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SOCIAL SECURITY:

DEFINING THE PROBLEM

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, FEBRUARY 9, 2005

Serial No. 109–2

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 9, 2005 ............................................ 1

Statement of: 

Hon. John W. Snow, Secretary, U.S. Department of the Treasury .............. 7

Hon. David M. Walker, Comptroller General, Government Accountability 

Office .............................................................................................................. 45

Douglas J. Holtz-Eakin, Director, Congressional Budget Office .................. 60

Peter R. Orszag, Ph.D., Senior Fellow, the Brookings Institution ............... 89

Prepared statement of: 

Secretary Snow ................................................................................................. 9

Mr. Walker ........................................................................................................ 47

Mr. Holtz-Eakin ................................................................................................ 63

Mr. Orszag ........................................................................................................ 91

(1)

SOCIAL SECURITY: DEFINING THE PROBLEM 

WEDNESDAY, FEBRUARY 9, 2005

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The committee met, pursuant to call, at 10:07 a.m., in room 210, 

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

committee) presiding. 

Members present: Representatives Nussle, Portman, Crenshaw, 

Putnam, Wicker, Hulshof, Bonner, McCotter, Diaz-Balart, 

Hensarling, Lungren, Ros-Lehtinen, Bradley, McHenry, Mack, 

Conaway, Simpson, Spratt, Moore, Neal, DeLauro, Edwards, Ford, 

Capps, Baird, Cooper, Davis, Jefferson, Allen, Case, McKinney, 

Cuellar, Kind, and Schwartz. 

Chairman NUSSLE. Good morning, and welcome to this Budget 

Committee hearing on Social Security long-term budget implications. We also have the opportunity today to talk a little bit about 

the economy. We have before us on the first panel, the very distinguished and honorable Treasury Secretary John Snow who has 

been before our committee before. We welcome you back to the 

Budget Committee. We are pleased to have the opportunity today 

to talk about a myriad of issues and subjects that—you as one of 

the principal advisers to the President with regard to a number of 

subjects, not the least of which of course is the economy, is an opportunity that we take very seriously. 

On our second panel today we will have the U.S. Comptroller 

General David Walker and the Director of the Congressional Budget Office, Douglas Holtz-Eakin. They are here today to discuss the 

analysis of their respective agencies with regard to the challenges 

facing Social Security. 

On the third panel we have Peter Orszag, who is a senior fellow 

at the Brookings Institute. 

We are also pleased today to welcome a new member to the 

Budget Committee, Mike Simpson, we are welcoming you from the 

Appropriations Committee. As we all know, because this is a leadership committee, we accept members from a number of panels as 

a subcommittee slot, and we appreciate the sacrifice you are making in coming over here and in joining our humble crew from the 

Appropriations Committee. Welcome. 

We also understand, if I am not mistaken, Mr. Spratt, that you 

will be welcoming another member as well. We want to yield to you 

for that purpose so you can make that introduction. 

Mr. SPRATT. Thank you, Mr. Chairman. I don’t see her here, but 

Allyson Schwartz will be coming. She has just been approved for 
2

membership on this committee by the Democratic Caucus. Oh, that 

was good timing. Allyson Schwartz from Philadelphia, Pennsylvania. 

Chairman NUSSLE. We welcome you to the Budget Committee. 

Mr. SPRATT. Is this seat here open? 

Chairman NUSSLE. That is the unfortunate thing, we show you 

the last seat on the panel. But welcome to our new members of the 

Budget Committee. We are pleased to have your involvement on 

our committee. 

To begin with, I want to make it clear that the purpose of this 

hearing is probably not today to write a bill. I understand that 

there is a lot of interest in coming forward and saying, let us skip 

to the last chapter of the book and write the plan, let us get on 

with it; but we have a lot of consideration, I think, to make before 

we get to that point in time. We are not here to try and evaluate 

specific reform proposals because there aren’t many to choose from 

just yet. We have a lot of work just defining the problem—just kind 

of getting our arms around it. We know there is a challenge out 

there for Social Security. I think most reasonable people who look 

at the numbers would suggest that. 

In part by holding this hearing, we are trying to help prepare the 

debate by examining and defining the problem itself so we as policymakers on the Budget Committee, as well as just Members of 

Congress, can begin to discuss this issue—base any plans for reform on a solid understanding of what it is or what it is not as a 

challenge, and what is possible within the Federal budget and the 

parameters that we have before us. 

It is clear from some of what you might call rhetoric, that is flying around here lately, that today’s hearing is probably a pretty 

necessary step in helping to dispel some of the apparent confusion 

and misinformation around the debate. I think we know pretty well 

that, at least from my colleagues on the other side, every chance 

they get to say the word ‘‘privatization,’’ I think you are going to 

hear that word probably today and forever and ever. Everyone 

wants to use that word. Let us go out and use that word because 

it seems to poll well if you want to scare people about what we are 

going to do with Social Security in the future. Well, I haven’t seen 

anything yet that smacks of privatization in the way most people 

I think look at that term. In fact, even the revolutionary thought 

of allowing people to control even a part of their own savings I 

think at best you could say is personalization rather than privatization. But I will let people have that rhetorical debate because 

that seems to be the interesting part. 

Even before we talk about those specific issues and solutions, we 

need to I think discuss the challenge itself—and I thought the 

President did a good job of doing that in his basic, as simple of 

terms as possible—why is it that Social Security is facing such a 

large shortfall in the future? So I will try in a humble way to lay 

it out as well as I can today. 

Back when Social Security was created, far less was demanded 

of it than it is today. People didn’t live as long and thus drew benefits for a shorter amount of time. The benefits themselves were 

much lower. And for every one person drawing benefits out of the 

system, there were some 16 workers paying into the system. Today, 
3

50 years later, things are a little different. Back when Social Security was created, the average American’s life span was 62 years. 

Today, it is an average, thank goodness, of 77 years. So we are living longer, we are drawing benefits for a longer period of time, 

about 15 years longer than when the program was first put into 

place. Plus, the benefits themselves are scheduled to rise dramatically over the next number of decades. So today, instead of those 

16 workers paying in for every beneficiary, we now have about 3. 

As I understand it, that number falls to about 2 over the next couple of decades. 

So there is the short answer to why Social Security is heading 

for some problems, challenges, crises, depending on that word 

that—who knows how it polls well, but we know that there is a 

challenge out there, a challenge that we have to deal with. 

So now let us take a look at where that gets us. By 2018, as we 

are going to hear today, I think quite often, Social Security will be 

paying out more than it takes in. That is a shortfall in a little over 

a decade and unless we make some necessary changes, the shortfall will grow larger every year after that. Let me make it clear, 

this doesn’t just start happening in 2018, as I understand it, the 

challenge begins today and has been going on for quite some time. 

If we stay on the current path, by 2033, the annual shortfall will 

be about $300 billion per year. By the year 2042, the entire system 

in fact by most people’s definition of the word ‘‘bankrupt’’ would be 

bankrupt. 

So, in a nutshell, Social Security is threatened by a looming fiscal imbalance that if left unaddressed will impose growing burdens 

on the budget, on the economy, and on the people it was meant to 

assist. For us to get to the point where we can even think about 

finding a so-called solution, we had better make sure that every 

Member of Congress on both sides has a crystal-clear understanding of the challenge that lays ahead. Again, it is pretty apparent that that is not necessarily the case. 

So, again, that is the reason for us to be here today to begin that 

discussion. Let us all try and do our best to stay focused on this. 

Now, I understand that there will be many different solutions that 

will be put forward by many different quarters. They are all responsible, they are all credible, and they all deserve our consideration. They shouldn’t be just lambasted out of hand without consideration, and they should be taken in total, as I see it, in the total 

picture of what retirement security is for an individual. 

You know, I don’t know about the people that you represent but 

Social Security doesn’t make it for most people in and of itself. Social Security is part of retirement security. If you are going to retire and feel secure, you have got to have health care, you have got 

to have savings, you have got to have investments that are working. You have got to have an economy that is growing. You have 

got to have long-term health care. You have to be able to make 

sure your veterans’ benefits are there, and you have got to make 

sure your housing is secure. You want to live in a safe environment. You want to live in a safe community and neighborhood. 

So when you talk about living in a secure retirement, if you only 

focus on Social Security, I think you are missing the point. It is an 

important part of it for those who depend on it, certainly, and all 
4

of us recognize that and all of us believe that. I believe it should 

be looked at in a much larger context, so today we are going to 

focus on that. 

As I said yesterday, the easiest job in Washington is to say, no, 

that is not going to work; no, I don’t like that proposal; no, we are 

not going to do it that way. That is the easiest thing to do. But we 

weren’t elected to say no. Inaction is not in my opinion a solution 

to this very vexing challenge. So we have to begin that process 

today. So I would like us to focus on that problem. 

That is the purpose behind the hearing. We are very pleased to 

have I believe the administration’s point person with regard to Social Security, the challenges of retirement security, and the economy before us today to discuss those issues. I focused on Social Security in my opening comments, but I know that we are very interested to hear as well how the economy is doing. We heard yesterday it is doing quite well. That is an important factor in us getting 

back to a balanced budget and dealing with the myriad of challenges that face our budget and our economy and the people that 

we represent. So we are pleased to have you before us today. 

With that, I am honored to turn it over to my friend, Mr. Spratt, 

for any comments he would like to make. 

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

And, Mr. Secretary, welcome again. We appreciate you coming. 

It has been 4 years since President Bush first sent the budget 

up to Congress. At the time we received his first budget, the budget 

was in surplus left over from the previous administration. That 

weekend after the budget came, the President made a radio address describing his budget, and I made the response to his Saturday morning address. And in my response, I implored the President 

to use some of the $5.6 trillion surplus then projected to deal with 

our long-term liabilities. I said, Mr. President, we may seem to be 

sitting on an island of surpluses, but we are surrounded by a sea 

of red ink. Not surprisingly, the President didn’t take my advice. 

He committed $1.7 trillion of the surplus to tax cuts, nothing to 

long-term liabilities, and today we see the consequences. 

Frequently in discussing Social Security, people develop in looking at these 75-year projections a notion of futility that the amount 

of money needed to make the account solvent is just overwhelming 

and unattainable. This simple bar graph shows that in choosing 

tax cuts over Social Security reform, there is enough money in the 

tax cuts for the top 1 percent to make Social Security solvent. Almost enough money; $3.4 trillion as opposed to $3.7 trillion, which 

is the actuary’s number for the present value of the shortfall in the 

Social Security account. 

But we didn’t get anything done about that long-term liability 4 

years ago. But the Office of Management and Budget (OMB), the 

Director, Mr. Daniel, did assure us that there would be a threshold 

condition—his word, a threshold condition—for every budget they 

submitted. He assured us that no budget they submitted would 

ever invade the Social Security surplus. That was the threshold 

condition. 

If you recall, the Clinton administration had moved the budget 

into surplus for the first time in 30 years. And when that surplus 

reached $236 billion in the year 2000, both parties in Congress, 
5

both sides of the aisle began to talk of a lockbox in which to keep 

the Social Security surpluses so that never again would those surpluses be used to buy new Government bonds and fund Government spending. We wanted to use the surplus to buy and retire 

outstanding Treasury bonds. Congressional Budget Office (CBO) 

told us that if Social Security followed this strategy diligently buying up outstanding bonds, then some $3 trillion in Treasury debt 

held by the public could be bought back, retired, over the next 10, 

12 years. 

Now, the lockbox had a corny name, I will grant you, but underlining it there was a serious idea. Each dollar of Treasury debt retired would be a dollar added to net national savings. That would 

in turn lower the cost of capital, and that in turn would spur economic growth. And, furthermore, when the baby boomers began to 

retire, the Treasury would be burdened with far less debt and be 

much stronger to meet the obligations, the long-term obligations of 

our Government, specifically Social Security. 

Well, the $5.6 trillion surplus was soon dissipated and replaced 

by ever-increasing deficits, $375 billion in the year 2003, $412 billion last year, 2004, and $427 billion OMB tells us this year 2005. 

In each of these years, the Social Security surplus was borrowed 

and spent in toto, all of it. So much for the lockbox. Instead of paying off debt, this administration has built up debt, a mountain of 

debt. 

As this next table shows, the Treasury, the administration, who 

had to come to Congress three times in the last 4 years to ask for 

the legal ceiling on what the Government can borrow, how much 

debt we can incur, to ask that the debt ceiling be raised three 

times: $450 billion in 2002, $984 billion in 2003, $800 billion last 

November, a total of $2.234 trillion. At that rate, today we are incurring $1 trillion of additional debt of the United States every 18 

months. Surely this is not a sustainable course. 

Now you decided that Social Security will be broke soon and 

needs fixing. But the solution that you are pushing, private accounts, really does little if anything to fix the solvency of the system. And by allowing payroll taxes to be diverted from the Social 

Security Trust Fund into private trust accounts, you add $4.9 trillion to the deficit over the first 20 years, by our calculation, $4.9 

trillion to deficits over that 20-year period and to the national debt 

during that time, to be stacked on top of other debt that could easily reach $12 trillion within the next 10 years. Surely there is a 

limit somewhere. 

In pushing this proposal, the administration described Social Security in dire if not crisis condition, in need of urgent attention. 

You say that in 2018 Social Security will go cash negative. The 

Chairman just said it would hit a shortfall. Well, in one sense that 

may be true, but it is also true that Social Security at that point, 

2018, will be sitting on a trust fund of over $2.5 trillion in Government bonds, and that corpus will increase to $7 trillion by the year 

2028 when Social Security will begin redeeming its bonds to add 

to its dedicated revenues so that it can pay benefits in full. I don’t 

consider a $5 trillion nest egg or a $7 trillion nest egg insolvency 

yet. 
6

The other night the President in the State of the Union said 

somehow in the year 2028 the Government of the United States is 

going to have to come up with $200 billion to give to Social Security. Well, I surely hope that the U.S. Government can come up 

with $200 billion to give to Social Security when it is sitting on a 

nest egg at that point in time of $7 trillion in Treasury bonds. 

Now, there are detractors of Social Security who say that these 

trust funds are fiction, and that the Treasury bonds they hold are 

just scraps of paper, IOUs. I hope, Mr. Secretary, that you will set 

this record straight today, that you will assure us and bondholders 

around the world that the U.S. Treasury will uphold the full faith 

and credit of the United States and meet its obligations as they 

come due, and that these bonds are just as strong as the economy 

and the full faith and credit of our Government. 

To wrap up, Mr. Chairman, Mr. Secretary, if we on this side 

don’t agree with the solution that you are advancing, it is partly 

because the logic of it escapes us. First of all, this problem is 

brought on because the Social Security Trust Fund may not have 

sufficient assets to meet its obligations in full through 2042 if you 

listen to the actuaries at Social Security, or through 2052 if you listen to CBO. The actuaries give us the present value of the shortfall 

at $3.7 trillion. Your solution is not to add to that shortfall to try 

to make it sufficient, but to subtract from it by allowing payroll 

taxes to be diverted into private accounts, which makes the problem worse; the shortfall greater, not better. 

Second, private accounts may or may not be a good idea, but they 

do little to make Social Security solvent over the next 75 years. 

You achieve solvency by reindexing the primary insurance amount 

which over 50 years will slash the budget, slash Social Security 

benefits in half. 

Third, the critical dates that the administration keeps referring 

to, 2018, 2028 and 2042, will all be advanced by many years if the 

diversion of payroll taxes is allowed, particularly at the level of 4 

percentage points off FICA. Social Security may then go negative, 

cash negative, as early as 2012 instead of 2018, and the trust fund 

may be exhausted as early as 2031 rather than 2042. To pay benefits in full, Social Security under the proposal you are making will 

have to begin borrowing in the 2020s and borrow in the trillions 

until the midpoint of the century. As the Secretary of Treasury, we 

would like you to explain to us how the U.S. Government can stack 

debt on top of debt in these amounts. 

Now, we all agree that Social Security is faced with a challenge, 

that the sooner we resolve it the easier it will be. But we simply 

can’t see the merit in the solution that requires us to borrow $5.9 

trillion over the first 20 years and trillions more thereafter, or in 

a solution that cuts benefits for new retirees in half over 50 years. 

And we can’t buy the notion that this is the only solution we have 

to choose from. 

In 1983, I was here, the retirement trust fund was in dire, dire 

condition, in danger of running dry in July 1983. Mr. Reagan appointed, with congressional consent, a bipartisan commission headed by Mr. Greenspan. It recommended a number of changes that 

have assured the solvency of Social Security for 60 years, from 

1983 to 2042. This model was shown to work then, and there are 
7

still today menus, whole menus of ideas to choose from if we chose 

that model again. 

So I say to you, Mr. Secretary, why not tune up the model we 

have got, the Social Security system that has served America so 

well for more than 50 years, as opposed to trading it in for a vehicle that has never been around the track and never been proven 

to work. 

We look forward to your testimony and to the questions that we 

will put to your afterwards. Thank you again for coming. 

Chairman NUSSLE. Mr. Secretary, welcome to the committee. We 

are pleased to receive your testimony at this time, and your prepared remarks will be made a part of the record as well. Welcome. 

STATEMENT OF JOHN W. SNOW, SECRETARY,

U.S. DEPARTMENT OF THE TREASURY 

Secretary SNOW. Thank you very much, Mr. Chairman. Mr. 

Spratt, thank you. I greatly appreciate the chance to appear before 

you again. I always look forward to this opportunity, always a good 

exchange of views and the lively discussion that ensues. 

Let me say that in the intervening years since I appeared before 

you last, we have made an awful lot of progress with the American 

economy. I know how pleased you must be, as we are in the administration, with the fact the American economy is now on a really 

good strong course. It is a tribute to the Congress, the leadership 

the Congress provided in enacting the President’s tax cuts, because 

at the very center of the strong recovery that the American economy is enjoying today are those tax cuts. 

And it is interesting to go back and look at the growth rates in 

the economy and job creation in the economy before those tax cuts 

took effect and what happened immediately thereafter. It was almost like a light switch went on in the American economy. As businesses began to take advantage of the expensing provisions that 

you made available, the greatly expanded expensing provisions, as 

the accelerated tax credits took effect, as the lower marginal tax 

rates took effect, as the dividends and capital gains reductions took 

effect, equity markets expanded, capital spending picked up, jobs 

picked up, and GDP picked up. And, Mr. Chairman, you know 

these numbers, but last year we had a 4.4 percent growth rate in 

GDP. We have had the best—for the last 18 months since the legislation took effect, the best growth rates in GDP in about 20 years; 

2.7 million jobs. And yet inflation stays low because productivity is 

high. 

The housing market is strong, the best we have ever seen. More 

home ownership in America today than any time in our history. 

National wealth, household wealth, the highest ever. 

I cite this to you to suggest we are on the right course, and we 

are going to continue on that course. And the budget that is before 

you is designed to assure that we do that. 

That is why the President has asked to make the tax cuts permanent. I think the results of the jobs and growth bill demonstrate 

the importance of a low-tax environment for the success of the 

American economy. 

I contrast our economy with Europe. Our economy has much 

lower tax rates, we have much higher growth rates, we have much 
8

higher employment rates. And we are creating lots of private sector 

jobs while the Euro zone isn’t. 

But we also recognize that we need to focus on the deficit. This 

budget tries to do that. It sustains the path that the President 

called for to cut the deficit in half over the course of the next few 

years, by the time he leaves office, to bring it to a level—and this 

is important—to bring it to a level which is low by historical standards. Forty-year average is something like 2.3 percent of GDP. The 

President’s budget carried out over the window, the budget window 

period, would bring that deficit down well below 2 percent. 

There are two keys to bringing the deficit down, and you know 

what they are. One is to continue the growth of the American economy; because if the American economy stays on a good growth 

path, not surprisingly, businesses become more profitable, more 

small businesses are established, entrepreneurship is rewarded, 

jobs are created, and we have businesses paying more taxes and we 

have individuals paying more taxes, and thus Government receipts 

rise. And we have seen that. And the budget lays out a path of increasing Government revenues as the economy gets stronger and 

stays on the growth path with—and this is a very important 

point—with revenues as a percent of GDP rising back up to their 

historic level of about 18 percent. 

That suggests to me that our problem with the deficit isn’t that 

we are undertaxed. Quite the contrary, it seems to me to suggest 

quite plainly that the problem is that we spend too much. 

And that brings me to the second part of the equation. The first 

part is growth; the second part is spending restraint. And you can 

argue with the particulars of the budget that we have sent up, but 

the key message from the budget is spending restraint is awfully 

important to keep us on a path of fiscal responsibility. 

But the President is not simply focused on the 5-year window, 

important as that is. I think we are in good shape on that. He is 

also focused on the longer term, where I think Budget Director 

Josh Bolten yesterday talked to you about the long-term problems 

growing out of Medicare and Medicaid and Social Security, and the 

need to deal with these unfunded obligations. 

That is one reason the President has put Social Security forward 

as a major national issue. It is why he made it the focal point of 

his State of the Union message. Social Security is a great part of 

the fabric of America. It is important that we sustain it, it is important that we secure it, it is important that we make the benefits 

of Social Security available to future generations, to the young of 

America. 

And yet we all recognize, I think, that there are real problems 

there. Mr. Spratt acknowledged there were problems. It is hard not 

to acknowledge the problems. It is not what we are saying, it is 

what the actuary, the nonpartisan actuary of the Social Security 

Administration is saying. It is what CBO is saying, it is what the 

Government Accountability Office (GAO) is saying. And I am glad 

you will be hearing from them later in the day. 

All the people who really know the numbers come to the same 

conclusion: The system is in real trouble, real trouble. And in 2018, 

the outflow exceeds the inflow. That is not a good sign. There is 

a trust fund with a surplus in it, that, Mr. Spratt, we will honor 
9

the bonds in the trust fund. Of course we will. They carry the full 

faith and credit of the United States. As with all obligations of the 

United States, they will be honored. But the bonds run out in 2042. 

And in 2042, with no surplus left in the fund, the fund must fall 

back on its own revenues, and its own revenues are only sufficient 

to meet about 72 percent of its obligations. So if we wait until 

2042, we are going to shortchange the future retirees. 

We can do better than that. That is why the President has put 

this issue on the table. We can do better than that. And the personal accounts provide younger people an opportunity to build a retirement, to build a nest egg for retirement, to take advantage of 

what Albert Einstein called the most powerful force in the universe, Congressmen, the power of compounding. And a young person of 24 who retires now has 40 years-plus of compounding of 

market returns to build a nest egg for their retirement. With that, 

they will do better than they would under the Social Security system that can’t fulfill its promises. 

So I think, while you may not agree with the solutions that have 

been put forward, at least I think we need to acknowledge that the 

President has provided real leadership here in taking the issue of 

Social Security to the American people, of focusing on our children’s retirement security. He could have passed this one up. He 

could have passed it on to another President, he could have passed 

it on to another Congress. He decided that the responsible thing to 

do was to confront it and to address it. 

In confronting it and addressing it, though, he said to seniors, we 

are not going to affect your benefits. If you are 55 or older, your 

benefits are absolutely secure. They won’t be affected. He said to 

younger people, we need to work now to put in place savings vehicles for you so your retirement security can be better. 

And I think he has performed an extraordinarily important national service by calling attention to the problem. 

People object to the term bankruptcy, that Social Security is 

going bankrupt. Bankruptcy is in fact the condition—impending 

bankruptcy is in fact the condition that Social Security faces in the 

very same sense that a private sector company—and my career has 

been in the private sector—that a private sector company that can’t 

meet its obligations goes into Chapter 11 or Chapter 7 and restructures. In that sense, Social Security is heading for bankruptcy. We 

don’t have to let it happen. By acting now, we can avoid those consequences, we can avoid a huge future burden on the young, and 

we can give them a much better retirement security. 

For all those reasons, Mr. Chairman, I thank you for the chance 

to be here and talk about this critically important issue. Thank you 

very much. 

Chairman NUSSLE. Thank you, Mr. Secretary. 

[The prepared statement of Secretary Snow follows:] 

PREPARED STATEMENT OF HON. JOHN W. SNOW, SECRETARY, U.S. DEPARTMENT OF

THE TREASURY

Good afternoon and thank you Chairman Nussle and Ranking Member Spratt for 

having me here today to discuss the President’s budget. I think you’ll find that it 

exhibits a dedication to fiscal discipline, transparency, and economic growth. 

By focusing on priorities and looking for savings in every agency, across the 

board, the President’s administration has come up with a budget that we believe 
10

is fair while also holding the Government accountable. As the President announced 

in his State of the Union Address last week, this budget adheres to the principle 

of ‘‘Taxpayer dollars must be spent wisely, or not at all.’’

It holds the growth of discretionary spending to just 2.1 percent, below the expected rate of inflation. Non-discretionary spending in this budget falls by nearly 

1 percent, the tightest such restraint proposed since the Reagan administration. 

