below, based on the intermediate assumptions

of the 1998 Trustees Report.

Estimated Amounts To Be Transferred to the OASDI Trust Funds

Billions of Current Dollars

2000 ....................................... $81.4 2005 ...................................... 117.4 2010 ...................................... 256.4

2001 ....................................... 67.2 2006 ...................................... 148.6 2011 ...................................... 280.0

2002 ....................................... 88.3 2007 ...................................... 174.8 2012 ...................................... 300.0

2003 ....................................... 87.2 2008 ...................................... 203.2 2013 ...................................... 316.0

2004 ....................................... 105.6 2009 ...................................... 232.5 2014 ...................................... 324.4

Amounts transferred would indirectly reflect values for years

2000 through 2014 that are about 62 percent of the expected unified budget surplus estimated by the Office of Management and

Budget for the President’s Fiscal Year 2000 Budget. Actual transfers for each year would be specified as the product of (a) the values computed under these budget projections, expressed as a percentage of OASDI effective taxable payroll, and (b) the then-current

estimated taxable payroll at the beginning of each year of transfer.

Revisions in amounts transferred each year would be made as estimates of taxable payroll for the year are finalized.
49

OASDI Trust Fund Assets in Stock

The 1994-96 Advisory Council on Social Security requested estimates assuming that the total annual real yield on stock investments would ultimately average about 7 percent, approximately

the average (geometric mean) yield on stocks so far this century.

(Total yield includes dividends as well as capital growth.) Estimates for this proposal are based on a more conservative assumption for the average ultimate total annual real yield of stock at 6.75

percent. The nearly four-percentage-point difference between this

assumed ultimate real stock yield and the Trustees’ 2.8-percent assumed ultimate real yield on government bonds held by the trust

funds is assumed to be maintained throughout the 75-year projection period.

The table below provides the estimated percentage of OASDI

trust fund assets that would be held in stock at the end of each

year 2000-14. The stock holdings are estimated to reach the level

of 14.6 percent of total trust fund assets at the end of 2014, after

which point this percentage would be maintained under the proposal.

Percent of OASDI Trust Fund Assets in Stock, End of year

2000 ....................................... 1.7% 2005 ...................................... 6.6% 2010 ...................................... 11.2%

2001 ....................................... 2.8% 2006 ...................................... 7.6% 2011 ...................................... 12.1%

2002 ....................................... 3.9% 2007 ...................................... 8.5% 2012 ...................................... 12.9%

2003 ....................................... 4.8% 2008 ...................................... 9.4% 2013 ...................................... 13.7%

2004 ....................................... 5.7% 2009 ...................................... 10.3% 2014 ...................................... 14.6%

If the average yield on stocks is greater or less than assumed

over the period 2000-14, the year in which the specified level of

14.6 percent of assets in stock is reached would be sooner or later

than the end of 2014.

The portion of the total value of publicly-traded stock in the

United States that is held by the OASDI trust funds will depend

not only on the yield achieved in the market, but also on the rate

of growth in the total market value of all stock. The total value of

stock represented in the Wilshire 5000 index (a fair representation

of all publicly-traded stock in the United States) was $9.3 trillion

at the beginning of 1998. Assuming that the total market value of

publicly-traded stock will rise generally by the rate of growth in

GDP after 1998, the trust funds would hold less than 4 percent of

the total market value, on average, over the next 40 years.

Average Percentage of Total Stock Market Value Held by OASDI

2001-14 ............................................................................................................................................................................ 1.9%

2001-20 ............................................................................................................................................................................ 2.9%

2001-30 ............................................................................................................................................................................ 3.7%

2001-40 ............................................................................................................................................................................ 3.7%

2001-50 ............................................................................................................................................................................ 3.4%

STEPHEN C. GOSS,

Deputy Chief Actuary.

Mr. PRICE. Now, you are paying interest on the debt held by the

trust funds as well as on the debt held by the public.

Mr. LEW. That’s correct.
50

Mr. PRICE. But as I understand it, the interest payments have

vastly different implications for year-to-year outlays. Can you explain that?

Mr. LEW. In the Federal budget, we usually look at net interest.

That is, the interest paid to the public. And if you look at the path

of a dollar, I think it is crystal clear what the difference is. If a

bank owns a Treasury bond and cashes it in, then the Federal Government will pay the bank interest on the Treasury bond. If the Social Security Trust Fund owns the Treasury bond, then the Federal

Government will pay the Social Security Trust Fund the interest

on the bond.

Now, I think the difference between a dollar of interest for the

private holder of a bond and a dollar interest for the Social Security Trust Fund is the difference between night and day. The Social

Security Trust Fund will take that dollar and pay a benefit that

is currently owed. We’re not increasing benefits. All we’re saying

is make sure the dollars are there to pay the benefits that we’ve

already promised. I think if we have a choice to look back 15, 20

years from now and ask ourselves, are we paying more debt to private holders of government bonds, or are we paying more debt to

pay Social Security benefits? We will feel a lot better if the dollars

are there to pay the Social Security benefits and we don’t have to

make the cuts in benefits, and we don’t have to increase taxes.

That’s a choice. It’s a choice which I think is made crystal clear

when you look at the alternative of what you do with the unified

surplus. A tax cut or large spending increases lead you one way.

Paying down the debt and putting the money into the trust funds

lead you a very different way.

Mr. PRICE. Thank you. My time is about to expire. Let me ask

you one further, quick question about the tax cuts that are contained in your proposal. I understand that there are a number of

tax cuts. I think we all think, one way or another, when we’re in

surplus we should take advantage of that to return money to the

American people. There is significant disagreement about exactly

how we do that. But you’re talking about childcare tax credits for

stay-at-home parents. You’re talking about incentives for employers

to provide childcare on site. You’re also talking about school construction. A lot of people don’t understand it. That is a tax provision—the school construction. The long-term care tax credit. And

then finally these USA accounts.

Since we are about out of time, perhaps the two you could focus

on would be the school construction and the USA accounts, because

I don’t think it’s generally understood that those are, in fact, tax

incentives. How would they work?

Mr. LEW. Well, they are very different. The tax provision for the

school construction program would make the investment in bonds

that would finance school construction treated preferentially for tax

purposes so that the interest wouldn’t be subject to tax. It would

make it easier to raise capital and would leverage the Federal investment, so that every dollar that we put into the tax expenditure

for a school construction bond would bring many more dollars into

school construction. It’s a very efficient way to bring a lot of dollars

into school construction that we probably couldn’t do in a direct

Federal appropriation.
51

It’s fully paid for. We have offsets of $33 billion in our budget,

of loopholes closers and other unwarranted benefits. That would be

a paid-for proposal that we could go forward on today before we

deal with Social Security.

The USA account is part of our framework for Social Security

and the surplus. And we very much believe the USA accounts are

the right way to give tax relief, but first we have to fix Social Security. So, first we have to put 62 percent aside for Social Security.

