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DOMESTIC ENTITLEMENTS:

MEETING THE NEEDS

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, FEBRUARY 17, 2005

Serial No. 109–4

Printed for the use of the Committee on the Budget

(

Available on the Internet: http://www.access.gpo.gov/congress/house/house04.html 
(II)

COMMITTEE ON THE BUDGET 

JIM NUSSLE, Iowa, Chairman 

ROB PORTMAN, Ohio, 

Vice Chairman 

JIM RYUN, Kansas 

ANDER CRENSHAW, Florida 

ADAM H. PUTNAM, Florida 

ROGER F. WICKER, Mississippi 

KENNY C. HULSHOF, Missouri 

JO BONNER, Alabama 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

THADDEUS G. MCCOTTER, Michigan 

MARIO DIAZ–BALART, Florida 

JEB HENSARLING, Texas 

ILEANA ROS–LEHTINEN, Florida 

DANIEL E. LUNGREN, California 

PETE SESSIONS, Texas 

PAUL RYAN, Wisconsin 

MICHAEL K. SIMPSON, Idaho 

JEB BRADLEY, New Hampshire 

PATRICK T. MCHENRY, North Carolina 

CONNIE MACK, Florida 

K. MICHAEL CONAWAY, Texas 

JOHN M. SPRATT, JR., South Carolina, 

Ranking Minority Member 

DENNIS MOORE, Kansas 

RICHARD E. NEAL, Massachusetts 

ROSA L. DELAURO, Connecticut 

CHET EDWARDS, Texas 

HAROLD E. FORD, JR., Tennessee 

LOIS CAPPS, California 

BRIAN BAIRD, Washington 

JIM COOPER, Tennessee 

ARTUR DAVIS, Alabama 

WILLIAM J. JEFFERSON, Louisiana 

THOMAS H. ALLEN, Maine 

ED CASE, Hawaii 

CYNTHIA MCKINNEY, Georgia 

HENRY CUELLAR, Texas 

ALLYSON Y. SCHWARTZ, Pennsylvania 

RON KIND, Wisconsin 

PROFESSIONAL STAFF

JAMES T. BATES, Chief of Staff 

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 17, 2005 .......................................... 1

Statement of: 

Gail R. Wilensky, Ph.D., senior fellow, Project HOPE .................................. 6

Ron Haskins, Ph.D., the Brookings Institute ................................................. 13

Kent A. Smetters, Ph.D., Associate Professor, the Wharton School, University of Pennsylvania ................................................................................ 24

Judith Feder, Ph.D., Dean of Policy Studies, Georgetown University ......... 33

Prepared statement of: 

Dr. Wilensky ..................................................................................................... 9

Dr. Haskins ....................................................................................................... 18

Dr. Smetters ...................................................................................................... 27

Dr. Feder ........................................................................................................... 36

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DOMESTIC ENTITLEMENTS:

MEETING THE NEEDS 

THURSDAY, FEBRUARY 17, 2005

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

The committee met, pursuant to call, at 10:01 a.m., in room 210, 

Cannon House Office Building, Hon. Jim Nussle (chairman of the 

committee), presiding. 

Present: Representatives Nussle, Barrett, Bradley, Conaway, 

Diaz-Balart, Mack, McCotter, McHenry, Portman, Putnam, RosLehtinen, Ryun, Simpson, Wicker, Allen, Baird, Capps, Case, Cooper, Cuellar, Davis, McKinney, Moore, Neal, Spratt, and Ryan. 

Chairman NUSSLE. Good morning and welcome to the Budget 

Committee hearing today to discuss the longstanding and, for that 

matter, worsening problem and challenge regarding overall entitlement spending in the Federal budget. 

Today we will hear from an expert panel of witnesses: Gail 

Wilensky, the senior fellow at Project HOPE; Ron Haskins of The 

Brookings Institution; Kent Smetters, an Associate Professor at 

Wharton School of the University of Pennsylvania; and Judy Feder, 

who is the Dean of Policy Studies at Georgetown University. 

We welcome all of our witnesses to the Budget Committee, and 

we appreciate and look forward to hearing your testimony. 

You know, I have to remind myself when I go back home to Iowa 

from Washington, and really, for that matter, anywhere outside the 

Beltway, that not all the folks back home realize that we have different kinds of spending in Washington. Most people look at it and 

say, well, spending is spending; it is a really big budget and you 

guys spend a whole lot of money. We know that there is discretionary spending, and that is the kind of spending that we review 

on a regular basis, and on an annual basis; we hold hearings on 

it. Sometimes we debate at great length on the floor of the House 

and in committees how many tax dollars will go to a particular program; we argue over a million here and a million there. Yes, it does 

all add up, but this type of spending only adds up to 39 percent 

of our total spending. 

So we have another kind of spending that is out there, and that 

is called entitlement—or another word that we use is mandatory 

spending. In a nutshell, this kind of spending keeps going and 

growing and going and growing every year, and it is a relatively 

simple process, it just continues to grow and magnify. Our budget 

office tells us how much bigger our mandatory spending is expected 

to get in the next years; we pretty much just say OK and we stick 
2

to that number in the budget, and it keeps going and growing and 

going and growing. While that is a little simplified for the point of 

explanation, it is pretty much true, and that is the complication 

and the frustration of it all. 

I have referred to this many times as the Federal Government’s 

auto pilot spending; it is spending that simply continues to grow 

year after year, largely without much review, modifications, or, for 

that matter, even oversight by the Congress. Many of the programs 

that make up our mandatory spending or automatic spending were 

created, in some instances, decades ago, and they still operate—

without too many basic reforms or modernization on the very 

model and technology, for that matter, that existed at the time that 

they were first brought into existence. 

That is the kind of spending that we are here to talk about 

today—and specifically why that kind of spending has become an 

ever-growing problem and challenge and burden for the Federal 

budget. So let us take a quick look at why the sustained and unchecked growth of these programs has become such a problem. 

I would like to show you the chart that we have made up that 

demonstrates this. [Chart.] 

The share of the budget consumed by entitlements, mandatory, 

or automatic pilot spending, has been growing rapidly since the 

mid-1970s and now stand at about 54 percent of the budget. So 

today this makes up over half of the Government’s spending. As 

you can see from the chart, continuing at that rate we are going 

now, by 2015 that portion will grow to 61 percent and eventually 

crowd out more and more of the other priorities that threaten really any kind of overall budget control. 

So as you can see here, 54 percent today of our budget is automatic, and now only 38 percent of the budget is discretionary. So 

during the sometimes 3-, 4-, 6-month appropriation process, where 

we haggle and debate and discuss the appropriation bills that come 

to the floor, it used to be 13, this year we are going to try a little 

bit different process—we will argue over only that 38 percent of the 

budget. Since half of it is defense and homeland security now, really it is even less that gets discussed. 

Now let us take a look at why we and our predecessors have let 

this problem continue unchecked; and two, why, even now, when 

the problem is staring us in the face and putting in peril funding 

for every other program whose spending we actually control, why 

there are still very few who have not only been unwilling to come 

forward and try to get their hands around this problem—but, for 

that matter, who are even available to admit that there is a problem. 

To answer the first problem, by its very nature, mandatory 

spending is difficult to control, just by the nature of the word. This 

spending is tied to a variety of factors outside Congress’s control, 

either political or otherwise, such as: demographics, economic conditions, medical prices, and so on. So as we talked at last week’s 

Social Security hearing, we have got an aging population with 

longer life expectancies, increasing benefits, and, as we are all well 

aware, ever-increasing prices and costs for medicine. 

Attached to all of this are these mandatory programs, particularly the larger ones, tend to have a never-ending labyrinth of pa-
3

perwork, layers and layers of Government bureaucracy and, let us 

face it, huge sums of money that are at stake, and many stakeholders. 

Second, at the root of these problems are critical needs that must 

be met—we are not suggesting that these are challenges that 

shouldn’t be met—such as Medicare payments, Social Security benefits, or other so-called unbreakable commitments that must be fulfilled, such as providing for the needs of our veterans. If the Government is there for anything, it is to help people who cannot help 

themselves, and many of these programs help people who cannot 

help themselves. 

Just as everyone in this country is somehow touched by one or 

more of these programs, either themselves, their children, their 

parents, or even their grandparents, so these programs are highly 

personal. In many cases, people associate a program in its totality 

to that one check with their name on it. Even talking about a program as a whole strikes a very personal nerve in a whole lot of people’s homes that depend on that safety net. These factors make it 

especially difficult not only to control so-called entitlement spending, but even to discuss it, and getting it back under control without deserving people worrying that their so-called benefits will be 

changed, affected, reduced, cut, or eliminated. 

So everyone here, certainly myself included, understands that we 

have a big problem to deal with, not only in getting our hands 

around it and looking for solutions, but in doing it in a way that 

is fair to today’s program recipients and all those who will need 

these programs when they get to that point in their particular station of life. 

I commend the President for taking steps in his budget to address this problem, by including savings in mandatory programs as 

part of our effort to get the growth rate under control and to help 

reduce the current deficit. These recommendations serve as a 

benchmark for Congress as we develop our budget. 

I think it is important to remind everyone that this hearing isn’t 

happening in a vacuum. Congress has already acted to attempt to 

get our hands around some of the discretionary spending, reduce 

some of the most obvious examples of waste and fraudulent spending, and to keep our now strong, growing economy continuing to 

grow. However, over the long run the Federal burden of mandatory 

spending will become too great for us to simply grow out of the 

problem; or for the economy to grow; or to just reduce wasteful or 

necessary spending enough to be able to continue to sustain some 

of these larger programs. 

So not only with our discretionary programs, such as education, 

the environment, science, defense, get squeezed tighter and tighter, 

our strong economy—which I think we are all pleased to see creating jobs and helping to reduce our deficits—is also at peril by 

this growing share of mandatory spending. This problem becomes 

bigger, more serious, and even more difficult to control with each 

passing year. 

I think that there is, and should be, bipartisan acknowledgment 

that this is a growing serious problem, and that we hopefully will 

work to finding bipartisan common sense solutions. I am looking 

forward to that discussion, and I am certainly interested in the dis-
4

cussion that we have today. We have got some fine witnesses who 

can give us their perspective on not only the challenge, but possibly 

some of the solutions. 

So, with that, I will turn it over to my friend and colleague, Mr. 

Spratt, for any opening comments he would like to make, and I ask 

unanimous consent that all members be allowed to put an opening 

statement in the record at this point. Without objection, so ordered. 

Mr. Spratt. 

Mr. SPRATT. Mr. Chairman, thank you very much. Thank you for 

calling this hearing. 

And I would like to thank each of our witnesses for the efforts 

they have made and for the time they have taken to come here and 

testify today. We look forward to hearing your testimony and to 

asking you further questions about it. 

The hearing today focuses on entitlements in the administration’s budget for mandatory spending, as we call it, programs like 

Medicaid, Medicare, and Temporary Assistance for Needy Families 

(TANF). We don’t question whether growing entitlements pose a 

problem. We do question whether the administration’s budget provides sound solutions. 

Although we have a budget that is $427 billion in deficit, the ad- ministration is still pushing substantial tax cuts, $1.6 trillion just 

to renew and make permanent the tax cuts passed in 2001 and 

2003. As a consequence, we find ourselves down in the safety net 

searching for savings that will offset an enormous deficit for which 

there is little end in sight. 

Among the entitlements in the administration’s budget, Medicaid is slated for $60 billion in gross cuts, $45 billion in net cuts, over 

the next 10 years. These cuts may not seem that great given the 

size of the program and the span of time, 10 years, but they could 

do real hurt to some of the most vulnerable among us. 

Furthermore, as three Governors told us yesterday, Medicaid 

needs to be reformed. From their point of view, it has to be reformed, restructured. But as they emphasized, the reconfiguration 

cannot and should not be driven by arbitrary budget numbers. We 

need to design the kind of system we want to deliver the care that 

is needed amongst those who are the most needy, and then decide 

what it costs and change it at the margins so that we can fit it into 

the budget. 

The President’s plan for our largest entitlement program really 

is beyond the scope of this hearing, but Social Security is a matter 

of great importance. Unfortunately, the full cost of what the President is recommending for Social Security has been omitted from 

this budget. It is one of the major omissions in this particular 

budget. 

Nevertheless, when we look at the proposal and then look at 

what the actuaries have told us about likely costs, we know that 

creating private accounts and allowing workers to divert 4 percentage points off their FICA payments into private accounts, instead 

of into the Social Security trust fund, will cause the Government 

to add substantial amounts to national borrowing in the next 20, 

30, 40 years. 

And the only time frame the administration has given us any 

number for, 2009 through 2015, during which they would imple-
5

ment their Social Security proposals, the cost is $754 billion. If we 

look at the first 10 years of implementation and use the same numbers, we figure the cost over the first 10 years of full implementation at $1.5 trillion; and over the second 10 years at $3.5 trillion. 

In other words, the first 20 years would cost $5 trillion in additional debt for the United States to incur, which will inevitably 

send us looking again, even more seriously, about the safety net 

program. 

Now, Medicare and Medicaid costs are growing, no question 

about it. If anything, Medicare is a worse problem, long-run, than 

Social Security. But it should be acknowledged that these costs reflect growing enrollment and rising health-care costs; growing enrollment particularly for Medicaid, particularly because of the recession from which we are just emerging; and the rising healthcare cost, medical care costs are not unique or special to Medicare 

or Medicaid, they reflect what is happening in our whole economy. 

So in a correct and broad sense, the problem before us when we 

talk about Medicare and Medicaid is not just the nature of these 

programs and the costs they are incurring, but the cost of medical 

care in our society generally. 

Both Medicare and Medicaid grew at an average annual rate of 

6.9 percent from 2000 to 2003, while private and premiums grew 

at a rate of 12.6 percent over the same period of time. That should 

be borne in mind. 

We are open to solutions, Mr. Chairman, open to negotiations, 

because we recognize that if we are going to put the budget back 

into balance, then programs of this kind have to be part of the 

equation, if for no other reason than they constitute a large and 

growing share of the budget. But we also are cognizant of the fact 

that these programs help the neediest among us, they help the 

least of these. If we cannot help them, nobody else can. Consequently, we have got to be very, very careful about making arbitrary cuts and arbitrary reductions, as the three Governors we visited with yesterday told us. 

So I look forward to the testimony today and the light that you 

can shed upon these problems, why they are growing, what we can 

do to make the programs better given the substantial sums of 

money we are spending upon them. Thank you again for coming. 

Chairman NUSSLE. I thank my friend, Mr. Spratt. We have, as 

I said and as he said, four good witnesses to help us with this discussion today. I will call on them in the order we have here on our 

witness sheet. We will start with Dr. Gail Wilensky, senior fellow 

from Project HOPE. 

All witnesses’ testimony as written will be put in the record, and 

you may summarize as you see fit. 

Welcome back to the committee, Dr. Wilensky. We are pleased to 

receive your testimony. 
6

STATEMENT OF GAIL R. WILENSKY, PH.D., SENIOR FELLOW, 

PROJECT HOPE; RON HASKINS, PH.D., THE BROOKINGS INSTITUTE; AND KENT A. SMETTERS, PH.D., ASSOCIATE PROFESSOR, THE WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA 

STATEMENT OF GAIL R. WILENSKY 

Ms. WILENSKY. Thank you very much, Mr. Chairman. As you 

have indicated, my name is Gail Wilensky. I am currently a senior 

fellow at Project HOPE, an international health education foundation. I am formerly an administrator of the Health Care Financing 

Administration (HCFA), now known as Centers for Medicare and 

Medicaid Services (CMS), and a former chair of the Medicare Payment Advisory Commission. 

My views expressed here are those of an economist, which is my 

professional training, as well as the experiences that I have had as 

HCFA administrator and MedPAC chair. They should not be interpreted as positions of Project HOPE. 

Most of the attention right now in Washington is being focused 

on 2006 budgetary issues, but the challenges, as you have indicated, for Medicare and Medicaid grow substantially larger over 

time. I am going to talk mostly about Medicare, but also a little 

about Medicaid; a little about the short-term issues and then more 

about the long-term challenges. 

The budget is providing for $346 billion in outlays for Medicare. 

This is a substantial increase. If you look at the 2001–2006 period, 

you see increases that are averaging over 9 percent. Most of the attention right now is focusing on the implementation of the Medicare Modernization Act. That is as it should be. I would like to 

commend you, as a former HCFA administrator, for including implementation money in the budget. That is all too frequently left 

out. It is an important part of any new legislation. 

The Congressional Budget Office (CBO) projections that were released last month for Medicare indicate that they expect Medicare 

to grow at an average rate of 9 percent over the 10-year period 

2006 to 2015. What it will mean during this time is Medicare will 

be growing from 2.6 percent of gross domestic product (GDP) to 3.9 

percent by 2015. And that is an optimistic assumption because it 

assumes that the current way of paying physicians, which has resulted in reductions in fees, only to be overturned by the Congress, 

stays in place. So, in fact, it is likely that the growth in spending 

over the 10-year period will be larger than what the CBO has estimated. 

There has been a fair amount of controversy about the cost of the 

Medicare prescription drug component. Initially, the difference between the $395 billion that was estimated by the CBO, as opposed 

to the $534 billion by the actuary in the CMS, although in absolute 

terms substantial, represent actually a very small amount of total 

Medicare spending over a 10-year period. It happened because of 

different assumptions about how many people would participate in 

the voluntary Part D program, how many low-income people would 

sign up, and how many people would join Medicare Advantage during that 10-year period. 
7

More recently, there has been a big flap about the $720 billion 

estimate of the cost of the Medicare Part D program for the years 

2006 to 2015. The reason for the change is not very complicated. 

The first 2 years, 2004–2005, were the cheap years. There was a 

discount drug program, a low-income support, but not the actual 

drug benefit, as you well know. The current 10-year projection now 

drops off those first 2 cheap years and it estimates the cost of the 

full program at 10 years. There are a lot of things that are difficult 

to understand about Medicare. This actually isn’t one of them. It 

does give a glimpse of what the true 10-year costs of the program 

are likely to be. 

In talking about longer-term issues, I am going to be relying on 

the last trustee’s report—it is actually almost time for the next 

one—but I think the issues that they raised are pretty much the 

issues that we will see again. Using intermediate projections, we 

see that Medicare is likely to be almost 8 percent of GDP by 2035. 

By 2024, Medicare will surpass Social Security in spending. Medicare is a program that is not currently as large as Social Security, 

but it is growing at a faster rate. 

Under current estimates, 2019 is the year when the trust fund 

that pays for Part A of Medicare is scheduled to be depleted of 

funds. As you probably well understand, it is going to be increasingly important to look at what happens to general revenue, because Part B of Medicare, the part that pays for outpatient hospital 

and physicians, as well as the new prescription drug Part D, come 

mostly out of general revenue, and general revenue is likely to 

start feeling exceedingly pressured. 

The Congress will receive reports from the trustees when the 

general revenue funding of Medicare exceeds 45 percent. Because 

Part A has been growing slower than expected, the big guess is 

whether or not the 7-year window that is required for reporting 

might be triggered in 2005 or not. 

There are, I am afraid to say, no easy answers to fixing Medicare, yet alone Medicaid. The first thing, as you know, is that the 

population who will be going onto Medicare is going to be doubling 

over the period 2010 to 2030, as the so-called baby boomers retire. 

In addition, people are living longer, so there will be more people 

on the program, and they will be on it for a longer time. But it is 

actually more serious because the baby boom generation is followed 

by something called the baby bust generation, the unusually small 

number of cohorts who were born in the generation after 1965. 

We have had, at various points, discussions about how changing 

benefits or changing financing could impact Medicare, and, ultimately, probably some of both will occur. None of these options are 

easy, either in terms of the economics or in terms of the politics, 

and I think it is fair to say an important first opportunity was lost 

when the Medicare Modernization Act was passed, providing a new 

benefit but not seriously taking on the long-term funding problems 

of Medicare. I don’t believe there was the will, at the time, to do 

that, but it is too bad that the carrot has already been given and 

now the hard part is ahead of us. 

There are two areas that I think get less attention, and I would 

like to talk about them as long-term strategies to help us reduce 
8

some of the spending pressures in Medicare. The first is rethinking 

retirement and the second is learning how to spend smarter. 

With regard to the rethinking retirement, we need to start thinking about Social Security and Medicare together. This is not a new 

concept; it received some renewed attention, however when Chairman Thomas of the Ways and Means Committee talked about it on 

one of the Sunday morning programs. This doesn’t make the reform 

easier, but it is likely to produce better results. 

More importantly is the need to rethink retirement at age 65 as 

the norm. Again, as you know, this was a convention that was 

adopted at a time when people didn’t normally live to or beyond 

age 65. While for some individuals, 65 is an important age for retirement because of increasing disabilities; nonetheless, far more 

survive now beyond 65, sometimes for substantial periods of time, 

20 and 30 years, and with far lower rates of disability than used 

to occur. Social Security is slowly bringing this into acknowledgment by raising the full benefit age from 65 to 67. It is still an age 

where many people can be in retirement for as much as 40 or 50 

percent of the time that they spent in the labor force. 

While there has been some increase in the number of people over 

age 55 who talk about expecting to work beyond the age of 65, or 

even into their 70s, it is clearly not the norm. It is not the cultural 

expectation and it is not a policy that receives the full support of 

the Federal Government in terms of fiscal policies that can support 

continued labor force participation. 

Fortunately, employers will be encouraged to find ways to be 

more flexible in their employment policies because of that baby 

bust generation that I mentioned. The shortage of people coming 

into the labor force will help to encourage employers to find ways 

to bring in older workers or keep on older workers, just as they 

found ways to hire women in greater numbers in the 1970s and 

1980s. 