This administration appreciates that cutting taxes and exercising fiscal discipline 

must go hand in hand. We appreciate that this is the people’s money with which 

we are dealing, and that we work for the taxpayers. 

That is why we are committed to making the President’s pro-growth tax cuts permanent and building on our strengthened economic fundamentals as we submit to 

you a budget that will increase the efficacy of our Government programs without 

over-spending the taxpayers’ money. 

Over the weekend, the finance ministers of the G7 met—the U.S. was represented 

by Treasury Undersecretary for International Affairs John Taylor—and they discussed the importance of promoting and achieving economic growth in our countries, 

as well as keeping our respective financial houses in order. These two issues are 

inextricably linked. 

The way that we, as the executives of the Federal Government, manage the taxpayers’ money sends a message to the people of America as well as to our trading 

partners and investors around the globe. When we control our spending, we are 

showing our citizens and the world that fiscal discipline is a priority on par with 

our policies that promote economic growth. 

I’ll talk more about fiscal discipline in a moment, but I’d like to start with a look 

at what we have recently achieved through pro-growth economic policies. 

Well-timed tax cuts, combined with sound monetary policy set by the Federal Reserve Board, have resulted in very good economic growth and, most importantly, 

continual job creation. The economy has created over 2.7 million jobs since May of 

2003. And while job growth can never be fast enough for those looking for work, 

the steady pace of job creation has been an unmistakable sign of an economy that 

has recovered from very tough times, and is now expanding. 

Whenever I speak with my counterparts in the G7, I am reminded that the American economy is the envy of the world. Our recovery and growth, our successful dedication to entrepreneurship—all these things are admired, and increasingly emulated, by our G7 partners. 

Is it any wonder that they want to learn the secret to our economic resiliency? 

A quick look at the facts reveals much to be envied: GDP growth for 2004 was 4.4 

percent. Our economy has posted steady job gains for twenty straight months. The 

unemployment rate is down to 5.2 percent—lower than the average rate of the 

1970s, 1980s and 1990s. Real after-tax income is up by over eleven percent since 

the end of 2000 and household wealth is at an all-time high. Inflation, interest 

rates, and mortgage rates remain at low levels. Homeownership rates are at record 

highs. 

Tax cuts can be hard on budgets and deficits in the short term, but if the tax 

cuts are geared toward improving incentives there are long-term benefits as well as 

short-term ones, and this fact has been well illustrated by these outstanding economic results. 

I point to this record because it is so important that we continue on a pro-growth 

path. Continued economic growth is needed, and will be needed, to continue to improve our standard of living and until every worker in America who is still looking 

for a job can find one. 

For example, we’ve got to make the President’s growth-enhancing tax cuts permanent—and that is included in this budget. The President’s Panel on Tax Reform was 

also created with economic growth in mind. It is a group of some of the best minds 

in our country, and they’ll be looking critically at the entire existing code and coming up with proposals that would make it fairer, less complex, and more pro-growth. 

While the Panel is working on that historic task, our efforts to grow the American 

economy will continue in many other areas—I am particularly interested in legislation that will reduce the burden of frivolous lawsuits on our economy—and this 

budget is part of the administration’s overall pro-growth policy agenda. 

As I already mentioned, economic growth is good for our country for the jobs it 

creates and the prosperity it spreads. But it is also, importantly, part of a winning 

strategy on deficit reduction—one of the top priorities of this budget—because economic growth increases Treasury receipts. 

Treasury receipts are rising—in the second half of calendar 2004, individual income tax revenue is up 10.5 percent versus the same period in 2003—and will continue to rise, as long as we have economic growth. That must be accompanied, as 

I emphasized earlier, by strict fiscal discipline. That is why the President’s budget 
11

proposes real savings. I know it will have its critics as a result, but its frugality 

is essential. 

Let me be very clear on this: we have deficits and they are unwelcome. But we 

are not under-taxed and higher taxes will not be the solution to reducing deficits. 

Fiscal discipline, combined with economic growth, is the correct path. 

Using this approach, we are making headway on deficit reduction, and we’re on 

track to halve the deficit by 2009. The deficit is also forecast to fall to 3.0 percent 

of GDP in 2006 and to 1.5 percent by 2009, well below the 40-year historical average 

of 2.3 percent of GDP. 

The 2004 deficit came in at 3.6 percent of GDP—nearly a full percentage point 

lower than had been projected. And the 2005 deficit is projected to show another 

decline. 

While we are pleased with this progress, we recognize that more needs to be done. 

We need to make the tough choices on spending and stand steadfast in our commitment to continuing economic growth in order to see that deficit whittled down. 

We also need to look at our long-term deficit situation. I spoke earlier about transparency, specifically the honesty of this budget, which deals openly with the needs 

of the times in which we live, from the war on terror to the need for continuing 

growth. 

In the interest of honesty and transparency, I encourage all of us to follow the 

politically courageous leadership of our President by looking at, and dealing with, 

the $10.4 trillion deficit facing our children and grandchildren in the form of an 

unsustainable Social Security program. 

The program is an important institution, a sacred trust, and it worked well for 

the times in which it was designed. It is, however, doomed by our country’s demographics and in need of wise and effective reform. 

The arithmetic is simple. As people live longer and have had fewer children, the 

ratio of workers paying into the system and retirees taking benefits out has dwindled dramatically. We had 16 workers paying into a system for every one beneficiary 

in 1950, and today we have just three workers for every beneficiary. That ratio will 

drop to two-to-one by the time today’s young workers retire. 

We all must agree that this demographic reality exists, that this problem exists. 

Social Security is secure for today’s retirees and for those nearing retirement, it will 

not change for those people who are 55 and over... but it is offering empty promises 

to future generations. When today’s young workers begin to retire in 2042, the system will be exhausted and bankrupt. 

It is the future of the program that President Bush is concerned about, and it is 

the future of the program that we must address, this year, here on Capitol Hill. I 

echo the President’s State of the Union Address in saying that we must join together to strengthen and save Social Security. 

We can, and should, do this without increasing payroll taxes. The level of increases that would be necessary, if we maintain the status quo, would have a terrible impact on our economy. It would negatively impact economic growth; jobs 

would be lost. We don’t have to go that way. 

We can, and should, reform the system in a way that encourages younger generations of workers to build a nest egg that they own and control and can pass on to 

their loved ones. 

Saving Social Security is an undertaking of historic proportions. We have hard 

work ahead of us as we strive for consensus in the name of younger generations. 

We also have hard work ahead of us when it comes to strengthening the fundamentals of our economy: deficit reduction, good fiscal policy, energy policy, lawsuit 

abuse reform, and encouraging savings. 

I appreciate that this administration has an ambitious agenda... but it is a good 

one, worth the work it will take to move forward, together, on it. 

Let’s start by passing this responsible, pro-growth budget. 

Thank you for having me here today; I’m pleased to take your questions now.

Chairman NUSSLE. Let me start, if I might, by going back to 

what my friend Mr. Spratt opened with, and that is with regard 

to the deficit, because we are here to talk about the budget as well. 

I have just got to say this again. As many times as my friend—

and he is my friend and he will continue to say it, and he is technically correct—that on September 11 and thereafter we started 

running deficits. It didn’t just happen, on September 10 we were 

running a surplus, and on September 11 and 12 and on and on and 

on, yeah, we started running deficits. But they didn’t just happen. 
12

We made deliberate decisions about strengthening the economy, 

about dealing with the emergency, about strengthening our homeland security, about improving our intelligence, about prosecuting 

a war on global terrorism. Those decisions, many of which were bipartisan decisions, were deliberate. 

So, yes, we find ourselves in a deficit; yes, we are going to run 

a tight budget, Mr. Secretary, the way we did last year, and we are 

going to hopefully get results that we saw last year. 

As we all remember, and you came in and reported to us—and 

let me just show you a chart. You reported to us last year that we 

were going to run a $521 billion deficit, well, we didn’t. When we 

closed the books, it was $412 billion. In 1 year we were able to reduce the deficit by $109 billion. I know my friends will tell me, 

don’t get too pumped up about that because you didn’t do it all by 

yourself, and I know that. Our constituents did it—it is called the 

economy. 

Our economy is a beautiful thing. When it gets unleashed and it 

starts growing, it can do miraculous things like it did last year. 

With tight spending restraint—we can be tighter. But with tight 

spending restraint and with a growing economy we can begin to reduce some of the challenges that we have such as the deficit. But 

the challenges of the war, the challenges of international relations 

that we have out there, the challenges of intelligence, of homeland 

security, they are still there. We want the economy to keep growing, so we don’t want a tax increase right now. 

So we are going to keep the economy growing, and you can report 

back to the President that his budget is alive and well on Capitol 

Hill. 

Having had the opportunity to meet with the budget director yesterday and talking to my colleagues and our leadership and members, we believe that we can get it done. Now, it is going to be 

tough, because all of that spending, as you well know, got there for 

a reason, and each and every one of us can identify something that 

we voted for and some important challenge for our State, district, 

or country that we believe in. So it all got there for a reason. You 

have our commitment that we are willing to work with the President in order to reduce this deficit and continue to meet our challenges. But a growing economy is an important part of this factor. 

Now, turning to the subject that we have today. So, if our economy is growing and growing so well, let us just grow out of this 

problem. I mean, come on, Mr. Secretary, our economy is a beautiful thing. Let us just grow out of the problem of Social Security, 

I have heard people suggest that. 

The interesting thing about it is, I heard the same thing back in 

the 1980s and 1990s when Republicans said let us just grow out 

of something, and, boy, we were lambasted for saying we can just 

grow out of the problem. Now I hear it from my friend on the other 

side that, just let us grow out of the problem of Social Security. 

So I would like you to address the grow-out-of-it opportunity that 

we have. Can we grow out of the problem that we face with regard 

to the challenge of Social Security? 

Secretary SNOW. Mr. Chairman, thank you. Unfortunately, no, 

we can’t grow our way out of the Social Security problem. With the 

economy as a whole, growth helps us an awful lot in dealing with 
13

the deficit because we pick up the top line, the revenue line. Unfortunately, the way Social Security is structured, growth translates 

into higher benefit levels and higher payout levels. So growth in 

and of itself has very little effect because of the benefit formula in 

Social Security, in improving the solvency of Social Security. I wish 

it were otherwise, but the fact that the benefits are indexed to 

wages and wages reflect productivity and growth in the economy 

makes growth in and of itself not—not—very helpful in solving the 

sustainability issues of Social Security. It will help, I must say, it 

will help a lot in dealing with the larger Federal deficit, but it 

won’t Social Security as such. 

Chairman NUSSLE. Well, I have also heard that there are those 

who suggest that the Government—the Government, you know, at 

the appropriate time, I assume they mean the Federal Government 

at the appropriate time, and I assume that means 2018 or 2019 or 

whenever we start running into this challenge, that we should just 

replenish the account, we should just replenish the trust fund, we 

should just start paying the benefits. You know, just put the money 

in there. Why is that, in your opinion, something that might or 

might not work? 

Secretary SNOW. Mr. Chairman, the notion of replenishing the 

trust fund sounds appealing on the face of it, but how would it be 

replenished? It would be replenished by tax increases in the most 

likely case. The tax increases that would be required to put Social 

Security on a sustainable basis would roughly double the current 

taxes, 50 percent increase in the current tax rate. And I would hate 

to see us go down that path because a 50 percent increase in Social 

Security taxes, which is required to put the system on a sustainable basis, would almost surely wreck the American economy. It 

would almost surely lead to very high unemployment rates, very 

slow growth rates, perhaps a recession. 

And I look at Europe and the Euro zone and their tax rates on 

labor versus ours, and you see the consequences, you see them visibly right before your eyes. Their growth rates are about half of 

ours, their unemployment rates are twice as ours. They aren’t creating anywhere near the number of private sector jobs we are. We 

don’t want to go that way, in my view. 

The other way is to cut other programs. That is a tough course 

to follow. And the third way is to borrow. And you will say, but you 

are borrowing; and I will say, yes, we are. But there is a big difference in the sort of borrowing we are proposing to fund the personal accounts and the sort of borrowing that would be required 

simply to put money into the trust fund. 

Chairman NUSSLE. What is that difference? 

Secretary SNOW. Well, the big difference is that by doing it the 

way the President has proposed with his personal accounts, we are 

borrowing to save. Every dollar borrowed becomes a dollar saved, 

as opposed to every dollar borrowed becoming a dollar spent. That 

has far different effects on the national accounts of the United 

States and on the economy of the United States. The President’s 

proposal will translate borrowing into savings. 

Chairman NUSSLE. Well, give me an example. I am borrowing $100, all right? Let us keep it real simple so I can explain it to my 

son who, according to the charts, isn’t going to have Social Secu-
14

rity. So I want to be ale to explain this to my 14-year-old son. All 

right? So I have got $100 that I want to borrow. Now, what is the 

difference between borrowing that to save and borrowing it to 

spend? I mean, isn’t it still borrowing $100? 

Secretary SNOW. It is borrowing $100 in both cases. But in the case of your son and his personal account, the money, the $100, becomes part of the capital stock of the United States; it becomes 

part of the savings of the United States; it becomes capital used 

to strengthen the growth of the American economy. The spending—

and it may well be for a very good purpose—but the spending is 

spent and it is gone. The savings becomes part of the capital base 

of the United States. 

Chairman NUSSLE. Does it grow? 

Secretary SNOW. And with time certainly it would grow. One of 

the beauties of the personal accounts is the opportunity to use this 

power of compounding, which, according to virtually all financial 

analysts, if you get a mutual fund-type investment with 60 percent 

equities and 40 percent bonds, put the $100 away, over a 40-year 

period that $100 is going to be worth a huge multiple of the $100. 

So the $100 becomes many times the $100 available then to your 

son when he retires. The difference is it is savings rather than 

spending. Spending disappears; savings builds and grows. 

Chairman NUSSLE. And then I have got to understand why this 

is so urgent. I mean, you know, 2018, most politicians only worry 

about the next election around here. Some think a little bit further 

than that, but by and large we are not used to thinking more than 

about the next election. You have to pardon us a little bit. You 

know, 2018 is a lot of election from now for most people. So why 

is it so urgent? I mean, can’t we just wait until—how about let us 

try 2016? Why does the problem get so much worse between now 

and 2016 that we can’t just wait and deal with it then? 

Secretary SNOW. Well, again, Mr. Chairman, citing the actuary 

of the Social Security system, every year we put this off, every year 

we postpone action, the problem becomes bigger and bigger and 

bigger and bigger. As I recall the actuary’s, assessment, the problem rises at the rate of about $600 billion a year. And whereas 

today, if the problem were solved simply by reducing benefits or 

simply by the shortfall or solved simply by raising taxes, you could 

do so with a 3.2 or 3.3 percent reduction—or increase. If you wait, 

you are going to have to have a 6.5 percent, 7 percent-type increase. So by acting now, by acting now we have the ability to put 

in place solutions that are far less costly. And we also by acting 

now have the opportunity to put in place these accounts which will 

use the power of compounding, take that $100 and make it many 

times the $100 the future when younger people like your son move 

to retire. 

We also by acting now I think show good faith with markets. 

Markets are watching us. Markets ultimately render judgments on 

people in positions of political leadership. I think the markets are 

giving us credit. They are saying, yes, you are going to address this 

problem. The issue is important because that $10.4 trillion obligation is out there and it hangs over the markets. By showing responsible behavior in defeasing it, in removing it, we are keeping 

faith with the financial markets of the United States and the finan-
15

cial markets of the world. And that sustains low interest rates. And 

low interest rates are one of the principal things we have going for 

us in sustaining a strong economy. 

So for all those reasons, Mr. Chairman, I would suggest that we 

really have no option but to act now. The problem is urgent, and 

the sooner we act the better. And the longer we wait, the bigger 

the problem becomes and the harsher the solutions. 

Chairman NUSSLE. Thank you, Mr. Secretary. 

Mr. Spratt. 

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

Mr. Secretary, we are trying hard to understand this proposal in 

full. This is a Budget Committee, and our understanding of it thus 

far is it will have an enormous impact on the budget for years to 

come. In fact, if the borrowings to finance transition are of the 

magnitude we expect, I don’t think we will see a balanced budget 

again in our lifetimes. You know enough apparently to give us a number, $754 billion, 

as the cost during the first 10 years, assuming implementation of 

your proposals in around 2009 to 2011. Can you tell us what you 

expect the cost to be in the first 10 years after full implementation 

and in the second 10-year period thereafter? 

Secretary SNOW. Mr. Spratt, I can’t because——

Mr. SPRATT. Can you give us an approximation? 

Secretary SNOW [continuing]. I don’t yet have a detailed understanding of what will come out of this legislative process. 

Mr. SPRATT. I am asking what you are proposing, not for what 

we produce. 

Secretary SNOW. Well, until we know the details, though, of the 

proposals that will come from the negotiations with Congress, the 

process that has now been launched, it is very hard to quantify 

what those future costs would be. But, I mean I certainly would 

grant you that the borrowing wouldn’t cease at the end of the 10-

year period; it would have to go on. And, but I have not run any 

or seen any runs of an—actuarial runs of what the next 10 years 

and the 10 years after that would be, because I think it depends 

so much on the details. But we have to acknowledge that it is going 

to be a continuing budget item going forward. 

Mr. SPRATT. Well, if you haven’t seen the details as Secretary of 

Treasury, how can you pass judgment on them? 

Secretary SNOW. We have seen the details and we have made 

available the details of the proposal for the first 10 years. But what 

happens with the cap, what happens with the contribution levels 

and so on, and what happens with the other aspects of the Social 

Security proposals is something that isn’t knowable at this point. 

The President has put forward four or five options for dealing, 

in addition to the personal accounts, for dealing with the problem. 

He has invited Members of Congress to join him in thinking about 

the problem and coming up with other ideas. He doesn’t think we 

have got all the good ideas. 

Mr. SPRATT. But you are his point man. The reason we are putting the question to you is you are the chief numbers operator in 

the Bush administration, and we are trying to get some financial 

explanation of what the impact of this proposal will be on our 

budget. And we are finding it a very elusive pursuit. We aren’t 
16

even able to find out what the cost is going to be over the first 20 

years, although we know it is going to be significant. By our calculation, it is going to be close to $5 trillion in additional debt of 

the United States. Does that comport with your back-of-the-envelope analysis? 

Secretary SNOW. Well, Mr. Spratt, as I say, I don’t have the runs 

on that, the actuarial runs on that, so I can’t confirm that. It 

sounds a little high to me. But certainly there would be continuing 

borrowing requirements and interest payments requirements. But 

remember, net-net we are simply making explicit an obligation 

which is implicit, and by doing that we are not adding to the longterm costs of the U.S. Government. 

Mr. SPRATT. Well, first of all, we are accumulating debt in the regular budget at a rapid clip. I showed you the numbers, $2.234 

trillion increase in the debt ceiling to accommodate the Bush budget for the first 4 years, $2.2 trillion. And we are running at that 

rate now, about $1 trillion in debt accumulation every 18 months. 

By 2012, 2015, we are likely to have $12 trillion in statutory debts 

subject to limit. If you go ahead and take then that debt, which is 

increasing as we speak, and add on top of it another $5 trillion, the 

Treasury is going to be in the private capital markets frequently 

borrowing big sums of money repeatedly and crowding out private 

borrowers, is it not? 

Secretary SNOW. No, I don’t think so. I don’t think so at all in 

this case because, again, this borrowing is not borrowing to spend, 

this is borrowing to save. And it is borrowing to defease a very 

sizeable long-term obligation. 

Mr. SPRATT. But it is still borrowing, and the Treasury of the United States has to go in the capital markets and say I want $1.5 

trillion dollars for these Treasury bonds. 

Secretary SNOW. But Mr. Chairman—I mean, Mr. Spratt. 

Mr. SPRATT. I will take that. 

Secretary SNOW. Mr. Spratt, there is a real difference here, and 

it is important to maybe take a minute and talk about this, because this isn’t your traditional debt. It doesn’t have the effects of 

traditional debt on markets. I have spent a lot of time now talking 

with the analysts in the Treasury Department who make the U.S. 

Treasury market, the people who are responsible for the largest 

debt market in the world, the U.S. treasuries. I spent a lot of time 

talking to people up on Wall Street about this. And Wall Street, I 

think, financial market people, people who worry about the bond 

market and credit ratings, they are going to applaud us, they are 

going to applaud you and the Congress for taking this issue on and 

defeasing that $10.4 trillion long-term liability. And they would 

readily find, I am convinced, the funding manageable. 

Mr. SPRATT. There is still going to be debt of the United States, 

and there will be interest payments either quarterly or semiannually. Those payments will have to be made. We will have a huge 

and growing amount of debt service, and that debt service is going 

to displace priorities in our budget, is it not? It is going to be a 

mountainous amount of debt service if you have $5, $6, $7 trillion 

dollars of additional debt. It has to be serviced. Does it not? 

Secretary SNOW. Well, certainly all debt has to be serviced. But, 

remember, when we do the borrowing it is of an equivalent value 
17

to the reduction that is occurring in the liability in the Social Security system, because the borrowing, the borrowing is exactly equal 

to the amount of money that is being taken out of the system and 

put into the personal accounts. So, in effect, it is a wash. The Social Security liabilities are coming down by an amount that is 

equal to the borrowing. 

Mr. SPRATT. But the interest is a net payment of the U.S. Government. We will have to shell out the interest in increasing 

amounts, and it will displace other priorities in our budget. 

Secretary SNOW. Well, not necessarily. No, that is not the way 

to look at this. If the borrowing doesn’t affect——

Mr. SPRATT. So we can borrow money with impunity then. 

Secretary SNOW. Well, no, you don’t, because you don’t borrow if 

you spend. You can borrow to save; you can’t borrow to spend. And 

that is the key difference. This is borrowing to save. And if you 

look at this I think in the right way, the savings of the United 

States are going to rise, not fall. At least they won’t be negatively 

impacted. If the savings of the United States aren’t negatively impacted, then——

Mr. SPRATT. You are diverting money from the public trust fund 

into private accounts. At best, it is a wash. Instead of going into 

the public trust fund where it would be saved, it is going into private accounts where it is saved. So at best it is a wash. 

Secretary SNOW. I would look at it a little differently. I would 

look at it this way. That is going from a pay-as-you-go system to, 

in a way, Mr. Spratt, the very lockbox you talked about, because 

the money is now going into a private account that could be analogized to a lockbox. It is in there, it can’t get out. The Government 

can’t take it away from you. They can’t go spend it. It is in the 

lockbox. It is not called a lockbox, it is called a personal account, 

but it has the same effect. 

Mr. SPRATT. Let me ask you to wrap up on this line of questioning. When can we expect the numbers? When can we expect to 

see a full financial display of how much debt we will have to incur 

to sustain this proposal? 

Secretary SNOW. I wish I could give you an answer in terms of 

a specific time. The time will be as the details of the proposal get 

worked out with you and Members of the Congress, is the best answer I can give you, the most honest answer. 

Mr. SPRATT. Let me ask you then another question about a different line. I have looked at model 2. And, as I take it, you are 

working off model 2 of the President’s Social Security Commission. 

And model 2 clearly acknowledges, particularly if you read the actuary’s letter that explains it, that the private accounts don’t account for the achievement of solvency within 85 years. That has to 

be done through benefit reductions or revenue enhancements, one 

or the other. And, in particular, model 2 actuary’s letter indicates 

that the primary source of solvency is achieved by reindexing the 

basic primary insurance amount. They go on to acknowledge, if you 

read it closely, that the replacement ratio, if this is done, over 50 

years will be cut in half. That is a substantial reduction in benefits. 

And that is a means by which you achieve solvency. It doesn’t have 

a thing to do with private accounts. Am I correct? 
18

Secretary SNOW. I would have to go back and review model 2. I 

get model 2 and model 3 and model 1 sort of muddled sometimes. 

But I think essentially you are right; model 2 doesn’t rely on the 

personal accounts alone to fix the system. But I think model 2, and 

model 3, as I recall, have the personal accounts as an integral part 

of the solution. 

Mr. SPRATT. The actuary indicated for that study that the cost 

of fixing Social Security would be equal to 1.89 percent of payroll. 

In other words, that was the shortfall expressed as a percent of 

payroll. The actuary’s letter said that the manner in which the primary amount of insurance would be determined indexed to prices 

instead of wages would account for 2.07 percent of payroll. 

So that was virtually the whole of the solution right there, in the 

reindexation solution of the bend points, redetermination of the primary insurance amount and over time, prospectively, it becomes a 

significant reduction in benefits. 

Secretary SNOW. Yes, I think Plan 2 does, by indexing to prices 

rather than wages, have the effect long-term of reducing at least 

the growth rate—I think, is maybe a better way to put it—the 

growth rate of benefit levels. But even then, I think it has the retirees, the beneficiaries, having replacement rates which are better 

than their parents and grandparents. 