Second, we want to put 15 percent aside for Medicare. And we

think it does come first: keeping our obligation to Medicare comes

first, even before the USA account.

Then, after we’ve done that, after we’ve taken 77 percent of the

surplus and dedicated it to paying the bills for Social Security and

Medicare, we think there should be a tax cut. And the USA accounts would be an incentive for individuals to save for their own

retirement. Moderate- and low-income individuals would get a Federal tax credit, which would start them off in savings. Any dollar

above that amount would be matched. Middle-income taxpayers,

higher-income taxpayers would get less of a credit and more of a

match. It would be very progressive. It would be a way to bring everyone into retirement saving so that it’s not just something that

the few have, but it becomes a basic, standard part of planning for

the future.

It has several very important effects. It would increase national

savings, whereas many tax cuts would not. It would help individuals get into the habit of saving and hopefully save more than the

amount that we help them save through the USA accounts. And

most importantly, it would give the kind of tax relief that I think

there is a broad consensus that we need to think about in a very

targeted way that would benefit the economy and benefit working

Americans, as opposed to squandering it or spreading it in a way

that might be less fair.

Mr. PRICE. Thank you, Mr. Chairman.

Mr. CHAMBLISS [presiding]. We want to give as many members

as possible an opportunity to ask questions. So, if you will, let’s

abide by the 5-minute rule. And, Mr. Lew, when you see the red

light come on if you would please speed up your answer. The gentleman from New Hampshire, Mr. Bass.

Mr. BASS. Thank you. I am sort of in the never-never land between microphones. Thank you very much, Mr. Lew, for appearing

here today. And I want to make a general comment that I think

I personally believe that the President has moved forward, especially in the area of Social Security, to begin a bipartisan dialogue

toward dealing with the issues of both solvency as well as structural reform of the system that does give Americans the—a little

more say over their retirement plans. And we do have some major

disagreements. But I think it’s a major start—or a significant start.

I share Mr. Sununu’s concern about the issue of user fees, not

only the idea that the user fees on aviation will have a significant

impact, in my opinion, on aviation safety, but also on another area:

on the concept that taking it—trying to loop what is, in effect, a

settlement for tobacco—damages that occurred between States Attorneys General and the tobacco companies and the Federal Gov-
52

ernment somehow would try to grab a portion of that for its own

damages, I think is wrong.

I guess my question—I’ve been a long-time advocate of special

education. And reading in the budget here, you have a significant

decrease in special ed. Now, I understand that you advance fund

in the fiscal year 2001. I was just wondering if you could explain

to me why you cut special ed funding from $5.1 billion to $3.1 billion, and then advance fund it back in fiscal year 2001, $1.9 billion,

calling that the academic year. Is it not true that ultimately what

you’re really doing is taking money in the year 2001, in the very

beginning and putting back into the year 2000 in order to make it

look like you’re staying within the budget caps, and, in effect, what

you’ve really done is cut special education by $2 billion.

Mr. LEW. Congressman, what we’ve done in special education

mirrors what the appropriators did last year with Title I. Last

year, I believe it was a total of $6 billion of advanced appropriations, and we’ve said in the area of special education, in order to

make room for the kinds of increases that we think are necessary

in 2000, we should do the same thing. It doesn’t do what I think

you suggested in the question which is cut special education. Just

as we’re providing the full dollar of program benefits in the Title

I program, we would be providing the full dollar of program benefits in the special education program. It’s an accounting issue as to

what year you attribute it to, and by attributing it to the portion

of the fiscal year that matches up with the school year, it does give

us the ability to spread it over 2 years, and then continue that

going forward.

Mr. BASS. But the academic year begins in September, not October. I am going to quibble with you on a month there. And what

you’re really going to have to do—I understand that this is an accounting gimmick. But why don’t you just put the money in the

proper fiscal year, which begins on September 1 and admit the fact

that what you’re really trying to do is to redirect priorities to your

other spending programs at the expense of special education and

use a—I—sometime the chickens are going to come—I hate using

cliches—they are going to come back to roost here. And then the

next fiscal year, you’re going to have another advance. You’re going

to do the whole budget with advanced—I am not going to support

or give credit to advance appropriations. I don’t agree with it in

Title I, either. But the reality of it is why not just put the money

in special ed and not cut it by $3 billion, $2 billion?

Mr. LEW. As I said, Congressman, we’re not cutting it. What

we’re doing is we’re financing it in a different way. So it’s not a

cut.

As far as the advanced appropriation question goes, it’s a fair

question to ask. And there have to be limits on how much of it we

do, and I agree with you that it can’t be done infinitely.

Last year, the House Appropriations Committee faced spending

limits that were very difficult in the area of Labor-HHS. The House

never passed a Labor-HHS appropriation bill. What the House

committee did, I believe, was eliminate programs. I believe it eliminated the Low-Income Home Energy Assistance Program. It eliminated the Summer Jobs Program. And that was something that we

had a pretty heated political debate about.
53

The Senate took a different tack. The Senate did put these advanced appropriations in, and it was a way to accommodate a

broader set of priorities within the budget rules. It’s not a perfect

solution to tight caps. But it is a solution that works under the

budget rules as long as we do it in a careful way.

I would argue, as with many of the choices we’re discussing in

terms of the surplus, it’s compared to what. And we think that the

advanced appropriation has no programmatic effect. I wouldn’t reduce a penny of benefits in the year that they are needed. And that

is the important programmatic issue.

As far as budgeting goes, I agree that we have to be very careful.

And we are being very careful.

Mr. BASS. I appreciate. We will not only say that I believe that

special education—that an increase in funding for special education

should be a priority before we start discussing the new spending

bills, the new spending proposals which, not only in new programs

but in existing programs, equal well over—all right, I’ll make it

up—$1.5 to $2 billion in the next fiscal year. And I yield back, Mr.

Chairman.

Mr. CHAMBLISS. Thank you. The gentleman from New Jersey,

Mr. Holt.

Mr. HOLT. Thank you, Mr. Chairman. And it’s good to see you

here this morning. Thank you.

Mr. LEW. Thank you.

Mr. HOLT. What particularly pleases me about the budget you’re

proposing is the emphasis on the long term. And you, I would say,

have resisted the temptation for immediate gratification in order to

invest in things that will be with us for a longer period of time,

or so that they can be with us for a longer period of time—Social

Security, environmental protection, and so forth.

I’d like to look for a moment, though, at what we need in order

to maintain our long-term productivity growth, and that would be

education and research and development. And I am particularly

pleased to see that you’re talking about employer provided educational assistance as well as workplace literacy and that sort of

thing.

I wanted to get a sense of how many people will be affected by

these programs? What long-term effect this will have on the quality

of our workforce?