If the United States, in addition, can learn how to spend smarter 

on health care through strategies involving paying for performance, 

health IT, electronic medical records, and, importantly, changes in 

the tax code, it may be possible to reduce health-care spending 

growth to rates that are below their historic averages. If this does 

not happen, we are all in big trouble. 

As you have heard, and as I agree, it is difficult to think about 

fundamentally reforming Medicare without looking at what is 

going on in health-care spending as a whole. Not surprisingly, 

when you look over long periods of time, Medicare tracks overall 

spending pretty closely. It is a big part of overall spending, it is 

getting to be a bigger part of overall spending, and it represents 

spending by a very big and important powerful political block of 

people. It is hard to imagine having overall spending providing different services or different quality for a sustained period than is 

provided for the Medicare population. 

There are a lot of things we can do to spend smarter. The good 

news is that there are so many things we are doing wrong now in 

terms of not rewarding the providers who do it right the first time, 

and that practice in a conservative manner. We have a system that 

has very sophisticated medical devices, with a very cottage industry 19th century paper system of information. But, to be honest, we 
9

don’t really know whether, if we spend smarter, we will just get 

better value for our money or whether we will really be able to 

slow down the spending growth. But given the alternatives that are 

available to us, it is an important step that we need to take. 

Let me just say, before I close, a few words about Medicaid. Medicaid involves a somewhat different set of issues, but there are 

some similarities in terms of the impact on the budgetary pressures that are being felt and the rates of growth that are occurring, 

annually now at about 8 percent. Predictions over the next decade 

show similar rates of growth as well. 

But the other reason it is important to think about Medicaid 

along with Medicare is that they cover some of the same or similar 

populations. While a majority of the people on Medicaid are families, the moms and kids, the majority of money on Medicaid goes 

to those who are aged and disabled. 

This is true even in the last 3-year period, where we have seen 

substantial increases in Medicaid spending, largely, as it has been 

reported, attributable to a growth in enrollment. While we may 

think that that primarily represents the effects of the recession, it 

is important to understand that even in this period, the impact was 

primarily from the growth and spending for the aged and disabled, 

even though their numbers were growing much slower than the 

growth of moms and kids or the families. Much of the experimentation that has been done in the past decade or decade and a half 

has involved the moms and kids. It is time now to see whether we 

can’t think of better, smarter ways to provide support to the aged 

and disabled, and to the so-called dual-eligible? 

One last point is that the administration has raised an issue not 

just of providing flexibility, but trying to go after some of the financial creativity that the States have shown in trying to finance Medicaid expenditures. I think this is a very important step to take in 

a program that has lots of areas that need to be considered. 

Medicaid’s primary strategy for moderating spending growth is 

the fact that it is a matching program. If and when the States find 

strategies to increase total spending by only increasing Federal 

spending, rather than by matching, you have fundamentally 

changed the nature, at least at the fiscal basis, of the Medicaid program. Making sure that this doesn’t happen in the future is just 

one of the many things that needs to change. 

On a broader level, the time is long overdue to think about the 

type of program we would like for our low-income populations for 

the 21st century. The current program leaves out many very poor 

people; it covers some people who are substantially above poverty; 

it provides extremely uncoordinated care for the very expensive 

dual-eligible population who are both on Medicare and Medicaid; 

and, finally, very little information is provided on the impact that 

this major program has on the health status of our most vulnerable 

low-income populations. 

Thank you. 

[The prepared statement of Gail Wilensky follows:] 

PREPARED STATEMENT OF GAIL R. WILENSKY, PH.D., SENIOR FELLOW, PROJECT

HOPE

Mr. Chairman and members of the Budget Committee: Thank you for inviting me 

to appear before you. My name is Gail Wilensky. I am a senior fellow at Project 
10

HOPE, an international health education foundation. I have previously served as 

the Administrator of the Health Care Financing Administration (now the Center for 

Medicare and Medicaid Services) and also chaired the Medicare Payment Advisory 

Commission. My testimony today reflects my views as an economist and a health 

policy analyst as well as my experiences at HCFA and MedPAC. I am not here in 

any official capacity and should not be regarded as representing the views of Project 

HOPE. 

The purpose of my testimony is to consider some of the challenges resulting from 

our medical care entitlements, Medicare and Medicaid. While most of the attention 

in Washington is currently focused on 2006 budgetary issues, the challenges from 

the entitlement programs grow even larger over time. My comments will reflect 

some of the short term challenges from the entitlements as well as longer-term challenges. The bulk of my testimony will be on the Medicare program but I will also 

include some observations about the Medicaid program. 

MEDICARE’S SHORT TERM ISSUES

The president’s budget provides for $346 billion in outlays, which represents an increase of $50 billion or 17 percent over last year. For the period 2001–2006, outlays will rise at an average annual rate increase of 9.7%. Since the full drug benefit 

resulting from the Medicare Modernization Act begins in January of 2006, it is not 

surprising that most of the focus of this year’s Medicare budget is on implementing 

the new drug benefit and that the budget includes a request for implementation 

funds. As a former HCFA Administrator, I have observed that including implementation funds is an aspect of new legislation that has been all too frequently overlooked and I commend the Congress for including it in the MMA. 

The Congressional Budget Office recently released its projections for the 10 year 

period, 2006 through 2015. According to CBO, Medicare spending is expected to 

grow at an average rate increase of 9 percent over the 10 year period, reaching $766 

billion by 2015. Medicare spending which was 2.6 percent of GDP in 2004 is expected to be at 3.9 percent of GDP by 2015. This substantial growth in spending 

may well be optimistic since it includes several years of reductions in physician fees, 

which resulted from the sustainable growth rate (SGR) included in the Balanced 

Budget Act. Since Congress did not let these reductions go into effect for the years 

2003, 2004 and 2005, it is not clear how likely the Congress is to let these reductions go into effect over the next few years. 

CBO estimates Medicare Part D spending to grow from $47 billion in 2006 which 

is a partial year ($75 billion in 2007) to $174 billion in 2015, representing 23 percent of Medicare spending by that time. As the Committee is well aware, there has 

been considerable controversy about the differing estimates of Part D between CMS 

and CBO. CMS estimated Part D spending at $534 billion for 2004–2013 and CBO 

estimated $395 billion for that same period. These differences primarily reflected 

different estimates of the percent that would enroll in the voluntary Part D, the percent of low income seniors that would enroll in Part D and the take-up rate by seniors in the new Medicare Advantage program. The difference, while large in absolute terms, represents slightly less than 3 percent of Medicare spending over the 

period 2004 through 2013. 

More recently, there has been a lot of attention given to the estimates of the cost 

of Part D for the period 2006 to 2015. The Administration estimates that cost at 

$720 billion. CBO’s estimate of $796 billion is not exactly comparable because it 

doesn’t allow for some of the adjustments included by the CMS actuary. CBO has 

also recently reiterated that its current estimate of the program costs for 2004 to 

2013 remains almost identical to its original estimate. 

The reason for the difference in the estimates for 2004 to 2013 and 2006 to 2015 

is not very complicated. The first 2 years of the program involved only the drug discount card program, some low income support and implementation expenses, all of 

which are relatively low costs. They were in the 10 year estimate made before passage of the bill. The 10 years that start with the next budget, i.e. 2006, lose the 

first two ‘‘cheap’’ years and add 2 years at the end. The end years are much more 

expensive because the full program will have been in force for 8 years and because 

of medical inflation and increasing numbers of seniors. There are a lot of difficult 

issues to face in Medicare but this difference in numbers is not one of them. However, what these numbers do very effectively is to give a glimpse of the true 10 year 

costs of the new drug benefit which will only continue to increase over time. 

MEDICARE’S LONGER TERM ISSUES

The longer term financial challenges to Medicare are documented annually in the 

annual report of the Social Security and Medicare Board of Trustees. While we are 
11

only about 2 months from the 2005 report, the 2004 report lays out the issues sufficiently clearly for the purpose at hand. According to their intermediate projections, 

which includes a medical inflation factor less than the rate experienced, Medicare 

expenditures will grow to 7.7 percent of GDP by 2035. Medicare’s expenditures are 

currently smaller than Social Security but Medicare costs are expected to exceed 

those for Social Security by 2024. Looking over the long haul, the full unfunded liability of Medicare has been estimated to be as high as $28 trillion, $8 trillion of 

which is attributable to the new drug benefit. 

The HI Trust Fund, which covers Part A of Medicare (inpatient hospital, nursing 

home and some home health care) and frequently receives the most attention from 

the public, is projected to exhaust its assets by 2019. HI assets are estimated to decline to 89 percent of annual expenditures by 2013, which would no longer meet the 

Trustees’ test of short range financial adequacy. 

In many ways, however, the greater concern should be with the impact of Part 

B Medicare (which covers outpatient hospital, physician, lab and DME) and Part D 

(the new Prescription Drug benefit). There is not the same concern about insolvency 

that there is for Part A but rather the impact that the growth in these two areas 

will have on the budget and the Treasury. The reason is that Parts B and D are 

financed partly by premiums and co-payments by the elderly but mostly from general revenue. 

As a result of this concern, the Medicare Modernization Act requires that the 

Trustees monitor when they estimate general revenue funding of Medicare will exceed 45 percent of total Medicare outlays and to report if this will occur within the 

first 7 years of projections. Since CMS has just reported that Part A costs were 

lower than expected in 2004 and Part B costs were somewhat higher than expected, 

there is great interest to see if this will occur with the 2005 report. 

NO EASY ANSWERS FOR MEDICARE

Diagnosing the problem with Medicare is much easier than finding viable solutions. There are several pressures that are driving up spending projections, including but not limited to the impending retirement of the baby-boomers. As all of you 

know, some 78 million baby-boomers will start turning 65 in 2011 and continue 

reaching retirement age over the next twenty years. This will double the over 65 

population currently covered by Medicare. 

But it is not just the increasing numbers of individuals who will be eligible for 

Medicare that becomes the issue. Those reaching 65 can be expected to experience 

increased longevity which means they will be on Medicare for longer periods of time 

than their predecessors. And almost as important, the baby-boomers are followed by 

the ‘‘baby-bust’’ generation, the unusually small numbers of cohorts born the generation after the boomers. This means that just as the ranks of seniors begins to 

surge, the ratio of workers to support them will begin to decline - a fiscal ‘‘double 

whammy’’ in the making. 

The most obvious types of options—changing benefits, changing eligibility or 

changing the financing of Medicare can affect the financial future of Medicare but 

none are easy-either in their politics or in their economics. An important opportunity was lost when the MMA was passed, providing an important new benefit to 

seniors, without also substantially modifying Medicare. But in fairness to the Congress and the Administration, I do not believe there was the political will at that 

time to take on these difficult issues. An important and little noticed component of 

the MMA is the provision that substantially reduces the Part B subsidy for higherincome seniors starting 2007, which could provide an important precedent for introducing other provisions that relate government contributions or subsidies to the income and/or wealth of baby-boomers. 

Two others areas may offer the potential to ease future financial burdens from 

Medicare and need to be explored further. The first is to rethink the whole concept 

of retirement and the second, is to find ways to ‘‘spend smarter.’’

RETHINKING RETIREMENT

The notion of thinking about pensions or Social Security and Medicare as joint 

programs for retirees is not a new concept but has received renewed attention following a recent mentioning of it by Chairman Thomas of the Ways and Means Committee. This doesn’t make the reform of Social Security and Medicare any easier but 

may lead to better results. 

Even more important, is the need to reconsider retirement at age 65 as the norm. 

As you probably are aware, the choice of age 65 as an expected retirement age occurred at a time when longevity was far less than it is at present and when the 

disability rates of those who survived into their sixties and seventies was far greater 
12

than it is today. Social Security is in the process of moving from age 65 to age 67 

for full benefits, still an age where the time in retirement could approach 40 percent 

or more of the time spent in the work force. 

While there has been some increase in the numbers of people over age 50 that 

expect to spend some time in their sixties and even seventies working, it is hardly 

the norm. Changing this expectation would require changes in fiscal policies as well 

as cultural expectations regarding retirement in order to encourage continued and 

more flexible labor force participation. The scarcity of new labor force entrants, associated with the baby bust generation should encourage employers to be more creative in their treatment of seniors just as they were with their employment of 

women in the 1970s and 1980s. But it is important to make sure that fiscal and 

other government policies are supportive of continued labor force participation as 

well. 

SPENDING SMARTER

Finally, if the United States can learn to spend smarter in health care, through 

strategies involving pay-for-performance, health IT, electronic medical records, and 

importantly, changes in the tax code, it may be possible to reduce the growth in 

health-care spending to rates that are below their historic averages. This will only 

happen, if these changes occur in all sectors of health care and not just in Medicare. 

To no surprise, over long periods of time, Medicare tracks the rest of health-care 

spending pretty closely. First, seniors spend substantially more per person than the 

younger population which means that even when they represented only 12 percent 

of the population, they accounted for a disproportionate share of spending on health 

care. As seniors become close to 25 percent of the population, they will have an even 

bigger effect on overall spending levels. Secondly, their relative growth in numbers 

combined with their high voting participation rates, will give them even greater political clout than they have had in the past. It is difficult to imagine this powerful 

group tolerating a health-care system that was in any important way ‘‘lesser than’’ 

what exists for the rest of the population. 

‘‘Spending smarter’’ is a theme that has received at lot of attention lately. While 

it seems pretty clear that we can and should have better information on relative 

cost-effectiveness and clinical-effectiveness of alternative therapies and procedures 

as well as better incentives for both patients and providers, not much is known on 

whether this will slow rates of spending growth relative to historic averages or just 

provide better value for the money spent. Similarly, introducing information systems in health care and making the information side approach the sophistication 

of the device and procedure side of medicine should provide substantial one-time 

savings. Whether these changes would reduce rates of spending over time is less 

clear. However, given the alternatives to slowing spending otherwise available, improving information and incentives, changes to the tax code and adopting modern 

information systems seems the most promising strategy available. 

MEDICAID

Although Medicaid represents a somewhat different set of issues, the sustained 

impact of a growing Medicaid program has some similar effects on the budgetary 

pressures which will be felt by the Federal Government. The Federal share of Medicaid spending has increased from $129 billion in 2001 to $193 billion for 2006, an 

average annual increase of 8.3 percent. The CBO predicts that Medicaid will grow 

at an average rate of 8.7 percent through 2015, reaching $392 billion for the Federal 

share by 2015. 

It is important to consider the effects of Medicaid along with those of Medicaid 

for several reasons. First, the budgetary effects are significant and the growth rates 

not dissimilar. Projections by CBO have indicated that if Medicare and Medicaid 

were to continue to grow at a rate of 2 percentage points faster than the GDP, 

which is close to its historic average, these two programs would account for 20 percent of the GDP by 2040, the approximate current share represented by the entire 

Federal budget. If the rates of growth were reduced to GDP plus one, spending on 

these two entitlements would approximate 12 percent of GDP. Thus, the need to 

think hard about ways to slow their growth rate is crucial. 

The second reason it is important to think about Medicare and Medicaid together 

is that the majority of expenditures go to the aged and disabled populations even 

if the majority of Medicaid participants are neither aged nor disabled. A recent 

study by the Urban Institute indicated that much of the growth in Medicaid spending from 2000 to 2003 was attributable to a growth in enrollment. While that might 

not sound so surprising since much of that period was characterized by slow job 

growth coming out of a recession, less attention has been given to the fact that even 
13

here, a majority of the spending growth was attributable to the aged and disabled. 

This was true even though the numbers of aged and disabled were growing more 

slowly than the numbers in families. 

So much of the experimentation with finding more efficient (or just cheaper) ways 

to provide in the past has focused on families and not on the aged and disabled but 

it is the latter two groups that represent the majority of spending and also spending 

growth. Hopefully some of the flexibility that the Administration is proposing for the 

provision of long term care services for the elderly and disabled will help spur the 

state’s creativity in these areas. 

The states’ creativity raises another issue important to a better understanding of 

Medicaid spending growth. When pressed financially, states have shown substantial 

creativity in finding ways to increase Federal dollars without a concomitant increase 

in their own spending. Sometimes the increased spending has gone into additional 

spending on Medicaid or other health-care programs and sometimes not. In either 

case, a program that relies on state matching as the primary mechanism for cost 

control cannot function if the states’ are not contributing their appropriate shares. 

I applaud the Administration for introducing a series of steps to make sure the 

states are contribution their legally determined match including restricting intergovernmental transfers and Medicaid payments that are in excess of actual costs of 

services. 

On a broader level, the time is long overdue to rethink the type of program for 

low-income populations that makes sense for the 21st Century. The current program 

leaves out many very poor individuals, covers some who are very substantially 

above poverty, provides very uncoordinated care to the so-called ‘‘dual-eligibles’’ who 

are on both Medicare and Medicaid and provides very little information on the impact that Medicaid and SCHIP has had on the health status of the low income populations being served.

Chairman NUSSLE. Thank you, Dr. Wilensky. 

Next we will hear from Ron Haskins. Dr. Haskins is from The 

Brookings Institute, and Dr. Haskins has also testified before the 

Budget Committee. 

We welcome you back, and we are pleased to receive your testimony. 

STATEMENT OF RON HASKINS 

Mr. HASKINS. Thank you very much, Chairman Nussle. And 

Ranking Member Spratt and members of the committee, as a 

former congressional staffer for the Ways and Means Committee, 

and as a citizen, as kind of a cranky budget analyst, I am very 

pleased to come before the committee today. I am also pleased to 

be of somewhat advanced age, because I think in this debate that 

we are going to have now, for the fourth time in three decades, 

about how we are going to get the Federal books in order, it is necessary for everybody to be extremely frank and honest, and it is 

good to have people involved who don’t necessarily have a political 

future and can call them the way they see them. So I would like 

to do that. 

Chairman NUSSLE. Can we ask what your age is? And do we 

need to swear you in before we——

Mr. HASKINS. You probably should swear me in, but my age is 

61. 

Chairman NUSSLE. OK. Thank you. 

Mr. HASKINS. Thanks to a program that I am about to condemn, 

though, I am doing OK. 

For the last 2 years at Brookings we have been studying the 

budget deficit, and I think you can put almost all of us down, both 

left of center and right of center, as being in the alarmist camp. 

We think something definitely has to be done about the deficit. 
14

This year we decided to include a political chapter, which Alice 

Rivlin, a former head of the Congressional Budget Office and Office 

of Management and Budget (OMB), and Belle Sawhill, a noted 

scholar, economist, and also a former official in the Clinton administration at the Office of Management and Budget, and we decided 

to do some interviews. So we talked with 20 budget experts, Washington insiders, people who have been involved in budget deals in 

the past; people like Bob Reischauer, Rudy Penner, Bill Frenzel, 

Tom Downey, and several others, 10 Republicans and 10 Democrats. 

I would like to tell you, Mr. Chairman, Mr. Spratt, and members 

of the committee, that there were three factors that all of them saw 

as crucial to the previous big bargains that involved taxes and 

spending the Congress has put together, in 1983 for Social Security; in 1986 the big tax reform measure; and the budget deals of 

1990, 1993, and 1997. The first is Presidential leadership, the second is bipartisanship, and the third is some external threat that 

the Members of the Congress saw as saying to them we better do 

something or there will be serious consequences. 

We are, this year, I think for the first time in an obvious way, 

seeing Presidential leadership. And the President has, for the first 

time, put a budget on the table that does contain serious cuts, as 

you can tell. If you read the editorial page of The Washington Post 

and New York Times, the sky is falling and so forth, which always 

happens whenever you have a serious budget proposal. But the 

President’s leadership is somewhat limited because the President 

would be expected to provide leadership for spending cuts only, not 

for tax increases. 

So this brings us to the second important ingredient of a budget 

deal, which is bipartisanship. And I think, frankly speaking, that 

the possibility of next fall, when we pass some huge bill of 2,000 

pages, that contains all of our provisions, that they will be almost 

exclusively cuts. There possibly could be some loophole closings, 

but I certainly don’t think that there is a groundswell of support 

among Republicans or in the White House for any kind of major 

tax increases. So that means that the possibility of a bipartisan 

agreement and substantial deficit reduction that involve both tax 

increases and spending cuts is probably quite modest. 

And, finally, the external threat. Unfortunately, our budget situation is such that these external threats, people talk about them 

incessantly, but so far nobody has really been hit by them. It is reputed that the Vice President once said in the White House that 

no one ever lost an election because of a budget deficit. I don’t 

know if that is true or not, but I think that does accurately reflect 

that the threats are possible in the future. They are not things that 

we can measure easily. We can’t say that this State or this group 

of people are going to have a serious problem if we don’t do something. 

The only person that we interviewed that really thought that the 

threats were about to hit us—by the way, everybody thought there 

were threats, but they couldn’t tell when they would hit. Alice 

Rivlin, however, was somewhat confident that within the next couple of years, that the markets are going to go, to use her term, 

wobbly. And when that happens, Members of Congress, Repub-
15

licans and Democrats, and members of the administration are 

going to get calls from businessmen, from people on Wall Street, 

and they are going to say, you need to do something about the deficit. 

The other possibilities, of course, are huge falls in the stock market, if the Chinese woke up one morning, decided not to buy our 

debt anymore. You know, there are a number of external threats 

that could really drive the Congress to action. 

So we have leadership for budget cuts and I think a very low 

possibility of tax increases. So we probably will not have a bipartisan deal. I think an external threat would be a good thing, but 

I hope the threat doesn’t actually come true before we do something. 

Now, the President’s plan, as nearly as I can tell, is to do some- thing like cut around $20 billion next year. And the head of OMB, 

Mr. Bolten, was reluctant to say what a 5-year figure was, because 

he thinks estimates are not very accurate, which I think we all 

agree with, but it is probably something on the order of $300 to 

$350 billion. 