Mr. SPRATT. Oh, no, not if we assume that the collateral account 

earns the bond rate of return, you will see a reduction in the—you 

will see a reduction in the replacement ratio of preretirement income for the median beneficiary retiring at age 65 earning the median income of over 50 years, the replacement ratio will decline 

from 43 percent to 22 percent. They will get half what their grandparents got. 

Secretary SNOW. The replacement ratio declines, but the actual——

Mr. SPRATT. Well, sure wages go up, no question about it. 

Secretary SNOW. But the actual payout is higher than their parents or grandparents in real terms, and I think with the private—

the personal accounts, with the personal accounts, the payout is 

higher than what would be available from Social Security alone, 

given the fact that Social Security can only pay out a fraction of 

the promised benefits. 

Mr. SPRATT. Well, if you go back and read model 2, I would recommend it to your attention. 

Secretary SNOW. OK, I will do that. 

Mr. SPRATT. You will find that they cut the replacement ratio in 

half over that period of time, and that makes this system not a fundamental source of retirement benefits but almost an incidental. It 

changes the character of Social Security. 

Let me ask you—and I will then let others have a shot. If we assume that these—and everybody is subject to this change in the indexation of the primary insurance amount, everybody, whether 

they opt into private accounts or not; everybody gets their benefits 

recomputed according to this different model. 

Now, that raises a particular problem for one-third, 30 percent, 

of the beneficiaries who are disabled beneficiaries or survivorship 

beneficiaries. They will have the same benefit reduction that others 

will have out through time, but in addition to that, they will not 
19

have the opportunity, because they will be drawing that benefit 

sooner than age 62 or age 65, they will not have the benefit of allowing the collateral accounts to build up. What happens to their 

benefits? It is critically important to the disabled and the survivor. 

Secretary SNOW. You put your finger on a very, very good issue, 

and the President in his principles to deal with Social Security has 

focused on that and said that nothing should be done to diminish 

the well-being, the welfare of the disabled, as a result of any of the 

fixes. 

Mr. SPRATT. So what do we do? What is the solution? The problem is inherent in the proposal as a problem, I understand that. 

Secretary SNOW. I agree with that. It is in Model 2, it is inherent 

so you would have to take that fix into account, whether you—and 

there are various ways you could do that—but including not applying the index to the disabled or making a commitment that the disabled would receive payment——

Mr. SPRATT. Then you would have disabled beneficiaries receiving a return higher than comparable age beneficiaries would receive at retirement who worked a whole 35, 40 years. 

Secretary SNOW. Now, you are putting your finger on the very 

reason the President said we want to work with Congress to find 

the answers. 

Mr. SPRATT. Well, now you are passing the buck. 

Secretary SNOW. Well, no, I am not. 

Mr. SPRATT. I am asking you for what your proposal——

Secretary SNOW. I am saying this is an issue on which I think 

the administration and Congress should, should spend a lot of time 

focusing. 

Mr. SPRATT. Well, what you are giving me as a fairly inchoate 

picture of what has been developed at this point in time. We have 

still got a very, very great number of items of fundamental vital 

importance that have to be defined before anybody can pass judgment on the validity of the attractiveness of this system. 

Secretary SNOW. As the chairman said in his well-put opening 

comments, we are really trying to make sure we have an agreement on the nature of the problem. If we can have an agreement 

on the nature of the problem, I think finding the answers will 

come, will come a lot more readily. 

We are prepared to work with you, Mr. Spratt, on the answers. 

But I think finding the answers depends on having some agreement whether or not the Social Security actuary is right in saying 

that, in 2018, the outflow exceeds the inflow. 

Mr. SPRATT. Well, wait now, the outflow does not exceed the inflow if you pay interest on your bonds. If you are paying interest 

on your bonds and add that to the inflow, then the inflow exceeds 

the outflow in 2018. 

Secretary SNOW. I am saying the current system, if we could 

have agreement, that the current system was unaltered, just on its 

own, the way it is running, will be—produce inflows that are less 

than outflows in 2018 and will produce in 2042 an inability to pay 

the benefits then scheduled, that would be the basis for finding, I 

think, foundation for a discussion to produce some answers. But I 

am not sure we are there yet. 
20

Mr. SPRATT. Well, I do not think we are there either. I mean, I 

think we have got a massive amount of detail and information necessary to flesh out this proposal. You would agree, I take it? 

Secretary SNOW. I do not. I do not agree that the problem has 

not been well defined. I think the actuary, I think CBO has been 

helpful. 

Mr. SPRATT. We cannot even agree on the method about which 

insolvency is to be achieved, about whether or not the reindexation 

of the primary insurance amount plays in that. 

Secretary SNOW. What I think we do agree—all—I think everybody who has looked at this has agreed, everybody who has looked 

at it in a serious way, from an actuarial point of view, everyone has 

agreed his system is not on a firm foundation. The system is in 

trouble. The President has said we have looked at this in the past 

and we said, let us have a temporary fix. 

All we have ever had is temporary fixes, and all we have done 

is kick the problem down the road to future Congresses and future 

administrations. He is saying—I think he is to be commended for 

it—he has said let us get a permanent fix, let us really fix this 

thing right, let us not kick it down the road. Let us not kick it to 

another Congress. I think that is commendable. 

Mr. SPRATT. Let me go back to words you use, this is not on a 

firm foundation, I will grant you, we have a problem in 2042. The 

easier, sooner we agree with it, the better it will be. But as to the 

foundation, in 2018, Social Security is sitting on $5 trillion to $6 

trillion in Treasury bonds; 2028, the amount of nest egg actually 

increases to $7 trillion. That is a pretty firm foundation for us to 

stand on while we try to work out a good sensible, fair and operable solution; isn’t it? 

Secretary SNOW. But the sooner we get to it, the better. 

Mr. SPRATT. No question about it. 

Secretary SNOW. The sooner we get to it is better for you and I, 

I think. If we do not get to it, that surplus gets exhausted and 

funded from some source——

Mr. SPRATT. No question about it. You keep saying 2018, and I 

keep saying, wait a minute, $5 or $6 trillion in Treasury bonds. 

That is pretty liquid. 

Secretary SNOW. But it has to be financed. It has to be financed, 

and the—and I think it is by 2040 or so, the whole that has to be 

financed is on the order of $600 billion. 

Mr. SPRATT. One final question. 

To me, it is obligations under the proposal that you are formulating. Social Security or the general fund of the Treasury will have 

to borrow substantial sums after 2020 to make up for the deficiency 

in the trust fund which is aggravated by the fact that you are going 

to be diverting a third of the revenues away from it. 

How far and how much from that point onward do you have to 

borrow? When do you cease having to borrow money? Is it 2062? 

Secretary SNOW. Yes. I wish—I do not want to be evasive or 

sound evasive. It depends on what the fixes are we come up with. 

There are fixes that would have it in that timeframe. There are 

fixes that would have it sooner. There are fixes that would have 

it later. It really depends on what the ultimate solution is. 
21

Secretary SNOW. Give us an approximation, the average and likely proposal you are going to make. Is it around 2062 you will be 

borrowing money to supplant, replace the benefits of Social Security? Some timeframe like that, you know, depending on—take 10, 

15 years, either side of it, depending on what the form of the ultimate—the resolution is. But I will grant you that. 

Mr. SPRATT. Thank you, sir, I appreciate your answers. 

Chairman NUSSLE. Mr. Portman. 

Mr. PORTMAN. Thank you, Mr. Chairman. 

Mr. Secretary, I thank you for being with us today and getting 

into some of the details of Social Security. This is the Budget Committee, so I will start by commending you on your budget which 

does restrain spending and does promote economic growth while 

funding our key priorities, and we know that is the magic. We did 

it back in the late 1990s, to getting back to fiscal discipline. I think 

your budget presentation made by Joshua Bolten yesterday does 

exactly that. 

On Social Security, I wish I had more time. But I guess my response to my friend, Mr. Spratt, he knows I respect him, you know, 

you cannot have it both ways. I think we are totally irresponsible, 

as Members of Congress, to be telling our constituents that the 

trust fund will be in a position to fund Social Security without sacrifice. 

You know, what the trust fund is, thanks to Congress, you know, 

over the last 30-plus years, is something that we have borrowed 

from. And we borrowed from it today, and our deficit numbers reflect that. In other words, there is more than there should be. For 

us to sit here and say we are concerned about the costs of personal 

accounts, and there is a transition financing to personal accounts 

but we are not worried about financing the $5 or $6 trillion trust 

fund deficit, I think is irresponsible. 

I think Members of Congress need to be very careful about this, 

because it is dangerously misleading to our constituents. I mean 

the honest truth is, the way the trust fund works, it is sort of like 

the Government reaches into its wallet, pulls out a little money to 

spend and that money gets spent on everyday purposes of government, and then we put an IOU in the coffee can, saying I owe myself $5; that is how it has worked. I really think we needed to be 

very careful about how we talk to our constituents and deal with 

this issue. 

Mr. BAIRD. Would the gentleman yield for one moment? 

Mr. PORTMAN. No, I will not, because I do not have enough time. 

Mr. Secretary, tell me, between 2018 and 2042, what is the 

amount of money that the Government would need to have by raising taxes or by borrowing more to be able to redeem the Government bonds in the trust fund, what is that amount of money, just 

between 2018 and 2042? 

Secretary SNOW. I think that is about $2.7, $2.8 trillion. 

Mr. PORTMAN. $2.7, $2.8 trillion. Where are we going to come up 

with it folks? I mean, this is the honest truth. I know it is painful, 

and it is hard for us to realize, but we have intergovernmental 

debt, and we have public debt. And they are very different things. 

Here, intergovernmental debt we have borrowed against. We are 

borrowing against it this year. 
22

For us to sit here and say, it is there, and it has been there for 

Social Security, and there is no pain involved in this, it is just 

wrong. We are going to have to raise taxes. We are going to have 

to borrow. We are going to have to cut benefits. We are going to 

have to do something. 

On the other hand to say, gee, we cannot do these personal accounts because they cost too much. 

Mr. Secretary, you said the $100 invested in personal accounts 

for 40 years would be a lot more than $100. I am assuming a 5 

percent rate of return, which I think is conservative. That is $704; 

$100 becomes $704; $10,000 becomes $70, $100 becomes $100,000. 

I mean, $100 becomes $700,000. This is what Einstein talked 

about, the magic, the greatest force in the universe, the power of 

compounding interest. That is what we are talking about here. 

Yes, it is not cost-free in the interim period, but it actually, it actually helped solve the Social Security problem because of this 

buildup of assets, and the fact that then Social Security will have 

less of a responsibility for those people who choose voluntarily to 

get into the personal accounts. 

That is why it is such an exciting proposal and why I strongly 

support it. Yes, we need to deal with the transition financing, and 

we will. But we need to do so understanding that the other option 

of relying on the $5 or $6 or $7 trillion in trust fund is not costfree either, and we ought not to mislead our constituents about 

that. 

In terms of the funds that would be used for the personal accounts, Mr. Secretary, you indicated that it is different because it 

is money that would go into savings. I would agree with that. But 

also it is different—isn’t it—because it defrays our long-term liabilities. Can you talk a little about that as well? 

Secretary SNOW. Yes, absolutely. Remember what is being done 

here. According to Social Security actuary, there is a $3.7 trillion 

hole, obligation, unfunded obligation of the United States over the 

75-year horizon, and it is $10.4 over the permanent horizon, rising 

at about $600 billion a year. 

What the proposal does is not only create a better retirement 

than Social Security can make available for younger people and future generations, but it defeases that obligation. It removes that 

obligation. 

That is why I said earlier, Mr. Portman, that Wall Street looks 

favorably on this, because they know that we are improving the 

balance sheet of the United States. We are putting our long-term 

fiscal house in order. 

Mr. PORTMAN. So it is borrowing that goes into savings, and it 

is borrowing that goes into defraying the liabilities we all know 

exist in Social Security. 

Let me just give you one final fact: That $100 you talked about—

assuming a 5 percent rate of return—becomes $704. That is the 24-

year-old you talked about. For that same 24-year-old, who will get 

on average, we are told, who will get a 1.8 percent rate of return 

under the Social Security, that $100 that person would invest in 

Social Security would result in a $204 return; $704 versus $204. 

Thank you, Mr. Secretary. 
23

Secretary SNOW. Yes. One way of thinking about your younger—

about that person and your children—is that they become owners 

in America, investors in America in exchange for being creditors on 

a Government promise that cannot be fulfilled. 

Chairman NUSSLE. Mr. Moore. 

Mr. MOORE. Thank you, Mr. Chairman. 

Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for being here today. Mr. Chairman 

made the statement during his opening remarks that members and 

politicians do not look beyond the next election. I want to respectfully take issue with that, because I am very, very concerned about 

my children, about my six grandchildren and their contemporaries 

out there and how they are going to dig out of this financial hole 

that we are putting them in right now. 

We have a $7.6 trillion national debt in this country. We are paying almost $1 billion a day in interest on our national debt. Deficits 

are running well over $400 billion a year. I think, respectfully, we 

need to change the way we are doing business in this country, and 

this should not—should not—be about Democrats and Republicans. 

We are all in this together. I do, really do have grave concerns 

about the future generations in this country if we do not turn 

things around. 

You said, Mr. Secretary, how can the trust funds be replenished 

and how can we achieve a solvency here? 

Yesterday, Mr. Secretary, I filed a bill that is called the—well, 

it does not matter what it is called—but what it will do is establish 

a true, a true trust fund. That would save the American people. 

Money that comes in for Social Security taxes cannot be used for 

even worthwhile programs such as education, healthcare, tax cuts, 

Iraq, anything else, but has to be set aside and saved for Social Security purposes in the future. That does not totally solve this problem of solvency of Social Security over the next few years, and I 

think every member in this room—and I hope probably in the Congress—believes there is a problem, maybe not a crisis, but a problem that needs to be addressed sooner rather than later. 

I would hope that we would start to be honest with the American 

people—and I do not think most people out there understand that 

the money that does come into the Social Security trust fundright 

now is used for every other purpose, and it is just not there—and 

we say, look up here, but do not look at what we are doing with 

the money down on the other hand. 

We need to start, I think, setting aside the money and preserving 

it for the intention and intended purpose. If we did that, again, we 

would be several steps in the right direction of extending the life 

of Social Security into probably several decades into the future. 

I want to ask a question though about this. I saw in the paper 

this morning, The New York Times, about a $720 billion estimated 

cost by the administration, just came out over, the next 10 years 

for the Medicare drug program. I do not know if you have seen 

that, Mr. Secretary, or if you are aware of that announcement. 

Secretary SNOW. Not—I saw the headline in The New York 

Times, but I have not yet had an opportunity to really study the 

issue, Mr. Congressman. 
24

Mr. MOORE. All right. Well, apparently some administration official offered an estimate of the cost of the Medicare drug benefit 

Tuesday saying it would cost $720 in the next 20 years. Congress 

has told us it would cost $24 billion. I do not want to get into all 

that. 

I do want to say this: It does cost a lot of money, a drug benefit 

through Medicare. What I handed you right before this meeting 

started was what I proposed—another bill I filed called the Meds 

Act. 

Back in 1992, the Secretary of Veterans Affairs was given the authority under Federal law to negotiate with pharmaceutical companies on behalf of about 25 million veterans for lower pharmaceutical drug prices. We have 44 million Medicare beneficiaries in 

this country. Each one right now is a one-person buying group. If 

we were to get a group discount for 44 million Medicare beneficiaries, I would think they would achieve the same kinds of savings hopefully that the veterans would have. The veterans I had 

talked to are pretty pleased with the benefit they get. I would ask 

you to go back to the administration and ask them to consider 

something like this. 

This was specifically prohibited in the Medicare bill that Congress passed, and I think it would be a—I would ask you if you 

have any comments on that, Mr. Secretary. 

Secretary SNOW. Congressman, I remember when we were at 

that nice luncheon in Kansas City when a subject like this came 

up. You were thinking about it then and yet put it into the form 

of legislation—let me just say——

Mr. MOORE. Thank you. 

Secretary SNOW. I would be delighted to look at it and give you 

some thoughts on it. 

Mr. MOORE. Thank you. 

The last issue I want to raise with you, and I am out of time, 

is this: I was with our European counterparts, NATO allies, in midNovember last year, and they raised the prospects of our $7.6 trillion debt. They talked about the fact that foreign nations, European countries, Japan and even China are financing our debt, a financial portion of our debt. 

They said they are concerned about the value of the dollar and 

what is going to happen in the future. 

Should we be concerned about that, Mr. Secretary? 

Secretary SNOW. Not if we do the right things, and we are trying 

to do the right things, and not if other people who have a responsible role to play here do the right things as well. The current account deficit is—again, we have talked about this in Kansas City. 

The current account deficit is really the difference between the rate 

of savings in the United States, domestic savings, and domestic investment opportunities. 

Right now, with our economy doing so well and growing so fast 

relative to our trading partners, we are creating a lot more investment opportunities in the United States than we are savings, so we 

need to borrow from others to finance the good investment opportunities in the United States. It would help if trading partners would 

grow faster. We are talking to our trading partners about doing 

that and the things they could do to grow faster. It would be help-
25

ful if we could save more. That is where the deficit is so important, 

because if we save more, we eliminate a source of dis-savings. 

Alan Greenspan, Chairman Greenspan, gave a speech a few days 

ago, saying that he thought the current deficit was in the process 

of turning the corner and cresting and coming back the other way. 

I think there are some reasons to think that that truly is the case. 

It would be helpful on that score if China would move to a more 

flexible exchange rate and go through the process of letting their 

currency be set more in open competitive markets rather than set 

by administrative fiat. 

Mr. MOORE. Thank you, sir. 

Chairman NUSSLE. Mr. Wicker. 

Mr. WICKER. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for your testimony. 

Let me follow up on a point that Mr. Portman was making. Right 

now, say you have got a couple out there in their late 20s, early 

30s, got a couple of kids, and they are struggling along trying to 

pay their bills. Right now, we are taking 6.2 percent of everything 

they make in FICA taxes. 

As I understand it, what we are promising them right now is 

something that is going to get them somewhere around a 1 percent 

return when they finally get to retirement age, plus or minus, but 

it is a very low 1 percent return. Is that right, Mr. Secretary? 

Secretary SNOW. It is. It is a very low return. 

Mr. WICKER. Let me just observe: If we could do better than that 

for our hardworking families out there, we ought to do better than 

that. We ought to take action that gets them a better return if we 

are going to take that much out of their paycheck. 

I was gratified to hear our ranking member acknowledge that 

there is a problem. I mean, I think that is a start. There is a question about whether it is a crisis or how urgent it is. But at least 

we are all acknowledging that there is a problem. 

Now, in the past, when Congress has decided to address the 

problem, they have done what I think you referred to, Mr. Secretary, as a temporary fix, kicking the can down the road for a few 

years. 

There are things that we could do again, totally different from 

what I think the President is going to propose. We could adopt a 

means test for benefits in the future. In other words, we could take 

6.2 percent of people’s money—and they get to certain income levels—and say, well, you are not going to get it anyway. We could 

reduce benefits. Certainly, Congress has, in the past, raised the 

payroll tax. We could, again, raise the retirement age. Congress did 

that many years ago. It is just now sort of coming home to roost 

there. We could increase the earnings limit. Without doing anything else, we could adopt a lower cost-of-living index. All of those 

things, I think, are not going to be very popular among the American people. 

But let me ask you, if we did any of that, would it help that 

young couple that is 29-years-old or in their early 30s with two 

kids and paying 6.2 percent of everything they make, would it help 

them get a better return at the end of the day? 
26

Secretary SNOW. It would, Congressman, that is a good way to 

frame the issue. It would if the personal retirement accounts are 

included as part of this as well. 

Mr. WICKER. OK. But I am not hearing much support from my 

friends on the left about the personal retirement accounts. Absent 

the personal retirement accounts, kicking the can down the road, 

means testing, reducing benefits long-term, raising taxes, raising 

the retirement age, raising their earnings limit, that still gives that 

couple 1 percent at the end of their working life, doesn’t it? 

Secretary SNOW. I think that is right, and that is why the opportunity the personal retirement account affords people should be 

part of any solution, because it does give them—I think the math 

on this is irrefutable. Congressman Portman took you through 

some of it, but the math on this is irrefutable. 

For a young person who has 40 years or 45 years to put away 

money and who earns the long-term average of a blended bond in 

equity, they are going to come out way, way, way ahead of that 1 

percent. 

Mr. WICKER. Right, but let me agree with a very important point 

the ranking member made. It is going to help when we can get specifics on the administration’s proposal, because I certainly appreciate that you cannot answer the very specific questions that members on both sides of the aisle have, until we do get the specifics. 

But I do understand that whatever the administration proposes, 

it is going to be voluntary, is that correct? 

Secretary SNOW. Absolutely. In other words, that couple can decide to get into personal savings accounts, or they can stay with 

their 1 percent for whatever reason. 

Also, there is going to be the same guaranteed benefit at the end 

of the day and whatever the administration proposal is. We are not 

just going to hang them out there to float. 

Secretary SNOW. The whole proposal is voluntary for younger 

people. Of course, not available to 55 and older who are—all their 

benefits will be secured. 

Mr. WICKER. Yes, I would think you may start getting a few complaints from those 55 years of age and older that they cannot buy 

into these personal accounts. 

But thank you very much for your testimony. 

Chairman NUSSLE. Mr. Edwards. 

Mr. EDWARDS. Thank you, Mr. Chairman. 

Let me just say, what I am observing is that the same people 

who, I assume, in good faith 4 years ago, 3 years ago, 2 years ago, 

wrote partisan budgets that turned a $270 billion a year Federal 

surplus in 3 years to the largest deficits in American history, having broken the promise that they could pass tax cuts and balance 

the budget, are now promising American people that to privatize 

the Social Security system is going to be better for them than a 

system that has been so deeply respected by generations of Americans. 

I think their promise that this Social Security privatization plan 

is going to help seniors, unfortunately, will be about as realistic as 

their promise that we could fight a war on terrorism, pass massive 

tax cuts and balance the budget. In regard to Mr. Portman’s comment, I want to commend you, it is irresponsible to not recognize 
27

the cost of replacing the money borrowed from the Social Security 

trust fund, although I would point out that much of that borrowing 

occurred because the partisan budget passed much of the Republican leadership in the last 4 years. 

But what I would say is, I wish the gentleman had made the 

statement 4 years ago, or at least listened to Democrats when we 

were making that statement, saying the cost of long-term Social 

Security is one of the reasons we needed to take advantage of the 

surplus of the $276 billion of the Clinton administration era and 

pay down our Nation’s debt. 

I think it was irresponsible for Republicans to not listen to 

Democrats for 4 years who urged our colleagues and said we cannot afford, given our long-term liabilities in this Government, to 

pass trillion after trillion dollar tax cut that is unpaid for. 

In regard to a couple of comments made by Secretary Snow: Mr. 

Secretary, you said the problem is, we spent too much. Let me just 

say, for the record—and this is factual—that the Bush administration has proposed significant increases in three of the five largest 

Federal programs that, out of thousands of programs, represent $2 

out of every $3 spent by the Federal Government. 

In terms of tax cuts, lending and economic growth, I am not sure 

that cause and effect has really been proven. It has been alleged. 

I am not sure it has been proven. But the tradition generally is 

that, coming out of recessions, you have economic growth. 

It kind of reminds me, down in Texas, we have some roosters 

that think that they are the reason the sun rises in the east, because they crow every day and the sun comes up; not long after 

that, the sun comes up in the east. 

I am not sure that allegation has been proven. But what I do 

know is that the former Bush administration White House economic official who now heads up the nonpartisan Congressional 

Budget Office testified after doing a long report on tax cuts and 

borrowing to pay for them, said that, in the long run, paying for 

tax cuts by borrowing billions of dollars from American citizens and 

the communist Chinese and other foreign countries hurts economic 

growth, not helps economic growth. 

So I do not buy into the allegation, unproven, that somehow massive tax cuts paid for by borrowing has somehow led to economic 

growth. 

Mr. Secretary, in terms of Social Security, let me just ask you if 

you could give me quick yes or no answers or specific answers without elaboration: 

When does the Social Security trust fund go insolvent, according 

to your numbers, what year? Just the year is all I need. 

Secretary SNOW. 2042 is the bankruptcy. 

Mr. EDWARDS. OK. When does the Medicare trust fund go insolvent, according to your numbers? 

Secretary SNOW. I would have to check. I have not viewed the 

Medicare actuary’s report here recently, but it is headed in the 

same way. 

Mr. EDWARDS. But the Secretary full well knows that the Medicare trust fund is going to be insolvent long before the Social Security trust fund. 
28

Now the chairman said his 14-year-old son, according to the 

charts, will not get Social Security. 

Mr. Secretary, factually, if no changes are made in Social Security, and we simply respect the legal obligations we owe the Social 

Security trust fund, is it, in fact, true that someone in his teens 

or 20s or 30s will receive no Social Security benefits? 