Mr. LEW. It’s difficult for me to give an exact number of the people affected, but the goal behind our literacy initiative is twofold:

first, there is a big problem that we have a lot of people who have

graduated high school and come into the workforce without the

basic skills that they need. And that’s not fair to them. It’s not fair

to society. We need to address that. We need to address it in terms

of adult education. We need to make sure our schools produce results so that we don’t have that problem in the future.

We also have an awful lot of immigrants who are here as legal

immigrants, who deserve the same chance that many of our parents and grandparents got to learn English and to get into the

workforce and make the contributions that we’ve always relied on

immigrants to make in this country. And we’ve been very, very fortunate. Generation after generation has. Our adult literacy initia-
54

tive really deals with both of those challenges. I’d be happy to get

back to you with the exact numbers.

[The numbers referred to follow:]

According to the Department of Education, 5.712 million adults would be served

under the adult literacy program if it were funded at the fiscal year 2000 budget

request level. This is an increase of 1.249 million over the fiscal year 1999 appropriation.

Mr. HOLT. But just to get a sense, I would appreciate further information on how much of our workforce this could be expected to

help.

And on the question of research and development, what do you

see the effect of your budget having on our overall research and development effort.

Mr. LEW. Yes, we’ve had a very aggressive funding commitment

to research and development for a number of years, and we’ve

reached the point where, in some areas, we have gotten ahead of

the schedule that we set out. We’re now ahead of the schedule to

double NIH.

We’ve tried in this year’s budget to have a balanced approach, to

make sure that basic science gets the funding increases in areas

like NSF, and the Department of Energy, where some of the core

theoretical science is done. There are slightly larger increases in

those areas than in NIH, not because we don’t support NIH, but

because it was time to have a little bit of catch up on that kind

of basic science. NIH benefits greatly from the basic science research done at NSF. And I think the percentage increase is about

7 percent in NSF, and we’ve kept NIH equal with inflation. That

is ahead of schedule to getting to the doubling of NIH that we proposed over the last few years. We think it’s a very important commitment and it is an investment in the future.

It’s very difficult in the area of science to predict very accurately

what you’re going to get for each dollar you put in. We’ve worked

very hard with the departments and the agencies that do science

research to focus their dollars well, but to leave them the room

through the process of peer review panels that they use to choose

the best recipients for research dollars, not to micromanage and

think that we know what breakthroughs they are going to find. We

haven’t been disappointed. The pace of scientific discovery only increases, and we’re proud that our investments have been part of

that.

Mr. BASS. Thank you, Mr. Lew. I yield back the balance of my

time. Thank you, Mr. Chairman.

Mr. CHAMBLISS. Thank you. The gentleman from California, Mr.

Herger.

Mr. HERGER. Thank you very much, Mr. Chairman. And thank

you, Mr. Lew, for being with us.

I’d like to take just a little bit different tack. One is to compliment the administration on at least what in general we’re hearing that would at least on the surface give the impression that

we’re not spending wildly; that we are being responsible; that, to

use the terminology of the previous inquirer, that we’re not seeking

immediate gratification.

But my concern is when we look at the fine print of President

Clinton’s budget. And I am reminded of an editorial that was in
55

one of our city newspapers here just a couple of days ago, which

shares my concern. It had tax and spend, tax and spend, tax and

spend. Now that’s very, very different than the spin than we seem

to be hearing. We’re talking about these large surpluses that we

have. But yet, under these large surpluses, looking at your document that you’ve put, put out by the Executive Office of the President on Management and Budget. And we look at even with these

projected surpluses, we look at what happens to the national debt.

And I notice that you try to differentiate between government and

public debt as though somehow there’s something different there,

but most of us out in—at least where I come from—a debt is a debt

is a debt—and it’s something that someone someday will have to

pay for—probably our children or grandchildren. But just looking

at your numbers on page 389 of his document, where it shows what

our debt will be. For 1998, $5.4 trillion, to 1999, $5.5 trillion; 2000,

$5.7 trillion. I could continue reading for each of the next 5 years,

not only with our projected surplus; not only does this debt not

come down, it goes up. And it’s increasing each and every year by

your own document, despite what you may be saying, to the tune

of $1.3 trillion increased debt over the next 5 years.

Now, I am concerned about that. When I go to my town hall

meetings, the people I represent in northern California are concerned about this. And I notice that you have attempted in the last

couple days—over in the Senate and here as well—to somehow

make a different—to differentiate between the debt we owe out to

the public and what the government owes; that somehow that differs.

And I’d like to have you explain to me how it’s different? Is it

not true that this debt is something that future taxpayers, i.e., our

children and our grandchildren, at some point down the line will

have to pay for? And isn’t it very disingenuous to be talking about

how we’re really taking care of things when, in essence, we are increasing the debt on the heads of our children each and every year

over the next 5 years by a total of $1.3 trillion?

Mr. LEW. Congressman, I have been trying to distinguish between debt held by the public and the debt subject to limit, because

I think it’s a distinction that really does make a big difference. A

dollar of interest paid on debt held by the public is a dollar that

is going to an investor in a bond, and that’s fine. It’s a good thing

to pay investors——

Mr. HERGER. A taxpayer out—they are receiving some money for

that?

Mr. LEW [continuing]. Yes, a bank, a corporation, an individual.

I don’t mean it as a pejorative. It’s going to someone who’s invested

in a Treasury bond and we’re paying it. But the dollar is gone as

far as the Federal Government is concerned.

Mr. HERGER. Into the hands of a real, live person.

Mr. LEW. A dollar paid to the Social Security Trust fund is going

to pay a dollar of benefits that’s already owed. When we calculate

the debt, we don’t add into that calculation all of the Social Security benefits that are going to have to be paid that aren’t already

funded.

We’re not increasing the moral debt of the country by a dollar

when we put a dollar in to the trust fund and say that we’re going
56

to pay that dollar of benefits that we already owe. And because of

government accounting, the debt subject to limit does go up when

we put those assets aside. But our moral commitment is there.

The fact that we put a bond in the trust fund is the second step.

The first step is we’ve made a promise, generation to generation,

and unless we plan to break that promise, we’re going to need the

dollars in the future to keep it. What we’ve said is you can’t keep

that promise if you also spend the money today, on either a tax cut

or a spending increase. And yes, it does commit future dollars. It

says the first call goes to Social Security. The second call goes to

Medicare. Those are promises we’ve already made. Before you

make any new commitments, let’s keep the promises we’ve already

made.

Mr. HERGER. OK, in other words what you’re saying—let’s follow

your reasoning through. Right now, I think about two-thirds of our

Federal budget is going to some type of entitlement. People are entitled to this. It’s already by law spoken for. So, in essence, what

you’re saying is that we’re just going to increase that percentage

so that our children some day, who are the only ones who are going

to pay for this—I mean, this isn’t funny money. It doesn’t somehow

come out of thin air. Someone is going to pay for it, and the real

difference is, as I hear you explaining this in real world terms, is

that the difference is that rather than give somebody this interest

today, some real world individuals out here, what we’re going to do

is indebting our children and grandchildren; and yes, it would first

call, but still we are an indebting—a debt is a debt is a debt—we’re

indebting somebody to pay this taxpayer somewhere down the line.