The main point of my testimony is that this should be the absolute minimum goal for the Congress, whether it is bipartisan or 

done primarily by Republicans. I am inclined to think it will be the 

latter. So you all are looking for at least $20 billion in cuts, not 

necessarily the ones the President recommended, but I think that 

is the place to start. 

Now, how do we get there? First, I want to make a couple of procedural comments. The first one is that I think that most scholars 

agree the PAYGO was a good innovation and served its purpose. 

Congress figured out eventually how to find its way around 

PAYGO after the 1997 agreement, but PAYGO was a pretty good 

procedure and it helped people who were intent on cutting the deficit. You know very well that we have had kind of a lively discussion about PAYGO recently, and there is a great deal of willingness 

to have PAYGO apply to cuts but not to tax increases, so I don’t 

know exactly how you are going to resolve that, but PAYGO of either form would be helpful. 

The second thing, and by far the most important, is reconciliation. I believe we have not done reconciliation since 1997, but reconciliation is definitely a powerful weapon for people who want to 

cut spending or increase taxes in order to reduce the deficit. And 

it is especially powerful because it can get around the 60 volt problem in the Senate. So this puts the House on an even par with the 

Senate when it comes to whatever actions we decide to take, and 

I think that is critical. 

So reconciliation I think is something the Budget Committee 

should examine very carefully, and it probably would not go unnoticed in this room that reconciliation would give the members of 

the Budget Committee a lot of leverage that they otherwise would 

not have, because they can give instructions to the committees of 

jurisdiction. 

And, third, I think we should take another run at the line-item 

veto. The Congress passed the line-item veto on a bipartisan basis 

during the Clinton administration. The first time Clinton used it, 

the Supreme Court found it to be unconstitutional, but there are 
16

lots of ways to do a line item veto, and I think the Budget Committee should look for ways and we should try a new way to have 

a line item veto. 

Now as for specific cuts. I have been asked to talk primarily 

today about entitlements, like everybody else, and to focus on income security. I present lots of information about past spending 

and projections in the future among income security programs, but 

let me bring a few things to your attention. 

First of all, compared with Dr. Wilensky’s testimony, I think 

what I am about to tell you could be accurately called cats and 

dogs, because the spending in question here, compared to Medicare 

and Medicaid and Social Security is quite modest. But, nonetheless, 

if we are going to try to get a minimum of $20 billion, this is a good 

place to start. There are some good ideas here. 

There has been huge growth in recent years, but that is misleading, I believe. If you look at the projections, the growth in income security is going to level off quite a bit; not completely, but 

will level off quite a bit. 

So where would we look if we want to have some cuts in income 

security? The first place I would look is Federal retirement. Now, 

I fully realize that sitting before me are Members of Congress who 

themselves are someday going to be the beneficiaries of Government retirement programs, so I will be cautious in my remarks. 

However, the concept that people should be able to retire at age 

40, 41, 42, or 43 and get a substantial benefit is part of what is 

driving our retirement programs off the cliff. We ought to at least 

have a lively discussion about why don’t we wait until people are 

at least 50, 55, or 60, before they can start drawing these benefits? 

That alone would dramatically reduce the Federal deficit in the future, and we need to think about the future. The big problems that 

Dr. Wilensky talked about are coming 10 and 20 and 30 and 40 

years down the road. 

Second, we could do a lot of things with the COLA. I will talk 

more about that in just a minute. The cost of living adjustment 

could be done on a different basis. 

And, third, there are other changes that we could make. For example, we could have a new procedure for defining the original 

benefit. We could use, for example, rather than 3 years, which is 

now used, the average of the highest 3 years to establish the benefit. We could use the highest 5 years, and that would automatically reduce everybody’s benefit, and that would save benefits of 

dollars. There is a table in my testimony that shows how much it 

would save. 

Secondly, unemployment insurance. I was with the Ways and 

Means Committee for many years, where I studied unemployment 

and we had lots of hearings. Unemployment is a program that is 

far too generous. Now, here is what we have. We have a welfare 

system now, after 1996, that is hell on wheels requiring people to 

work. If they don’t work, they lose their benefit. And it had a dramatic impact; the roles have declined 60 percent. 

And, yet, in unemployment insurance, with people with work history, more education, much more experience in the labor market, 

the work requirement, which we have in the law but it is observed 

in the breach, we don’t have strong work requirements. If we had 
17

a strong work requirement in unemployment insurance, we would 

save a lot of money. So that would be one thing that we should do, 

is have a much stronger work requirement in unemployment insurance. There is no reason people should be able to sit around for 6 

months and draw an unemployment insurance check, or even 

longer than that during a recession. 

Third, Supplemental Security Income (SSI). I want to point out 

to the members of this committee I urge you to go back and look 

at the changes that we made in 1996. We made a whole series of 

changes. I had no doubt that those changes would save at least $50 

billion over 10 years. The Rand Corporation studied just the 

changes in the child SSI program, which I think were quite reasonable and passed Congress on a bipartisan basis and were signed by 

President Clinton. The Rand Corporation estimates that we saved 

$24 billion over 10 years just on the changes in the child SSI program. And I would point out to you that SSI is one of the most rapidly growing programs within the income security super function, 

so it bears careful examination. 

Next, child nutrition. We all know and love the child nutrition 

programs, and I am going to say something in just a moment about 

programs for low-income families. But there is a part of the child 

nutrition program that provides a subsidy for school lunches for 

people who are not low-income, they are over $28,000 a year. Now, 

that could lead to some extreme administrative difficulty, the 

schools certainly would not like it, there would be all kinds of lobbying, like there would be for any cut, but the principle of subsidizing school lunches for families earning $50,000, $60,000, or 

$70,000 is something that some Americans might think is not a 

wise thing to do. 

And finally let me say that the wonderful Congressional Budget 

Office every 2 years publishes a volume that used to be called 

‘‘Spending and Revenue Options’’; it is now called ‘‘Budget Options.’’ And as luck would have it, a brand new one came out just 

this week, and it is full of options for cutting spending; also for 

raising revenues, which might go somewhat unused on the right 

side of this aisle. 

There are all kinds of great suggestions, and in the area of income security, there are 13. They left one out from 2 years ago, 

which I don’t know why, but I have a table in my testimony that 

shows you that if we picked up on all the options that they lay 

out—they are not recommendations from the Congressional Budget 

Office, but options—we would really save a tremendous amount of 

money: over 5 years, almost $26 billion, and over 10 years almost 

$76 billion. So that gets you a long ways toward what I think ought 

to be the absolute minimum that we should try to do. 

Now, let me just say I, for most of my adult life, was a researcher, and then I was with the Ways and Means Committee and 

I was the head of the Welfare Subcommittee, the staff director of 

the Welfare Subcommittee of Ways and Means. And I am at Brookings now, and the project that I work on is called Welfare Reform 

and Beyond. So although I am conservative, I do have a special 

concern with programs for low-income Americans, and, to my way 

of thinking, low-income Americans, millions of them, have an even 
18

greater claim on public concern at this point because so many of 

them now work, and work at low-wage jobs. 

So I am hoping that, in making budget cuts, you would look carefully at programs that support low-income Americans, and cut 

where there is waste and abuse and so forth, but be cautious, because these programs support lots of low-income working families 

that are really dependent on the benefit, and many, many of those 

families, disproportionately those families are raising the next generation of Americans. So I urge caution. 

In conclusion, I think we are on the right path at last. I wish we 

had started several years ago, but we are on the path of deficit reduction. And under the leadership of this committee, and specially 

with strong reconciliation recommendations from this committee, 

Congress and the President could significantly reduce spending. If 

taxes were on the table, we could do more, and we could do it in 

a bipartisan fashion, but that is likely not to be the case. But even 

without taxes we can get at least part of the way there, and that 

would be better than nothing. 

Thank you. 

[The prepared statement of Ron Haskins follows:] 

PREPARED STATEMENT OF RON HASKINS, SENIOR FELLOW, ECONOMIC STUDIES, THE

BROOKINGS INSTITUTION

Chairman Nussle, Ranking Member Spratt, and Members of the Budget Committee, I consider myself fortunate to address the members of the House Budget 

Committee. Along with the Appropriations Committee, this committee has the 

toughest but most important job in Congress this year. Our Nation faces a budget 

crisis that will soon be of historic proportions. Something must be done—and the 

buck stops here. As a citizen, a scholar, and a former Congressional staffer, I am 

honored to have the opportunity to provide some humble advice to you who must 

make momentous decisions. 

The budget problem has two dimensions. First, the short-term deficit is too high. 

This year the deficit is expected to be around $427 billion according to the Office 

of Management and Budget (OMB). Adding the costs of the war in Iraq would push 

the deficit still higher. If Congress extends the tax cuts, enacts a reasonable adjustment of the Alternative Minimum Tax, and allows domestic discretionary spending 

to increase in proportion to population growth and inflation, the deficit will average 

more than $500 billion over the next decade. Some observers take comfort from the 

fact that deficits associated with the recessions of the mid-1970s, the early 1980s, 

and the early 1990s were higher as a percentage of Gross Domestic Product than 

the current deficit. However, in all these cases Congress and the president took very 

strong action to reduce the deficits, both by cutting spending and by increasing 

taxes. But so far in this new century, neither Congress nor the president has taken 

serious action to reduce the near-term deficits. Worse, the current deficit could be 

considered more threatening than the former deficits because we are now on the 

cusp of baby boom retirement, an unfolding event that will place huge strains on 

federal finances in the decades ahead. 

The lack of action on the deficit is perplexing for those of us who played a role 

in the Republican assault on the deficit after capturing the House and the Senate 

in the elections of 1994. As Bill Thomas of California, now the Chairman of the 

Ways and Means Committee said, ‘‘We can no longer tolerate mere promises of fiscal restraint. To do so would saddle our children, and children’s children, with uncontrollable and runaway deficits’’ (Congressional Record, 1995). How can it be that 

in 1995 Republicans believed deficits to be the governmental version of the apocalypse and now many Republicans can muster little more than a yawn when the deficit figures are recited? 

Nor do the figures I have presented so far give a complete picture of the magnitude of the deficit threat. The second budget problem we face is the long-term deficit. The leading edge of baby boom retirement begins in 2008 and intensifies in subsequent decades. The Medicare trust fund will be the first to go belly up as a result 

of additional spending on retirees. According to its trustees in last year’s report, 

Medicare will be in the red by 2019, seven years earlier than the trustees predicted 
19

in their annual report just one year earlier. Once Medicare goes broke, its financial 

imbalance will intensify dramatically in subsequent years. Social Security, again according to its trustees, is in better financial shape, but only in the sense that it goes 

broke later than Medicare. The Medicare Trustee’s report informs us that the additional resources needed to meet the projected expenditures of Social Security, Medicare, and Medicaid over the next 15 years is $33.2 trillion (Board of Trustees, 2004, 

p. 183). 

One of the more alarming perspectives on the condition of the federal budget is 

that if Congress makes the tax cuts permanent, enacts a reasonable fix on the Alternative Minimum Tax, and increases domestic discretionary spending to keep pace 

with inflation, Gene Steuerle of the Urban Institute and a former Treasury official 

in the Reagan administration calculates that interest on the debt, Medicaid, Medicare, Social Security, and Defense will consume all federal revenues by 2015, leaving no remaining funds to operate the rest of government (Steuerle, 2003). 

These are deeply troubling scenarios that serious and nonpartisan analysts have 

assured us will occur during our lifetime. We’re eating cake, playing our fiddles, and 

maximizing consumption while passing the bill to our children and grandchildren. 

Something must be done. 

The President has proposed the toughest budget since Republicans and Democrats 

reached an agreement to balance the budget in 1997. Its cuts in social programs 

have been widely criticized, often in language of the most alarmist sort (Krugman, 

2005). But here is the main point of my testimony: the deficit reduction achieved 

by the president’s budget is the least Congress should do this year. I hope there will 

be bipartisan agreement on this point, but even if there is not, then Republicans, 

as the majority party, must accept responsibility for achieving at least the $20 billion in spending cuts next year and perhaps on the order of $300 billion over 5 years 

proposed by the president (Andrews, 2005). Given the size of the deficit and the burden it promises to impose on our children and grandchildren, the Bush cuts which 

have been so widely criticized are not much more than a promising down payment 

on the cuts that will be needed to reduce the deficit by half on a permanent basis. 

The action needed to cut the deficit by half on a permanent basis would be much 

easier if Republicans were willing to consider tax increases—or at least consider not 

extending all the tax cuts put in place since in 2001. Even former Senator Nickles, 

the immediate past chair of the Senate Budget Committee and one of the strongest 

supporters of tax cuts, recently told the Washington Post that some ‘‘adjustments’’ 

might need to be made in tax cuts and other Republican policies (Weisman and 

Baker, 2005). Most of those who follow politics in Washington seem to believe that 

it is exceptionally unlikely that Republicans in Congress or President Bush will seriously consider tax cuts. So be it. Republicans are in control of both ends of Pennsylvania Avenue and, if they can hold their votes, they can protect their tax cuts and 

make them permanent. But if Republicans want to reestablish themselves as the 

party of fiscal rectitude and to alter the Nation’s current course of simply writing 

checks that our children and grandchildren must cover, it follows that their spending cuts will have to be all the deeper. It would be inconsistent with family values 

to do any less than prepare for the retirement of the baby boom by getting our fiscal 

House in order—in this case through truly remarkable cuts in spending. 

Last year, for a book on the fiscal crisis published by the Brookings Institution, 

along with Alice Rivlin, the former head of both OMB and the Congressional Budget 

Office (CBO), and Isabel Sawhill, a senior official at OMB in the Clinton administration, I wrote a chapter exploring the level of spending cuts that would be necessary 

to bring the budget into balance within a decade (Haskins et al., 2004). Our search 

for spending cuts was driven by principles supported by the Republican party; 

namely, smaller government, minimal government interference in the economy, 

more power and control at the state level, and a minimum of reliance on new revenues. Figure 1 shows the levels of spending cuts and increased revenues required 

to balance the budget within 10 years under our budget assumptions. Our spending 

cuts included: 

• $138 billion in commercial subsidies such as the Export-Import Bank, the Federal Aviation Administration, and various Energy Department programs, 

• $123 billion in devolution of programs such as the entire Department of Education to the state and local level, 

• $7 billion from the list of wasteful spending originated by this committee last 

year, 

• $58 billion from non-defense discretionary programs, and 

• $74 billion from entitlement programs. 

After making this spectacular level of cuts, we still needed $134 billion in revenues to achieve the $534 billion in combined spending cuts and revenue increases 

required to balance the budget in 2014 under our baseline assumptions. To comply 
20

at least in part with Republican goals, the revenue raisers did not include any 

changes in the personal income tax rates. Rather, revenue was obtained primarily 

by improved enforcement of the tax code, freezing the estate tax at its 2009 level, 

and increasing taxes on cigarettes, alcohol, and motor fuels.

A major purpose of the Brookings exercise was to demonstrate the drastic, unprecedented level of spending cuts that would be necessary to actually balance the budget within a decade. Although we did not realize it when we put the deficit balancing 

plan together last year, this exercise also shows how modest are the cuts proposed 

by President Bush this year. I would not minimize the difficulty of actually enacting 

the cuts proposed by the president, as shown by the bitter response they have provoked from advocates, editorial writers, and a number of Democrats in Congress. 

But perhaps members of this Committee who are preparing to withstand severe criticism for being fiscally responsible will take some comfort from the much greater 

level of cuts outlined in Figure 1. 

In turning to the search for specific places to cut spending, I have been asked by 

the Chairman to report to the Committee about potential cuts in the Income Security function of the federal budget. Based on the Historical Tables volume from the 

President’s 2006 budget (U.S. Office of Management and Budget, 2005, pp. 53–70), 

Figure 2 presents changes in spending within each of the six subfunctions that comprise the Income Security function. All the figures are expressed in inflation-adjusted 2004 dollars. Several points are notable. First, the General Retirement subfunction, which consists primarily of railroad retirement, is the least interesting because it is low (under $10 billion every year) and declining. Second, Unemployment 

Insurance and Nutrition move in rough accord with the economy—they go up when 

the economy is in recession and down in times of expansion. Both grew quite considerably during and following the brief recession of 2001 but their growth is now moderating. Housing has grown throughout the period, especially in the mid-1990s and 

since 2000. Between 1980 and 2004, housing expenses increased from around $11 

billion to over $36 billion. 

Federal Retirement, which includes federal civilian and military retirement and 

disability programs, has been growing relentlessly. Over the nearly 25 year period, 

it grew from $53 billion to nearly $89 billion. Retirement policy for federal employees deserves special attention. Spending is huge and growing, and given the high 

level of government employment, this account will continue to be very high in the 

future. Although controversial, it could be argued that providing retirement benefits 

to someone who is 42 years old because they have worked for 20 years is somewhat 

extravagant. Perhaps retirement benefits should not begin until recipients reach 55 

or even 60 or 65 years of age. Those currently receiving retirement benefits could 

continue under the current rules, but those who retire after some future date could 

be phased in a year at a time to delay their receipt of retirement benefits.
21

The remaining subfunction is the ‘‘Other’’ category. Figure 3, which portrays the 

spending history since 1980 of several of the most important constituent programs 

in the Other subfunction (U.S. Office of Management and Budget, 2005, pp. 135–

140), shows that growth is beginning to moderate in Supplemental Security Income 

(SSI) and foster care/adoption. The only program that appears to be growing rapidly 

is the Earned Income Tax Credit (EITC), although more recent data show that the 

rapid growth of EITC has now ended as well. In fact, as the projections in Historical 

Tables show, all the programs in the Other category moderate their recent rapid 

growth rates and several actually decline in constant dollars (including the EITC) 

between 2005 and 2010.

There are at least three lessons emerging from these program trends within the 

Income Security function that can prove instructive to anyone interested in controlling federal spending. The first is represented by SSI. The 1996 welfare reform leg-
22

islation and associated legislation made very substantial reforms in the SSI program. These included removing drug and alcohol addiction from the list of qualifying conditions for SSI; reducing the number of children receiving SSI by changing 

the definition of childhood disability and terminating one of the major procedures 

for determining whether a child was disabled; and ending SSI benefits for noncitizens who enter the country after 1996. The Rand corporation has estimated that 

just the reforms of the SSI program for children saved nearly $22 billion over the 

10-year period between 1996 and 2005 (Rogowski, 2002). As this example illustrates, Congress can enact modifications to programs by limiting eligibility to 

produce considerable savings over the years. It should be noted that in the case of 

SSI, the primary rationale for enacting the program changes that resulted in savings was not to save money but to remove benefits from individuals who, under a 

reasonable set of criteria, should not be eligible for benefits. It is possible to imagine 

that the Budget Committee or committees of jurisdiction for SSI and a host of other 

programs would carefully examine all the programs under their jurisdiction to determine whether program integrity is being maintained. 

A second lesson on ways to save money is illustrated by the Family Support line 

item. The major program in this line item is the Temporary Assistance for Needy 

Families (TANF) program, formerly Aid to Families with Dependent Children 

(AFDC). AFDC was an open-ended entitlement welfare program that cost more 

money almost every year. In the 30 years between 1962 and 1992, enrollment and 

spending grew in all but 7 years (U.S. Department of Health and Human Services, 

2004, p. A9). The authors of the 1996 welfare reform legislation, based largely on 

principles that suffuse Republican thinking about welfare programs, believed that 

too many young people who could support themselves were relying on public welfare. AFDC and other welfare programs were, in short, luring people into dependency. In 1996 the program was converted to a block grant with fixed funding and 

states were required both to limit adults receiving welfare to a maximum of 5 years 

of benefits and to impose strong work requirements on their caseload. The block 

grant has kept expenditures on the TANF program flat for nine years. Taking inflation into account, federal spending on TANF, as measured by budget authority, has 

actually decreased every year. In large part because of the time limit and work requirements (plus a hot economy), families left welfare as never before and took jobs. 

As a result, cash welfare payments to families dropped from $12.0 billion in 1995 

to $4.6 billion in 2002, a drop of over 60 percent (U.S. Department of Health and 

Human Services, 2004, p. A12); and states used most of the money saved to pay 

for child care and other work supports that helped families stay in jobs (there were 

also substantial savings on food stamps and Medicaid). Perhaps the best part of the 

story is that throughout this period, the average total income of these families increased every year and child poverty declined every year. In fact, the decline in 

child poverty was the first sustained decline since the early 1970s and poverty 

among black children reached its lowest level ever. Thus, by working rather than 

remaining on welfare, families had more money, children benefited from reduced 

poverty rates, and taxpayer payments for welfare declined substantially. Under 

some circumstances block grants to states constitute both good policy and an effective tool for saving money (Haskins, forthcoming). 

A third point illustrated by spending developments in income security programs 

is that a good economy causes spending in many programs for low-income families 

to fall. The number of mothers leaving welfare for employment was undoubtedly 

boosted both by the sweeping changes in welfare programs and by a growing economy that produced jobs these mothers could fill. The fact that mothers were earning 

money rather than receiving welfare reduced welfare spending on the TANF program. Similarly, outlays on food stamps, the biggest program within the nutrition 

subfunction in Figure 2, fell substantially as the economy grew between 1995 and 

2000. When the economy fell into recession after 2000, spending on food stamps 

began to rise again. The unemployment insurance program shows an even greater 

responsiveness to the economy than TANF and food stamps. In 2000, the year before the mild recession of 2001 hit, about $21 billion was spent for unemployment 

insurance benefits. After the brief 2001 recession, spending on unemployment benefits jumped to $27 billion, $49 billion, and $51 billion in 2002, 2003, and 2004 respectively. As the pattern of outlays in these three programs demonstrates convincingly, spending leaps dramatically during recessions. It follows that federal policies—including low tax rates and modest regulations—that stimulate the economy 

will have a major impact on helping reduce the deficit. Conversely, if the Nation 

enters a recession in the next decade or so, federal spending and as a result the 

federal deficit will leap far beyond the projections in the CBO baseline. 