I believe that is a false statement, and it is a myth that is been 

perpetrated on the younger generation. Isn’t it in fact true that Social Security beneficiaries that are in their 20s today—and they become beneficiaries—would actually get somewhere—estimates are 

70 to 80 percent of present-day benefits if no changes were made? 

Isn’t that correct? 

Secretary SNOW. Yes. I think the trust fund in 2042 can pay out 

about 70 percent, 72 percent. That declines with——

Mr. EDWARDS. OK. But the statement is, it is simply false, that 

teenagers and young people in their 20s and 30s would not get any 

Social Security benefits if we do not change the law. I do not think 

we ought to build the change on the most important social-problem 

safety net in the Nation’s history based on a false myth. 

Mr. PORTMAN [presiding]. Let us see, who is next? 

Mr. Bonner for 5 minutes. 

Mr. BONNER. Thank you, Mr. Chairman. 

Mr. Secretary, it is good to have you here today, and I am glad 

you are sitting down. 

Yesterday, I was reflecting when I was a freshman 2 years ago, 

when I was sitting on the front row where my friend 

Mr. Lungren from California is sitting, and I always had a great 

view of the witnesses. And the people on this row had a great view 

of my bald head. So I am glad to have this good view of you today. 

I am sad, though, that both yesterday with the OMB director and 

today, it seems that the talk of bipartisanship and the talk of 

Democrats and Republicans working together as Americans is 

nothing more than just that, and that is frustrating. I know it has 

got to be frustrating to you. 

I referred to an article that was in yesterday’s Hill newspaper. 

For now, Democrats will offer no Social Security reforms. It is 

much as the statements yesterday with OMB director were made. 

On the one hand, the blasting criticism, waxing nostalgic for the 

glory years of the Clinton administration when all these surpluses 

were created, and yet then turning around with the same blasting 

criticism that all of these cuts are punitive—that the President’s 

budget has proposed—and these cuts are going to be Draconian to 

the social problems, many of which were created by Great Society 

in the New Deal. 

I think it is frustrating for some of us people on this side to hear 

people, because we know when we have a vote on the budget, Mr. 

Edwards, there will be amendment after amendment after amendment offered by members on the other side that will raise money 

for all of these wonderful programs to put us in an awkward position. Because if we vote against it, then that becomes a campaign 

commercial back home because we are voting against these programs. 

Mr. Secretary, if we do nothing, if we do nothing, and the President could have come to the Congress last week with the State of 
29

the Union and said: Look, I inherited a recession, and we dealt 

with it, and we have turned it around, and we are now creating 

jobs and the economy is growing. 

We inherited 9/11 because, in a large part, of failed attempts in 

the past on both sides to take aggressive actions against terrorists, 

but we inherited 9/11, and we are having to pay for 9/11 now. 

Ladies and gentlemen, I am going to take a break. I am not 

doing to dig deep into this issue. We could have taken a pass on 

it. Instead, he did not. He is asking the American people to engage 

us and him in a conversation about what is the best thing to happen about one of America’s most sacred programs, Social Security. 

So my first question is, if we do nothing, can the young couple 

that Congressman Wicker is talking about have anything to look 

forward to other than a measly return on a very significant portion 

of their paycheck taken out each month? 

Secretary SNOW. No. The returns, Congressman, if nothing is 

done, will be very, very slight. 

In fact, for future generations, I think they will be negative, so 

that you get no return on your payroll taxes. You get a negative 

amount back. 

No, you are right about the President. He came to Washington 

to solve problems. Not to pass them on to future presidents and future generations. I think he is saying to the Congress, on the 

Democratic side, on the Republican side: If you do not like my proposals, come up with some other ones. I want to talk to you, I want 

to have a dialogue on this. I want to find the answers. 

Mr. BONNER. In fact, did he not say that in the State of the 

Union message when he cited several proposals Congressman 

Penny, Senator Moynihan, President Clinton and others who have 

made recommendations in the past on Social Security, did he not 

invite all 435 Members of Congress and the 100 Senators to come 

up with other proposals as well? 

Secretary SNOW. Yes. Yes, he did. I think he truly is reaching out 

to the Congress for a bipartisan approach to this. 

Mr. BONNER. Well, Mr. Secretary, again, I want to thank you for 

coming up and helping, because there are a lot of questions that 

we have. This is not an easy subject. But it does not help when 

people go into any conversation and say that they are close-minded 

to new opportunities and to new options to consider. To me, if you 

go into a discussion where you already have said, we are not willing to consider new options, it really says that they are really not 

looking to solve problems. 

Thank you very much, Mr. Secretary. 

Secretary SNOW. Thank you, Congressman. 

Mr. PORTMAN. Mrs. Capps, for 5 minutes. 

Mrs. CAPPS. Thank you, Mr. Chairman. 

May I first respond to my colleague on the other side, directly 

across from me. Mr. Bonner is being critical of our side for not having a proposal and I would only respectfully recall the interchange 

between our ranking member, Mr. Spratt, and the Secretary, trying 

to elicit details of the President’s proposal. Those details are woefully missing, and it is hard to respond to something which is lacking in substance. So we await further discussion. 

But now, Mr. Secretary, thank you for appearing today. 
30

The administration has expressed serious interest in limiting initial benefit levels to the growth at the rate of prices rather than 

the growth in rate of wages. This would mean a basic benefit cut 

over the next 50 years of over 40 to 50 percent. Wouldn’t this undercut Social Security’s ability to help seniors maintain their 

standard of living in their retirement? 

Secretary SNOW. Congresswoman Capps, we have not embraced 

Model 2, which I think is the Social Security Model 2, which I 

think is the one that has the index, going from wages to prices. The 

President did mention that as an option in the State of the Union 

message along with a variety, a variety of other options. 

By going to the Model 2-type solution, you actually overcorrect 

the problem, as I understand Model 2. It has a solution which is 

100 percent plus of the deficiency of the shortfall in Social Security. 

I do not think we would ever recommend that. 

But even Model 2, as long as there are personal accounts giving 

the retiree, the beneficiary, the chance to come out ahead of where 

they would if we simply leave the system on automatic. 

Mrs. CAPPS. So I hear you saying that model which the President 

touted in the State of the Union does have serious flaws. 

But I want to ask you now about private accounts. You said 

that—you have said that the basic benefit cut would be made up 

by the value of these private accounts, which is better than doing 

nothing, according to your point of view. 

What happens to people whose private accounts do not pan out? 

Maybe they made a bad investment choice or retire at close to a 

low point in the market. 

This would be then tough luck? 

Secretary SNOW. Well, then, the investment vehicles would be 

prudent and safe. They would be quite limited. People would be required to keep their money in those vehicles. They would not be allowed to, you know, as the President says, go off to the roulette 

wheels or the racetrack with their money. They would have to put 

it in these safe vehicles, and the vehicle would not be individual 

bonds or individual equities. They would be—they would be diversified funds of bonds or equities. 

Mrs. CAPPS. Well——

Secretary SNOW. Including a so-called life cycle fund that deals 

with your issue, because the life cycle fund automatically moves 

the ratio of equity to debt down so that you retire with a lot more 

debt of fixed income instruments than you do equity, and that mitigates any of those concerns. 

Mrs. CAPPS. So it is a different stock market than we know 

today, perhaps. 

I want to ask you about one other point I would like to bring up. 

Mr. Spratt raised this issue of fully a third of the beneficiaries who 

are survivors or disabled, a different population than we usually 

think of when we think of Social Security beneficiaries—many of 

us fall into that category. 

You agree that you cannot realistically cut the benefits of these 

people; correct? And so if you cannot or do not want to cut their 

benefits, won’t you have to cut the benefits of retirees even more 

than the 40 to 50 percent Plan 2 envisions to keep the system up? 

In other words, the beauty of the system that we have today is that 
31

people with disabilities and who are survivors are part of the larger 

group that is protected in substantial ways? 

Secretary SNOW. Right. Well, I think that the Plan 2 has a lot 

of merit to it. I would not discard it entirely. But it does not—it 

does not meet the President’s principle of protecting the benefits of 

the disabled. So that is one of the President’s core principles, and 

he would want to see the disabled protected in any legislation that 

came out. 

Mrs. CAPPS. Could I ask for a further explanation of how they 

would be protected? 

Secretary SNOW. Well, there were a variety—there were a variety 

of means that could be made available to do that, technically dealing with the bend points, technically dealing with the crediting of 

years, changing the ratios, number of years work, crediting with 

years worked and so on. So there are a variety of things that can 

be done. The President’s point is, it should be done, and he wants 

to work with Congress to find out the right way, the best way to 

do it. 

Mrs. CAPPS. But the bottom line would be shifting those costs 

to—well, those with private accounts? 

Secretary SNOW. Well, there are a variety of ways to do it within 

the system. I think—I do not want to speculate on precisely how 

it would be done. That would be the result of the ensuing discussion we had hoped to have with you and Members of the Congress. 

Mrs. CAPPS. Thank you, Mr. Chairman. 

Chairman NUSSLE [presiding]. Mr. Secretary, just for point of 

clarification—because I have been hearing about this Plan 2—is 

the President’s plan Plan 2? 

Secretary SNOW. No, no. 

Chairman NUSSLE. OK. I just wanted to make sure because I 

keep hearing this Plan 2—I see charts; Plan 2 is this, and Plan 2 

is that. I mean is it Plan 2 or isn’t it Plan 2? 

Secretary SNOW. No, sir. 

Chairman NUSSLE. I understand you may not have a lot of specifics about—but, I mean, if you know that at least, let us make 

sure I am——

Secretary SNOW. No. The President in the State of the Union 

message—I think far from what someone suggested—did lay out a 

lot of details. The details went to the nature of the problem. He defined the problem. He talked about the declining ratio of people 

paying into the system to those taking out of the system, going 

from 40 when it was first established, to 16 in 1950, to 3 today to 

2 with the baby boomers. He talked about the nature of the problem. 

He then went on to talk in quite a bit of detail about the personal retirement accounts, laid out how they would work. 

Then, in addition, he suggested that, in addition to private, to 

the personal accounts, there were some other things that need to 

be considered, and he talked about the indexing, and he talked 

about CPIs, and he talked about things that Members of Congress 

and, I think, prior presidents have talked about, to put them on the 

table to say, here are the sorts of things we need to have in the 

dialogue to put Social Security on a sustainable basis. But he did 

not embrace commission Plan 2. 
32

Chairman NUSSLE. Thank you. 

Mr. Mack for 5 minutes. 

Mr. MACK. Thank you, Mr. Chairman. 

Thank you, Mr. Snow for being here. 

Secretary SNOW. Thank you. 

Mr. MACK. It is a great opportunity for me and for my constituents, I think, to talk a little bit about the challenges that are facing 

us. I think that we are—this is a historic time as it relates to our 

seniors and also younger workers. 

The current system is broken. I hear a lot of talk about, you 

know, when is it—you know, is it broken now? Is it broken in 18 

years? Is it broken then in 2042? When is it broken? 

But it is broken, and it needs to be fixed. And I commend the 

President for taking this issue on. That is exactly what we need in 

leadership, is someone who is willing to take the tough issues on. 

It is long overdue, and I believe it needs to include all citizens from 

every walk of life. 

I know that this process will not be short, and I know it will not 

be easy, but I think the debate is an important one to have, and 

I think we should all agree to that. 

You know, as a parent, I do not believe that I would recommend 

to my children as they get older to buy a house that is built on a 

faulty foundation. That just would not be appropriate. It would not 

be the right thing to do. It would not be a loving thing to do as 

a parent, to recommend to your children to buy a home that is on 

a faulty foundation. 

I just would like to give you an opportunity, if you would, to talk 

to us a little bit about the benefits of taking this issue on now instead of waiting for later, as someone suggested to do—you know, 

let us wait 5, 10, 20, 30 years down the road—talk about the benefits of taking this issue on now and getting this in a sound position 

now, rather than later. 

Secretary SNOW. Congressman, thank you for that, those comments and the question and the opportunity that gives me. 

Somebody has said that you do not—as you were suggesting—

you do not wait until you are in a crisis to deal with it. You try 

and anticipate a crisis and avoid it. If you know that the girders 

in your house, as somebody said, are weak, you do not wait up till 

they fall down to fix it. You fix it before they fall down. The reason, 

the reason to deal with this now, of course, is that we have a lot 

more options available to us. It is less costly to fix it now. The 

longer we wait, the bigger the problem becomes. 

The longer we wait, the more prejudicial the outcome will be. 

The less beneficial, the more prejudicial the outcome will be to your 

children and to future generations, because by starting it now, by 

getting it under way, they will be able to use this power of 

compounding over a long lifetime of work and thus build much bigger accounts and a much better, a much better retirement. 

According to the Social Security actuary, every year we wait, the 

problem grows by about $600 billion. 

Now, even by Washington standards, that is an awful lot of 

money. To have it growing every year at that rate means that this 

$10.4 trillion present value obligation becomes larger and larger 

and larger, overwhelmingly large. 
33

What we are talking about here is the fiscal future of the United 

States, and the fiscal and the retirement future of future generations. That is what this issue is about. The sooner we get about it, 

the more we fulfill our obligations, I think, as public servants to 

both our children, future generations and to the financial and fiscal 

well-being of our country. 

Mr. MACK. Thank you, and what was that number again, $600 

billion and what every year? 

Secretary SNOW. Billion, rising, the 10.4 is rising, according to 

the Social Security actuary. These numbers we cite are not our 

numbers; sometimes people say, ‘‘those are your numbers, they are 

not our numbers.’’ we are using the numbers that come from the 

actuary of the Social Security Administration, a nonpartisan actuary. 

Mr. COOPER. Thank you very much. 

Chairman NUSSLE. Mr. Cooper, for 5 minutes. 

Mr. COOPER. Thank you, Mr. Chairman. 

Mr. Secretary, on page 149 of the December 2001 Presidential 

Commission on Social Security Reform, they talk about the disability program under Social Security. Many of the comments of my 

colleagues have talked about the retirement program for Social Security. 

Secretary SNOW. Right. 

Mr. COOPER. But it is well-known, or should be to everyone, that 

Social Security really has three benefits: The retirement plan, the 

survivors benefit, and the disability benefit. 

Now this commission in 2001 did a lot of great work. But I believe this is accurate to say that, regarding disability, they were 

unable to come to a conclusion. They said, in fact, that the benefit 

was a little bit too complicated for them to deal with. 

So I would like to ask you today, since the administration is 

planning on changing one of its most popular and successful programs in American history, I would like to ask you about that disability element. 

If a young person or middle-aged person or older person wanted 

to go out on the marketplace today, could they buy a benefit, a disability benefit, like the one in Social Security? Could they buy such 

a benefit from a private company? If so, what would the premium 

be? 

Secretary SNOW. I think disability benefits are available in the 

open market. It would depend an awful lot on whether you are a 

violin player, a major league baseball player or you are climbing 

trees or working off 100-story buildings in New York City. 

So it is a little hard to answer the question in the abstract without knowing the details of the individual. 

Mr. COOPER. Well, let me get more specific. 

Since you are part of an administration proposing this fundamental change for all Americans, what is the valuation you would 

put today on the benefit that is available under Social Security disability? What is that worth actuarially? 

Secretary SNOW. We will see if we have a number. I have not 

seen the actuary’s valuation of the disability benefits implicit in the 

Social Security system. 
34

But what the President has said—and maybe this cuts to the 

chase—what the President has said is, he wants to sustain, protect, 

secure, make safe the disability benefits. 

Mr. COOPER. But all the estimates that we have seen involve outyear cuts and benefits, not sustain those benefits, so I think it is 

crucial for the administration, if they want to change the system, 

to know the value of what they are changing. It is my understanding—and I do not have the power that a Secretary of the 

Treasury does—it is my understanding that a disability benefit of 

this type is unavailable from any commercial source in the world 

today. 

Now, perhaps I am mistaken in that, and perhaps you can find 

a seller of disability insurance that is as good or better than Social 

Security is. I would love to have that information. So if you could 

supply that. 

Secretary SNOW. We will. I will check on that, and I will check 

on the actuary’s rendering of the valuation of disabilities as well. 

Mr. COOPER. But let me express some concern about your preliminary answer though. You said, if you were to buy a disability 

today, it might depend on if you were a violinist, had some other 

job or worked on 100-story buildings. 

But one of the great benefits of Social Security is it does not matter what your job is as long as you pay into the system. It protects 

everybody equally. 

Because it is hard to predict, especially in this modern life, what 

career you are going to have. It is certainly hard to predict your 

health situation. You were unable to attend a meeting last week 

because of your health, and that was unexpected. 

So the value of that disability benefit has to be valued before the 

administration takes liberties with it. 

Let me ask another question. 

Secretary SNOW. I agree with you. Disability is an important, 

critically important part of Social Security, and we want to sustain 

the benefits of Social Security. 

Mr. COOPER. I see your brain trust behind you. Do any of them 

have any idea what the current value of the disability is? 

Brain trust? 

Chairman NUSSLE. Well, this is—the gentleman will suspend. 

The Secretary has been asked to testify. If he would like to refer 

to them for an answer, otherwise he has offered to give you that 

answer in the future. 

So we will conduct the hearing here. 

Thank you. 

Mr. Cooper is recognized for the balance of his time. 

Mr. COOPER. Thank you, Mr. Chairman. 

Another fundamental area to ask. It is one thing to take the existing Social Security pie and reslice that, and some folks may advocate partial privatization of the system. Others may not. 

But basically, you are just reslicing the same pie. What is the administration proposing to actually grow the pie to increase the 

amount of money that average Americans are able to save every 

year? Today, we have many wonderful ways of doing that—IRAs; 

401(k)s; SEPs; other good savings programs; but many Americans 
35

are not fully utilizing those savings vehicles. What can we do to 

grow the savings rate in this country? 

Secretary SNOW. Probably the single most important thing you 

can do to grow the savings rate in this country and thus help people have secureretirements is to adopt the President’s personal savings account as a part of fixing Social Security. 

Mr. COOPER. Mr. Secretary. 

Secretary SNOW. That is real savings, that is genuine savings. 

Mr. COOPER. No. 

Mr. Secretary, under the President’s proposal he would take up 

to 4 percent of what is being paid into the current system. He is 

not suggesting a plan that would really boost savings and additional vehicles on top of the amount that would be allocated to Social Security. He is just talking about reshuffling that. 

Secretary SNOW. In fact he is, Congressman, in fact, in the budget, you will see a section on lifetime savings accounts, retirement 

savings accounts, employer savings accounts for employees. No, we 

recognize—as I responded earlier in—on the current account question—we need to encourage more savings in the United States. The 

budget reflects the need to do that. 

But I would say that, in addition to all the things in the budget, 

the personal retirement accounts that the President is proposing 

are one other important way, because people will then, say, accumulate, accumulate a nest egg through power of compounding, 

have more at the end than they otherwise would have; by far, earn 

rates of return far higher than they could secure under the Social 

Security system. 

Mr. COOPER. You say that as if it were a guarantee. 

Chairman NUSSLE. The gentleman’s time has expired. 

Mr. Hensarling for 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Mr. Secretary, I want to start out thanking you and the President. As the father of two in diapers who knows a whole lot more 

about Barney and Big Bird than Social Security, I cannot tell you 

how much it warms my heart that somebody is looking out for the 

next generation and not the next election. 

There was an old advertising campaign many, many years ago by 

a company, I believe, called AAMCO Transmissions. The tag line 

was: You can pay me now or you can pay me later. I think the idea 

was that, if you had maintained your transmission and spent a 

couple of hundred dollars today, the thing would not completely go 

bust on you so that you would have to pay $2,000 later and replace 

that transmission. 

I am sitting here looking—I am jumping the gun a little bit. But 

I have a GAO report here. I want to make sure we are all focused 

on this figure. If I am reading it correctly, our unfunded obligation 

to Social Security is $10.4 trillion. We were getting into a little bit 

of discussion of what an administration plan might cost. I have 

seen other plans that have transition financing, perhaps $1 trillion, 

a very large sum of money; but last I looked, a whole lot smaller 

than $10.4 trillion. So, ultimately, to save Social Security, we will 

be saving not only Social Security, but we will be saving taxpayers 

money. 
36

Secretary SNOW. Well, absolutely, Congressman. That is a critical point here. One way to look at this is $10.4 trillion obligation out there, and on a present value basis, you might spend $2 trillion to defease it. 

What sensible business person would not spend $2 to get $10? That 

is the reality of what we are doing here. We are defeasing. We are 

removing a huge overhang liability on the balance sheet of the 

United States. And in the process we are also creating greater 

prosperity for future generations. 

Mr. HENSARLING. Well, if I could ask you, and my second question here is we have heard a lot of talk of massive borrowing, how 

that could impact markets in order to save Social Security. If I 

have done my homework right, over the last 10 years, we as Congress have grown the size of the Government at an average of 4.5 

percent a year, which is roughly twice the rate of inflation, and at 

least 50 percent greater than the family budget is measured by median worker income. 

I want to congratulate you and the President again, and the administration for submitting a fiscally responsible budget that will 

help save the family budget from the Federal budget. 

But my question is this: If we could just simply institute some 

fiscal discipline in this institution, and say we grew Government 

somewhere in the range of 3 to 3.5 percent a year instead of our 

traditional pattern of 4.5 percent a year over the last 10 years, and 

if we managed to save the remaining Social Security surpluses, 

wouldn’t that take us a long way toward coming up with the transition financing to save Social Security? 

Secretary SNOW. Well, certainly, if we could hold spending to the 

sorts of numbers we are talking about and sustain the sort of 

growth in the economy that we have got that is producing increases 

in Government receipts at well above the growth levels you are 

talking about on spending, you would be quickly getting the finances of the United States into strong and good shape. Absolutely. 

Mr. HENSARLING. Thank you. My next question. I don’t have the 

chart at my fingertips, but I have seen a chart from GAO before 

that has persuaded me that my grandparents, who were born at 

roughly the last turn of the century, received roughly an 11 to 12 

percent rate of return on their Social Security. My parents, who 

were born in the late 1920s, early 1930s, apparently are receiving 

a roughly 7 percent rate of return on their Social Security. And it 

is an important part of their retirement. I believe that I am going 

to receive somewhere in the neighborhood of maybe a 2.5 percent 

rate of return on my Social Security. My daughter, who is almost 

three, and my son who is 16 months old, I believe could actually 

see a negative rate of return. 

I guess two questions. One, is that possible? And, if so, what has 

happened to the security of Social Security if we do that to future 

generations? 

Secretary SNOW. Well, your numbers are right in the ballpark. 

Early generation did very well. Of course, some of them didn’t pay 

in very long and had long lives, retirement lives, and collected for 

a long time. This is all really a matter of basic arithmetic, and the 

arithmetic is compelling. We have gone from having many, many 

people working and paying for every retiree to having fewer and 
37

fewer, and we are facing now, with the baby boomer retirees coming on stream, having only two people paying in for every retiree. 

Now, a pay-as-you-go system—and this is a pay as you go system—works real well when you have got, you know, when you talk 

about your grandparents there were 50 people paying in for every 

retiree. And then, you know, back 50 years ago there were 16. 

Today there are 3. We are going to 2. The system just doesn’t hold 

together. It is a matter of basic arithmetic. And the rates of return 

of future generations will clearly be negative on the path we are 

on. 

Chairman NUSSLE. Mr. Secretary, it is my understanding you 

have to be walking out the door at 1:00 p.m., and we are told that 

we are going to have four, maybe five procedural votes on the floor 

coming up here at any moment. So what I am going to do is to keep 

going around to talk to the Secretary here. But when the votes are 

called, what I will do is I will dismiss the first panel so that you 

can make your appointment, and we will take the second panel. 

What we will do with members, unless there is objection, I would 

like to continue down the row in calling people so that they can 

continue. 

We have a lot of members who want to participate in this, and 

I don’t want to start all over with the senior members and have 

to work back to you. You have been very patient, our new members 

in particular. So I would like to continue that, unless I hear a 

strong objection. So, without objection, we will do that. 

Mr. Davis for 5 minutes. 

Mr. DAVIS. Thank you, Mr. Chairman, and Mr. Secretary. 

Let me if I can go back to a line of questions that the ranking 

member on this committee pursued with you earlier. The two of 

you talked about the relative difference in the size of extending the 

President’s tax cuts and of the actual amount of the Social Security 

shortfall. And your answer was a fairly familiar one. You were saying that if we walk away from extending the tax cuts, that it will 

cause us economic damage. So I want to test that proposition a little bit. 

You agree that we had a pretty robust rate of economic growth 

from the 1990s, I would assume. Wouldn’t you? 

Secretary SNOW. Yeah, sure. 

Mr. DAVIS. I think your are off the microphone, but I heard you 

say, yeah, sure. And I agree with you on that. 

Secretary SNOW. We had some good growth rates. Unfortunately, 

they ended in a bad way. 