Isn’t that—well, let me just make a statement. In my mind, that

is immoral what you are doing. That is basically lying to the American public at a time when we have surpluses and leading them to

believe that everything is OK. We’re taking care of your problem.

When, in reality, just exactly the opposite is true.

Mr. LEW. If I could just respond briefly, Congressman. We think

exactly the opposite. We’ve already made a promise. We’ve made a

promise, and all of our projections in terms of the share of the Federal Government that goes to Social Security and Medicare assume

that we’re going to keep the promise. We’re just putting the money

behind the promise and saying let’s not make new promises until

we put the money aside——

Mr. HERGER. As long—you’re—a debt you’re putting behind it.

You not putting money. You’re putting something that will be paid

by some future taxpayers, is that correct?

Mr. LEW [continuing]. Well, if we don’t spend——

Mr. HERGER [continuing]. Isn’t that what it is. Isn’t that what a

bond is?

Mr. LEW. If we don’t spend the money on a tax cut or a spending

program today, those dollars will be there in the future.

Mr. HERGER. A piece of paper written up in West Virginia will

be there. OK, thank you. I think the point’s made.

Mr. CHAMBLISS. I want to recognize my friend from Massachusetts for his questioning. And let me just say that we’ve still got

a number of members here. We’ve got three votes. So it’s probably

going to take us 25 minutes for these votes. If you all want to come

back and ask questions of Mr. Lew, if you’re available, we’d like to
57

have that option if members want to come back. Or, we can submit

written questions. What’s the preference of the committee?

OK, we got some that would like to come back. Can you stick

around?

Mr. LEW. I would be delighted to stay if members would like to

come back.

Mr. CHAMBLISS. OK. Great. I recognize the gentleman from Massachusetts, Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

Mr. Lew, as we look at your pie chart over here, 62 percent of

the pie chart is dedicated to Social Security?

Mr. LEW. That’s correct.

Mr. MARKEY. Now the way that I understand it is that the Republican 10 percent across the board tax cut would consume an additional 38 percent, is that correct?

Mr. LEW. That’s my understanding.

Mr. MARKEY. Now, the way I’ve heard it on television in the last

couple of days, Mr. Archer and Mr. Domenici have both said that

the 62 percent now up for Social Security makes some sense to

them. I think that I’ve heard that. If that’s the case, that means

that the Republican 10 percent across the board tax cut consumes

all of the money that would be expended for Medicare, all of the

money for the universal savings accounts, all of the money for defense, all of the money for education, all of the money that’s left

on that pie chart. So the 10 percent tax cut, obviously, is something

that threatens every other program, except to the extent to which

I guess I would say that I am not worried that the money will be

found by the majority for the defense budget. I think they are finding that one. But that puts even more pressure on Medicare, even

more pressure on education, even more pressure on the universal

savings account.

And here’s the problem that I have. In 1997, as part of the last

budget deal, there was a $115 billion cut in Medicare, which almost

exactly matched the huge tax cut—huge, however, only in 1997

terms, not huge when compared to a 10 percent or a 9 percent or

an 8 percent across the board tax cut in perpetuity.

So here’s my problem: there was a $17 billion cut out of Medicare

for home health services in 1997. We have 4,000,000 people with

Alzheimer’s in America. We have millions more with Parkinson’s

and other neurological diseases, cancer, diabetes. They are at

home. And husbands are caring for wives, and wives are caring for

husbands. Then we cut that program by $17 billion. All they got

was a daily visit from a visiting nurse to give them a break. This

just gave them a couple of hours where they could take a nap.

Now, these people are the biggest heroes in our society. Twentyfour hours a day with their wife or their husband in a condition

that is almost impossible for anyone in our age group to even consider. But they do it. And they are the real heroes. But heroes need

help. And the way this debate is now structured, following on what

happened in 1997, is that we’re guaranteeing that that generation

of people who built this country are going to be left with a smaller

and smaller and smaller share of the help which they need to be

heroes. And I think that if this tax cut debate continues as it has,

that we’re going to wind up with a tremendous confrontation in
58

this country—between the legitimate needs of this older generation

that can only be served if the revenues are there. And they are

there. And by the way, I think when we did that tax cut in 1997,

if that has produced this surplus, we cut home health care in order

to do the tax cut. Now, we’ve got the surplus, let’s give back the

money to the program.

Now, Mr. Lew, can you help me with this. I know you’ve made

an effort to increase somewhat the program for home health care

in your legislation, but it still is far short of the money that was

cut out in 1997, or of this growing need which has been identified

in our society.

Mr. LEW. Congressman, the choice that you’ve put forward is a

very real one. If 38 percent of the surplus is dedicated to a tax cut,

I believe that that will mean cuts in Medicare in the future, and

I believe that those are going to be very, very difficult and painful

decisions. We have to deal with Medicare. We have to go beyond

this 15 percent and make the kinds of long-term reforms that require tough choices. The President, in the State of the Union, said

that that would give us the opportunity to make some tough

changes and also perhaps expand some benefits like the prescription drug benefit so that the program meets more of the needs of

people. But if we don’t start by putting 15 percent of the surplus

aside, we are setting the bar very high. And we are probably going

to have difficulty reaching bipartisan consensus. And we’re going to

be faced in a very short period of time with very difficult choices.

We think the most prudent thing to do is to take the good fortune

we have, that we’ve gotten because we made tough decisions on

Medicare, we made tough decisions to reduce the deficit. We now

have a surplus. We should put some of it back. That 15 percent

would really be putting money where we should put it, to keep the

promise we’ve made to pay benefits.

Mr. MARKEY. Thank you, Mr. Lew. Thank you, Mr. Chairman.

Mr. CHAMBLISS. We will stand in recess until 12:45 p.m.

Mr. LEW. Thank you.

[Whereupon, at 11:57 a.m., the committee recessed, to reconvene

at 12:45 p.m., the same day.]

Mr. CHAMBLISS [presiding]. All right, why don’t we resume, and

we will take members as they come back in the order that they are

on the list, and if we have to skip somebody, we will try to get back

to them. But the gentleman from Pennsylvania, Mr. Toomey, is recognized for 5 minutes.

Mr. TOOMEY. Thank you, Mr. Chairman, and thank you, Mr.

Lew.

Just a couple of questions for clarification purposes. The courts

have clearly stated, I believe, that workers have no ownership per

se, no property rights to the payroll taxes that they pay into the

Social Security system, and that implies and really means that all

future benefits are, therefore, entirely subject to the whims of politicians. Is it true, is it fair to say that the President’s proposal does

nothing to substantively change that feature?