In pursuing the analysis of potential savings from Income Security programs, I 

turn now to the very useful volume on Budget Options published by the Congres-
23

sional Budget Office (Congressional Budget Office, 2005). This volume of possible 

cuts in spending and increases in revenues is undoubtedly well known to members 

of the Committee. Of course, CBO does not endorse any of the spending cuts or revenue raisers in the volume, but the volume is tailor-made for a committee looking 

for ways to reduce spending. Figure 4 summarizes the thirteen possibilities for reducing spending in Income Security programs from CBO’s 2005 volume and one 

from their 2003 volume. Enacting all these cuts would save almost $26 billion over 

5 years and nearly $76 billion over 10 years.

I would not refer to the cuts in Income Security programs outlined by CBO as 

low-hanging fruit, but they are all reasonable reforms that would do minimum damage to those who would have additional costs imposed on them. Some of the cuts 

would be criticized because the costs are imposed on low-income individuals or families. However, many of the options could be tailored so that they impose low or even 

no costs on families below some income criterion, say, the federal poverty line (in 

which case the savings would be reduced). A few of the options, such as reducing 

foster care administrative and training costs, limiting the cost-of-living adjustment 

for federal retirees, and increasing the insurance rate on pension plans would impose no direct costs on poor families. 

As this brief analysis of potential spending cuts in the Income Security function 

demonstrates, there are no painless spending reductions to be made in the federal 

budget. In policymaking, fool’s gold is the search for policies that have all benefits 

and no costs. The task of budget balancing in which Congress should engage this 

year is almost always a zero-sum game. My personal view is that, although the pain 

cannot be avoided, Congress should do its best to distribute the pain across demographic groups and regions of the country. Moreover, as someone who has worked 

on programs for poor and low-income families for most of my adult life, I think Congress should minimize reductions in benefits for poor families, especially those that 

work. 

But regardless of the specific criteria followed by the Budget Committee and the 

authorizing committees that must make final decisions, there is no escaping the 

heavy burden now being imposed on the Nation’s future by the federal deficit. We 

are in the early stages of something very much like a crisis, except that it will last 

for many decades and will impose costs of uncertain magnitude and timing. The 

prudent course is to begin making the tough decisions this year that will put the 

budget on a path that leads to substantial deficit reduction and that will maintain 

the deficit at an acceptably low level. The minimum level of spending control that 

Congress should undertake as a first step on this path of fiscal responsibility is to 

equal the savings in the president’s budget. 

Many wise budget experts, including noted Republicans (Penner and Steuerle, 

2003), believe the Nation is in the early stages of a budget crisis and that the longer 

we wait, the more pain Congress will inflict on the Nation when it makes the major 

decisions needed to reduce the deficit—as inevitably it must. We are now entering 
24

crisis, but far too many people are delaying action until we—or more likely, our children—are hit by chaos. 

REFERENCES

Andrews, Edmund L. 2005. ‘‘White House Budget Projections Suggest Pain, Much 

of it Political,’’ New York Times, February 11, 2005, p. A23. 

Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability 

Trust Funds. 2004. The 2004 Annual Report of the Board of Trustees of the 

Federal Old-Age and Survivors Insurance and Disability Trust Funds. Social 

Security Administration. 

Congressional Budget Office. 2005. Budget Options. Washington, DC: Author. 

Congressional Record. 1995. 104th Congress, 1st session, January 26, 1995, 141, no. 

16: H777. 

Haskins, Ron, Alice M. Rivlin, and Isabel Sawhill. 2004. ‘‘Getting to Balance: Three 

Alternative Plans.’’ In Restoring Fiscal Sanity, edited by Alice M. Rivlin and 

Isabel Sawhil, pp. 31–55, Brookings Institution Press. 

Haskins, Ron. Forthcoming. ‘‘Welfare Reform: The Biggest Accomplishment of the 

Revolution.’’ In Republican Revolution Ten Years Later, edited by Chris Edwards. Washington, DC: Cato. 

Krugman, Paul. 2005. ‘‘Bush’s Class-War Budget.’’ New York Times, February 11, 

2005, p. A25. 

Penner, Rudolph G, and C. Eugene Steuerle. 2003. Budget Crisis at the Door. Washington, DC: Urban Institute. 

Rogowski, Jeannette, and others. 2002. Final Report for Policy Evaluation of the Effect of the 1996 Welfare Reform Legislation on SSI Benefits for Disabled Children. Santa Monica, CA: RAND. 

Steuerle, C. Eugene. 2003. The Incredible Shrinking Budget for Working Families 

and Children. National Budget Issues, No. 1. Washington, DC: Urban Institute. 

U.S. Department of Health and Human Services. 2004. Indicators of Welfare Dependence: Annual Report to Congress 2004. Washington, DC: Author. 

U.S. Office of Management and Budget. 2005. Budget of the United States Government, Fiscal Year 2006, Historical Tables. Government Printing Office. 

Weisman, Jonathan and Peter Baker. 2005. ‘‘After Bush Leaves Office, His Budget’s 

Costs Balloon,’’ Washington Post, February 14, 2005, p. A1.

Chairman NUSSLE. Thank you, Dr. Haskins. 

Next we will hear from Dr. Kent Smetters, who is a professor at 

the Wharton School at the University of Pennsylvania. 

We welcome you to the committee, and we are pleased to receive 

your testimony. 

STATEMENT OF KENT A. SMETTERS 

Mr. SMETTERS. Thank you, Chairman. I am younger and I am 

even more cranky, as you will see. Thank you, as well as the rest 

of the committee, for the opportunity to talk, to speak on the challenges of meeting the Nation’s future obligations in domestic entitlement programs. While these programs are a vital source of resources to many families, they also represent huge financial shortfalls over the next couple decades. 

Figure 1 in my testimony, which is very similar to the pie chart 

that you had started out with, Mr. Chairman, which is based on 

the President’s budget, shows that the Nation’s three largest entitlement programs—Medicare, Social Security, and Medicaid—will 

grow rapidly over time and absorb all Federal revenue within the 

lifetime of a young person today. In fact, by 2075, virtually all Federal tax receipts will go to just these three programs. 

In fact, this is an optimistic projection. The reason why, it assumes, consistent with the President’s budget, there is no fixed in 

the Alternative Minimum Tax (AMT), which we all know is a problem. Consistent with the Medicare trustee’s assumptions, it assumes that health-care costs grow much slower than they have his-
25

torically, and these shortfalls, more importantly, don’t show the 

huge shortfalls after 2075, as the baby boomers retire from the Social Security and Medicare system. 

There is an alternative way of looking at this, and that is to use 

present value analysis, to take the present value of all the future 

cash flow deficits for the Government as a whole, and I present this 

in Table 2 in the appendix of my testimony. I won’t attempt to go 

into it in detail. But how this works is that the future cash flows 

are discounted, that is, reduced, by the Government’s borrowing 

rate in order to demonstrate how much money that we needed 

today if hypothetically invested would place Government policy on 

a sustainable path. 

In the year 2005, based on the President’s current budget, the Government currently faces a present value imbalance of $65 trillion, of which the prescription drug bill comprises $17 trillion 

alone. To put it in this context, the total value of all the capital 

stock in the United States, including all buildings, home, land, is 

about $45 trillion. So we owe a lot of money. Now, how could we deal with this $65 trillion? Well, hypothetically, one way is we could increase payroll taxes, the Medicare 

payroll tax, an uncapped earnings, immediately and forever by 22.4 

percentage points, thereby more than doubling the current taxes on 

both employees and employers. Of course, this would send the 

economy into a tailspin; you wouldn’t collect any revenue. This 

would be obviously a very difficult thing. 

So obviously we have to control the growth rate of these payments over time, it is the only way to avoid an economic collapse. 

If you delayed action—suppose that we just waited 5 years before 

we did this, we started to do something—this $65 trillion shortfall 

in present value increases to $79 trillion, because it grows with interest just like other Government debt. 

So the question is why do we have these huge shortfalls today. 

And the reason why is because the current budget framework used 

by the Federal Government encourages policymakers to over-commit. So the obvious example is look at the 5-year or the 10-year 

budget window. It really substantially underestimates the costs for 

entitlement program. 

A good example of this is the Medicare prescription drug benefit. 

When it was first before Congress and the President signed it, it 

was scored at $400 billion, and there was a controversy that erupted after it was signed and we realized the real cost was going to 

be $535 billion. Today the cost is $724 billion; and that is assuming 

considerable cost savings actually materialize. That difference between the $535 billion and the $724 billion comes simply from moving that 10-year window 2 years. So it just shows the problem with 

even a 10-year budget horizon. 

Now, 75 years may seem like a good horizon too, that is what 

Social Security and Medicare trustees focus on. As the President’s 

budget, however, points out, even 75-year actuarial calculations on 

a present-value basis emit large deficits that happen outside that 

75-year window. 

So a good story to really understand this is back in 1983 we supposedly balanced Social Security for 75 years, and at that point the 

75th year was 2057. Now, 22 years later we now face another big 
26

problem with Social Security on a 75-year basis. That 75-year window now is 2079; that is when the 75th year ends. Over 60 percent 

of the shortfalls that we have today in the 75-year calculation 

comes from simply moving that 75-year window from 2057 to 2079. 

Suppose that we were to hypothetically balance Social Security 

for 75 years today, either—not my preferred approach—increase 

taxes or control the growth rate of benefits on a 75-year basis. 

Then in not 75 years, but just 20 years we will have the same problem that we see today. On the 75-year basis we will have the same 

75-year shortfall. So 75 years sounds like a long time, but it really 

is not. 

So a new Federal budget framework that includes the present 

value of all future Federal sources of revenue and outlays are needed, and not just over a limited time horizon. In my testimony I 

have a table that shows how that will work. I don’t have time to 

go into that in all detail, but it is basically giving a present value 

of all sources of Government revenue and outlays. 

These types of measures have recently been included just for the 

Social Security and Medicare programs by the Social Security and 

Medicare trustees’ reports starting in 2003 and now 2004. A technical panel composed of leading economists and actuaries appointed by the independent and bipartisan Social Security Advisory 

Board has strongly endorsed inclusion of these measures. Yesterday, Chairman Greenspan also endorsed looking at this new approach and also criticized 75-year accounting. 

By the way, pay-as-you-go rules, as good as they are, are not 

going to get around this problem. You can have a pay-as-you-go Social Security or a pay-as-you-go Medicare program that transfers 

enormous wealth between generations, yet still satisfies those payas-you-go rules. You really have to do honest present-value analysis. 

Fortunately, the President’s budget proposes new measures, to 

quote them, to ‘‘prevent the enactment of legislation that worsens 

the long-term unfunded obligations of the Federal entitlement programs.’’ Now, the budget doesn’t explicitly state what these new 

measures are, but they are very similar, from their analysis, it appears to be very similar to Table 2 that is your testimony. Senator 

Lieberman, in 2003, introduced the Honest Government Accounting 

Act that would help ensure that the Government fully accounts for 

its implicit and explicit liabilities on this present-value basis. 

Although my invitation letter was mainly to focus on the large 

entitlement programs, let me also talk about a couple of things I 

was asked to talk about, and that is some of the contingent liabilities in the Federal Government, things like the Pension Benefit 

Guarantee Corporation, the Terrorism Risk and Insurance Act, 

FDIC, and so forth. There are arguments pro and con for those programs. 

The main thing is that the real liabilities of those programs do 

not currently show up in the budget. For example, the PBGC right 

now has $39 billion in assets but has about $62 billion in liabilities, 

so it is going to face very large shortfalls. The President has introduced some ideas for trying to reduce that risk, but still that program faces large risks. The TRIA, the Terrorism Risk and Insur-
27

ance Act, exposes the Federal Government to up to $100 billion in 

losses. 

But the fair-market value of neither of those programs shows up 

in the budget, nor does it for FDIC. In fact, just the opposite. To 

the extent that the PBGC and FDIC collect some revenue, it actually shows up as a revenue gain to the budget. The actual fair 

value of those programs, the costs, do not show up. 

Under the 1990 Credit Reform Act, which only applies to direct 

loans and guaranteed loans, there is some present-value analysis 

that shows up for those programs, like the student loan program, 

on the budget. But even that is limited, because it is only done on 

an expected value basis, it doesn’t include the market value of risk. 

Presumably, students default on their loans when it is a bad economy, and there is market risk associated with that. The private 

sector would charge a lot more. So things like option pricing techniques and things like that which give you the real-market value 

should be used for these different programs, and they can be used 

in order to take away the appearance of a zero-cost program that 

makes it easier for policymakers to just hand out stuff. 

I wasn’t going to give you my hit list, but given I have 30 seconds, what would I do? If I were in charge, I would just point out 

that the prescription drug benefit that we just passed, a benefit 

that not many people are happy with, I should point out, a benefit 

that we just passed, the present-value cost of that is 1.7 times larger than the entire imbalance in the Social Security system. So we 

are talking about reforming Social Security today and we just 

passed something that is 1.7 times larger. It seems to me, if you 

want to reduce cost, now is the time to do it, before the benefits 

start to get paid. 

Secondly, I think you have to control the growth rate of benefits 

in the Social Security program. We can argue about whether you 

increase the retirement age or whether you go to price index, and 

there are different economic effects of both, but the Social Security 

program places a $10.4 trillion shortfall, much smaller than the 

Medicare program, but still a large shortfall. 

Then, finally, regarding the Medicare program, I think health 

savings accounts are not the magic bullet, but they are certainly 

a step in the right direction in terms of helping to reform Medicare. 

But there are still going to be very tough charges required for 

Medicare. 

Thank you for the time to talk. 

[The prepared statement of Kent Smetters follows:] 

PREPARED STATEMENT OF KENT A. SMETTERS, PH.D., THE WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA

Thank you, Chairman Nussle, and members of the Committee for the opportunity 

to speak on the challenges in meeting the Nation’s future obligations in its domestic 

entitlement programs. While these programs provide vital resources to many American households, these programs also face enormous financial shortfalls during the 

next several decades. 

The purpose of this testimony is three fold. First, it documents the looming financial problems in the Nation’s entitlement programs. Second, it demonstrates how 

the current Federal budget framework encourages the U.S. Congress to promise 

more in the form of future entitlement spending than can actually be afforded; conversely, the Federal budget makes it difficult to reduce these unfunded obligations. 

Third, this testimony shows how various budget frameworks and rules are ineffective at controlling entitlement spending. A new framework is then recommended. 
28

ENTITLEMENT SPENDING DOMINATES THE BUDGET LANDSCAPE

As you can see from Figure 1 (also see Table 1 in Appendix) that is based on the 

President’s 2006 Budget, the Nation’s largest three entitlement programs—Medicare, Social Security, and Medicaid—will grow rapidly over time and absorb almost 

all projected Federal revenue within the lifetime of young people alive today. Medicare represents the largest problem at the Federal level, followed by Social Security 

and then Medicaid. However, unlike the other two, Medicaid is shared between the 

Federal Government and the states, and represents a growing problem at the state 

level. 

FIGURE 1

Source: The President’s 2006 Budget, Analytical Perspectives, p. 209; also see Table 

1 in Appendix

Figure 1 is, in fact, fairly optimistic for several reasons. First, it assumes no fix 

of the Alternative Minimum Tax (AMT). The AMT will continue to tax an increasing 

number of households over time since the AMT’s thresholds are not indexed to 

prices. Second, consistent with the Medicare Trustees’ assumptions, these calculations assume that health-care costs in the future grow at a much slower rate than 

they have in the past. Third, these calculations don’t show the shortfalls after 2075; 

these financial problems do not subside after the baby boomers generation passes 

on. 

Table 2 in the Appendix presents an alternative perspective that shows the 

present value of all future cash flow deficits for the government as a whole as well 

as specifically for the Social Security and Medicare programs. Future cash flow deficits are discounted—that is, reduced—by the government’s borrowing rate in order 

to demonstrate the amount of money needed today (if invested with interest) that 

would place government policy on a sustainable course. For 2005, the Federal Government currently faces a present value imbalance equal to about $65 trillion, of 

which Medicare alone contributes $63 trillion. The new prescription drug benefit 

alone costs about $17 trillion. 

This $65 trillion imbalance is about $20 trillion more than the value of all U.S. 

corporations, homes, and land in the United States. This imbalance could, in theory, 

be eliminated by increasing uncapped (HI) payroll taxes immediately and permanently by an additional 22.4 percentage points, thereby more than doubling the current employer and employee combined payroll tax of 15.4 percent. Of course, such 

a policy would first send the U.S. economy into a tailspin and collect little revenue. 

Instead, the growth of entitlement spending must be controlled in order to avoid 

economic collapse. 

Delaying action will place an even larger burden on the economy. Table 2 shows 

that in 2010, or just 5 years from now, the Nation’s present value imbalance will 

increase to over $79 trillion if no action is taken. Such an imbalance could, in theory, be eliminated by increasing uncapped (HI) payroll taxes immediately and permanently by an additional 23.9 percentage points. In other words, the required payroll tax increase would increase by 1.5 percent points in just 5 years if no action 
29

is taken. Clearly, quick action is needed to avoid a disintegration of the standard 

of living in the United States. 

BUDGET HORIZONS

Why do we face such a large shortfalls today? The answer is very straightforward: 

The current Federal budget framework encourages policymakers to over-commit to 

future entitlement spending because the true long-term costs are not properly 

tracked in the budget. 

The standard 5-year or 10-year projection window, in particular, substantially 

underestimates the costs of entitlement programs. For example, before Medicare 

Part D (prescription drugs) was passed by Congress toward the end of 2003, it was 

scored as having a 10-year cost of $400 billion between 2004 and 2013. Controversy 

erupted when it was learned, after the bill was signed into law, that the cost would 

be closer to $535 billion over this same time period. Today, the cost of Part D is 

estimated to equal $724 billion over the 10-year period between 2006 and 2015, assuming that the cost savings assumed in the score actually materializes. Virtually 

all of the increase in cost of Medicare Part D, from $535 billion to $724 billion, 

comes from simply shifting the 10-year window to include 2014 and 2015. 

In their annual reports, the Social Security and Medicare Trustees have traditionally focused on the ‘‘actuarial deficit’’ that includes the present value of the program’s shortfall over the subsequent 75 years. While 75 years might seem like a 

long projection window, it is also inadequate: 

‘‘Doing the calculations for a 75-year horizon understates the deficiencies, because 

the 75-year actuarial calculations omit the large deficits that continue to occur beyond the 75th year. The understatement is significant, even though values in the 

distant future are discounted by a large amount.’’ (President’s 2006 Budget, Analytical Perspectives, p. 217) 

For example, the 1983 Social Security reforms were designed to eliminate Social 

Security’s shortfall over the subsequent 75 years, that is, until 2057. Today, only 

22 years later, Social Security faces another multi-trillion dollar deficit calculated 

over 75 years, that is, until 2079. Over 60 percent of the Social Security shortfall 

we see today consists simply of moving the 75-year window to include the new cash 

flow deficits in the years between 2057 and 2079. The ‘‘moving-window problem’’ is 

even worse today. If a reform today balanced Social Security for just 75 years, then 

in just two decades, the new 75-year imbalance would equal the 75-year shortfall 

that we face today. In other words, attempting to balance Social Security for 75 

years only provides about 20 years of actual progress. 

In response to this problem, Social Security’s chief actuary, when scoring a proposed piece of legislation, will often determine whether it will allow the Social Security program to become ‘‘sustainably solvent.’’ In particular, he determines whether 

a proposed legislation eliminates the 75-year imbalance and produces time path of 

values for the Social Security trust fund that is increasing toward the end of the 

75-year window. The critical assumption is that the trust fund will continue to increase in value after the 75th year. This joint criterion, though, has two problems. 

First, it cannot be used for programs like Medicare that are not self-financing. Second, the joint criterion is easy to ‘‘game’’ with a vast array of different policy reforms 

that produce additional revenue inside of the 75-year window but require larger outlays after the 75th year, e.g., increasing Social Security’s maximum taxable earnings. In other words, the assumption that the trust fund continues to increase after 

year 75 simply because it is increasing before year 75 is often incorrect. 

REFORMING THE BUDGET FRAMEWORK

A new Federal budget framework, therefore, is needed that includes the present 

value of all future Federal sources of revenues and outlays, and not just over a limited time horizon. Table 2 provides a summary of a new Federal budget framework 

that accurately includes the present value of all of the Federal Government’s 

sources of revenues and outlays into the indefinite future, thereby removing any incentive to over-commit.1 Table 2 is decomposed into the major spending categories, 

including Medicare, Social Security, and the rest of Government. Additional details 

could also be provided within this framework. For example, the present value of 

Medicaid’s shortfalls and defense spending could be listed under ‘‘Fiscal Imbalance 

in the Rest of Federal Government.’’

For the major entitlement programs, Table 2 also decomposes the present value 

shortfalls in Medicare and Social Security into the present value of overspending on 

past and living generations (those age 15 and over as well as the deceased) and the 

present value of overspending on current and future generations (those age 14 and 

younger as well as the unborn). This generational decomposition is important be-
30

cause major entitlement programs are mostly financed on a pay-as-you-go basis 

where taxes on workers are distributed almost immediately as benefits to retirees. 

Currently, Medicare and Social Security face shortfalls because future tax revenue 

doesn’t equal outlays in present value. 

An entitlement program that is financed on a strict pay-as-you-go basis would not 

produce cash flow deficits and, hence, would not lead to present value imbalances. 

Nonetheless, it would transfer considerable wealth between generations. The reason 

is that retirees and near-retirees alive at the time that this policy is enacted are 

given resources for which they paid little or nothing during their working years. 