Mr. DAVIS. Well, let me ask you about this then. Right now, the 

combined level of corporate and income tax as opposed to GDP and 

the combined rate of corporate and income taxes added together is 

as I understand it a very low share of the GDP today—a very high 

share of the GDP today. The combined rate of corporate and income is today a very low share of our GDP relatively speaking. 

Secretary SNOW. It is. We have hit—for a variety of reasons it 

is low, but it is now rising and returning over the course of this 

budget to its historical level of roughly 18 percent. 

Mr. DAVIS. But just to fix the level today, it is actually the lowest 

combined level since 1942, or since the middle of World War II. Is 

that not correct? 
38

Secretary SNOW. As a percent of GDP, I think it is about 16 percent, which is low by historical standards, yes. 

Mr. DAVIS. Now, in the 1990s, what was the relative rate of income and corporate taxation of GDP? 

Secretary SNOW. Well, by the end of the 1990s, given the stock 

market and the technology bubble, while it lasted, which produced 

lots of option return and capital gains returns, the tax returns 

went up to about 21.6 percent of GDP. 

Mr. DAVIS. And, again, despite the 21 percent of GDP, we still 

had a high rate of growth during that time. The reason I make that 

point is that—and I think if, we went back, Mr. Secretary, you look 

at 1960s, we had a fairly high rate of growth then. Did we not? 

Secretary SNOW. Yeah, we had a pretty good growth rate. 

Mr. DAVIS. We also had a very high level of taxation in the 

1960s. Didn’t we? 

Secretary SNOW. Well, thanks to President Kennedy, we got 

them lower. 

Mr. DAVIS. But we still had a relatively high rate of taxation 

combining corporation and income. In fact, the rate of the 1960s 

was once again higher than the rate today. In fact, considerably 

higher than the rate today. Isn’t it? 

Secretary SNOW. As a percent of GDP. 

Mr. DAVIS. Percent of GDP. So, once again, we have the two 

strongest growth periods since World War II, the 1960s and the 

1990s, where we had very high levels of taxation, far higher than 

the levels of taxation we have today as opposed to GDP. And it is 

clear that was not enough to check the economic growth. That is 

an important point, because I think that significantly undermines 

a good deal of the administration’s argument, frankly. 

I think all of us would have the perspective, Mr. Secretary, that 

if we were trading away our economic future, if we were walking 

away from a recovery if we didn’t extend the tax cut, particularly 

just the top 1 percent, I think a lot of us on this side of the aisle 

would buy into your arguments. But the problem is, you know, 

some of us in the room still believe that facts are the best evidence 

and not just faith. And the facts tell us that the two biggest periods 

of growth, the 1990s and the 1960s, we had very high levels of taxation, and it apparently did nothing to slow our economy. 

Let me move in the limited time I have to another round of questions or to another topic. As I understand the Social Security Administration, they are predicting that the slow, the shortfall of the 

Social Security between now and 2042, which troubles all of us, is 

apparently based on a growth rate projection of 1.8 percent. Do you 

agree or disagree with that? 

Secretary SNOW. No, that is right. 

Mr. DAVIS. Now, 1.8 percent growth over the next 37 years, can 

you think of any period since the war where we have had over the 

course of one decade a growth rate of 1.8 percent? 

Secretary SNOW. Yes. 

Mr. DAVIS. What would that be? 

Secretary SNOW. That number which comes from the actuary, as 

I remember what the actuary said, the 1.8 is basically the productivity number for the 40 or 45 year period. 
39

Mr. DAVIS. But is there any comparable period, Mr. Secretary, 

where we have had—because that is a very anemic growth. 

Secretary SNOW. That is it, that is the 45-year period. 

Mr. DAVIS. But is there any period since 1945—and I am thinking in terms of decades, where we have had growth that has been 

that anemic? And the proposition that I make, if the Chair will indulge me just 15 seconds to sum up. If we had that kind of a 

growth rate over the next several years, Mr. Secretary, over the 30-

some years I should say, it strikes me that it would mean that our 

economy was in dire straits. And of course, if our economy were in 

dire straits, it follows for some of us that the stock market would 

probably be underperforming. So it is very curious that the administration that is always optimistic about growth is basing its Social 

Security program on a growth rate line of 1.8 percent, far worse 

than we have had in our recent experiences, and incredibly willing 

to gamble our seniors on Social Security being invested in the stock 

market. Can you respond to that? 

Secretary SNOW. Oh, sure. I would be delighted to, because I 

think there is a huge misconception implicit in what you just said. 

The stock market correlates with productivity. There is a recent 

study by a professor, I think at the University of California who 

looks at over a 40, 50-year period the stock market and what it correlates with. And the stock market best correlates over any long 

period of time with productivity per capita. 

What is happening for the—and the actuary uses in that 1.8, I 

think 1.6 of that 1.8 which is GDP, 1.6 of the 1.8 is the productivity. The point two is population. Now of course the population 

growth of the United States is slowing, but the productivity growth 

according to the actuary, which is based on the prior 45 years, is 

the same. 

Mr. DAVIS. But 1.8 is still a very slow growth rate. 

Secretary SNOW. No, it not. 1.8 is the historic 45-year average 

productivity growth rate in the United States economy which has 

produced the returns to the stock market we have seen over that 

period. So the correlation is one to one. 

Chairman NUSSLE. Mr. Simpson for 5 minutes. 

Mr. SIMPSON. Thank you, Mr. Chairman. 

And I appreciate you being here today, Mr. Secretary, and taking 

the time to discuss this issue with us. First of all, in relation to 

what Mr. Davis said, it was interesting as I listened to that. I was 

over in Ireland earlier this year, talked to some of the officials over 

there, several of them. And they told me that about 15 years ago 

Ireland had the lowest per capita income in the European Union. 

They currently have the second highest per capita income in the 

EU next to Luxembourg. And I said, what did you do to change 

that outcome? And they said, we sat down and made some really 

tough decisions, and that is that we were taxing our people too 

much, that we were—that it would cost too much to produce in this 

country, and we made some tough choices. And we went through 

some very difficult times, but it has changed our economy around, 

and essentially every major corporation in the country now has a—

in the world, has a company located in Ireland. 

So, and I think you are on the right track. And I appreciate—

you know, this is something we have known ever since Adam 
40

Smith, but we haven’t always followed it. But I appreciate the 

track that you are on and what you are doing for the economy. 

Secretary SNOW. I visited there, myself, sometime back, and got 

a first-hand conversation with the people who created the so-called 

Celtic miracle, and they talked about where they were two decades 

back and the transformation that has occurred, largely because 

they embraced Adam Smith and market practices and low tax 

rates. 

Mr. SIMPSON. Right. I appreciate that. One of the things that 

concerns me is the rhetoric that is surrounding all this proposal, 

and in fact the American people out there are very confused about 

whether there actually is a problem with Social Security or not. Because when we start talking about the actual problem, we start 

talking about our favored plan to solve that problem and it gets 

mixed up with it, or the cause of the problem, or whatever. What 

is the administration doing? I appreciate the fact that the President has been out on the stump the last while, and ultimately we 

respond to voters. 

What are we doing to try to educate the American public to the 

nature of the problem? Because, to me, we have got to have a discussion with the American people about their retirement system, 

and also not only that it is their system but that it is a—as was 

mentioned by the chairman earlier, it is not their total retirement 

system, it is supposed to be supplemental retirement, and they 

need to also be saving for retirement in other areas. 

Too many people have depended on Social Security for their total 

retirement fund and figured, well, the Government will take care 

of that. I don’t have to worry about retirement anymore. And somehow we have got to change that attitude. But we have to do, I 

think, a good job somehow of engaging the American people in this 

discussion. And unfortunately what happens right now is you have 

got the American senior citizens who are very engaged in this subject who the President says this won’t affect; and I find it interesting that it is 55 and older that are not going to have their benefits affected and then we talk about the younger people. 

I am 54, I am worried. But we have to, the American senior citizen is engaged because they obviously depend on Social Security. 

The younger generation is not real engaged in this discussion because, just like I am sure you and the rest of us, we didn’t care 

about Social Security when we were first entering the workforce, 

but they had better start caring about it relatively soon. 

How are we going to engage them? 

Secretary SNOW. Well, Congressman, you put your finger on a 

critical issue here. I think the President knows he has got an obligation to lead this, to get out and use the bully pulpit and talk to 

the American people and really engage them on the problem and 

be straight with them, be honest with them, tell them the facts and 

get the facts out. You know, America is a Nation of problem solvers, we are a Nation of fixers, but we first have to understand what 

the problem is. That is why this hearing today, the other hearings 

are so important to get the facts out. And I am glad to hear people 

from both sides of the aisle agreeing that there is a problem, because that is where the solution starts, with identifying the problem. 
41

This is only going to be addressed when the American people say 

there is a problem and we want answers. And the President knows 

he has to take that message to the American people. He has asked 

us in the cabinet to do it, but he knows he has to lead that effort. 

Mr. SIMPSON. Do you think there is broad consensus about what 

the problem exactly is? 

Secretary SNOW. I think there is a growing understanding of 

what the problem is, the demographics which are—this is all about 

arithmetic, it is not about ideology. It is simple, straightforward 

arithmetic. Nobody can repeal the laws of arithmetic. And the laws 

of arithmetic are dooming Social Security on its present course. 

And the sooner we act to fix it, the better the chances. I think that 

more and more people—I wouldn’t say it is fully understood by any 

means, but more and more people are beginning to get a sense of 

the dimensions of the problem and the need to act on it, and I 

think they are going to be asking their elected representatives 

around the country, what are you doing? 

Mr. SIMPSON. Well, I hope so. I have spent the last 2 years actually talking about the problem we have with entitlement spending 

and how that is driving really the budget deficit and a few other 

things, and Social Security particularly. And I have found that any 

number of people have come up afterwards and said I appreciate 

the fact that you are talking about that because I really didn’t understand it before. So I appreciate the fact that you are engaged 

in this and the President is engaged in this. It is something that 

would be so easy for us to put off for another 10 years. 

Chairman NUSSLE. I am going to call on Mr. Allen for 5 minutes, 

a quick 5 minutes, and then Mr. Bradley for 5 minutes, and then 

we will wrap up. We have as I understand a couple votes on the 

floor. Mr. Allen for 5 minutes. 

Mr. ALLEN. Thank you, Mr. Chairman. 

And thank you, Mr. Secretary, for being here. If I were trying to 

summarize your testimony so far, I would say that you are saying 

that mathematics is not important. There is basic math involved 

here. You don’t know the details of the President’s proposal, but 

you certainly know it includes private accounts. You don’t know 

how much money will have to be borrowed after the first 10 years, 

but you do know it will save taxpayers money and it will be better, 

that younger people will be better off. 

What I take from this is the conclusion has been arrived at before the mathematics has been done. We are not talking about 

model two, but we are talking about something close to model two. 

We don’t know all the details, we don’t know how many trillions 

of dollars will be borrowed. But just to look at one analysis based 

on Social Security Administration economic assumptions—I would 

like to have chart 4 put up on the screen, and I will come back to 

that in a moment. I mean, just to take one—we will wait for that 

to come up. 

Now, you have said that you know that the plan will take care 

of the long-term Social Security liability, but you don’t know how 

much borrowing the plan requires after the first 10 years. It is 

those kinds of conflicts which makes some of us really skeptical. 

The second point I would say is that what I hear you saying is 

that deficits really—I think you are saying that deficits really mat-
42

ter between now and 2009. And we have to knock down the deficit 

from that estimated inflated, I would argue, level of $521 billion. 

But after 2009, it is OK to borrow trillions and trillions of dollars. 

As you may remember, your predecessor, Paul O’Neill had a little 

disagreement with the President over the 2003 tax cuts. And Vice 

President Cheney said to Mr. O’Neill that Ronald Reagan proved 

that deficits don’t matter. But Mr. O’Neill’s advice to the President 

was, if you pass the 2003 tax cuts, if you do that, you will not be 

able to do anything else that you want to do including, specifically 

he was concerned about privatizing Social Security because he is 

a believer in privatization. 

Yesterday, Josh Bolten was here and said that it is all OK, we 

don’t have exact numbers but it is OK. This new idea of borrowing 

to save instead of borrowing to spend, he checked it out with some 

Wall Street analysts; you are telling us today you have checked it 

out with some Wall Street analysts, and also with Treasury analysts, it is OK, it is fine. Of course, someone on Wall Street is going 

to make billions of dollars in all probability from this plan. But 

thinking about my friends from the other side of the aisle, when 

it comes to estimates from this administration—today’s Washington Post says: Medicare drug benefit may cost $1.2 trillion. 

Now, we have been through here before with estimates from the 

administration, and, frankly, particularly Republicans were sandbagged when the administration refused to give them—or us for 

that matter—the true estimated cost of the administration when it 

came to the cost of the Medicare benefit, which is exploding in cost. 

The American people are going to need more than someone standing up and saying Wall Street analysts say this is OK. Aren’t they? 

Secretary SNOW. Well, I hope you don’t think that is all we are 

saying, Congressman. 

Mr. ALLEN. It is all I have heard. It is all I have heard about 

the source of the confidence as to the fact that borrowing $5 or $6 

trillion in the first 20 years is not going to suck money out of the 

private capital markets. It seems to me it is inevitably going to 

suck money out of the private capital markets, drive up interest 

rates, and slow down the economy. 

Secretary SNOW. Remember what is happening here. Remember 

what is happening. The structure of what is happening is essential 

to keep in mind. People will be taking money that otherwise would 

go into Social Security. Right? And they will be putting it into 

these private accounts. As they remove money from Social Security, 

they also give up a future claim on Social Security. 

Mr. ALLEN. Their benefits will be cut. 

Secretary SNOW. They give up, the liability of the United States 

goes down by the amount of the money that is diverted. So from 

the Social Security point of view, this is not a cost to the Social Security system. But from the point of view of the balance sheet of 

the United States and the American economy, the money that is 

diverted is put into savings. It helps the savings. Net savings is not 

adversely affected. In fact, I think it would be positively affected. 

Chairman NUSSLE. Mr. Bradley for 5 minutes. 

Mr. BRADLEY. Thank you very much, Mr. Chairman. 

Mr. Snow, just two quick questions, please, if I might. My home 

State which is New Hampshire ranks second highest in the per-
43

centage of the population between the ages of 34 and 54. Could you 

just outline for me what the administration’s thinking is as to how 

the personal accounts proposed are going to be structured to ensure 

that these middle-aged workers—and I guess with my gray hair I 

am getting almost beyond that—who don’t have the same amount 

of time as younger workers, for instance Mr. Hensarling’s children, 

will be able to build up their portfolios? That is question number 

one. 

And number two. There was a recent article last week in The 

Wall Street Journal about other country’s experiences with personal accounts. Could you just touch on some of the issues that 

have arisen with regard to other countries and how you are incorporating that into your thinking? 

Secretary SNOW. Right. Well, on the 34 to 54 age cohorts, any reduction in benefits we have said would have to be gradual so that 

they wouldn’t face a sharp dropoff in their benefits and they would 

be able to help offset those benefits reductions with the personal 

accounts. One reason to start this soon is that that group of people 

will then have more time. Every year we put it off, they have one 

less year to get the virtue of compounding. 

I will be glad to share with you some research the Treasury has 

done on the variety of countries who have put in place approaches 

that are called personal accounts. They vary a lot and therefore it 

is hard to come up with one overall conclusion. The article that was 

in the paper that got some prominent feature on Chile, I think sort 

of badly distorted the reality of what has happened in Chile and 

did not reflect the real facts. But I will be happy to send you our 

analysis of—and many, many, many countries. The United States 

is in a way not in the forefront but one of the later countries to 

come to the use of personal accounts, the market investments to 

help augment retirement. But I will be glad to do that. 

Mr. BRADLEY. Thank you. And I will yield my time. 

Ms. MCKINNEY. Mr. Chairman, inasmuch as I haven’t had an opportunity to address the Secretary, I would like to ask unanimous 

consent that I have a statement submitted for the record. 

Chairman NUSSLE. The gentlelady is—and would the gentlelady 

like to ask? I have got time for one question. You will get the last 

word. If you have one question you would like to ask? But certainly 

without objection, your statement will be part of the record, as is 

true for all members, without objection. 

Ms. MCKINNEY. Well, thank you very much, Mr. Chairman, for 

the indulgence. 

I have a series of newspaper articles about the Senator Frist political fund losing, as they say, big time in the stock market. The 

Tennessean newspaper, the Washington Post reported that after 

big losses in the stock market, U.S. Senate Majority Leader Bill 

Frist campaign committee was short of money and couldn’t make 

its loan. 

Now, Mr. Secretary, you are suggesting that the guaranteed retirement benefit in Social Security be replaced with a system that 

could yield for the average participant a result like Senator Frist. 

My question is, what happens then to the person whose investment 

goes bust? 
44

Secretary SNOW. Congresswoman, thank you for that question. I 

think the President in the State of the Union message made it 

clear that these would be safe investment vehicles. This wouldn’t 

be investments in individual stocks, it wouldn’t be investments in 

options or hedge funds or trade or derivatives, anything like that. 

It is very important that these funds be deployed in a way that is 

safe and secure, and the investment vehicle that would be designed 

to accomplish that is very much like the investment vehicle available to you as a Government public official, the so-called Thrift 

Savings Plan. This would have some other features to it though. 

Ms. MCKINNEY. But what I have is in addition, the Thrift Savings Plan is in addition to the Social Security. So what you are proposing is instead of. 

Secretary SNOW. But you are asking me the nature of the investment opportunities, and the nature of the investment opportunities 

would be the same sort of safe and secure investment opportunities 

that you have through your savings plan. 

Ms. MCKINNEY. But the benefit is—the guaranteed benefit is 

definitely not guaranteed under your plan. 

Secretary SNOW. No. This is an opportunity for people to invest 

in bonds and stocks; and there is no guarantee on bonds and stocks 

except that over time they tend to do very, very, very well relative 

to the return you would get in the——

Ms. MCKINNEY. So the average taxpayer’s personal accounts 

could end up like Senator Frist’s; it could go bust. 

Secretary SNOW. That is extraordinarily unlikely. 

Ms. MCKINNEY. Thank you, Mr. Chairman. 

Chairman NUSSLE. I thank the gentlelady. 

Mr. Secretary, thank you for indulging us your time today. I will 

dismiss this panel. And when we resume after the series of votes 

we will resume with panel two. The committee stands in recess. 

[Recess.] 

We will resume the Budget Committee hearing. We are pleased 

to welcome our second panel to the witness table. We have before 

us today the two very distinguished public servants, who in their 

own right, deserve their own panel, to be quite honest. Typically 

we ask the two of them to give us their information singularly. We 

are asking them to do it today together because, quite frankly, 

have both of you have given us some ideas and sounded the alarms 

and suggested that we need to tackle these problems in many different ways. 

So I think, if there is any time to put the two of you together 

and, as they say, put your heads together, we have got two of the 

best thinkers that provide information to our Congress on our 

panel. We are pleased to have both of you here today. 

STATEMENTS OF HON. DAVID M. WALKER, COMPTROLLER 

GENERAL, GOVERNMENT ACCOUNTABILITY OFFICE; AND 

DOUGLAS J. HOLTZ-EAKIN, Ph.D., DIRECTOR, CONGRESSIONAL BUDGET OFFICE 

Chairman NUSSLE. By a coin flip and going in alphabetical order, 

we will call on Douglas Holtz-Eakin. Or you would like to go first? 

We will do it that way. We will go in reverse alphabetical order 

and call on David Walker, the Comptroller General of the Govern-
45

ment Accountability Office. Welcome, General, and we are pleased 

to receive your testimony. Your entire testimony will be made a 

part of the record. 

STATEMENT OF HON. DAVID M. WALKER 

Mr. WALKER. Thank you, Mr. Chairman. It is good to be back before the House Budget Committee, this time to speak about our 

Nation’s Social Security program. I appreciate you putting my entire statement in the record. I will summarize some key points. 

I think it is important for the members to know at the outset 

that, in addition to working on this issue at GAO in my capacity 

as Comptroller General of the United States, I was also a trustee 

of Social Security and Medicare from 1990 to 1995, so I am very 

deep on these issues and care about them very much. 

As I have testified on many times before Congress, Mr. Chairman, the Social Security system faces both a solvency and a sustainability challenge over the longer term. And while the Social Security program does not face an immediate crisis, it does have a 

$3.7 trillion gap in current dollar terms between promised and 

funded benefits. This gap is growing daily; and given this and other 

major fiscal challenges that face the country, it would be prudent 

to act sooner than later to reform the Social Security program. 

Failure to take steps to address our large and structural long-range 

fiscal imbalance which is driven largely by projected increases in 

Medicare, Medicaid, and Social Security spending, will ultimately 

have significant adverse effects on our country, children, and 

grandchildren. If I can, let me make a few key points. 

In looking at Social Security, several key points are important. 

First, solving Social Security’s long-term financing problem is more 

important and complex than merely making the numbers add up. 

It is important to keep in mind that Social Security is not only a 

program for retirement income, but also a program for disabled 

workers and for survivors of deceased workers. It is important to 

keep all those dimensions in mind. 

Secondly, and the first chart (chart 1). Social Security reform is 

part of a broader fiscal economic challenge. We need to keep this 

in context with regard to the larger challenges that we face. This 

chart shows one scenario in GAO’s long-range budget simulations. 

This one is based on CBO’s baseline projection; you can see that 

we face large and growing structural deficits in the out years due 

largely to known demographic trends and rising health care costs. 

If you look at the simulation, you have to keep in mind three 

things. First, it is bound by the constraints imposed on CBO’s 10-

year baseline. Those relevant to this simulation are, number one, 

that no new laws will be passed. Number two, that discretionary 

spending will grow by inflation. And, number three, that all tax 

cuts will sunset as scheduled. 

So even under those assumptions you can see that we have a 

problem which increases with time, the white line being revenue as 

a percentage of GDP, the bar being spending as a percentage of 

GDP. 

The next one (chart 2), however, is much more sobering and dramatic. The only two differences between this one and the next one 

are number one, discretionary spending grows by the rate of the 
46

economy throughout the period. And, number two, all tax cuts are 

made permanent. 

Under the second scenario, the only thing that the Federal Government can do in the year 2040 or slightly beyond is pay interest 

on massive debt. That is obviously not an acceptable outcome. 

Next, please (chart 3). 

It is important to keep in mind that you can’t just look at trust 

fund solvency alone. After all, the trust funds are nothing more 

than an accounting device. They are not true fiduciary trust funds. 

If you look on the financial statements of the U.S. Government, you 

will not find a liability of the U.S. Government owing to the trust 

funds. Further, the trust fund does not tell us whether or not the 

program is sustainable; it doesn’t tell us how much of a burden the 

program represents on future budgets or on the economy. So it is 

important to keep in mind cash flows because cash is of critical importance. We have already turned a negative cash flow in Medicare 

Part A. That happened last year in 2004. We are projected to turn 

a negative cash flow in Social Security/OASDI combined in 2018, 

and it will get progressively worse every year thereafter. 

I think it is also important to note that acting sooner rather than 

later will help to ease the difficulty in achieving reforms. Not only 

will you not have to make dramatic changes, but people have more 

time to adjust to whatever changes that you make. 

Just as importantly, by acting sooner, we can send a positive signal to the markets that will enhance our credibility that the Government is willing to act to deal with known long-range challenges 

before they reach crisis proportions. Furthermore, it would hopefully give elected officials the confidence necessary to take on truly 

more difficult challenges. Because Medicare is eight times worse 

than Social Security. Candidly, Medicare is going to be a lot tougher to solve. It is going to take many years, and you are going to 

have to do it in installments. 

Last, is it is very important to keep in mind that any Social Security reform proposals need to be evaluated as packages. There 

are going to be pros and cons of every Social Security reform proposal. It is also important to keep in mind that not all promised 

benefits are funded. And, therefore, it is not fair to compare reform 

proposals solely to promised benefits. They must be compared to 

both funded benefits and promised benefits to understand the relative trade-offs. And, in doing that, I would respectfully suggest to 

the committee that you consider the work that GAO has done for 

the Congress in this regard. We basically recommend analyzing Social Security reform proposals as a package against those two 

benchmarks and based on three criteria: Whether and to what extent the proposal will achieve sustainable solvency, not just over 75 

years but for the long term; whether or not it meets the standard 

of adequacy and equity; and, whether or not it can be implemented 

and administered in a feasible and a cost effective manner. 

In summary, Mr. Chairman, Social Security may not be in a crisis, but it has a large and growing financing problem. It would be 

prudent to act sooner rather than later because, candidly, Social 

Security should be easy lifting as compared to the other work that 

has to be done. The Congress has an opportunity to exceed the expectations of every generation of Americans with or without indi-
47

vidual accounts. I realize that is an issue that is going to be debated. In any event, individual accounts would have to be part of 

a comprehensive reform package in order to achieve the objectives 

that I outlined earlier. But with or without individual accounts you 

can exceed the expectations of every generation. I hope that the 

Congress will act. Thank you, Mr. Chairman. 