Mr. LEW. I think that it is true that individuals don’t have a

right to their contributions. But I think that it is not correct to say

that they don’t have a right to the benefits. It would require a

change of law to take the benefits away from them.
59

Mr. TOOMEY. Exactly, which could happen by a majority vote of

Congress——

Mr. LEW [continuing]. Yes, it could.

Mr. TOOMEY [continuing]. And passage by the President at any

time.

Mr. LEW. It has not been an easy thing to do in the past, but,

yes, theoretically it could happen.

Mr. TOOMEY. Right.

In your opening comments, I believe, if I understood you correctly, you suggested that one of the important features that the

President feels must be retained in Social Security is that the benefits are guaranteed, there be a guaranteed defined-benefit program.

But, in light of the previous question, isn’t it really impossible

under the current structure to guarantee them because the political

process could always reverse that guarantee?

Mr. LEW. Well, I would say that the history since 1935 has been

expanding, not contracting, benefits. In 1983, there was a bipartisan effort to deal with the Social Security financing problem. Tough

decisions were made. It was very, very difficult to get agreement

on any benefit reductions. And I would suggest that benefit reductions will be very hard to make for good reason. People work their

lives and plan on receiving the benefits, and they do have a right

to them.

Mr. TOOMEY. Right, but we also are in a situation now as the

system has matured and there are no longer ever-increasing numbers of workers paying for an increasing number of retirees, it is

going to be much harder to make those payments. So, I would suggest that the ability to honor those payments under the current

system is increasingly in jeopardy.

Mr. LEW. And we agree that we need to work together to get 75-

year actuarial solvency, which would require some of those tough

decisions. We think that this is a good first step.

Mr. TOOMEY. OK.

Second question is, in a system in which workers were free to direct and actually own, actually have property rights to a portion of

their payroll tax, invested as they see fit, perhaps with restrictions

and guidelines, if such a system included an explicit governmentminimum guarantee in it, would that not fulfill that objective, and

would the President, therefore, be willing to consider such a system?

Mr. LEW. We have said for the last year that we would look at

alternatives, specific alternatives, as they are proposed. I am a little reluctant to respond to a hypothetical. The principles that the

President laid out through the past year of discussion about Social

Security reform have been very clear about guaranteeing the benefits, about making sure that there is progressivity in the system,

making sure that we don’t somehow do something that undermines

the benefits available for someone when they become disabled, for

a survivor.

In order to answer a question about a specific plan, one really

has to look at it in its entirety. We think that preserving the core

benefit as we have it today is the safest way. But we will look at

alternatives. We have said in recent weeks, and I have said this
60

morning, that our view is that the entire payroll tax should remain

dedicated to the traditional Social Security benefit.

Mr. TOOMEY. OK. Let me try to ask it a different way.

Would it be fair for me to conclude, then, that if the design of

the system met certain conditions that you feel are important, then

there would be a possibility that the President would agree to a

system in which workers would own and control a portion of that

payroll tax?

Mr. LEW. I think that I have indicated very clearly what our

view is. You are asking me to draw hard lines about it, not even

having a discussion. We have tried very hard, on an issue where

it is difficult to keep lines of communication open, to keep lines of

communications open. So, I am trying not to draw the kinds of arbitrary hard lines. But at the same time, I am trying to be very

clear about what our view is and what our position is. And we are

not wavering from that. I am not wavering from that today.

If there is a specific plan that you would like us to look at, I

would be delighted to look at it. I would be delighted to have our

Social Security team look at it. And I think that the five principles

that the President outlined over the past year speak for themselves, and that is what will guide our view of any proposal. Our

view is that the Social Security payroll tax should remain dedicated to the traditional benefits.

Mr. TOOMEY. OK. Thank you Mr. Lew.

I will yield the balance of my time, Mr. Chairman.

Mr. CHAMBLISS. Thank you.

Mr. Minge.

Mr. MINGE. Thank you, Mr. Chairman.

Mr. Lew, as I understand it, in fiscal year 1999, to talk about a

surplus requires that we focus everything on the unified budget,

and if we were to simply look at the Federal budget without Social

Security—as I believe the budget legislation requires us to do on

the congressional side—we would have a deficit of $38 billion. Does

that square roughly with the numbers that you have been working

with?

Mr. LEW. Yes, it does.

Mr. MINGE. And, as I understand it, that would mean that if we

were to have a tax cut this year, we would be borrowing money,

essentially, from the Social Security Trust Fund in order to fund

that tax deduction, and similarly, if we were to expand programs

this year, we would be expanding them by borrowing that money

from the Social Security Trust Fund.

Mr. LEW. Technically, we are leaving the assets to the Social Security Trust Fund, but the entire surplus this year is attributable

to the contribution of Social Security through the off-budget calculation to the surplus.

Mr. MINGE. Now, I would like to take this one step further and

look at the 15-year proposal which you have outlined, which I think

is admirable because it really challenges Congress and the country

to plan in the long term.

If we were to simply insist that as long as we must rely on the

Social Security Trust Fund to balance the budget that we would devote all of the surplus, so to speak, which is really all of the Social

Security Trust Fund money, to the Trust Fund and not have any
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program expansion or tax reduction that was not otherwise offset

within the budget, wouldn’t we be doing better by the Social Security Program by such an insistence, at least during the next couple

of years until we have a surplus in the nonunified budget?

Mr. LEW. Well, I think that we would have to look at the Social

Security Trust Fund, and the question of the unified budget a little

bit more broadly, looking at a longer term. The Social Security

Trust Fund will build up assets from now until 2012. Until 2012,

Social Security revenues will be equal to or greater than the benefits paid. After 2012, the Social Security Trust Fund will start getting drawn down, and under current law it will expire in 2032, and

we have proposed to extend it until 2055.

The question of the unified budget, as much as what do we do

today, is what condition will we be in in 2012 through 2055? And

at that point we will need a non-Social Security surplus of substantial magnitude to pay back these bills to Social Security.

So, the discussion of ‘‘on budget-off budget’’ becomes a very different one once those lines cross and Social Security starts needing

to have its bonds paid back as opposed to paying them in. And

we——

Mr. MINGE. But for the next couple of years the lines haven’t

crossed——

Mr. LEW [continuing]. Correct.

Mr. MINGE [continuing]. And we are dealing with truly a deficit

in the nonunified budget, and what we are trying to do, as I understand the President’s proposal, is to look at this 15-year period of

time and saying, ‘‘If we can maintain the course for 15 years and

devote 62 percent of the unified surplus to Social Security, we are

going to be ahead.’’ Do you have any estimate as to how much we

would be ahead by doing that as compared to simply insisting that

all of the Social Security Trust Fund cash flow surplus be reserved

for Social Security purposes?