These resources are paid for by younger workers and future generations who must 

pay additional taxes instead of investing their money and earning investment income. The generational decomposition shown in Table 2 would indicate this transfer.2

These types of new measures have been recently included in their annual reports 

by the Social Security and Medicare Trustees for those specific programs. The Social 

Security Trustees began reporting Social Security’s present value imbalance, along 

with its breakdown between generations, in its 2003 Report, and continued with its 

2004 Report. A technical panel composed of leading economists and actuaries who 

were appointed by the independent, bipartisan Social Security Advisory Board 

‘‘strongly endorsed’’ the inclusion of these newer measures.3 The Medicare Trustees 

began including these measures in their 2004 Report. 

Present value projections of the type shown in Table 2 have sometimes been criticized as being ‘‘sensitive’’ to the underlying demographic and economic assumptions. 

While it is true that the dollar value of these imbalances are sensitive to different 

assumptions, the values of the imbalances relative to the present value of tax receipts or outlays is generally not that sensitive, since both the numerator and denominator move in similar directions.4 In other words, the size of the policy reform 

that is needed to balance entitlement programs is not very sensitive to the key underlying assumptions. 

CURRENT REFORM PROPOSALS

The President’s 2006 Budget proposes the reenactment of various pay-as-you-go 

rules on mandatory spending that were formerly in the Budget Enforcement Act, 

‘‘except that it does not apply to tax legislation. It also does not permit mandatory 

spending increases to be offset by tax increases.’’ (President’s 2006 Budget, Analytical Perspectives, p. 238). It is unclear whether Congress will impose this set of 

asymmetric constraints on future budget authority. Without these asymmetric constraints, however, the pay-as-you-go requirement would still allow pay-as-you-go entitlement programs to transfer large sums of resources from workers and future 

generations toward retirees. The pay-as-you-go rule would also prevent positive reforms to entitlement programs that required an upfront investment but produced 

long-run reductions in unfunded obligations in present value. 

The President’s 2006 Budget also proposes ‘‘new measures to prevent enactment 

of legislation that worsens the long-term unfunded obligations of Federal entitlement programs.’’ (President’s 2006 Budget, Analytical Perspectives, p. 240). The 

Budget does not explicitly define these measures but its own analysis suggests 

something close to Table 2. However, the Budget’s focus on just entitlement programs could allow for some ‘‘gaming’’ vis-a-vis general revenue transfers unless 

those transfers are explicitly excluded when calculating the entitlement program’s 

present value imbalance, as in Table 2. Senator Joe Lieberman introduced the Honest Government Accounting Act of 2003 (S. 1915) into the 108th Congress (1st Session) that would help ensure that the government fully accounts for its explicit debt 

and implicit unfunded obligations. It deserves careful study. 

FEDERAL PROGRAMS WITH CONTINGENT LIABILITIES

Although my invitation letter asked me to testify before the Committee on my 

views ‘‘on our challenges in meeting the obligations of domestic entitlement programs,’’ let me close with a few words about the budgetary treatment of several Federal programs with contingent liabilities that represent a non-trivial risk to the 

budget, including the Pension Benefit Guarantee Corporation (PBGC) and the Terrorism and Risk Insurance Act of 2002 (TRIA). Currently, the PBGC has about $39 

billion in assets and so it can meet its obligations for several years. But the PBGC 

also has about $62 billion in liabilities and so it will face large funding shortfalls 

in the future.5 The Administration has proposed a set of new reforms that will reduce the PBGC’s likely shortfall, but risks still remain. TRIA exposes the Federal 

Government to $100 billion in possible losses after a terrorist act. The fair market 

values of neither of these contingent liabilities appear in the President’s budget.6
31

Instead, these programs, along with other Federal programs such as the FDIC, are 

treated on a cash flow basis. In fact, quite perversely, premium income collected by 

the PBGC and FDIC often appears to provide revenue. 

Under The 1990 Credit Reform Act, the cost of direct loans and loan guarantees 

must be recorded in the Budget. This cost is calculated as the present value of all 

cash flows over the life of the loan, discounted using the interest rates on Treasury 

securities of the same maturity. This Act, for example, covers the Federal Government’s student loan program but does not cover the contingent liabilities noted 

above. While Credit Reform was a step in the right direction, it still falls short because the true economic costs of the loans and loan guarantees, as reflected in the 

values that the market would place on the underlying risks, are not incorporated. 

Options pricing and other pricing techniques should be used to determine the 

market value for the contingent liabilities in the PBGC, TRIA, and FDIC program 

as well as for the programs covered under Credit Reform. A ‘‘zero’’ cost (or, in some 

cases, a negative cost)—which is currently assumed in the Budget for many of these 

program—currently encourages policymakers to create seemingly ‘‘free’’ contingent 

liabilities.7 Requiring that the market values of these programs be included in the 

budget would remove this bias. 

Mr. Chairman, thank you again for the opportunity to share my views with you 

and the Committee.

TABLE 1.—LONG–RUN FEDERAL BUDGET RANGE ESTIMATES 

(As a percent of GDP) 

Fiscal years 2005 2015 2025 2045 2055 2065 2075

Receipts ....................................................................... 16.8 18.5 19.1 20.2 20.9 21.5 22.0

Outlays ......................................................................... 20.3 19.4 21.8 27.6 30.8 35.1 40.4

Discretionary ............................................................ 7.9 5.9 5.9 5.9 5.9 5.9 5.9

Mandatory ................................................................ 10.9 11.6 13.8 16.9 18.0 19.5 21.2

Social Security .................................................... 4.2 4.4 5.4 6.0 6.1 6.2 6.4

Medicare ............................................................. 2.4 3.3 4.6 7.0 7.9 9.1 10.4

Medicaid ............................................................. 1.5 1.9 2.1 2.6 2.8 3.0 3.3

Other ................................................................... 2.8 2.0 1.7 1.3 1.2 1.1 1.0

Net Interest ............................................................. 1.5 1.9 2.0 4.8 6.9 9.7 13.3

Surplus or Deficit (¥) ................................................ ¥3.5 ¥0.9 ¥2.7 ¥7.4 ¥10.0 ¥13.6 ¥18.4

Source: The Presidents 2006 Budget, Analytical Perspectives, p. 209

TABLE 2.—FISCAL AND GENERATIONAL IMBALANCES AT END OF THE YEAR SHOWNLONG–RUN 

FEDERAL BUDGET RANGE ESTIMATES 

(Billions of constant 2004 dollars)*

Fiscal years 2004 2005 2006 2007 2008 2009 2010

Total Fiscal Imbalance—

U.S. Federal Government 63,220 65,861 68,564 71,245 73,893 76,570 79,337

Social Security ............... 8,006 8,352 8,710 9,067 9,423 9,784 10,158

Medicare ........................ 60,822 63,315 65,805 68,249 70,641 73,044 75,518

Rest of Federal Government .......................... ¥5,608 ¥5,805 ¥5,951 ¥6,071 ¥6,171 ¥6,258 ¥6,339

Fiscal Imbalance in Social 

Security .......................... 8,006 8,352 8,710 9,067 9,423 9,784 10,158

Future Benefits less 

Taxes, those age 15 

and over (and deceased) ..................... 9,549 9,899 10,256 10,610 10,958 11,311 11,676

Future Net Benefits 

of Living Generations ..................... 11,182 11,686 12,205 12,729 13,255 13,787 14,338

Trust Fund ................ ¥1,634 ¥1,787 ¥1,949 ¥2,120 ¥2,297 ¥2,476 ¥2,662
32

TABLE 2.—FISCAL AND GENERATIONAL IMBALANCES AT END OF THE YEAR SHOWNLONG–RUN 

FEDERAL BUDGET RANGE ESTIMATES—Continued

(Billions of constant 2004 dollars)*

Fiscal years 2004 2005 2006 2007 2008 2009 2010

Future Benefits less 

Taxes, those age 14 

and below (and unborn) ......................... ¥1,543 ¥1,547 ¥1,547 ¥1,543 ¥1,535 ¥1,527 ¥1,518

Fiscal Imbalance in Medicare ............................... 60,822 63,315 65,805 68,249 70,641 73,044 75,518

Future Benefits less 

Taxes and Premiums, 

age 15+ (+ deceased) ..................... 24,094 25,430 26,777 28,130 29,483 30,860 32,287

Future Net Benefits 

of Living Generations ..................... 24,375 25,725 27,097 28,465 29,834 31,226 32,668

Trust Fund ................ ¥282 ¥295 ¥320 ¥335 ¥350 ¥366 ¥381

Future Benefits less 

Taxes and Premiums, 

age 14- (+ unborn) .. 36,728 37,885 39,028 40,118 41,158 42,184 43,231

Fiscal Imbalance in the 

Rest of Federal Government .............................. ¥5,608 ¥5,805 ¥5,951 ¥6,071 ¥6,171 ¥6,258 ¥6,339

Future Outlays ............... 81,323 83,402 85,537 87,576 89,492 91,375 93,304

Future Revenues ............ ¥93,266 ¥96,013 ¥98,675 ¥101,168 ¥103,500 ¥105,770 ¥108,055

Living Generations .... ¥34,939 ¥36,156 ¥37,325 ¥38,417 ¥39,431 ¥40,405 ¥41,364

Future Generations ... ¥58,327 ¥59,857 ¥61,350 ¥62,751 ¥64,069 ¥65,365 ¥66,691

Excess Future Outlays 

Over Revenues .......... ¥11,943 ¥12,611 ¥13,138 ¥13,591 ¥14,008 ¥14,395 ¥14,751

Liabilities to Social Security and Medicare 

Trust Funds ............... 1,915 2,082 2,269 2,454 2,648 2,842 3,043

Debt Held by the Public 4,421 4,724 4,918 5,066 5,190 5,294 5,368

MEMO Items: 

Present value of GDP .... 762,921 772,260 790,733 812,819 834,656 855,240 874,525

Present Value of uncapped Payroll .......... 291,063 294,436 301,354 309,630 317,783 325,432 332,577

*Positive numbers add to the imbalance and negative numbers reduce it.

Source: Gokhale and Smetters (2005), ‘‘Measuring Social Security’s Financial Problems’’ NBER Working Paper No. 11060, 2005. Based on FY2005 budget information obtained from the Office of Management and Budget and calculated under OMB economic assumptions. 

ENDNOTES

1. See Jagadeesh Gokhale and Kent Smetters (2003), Generational and Fiscal Imbalances, AEI, 2003, updated in Gokhale and Smetters (2005), ‘‘Measuring Social 

Security’s Financial Problems,’’ NBER Working Paper #11060. These calculations 

are based on the President’s 2005 FY Budget assumptions and are currently being 

updating for the 2006 FY. 

2. Similarly, a tax cut in the short term that is financed by an equal present value 

tax increase in the long term would also change the generational decomposition. 

3. 2003 Technical Panel on Assumptions and Methods, Social Security Advisory 

Board [available at: http://www.ssab.gov/NEW/documents/

2003TechnicalPanelRept.pdf, check on 2/13/05] 

4. See Gokhale and Smetters (2003), op cited. One exception is the assumed 

growth rate in health-care spending relative to GDP. Following the Medicare Trustees, we used very optimistic projections over the first 75 years (1 percent over GDP); 

after year 75, we made the even more optimistic assumption of identical growth 

with GDP. Despite these optimistic assumptions, Medicare still faces a very large 

present value imbalance. 

5. President’s 2006 Budget, Analytical Perspectives, p. 104. 

6. Currently, the CBO includes an estimate for TRIA in its baseline but OMB does 

not. 
33

7. See, for example, CBO, ‘‘Estimating the Value of Subsidies for Federal Loans 

and Loan Guarantees,’’ August 2004.

Chairman NUSSLE. Thank you, Dr. Smetters. 

Mr. COOPER. Mr. Chairman? I have a parliamentary inquiry. 

Where are the administration witnesses? 

Chairman NUSSLE. The gentleman is not recognized for that purpose. 

The last witness for the panel today is the very distinguished Dr. 

Judy Feder, who has testified before our committee before. She is 

the Dean of Policy Studies at Georgetown University. 

We are very pleased to have you back before the committee, and 

we are pleased to receive your testimony. Thank you. 

STATEMENT OF JUDITH FEDER, PH.D., DEAN OF POLICY 

STUDIES, GEORGETOWN UNIVERSITY 

Ms. FEDER. Thank you, Mr. Chairman. 

Mr. Chairman, Mr. Spratt, members of the committee, I am delighted to be with you today, and will try not to be cranky. I am 

going to round out our discussion by bringing us back to the 

health-care issues that Dr. Wilensky so ably handled, because that 

is the area of my expertise. 

Medicare and Medicaid expenditures loom large in the conversation on the budget because of the resources they require, both now 

and in the future. But this committee’s appropriate focus on fiscal 

concerns should not obscure two truths about these programs. 

First, they make health care affordable and long-term care available for millions of older, disabled, and low-income Americans who 

would otherwise lack access to care when they need it. Second, the 

fiscal challenges facing these programs reflect factors beyond their 

control: growth in the populations they serve—elderly, disabled, 

and especially, for Medicaid, low-and modest-income families without health insurance—and growth in the Nation’s health-care costs. 

Therefore, cuts in Federal funds or structural changes in Federal 

financing, like arbitrary caps or fixed appropriations or block 

grants, cannot be justified as promoting efficiency or personal responsibility when it comes to health-care financing. On the contrary, they would cut benefits for or shift cost to the Nation’s most 

vulnerable citizens. Let me talk a little bit about Medicare and 

Medicaid in turn. 

I want to start with a very brief reminder of how much Medicare 

accomplishes. 

In July 2005 we will celebrate the 40th anniversary of Medicare’s 

enactment. The program’s explicit goal in 1965 was to assure access to mainstream medical care for the Nation’s senior citizens, a 

promise later extended to some people with disabilities. Medicare 

has been enormously successful in achieving these goals, and is 

credited both with extending and enhancing life for older Americans and, equally important, alleviating financial burdens on their 

families. 

These achievements have not been inexpensive. Increases in program costs have actually been a problem for this program, or a political issue, from the program’s inception. But again, it is important to note, as Dr. Wilensky said, Medicare’s record in containing 

health-care costs has been at least as strong as, if not stronger 
34

than, the record for private health insurance. Both Medicare and 

private insurance purchase health care in the same market, and 

both struggle to balance the need for containing costs with people’s 

need for ever more costly care. Medicare has actually been a leader 

in promoting that balance, tough as it is. 

Rising Medicare costs have not been a function of benefits that 

are too generous in Medicare. Medicare benefits have been, and 

even with the newly enacted prescription drug benefit will be, less 

comprehensive than the benefits in employer-sponsored health insurance provided to the working age population. As a result, beneficiaries face substantial out-of-pocket cost. The typical senior today 

is estimated to spend more than 20 percent of income on health 

care, both to receive and supplement Medicare’s benefits. 

Does Medicare face a fiscal challenge? Absolutely. From its inception, Medicare has been financed through a combination of payroll 

taxes on the working age population, premiums from beneficiaries, 

and we must not forget, from the beginning, general revenues. Part 

A resembles Social Security with a payroll tax-generated trust fund 

that is dedicated to financing its benefits. And as others have described, the aging of the population will pose a problem for Medicare, as it does for Social Security: it will lead to shortfalls in this 

trust fund as a larger number of older persons rely on financing 

from a smaller number of working age taxpayers. 

But Part A is the only part of Medicare to which the concept of 

shortfall applies. It makes no more sense to talk about shortfalls 

in general revenue-funded portions of Medicare than it does to talk 

about shortfalls in defense spending or other kinds of spending 

supported by general revenues. What is important is whether we 

provide the revenues to meet our needs. They are demands, but not 

shortfalls. 

Now, what makes Medicare’s financing challenge different from 

Social Security’s is the growth in its per capita costs. Both programs face an increasing number of seniors; Medicare also faces an 

increase in health-care cost per senior. Health-care cost growth, 

however, is not a problem unique to Medicare; it is a problem that 

faces the entire health-care system. Therefore, any measure that 

reduces Federal spending on Medicare without slowing growth in 

the Nation’s health-care costs will undermine, not strengthen, the 

health insurance protection and security that Medicare provides. 

Arbitrary caps on Medicare funding would not eliminate the 

costs of health care, nor would shifts from guaranteed benefits to 

premium contributions that might be fixed in advance. It would 

simply shift these costs from the program and from the taxpayers 

to the individuals who need health care and their families. 

Now let me turn to challenges and choices in Medicaid, which 

will also celebrate the 40th anniversary of enactment in July 2005, 

and has become the Nation’s largest public health insurance program, serving 52 million children, low-income working adults, primarily parents, people with disabilities, and elderly people. 

Medicaid’s protections, like Medicare’s, come at considerable expense not only to Federal, but also to State governments. But 

again, cost growth is not a problem, or the cost of the services they 

buy is not a problem that is unique to the Medicaid program; it is, 

again, a function of the entire health-care system. Nor can it be at-
35

tributed to Medicaid inefficiency. Rather than reflecting excessive 

payments to providers, Medicaid is criticized far more frequently 

for paying too little than too much. Medicaid expenditure growth 

often reflects increases in the number and kinds of people it serves. 

It is clear from an Urban Institute analysis of Medicaid spending 

between 2000 and 2003, that recent Medicaid cost increases have 

been largely a function of enrollment increases. In this period, 

Medicaid spending increased by about a third, not because of expansions of eligibility or dramatic increases in payment, but because of increased demand for Medicaid services largely as a result 

of the recession. Without expansion of the Medicaid safety net in 

that period, the Nation would likely have experienced an increase 

in the number of children without health insurance and an even 

larger increase than otherwise occurred in uninsured adults. 

And for people of all ages who need long-term care, Medicaid is 

the Nation’s safety net. Long-term care is not only expensive—

hence, the high per capita costs in Medicaid for older and disabled 

beneficiaries—but, sadly, its provision is inadequate, as an estimated one in five of the Nation’s citizens who need long-term care 

report getting inadequate service and suffer serious consequences 

as a result. 

It is critical to remember that it is the Medicaid entitlement that 

makes Medicaid’s safety net role possible. The entitlement means 

that the program serves any individual who qualifies for eligibility. 

To support these services, the Federal Government provides States 

open-ended matching funds. The more people who are eligible for 

service and the more service costs, the more health-care costs, the 

more States receive in Federal matching funds; the fewer people eligible, the less States receive. Open-ended matching funds enable 

States to respond to increased need that comes with recession or 

public-health emergencies, or to support newly available and often 

expensive treatments like pharmaceuticals, for example, expensive 

AIDS medications. 

Concerns about the costs of Medicaid have historically, and 

today, led to calls for so-called Medicaid reform. Too often, these 

proposals would limit the entitlement by imposing arbitrary caps 

on Federal Medicaid payments or substituting fixed allotments or 

block grants for open-ended matching financing. Without offering a 

specific proposal, the President’s budget refers to a ‘‘modernized 

Medicaid system’’ that will give States greater flexibility to serve 

more people for the same amount of money by changing delivery 

systems, targeting populations, and providing what is referred to 

as ‘‘appropriate benefit packages.’’

However, no creativity in delivery can offset likely increase in 

numbers of people in need and increases in the costs of services 

over which Medicaid has little, if any, control. With capped funds, 

States’ ability to flexibly expand coverage, provide coverage to currently ineligible, uninsured populations, or to continue to expand 

home-and community-based long-term care services would be hampered, not enhanced, given the need to cover the inevitably rising 

costs of existing obligations. 

Indeed, with capped Federal funds, so-called flexibility is nothing 

more than a euphemism for cuts in protections that Federal rules 

currently do not allow: creating waiting lists for enrollment, favor-
36

ing some parts of States over others, charging even the poorest 

beneficiaries out-of-pocket payments for service, and limiting access 

to any and all services based on fiscal concerns. 

As it is sometimes proposed that such limits apply only to what 

are referred to in Medicaid as optional populations, populations 

that States are not required to cover, but may choose to cover, it 

is important to remember that in this category are elderly and disabled people with incomes below the Federal poverty level, but 

above three-fourths of the Federal poverty level; the majority of elderly Medicaid nursing home residents; pregnant women with incomes above 133 percent of the Federal poverty level; near-poor 

children and very poor parents. To States, under such a proposal, 

coverage would become an option, but to the affected population, 

care would remain a necessity they could not afford. 

President Bush has characterized Medicare as, and I quote 

again, ‘‘the binding commitment of a caring Nation.’’ The language, 

in my view, should also apply to Medicaid. Yet the administration 

has offered no proposals to secure these essential commitments. Increasing health-care costs that affect Medicare and Medicaid along 

with the rest of the health-care system cannot be addressed 

through caps on malpractice awards or the creation of health savings accounts. Malpractice costs are estimated to count for a very 

small portion of health-care costs; the caps hurt damaged patients 

and provide virtually no relief from health-insurance costs, less 

than half a percent. 

Individuals cannot own responsibility for their own health care 

by managing limited accounts when the bulk of health-care costs 

are catastrophic and decisions are driven by health-care providers. 

Meager tax credits for the purchase of private health insurance 

policies can assure few, if any, of the 45 million uninsured Americans affordable and adequate insurance protection, and cuts in 

Federal funds for Medicaid do not eliminate the cost of care to vulnerable populations, they shift the burden of bearing those costs to 

States and to the population at risk. 

In 2005, after 40 years of experience with Medicare and Medicaid, we should recognize that investment of our collective resources to protect those among us who become ill or need long-term 

care enhances the quality of our lives and our strength as a Nation. 

This is the time to renew and extend their commitment, not to explore ways to abandon it. 

Thank you, Mr. Chairman. 