[The prepared statement of David M. Walker follows:] 

PREPARED STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL, U.S. 

GOVERNMENT ACCOUNTABILITY OFFICE

Mr. Chairman and Members of the Committee, I appreciate the opportunity to 

talk with you about our nation’s Social Security program1 and how to address the 

challenges presented in ensuring the long-term viability of this important social insurance system. Social Security provides a foundation of retirement income for millions of Americans and has prevented many former workers and their families from 

living their retirement years in poverty. Fixing Social Security is about more than 

finances. It is also about maintaining an adequate safety net for American workers 

against loss of income from retirement, disability, or death. 

As I have said in congressional testimonies over the past several years, the Social 

Security system faces both solvency and sustainability challenges in the longer 

term.2 While the Social Security program does not face an immediate crisis, it does 

have a $3.7 trillion gap between promised and funded benefits in current dollar 

terms. This gap is growing daily and, given this and other major fiscal challenges 

including expected growth in Federal health spending, it would be prudent to act 

sooner rather than later to reform the Social Security program. Failure to take steps 

to address our large and structural long-range fiscal imbalance, which is driven in 

large part by projected increases in Medicare, Medicaid, and Social Security spending, will ultimately have significant adverse consequences for our country, children, 

and grandchildren. 

Let me begin by highlighting a number of important points concerning the Social 

Security challenge and our broader fiscal and economic challenge. 

• Solving Social Security’s long-term financing problem is more important and 

complex than simply making the numbers add up. Social Security is an important 

and successful social insurance program that affects virtually every American family. It currently pays benefits to more than 47 million people, including retired 

workers, disabled workers, the spouses and children of retired and disabled workers, 

and the survivors of deceased workers. The number of individuals receiving benefits 

is expected to grow to almost 69 million by 2020. The program has been highly effective at reducing the incidence of poverty among the elderly, and the disability and 

survivor benefits have been critical to the financial well-being of millions of others. 

• Social Security reform is part of a broader fiscal and economic challenge. If you 

look ahead in the Federal budget, Social Security together with the rapidly growing 

health programs (Medicare and Medicaid) will dominate the Federal Government’s 

future fiscal outlook. While this hearing is not about the complexities of Medicare, 

it is important to note that Medicare presents a much greater, more complex, and 

more urgent fiscal challenge than Social Security. Medicare growth rates reflect not 

only a burgeoning beneficiary population, but also the escalation of health care costs 

at rates well exceeding general rates of inflation. Taken together, Social Security, 

Medicare, and Medicaid represent an unsustainable burden on future generations. 

Furthermore, any changes to Social Security should be considered in the context of 

the problems currently facing our nation’s private pension system. These include the 

chronically low level of coverage of the private workforce, the continued decline in 

defined benefit plans coupled with the termination of large underfunded plans by 

bankrupt firms, and the shift by employers to defined contribution plans, where 

workers face the potential for greater return but also assume greater financial risk. 

• Focusing on trust fund solvency alone is not sufficient. We need to put the program on a path toward sustainable solvency. Trust fund solvency is an important 

concept, but focusing on trust fund solvency alone can lead to a false sense of security about the overall condition of the Social Security program. After all, the Social 

Security Trust Fund is a subaccount of the Federal Government rather than a private trust fund. Its assets are not readily marketable nor are they convertible into 

cash other than through raising revenues, cutting other Government expenses, or 

increasing debt held by the public. Furthermore, the size of the trust fund does not 

tell us whether the program is sustainable—that is, whether the Government will 

have the capacity to pay future claims or what else will have to be squeezed to pay 
48

those claims. Aiming for sustainable solvency would increase the chance that future 

policymakers would not have to face these difficult questions on a recurring basis. 

Estimates of what it would take to achieve 75-year trust fund solvency understate 

the extent of the problem because the program’s financial imbalance gets worse in 

the 76th and subsequent years. 

• Acting sooner rather than later helps to ease the difficulty of change. The challenge of facing the imminent and daunting budget pressure from Medicare, Medicaid, and Social Security increases over time. Social Security will begin to constrain 

the budget long before the trust fund is exhausted in 2042. The Social Security cash 

surpluses that are now helping to finance the rest of the Government’s budgetary 

needs will begin to decline in 2008, and by 2018, the cash surpluses will turn to 

deficits. Social Security’s cash shortfall will place increasing pressure on the rest of 

the budget to raise the resources necessary to meet the program’s costs. Waiting 

until Social Security faces an immediate trust fund solvency crisis will limit the 

scope of feasible solutions and could reduce the options to only those choices that 

are the most difficult. It could also contribute to a further delay of the really tough 

decisions on Federal health programs. Acting sooner rather than later would allow 

changes to be more modest while also being phased in so that future retirees will 

have time to adjust their retirement planning. Furthermore, acting sooner rather 

than later would serve to increase our credibility with the markets and improve the 

public’s confidence in the Federal Government’s ability to deal with our significant 

long-range fiscal challenges before they reach crisis proportions. 

• Reform proposals should be evaluated as packages. The elements of any reform 

proposal interact; every package will have pluses and minuses, and no plan will satisfy everyone on all dimensions. If we focus on the pros and cons of each element 

of reform by itself, we may find it impossible to build the bridges necessary to 

achieve consensus. Analyses of reform proposals should reflect the fact that the program faces a long-term actuarial deficit and that benefit reduction and/or revenue 

increases will be necessary to restore solvency. This requires looking at proposed reforms from at least two perspectives or benchmarks—one that raises revenue to 

fund currently scheduled benefits (promised benefits) and one that adjusts benefits 

to a level supported by current tax financing (funded benefits). 

Today, the Social Security program does not face an immediate crisis, but rather 

a long-range financing problem driven by demographic trends. While the crisis is 

not immediate, the challenge is more urgent than it may appear since the program 

will experience increasing negative cash flow starting in 2018. Acting soon to address these problems reduces the likelihood that Congress will have to choose between imposing severe benefit cuts and unfairly burdening future generations with 

the program’s rising costs. Acting soon would also allow changes to be phased in 

so the individuals who are most likely to be affected, namely younger and future 

workers, will have time to adjust their retirement planning while helping to avoid 

related ‘‘expectation gaps.’’ On the other hand, failure to take remedial action will, 

in combination with other entitlement spending, lead to a situation unsustainable 

both for the Federal Government and, ultimately, the economy. 

Today we have an opportunity to address the relatively easier part of the overall 

entitlement challenge before the baby boom generation begins to retire and the challenge begins to compound. Medicare represents a much larger driver of the longterm fiscal outlook, but this does not mean that Social Security reform should be 

postponed until after it is addressed. On the contrary, it argues for moving ahead 

on Social Security soon. Unlike the case in health care, potential approaches to Social Security reform have already been articulated in various proposals in recent 

years. These approaches can serve as a starting point for deliberations. Since health 

care will be much harder to address, there is a significant danger that if we do not 

move ahead on Social Security now, we could end up reforming neither. Successful 

Social Security reform could also help build both trust and confidence and thereby 

facilitate consideration of the needed structural changes in the health care system. 

The Social Security system has required changes in the past to ensure its future 

solvency. Congress took action to address an immediate solvency crisis in 1983. 

While such an immediate crisis will not occur for many years, waiting until it is 

imminent will not be prudent. Furthermore, I believe it is possible to craft a solution that will protect Social Security benefits for the nation’s current and near-term 

retirees, while ensuring that the system will be there for future generations. I believe that it is possible to reform Social Security in a way that will assure the program’s solvency and sustainability while exceeding the expectations of all generations of Americans. 
49

SOCIAL SECURITY REFORM IS PART OF A BROADER FISCAL AND ECONOMIC CHALLENGE

In my role as lead partner on the audit of the U.S. Government’s consolidated financial statements and the de facto Chief Accountability Officer of the U.S. Government, I have become increasingly concerned about the state of our nation’s finances. 

In speeches and presentations over the past several years, I have called attention 

to our large and growing long-term fiscal challenge and the risks it poses to our nation’s future.3 Simply put, our nation’s fiscal policy is on an unsustainable course, 

and our long-term fiscal imbalance worsened significantly in 2004. GAO’s simulations—as well as those of the Congressional Budget Office (CBO) and others—show 

that over the long term we face a large and growing structural deficit due primarily 

to known demographic trends and rising health care costs. Continuing on this 

unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, 

our standard of living, and ultimately our national security. Our current path also 

will increasingly constrain our ability to address emerging and unexpected budgetary needs. 

Regardless of the assumptions used, all simulations indicate that the problem is 

too big to be solved by economic growth alone or by making modest changes to existing spending and tax policies. Nothing less than a fundamental reexamination of 

all major spending and tax policies and priorities is needed. This reexamination 

should also involve a national discussion about what Americans want from their 

Government and how much they are willing to pay for those things. This discussion 

will not be easy, but it must take place. 

In fiscal year 2004 alone, the nation’s fiscal imbalance grew dramatically, primarily due to enactment of the new Medicare prescription drug benefit, which added 

$8.1 trillion to the outstanding commitments and obligations of the U.S. Government. The near-term deficits also reflected higher defense, homeland security, and 

overall discretionary spending which exceeded growth in the economy, as well as 

revenues which have fallen below historical averages due to policy decisions and 

other economic and technical factors. 

While the nation’s long-term fiscal imbalance grew significantly, the retirement 

of the baby boom generation has come closer to becoming a reality. In fact, the cost 

implications of the baby boom generation’s retirement have already become a factor 

in CBO’s baseline projections and will only intensify as the boomers age. According 

to CBO, total Federal spending for Social Security, Medicare, and Medicaid is projected to grow by about 25 percent over the next 10 years—from 8.4 percent of gross 

domestic product (GDP) in 2004 to 10.4 percent in 2015. Given these and other factors, it is clear that the nation’s current fiscal path is unsustainable and that tough 

choices will be necessary in order to address the growing imbalance. 

There are different ways to describe the magnitude of Social Security’s long-term 

financing challenge, but they all show a need for program reform sooner rather than 

later. A case can be made for a range of different measures, as well as different time 

horizons. For instance, the shortfall can be measured in present value, as a percentage of GDP, or as a percentage of taxable payroll. The Social Security Administration (SSA) has made projections of the Social Security shortfall using different time 

horizons. (See table 1.)

While estimates vary due to different horizons, both identify the same long-term 

challenge: The Social Security system is unsustainable in the long run. Taking action soon on Social Security would not only make the necessary action less dramatic 

than if we wait but would also promote increased budgetary flexibility in the future 

and stronger economic growth. 

Although the Trustees’ 2004 intermediate estimates project that the combined Social Security Trust Funds will be solvent until 2042,4 within the next few years, Social Security spending will begin to put pressure on the rest of the Federal budget. 

(See table 2.) Under the Trustees’ 2004 intermediate estimates, Social Security’s 

cash surplus—the difference between program tax income and the costs of paying 

scheduled benefits—will begin a permanent decline in 2008. (See fig. 1.) To finance 

the same level of Federal spending as in the previous year, additional revenues and/

or increased borrowing will be needed in each subsequent year.
50

By 2018,5 Social Security’s cash income (tax revenue) is projected to fall below 

program expenses. At that time, Social Security will join Medicare’s Hospital Insurance Trust Fund, whose outlays exceeded cash revenues in 2004, as a net claimant 

on the rest of the Federal budget. The combined OASDI Trust Funds will begin 

drawing on the Treasury to cover the cash shortfall. At this point, Treasury will 

need to obtain cash for those redeemed securities either through increased taxes, 

and/or spending cuts, and/or more borrowing from the public than would have been 

the case had Social Security’s cash flow remained positive. 

Today Social Security spending exceeds Federal spending for Medicare and Medicaid, but that will change. While Social Security is expected to grow about 5.6 percent per year on average over the next 10 years, Medicare and Medicaid combined 

are expected to grow at 8.5 percent per year. As a result, CBO’s baseline projects 

Medicare and Medicaid spending will be about 30 percent higher than Social Security in 2015. According to the Social Security and Medicare trustees, Social Security 

will grow from 4.3 percent of GDP today to 6.6 percent in 2075, and Medicare’s burden on the economy will quintuple—from 2.7 percent to 13.3 percent of the economy. 

GAO’s long-term simulations illustrate the magnitude of the fiscal challenges associated with an aging society and the significance of the related challenges the 

Government will be called upon to address. Figures 2 and 3 present these simulations under two different sets of assumptions. In figure 2, we begin with CBO’s January baseline, constructed according to the statutory requirements for that baseline.6 Consistent with these requirements, discretionary spending is assumed to 

grow with inflation for the first 10 years and tax cuts scheduled to expire are assumed to expire. After 2015, discretionary spending is assumed to grow with the 

economy, and revenue is held constant as a share of GDP at the 2015 level. In figure 3 two assumptions are changed: discretionary spending is assumed to grow with 

the economy after 2005 rather than merely with inflation and the tax cuts are extended. For both simulations Social Security and Medicare spending is based on the 
51

2004 Trustees’ intermediate projections, and we assume that benefits continue to be 

paid in full after the trust funds are exhausted. Medicaid spending is based on 

CBO’s December 2003 long-term projections under mid-range assumptions.

Both these simulations illustrate that, absent policy changes, the growth in 

spending on Federal retirement and health entitlements will encumber an escalating share of the Government’s resources. Indeed, when we assume that recent tax 

reductions are made permanent and discretionary spending keeps pace with the 

economy, our long-term simulations suggest that by 2040 Federal revenues may be 

adequate to pay little more than interest on the Federal debt. Neither slowing the 

growth in discretionary spending nor allowing the tax provisions to expire—nor both 

together—would eliminate the imbalance. Although revenues will be part of the debate about our fiscal future, the failure to reform Social Security, Medicare, Medicaid, and other drivers of the long-term fiscal gap would require at least a doubling 

of taxes—and that seems implausible. Accordingly, substantive reform of Social Security and our major health programs remains critical to recapturing our future fiscal flexibility.
52

Although considerable uncertainty surrounds long-term budget projections, we 

know two things for certain: the population is aging and the baby boom generation 

is approaching retirement age. The aging population and rising health care spending will have significant implications not only for the budget but also for the economy as a whole. Figure 4 shows the total future draw on the economy represented 

by Social Security, Medicare, and Medicaid. Under the 2004 Trustees’ intermediate 

estimates and CBO’s long-term Medicaid estimates, spending for these entitlement 

programs combined will grow to 15.6 percent of GDP in 2030 from today’s 8.5 percent. It is clear that, taken together, Social Security, Medicare, and Medicaid represent an unsustainable burden on future generations.
53

The Government can help ease future fiscal burdens through spending reductions 

or revenue actions that reduce debt held by the public, thereby saving for the future 

and enhancing the pool of economic resources available for private investment and 

long-term growth. Economic growth can help, but given the size of our projected fiscal gap we will not be able to simply grow our way out of the problem. Closing the 

current long-term fiscal gap would require sustained economic growth far beyond 

that experienced in U.S. economic history since World War II. Tough choices are inevitable, and the sooner we act the better. 

Some of the benefits of early action—and the costs of delay—can be illustrated 

using the 2004 Social Security Trustees’ intermediate projections. Figure 5 compares 

what it would take to keep Social Security solvent through 2078 by either raising 

payroll taxes or reducing benefits. If we did nothing until 2042—the year SSA estimates the Trust Funds will be exhausted—achieving actuarial balance would require changes in benefits of 30 percent or changes in taxes of 43 percent. As figure 

5 shows, earlier action shrinks the size of the necessary adjustment.

Both sustainability concerns and solvency considerations drive us to act sooner 

rather than later. Trust Fund exhaustion may be nearly 40 years away, but the 

squeeze on the Federal budget will begin as the baby boom generation begins to retire. Actions taken today can ease both these pressures and the pain of future actions. Acting sooner rather than later also provides a more reasonable planning horizon for future retirees. 

DEMOGRAPHIC TRENDS DRIVE BOTH THE LONG-TERM FISCAL OUTLOOK AND SOCIAL

SECURITY’S FINANCING CHALLENGE

The Social Security program’s situation is but one symptom of larger demographic 

trends that will have broad and profound effects on our Nation’s future in other 

ways as well. As you are aware, Social Security has always been a largely pay-asyou-go system. This means that the system’s financial condition is directly affected 

by the relative size of the populations of covered workers and beneficiaries. Histori-
54

cally, this relationship has been favorable to the system’s financial condition. Now, 

however, people are living longer and spending more time in retirement. 

As shown in figure 6, the U.S. elderly dependency ratio is expected to continue 

to increase.7 The proportion of the elderly population relative to the working-age 

population in the U.S. rose from 13 percent in 1950 to 19 percent in 2000. By 2050, 

there is projected to be almost 1 elderly dependent for every 3 people of working 

age—a ratio of 32 percent. Additionally, the average life expectancy of males at 

birth has increased from 66.6 in 1960 to 74.3 in 2000, with females at birth experiencing a rise from 73.1 to 79.7 over the same period. As general life expectancy has 

increased in the United States, there has also been an increase in the number of 

years spent in retirement. Improvements in life expectancy have extended the average amount of time spent by workers in retirement from 11.5 years in 1950 to 18 

years for the average male worker as of 2003.

A falling fertility rate is the other principal factor underlying the growth in the 

elderly’s share of the population. In the 1960s, the fertility rate, which is the average number of children that would be born to women during their childbearing 

years, was an average of 3 children per woman. Today it is a little over 2, and by 

2030 it is expected to fall to 1.95—a rate that is below what it takes to maintain 

a stable population. Taken together, these trends threaten the financial solvency 

and sustainability of Social Security. 

The combination of these factors means that annual labor force growth will begin 

to slow after 2010 and by 2025 is expected to be less than a fifth of what it is today. 

(See fig. 7.) Relatively fewer workers will be available to produce the goods and 

services that all will consume. Without a major increase in productivity or increases 

in immigration, low labor force growth will lead to slower growth in the economy 

and to slower growth of Federal revenues. This in turn will only accentuate the 

overall pressure on the Federal budget.
55

The aging of the labor force and the reduced growth in the number of workers 

will have important implications for the size and composition of the labor force, as 

well as the characteristics of many jobs, throughout the 21st century. The U.S. 

workforce of the 21st century will be facing a very different set of opportunities and 

challenges than that of previous generations. 

Increased investment could increase the productivity of workers and spur economic growth. However, increasing investment depends on national saving, which 

remains at historically low levels. Historically, the most direct way for the Federal 

Government to increase saving has been to reduce the deficit (or run a surplus). Although the Government may try to increase personal saving, results of these efforts 

have been mixed. For example, even with the preferential tax treatment granted 

since the 1970s to encourage retirement saving, the personal saving rate has steadily declined. Even if economic growth increases, the structure of retirement programs and historical experience in health care cost growth suggest that higher economic growth results in a generally commensurate growth in spending for these programs in the long term.8

In recent years, personal saving by households has reached record lows while at 

the same time the Federal budget deficit has climbed. (See fig. 8.) Accordingly, national saving has diminished but the economy has continued to grow in part because 

more and better investments were made. That is, each dollar saved bought more investment goods and a greater share of saving was invested in highly productive information technology. The economy has also continued to grow because the United 

States was able to invest more than it saved by borrowing abroad, that is, by running a current account deficit. However, a portion of the income generated by foreign-owned assets in the United States must be paid to foreign lenders. National 

saving is the only way a country can have its capital and own it too.
56

In general, saving involves trading off consumption today for greater consumption 

tomorrow. Our budget decisions today will have important consequences for the living standards of future generations. The financial burdens facing the smaller cohort 

of future workers in an aging society would most certainly be lessened if the economic pie were enlarged. This is no easy challenge, but in a very real sense, our 

fiscal decisions affect the longer-term economy through their effects on national saving. 

The persistent U.S. current account deficits of recent years have translated into 

a rising level of indebtedness to other countries. However, many other nations currently financing investment in the United States also will face aging populations 

and declining national saving, so relying on foreign savings to finance a large share 

of U.S. domestic investment or Federal borrowing is not a viable strategy in the long 

run. 

HEALTH CARE IS A LARGER AND MORE DIFFICULT CHALLENGE THAN SOCIAL SECURITY

As figure 4 showed, over the long term Medicare and Medicaid will dominate the 

Federal Government’s future fiscal outlook. Medicare growth rates reflect not only 

a burgeoning beneficiary population but also the escalation of health care costs at 

rates well exceeding general rates of inflation. Health care generally presents not 

only a much greater but a more complex challenge than Social Security. The structural changes needed to address health care cost growth will take time to develop, 

and the process of reforming health care is likely to be an incremental one. 

While the long-term fiscal challenge cannot be successfully addressed without addressing Medicare and Medicaid, Federal health spending trends should not be 

viewed in isolation from the health care system as a whole. For example, Medicare 

and Medicaid cannot grow over the long term at a slower rate than cost in the rest 

of the health care system without resulting in a two-tier health care system. This, 

for example, could squeeze providers who then in turn might seek to recoup costs 

from other payers elsewhere in the health care system. Rather, in order to address 

the long-term fiscal challenge, it will be necessary to find approaches that deal with 

health care cost growth in the overall health care system. 

Although health care spending is the largest driver of the long-term fiscal outlook, 

this does not mean that Social Security reform should be postponed until after 

health is addressed. On the contrary, it argues for moving ahead on Social Security 

now. The outlines of Social Security reform have already been articulated in many 

Social Security reform proposals. These approaches and the specific elements of reform are well known and have been the subject of many analyses, including GAO 

reports and testimonies. Reform approaches already put forward can serve as a 

starting point for deliberations. 
57

CONSIDERATIONS IN ASSESSING REFORM OPTIONS

As important as financial stability may be for Social Security, it cannot be the 

only consideration. As a former public trustee of Social Security and Medicare, I am 

well aware of the central role these programs play in the lives of millions of Americans. Social Security remains the foundation of the Nation’s retirement system. It 

is also much more than just a retirement program; it pays benefits to disabled workers and their dependents, spouses and children of retired workers, and survivors of 

deceased workers. In 2004, Social Security paid almost $493 billion in benefits to 

more than 47 million people. Since its inception, the program has successfully reduced poverty among the elderly. In 1959, 35 percent of the elderly were poor. In 

2000, about 8 percent of beneficiaries aged 65 or older were poor, and 48 percent 

would have been poor without Social Security. It is precisely because the program 

is so deeply woven into the fabric of our nation that any proposed reform must consider the program in its entirety, rather than one aspect alone. To assist policymakers, GAO has developed a broad framework for evaluating reform proposals that 

considers not only solvency but other aspects of the program as well. Our criteria 

aim to balance financial and economic considerations with benefit adequacy and equity issues and the administrative challenges associated with various proposals. 

GAO FRAMEWORK FOR EVALUATING REFORM PROPOSALS

The analytic framework GAO has developed to assess proposals comprises three 

basic criteria: • Financing Sustainable Solvency—the extent to which a proposal achieves sustainable solvency and how it would affect the economy and the Federal budget. Our 

sustainable solvency standard encompasses several different ways of looking at the 

Social Security program’s financing needs. While a 75-year actuarial balance has 

generally been used in evaluating the long-term financial outlook of the Social Security program and reform proposals, it is not sufficient in gauging the program’s solvency after the 75th year. For example, under the trustees’ intermediate assumptions, each year the 75-year actuarial period changes, and a year with a surplus is 

replaced by a new 75th year that has a significant deficit. As a result, changes made 

to restore trust fund solvency only for the 75-year period can result in future actuarial imbalances almost immediately. Reform plans that lead to sustainable solvency would be those that consider the broader issues of fiscal sustainability and 

affordability over the long term. Specifically, a standard of sustainable solvency also 

involves looking at (1) the balance between program income and costs beyond the 

75th year and (2) the share of the budget and economy consumed by Social Security 

spending. • Balancing Adequacy and Equity—the relative balance struck between the goals 

of individual equity and income adequacy. The current Social Security system’s benefit structure attempts to strike a balance between these two goals. From the beginning, Social Security benefits were set in a way that focused especially on replacing 

some portion of workers’ preretirement earnings. Over time other changes were 

made that were intended to enhance the program’s role in helping ensure adequate 

incomes. Retirement income adequacy, therefore, is addressed in part through the 

program’s progressive benefit structure, providing proportionately larger benefits to 

lower earners and certain household types, such as those with dependents. Individual equity refers to the relationship between contributions made and benefits received. This can be thought of as the rate of return on individual contributions. Balancing these seemingly conflicting objectives through the political process has resulted in the design of the current Social Security program and should still be taken 

into account in any proposed reforms. 