Mr. LEW. Well, roughly speaking, if you looked over the next 15

years, the 62 percent that we are putting in over 15 years is roughly equal to the off-budget Social Security surplus. If you look at the

Medicare component, that is all additional debt reduction. That is

all additional savings for the future. And it is a rough proxy. It is

really when you get beyond the 62 percent that the question starts

to come in.

On a year-to-year basis, our proposal would not be exactly as

what you have described, but over 15 years, it would be a little bit

more.

Mr. MINGE. It would be a little more, but it would be roughly the

same. It is when you look at Medicare that you are really making

a dramatic improvement in savings.

Mr. LEW. That is right.

Mr. MINGE. Now, to take this one step further, it troubles me

that here, at least for the next 2 years, we would be only using 62

percent of that Social Security Trust Fund surplus that is being

generated each of these 2 years for the Social Security Program

and we would be counting on future Congresses and future administrations that show the self-restraint and the discipline to stay the

course on that 62 percent thereafter, when, of course, it will be a

future Congress and a future administration.
62

Is there anything that you see that we can do during this year

and next year that would truly commit future Congresses and the

future administrations to this course, or is it somewhat like what

we faced back in 1994 or 1993 when we adopted a 5-year budget

plan, but when the next year rolled around and the next Congress

rolled around, that budget plan was just gathering dust? That was

history. And people again wanted to plan and look to the future.

Mr. LEW. I think that there is a very big difference between a

budget plan and a promise to make certain contributions to the Social Security Trust Fund. I would hazard the political guess that,

if we put into law scheduled contributions into the Social Security

Trust Fund, that we will keep those promises and that it will be

very difficult for future Congresses to change that. It is not impossible. Our constitutional system does give future Congresses the

right to change the law, but I think that it is highly probative how

difficult it has been to cut Social Security, and I think correctly so.

I think that it is very unlikely that we would see a substantial

backing off of commitments that we make this year to put money

into the Trust Fund.

Mr. MINGE. Thank you.

Mr. CHAMBLISS. My good friend and colleague from Georgia, Mr.

Collins, is recognized for 5 minutes.

Mr. COLLINS. Thank you, Mr. Chairman.

Mr. Lew, I want to go back to a comment by Mr. Minge, when

he referred to tax relief as having an effect on Social Security.

Under current budget law, tax relief would not affect Social Security unless the benefit structure of Social Security was changed. Is

that not true?

Mr. LEW. I am not sure that I understand the question.

Mr. COLLINS. You do nothing to Social Security, and you give tax

relief, it has no effect on Social Security.

Mr. LEW. Well, it wouldn’t reduce the benefit that we owe.

Mr. COLLINS. It would not even affect it.

Mr. LEW. But, it would reduce our ability to pay the benefit.

Mr. COLLINS. The question, though, it would not affect—tax relief

would not affect Social Security unless you change the benefit

structure to match the tax relief also?

Mr. LEW. But we have no way now to show how——

Mr. COLLINS. Yes or no to that?

Mr. LEW [continuing]. I don’t think that it is a simple yes-or-no

question.

Mr. COLLINS. Sir?

Mr. LEW. I don’t think that it is a simple yes-or-no answer, Congressman.

Mr. COLLINS. Yes, it is.

Mr. LEW. Then the answer is, yes, it would affect Social Security.

Mr. COLLINS. It would not affect Social Security at all.

Mr. LEW. Yes, it would.

Mr. COLLINS. I only have limited time. You seem to want to

skate around the answer there. Let’s don’t do that on some of the

others.

Lots has been said about Mr. Greenspan and some of his comments. When he testified before the Ways and Means Committee

the other day, he had several recommendations. One, he said, run
63

the surpluses. I am very reluctant to use the word ‘‘surplus’’; I like

to use the words ‘‘positive cash flow’’ because it is all over in the

Trust Funds today, the positive cash flow. And I understand, too,

by running those positive cash flows into the Trust Funds and having public debt offset by government bonds will help in the area of

interest rates.

Second thing, though, he said, is if you do look at tax reduction,

look at marginal rates, and also look at capital gains tax relief. We

know that some of the changes that have taken place in the last

4 years have been through the cooperation of the Congress and the

administration in a year of taxation, and one of those was capital

gains tax relief.

But what he did caution about was no new spending, no increase

in spending. Now, he did not say no new programs, and no one else

will say no new programs. But if you are going to look at new programs, you look at them within the structure of your existing budget where you make your move around your budget caps.

Another thing that he cautioned us about, and it is in an area

of Social Security, and that is in the pay-as-you-go system—in

other words, current workers are paying current beneficiaries’

checks—but what I see that the President has offered is not an end

to the pay-as-you-go system but an extension of it from some 30 to

possibly 50 or 75 years. Is that not true?

Mr. LEW. Well, it is a change in the sense that it is committing

resources in a different form. Pay-as-you-go refers to the payroll

tax, and this is a bit different.

Mr. COLLINS. But it doesn’t change the pay-as-you-go system

from that of social income insurance to that as vested interest retirement.

Mr. LEW. That’s correct.

Mr. COLLINS. And a debt is a debt. And as you have said, each

year the national debt increases. Now I understand your difference

between the public sector portion of it versus the government portion of it, but it does increase. And at some point in the future—

I don’t see the chart there now—you estimated that the interest

portion of the budget would be 2 to 3 percent?

Mr. LEW. That was 2014, that projection.

Mr. COLLINS. Now, using that 2 percent or 3 percent—and I believe that you answered this when Mr. Price was questioning you—

that does not include the interest accrued of interest owed that

particular year to the Trust Fund. Is that not true?

Mr. LEW. That was net interest, correct.

Mr. COLLINS. That’s right. So, that is true; it does not include it.

If you use the word ‘‘debt interest,’’ that means that you have excluded that portion.

Mr. LEW. That’s correct.

Mr. COLLINS. OK.

Once we get to the point of having to redeem those governmentheld securities, how do you plan to do that? You said that you have

to have discipline in the budget and have resources beyond the unified budget.

Mr. LEW. Our current forecast shows surpluses—I forget if it is

through 2045 or 2046; it is way, way out into the next century. If

we are running surpluses in the non-Social Security budget, we
64

will be able to pay those bills back, and that is exactly the point

in terms of fiscal discipline. If we are not running those kinds of

surpluses in the non-Social Security budget—we already have the

debt. The Social Security benefit is a promise. If I were to promise

you that I was going to give you $100, that is a promise. If I then

write up a note, that doesn’t make it more or less of a promise.

That records it. When you record it, it shows up as increasing the

debt subject to limit. But the promise is every bit as much there

today without that note.

Mr. COLLINS. But it you are increasing the debt year after year

based on new spending, that is not very good fiscal discipline, is

it not?