[The prepared statement of Judith Feder follows:] 

PREPARED STATEMENT OF JUDITH FEDER, PH.D., PROFESSOR AND DEAN, GEORGETOWN PUBLIC POLICY INSTITUTE, GEORGETOWN UNIVERSITY

Mr. Chairman, Congressman Spratt, and members of the committee, thank you 

for inviting me to discuss entitlement programs and the Federal budget. My remarks will focus on the health entitlements—most prominently, Medicare and Medicaid, which are my particular area of expertise. 

The Medicare and Medicaid programs loom large in discussions of the budget, 

both because of the resources they currently require and the greater resource demands they will make in the future. However, this committee’s focus on fiscal concerns should not obscure two ‘‘truths’’ about these programs. 

First, they make health care affordable and long-term care available for millions 

of older, disabled, and low income Americans who would otherwise lack access to 

care when they need it. Second, the fiscal challenges facing these programs reflect 

factors beyond their control—growth in the populations they serve (elderly, disabled 
37

and, for Medicaid, low and modest income families without health insurance) and 

in the Nation’s health-care costs. 

Cuts in Federal funds or structural changes in the structure of Federal financing 

(like arbitrary caps or fixed appropriations-block grants) cannot be justified as promoting efficiency or personal responsibility in the Medicare or Medicaid programs. 

On the contrary, they would represent an abdication of the Nation’s responsibility 

to care for its most vulnerable citizens. 

CHALLENGES AND CHOICES IN MEDICARE

In July, 2005, we will celebrate the 40th anniversary of Medicare’s enactment. 

This program’s explicit goal was to assure access to mainstream medical care for 

the Nation’s senior citizens—a promise later extended to some people with disabilities. Medicare has been enormously successful in achieving those goals, and is credited both with extending and enhancing life for older Americans and alleviating financial burdens on their families. 

These achievements have not been inexpensive. Increases in program costs have 

been a significant concern from the program’s inception. However, Medicare’s record 

in containing health-care costs has been as strong if not stronger than the record 

of private health insurance. Medicare and private health insurers purchase health 

care in the same health-care system and face the same pressure to balance access 

to care against controlling the cost of care. Medicare has been a leader in promoting 

that balance, ahead of the private sector in adopting provider payment methods that 

promote value for the dollar in the purchase of care. 

Although beneficiaries have benefited significantly from the access to health care 

that Medicare provides, they too have faced significant costs. Medicare benefits have 

been and, even with the newly enacted prescription drug benefit, will remain less 

comprehensive than employer-sponsored insurance benefits. As a result, beneficiaries incur substantial out-of-pocket spending and in traditional Medicare have 

no ‘‘stop-loss’’ or ceiling to protect them against catastrophic costs. The typical senior is estimated to spend more than 20 percent of income on health care, to receive 

and supplement Medicare’s benefits. 

From its inception, Medicare has been financed through a combination of payroll 

taxes on the working aged population, premiums from beneficiaries, and general 

revenues. Part A resembles Social Security, with a payroll-tax-generated trust fund 

that is dedicated to financing its benefits. As is true with Social Security, the aging 

of the population will lead to shortfalls in this trust fund, as a larger number of 

older persons rely for financing on a smaller number of working-aged taxpayers. 

(Part A is the only part of Medicare to which the concept of shortfall applies; it 

makes no more sense to talk about shortfalls for general-revenue-funded portions 

of Medicare than it does to talk about shortfalls in defense spending.) 

What makes Medicare’s financing challenge different from Social Security’s is the 

growth in its per capita costs, alongside growth in the number of beneficiaries. 

Health-care cost growth is not a problem unique to Medicare, however. It is a problem facing the Nation’s entire health-care system. 

Securing the adequacy of Medicare financing (the Trustees estimate exhaustion 

of the trust fund in 2019) is an important policy objective. But any measure that 

reduces Federal spending on Medicare without slowing growth in the Nation’s 

health-care costs will undermine, not strengthen, the security that Medicare provides. Arbitrary caps on Medicare funding would not eliminate the costs of health 

care; it would simply shift them from the program to the individuals who need 

health care and their families. Moving from Medicare’s guaranteed benefits to ‘‘premium support’’ or contributions to purchase private health insurance would similarly shift risk. Claims that more competition across health plans can slow cost 

growth have simply not been supported by the evidence. The strongest competition 

among health plans seems to be to enroll people perceived to have fewer and less 

costly health needs and to avoid (or disenroll) people with greater, more costly 

needs. In the absence of mechanisms to overcome this ‘‘selection’’ problem, government pays private insurers more to serve beneficiaries than it would under the traditional system, and individuals who need the most care receive insufficient support. 

This problem would be exacerbated if government were to limit its contributions 

to premiums, regardless of the growth in health-care costs. In these circumstances, 

not only would those needing the most care face the highest risk, but all beneficiaries would face the burden of even greater out-of-pocket spending. In other 

words, reliance on private plans does not contain health-care costs; it shifts the risk 

of bearing them from Medicare to individuals and their families. 
38

Medicare has been enormously successful in assuring access to mainstream medical care for its beneficiaries. Our goal should be to secure the protection it provides, 

not to shift risks back to the very individuals it aims to protect. 

CHALLENGES AND CHOICES IN MEDICAID

July 2005 will also mark the 40 anniversary of enactment of the federal-state 

Medicaid program. As a safety net for low income Americans who otherwise lack 

health insurance and the Nation’s primary safety net for long-term care, Medicaid 

has become the Nation’s largest public health insurance program. In 2003, Medicaid 

provided coverage for 25 million children, 14 million adults (primarily low-income 

working parents), 5 million seniors and 8 million people without disabilities. In the 

absence of Medicaid, the vast majority of its beneficiaries would be uninsured—and 

lack the access to medical and long-term care that Medicaid provides. 

Medicaid’s protections, like Medicare’s, come at considerable expense to Federal 

and state governments. But cost growth cannot be attributed to Medicaid inefficiency. Rather than reflecting excessive payments to providers (Medicaid is criticized far more often for paying too little than too much), Medicaid expenditure 

growth typically reflects increases in the number and kinds of people it serves. 

Urban Institute analysis of Medicaid spending between 2000 and 2003 illustrates 

the critical role of the Medicaid health insurance safety net. In this period of recession and rising health-care costs, Medicaid spending increased by about a third—

not because of expansions of eligibility or dramatic increases in payment. Rather, 

the increased spending reflected substantial increases in enrollment, as people’s incomes declined and employer-sponsored health insurance disappeared. Without expansion of the Medicaid safety net, the Nation would have an experienced an increase in the number of children without insurance and an even larger increase 

than otherwise occurred in uninsured adults. 

Although three quarters of Medicaid enrollees are children or their parents, about 

70 percent of Medicaid’s expenditures are for low income elderly people. Low income 

people with disabilities do not qualify for private health insurance. And few Americans have insurance for long-term care—the costs for which exceed the incomes of 

most American families. Responsible for half the revenues received by nursing 

homes and providing full or partial support for more than half of all nursing home 

patients, Medicaid is the Nation’s only safety net for long-term care. 

It is the Medicaid entitlement that makes Medicaid’s safety net role possible. The 

entitlement means that the program serves any individual who qualifies for eligibility. To support these services, the Federal Government provides states openended matching funds: the more people who are eligible for service and the more 

services costs, the more states receive in Federal matching funds; the fewer people 

eligible, the less states receive. Open-ended matching funds enable states to respond 

to increased need that comes with recession or public health emergencies or to support newly available treatments, like ever-improving AIDS medications. Medicaid 

covers an estimated 55 percent of persons living with AIDS and 90 percent of all 

children living with AIDS. When the number of people affected increases or the 

costs of treatment rise, Federal funds automatically increase to share the burden. 

Concerns about the costs of Medicaid have historically generated policy proposals 

to limit this entitlement by imposing arbitrary caps on Federal Medicaid payments 

or substituting fixed allotments or ‘‘block grants’’ for open-ended matching financing. 

Without offering a specific proposal, the President’s budget, refers to a ‘‘modernized 

Medicaid system’’ that will give state greater flexibility to serve more people for the 

same amount of money—by changing delivery systems, targeting populations and 

providing ‘‘appropriate benefit packages’’. However, no creativity in delivery can offset likely increases in numbers of people in need and increases in the cost of services over which Medicaid has little if any control. With capped funds, states’ ability 

to ‘‘flexibly’’ expand coverage—provide coverage to currently ineligible uninsured 

populations or continue to expand home and community-based long-term care services—will be hampered, not enhanced, given the need to cover the inevitably rising 

cost of existing obligations. Either that, or expansions will come at the expense of 

people already in need. Jeanne Lambrew’s recent Milbank Quarterly analysis makes 

abundantly clear that replacing open-ended Federal matching with fixed growth 

rates or allotments in Federal spending will inevitably fail to provide funds adequate to meet changes in need or changes in cost, leaving people without care. 

Indeed, with capped Federal funds, ‘‘flexibility’’ is nothing more than a euphemism for cuts in protection that Federal rules currently do not allow: creating waiting lists for enrollment, favoring some parts of states over others, charging even the 

poorest beneficiaries out-of-pocket payments for service, and limiting access to any 

and all services based on fiscal concerns. Previous proposals have limited new ‘‘flexi-
39

bility’’ to Medicaid’s so-called ‘‘optional’’ populations, keeping Federal requirements 

in place for ‘‘mandatory’’ population groups—primarily poor children, and elderly 

and disabled people eligible for Supplemental Security Income (SSI) (that is, with 

incomes below 74 percent of the Federal poverty level). Without these protections, 

coverage would likely decline for ‘‘optional’’ populations, which that include elderly 

and disabled people with incomes below poverty but above 74 percent of the Federal 

poverty level, the majority of elderly Medicaid nursing home residents, pregnant 

women with incomes above 133 percent of the Federal poverty level, near poor children and very poor parents. To states, coverage would become an option; to the affected population, care would remain a necessity. 

POLICY PRESCRIPTIONS

President Bush has characterized Medicare as ‘‘the binding commitment of a caring Nation.’’ The same language should apply to Medicaid. Yet the administration 

has offered no proposals to secure these essential commitments. 

Increasing health costs that affect Medicare and Medicaid along with the rest of 

the health-care system cannot be addressed through caps on malpractice awards or 

the creation of ‘‘health savings accounts’’. Malpractice costs are estimated to account 

for about 2 percent of all health-care costs; caps hurt damaged patients and provide 

virtually no relief from health insurance costs (less than half a percent). Individuals 

cannot ‘‘own’’ responsibility for their own health care by managing limited accounts, 

when the bulk of health-care costs are catastrophic and decisions driven by healthcare providers. Meager tax credits for the purchase of private health insurance policies can assure few if any of the 45 million uninsured Americans affordable and adequate insurance protection. And cuts in Federal funds for Medicaid do not eliminate 

the costs of care to vulnerable populations; they shift the burden of bearing these 

costs to states and the population at risk. 

In 2005, after forty years of experience with Medicare and Medicaid, we should 

recognize that investment of our collective resources to protect those among us who 

become ill or need long-term care enhances the quality of our lives and our strength 

as a Nation. This is the time to renew and extend our commitment, not explore 

ways to abandon it.

Mr. PORTMAN [assuming Chair]. I thank all the witnesses for 

their testimony. We have a lot of questions for you all, and I will 

try to be as brief as I can, starting with saying that the information you are giving us today as experts is extremely helpful as we 

look at the big picture, which is not just the domestic discretionary 

spending, which is a smaller and smaller part of our budget, but 

also on the mandatory side. 

I would like to start, if I could, just laying out the problem. We 

know from the projections we have that mandatory spending is projected to rise at about 5.6 percent just over the next 5 years. And 

as Dr. Wilensky has reminded us, there are some longer-term 

growth rates that are even higher. I think, if you look at the President’s budget fully adopted, mandatory spending would be about 

5.5 percent; and that is the chart you see here. So just to put this 

in a little perspective, given Dr. Feder’s comments at the end, I 

think it is important to note that we are not talking about major 

changes. 

With regard to Medicaid in particular—could we put a chart up 

on Medicaid? 

The President is talking about 60 billion over 10 years in 

changes. The growth rates under Medicare are projected over 10 

years, 7.6 percent. We are talking about substantial growth even 

under the Bush reforms, to 7.3 percent. In fact, if you look at the 

Bush budget that we got, there are actually, on the health-care 

side—and Dr. Feder makes a good point that this is related to general health care, not just to Medicaid—there is about $142 billion 

in new spending on health-care initiatives. 
40

Subtracting from that the $60 billion in Medicaid that is reflected here, you end up with actually net new spending of about 

$82 billion, as compared to current law, including the entitlement 

programs. And that new $142 billion is not in Medicaid, but it is 

health care, including expanding some of Medicaid, about $16.5 billion more, the Cover the Kids outreach campaign and so on. 

So just to put that in some perspective, at the same time we hear 

from Dr. Wilensky, which I think is pretty well established now, 

that Medicaid and Medicare alone could be 20 percent of our gross 

domestic product by the year roughly 2040, which is what our entire budget is now. So all of our spending on the domestic side, all 

of our military spending, all of our entitlement spending now is 

about 20 percent, including interest on the debt; and Medicare and 

Medicaid alone, by 2040, would consume all of that. And this is 

why we need your input. 

And, Dr. Feder, again, I agree with you that the Medicaid increases, which, as we have seen here, is over 7 percent, and therefore difficult to sustain, in my view, is reflective of health-care cost 

increases generally. But when you go through the list you think liability reform isn’t going to help, HSAs and more competition and 

transparency is not going to help, tax credits aren’t going to help; 

we just need to invest more. I don’t know how we can invest more 

if it, over the next 35 years, is going to consume, with Medicare, 

all of our current budget. 

I guess I would just ask Dr. Wilensky and Dr. Feder to comment 

on that, and the other two witnesses feel free to as well. What 

would the impact be on our economy if we don’t begin to figure out 

a way not to reduce spending, but to restrain and reform? 

And when the President talks about more flexibility, and I think 

about skilled nursing facilities back home and the degree to which, 

increasingly, Medicaid is being relied upon, it is a very inefficient 

way to offer health care, and for families to have to go through this 

process of disgorging their assets and so on, and nursing facilities 

not getting full reimbursement, but relying more and more Medicaid, certainly there should be some opportunities for some improvements. 

And maybe, Dr. Feder, you can answer first, then Dr. Wilensky, 

and then I will turn to my colleague, Dr. Spratt, to address the witnesses. 

Dr. Feder. 

Dr. FEDER. Thank you, Mr. Chairman. Let me respond to your 

bigger points first. 

When we look at the projected growth in Federal funding for 

Medicaid, as for health care in general, one has to look at it always 

relative to the cost of care. So even if it is growing, we need to 

know how it is growing relative to the demand of the population, 

a demand of Medicaid and the cost of services. Any cut in Medicaid, facing a growing demand, is a problem to that program’s capacity to provide service, as we can hear from the States. And I 

don’t have to tell you what they are saying about the kinds of pressures they are facing to cut services. 

The second point, you are absolutely right about—and I am glad 

we agree—on the importance of health-care costs. And I would support the suggestions that Dr. Wilensky made with respect to smart-
41

er purchasing; not just for Medicare, I think for the entire healthcare system. There is no excuse for not getting value for the dollar 

in the entire health-care system. My concern is focusing only on 

public programs, rather than the system as a whole; and I think 

we need to do that. 

A third issue, how can we possibly sustain this. I think it is a 

mistake—and a number of economists have made this argument—

to look at our resources as a fixed pie. We are a growing economy. 

It is nicer when we grow faster and when low-income people are 

benefitting more, but we are a growing economy, and when we look 

out into the future, our capacity to support a growing elderly population grows, and we mustn’t forget that. 

Finally, in that respect, it is important to remember that what 

we take in from those resources in taxes is not a fixed pie. I believe 

that we are at about the lowest tax rate, at this time in this Nation, that we have experienced in a long time. Revealing what 

might be a conflict of interest, I am proud to say I am at the lead 

of the baby boom generation. And I believe, though I hope my earnings are still going up, that I am at the peak of my earning years. 

So my plea is: tax me now. I can give now. It would reduce burdens 

on future generations, and the resources would be there to help my 

generation when we are older. 

Finally, I said it before, but you asked a very specific question 

or mentioned something specific about long-term care. If I could rephrase or state somewhat differently what you said, there is a tremendous concern about a long-term care system that is focused so 

heavily on nursing home care, rather than on care at home and in 

the community, where most people would rather receive it. We 

have made strides in Medicaid in recent years in redressing that 

balance and community-based care has expanded substantially. Indeed, some of those expansions are threatened by fiscal constraints 

at the moment. But that is a direction in which I believe that we, 

as a Nation, would like to go. 

I would urge you, however, based on a great deal of evidence, not 

to be optimistic that that will save money, in part because we have 

a larger number of people in need than are now receiving care in 

nursing homes. In fact, the bulk of people who need long-term care 

now receive it in their home, however inadequately. So I believe we 

should serve a larger population at home, but I am skeptical that 

it will actually save money. 

Mr. PORTMAN. Thank you. 

Dr. Wilensky. 

Ms. WILENSKY. The area that is the most promising in reducing 

growth rates in health-care spending is to learn how to spend 

smarter. Think about Medicare for a moment. We have spent the 

last 20 years—and I was Medicare director during this period, so 

I am including myself in this statement—reimbursing exactly 

wrong in terms of trying to spend smarter. 

Why do I say that? Well, you get exactly the same payment if 

you are a physician or if you are a hospital and you are best in 

class or you are just barely above the indictable level. That is fundamentally a bad idea. Trying to change reimbursement so that institutions and individuals who do it right, do it right the first time, 
42

get more money and those who don’t do it very well get less is very 

different from the current system. 

This is not very different from what goes on in the private sector. 

There are small demonstrations, under what is called pay-for-performance that are being started by Medicare. There is a lot of activity going on in the private sector right now where corporations 

are attempting to start changing how providers are paid. Information systems are another issue, although there are questions about 

whether Medicare should actually pay physicians or hospitals to 

adopt new information systems or should change the incentives associated with reimbursement. 

I would caution before we go down the road of direct reimbursement. First, it would move us back to a cost-based reimbursement 

system, which we have now spent 20 years trying to move away 

from. Secondly, we don’t need to pay hospitals to set up cath labs 

and open heart surgery centers; the reimbursement system drives 

hospitals to set them up whenever and wherever they can. Some 

people might say maybe too often. 

What we need to think about is how can we change the reimbursement system in the public sector, and in the private sector as 

well, so that you drive the kinds of changes you want. Sure, you 

might need to help rural institutions and rural providers who can’t 

easily access the capital they would need in order to make these 

changes. 

We also have a lot of new technology that is going to be coming 

online, in part thanks to the doubling of the NIH budget. The question is whether we can get information out about comparative costeffectiveness and comparative clinical effectiveness of these technologies so payors and patients and providers have some idea 

about what really works when. 

Finally, some of the issues that Dr. Feder raised about malpractice or changes in the tax code I think are also important. They 

are certainly not silver bullets. But, as long as physicians and institutions worry that if they have a bad outcome, they will be subject 

to liability claims, there will be unhelpful drivers of health-care 

spending. Maybe introducing patient safety measures into the system would be the ‘‘quid pro quo’’ to bring the warring parties in the 

Congress together to limit liability, but to do so while providing additional safety to patients. 

The notion that only 1 or 2 percent of health-care spending may 

be attributable to malpractice first is based on a couple of very 

small studies in the 1980s and, second, denies the fact that 1 or 

2 percent of $1.8 trillion is still a very big number. 

Mr. PORTMAN. Plus it doesn’t take into account all the defensive 

medicine. 

Ms. WILENSKY. It is very difficult to try to measure defensive 

medicine. Asking institutions and individuals to put themselves at 

financial risk, if they have a bad outcome, and at the same time 

berate them for not practicing in a conservative practice style 

makes no sense. We have got to take this issue on. 

Mr. PORTMAN. I would love to hear from Dr. Smetters and my 

friend, Dr. Haskins, but in the interest of getting to the other committee members, you will have the opportunity to respond to their 

questions. 
43

With that, I would like to have the ranking member, Mr. Spratt, 

inquire. 

Mr. SPRATT. Thank you, Mr. Chairman. 

Once again to our witnesses, thanks for your testimony. 

Could we compare charts? Chart No. 1, which differs significantly from the chart the chairman just showed us, assumes a $45 

billion cut in Medicaid over a 10-year period of time. In truth, the 

gross cut is $60 billion. It is not clear to me from reading the President’s budget where the other $15 billion goes. But, in any event, 

we have taken the $45 billion net number, and it spreads down 

over the period of 10 years resulting in an $8 billion cut in 2015. 

Mr. Chairman, as I recall, the two bar graphs you showed were 

for 1 year, and it was a minor amount, like the amount that is assigned there for 2006, but the cut gets deeper and deeper. Yesterday three Governors came over to meet with us and told us that 

this was the biggest problem they faced, and they implored us not 

to force them to redesign the system according to a certain arbitrary budget cost reduction number, but let us work together to reconfigure, restructure, reform the system. Then estimate its costs, 

then change it at the margins with copays or other provisions in 

order to shoehorn it into the budget once it is reconfigured and redesigned, but not let the redesign be driven by an arbitrary number. 

Would you disagree with that, Dr. Wilensky? 

Ms. WILENSKY. That is a better way to go, to redesign the whole 

system. I object to some of the fiscal strategies that States have 

used that circumvent the need for them to put up additional funding. 

Mr. SPRATT. Upper payment limits and provider taxes, and 

things of this kind. 

Ms. WILENSKY. Exactly. I sympathize with the States that they 

would prefer to have these strategies available, but I believe it fundamentally circumvents the matching intention of the Congress in 

setting up the Medicaid program. So I don’t disagree that Medicaid 

is desperately in need to be redesigned. I don’t put those changes 

in quite the same category. 

Mr. SPRATT. Let me say, as one State which has been an active 

user of creative accounting when it comes to Medicare——

Ms. WILENSKY. But not the worst. 