• Implementing and Administering Proposed Reforms—how readily a proposal 

could be implemented, administered, and explained to the public. Program complexity makes implementation and administration both more difficult and harder to 

explain. Some degree of implementation and administrative complexity arises in virtually all proposed changes to Social Security, even those that make incremental 

changes in the already existing structure. Although these issues may appear technical or routine on the surface, they are important issues because they have the potential to delay—if not derail—reform if they are not considered early enough for 

planning purposes. Moreover, issues such as feasibility and cost can, and should, influence policy choices. Continued public acceptance of and confidence in the Social 

Security program require that any reforms and their implications for benefits be 

well understood. This means that the American people must understand why 

change is necessary, what the reforms are, why they are needed, how they are to 

be implemented and administered, and how they will affect their own retirement 

income. All reform proposals will require some additional outreach to the public so 
58

that future beneficiaries can adjust their retirement planning accordingly. The more 

transparent the implementation and administration of reform, and the more carefully such reform is phased in, the more likely it will be understood and accepted 

by the American people. 

The weight that different policymakers place on different criteria will vary, depending on how they value different attributes. For example, if offering individual 

choice and control is less important than maintaining replacement rates for low-income workers, then a reform proposal emphasizing adequacy considerations might 

be preferred. As they fashion a comprehensive proposal, however, policymakers will 

ultimately have to balance the relative importance they place on each of these criteria. As we have noted in the past before this committee and elsewhere, a comprehensive evaluation is needed that considers a range of effects together. Focusing 

on comprehensive packages of reforms will enable us to foster credibility and acceptance. This will help us avoid getting mired in the details and losing sight of important interactive effects. It will help build the bridges necessary to achieve consensus. 

REFORM’S POTENTIAL EFFECTS ON THE SOCIAL SECURITY PROGRAM

A variety of proposals have been offered to address Social Security’s financial 

problems. Many proposals contain reforms that would alter benefits or revenues 

within the structure of the current defined benefits system. Some would reduce benefits by modifying the benefit formula (such as increasing the number of years used 

to calculate benefits or using price indexing instead of wage indexing), reduce costof-living adjustments (COLA), raise the normal and/or early retirement ages, or revise dependent benefits. Some of the proposals also include measures or benefit 

changes that seek to strengthen progressivity (e.g., replacement rates) in an effort 

to mitigate the effect on low-income workers. Others have proposed revenue increases, including raising the payroll tax or expanding the Social Security taxable 

wage base that finances the system; increasing the taxation of benefits; or covering 

those few remaining workers not currently required to participate in Social Security, 

such as older state and local government employees. 

A number of proposals also seek to restructure the program through the creation 

of individual accounts. Under a system of individual accounts, workers would manage a portion of their own Social Security contributions to varying degrees. This 

would expose workers to a greater degree of risk in return for both greater individual choice in retirement investments and the possibility of a higher rate of return 

on contributions than available under current law. There are many different ways 

that an individual account system could be set up. For example, contributions to individual accounts could be mandatory or they could be voluntary. Proposals also differ in the manner in which accounts would be financed, the extent of choice and 

flexibility concerning investment options, the way in which benefits are paid out, 

and the way the accounts would interact with the existing Social Security program—individual accounts could serve either as an addition to or as a replacement 

for part of the current benefit structure. 

In addition, the timing and impact of individual accounts on the solvency, sustainability, adequacy, equity, net savings, and rate of return associated with the Social 

Security system varies depending on the structure of the total reform package. Individual accounts by themselves will not lead the system to sustainable solvency. 

Achieving sustainable solvency requires more revenue, lower benefits, or both. Furthermore, incorporating a system of individual accounts may involve significant 

transition costs. These costs come about because the Social Security system would 

have to continue paying out benefits to current and near-term retirees concurrently 

with establishing new individual accounts. 

Individual accounts can contribute to sustainability as they could provide a mechanism to prefund retirement benefits that would be immune to demographic booms 

and busts. However, if such accounts are funded through borrowing, no such 

prefunding is achieved. An additional important consideration in adopting a reform 

package that contains individual accounts would be the level of benefit adequacy 

achieved by the reform. To the extent that benefits are not adequate, it may result 

in the Government eventually providing additional revenues to make up the difference. 

Also, some degree of implementation and administrative complexity arises in virtually all proposed changes to Social Security. The greatest potential implementation and administrative challenges are associated with proposals that would create 

individual accounts. These include, for example, issues concerning the management 

of the information and money flow needed to maintain such a system, the degree 

of choice and flexibility individuals would have over investment options and access 

to their accounts, investment education and transitional efforts, and the mecha-
59

nisms that would be used to pay out benefits upon retirement. The Federal Thrift 

Savings Plan (TSP) could serve as a model for providing a limited amount of options 

that reduce risk and administrative costs while still providing some degree of choice. 

However, a system of accounts that spans the entire national workforce and millions 

of employers would be significantly larger and more complex than TSP or any other 

system we have in place today. 

Another important consideration for Social Security reform is assessing a proposal’s effect on national saving. Individual account proposals that fund accounts 

through redirection of payroll taxes or general revenue do not increase national saving on a first order basis. The redirection of payroll taxes or general revenue reduces Government saving by the same amount that the individual accounts increase 

private saving. Beyond these first order effects, the actual net effect of a proposal 

on national saving is difficult to estimate due to uncertainties in predicting changes 

in future spending and revenue policies of the Government as well as changes in 

the saving behavior of private households and individuals. For example, the lower 

surpluses and higher deficits that result from redirecting payroll taxes to individual 

accounts could lead to changes in Federal fiscal policy that would increase national 

saving. On the other hand, households may respond by reducing their other saving 

in response to the creation of individual accounts. No expert consensus exists on 

how Social Security reform proposals would affect the saving behavior of private 

households and businesses. 

Finally, the effort to reform Social Security is occurring as our Nation’s private 

pension system is also facing serious challenges. Only about half of the private sector workforce is covered by a pension plan. A number of large underfunded traditional defined benefit plans-

• plans where the employer bears the risk of investment—have been terminated 

by bankrupt firms, including household names like Bethlehem Steel, US Airways, 

and Polaroid. These terminations have resulted in thousands of workers losing 

promised benefits and have saddled the Pension Benefit Guaranty Corporation, the 

Government corporation that partially insures certain defined benefit pension benefits, with billions of dollars in liabilities that threaten its long-term solvency. Meanwhile, the number of traditional defined benefit pension plans continues to decline 

as employers increasingly offer workers defined contribution plans like 401(k) plans 

where, like individual accounts, workers face the potential of both greater return 

and greater risk. These challenges serve to reinforce the imperative to place Social 

Security on a sound financial footing which provides a foundation of certain and secure retirement income. 

Regardless of what type of Social Security reform package is adopted, continued 

confidence in the Social Security program is essential. This means that the American people must understand why change is necessary, what the reforms are, why 

they are needed, how they are to be implemented and administered, and how they 

will affect their own retirement income. All reform proposals will require some additional outreach to the public so that future beneficiaries can adjust their retirement 

planning accordingly. The more transparent the implementation and administration 

of reform, and the more carefully such reform is phased in, the more likely it will 

be understood and accepted by the American people. 

CONCLUSIONS

Social Security does not face an immediate crisis but it does face a large and 

growing financial problem. In addition, our Social Security challenge is only part of 

a much broader fiscal challenge that includes, among other things, the need to reform Medicare, Medicaid, and our overall health care system. 

Today we have an opportunity to address Social Security as a first step toward 

improving the Nation’s long-term fiscal outlook. Steps to reform our Federal health 

care system are likely to be much more difficult. They are also likely to require a 

series of incremental actions over an extended period of time. As I have said before, 

the future sustainability of programs is the key issue policy makers should address—i.e., the capacity of the economy and budget to afford the commitment over 

time. Absent substantive reform, these important Federal programs will not be sustainable. Furthermore, absent reform, younger workers will face dramatic benefit 

reductions or tax increases that will grow over time. 

Many retirees and near retirees fear cuts that would affect them in the immediate 

future while young people believe they will get little or no Social Security benefits 

in the longer term. I believe that it is possible to reform Social Security in a way 

that will ensure the program’s solvency, sustainability, and security while exceeding 

the expectations of all generations of Americans. 
60

ENDNOTES

1. In this statement, Social Security refers to the Old-Age and Survivors Insurance and Disability Insurance (OASDI) program. 

2. GAO, Budget Issues: Long-Term Fiscal Challenges, GAO-02-467T (Washington, 

D.C.: Feb. 27, 2002); Social Security: Long-Term Financing Shortfall Drives Need for 

Reform, GAO-02-845T (Washington, D.C.: June 19, 2002); and Social Security: LongTerm Challenges Warrant Early Action, GAO-05-303T (Washington, D.C.: Feb. 3, 

2005). 

3. Saving Our Nation’s Future: An Intergovernmental Challenge, Outlook 2005 

Conference, The National Press Club (Washington D.C.: Feb. 2, 2005). This product 

can be found on GAO’s web site, www.gao.gov. 

4. Separately, the Disability Insurance (DI) fund is projected to be exhausted in 

2029 and the Old-Age and Survivors’ Insurance (OASI) fund in 2044. Using slightly 

different economic assumptions and model specifications, CBO estimated the combined Social Security trust fund will be solvent until 2052. See Congressional Budget Office, The Outlook for Social Security (Washington, D.C.: June 2004) and Updated Long-Term Projections for Social Security (Washington, D.C.: January 2005). 

5. CBO estimates that this will occur in 2020. See CBO’s Updated LongTerm Projections for Social Security (January 2005). 

6. The Congressional Budget Office, The Budget and Economic Outlook: Fiscal 

Years 2006 to 2015, (Washington, D.C.: January 2005). 

7. The elderly dependency ratio is the ratio of the population aged 65 years or 

over to the population aged 15 to 64. 

8. Initial Social Security benefits are indexed to nominal wage growth resulting 

in higher benefits over time.

Chairman NUSSLE. To your credit, if I may amplify your testimony, this is not the first time you have given us this advice. We 

appreciate that. 

Mr. WALKER. Thank you. 

Chairman NUSSLE. Doug Holtz-Eakin, the Director of the Congressional Budget Office. We welcome you back to the committee, 

and we are pleased to receive your testimony. All of your statement 

will be made part of the record. 

STATEMENT OF DOUGLAS J. HOLTZ-EAKIN 

Mr. HOLTZ-EAKIN. Thank you, Mr. Chairman, and members of 

the committee. The CBO is happy to be back to talk about this important issue and to continue to work with the committee on this 

and other areas. I wanted to simply submit the testimony as we 

have it written and talk about this program, which is very important from many perspectives, and bring to the discussion not merely a discussion of the system’s finances, but the larger perspective 

of the economy, where the Social Security program is very important to beneficiaries in deciding their labor supply, how much they 

work and when they retire, where it is central to decisions on saving for retirement and the kind of portfolios people hold at the moment, where it has a big contribution to retirement income along 

with private saving and private pension plans, and where it has 

important implications for the distribution of well-being between 

parents and their children. 

It is one of the central pieces of economic policymaking in the 

United States. It is also a very important budgetary issue. It is our 

single largest Federal program at the moment and should be analyzed from budgetary perspectives as well. 

I thought I would devote my time to talking about three figures 

which outline the future of the Social Security program and shed 

light on the nature of the problem facing this committee from a 
61

budgetary and economic perspective. If we could look at the first 

of those. 

This summarizes the current CBO projections for the outlook for 

Social Security under the current law. It may differ in numerical 

detail from those you would hear from my colleague to the right 

or from those in the Social Security Administration. However, 

qualitatively, we all have the same message about the outlook for 

the program. And that is, that at the moment revenues dedicated 

to Social Security exceed the outlays for benefits to current retirees. And that will continue and grow, in fact, until shortly after the 

retirement of the leading edge of the baby boom generation. 

Beginning in about 2010, that excess will begin to diminish. It 

diminishes steadily in our projections until 2020, at which point 

the cash flow surplus switches to a cash flow deficit. At that point, 

Social Security is entitled to continue to pay full benefits, the red 

line, which will exceed dedicated revenues, the blue line, for decades. And those benefits will be paid in full from resources drawn 

elsewhere in the Federal budget. They will come from either lower 

spending elsewhere in the Federal budget, higher taxes, or greater 

borrowing from the public. 

In our projections, the trust fund, the accounting mechanism that 

gives the legal authority to pay full benefits will exhaust in 2052, 

at which point there will be an across-the-board 22 percent diminishment in the ability to pay benefits, and the program can then 

continue paying out benefits equal to payroll taxes thereafter. 

That suggests a couple of things. Number one, in terms of timing, some form of the current Social Security program can in fact 

be sustained indefinitely, and that is the edge at the right where 

benefits are brought down to payroll taxes. 

In terms of other issues of urgency, whether things need to be 

done sooner or later, it is in the eye of the beholder. At some point, 

2052 would be the across-the-board benefit cut. Others would point 

to 2020 in our projections when cash flow surplus turns to cash 

flow deficit. Others would note that surplus peaks in 2010, and 

that between 2010 and 2025, we will swing from providing $100 

billion from Social Security to the remainder of the budget to $100 

billion in today’s dollars from the remainder of the budget for Social Security, and that budgetary pressure should be the driving 

consideration in reform. Any of those I think are plausible dates, 

and in the context of the larger Federal budget all will be noticeable events for this committee. 

If we go to slide two. This simple display also I think displays 

the size of the problem. There are many different measures of what 

is deemed to be how large a problem we have. To my eye, the size 

of the problem is illustrated by the fact that scheduled benefits 

under current law, the outlay line on top in red exceeds dedicated 

revenues under current law, the blue line at the bottom, as far as 

the eyes can see. And all measures that you will hear about the 

size of the problem have to do with adding up over different horizons and for different people the size of that gap between the outlays and the revenues. From a larger budgetary point of view, one 

could make the arithmetic case that we simply do not have a Social 

Security problem. That we can honor the benefit promises at the 

top. But I would note that, as a matter of arithmetic, if one makes 
62

that case, they must simultaneously make the case that they can 

find those resources elsewhere in the Federal budget and solve the 

larger looming problem that we face and that David illustrated so 

nicely. 

The third thing this shows us, if we go to slide three, is the difference between two notions of fixing the problem. One notion of 

fixing the problem that one hears quite frequently is fixing it in a 

75-year actuarial balance sense. CBO’s estimates are that over 75 

years the actuarial imbalance is a bit above 1 percent of taxable 

payroll. That would suggest that the problem is fixed if one simply 

raises, for example, the payroll tax by 1 percentage point and has 

that as the solution to Social security. That is the rise in blue line 

from the bottom one to the dotted one above it. You will notice 

that, from a budgetary point of view, this diminishes but does not 

eliminate the cash flow shortfall between promised benefits and 

dedicated revenues. 

A different way to say is that any actuarial fix comes with it a 

budget financing plan, a dedication of future cash flows that must 

come out of the remainder of the Federal budget through either 

less borrowing or some other source that makes good on that 75 

year actuarial fix. It is also the case that once you get to the end 

of 75 years, you have a problem remaining, this is not a sustainable fix in every sense. 

All of this will come to pass in an environment in which there 

will be even greater budgetary demands from other programs. So 

to the extent that you adopt a fix for Social Security, it must be 

developed in the context of rising demands for Medicare and Medicaid that will dwarf the rising outlays for Social Security. Social 

Security’s outlays are likely to go up by about 50 percent, it is a 

fraction of GDP; Medicare and Medicaid, if things go well, may triple in size and could in fact be quite large. 

These are the budgetary problems that face this committee and 

the Congress as a whole as it faces Social Security. I would remind 

everyone in closing that these budgetary futures will be a reflection 

of economic policy issues, and that the threshold questions are 

whether this Social Security system is the one that the Congress 

wants for the 21st century, whether it is designed appropriately for 

a world in which there are very different demographics, where fertility is much different than it was at the time the program was 

put into place, where longevity is rising, and where the dependency 

ratio, as a result, is much greater. 

And in looking at the program, the new element that has been 

raised is the possibility of individual accounts. And there, I would 

suggest, that in addition to the financing considerations that we 

have heard so much about already today, one remember the economic policy considerations; that to the extent that one favors individual accounts and prefunding in that form, it is an argument in 

favor of increased reliance on individuals, in enhancing labor supply incentives in this program, in enhancing savings incentives in 

the program, and offering participants a potential for a higher rate 

of return. 

In contrast, those who favor a modification of a pay-as-you-go Social Security system for the new demographics are highlighting the 

importance of universality in the program, the ability to redis-
63

tribute through Social Security, and to offer genuine social insurance in which the retirement benefit is decoupled from the particulars of someone’s labor market experience. These are important 

economic policy issues. They will reflect themselves in the budget 

and in Social Security more narrowly, and we look forward to 

working with the Congress in helping you as you make these decisions. Thank you, Mr. Chairman. 

[The prepared statement of Douglas J. Holtz-Eakin follows:] 

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

Chairman Nussle, Congressman Spratt, and Members of the Committee, I appreciate the opportunity to appear before you today to discuss the Social Security system. Discussions about reforming the system have focused on the program and its 

trust funds. But important insights can also be gained by looking at Social Security 

from the perspectives of the economy and the Federal budget as a whole. 

First, from the perspective of the economy, beneficiaries make decisions about 

when to retire and how much to work before retirement partly on the basis of the 

amount of taxes they pay and the amount of benefits they expect to receive. Social 

Security also influences people’s decisions about how much to save, and that saving 

plays a role in determining the size not only of people’s retirement income but also 

of the Nation’s capital stock as a whole. Consequently, Social Security has important 

implications for aggregate economic performance for the flow of income that the 

economy will be able to generate and for the total stock of wealth and overall economic resources that will be available in the future. As a result, Social Security can 

significantly affect the Nation’s standard of living as well as the distribution of income within and among generations. 

Second, from a budgetary standpoint, Social Security is the single largest program 

of the Federal Government. This fiscal year, outlays for Social Security are expected 

to top $500 billion and account for 23 percent of total Federal spending (excluding 

interest). Looking further ahead, the Congressional Budget Office (CBO) projects 

that Social Security outlays will grow from 4.2 percent of gross domestic product 

(GDP) in 2005 to 6.5 percent in 2050. Although that growth is significant, it pales 

in comparison with the projected growth of the Government’s two big health programs, Medicare and Medicaid. 

Finally, Social Security can be analyzed from the perspective of the program itself. 

The most recent programmatic focus has been on the ‘‘sustainability’’ of the system’s 

finances. However, several other aspects of the program are also important. 

Throughout its long history, Social Security has had multiple goals—some related 

to redistributing income, others to offsetting lost earnings. In 2004, only about twothirds of Social Security’s beneficiaries were retired workers; the rest were disabled 

workers, survivors of deceased workers, and workers’ spouses and minor children. 

Policymakers will need to decide whether the program’s goals are still appropriate, 

and if so, how changes to Social Security would aid or hinder the achievement of 

those goals and affect various types of beneficiaries and taxpayers. Those decisions 

will also need to take into account the dramatic increase in the elderly population 

that is expected in coming decades. 

My statement examines the prospects for Social Security from each of those three 

perspectives, in reverse order, beginning at the programmatic level. 

THE OUTLOOK FOR THE SOCIAL SECURITY PROGRAM

Although there is significant uncertainty involved in making numerical projections of the future of Social Security, the basic trajectory is widely accepted. The 

outlook for the Social Security program is generally the same regardless of whether 

one turns to the long-term projections of Social Security’s trustees or to those of the 

Congressional Budget Office. 

In 2008, the leading edge of the baby-boom generation will become eligible for 

early retirement benefits. Shortly thereafter, the annual Social Security surplus—

the amount by which the program’s dedicated revenues exceed benefits paid—will 

begin to diminish (see Figure 1). That trend will continue until about 2020, when 

Social Security’s finances will reach a balance, with the revenues coming into the 

system from payroll taxes and taxes on benefits matching the benefit payments 

going out. Thereafter, outlays for benefits are projected to exceed the system’s revenues. To pay full benefits, the Social Security system will eventually have to rely 

on interest on Government bonds held in its trust funds and ultimately on the re-
64

demption of those bonds. But where will the Treasury find the money to pay for the 

bonds? Will policymakers cut back other spending in the budget? Will they raise 

taxes? Or will they borrow more? 

FIGURE 1.—SOCIAL SECURITY REVENUES AND OUTLAYS AS A SHARE OF GDP UNDER CURRENT 

LAW

(Percentage of GDP)

Source: Congressional Budget Office.

Note: Based on a simulation from CBO’s long-term model using the Social Security trustees’ 

2004 intermediate demographic assumptions and CBO’s January 2005 economic assumptions. 

Revenues include payroll taxes and income taxes on benefits but not interest credited to the Social Security trust funds; outlays include trust-fund-financed Social Security benefits and administrative costs. Under current law, outlays will begin to exceed revenues in 2020; starting in 

2053, the program will no longer be able to pay the full amount of scheduled benefits.

In the absence of other changes, the redemption of bonds can continue until the 

trust funds are exhausted. In the Social Security trustees’ projections, that happens 

in 2042; in CBO’s projections, it occurs about a decade later, largely because CBO 

projects higher real (inflation-adjusted) interest rates and slightly lower benefits for 

men than the trustees do. Once the trust funds are exhausted, the program will no 

longer have the legal authority to pay full benefits. As a result, it will have to reduce payments to beneficiaries to match the amount of revenue coming into the system each year. Although there is some uncertainty about the size of that reduction, 

benefits would probably have to be cut by 20 percent to 30 percent to match the 

system’s available revenue. 

The key message from those numbers is that some form of the program is, in fact, 

sustainable for the indefinite future. With benefits reduced annually to match available revenue (as they will be under current law when the trust funds run out), the 

program can be continued or sustained forever. Of course, many people may not consider a sudden cut in benefits of 20 percent to 30 percent to be desirable policy. In 

addition, the budgetary demands of bridging the gap between outlays and revenues 

in the years before that cut may prove onerous. But the program is sustainable from 

a financing perspective. 

What is not sustainable is continuing to provide the present level of scheduled 

benefits—those based on the benefit formulas that exist today—given the present 

financing. Under current formulas, outlays for scheduled benefits are projected to 

exceed available revenues forever after about 2020 (see Figure 2). That gap cannot 

be sustained without continual—and substantial—injections of funds from the rest 

of the budget. 

THE IMPACT OF SOCIAL SECURITY ON THE FEDERAL BUDGET

I would like to make three points about Social Security in the larger context of 

the total budget. First, Social Security will soon begin to create problems for the 

rest of the budget. Right now, Social Security surpluses are still growing and contributing increasing amounts to the rest of the budget. But as explained above, 

those surpluses will begin to shrink shortly after 2008, when the baby boomers start 

to become eligible for early retirement benefits. As the rest of the budget receives 

declining amounts of funding from Social Security, the Government will face a period of increasing budgetary stringency. By about 2020, Social Security will no 

longer be contributing any surpluses to the total budget, and after that, it will be 
65

drawing funds from the rest of the budget to make up the difference between the 

benefits promised and payable under current law and the system’s revenues. Policymakers will have only three ways to make up for the declining Social Security surpluses and emerging Social Security deficits: reduce spending, raise taxes, or borrow 

more. 

FIGURE 2.—SOCIAL SECURITY REVENUES AND OUTLAYS AS A SHARE OF GDP WITH SCHEDULED 

BENEFITS EXTENDED

(Percentage of GDP)

Source: Congressional Budget Office.

Note: Based on a simulation from CBO’s long-term model using the Social Security trustees’ 

2004 intermediate demographic assumptions and CBO’s January 2005 economic assumptions. 

Revenues include payroll taxes and income taxes on benefits but not interest credited to the Social Security trust funds; outlays include Social Security benefits and administrative costs. In 

this simulation, currently scheduled benefits are assumed to be paid in full after 2053 using 

funds from outside the Social Security system.

CBO’s projections offer some guidance about the potential impact of those developments on the budget. By CBO’s calculations, the Social Security surplus (excluding 

interest) will reach about $100 billion in 2007; but by 2025, that surplus is projected 

to become a deficit of roughly $100 billion (in 2005 dollars). That $200 billion swing 

will create significant challenges for the budget as a whole. 

Second, the demand on the budget from Social Security will take place simultaneously with—but be eclipsed by—the demand generated by Medicare and Medicaid. 

Currently, outlays for Social Security benefits equal about 4 percent of GDP, as does 

Federal spending on Medicare and Medicaid. But whereas Social Security outlays 

are projected to grow to almost 6.5 percent of GDP by 2050, spending on the two 

health programs is expected to grow substantially more. Over the past few decades, 

excess growth in health care costs—the extent to which per-beneficiary costs increase faster than per capita GDP—has been about 2.5 percent annually. If one assumes a fairly dramatic shift to a slower increase in health care costs—that excess 

cost growth will decline to less than half of its historical rate Federal spending on 

Medicare and Medicaid will still roughly triple by 2050, to 12 percent of GDP. The 

clear message is that although Social Security will place demands on the Federal 

budget, those demands will coincide with much greater demands from Medicare and 

Medicaid. 