Mr. LEW. I actually think that it is very good fiscal discipline,

and most of the comments that Alan Greenspan——

Mr. COLLINS. An increased spending and increased debt year

after year?

Mr. LEW [continuing]. Alan Greenspan, when he testified before

the Congress, made a number of points. He said that the President’s approach to Social Security reform is a major step in the

right direction and that it would ensure that the current rise in

government’s positive contribution to the national savings is sustained. The reason that he said that is that we reduce the debt

held by the public.

Mr. COLLINS. That’s right.

Mr. LEW. And that is the reason that we have the virtuous cycle

which reduces the net interest cost. I would argue that there is a

very big difference between a dollar of interest that is being used

to pay a current commitment for Social Security benefits and a dollar of interest used to pay a privately held bond. A dollar is not

a dollar in this case. One dollar is keeping a promise to Social Security; the other is not.

Mr. COLLINS. In the area of accounting you use the same dollar

twice the way you are using it. And that——

Mr. LEW. No, we actually haven’t used the same dollar twice.

Mr. COLLINS [continuing]. Yes, you are. And also—I am going to

close with this because my time is up—I think that the greatest

threat to this Nation is the national debt. At one point in time—

at some point in time in the future it will bankrupt this country

if we don’t get this thing under control and keep it under control.

Thank you, Mr. Chairman.

Mr. CHAMBLISS. The gentleman from Minnesota, Mr. Gutknecht.

Mr. GUTKNECHT. Thank you, Mr. Chairman, and I appreciate

this opportunity to visit with you, Mr. Lew, and I appreciate a lot

of the things that you have said today. In fact, I probably, at least

on this side, am going to be more congratulatory perhaps than

some of my colleagues, because it seems to me that there are three

questions that this committee and ultimately the Congress has to

answer. The first question is, how much do we want to spend? The

second question is, how much surplus will that create? And the

third, and perhaps the biggest, question that we are going to have

to resolve is, what is the highest, best use of that surplus?

Now we can argue—and I have found, and I will let my colleague

pass here—I have found in my townhall meetings, and when I

meet with my constituents, one of the most difficult questions to
65

really respond to and to define is this whole Social Security system

because it seems to me that it is a hybrid between a defined-benefit

plan with a Trust Fund and a pay-as-you-go system. And that is

how we sort of wind up speaking out of both sides of our mouths

about the unified budget, and it does get very difficult. And I don’t

have a perfect answer for it either.

But let me come back to the central question: how much do we

want to spend? And that is where I really want to give the administration a tremendous amount of credit because, as I read through

the budget, as my staff looked at it and as I looked at the numbers,

and so forth, the first thing that really did strike me is that you

are talking about a total spending increase for the next fiscal year

of only $39 billion. Now am I correct in that?

Mr. LEW. I don’t remember the exact number, but it is very close,

if that is not right.

Mr. GUTKNECHT. And if I remember correctly, and I have been

one who has felt very strongly that it is important for this Congress, for a whole variety of reasons, to keep faith with the spending caps which have been set in the past, and with at least the

spirit of the balanced budget agreement that the President signed

a couple of years ago, and many of us went down to the Rose Garden to join in the signing. And as I read your budget request, you

are actually talking about exceeding those spending caps by only

$17 billion.

Now, I think that within that framework there is at least an opportunity for us to agree—the Senate, the House, Republicans,

Democrats, Independents, and people in the administration—to

agree to some kind of a spending cap that is somewhere at least

within the spirit. And starting with your budget document, I must

say that the average family, to the best of my knowledge, the average family budget today in America will probably increase about

2.5 percent. So, to your credit, for the first time in my memory, we

are talking about increasing the Federal budget at a slower rate

than the family budget, and you deserve a tremendous amount of

credit for that.

That is the good news. The bad news, it seems to me, is that we

look through the document and begin to sift through it—Mr.

Chambliss has raised the issue of the agriculture budget and crop

insurance. Others have talked about veterans’ benefits. Mr. Bass

talked about special education. I am extremely concerned about

what ultimately this means for Medicare reimbursements, particularly in rural America. The NIH budget, it seems to me that there

is a good deal of shifting, or however we want to describe it. And

then there is the big issue of the defense budget. Where it strikes

me that in some respects the administration is saying, OK, we’re

going to hold the limit at a lid at 2.3 percent, but in a way we’re

going to do a little jostling so we can fund our new programs.

Let me just ask you this question: Does the President’s budget

reflect the requirements that the administration and the Defense

Department and others are going to need in terms of our commitment to Bosnia, to Iraq, and perhaps even to Kosovo? Are those reflected at all? Are those within the budget? In other words, the real

question is this: Do you anticipate coming back to this Congress
66

sometime before we adjourn or go home this fall with some kind

of an emergency supplemental to fund those requirements?

Mr. LEW. Congressman, the answer is in some cases different, so

let me go through the items.

In the case of Bosnia, we did include funding in our budget, in

the body of our budget——

Mr. GUTKNECHT. So, you will not be coming back to Congress for

more money for Bosnia?

Mr. LEW [continuing]. That is certainly my expectation. I would

just caution that we are talking about situations that are inherently fluid. But this budget is for the full year, correct.

Mr. GUTKNECHT. Assuming that nothing changes, you will not be

back for more money?

Mr. LEW. Right.

Mr. GUTKNECHT. OK.

Mr. LEW. With regard to Iraq, we are working with the Defense

Department on whether or not there is a need for a supplemental,

and we haven’t reached that determination yet. The one supplemental that we do know that we are going to be presenting is for

Central America, and we hope to do that very shortly. With regard

to Kosovo, I can’t answer that question until policy decisions are

made.

The budget includes an allowance of $3.25 billion in anticipation

of, at a minimum, the Central America supplemental and the possibility that there may be others. We put in a number that was consistent with last year’s budget. It was not consistent with last

year’s final action. And I think that we share the concern that

many here share that it got a little too large last year. We think

that the emergency authority remains an important one. If things

happen between budgets, as a country, we have to be able to respond, but a real emergency is different than other circumstances

that may test the definition.

We hope to work with the Congress to make sure that the emergency authority remains available, but we don’t currently have any

immediate expectations except for the Central America supplemental.

Mr. GUTKNECHT. Well, the fear of this Member is that there is

the temptation already to say, well, you know, Congress is probably

going to plus-up the crop insurance program. Congress is probably

going to do something with veterans’ benefits. We certainly need to

do something to change the special education formula and live up

to our commitments there. Medicare, you know, I don’t know what

is going to happen with Medicare. NIH, Defense, all of that—the

danger I see happening is that we start off with this number 2.3

percent, but by the time it is over, the deal at the end of the day

could be significantly larger than that.

Mr. LEW. Congressman——

Mr. GUTKNECHT. And it seems to me that it is the responsibility

of this committee to set the overall spending limits and to do what

we can to make certain that we enforce them, and that is where

we need your help.