Mr. SPRATT. No. Thank you very much. It is done for good motives, too, because the devices that South Carolina uses, and other 

States which have done the same thing, are mainly to deal with 

the problem of small rural hospitals, typically, or large urban hospitals, and the devices they use are proxies for some other device 

that would funnel money to those institutions that serve Medicare 

and Medicaid population and, therefore, get the lowest rates of reimbursement and need something to stay solvent, frankly. 

Let me ask you, Dr. Wilensky, about MedPAC. Are you still on 

the board? 

Ms. WILENSKY. No. My term ended in 2001. 

Mr. SPRATT. Are you familiar with their report? And for this year 

applying the sustainable growth rate——

Ms. WILENSKY. Yes. 
44

Mr. SPRATT (continuing). They indicate that physicians’ fees will 

be reduced by 5 percent. 

Ms. WILENSKY. Correct. 

Mr. SPRATT. And as I understand it, the President’s budget assumes in its cost estimates for the Medicare program that that 5 

percent will be implemented and not overturned by Congress. Can 

you give us an idea of the consequences of that? How does this 

mechanism work? 

Ms. WILENSKY. This was an unfortunate piece of the Balance 

Budget Act passed in 1997. I was chairing the Physician Payment 

Review Commission at the time—one of the two predecessor commissions to MedPAC. The problem is that the sustainable growth 

rate looks only at total spending on physician services. If physician 

spending is growing faster than allowed for in the budget, the SGR 

ratchets down fees across the board, which is particularly unfair 

and inequitable. The conservatively practicing physicians get hit as 

hard as anyone else. 

The concern by the Congress has been, and I think with some 

cause, that if repeated 5-percent reductions in fees were to go into 

place, seniors would have trouble getting in to see their physicians. 

In fact, there is not any such evidence available yet and in fact, the 

Government Accountability Office (GAO) just released a study that 

says it does not appear that in 2002 when the 5-percent reduction 

went into effect, there was a measurable problem. 

But the notion of having repeated 5-percent reductions in fees, 

which is what the law has in place for the next several years, is 

troublesome, nevertheless. 

Mr. SPRATT. Do you think Congress should intercede and reverse 

that change? 

Ms. WILENSKY. I wish they would redesign the whole system of 

physician payment. 

Mr. SPRATT. Only as part of a complete redesign of the whole 

health system, the whole Medicare system? 

Ms. WILENSKY. No, I would do it now. I think they need to redesign the physician payment system. The physician relative value 

scale is front and center in this notion of paying the same for best 

in class and worst in class. It is a very disaggregated payment system, unlike the way we pay hospitals on a discharge basis and it 

is capped with the sustainable growth rate. The way we pay physicians just isn’t very smart. 

Mr. SPRATT. Wasn’t the problem as we bore down on rates as we 

did in 1990, 1993, and 1997, there was no increase at all in the 

Medicare Program in 1998 as a result of the BBA of 1997, a phenomenon we haven’t seen repeated but there was none. The problem was as we bore down on rates, volume tended to increase to 

make up for the lower rates. How do you handle that problem if 

you don’t have even this cumbersome thing called a sustainable 

growth factor? 

Ms. WILENSKY. What helped in 1998 is that the economy was 

booming, so you could have substantial increases in reimbursements without exceeding the sustainable growth rate. The question 

of whether or not the growth in the economy as a whole ought to 

govern what we spend on physician spending in the narrow is 

something else. We don’t know if physician spending goes up 
45

whether it is a good thing or a bad thing. In part, it depends on 

what happens to the outpatient hospital spending and what happens to nursing home and home care. To try to put an arbitrary 

cap on one area of Medicare spending has never made any sense. 

Mr. SPRATT. Could I ask Dr. Feder for her opinion about the sustainable growth factor and what we should do with the otherwise 

automatically implemented 5 percent cut in physician payment 

rates? 

Ms. FEDER. I think I agree with most of what Gale had to say 

in terms of the need for refinements in the system and the difficulties with arbitrary caps. That said, you rightly say we have an 

issue of balancing in the relationship between changes and fees 

and changes in volume. I think that greater refinement in the system, and I would like to be more precise for you right now but 

can’t, might help us find smarter ways to do that but it has always 

been a concern, and I don’t know where they are now with the Congressional Budget Office, giving you difficulties as I recall in scoring changes you wanted to make because volume increases offset 

payment reductions. 

I think you have rightly identified and I think more work on reimbursement is necessary. 

Mr. SPRATT. I am sort of uncovering an irony here in that all of 

you have sort of decried the increasing cost of providing medical 

care in our society and in these programs in particular, but testimony we have supports a pretty substantial increase. That has a 

pretty significant dollar impact on the budget for next year. 

Ms. WILENSKY. The dollar impact depends in part on whether or 

not you are willing to pay less for those who perform poorly. Most 

of the pay for performance strategies look at add-ons. Practitioners 

get what they were going to get and those that do it better, get a 

little more. One question is whether people willing to start to think 

about spending more for what works, spending less for what 

doesn’t or for institutions that don’t provide good outcomes. That 

is a whole different way to do it. 

Mr. SPRATT. Another question about the MedPAC report. It is my 

understanding that it also indicates that hospitals and Medicare 

patients are experiencing a negative operating return of ¥1.5 percent. Do you think that DRG, hospital rates of reimbursement 

ought to be adjusted because of that negative operating margin? 

Ms. WILENSKY. It depends on what you think will happen to the 

hospitals if you let payments drop to minus 1 or 2 percent. The 

same with regard to the physicians. You asked me do I think there 

would be a problem for repeated ¥5 percent reductions and the answer is repeated ¥5 percent reductions will start to get into access 

problems. Will a single ¥5 percent reduction or ¥2 percent reduction? Probably not. It is really the same response with regard to 

the hospitals either across the board or for a year whether or not 

reductions will cause any problems with regard to access for seniors. 

We tend to focus what happens to institutions. Will some of them 

close? They may. The real question is what happens to access to 

care for seniors? Does that negatively impact them or not? 

Mr. SPRATT. Let me ask you something about the Medicare Modernization Act which you mentioned in your testimony. Buried in 
46

that, for the purposes of most observers because most people were 

focused on the prescription drug coverage, are provisions that deal 

with competition for traditional fee-for-service Medicare. In particular, there are subsidies provided to managed care firms offering 

capitated fees and taking on Medicare patients supposedly at a 

savings to the traditional program but in fact, these managed care 

outfits have been making about 107 percent according to GAO, 

spending about 107 percent according to GAO more than the feefor-service plan pays. GAO suggests that if you adjusted the profile 

of the patients who tend to be healthier, they are really spending 

about 110 percent more. 

Nevertheless, because the HMOs were pulling out of Medicare, 

this bill, as I understand it, subsidizes the continued competition 

with fee-for-service Medicare. In light of the swelling cost to this 

program, do you think that subsidy is justifiable? 

Ms. WILENSKY. I would like to see them get no more or no less 

than fee-for-service groups. I think the question is whether so 

many problems were created by the Balanced Budget Act that it 

led to the withdrawal of substantial numbers of plans from the 

Medicare Program. If so, it could justify having 1 or 2 years of 

extra payment to get them back to Medicare. But there is no question in any long-term period, these groups ought to play on the 

same ground and by the same rules, the same reporting requirements as fee-for-service institutions. I wish that the direct head-tohead competitive provisions that had been initially in the House 

bill had made it to the final bill. They did not. 

There is an area that we haven’t spoken about. It is hard to resolve but important nonetheless; that is, there is tremendous variation in spending in the Medicare Program. Analysts have observed, including Elliott Fisher, a physician at Dartmouth, who 

looked at what services people get in the areas that are high spenders in Medicare. The answer is not much either in the way of beneficial services or satisfaction to the patient. How to drive down 

spending in the high spending areas of the country, by which I 

mean the county-level spending would help enormously but would 

require rethinking how we reimburse in Medicare. It would also 

cause a lot of push back politically from those States and counties 

that now are high spending. This type of change couldn’t happen 

in a single year but it could be done over a 2- or 3-year period. 

Mr. SPRATT. Looking at the numbers we have seen here presented for Medicare and Medicaid, it appears they are not exactly 

run away but they are soaring, increasing at a rapid rate. In fact, 

when you unpack the reason for their rise in recent times, there 

are some policy actions that Congress has taken and the administration has supported which have caused it. For example, the Federal Medicaid Assistance Percentage (FMAP), the additional 

amount of money that was funneled into Medicaid as a counter recessionary move on our part to sort of strengthen the safety net 

and secondly, Medicare prescription drugs. There has been a fundamental change so this is not something in the system that suddenly 

has gone out of control, this was something added intentionally. 

The costs now appear to be more than those expected who voted 

for it but there are a couple of provisions in there which I wonder 
47

are still justified in light of the additional costs. I think you know 

what I am talking about. 

One is the black letter provision that prohibits the Federal Government from negotiating the price of drugs, the first time in the 

22 years I have been in Congress that I have been asked to vote 

on a provision that would say to an officer of the Government, you 

are not obligated to cut the best deal you possibly can for the 

American taxpayer. Do you think it is justifiable particularly now 

in light of the soaring cost of the Medicare prescription drug coverage? 

Ms. WILENSKY. Let us at least use language honestly. Government doesn’t negotiate prices, Government sets prices in Medicare. 

There is no negotiation with the physicians, no negotiations with 

the hospitals. So the question is should we have administered pricing or Government price setting for prescription drugs as Medicare 

does elsewhere? 

I can only tell you that your CBO and now the CMS Actuary 

have both said that at least in the near term, they don’t believe you 

would get additional savings over what you will get at least ‘‘in the 

near term’’ from having a competitive environment. Whether that 

will hold for 3 or 4 years I think is a real question. I am not sure 

whether it will or not. 

So, let us not talk about negotiation, let us at least just say 

should we have Government administered pricing or not? 

Mr. SPRATT. Let me ask a couple questions and I will let everyone else go. I am sorry, I just have a lot of questions from the testimony you have given. 

Mr. Haskins and Mr. Smetters, your testimony struck me because you frankly seemed to be ignoring the elephant in the room. 

You are worried about the increase in the deficit both recognized 

and unrecognized because we have cash basis books instead of accrual books and the programs that are increasing at a fast clip but 

you didn’t mention what is now being proposed for the biggest entitlement of all, Social Security. 

If I could have Chart No. 8 on the screen, this is what we extrapolate to be the cost of additional borrowing by the Federal Government. If today’s workers are allowed to divert 4 percentage 

points off FICA into private accounts and away from the Public 

Trust Fund, as you can see there in 2028, the total addition to the 

national debt is about $4.9 trillion to the unified deficit. That is in 

2028 and you aren’t even half way up the slope at that point. That 

is an enormous amount of borrowing which neither of you mention 

in your testimony. Do you not regard this as significant or is it just 

something you happened not to notice? 

Mr. SMETTERS. In fact, your chart makes the perfect point. It is 

very misleading. In particular, the reason why it appears there are 

transition costs the way you have shown is because the Federal 

budget is very misleading. It doesn’t give the full present-value calculation. 

In the President’s plan, people who put $1 into their personal account will receive a benefit reduction discounted by a 3 percent 

rate of return. Those personal accounts do not require any additional money in present value. You are right, the way you are looking at it. 
48

Mr. SPRATT. It would require the Government to borrow and require the Government to pay debt service on the amounts we borrow. 

Mr. SMETTERS. It increases the explicit debt but decreases the 

implicit debt dollar for dollar. It is a perfect offset. The problem is 

that the Federal budget looks at the explicit debt, ignores the much 

large implicit debt and therefore you say there is a transition cost, 

whereas in the President’s budget, the President’s personal account 

plan, it would require no additional money in present value. I am 

glad you showed that chart. 

Mr. SPRATT. Budgetarily though, we are still faced with the fact 

that this is debt, real debt. The Federal Government has to go into 

the bond markets, the capital markets, squeeze out, crowd out 

other borrowers, borrow $4.9 trillion over this period of time. Once 

it is borrowed, semi-annually interest has to be paid. Debt service 

soars along with debt itself and as a consequence, more and more 

things the Government traditionally supports have to be crowded 

out. 

Mr. SMETTERS. No, that is incorrect. 

Mr. SPRATT. Who is going to pay the debt service then? 

Mr. SMETTERS. Public debt goes up by $1, private saving goes up for $1, it is a complete wash. 

Mr. SPRATT. You can’t dip into that $1 on the private side to pay 

the debt service or to pay the bond when it comes due. 

Mr. SMETTERS. The debt service is, in fact, calculated in the 

amounts of the benefit reduction in the President’s plan. This is 

why he discounts future benefits at a 3 percent rate of return. In 

other words, in your personal account, if you make a 3 percent rate 

of return after inflation, you just meet the benefit reduction in the 

personal account. That includes the debt service, so it is a complete 

wash. 

Mr. SPRATT. You have different timing periods for incurring of 

the debt. 

Mr. SMETTERS. No, it is the exact same present-value calculation. 

Mr. SPRATT. I won’t take up the committee’s time to argue with 

you further except to say that the Director of CBO disagreed with 

you when he testified the other day. 

Mr. SMETTERS. The CBO doesn’t do the budget correctly either. 

Mr. SPRATT. It is real debt, it has to be borrowed, it has to be 

paid and it has to be services and all of that becomes a burden 

upon the Federal Government. It becomes almost insuperable in 

the out years of the President’s projections. 

Additionally, you barely talked about tax cuts. I guess you have 

ruled them out as a political possibility but bear in mind 2010, 

2011—December 31, 2010, most of these tax cuts expire by design, 

they sunset. To renew them between 2011 and 2015 costs $1.66 

trillion. That is about a 5-year period of time, so the 10 year cost 

of renewal is really over $3 trillion. 

Mr. Haskins I believe mentioned several times the fact that no 

provision was made to fix the alternative minimum tax. That is 

$650 billion over the budget time frame. Not a dime even to patch 

it for 1 year even though the number of tax filings will go up from 

4 million to 17 million according to CBO, there is not a dime in the 

budget to fix that. Finally, the $322 billion worth of other tax pro-
49

visions not enacted in 2001, the R&E tax credit, for example, that 

had to be renewed too, how can we accommodate all these tax cuts, 

Mr. Haskins, Mr. Smetters, and ever dream of balancing the budget again? 

Mr. HASKINS. We can’t. 

Mr. SPRATT. That is fine. I will take that and rest my case. 

Mr. HASKINS. That is what I said in my testimony but nonetheless, even if we don’t do anything about taxes. 

Mr. SPRATT. You still have huge problems? 

Mr. HASKINS. Absolutely, but it is still worthwhile to do as much 

as you can on the spending side. I realize the Democrats won’t particularly like that, but if we are worried about the deficit, there are 

only two ways to do something about it, raise revenues or cut 

spending. If we can’t raise revenues because the votes aren’t there, 

then cut spending. 

Mr. SPRATT. Mr. Smetters, do you want to respond to that? 

Mr. SMETTERS. Suppose you didn’t extend the tax cuts and on the 

spending side, suppose we got rid of the Department of Defense, 

the Department of Homeland Security, and all Federal agencies except payments for Social Security and Medicare and Medicaid? We 

still would not have enough money. The magnitude of the Social 

Security, Medicare and Medicaid problems are huge. This is a crucial point. When making the projections for Medicare, they already 

are assuming huge cost savings. They assume this program grows 

at 1 percent faster than GDP which is almost hilarious. There are 

incorporating already enormous cost savings into the program. The 

program has never grown at 1 percent faster than GDP. It is much, 

much faster. So we are talking about huge, huge problems here. 

Mr. SPRATT. Thank you again for your testimony. 

Mr. PORTMAN. Mr. Wicker, the patient one. 

Mr. WICKER. Thank you. I am really not very patient but it is 

nice of you to think that I am. 

Along the lines of the overall increase in health-care costs outside of the Federal programs, Dr. Wilensky commented a little 

about that. Let me ask a twofold question. Are there any industrialized countries that are not experiencing this very same problem? 

And what about a major factor being the lack of competition in 

health care? 

Dr. Smetters likes health savings accounts. Let me ask you as 

economists, when you send a lot of money anywhere, the cost, the 

price seems to go up. To what extent has the cost of health care 

risen because over time with Medicare, Medicaid, almost universal 

health insurance, employment-based, without competition in 

choices, been a major factor in this overall increase in health care? 

Ms. WILENSKY. Let me respond to the first part of your question, 

are we having a problem other or different from problems other 

countries have had? We tend to look at what we spend per person 

in this country relative to what other countries, G–7 countries, 

spend and observe we spend a lot more. We spend less time looking 

at rates of increase in spending in the United States compared to 

rates of increase in spending in other G–7 countries. Here we actually look far more similar than we look dissimilar. 

A lot of the increased spending probability has to do with increasing medical capabilities as well as other factors such as in-
50

creasing income and wealth. So in part, this is an issue that all of 

the developed countries are struggling with because they are all 

having aging populations. More importantly, they are also all 

struggling with how to try to take appropriate advantage of new 

medical technologies. 

I am more positive than many of my colleagues in health economics and health policy about health savings accounts but only 

within a certain venue. I think it is important to give people part 

of the decision-making with regard to who they see and to understand that quality and price can differ. 

As Dr. Feder mentioned early on, there is an unfortunate fact of 

life about health-care spending and that is it tends to be very concentrated. Spending is very concentrated in relatively small numbers, 1 percent, 10 percent of the population. If you want to really 

stretch, you can go out to the top 20 percent but basically the top 

1 to 10 percent of spenders account for a lot of money. People will 

blow through any deductible that is in place as soon as they encounter a hospital, certainly by day two and generally by day one. 

The question is whether you think health savings accounts and 

changing the tax treatment of health care to make it neutral for 

those with employer-sponsored insurance, maybe also cap the tax 

subsidy for those with extensive employer-sponsored insurance, a 

favorite remedy for most economists, will change behavior. Whether by getting people involved in the decision-making with the early 

dollars, you might have them more willing and amenable to have 

real care coordination for the expensive, ‘‘back’’ dollars, if applicable, there was better information about what really works when, 

and if there was a change in reimbursement so that those institutions that do it well, do it right the first time are rewarded. Together, would that help? 

I think it would but I would be dishonest to say that tax savings 

or tax changes alone will drive the kind of change that is needed 

because of the very concentrated spending in health care. 

Mr. SMETTERS. I agree, HSAs are not a magic bullet. In terms 

of other countries, if you actually look at the level of spending as 

a percentage of GDP, it is not hugely different than the United 

States. It is higher partly because health care is a luxury good and 

you spend more as you get richer. As just pointed out, the growth 

rates are very similar. That means they are going to converge over 

time. 

If you look at what is provided in the Canadian or the UK system, if Hilary Clinton had succeeded in nationalizing the healthcare system, President Clinton would not be alive today. Look at 

the UK or Canadian system, when you need open heart surgery, 

you don’t get it in 3 or 4 days. Their average que is 9 months. The 

average person dies in the United Kingdom waiting for open heart 

surgery. Yet what have they achieved with it? Similar growth 

rates, a smaller level of spending, so we are talking about not 

much progress for just a very little amount of money. 

Ms. FEDER. I actually would make a different point about the 

international comparisons. First, it is very important to note that 

all the other industrialized nations have everybody in their healthcare coverage systems. We have 45 million people who don’t have 

coverage. I think that is an important point. 
51

Also I think it is absolutely true that every nation is grappling 

with health-care costs and trying to get value for the dollars. As 

I understand it, actually Great Britain is making some great 

strides in trying to build the kinds of information systems perhaps 

similar to what Dr. Wilensky was talking about to enable them to 

get greater value for the dollar in their systems. 

The other point to make I suppose is that all of these systems 

view their health-care spending as a budgetary decision and politically engage in the choices they want to make about what they 

want to spend for their Nation’s health care. We don’t do that. As 

I have argued in my testimony, I don’t want to do it for the most 

vulnerable populations and not the whole health-care system but 

every other nation is trying to do that and do it directly. It might 

behoove us to make some of those decisions as well. 

Mr. PORTMAN. Mr. Wicker, would you like to sum up? 

Ms. McKinney for 5 minutes. 

Ms. MCKINNEY. Thank you. 

Actually the question I have doesn’t really pertain to the subject 

matter of today but because we have four economists, PhDs sitting 

here, I feel compelled to ask this question that has been asked of 

me that I have not been able to answer. 

One of the benefits of serving on the House Budget Committee, 

this is my first time on this committee, is that you get to view a 

lot of charts. These charts are really impressive with the nice color 

and a lot of red ink lately. My Democratic leader talks about millions and billions and trillions and I cannot fathom millions and 

billions and trillions. I know that my next door neighbor who has 

a 22-year-old daughter can’t fathom those numbers either. It was 

Dr. Haskins, I believe, who said we won’t balance the budget. 

Could each of you explain for me what the impact is on my next 

door neighbor who has a 22-year-old daughter of deficits and national debt in the trillions of dollars? 

Ms. WILENSKY. It depends and the reason it depends is it depends on the economy and it depends on who holds the debt and 

it depends on whether or not they are willing to continue holding 

the debt. Most economist in the 1990s thought there would be a 

real drag on the economy from the deficit and that our interest 

rates would go up and slow down the economy but it actually didn’t 

happen. As you know, in the 1990s, there was rather robust 

growth. Other countries were exceedingly willing to hold our debt, 

did not appear to be a drag. I don’t know that I am in a position 

what would have happened had we been in a different fiscal position but when you are looking at the impact of a deficit as I look 

at it, although my colleagues may have other answers, it depends 

in part on the debt relative to the rest of the economy, who is holding the debt, whether they are continually willing to hold the debt 

and if not, do they engage in activities that drive up the interest 

rate so as to try to attract people to hold that debt and does that 

then put a drag on the economy. 