Mr. LEW [continuing]. Well, we certainly hope that we reach

agreement on a broad basis, so that we move beyond the discussion

of 2000 to the multi-year context.
67

In the case of 2000, we have a number of offsets in there, and

if they are not adopted, we understand that it is going to be a difficult process working through the year.

Last year, when we got to the end, the President’s class size initiative, which was a very important priority, was included in the

final Omnibus with an offset. It was an offset that we worked

through with the two Budget Committees to make sure that it

scored. And we hope that we can work together both on a

multiyear basis to have a resolution to the question of the surplus,

because we do believe that there is a need for more discretionary

resources going into the out years, but after we do Social Security

first. Hopefully we will get to the point where we do Social Security

and this gets a little bit easier.

But I agree with you, there is a need for discipline. There is a

need for caps. There is a need for pay-as-you-go rules. We know

where we go when we don’t have any rules. We know that it is a

lot easier to spend money and to give tax cuts and then afterwards

see the result. We need to use the opportunity of the surplus to

make some very wise decisions now and then have discipline going

forward.

Mr. GUTKNECHT. Thank you, Mr. Chairman. My time has expired.

Mr. CHAMBLISS. That was a very good question, Mr. Gutknecht,

and being a little bit more definitive, Mr. Lew.

And now with respect to Bosnia, the administration has Bosnia

funded in the fiscal year 2000 budget, fully funded there. You have

only got 6 months budgeted in the fiscal year 2001, so I am assuming that you are planning that we are out of there in 2001; otherwise we have got no money in there for Bosnia; we’ve got no money

in there for Kosovo. So, we need to be—everybody needs to thoroughly understand that as we move into this.

Mr. Wamp.

Mr. WAMP. Thank you, Mr. Chairman, and thank you, Mr. Lew,

for the relationship that you have with our chairman, and just carrying forward in a positive way. I want to say that I think Congressman Clement is onto something that this budget, from our

side of the aisle, should represent a good starting point. I think

that it raises the right questions, and I think that it does include

some good ideas, and I would think that my friend from Minnesota

is correct there.

A couple of points that I would like to make because I have

learned—this is my fifth year—that you have to clear things up.

You talked about the NIH funding being ahead of schedule, and

let’s be candid, the Republican Congress has really carried a lot of

that weight over the last 4 years to increase NIH funding. As a

member of the Appropriations Committee, I just want to point that

out.

Also, earlier, when Chairman Kasich questioned you on the 2

percent payroll tax, I have also found that out there are across the

country regular people who think that that means somehow that

money would be turned back over to the beneficiary. But it needs

to be pointed out every time that we talk about it, so they will understand, that the government will still control that money. The

beneficiary will just direct that money. And I hope that somehow
68

we can come to an agreement much like Chairman Kasich said,

like the Thrift Savings Account for Federal employees, where you

can direct where it is invested, but the government keeps the

money. The government controls the money. That money doesn’t go

back to the beneficiary. It stays in a fund, but it can continue to

grow.

There is another thing that I am a little dismayed about. I am

one of the Republicans that for the last 4 years has said let’s be

more broad-based in our approach to tax relief, so that they can’t

say that we’re trying to help the wealthier Americans. I am a little

frustrated that, after carrying that mantra for the last 4 years and

for us to propose more broad-based tax relief and then you still say

that it benefits more wealthy Americans. The only way that you

can really take that position is that you think everybody with a job,

or everybody that is working, or everybody that is doing OK out

there represents wealthier Americans. At some point we need to

come together on broad-based tax relief. And I concur that the

more broad it can be, the more it can affect every working American, the better off it is.

But my one question is this: On education funding, will there—

and this kind of presses you, like Chairman Kasich pressed you

about ever agreeing to a 2-percent payroll tax that is self-directed

by beneficiaries—is there any way that the President can agree to

block grant the education dollars? Because, during the Great Society the intent was to eliminate poverty. It didn’t work. We created

Federal program after Federal program after Federal program, and

ultimately the Governors have cried long enough and loud enough

for us to start block granting those same dollars, and that is working. And I just wonder if we’ve got to go back throughout this entire exercise over a generation of creating programs—in terms of

trying to improve education, that motive and intent is all the same.

We all agree that we need to improve education. But do we have

to go through this same cycle again, or can’t we just go ahead and

block grant the money right back to State and local governments

and let them spend it in a more efficient way. And is there any way

that you will agree with us on that approach over the next few

months?

Mr. LEW. I think that over the last several years we have made

very clear how strongly we, the administration, the President oppose block granting all of the education funds. We have worked

with the Congress to provide greater flexibility in many areas.

When it comes right down to it, the argument comes down to

what do you want the Federal education policy to be? Do we want

to be promoting the kinds of standards that the President has spoken to? Do we want to be promoting policies that are aimed at specific objectives like reducing the social promotions? This is an important part of our policy.

The question to block grant or not to block grant sounds like it

is an accounting issue, but it is not. It is really a policy issue, and

the President has very strong convictions in a lot of these areas.

So, I think that you can expect that our opposition will be consistent with our past position.

Mr. WAMP. Let me just say one thing: If you go to a PTA meeting, you get on talk radio, you go out there where parents are in-
69

volved today, they will say, please, no more mandates; please, don’t

create any more education programs that tie our hands—we’ve got

people doing paperwork instead of delivering education because of

the Federal programs we have created in education.

I would just submit to you, please try to work with us on this,

so we can have fewer programs but more money flowing back to

the schools to let them spend it as they see fit without all these

mandates that seem to flow every time we come up with a new

education bureaucracy in Washington.

Mr. LEW. Hopefully, we will be able to work through the Elementary and Secondary Education Act amendments to achieve some of

our common goals and to reduce the paperwork. Our goal is not to

be paying for administrators and paperwork. Our goal is to improve the quality of education. And on that, I think that we can

agree.

Mr. WAMP. I think, Director Lew, the glass is half full and not

half empty. So we have got a good starting point.

Thank you, Mr. Chairman.

Mr. CHAMBLISS. Jack, let me thank you again for being here, and

I particularly thank you for having patience with us and hanging

around to give everybody an opportunity to ask questions.

I hope that everybody that wanted to ask questions has come

back to do so. But let me just say that if there are any members

who have additional questions, we would like to submit them to

you in writing, and I assume you will answer them within about

30 days or so.

Mr. LEW. It would be my pleasure.

Mr. CHAMBLISS. And we, obviously, have a lot of things that we

agree on. There are a lot of things that we have a disagreement

about with respect to particular issues and philosophically, but we

look forward to working with you and my friend John will be in

touch and dialoguing, and, hopefully, we will come up with something that is beneficial to the American people here in short order.

Mr. LEW. Thank you.

Mr. CHAMBLISS. Thank you very much.

[Whereupon, at 2:50 p.m., the committee was adjourned.]

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