Starting in the mid-1980s, there had been predictions of dire results of having continuing deficits that actually did not, as best I 

can tell, turn out to happen. Having said that, when you look out 

at what happens when you start looking far into our future with 

regard to mandatory spending, the entitlement programs and with 
52

regard to the revenues likely to come in, it is hard not to feel concerned. That would be my translation in terms of how I would regard the answer. 

Ms. MCKINNEY. But I need it in like a 30 second sound bite. 

Ms. WILENSKY. I am not sure right now she is impacted. For 

right now, I am not sure she has any impact. 

Ms. MCKINNEY. OK. 

Yes, Dr. Feder. 

Ms. FEDER. Let me give it a shot and it will be clear from my 

answer I am not a Ph.D. in economics. I am a Ph.D. in political 

science. 

I don’t remember whether you were the mother or talking to 

your friend’s daughter but I guess if I were speaking to my friend’s 

daughter, I would say that the problem right now is that the 

Goverment is not taxing your mom and me and we are spending 

money without the tax revenue to support it as a nation. That 

would be as if I went on a spending spree, went to Las Vegas, went 

to the Caribbean, had a hell of a time and didn’t put money away 

to help you, 22-year-old, as you are starting out in your life, as you 

start building a career, making modest wages, need some help getting a house, with your education and building your family. 

What is happening to the Nation is that we are borrowing this 

money and we are going to have to pay the piper. Not only are we 

not helping you with your new home and your education and your 

child’s needs, we are borrowing the hell out of the world’s resources. Some day we are going to have to pay for that. It is you 

who are going to have to pay; and you are also going to have to 

pay for me because I am going to be old and sick and I am going 

to need your help. 

Ms. MCKINNEY. That is beautiful. 

Ms. FEDER. I would like a different story to tell. 

Mr. SMETTERS. I agree basically with what was said with one 

modification. I would say we shouldn’t be going to Las Vegas. The 

problem is not the amount of money. The problem is we don’t need 

to increase taxes, I believe. I think that would have a very detrimental impact on our economy, especially the effective tax rates on 

U.S. companies are much higher than they are even in Europe. I 

think the problem is we are over spending and part of that over 

spending is the prescription drug bill again that we completely unfunded, completely a large burden to future generations. 

Ms. MCKINNEY. So you would recommend going to Las Vegas 

and having a darned good time? 

Mr. SMETTERS. No, I would recommend not going to Las Vegas. 

Ms. MCKINNEY. Oh, don’t have a good time? 

Mr. SMETTERS. Don’t have a good time. We should live within our 

means. 

Mr. HASKINS. I think the main message is in the long run someone has to pay. The problems that Dr. Wilensky brought up about 

interest rates, I was a staffer in the Congress in the 1980s and 

1990s and everybody was in a panic about the interest rates and 

it turned out to be the sky is falling, the sky is falling. The sky 

didn’t fall. 

Still, if your income is 17 percent gross domestic product and 

your spending is 20 percent of gross domestic product, which that 
53

looks like the direction in which we are heading, eventually it is 

going to bite you. So we are spending too much or taxing too little, 

one of the two. Some people think we are spending too much, some 

people think we ought to both reduce spending and increase taxes, 

but the point I have tried to make to this committee is, we are 

probably not going to raise taxes this year because people like you 

don’t have the votes, so let us at least cut spending. 

Ms. MCKINNEY. What does that mean? Does that mean depression? What does it mean? 

Mr. SMETTERS. If we increase taxes? 

Ms. MCKINNEY. No. When the bill comes due? 

Mr. SMETTERS. Sure, but ultimately that means tax increases on 

future generations. So as I pointed out, suppose we were to try to 

tax our way out of it and suppose we implemented this tax today, 

we didn’t even pass it along completely to future generations, it 

would require increasing payroll taxes on uncapped earnings, talking about the Medicare payroll tax, taxes everything by 22 percentage points. That is over a 146 percent tax increase relative to the 

tax rate today on employers and employees forever. That is assuming we don’t just kick the whole can down the road to future generations. I think most economists would agree, that would have an 

extraordinarily detrimental impact and again, that is assuming all 

these cost savings the trustees are assuming in terms of Medicare 

costs only growing 1 percent faster than GDP. This is a very difficult situation that we are in and it could mean economic collapse. 

Ms. MCKINNEY. I thank you for your indulgence. 

Mr. BRADLEY. Thank you, Mr. Chairman. 

Given the lateness of the hour and the fact we have votes in just 

a few moments, I will pass on any questions. 

Mr. MCHENRY [assumes Chair]. Congressman Davis. 

Mr. DAVIS. Thank you. 

Let me try to be brief given the fact we do have votes coming up. 

As we sit here, Chairman Greenspan is testifying before the Financial Services Committee right now. He said something that may 

be a little surprising coming from the Chairman but it is a very, 

very eloquent and powerful point. He said the last time he testified 

before this committee that ‘‘Equity and the perception of equity are 

important pillars in our society.’’ I happen to believe that, I know 

that certainly John Spratt believes that and a lot of others in the 

room believe and I am glad Alan Greenspan believes it. 

I want to touch on that for a moment because what strikes me 

is the constant theme, whether we are looking at HSAs as opposed 

to a different approach to health care, whether we are looking at 

partial privatization of Social Security versus a more egalitarian 

approach, whether we are looking at the President’s tax cuts versus 

a more egalitarian set of tax cuts, whether we are looking at the 

President’s budget choices versus a more egalitarian set of budget 

choices, there is a constant theme. On issue after issue, what we 

see is a set of policies that are arguably skewed toward some people in society and not others. 

Again, HSAs are a great example. Most of the uninsured in this 

country aren’t paying taxes, so therefore any kind of system that 

is geared around the amount of taxes they can take isn’t going to 
54

do them a lot of good or allow them to earn in the 15 percent 

bracket. 

Obviously partial privitization of Social Security will reward the 

savvy who know something about earnings and investments and 

probably won’t be as impactful for people who don’t have that kind 

of knowledge. The President’s tax cuts were enormously generous 

to people in the top end of our society. The average person in my 

district got about $38 a month. 

I would like to hear from Dr. Wilensky on that general point because I am concerned as we talk about reform in a number of 

areas, this persistent inequity and this drive toward policies that 

favor the few at the expense of the many, that there seems to be 

a real constancy to that theme in this administration. Do you agree 

with that, Dr. Wilensky? 

Ms. WILENSKY. I don’t think I would characterize it that way. 

Mr. DAVIS. Do you disagree substantively with any of the examples I laid out? 

Ms. WILENSKY. I think the tax cut that was passed initially was 

a very important factor in jump starting the economy. 

Mr. DAVIS. Should it have been more egalitarian or more geared 

toward the middle class in your opinion? 

Ms. WILENSKY. I am not here as a tax expert although public finance is my background. I think how you gear and particularly 

what happens to the renewal is a serious issue but I think to just 

blanketedly dismiss the notion. 

Mr. DAVIS. I am not being blanket, I am asking a specific question. The tax burden on the middle class has stayed relatively constant and it has actually gone up to some degree in the last several 

years whereas the tax burden on people on the upper end has had 

a significant amount of decrease. Dr. Feder, you are nodding your 

head. Do you want to weigh in on this? 

Mr. SMETTERS. Could I? A couple of points. I agree with you in 

terms of equity. I would simply say also look between generations 

in terms of equity and I don’t think we are being equitable that 

way. 

The second point is I am surprised you would be opposed to personal accounts for Social Security. Personal accounts aren’t going 

to help you or not because we already have access to an equity 

market but look at the bottom 20 percent of people in the income 

distribution, 9 percent of them have some access to capital markets, one-third of African Americans have some investment in the 

capital markets. That to the personal accounts helps. It is those 

people who have finally had a chance to build wealth that don’t 

have access right now. 

The personal account system the President is talking about 

would make it very, very easy to do so. 

Mr. DAVIS. The only thing I would add, Mr. Smetters, that may 

be a little bit of difference is I think if you were to poll the democratic side of the aisle, if we had a blank check to write, I think 

a lot of us would like the idea of private accounts assuming people 

could leave it to their children which the President would not allow 

them to do, assuming a number of other factors but the reality is 

we don’t have a blank check, we have a prospect of trillions of dollars worth of borrowing. 
55

You make a very important and good point about intergenerational equity. Is there a deeper inequity in one generation 

passing on the cost of what is yet another government reform to 

the next generation? 

Ms. FEDER. I would also say there is a real difference between 

enhancing the capacity of younger people to invest and have accounts on top of protections that we now have in Social Security 

as opposed to eliminating some of the Social Security protections 

and substituting something that is much riskier to individuals. Social security is a kind of insurance, it is about spreading risk and 

we must hold on to that concept in any policy changes as we move 

forward. 

Mr. DAVIS. If I can just close. 

Mr. MCHENRY. The gentleman’s time has expired. We have votes 

and there are others who would like to ask questions, me included. 

Thank you. 

I too am part of the Financial Services Committee and heard 

Chairman Greenspan testify this morning. I want to read you a 

portion of his opening statement that is pertinent to our discussion 

here today. ‘‘Beyond the near term, benefits promised to an ever increasing retirement aged population under mandatory entitlement 

programs, most notably Social Security and Medicare, threaten to 

strain the resources of the working age population in the years 

ahead. Real progress on these issues will unavoidably entail many 

difficult choices but the demographics are inexorable and call for 

action before the leading edge of baby boomer retirement becomes 

evident in 2008. This is especially the case because long-term problems, if not addressed, could begin to effect longer dated debt 

issues, the value of which is based partly on the expectations of developments many years in the future.’’

Certainly it is much easier to hear Alan Greenspan read that because he actually understands what those words mean. However, 

I think it is a pertinent question here today, what are the longterm liabilities that we face with entitlement programs going to do 

to our long-term economic ability to sustain the Government spending we have today, programs accounting for roughly 20 percent of 

GDP. If that continues on track, that will be 40 percent of GDP 

just a decade down the road. My question to you, Dr. Smetters is 

what is the answer? Is it perhaps with Social Security, increasing 

private savings while reducing long-term unfunded liabilities for 

the Government? Is it looking at ways to create cost savings 

through greater efficiency or is it cuts? 

Mr. SMETTERS. It has to come in the form of controlling the 

growth through the benefit increases. In particular, I will be the 

first to tell you that the personal accounts themselves are not a 

magic solution. They don’t add to the problem, they don’t make the 

problem smaller. You really have to control the growth rate of benefits themselves. 

The alternative is to increase taxes and that would collapse the 

economy. Controlling the growth through the benefits would not 

collapse the economy and the reason why is because we can still 

afford under Social Security to pay future generations the same inflation adjusted value of benefits that we pay current retirees. 

What we cannot afford, which is what current law promises, is to 
56

grow the benefits at a rate faster than inflation. That is the problem. 

The reason we have this problem is because current law is actually promising future generations a level of benefits that is actually 

higher than what current retirees are getting even after you adjust 

for inflation. We just can’t do that with either Social Security or 

Medicare. 

Mr. MCHENRY. But isn’t it true with Social Security the demographic shift in this country, the fact we have fewer workers per 

retiree and getting fewer and fewer and fewer in outlying years 

means that it is not a sustainable system on a pay-as-you-go basis? 

Mr. SMETTERS. That is correct. Even after the baby boomers are 

out of the system, it still has huge cash flow problems. So we do 

have to think about reducing those benefit sizes. The best approach 

too would be to increase personal savings I believe through personal accounts because we have a paltry level of personal saving 

in this country already. That certainly is going to contribute to future economic problems. 

Mr. MCHENRY. Thank you. 

Mr. HASKINS. May I make a brief comment? Mr. Spratt referred 

to the elephant in the room. The real elephant in the room is that 

the Congress won’t cut spending. That is the elephant in the room. 

You could say we ought to increase taxes somewhat but we just 

spend too much money and we’re going to spend too much money 

in the future. We complicated the problem when we passed the 

drug benefit. At some point, the Congress is really going to have 

to do something about spending. That is the elephant in the room 

as far as I am concerned. 

Mr. MCHENRY. I hope to reach out to Ranking Democrat Spratt 

so we can come up with ways to cut spending and actually fully 

restrain Government spending. I think that would be a positive 

thing if we could reach across the aisle and look at ways we could 

find real cuts. 

Chairman Nussle. 

Chairman NUSSLE. Yes. Thank you, Mr. Chairman. 

First, I would like to thank the gentleman from North Carolina 

for chairing the hearing and for giving us the chance to ask the 

panel. I had to step out for a moment so I didn’t hear all of the 

answers so I may retread some ground here. 

I wanted to bring to you and other members attention a meeting 

that Mr. Spratt alluded to and that was with myself and Mr. 

Spratt and as it turns out, Governors met yesterday with members 

of the Senate to talk a bit about the challenges regarding Medicaid. 

The headline from the New York Times I just had a chance to look 

at is interesting. It says, ‘‘Governors in Capital to Talk about Medicaid.’’ The opening paragraph says, ‘‘Congress, Governors and the 

Secretary of Health and Human Services began negotiations 

Wednesday on the future of Medicaid with a view toward making 

fundamental changes in the program to control its costs.’’ I can tell 

you that was not what happened yesterday. There was a lot of 

whining, there was a lot of complaining, there was a lot of my not 

in my backyard, please don’t cut me, not this year, oh my gosh the 

sky is falling but I can tell you there was no Congress, Governors 

and the Secretary of Health and Human Services beginning any 
57

negotiations yesterday about a view to fundamental changes in the 

program to control its cost. 

In fact, interestingly enough, they said, we will come back to you 

with a plan for next year. My Governor was here, Governor Tom 

Vilsack of Iowa is quoted. A Democrat said, ‘‘The current Medicare 

system is not sustainable’’ and goes on to say, ‘‘Governors desperately want to slow the growth of Medicaid which they say is eating up State tax revenues they want to use for education.’’

Going to Mr. Haskins’ point, this whole issue or the notion of is 

there some outside force? I don’t think there is any question that 

the outside force is there. I think you are right. The outside force 

to control costs, the realization of what it is doing to the Federal 

budget, to the State budgets, to family budgets, to business budgets, to everything across the board, the out of control costs and nature of health care is an outside pressure that is just growing and 

is enormous. 

What troubles me about not only the article but more than the 

article, the meeting, maybe they had a different meeting with the 

Senate but I can tell you that there was no discussion about doing 

anything this year. They all basically said please wait until next 

year. As my father always said, tomorrow never comes because by 

the time you get there it is either today or tomorrow is the next 

day. Tomorrow never comes. They basically were saying please do 

this tomorrow was their first message and my message back to 

them is why are you here then? 

My guess is the reason why they are here is because of the ‘‘R’’ 

word that has crept up which was your second point or another 

point you made Dr. Haskins and that is reconciliation. The fact 

that the President has proposed savings of any kind for any reason, 

and the fact that I have used the term and Senator Gregg, the 

Chairman of the Budget Committee has used the term, our leadership has used the term and we are starting to hear people talking 

about reconciliation which is a real process different than PAYGO 

as it is often called which is I think an illusory process, a way if 

you want to do it you use it, if you don’t want to do it you waive 

it. 

Reconciliation, as we all know, is real and that has forced Governors to come here and basically take that reality and say OK, 

now we have to talk. We are glad they are here. They should have 

been here last year, they should have been here the year before. 

None of this information is new. We know it is unsustainable and 

I would guess that is a unanimous view of the four of you. Even 

Dr. Feder, I can’t believe you are here saying that the current programs are sustainable. You may have a different opinion on what 

we do next, that is a different issue but the fact we have a problem, 

the fact the program is broke and the fact it is not sustainable, I 

don’t think there is any argument. Is there really? You think the 

program is sustainable? 

Ms. FEDER. I think when one uses the kind of language as 

unsustainable and broke, and you went on to say broken——

Chairman NUSSLE. All right, I won’t say broken. 

Ms. FEDER. Don’t say broken. What I think is that the financing 

needs attention. 

Chairman NUSSLE. It is unsustainable. 
58

Ms. FEDER. I won’t say it that way. 

Chairman NUSSLE. I will let you argue with my Governor then. 

He says it is unsustainable. 

Ms. FEDER. I think the difficulty with that language is that it implies that we lack the resources to support our commitments. I do 

not believe that. Whether they are there under existing tax structures or existing Federal/State arrangements, that is another story. 

Chairman NUSSLE. All right. That is fair. 

Ms. FEDER. We usually agree when we fight it out. 

Chairman NUSSLE. It is a difference of context. If the context is 

we could do away with our military; we could do away with Homeland Security, we could do away with lots of things or we could 

raise taxes on the rich, just tax the rich, we could do all those 

things. I understand there are options but at its current rate, is it 

sustainable? The answer is obviously no. 

Ms. FEDER. We have discussed it and I would not use the same 

language. 

Chairman NUSSLE. I will let you argue with my Governor. 

Mr. HASKINS. Chairman Nussle, could I add something briefly? 

Mr. Smetters made the point that by 20—I forget the year—that 

just Medicaid, Medicare and Social Security, just those three, 

would require 20 percent of GNP. 

Chairman NUSSLE. Which is what our total budget is also. 

Mr. HASKINS. You are talking at least 30 percent. Can anybody, 

including the Democrats in this room, imagine a tax system that 

is going to take 30 or 35 percent of GNP? It is not going to happen. 

Chairman NUSSLE. That may be possible. You can imagine it but 

is it realistic is a different issue. It is not realistic and it is not sustainable. 

Ms. FEDER. If you were to speak differently, talking about 

health-care programs——

Chairman NUSSLE. I am talking about my Governor. I am not 

speaking differently. 

Ms. FEDER. I will stop if you want but where I wanted to go was 

to say that if you want to talk about the entire health-care system 

which is not simply imposing costs on public programs but also on 

families who are relying on private health insurance and on jobs, 

it really poses a problem. 

When we talk about whether we want to change the rate of 

growth in our health-care system, I am ready to talk. 

Chairman NUSSLE. Thank you and that is my last question to 

Dr. Wilensky. Could you help us figure out how we can allow the 

Medicaid program to grow at 5.5 percent a year as opposed to 5.7 

percent a year or 7.5 as opposed to 7.4? Is it possible just to slow 

this down a bit and still deliver a quality product to the people that 

we want to help? Can we slow down the rate just a little bit? That 

is what we are asking. 

The things you mentioned and have mentioned so many times in 

the past, can they be employed so that we can continue to spend 

more money and continue to increase the program but just slow it 

down just a little bit so we can save a little bit of money over the 

long term? 
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Ms. WILENSKY. You probably can. The difficulty with Medicaid is 

that it tends to be a residual pick-up for populations that aren’t 

picked up in other programs. That really is what makes it hurt. 

The reason I say maybe you can is we have done less thinking 

about how to try to help get a little better deal, a little better value 

for the aged disabled population. If what sometimes happens is you 

get a little more efficient, so you bring a few more people in to get 

services, then you are not going to be any better off. 

What we did find when managed care and other strategies were 

introduced to the moms and kids, the families part, there were 

some savings that were available but they weren’t 5 percent over 

the time. The question is, could you get .2 of a percent down? 

Maybe, but there are a lot of other people who might want to come 

in and receive some of the services who are not quite eligible now 

or who aren’t being brought in by their own States and the big 

problem is they may well soak up any additional savings that you 

might have with the current population. That kind of number you 

ought to be able to do. It is the residual population that we are not 

taking care of that you don’t know what it will do to the Medicaid 

spending. 

Chairman NUSSLE. One of the Governors we met with yesterday 

on the one hand said, please don’t cut, let us do this next year and 

almost the day before, I think 24 hours before, was announcing the 

fact they were increasing Medicaid for 20,000 new recipients. It 

was interesting, please don’t cut us, we will work on Medicaid reform, we will do it next year, we will do it tomorrow, but oh, in 

the meantime, we are going to continue to increase the people who 

are eligible. It is a fair concern but it is kind of hypocritical or at 

least it is certainly not consistent with the message. 

Lastly, I would ask, there have been some who have suggested 

that we need a Medpac so to speak advisory committee for Medicaid, that we need some type of an organization who can give us 

similar advice the way you did when you were on Medpac for Medicare. Would that be an idea that you could endorse or suggest or 

do you have a better idea of how we could approach this? 

Ms. WILENSKY. The problem with a Medpac counterpart for Medicaid is the Federal Government doesn’t run Medicaid, it runs 

Medicare and prescription drugs excluded, it sets the prices, the reimbursement for everything in Medicare and monitors quality. 

The States do all of that, so unless you are thinking about changing that arrangement, I am not sure what a Medpak counterpart 

would do. 

A group could try to rethink the issue if we think there are problems with the existing Medicaid program, what would a different 

Medicaid program look like? That is more of a one-time commission 

and if it was the Federal Government that would be making the 

decisions rather than the State, of course a Medpak type of commission would be fine but under the current power sharing which 

is basically the States run the program with some Federal oversight and a whole lot of Federal money, I am not sure what a commission would do advising the Congress. 

Chairman NUSSLE. What about with dual eligibles? 

Ms. WILENSKY. I think dual eligibles are really a program that 

absolutely needs to have reconsideration. It is not a big number but 
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it is a whole lot of money. The worse part is they don’t get very 

good care. They spend a lot of money, get better care than if they 

weren’t dual eligibles, but for the kind of money that is being 

spent, it is incredibly uncoordinated for the people who have the 

most complex medical problems. 

Chairman NUSSLE. Thank you, Mr. Chairman. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

Thank you all for being here today and I appreciate you taking 

the time to spend a few lovely hours with the House Budget Committee. Thank you again for your testimony. Thank you, Mr. Chairman, for the honor of serving as chairman for a moment. 

This meeting is adjourned. 

[Whereupon, at 12:30 p.m., the committee was adjourned.]

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