Third, a key distinction exists between the programmatic perspective and the 

budgetary perspective in analyzing policy changes. From a programmatic standpoint, the 75-year actuarial imbalance in the Social Security system (the present 

value of expected outlays over 75 years minus the present value of expected revenues over that period) equals 1.04 percent of the present value of Social Security’s 

taxable payroll over those years, CBO estimates. That number suggests that, leaving aside economic feedbacks on the budget, immediately and permanently raising 

the payroll tax rate by about 1 percentage point or reducing initial benefits for 

newly entitled beneficiaries by 9 percent would address the 75-year imbalance in the 

system. 

From a budgetary perspective, however, annual benefits would continue to exceed 

revenues by a large margin after 2025 under either policy change (see Figure 3). 

Thus, neither policy would provide a permanent solution for the system’s financing. 

Either policy could fix that financing for the next 75 years, but only if the projected 
66

cash-flow deficits shown in Figure 3 were offset elsewhere in the Federal budget. 

In principle, lower net interest payments on Federal debt held by the public could 

provide that offset. But such a policy change would fix Social Security over the next 

75 years only if the rest of the budget was not altered. 

SOCIAL SECURITY AND THE ECONOMY

Although looking at the overall budgetary context is important, Social Security 

and its possible reform also carry significant implications for the economy and economic policy. 

One of the major achievements of reform could be to resolve uncertainty about 

the future of the program. Uncertainty is an economic cost in its most fundamental 

form, and in the current context, there is uncertainty about the future of Social Security, its configuration, and who will be affected. The sooner that uncertainty is 

resolved or reduced, the better served will be current and future beneficiaries, who 

must make various decisions about their retirement (from how much they should 

save to when they will be able to stop working). 

FIGURE 3.—SOCIAL SECURITY REVENUES AND OUTLAYS AS A SHARE OF GDP UNDER VARIOUS 

POLICY OPTIONS

(Percentage of GDP)

Source: Congressional Budget Office.

Notes: Based on a simulation from CBO’s long-term model using the Social Security trustees’ 

2004 intermediate demographic assumptions and CBO’s January 2005 economic assumptions. 

Revenues include payroll taxes and income taxes on benefits but not interest credited to the Social Security trust funds; outlays include Social Security benefits and administrative costs. The 

projections do not incorporate macroeconomic feedbacks. 
67

Under current law, annual outlays will begin to exceed revenues in 2020; starting in 2053, 

the program will no longer be able to pay the full amount of scheduled benefits. Under either 

a 1 percentage point increase in the payroll tax rate or a 9 percent cut in initial benefits, outlays 

will exceed revenues by 2025, and scheduled benefits will not be able to be paid starting in 2083.

A key uncertainty stems from a central policy question: to what extent should the 

Social Security program in the 21st century resemble the program in the 20th century? There are two separate aspects to consider: insurance and financing. 

In terms of insurance, the major issue is finding the appropriate balance between 

social responsibility and individual responsibility. On one side, some people argue 

that the nation needs a program of universal social insurance that allows for the 

redistribution of resources among individuals and provides a hedge against such adverse outcomes as poor health, unemployment, low wages, or simply bad luck. On 

the other side, some people argue that it would be better to have a retirement system that relied more on individuals (which proponents view as desirable in itself) 

and included provisions that strengthened incentives for individuals to work and 

save. 

In terms of financing, the major issue is striking the appropriate balance between 

prefunding retirement (with each generation saving for its own retirement) and employing a traditional pay-as-you-go method of financing (in which assets are not accumulated, but instead current revenues are used to finance benefit payments to retirees). Prefunding retirement benefits has the potential to increase the nation’s capital stock, boost productivity, and raise GDP in the long run. However, prefunding 

requires some people to consume less or work more than they would otherwise during a transitional period. 

Although prefunding could be carried out either by having individuals save more 

or by having the Government save more (through smaller budget deficits or larger 

budget surpluses), analysts disagree about the extent to which the Government 

could actually prefund retirement benefits, for several reasons. The experience of recent years, for instance, raises questions about the likelihood that the Government 

would be able to maintain budget surpluses for long periods of time. 

Regardless of one’s views about those issues, any approach to Social Security will 

have to confront the new demographic situation—low fertility rates; declining mortality rates; and changing patterns of marriage, divorce, participation in the labor 

force, and immigration—as well as a host of other factors that are very different 

now than they were in the past. Reconfiguring Social Security to reflect those new 

realities, and better insulating the system from unexpected demographic or economic changes, will be major challenges for policymakers.

Chairman NUSSLE. Thank you, Mr. Director. As I announced previously, I am going to go to members who have not had an opportunity to question the first panel to begin with. So Mr. Baird is recognized for 5 minutes. 

Mr. BAIRD. I thank the Chairman. I thank the gentleman. 

I would say at the outset that our experience, my experience on 

this committee, these two individuals have given us the most forthright, balanced, and objective information that we are privileged to 

receive. And I am grateful for their presentations, not only today, 

but previously. 

I want to just address a few quick items that were sort of left 

over from the last speaker. First of all, one of my good colleagues 

Mr. Portman, suggested that it is the Congress that has been 

spending the Social Security trust funds. I would point to page 363 

of the President’s budget offered to us by OMB, and would note 

that in 2005, the President proposes to spend $162 billion of the 

Social Security trust fund; in 2006, 173 billion; in 2007, 197 billion, 

on up to a total of 256 billion in 2010 alone. In 5 years, it amounts 

to over a trillion dollars. In 10 years, I suspect it would be $2 trillion of expenditures not proposed by the Congress but proposed by 

the administration. Just to clear that. 

Secondly, the Treasury Secretary said that he thought it was appropriate to characterize Social Security as approaching bankruptcy. My assumption there is he seeming to be suggesting that 
68

if current demands exceed current revenues into a system, we are 

thereby bankrupt. If that were to apply to the Federal budget overall, do current—and I will ask the two gentlemen as experts in this 

area. Do current revenues for the U.S. Government exceed or fall 

short of current expenditures? 

Mr. WALKER. They fall short. And if I can address the issue of 

insolvency versus bankruptcy. One of the things I find in Washington is that sometimes you have to go back to Webster’s to look 

for the definition. The definition of bankruptcy is utter failure or 

impoverishment. The definition of insolvency is unable to pay debts 

as they fall due. 

I would respectfully suggest, for 2042, the program would be insolvent under that definition but not bankrupt. 

Mr. BAIRD. That is a very helpful clarification, and I appreciate 

it and share the opinion. I would be remiss if I didn’t just make 

a marker here today about one of our concerns in the northwest 

about the President’s proposed budget. I will not ask these gentlemen necessarily to comment on it, but it needs to be for the record. 

The proposed budget seems to depend for an increased source of 

revenues on gradually shifting what are currently cost based power 

rates in four power marketing areas of the country to market-based 

power rates, effectively leveling an increased taxation in the form 

of increased power rates on those four regions of the country. I personally am profoundly opposed to that. It goes against a proud tradition of this Government of supporting market-based rates in the 

public power supply systems, and would just like to put that down. 

And I believe it would have a profoundly negative impact if you increase power rates by up to 20 to 50 percent in those regions. I 

think it would be tantamount to a gross taxation on those consumers, and would be opposed to that. 

Let me ask a question that maybe you can help me address. 

Would you think it is good advice for a hypothetical family alluded 

to by Mr. Wicker and others to advise your children to go out and 

borrow money in order that they can invest it? 

Mr. HOLTZ-EAKIN. At the individual level, the issue is the degree 

to which you have a comfort for risk. You can borrow and invest. 

That is known as leverage. It offers you the potential for higher 

rates of return and it carries with it greater risk. And in the 

United States’ financial markets, individuals have the ability to 

tailor their investment strategy to the kind of risk that they are 

comfortable taking. 

Mr. BAIRD. Would it be a good——

Mr. HOLTZ-EAKIN. Truthfully, that is not the kind of advice you 

will ever get me to give personally or otherwise. I am much too 

much of a coward. But I would give them exactly those options and 

send them on their way. 

Mr. BAIRD. So in general, though, it would seem to me that to 

some extent banks must set their interest rates proportionate to 

what one might receive were they to invest the money in another 

way, and they must somewhere make a calculation that we think 

overall, again bearing in mind risk, that the amount of risk you 

would obtain from investing your borrowed money doesn’t seem to 

me that the percentages would play out. In other words, would you 

say son or daughter go out and borrow a bunch of money from the 
69

bank and then put it in the stock market because that will get you 

more money for sure than the interest rates you will pay on the 

loan? 

Mr. WALKER. Well, first, as you know, interest rates vary based 

upon the type of borrowing. Credit card interest rates are very, 

very high; interest rates for mortgages or home equity loans are a 

lot less. And so, therefore, one would have to determine with what 

degree of confidence that they have that they are going to end up 

gaining a net positive return from that leverage, understanding 

that there is nothing guaranteed. 

Mr. BAIRD. That is a good summary. 

The final question, and I don’t think you have time necessarily 

to answer it. But I haven’t heard anyone really talk about this and 

I have some questions. What would be the impact on the value of 

extent shares in the stock market of gradual or sudden influx of 

new purchasers of stocks under this type of scenario? In other 

words, we tend to talk about what happens to the Federal budget 

deficit vis-a-vis this, but wouldn’t there be some substantial impact 

on the value of stocks in the market? 

Mr. HOLTZ-EAKIN. The benchmark valuation will be driven by 

the underlying fundamentals in each company. And shares are 

worth no more than the future profits to which they give you claim. 

It could be the case that, given shifts in portfolios of this type you 

would see some transitory revaluation, but it is hard to imagine 

you would get a persistent revaluation of the same profits. 

Mr. BAIRD. Thank you. I thank the gentleman and I thank the 

Chair. 

Chairman NUSSLE. Mr. Walker, I have before me the Webster’s 

No. 2 New College Dictionary. I would just like to read you a definition of the word ‘‘crisis:’’ A crucial or decisive point or situation. 

I think we are probably, at least according to Mr. Webster, at a 

crisis point if in fact we have got to make a decision now as you 

have counseled us. Problem is defined as, a question or situation 

that presents doubt or perplexity. I would suggest to you that politicians have problems with Social Security, and I would suggest 

that Social Security itself is in a crisis, according to these definitions. I am just having fun with you. 

Mr. Jefferson for 5 minutes. 

Mr. JEFFERSON. Thank you, Mr. Chairman. This is the first time 

I will have a chance to inquire about anything as a member of the 

Budget Committee, so I am pleased to have a chance to participate 

in these most important hearings. I am sorry that Mr. Portman 

isn’t here, because my line of inquiry has to do with his assertions 

about the value of private accounts. He said, if I can remember correctly, that one might expect a 5 percent return on private accounts 

as against a 1.8 percent or so percent return on that is now yielded 

by Social Security investments. But I note, however, that under the 

President’s proposal, as I am given to understand it, CBO projects 

a 3.3 percent return on private accounts; the Social Security Administration projects a 4.6 percent return; but in each case they 

also anticipate a crawlback of 3 percent. 

And I just want to see if you agree with me that if the CBO 

bears out to be correct at 3.3, with a clawback of 3 percent, then 

there is virtually nothing from the investment that would be yield-
70

ed from private accounts. And if SSA is right and the return is 4.6 

percent with a clawback of 3 percent, then there is actually a 1.6 

percent return. Am I correct in my analysis of that? 

Mr. HOLTZ-EAKIN. If I could, let me say a few words about the 

different rates of return that are floating around, because I think 

there is a fair amount of confusion, particularly about the work 

that we have done. One rate of return is the rate of return that 

is possible in a sustainable pay-as-you-go Social Security system. 

That rate of return with current beneficiaries being paid by current 

taxes, the rate of return is only the rise in the payroll tax base. 

That is the only way you can get a rate of return in that kind of 

a system. In our projections, that would be a number that would 

look like one and a half, 2 percent real increase. We don’t have a 

sustainable Social Security system, so rates of return are quite 

likely to be lower than that in the future as taxes are raised or 

benefits are cut. 

The second rate of return would be the rate of return possible in 

a prefunded system. One could imagine paying for one’s own retirement. Instead of paying for current retirees, you pay for your own 

retirement by putting funds away. There, you could get, given historical rates of return, 3.3 percent after inflation simply by putting 

it in U.S. Treasuries. 

You could also then get a higher rate of return if you chose to 

take more risk. In our estimates, we assume the return on corporate equities is 6.8 percent, inflation adjusted, and corporate 

bonds would be in between. You could pick a portfolio and get a 

higher rate of return. Our rates of return are no different than anyone else’s. Although they differ numerically, we acknowledge the 

higher rate of return——

Mr. JEFFERSON. You have chosen the 3.3 percent figure even 

though you could check the figures and have chosen some other 

ones. 

Mr. HOLTZ-EAKIN. Let me finish. Those are all the rates of return 

that we use, and so those are consistent with history, they are consistent with the economics that we have. 

The final question is, what would be the valuation now of a 

transaction that gave me the access to, say, corporate equity? It 

has a higher return historically, and we don’t dispute that it comes 

with a higher risk. As Mr. Baird’s question suggested, different 

people value that risk return trade-off differently. What we have 

done is examined the average as reflected in U.S. financial markets 

and note that in the U.S. financial markets individuals simultaneously hold Treasuries for the 3.3 return and equities that get 6.8 

in the presence of risk. They therefore right now view their futures 

as valued equivalently. And that is the nature of our analysis. It 

is not quite the same thing as saying the individual account will 

get 3.3 percent. 

Mr. ORSZAG. We should be building accounts where they belong 

and shoring up the traditional program as a core tier of financial 

security. Thank you very much. 

Mr. JEFFERSON. I understand. 

Mr. HOLTZ-EAKIN. It was a long answer, I apologize. 

Mr. JEFFERSON. Right. 

Mr. HOLTZ-EAKIN. There are many, many different returns there. 
71

Mr. JEFFERSON. At the end of the day, though, I am using the 

figure 3.3 percent, because that is—after all that summarizing, we 

ended up with a number that we used as a—I mean, the report 

that I have is that CBO’s suggested rate of return, inflation adjusted, such and such. 

But my point is, there is a clawback in this provision, isn’t there, 

of 3 percent? So whatever we do, whatever number we arrive at, 

we have taken away 3 percent which goes back to the Government. 

The individual person gets what the excess is, correct? 

Mr. HOLTZ-EAKIN. Correct. 

Mr. JEFFERSON. So it would be incorrect to say that there is a 

5 percent return, any percent return is pure investment that 

doesn’t involve the clawback, that would be correct wouldn’t it? 

Mr. HOLTZ-EAKIN. One could evaluate the investment or, as 

David suggested, the whole package. If the package has investment 

plus diminished regular benefit, it is the net effect that would matter. 

Mr. JEFFERSON. Last question, if I could squeeze it in here. What 

would be the value of one’s nest egg now that would yield $850, or 

something like the average return, the average Social Security 

check today that one gets every month? What would be the size of 

a nest egg that one would need to generate that sort of monthly 

income? 

Mr. HOLTZ-EAKIN. I am sure that is a question for Dave. I will 

be happy to provide——

Mr. WALKER. We can find out. Mr. Jefferson, I think there is one 

thing that you and all members need to keep in mind, not all promised Social Security benefits have been funded. 

If you did nothing, then if you are 30 years of age or younger, 

your benefits are going to get cut by 27 percent plus, all at once, 

for your entire life. If you are over 30, your benefit is going to get 

cut by 27 plus percent, all at once, for the remaining portion of 

your life. 

We believe it is important, when you analyze proposals, you have 

benchmarks based on both promised benefits and funded benefits, 

because it is not fair to assume that all the current promised benefits are funded. 

There are going to have to be changes, with or without individual 

accounts, to make this program solvent, sustainable, and secure for 

future generations. 

Mr. JEFFERSON. On the nest egg, can someone answer that—

what size would the nest egg have to be to generate——

Mr. WALKER. I would be happy to try to provide something for 

the record. We could do some math on it and be happy to try to 

give you something. 

MR. WALKER’S RESPONSE TO CONGRESSMAN JEFFERSON’S QUERY ABOUT NEST EGG

SIZE

One estimate of the nest egg required today to yield a monthly benefit is the 

present value of one’s lifetime Social Security benefits. Based on CBO’s Updated 

Long-Term Projections for Social Security (March 2005), the initial median monthly 
72

1This estimate reflects the benefit for a retired worker; it does not reflect disability or survivor benefits. 2 All values are net of income taxes paid on benefits. 

Social Security benefit for a peson aged 65 today1 is about $1,140. CBO estimates 

the lifetime scheduled benefits for that person to total about $127,000 (in present 

value 2004 dollars discounted at the Treasury rate.2

However, as time goes on and both wages and Social Security benefits increase, 

the nest egg required to provide median scheduled Social Security benefits would 

increase. For example, the initial median monthly Social Security benefit for a 

perwson born in 2000 is about $2,083. CBO estimates the lifetime scheduled benefits for that person to total about $265,700 (in present value 2004 dollars discounted 

at the Treasury rate). 

As I noted at my testimony, scheduled Social Security benefits are not funded. If 

you did nothing, according to CBO’s estimates a person born in 2000 would only receive 71 percent of scheduled benefits over his lifetime.

Chairman NUSSLE. Mr. Lungren for 5 minutes. 

Mr. LUNGREN. Thank you, Mr. Chairman, and thank you for appearing. I am sorry I missed your live comments. I was over on the 

floor on the immigration bill. 

From the exchange I just heard, it reminds me of Larry Gatlin 

and the Gatlin Brothers, and the lyrics of the song they sang a 

number of years ago: ‘‘all the gold in California is in a bank in Beverly Hills in someone else’s name.’’ There are a lot of people who 

assume that there is an account sitting there at the Department 

of Treasury with their name on it that is fully funded. 

I guess one of the things we have to do is to try to explain to 

people what the reality is. I think as you pointed out, we have 

promised benefits, but we haven’t funded those benefits. The question is, how do we fund it, and do we do something to essentially 

change in part the nature of Social Security, so it is not only funded, but that we don’t run into these problems in the future? 

I guess I would address this question to both of you to see your 

perspectives on that. 

Secretary Snow has said that each year that we don’t do something it gets worse. They have put a number on it, $600 billion a 

year. 

Can you give me your observations on the accuracy of that comment and how we come to that conclusion? 

Mr. HOLTZ-EAKIN. My observation would be—I am not the source 

of the number, I don’t know how it was calculated, but it has the 

feel of one of these actuarial numbers that looks out over the future 

horizon. 

As I noted in the remarks that you missed, ultimately those actuarial calculations carry with them some budgetary implications to 

make them whole. So to the extent that you want to go that way 

is a matter of preference. I think it is more useful to look at the 

cash-flow demands in the context of the other demands that this 

Congress will face, and that those happen very quickly, the surpluses begin to diminish. They are consequential aspects of the 

Federal budget, and I think that is a metric of how soon things 

happen that will be useful and reveal the trade-offs. 

Mr. LUNGREN. Let me ask it very simply, and that is, is it true 

that every year that we postpone doing something to change the 

system as it is now makes the system worse? 

Mr. WALKER. That is true. The reason it is true is because of demographics, because every year you drop a positive year—last year 
73

we had $151 billion surplus, and you add an increasingly bad year 

because of demographic trends. So it is true that it gets worse with 

the passage of time. 

Mr. HOLTZ-EAKIN. Yes. 

Mr. LUNGREN. A question that I have for you, and this has been 

a subject that often has been talked about, I guess; it is option 2, 

or the Penny option, or whatever we call it, the Tim Penny option—which is to change the indexing from, as it is now, wage increases to price increases. 

There is some graph that the other side keeps putting up that 

shows you are going to diminish the benefits, and they do it as a 

percentage of replacement income, I believe. 

My question is a little different. Maybe I am wrong on this. I 

would like both of your observations. 

If we go to a price indexing, is it not in the nature of price indexing that you are preserving the purchasing power for the individual? In other words, there is purchasing power equity as opposed to what appears that they are suggesting. If you have wage 

indexing, you actually have more purchasing power 10 years down 

the line as opposed to price indexed? 

Mr. HOLTZ-EAKIN. Can we pull up slide 14? 

Slide 14 is an illustrative example of exactly the question that 

you asked, and it shows what would happen to the median person 

in the population. 

Go back one, please. Thank you. 

Under current law, black lines, price indexing, blue lines, current 

law—and these are for people, going from left to right, older to 

younger. The right-hand are those born in 2000. So, under current 

law, you will see that as we move to the right, ultimately benefits 

get cut due to trust fund exhaustion, and then begin to rise after 

that. 

The pricing indexing just sets the purchasing power roughly 

equal. You see the blue lines are the same for all cohorts going forward. That is the nature of that kind of a proposal. 

Mr. LUNGREN. So price indexing would allow you to have the 

same purchasing power year after year after year. 

Mr. HOLTZ-EAKIN. Right. That is the blue lines I am looking at. 

Mr. LUNGREN. Right. But I am just trying to get that clarified, 

because when you go to this question of salary replacement percentage, or whatever it was they were using there, it shows—it 

gives a tremendous diminishing line. If what we are trying to do 

is preserve a system that allows you to purchase what you can now 

on into the future with price indexing, that means something different to me than I had thought. 

Mr. WALKER. I think I can help you. I would say that the difference if you do price indexing, you are preserving purchasing 

power based on today’s standard of living. 

Mr. LUNGREN. Correct. 

Mr. WALKER. OK. If you do wage indexing, you are preserving a 

relative standard of living for tomorrow’s standard of living, so that 

is the difference. 

Chairman NUSSLE. Mr. Case for 5 minutes. 

Mr. CASE. Thank you, Mr. Chairman. 
74

Gentlemen, Social Security is the big picture, and so are a number of the other issues. I am going to go a step above that and talk 

about something that I raised with 

Mr. Bolten yesterday: debt over the long term. 

What I want to engage you in is getting straight in my mind 

where we stand with the debt of this country. Under the budget as 

submitted by the President, as I understand it, the total debt of our 

country today is roughly $7.6 trillion; is that about right, a little 

bit above the $7.3 trillion it was a few months ago? 

Mr. HOLTZ-EAKIN. That presumably includes debt held in trust 

funds? 

Mr. CASE. Yes, all debt; debt subject to the debt ceiling that we 

have voted on a number of times, total debt. The President’s budget 

projection, which only goes out 5 years, projects the debt is going 

to go to $11.1 trillion in 5 years. Now, I just want to be sure that 

I have got straight what I am being told by everybody. 

That is that when we talk about that debt, when we talk about 

the President saying he wants to halve the budget deficit within 5 

years, we are still talking about the accumulation of greater debt 

every single year; is that right? I mean we are not halving the 

budget, but halving the deficit. We have still got a deficit of somewhere between $200 and $300 billion a year. That is adding up, 

right? 

Mr. HOLTZ-EAKIN. Yes. 

Mr. CASE. Fueling a higher debt. That does not include, as I understand, any additional spending, because that is what it is. 

Spending for either outright expenditures having to do with the 

Iraq-Afghanistan war or whatever costs there are, short term, long 

term, permanent or temporary, of converting Social Security or to 

repair the alternative minimum tax or increased debt service for 

that matter. Is that your understanding? 

Mr. HOLTZ-EAKIN. We will do a complete analysis. As you know, 

my understanding is there is recognition in there—the potential 

$80 billion supplemental for 2005 but nothing past that in Iraq. 

Mr. CASE. Now, if we added up all of those assumptions, do you 

have any quarrel with the estimate by my ranking member that 

the total amount would be somewhere in the range of $2 trillion 

additional to that debt? 

Mr. HOLTZ-EAKIN. I am always loath to certify numbers on the 

fly, but we have done calculations similar to that in our January 

budget outlook, and I would be happy to work with you on that if 

you want me. 

Mr. CASE. Is that in the range? 

Mr. HOLTZ-EAKIN. Sounds about right, but I don’t know the 

pieces. 

Mr. CASE. Now, let me cover the next 5 years. I have been told, 

and I believe, that it gets a lot worse a lot faster after that first 

5 years, unless we do something now or next year or sometime in 

the near future. Does that generically ring true to you? 

Mr. HOLTZ-EAKIN. Oh, yes; generically these are the good times. 

The outyears with Medicare, Medicaid, Social Security, rising costs 

in the budget, are all far more daunting than what we are seeing 

right now. 
75

Mr. CASE. For example, that debt number of $11.1 trillion does 

not include the potential extension of tax cuts that under current 

law sunset prior to the end of that budget cycle, is that right? 

Mr. HOLTZ-EAKIN. That is true. I would add that in our 2003 

long-term budget outlook, we showed paths going out to 2050 for 

the budget, with and without the tax cuts, and alternative scenarios. 

The troubling fact is it is very unlikely that current law, fiscal 

policy is sustainable with or without the tax cuts over the long 

term, and that to attempt to maintain the levels of spending committed at the moment would be quite damaging. 

Mr. CASE. I guess what I am trying to get at is, OK, we have 

got the President somehow saying that somehow it is cool and 

good, and it is OK, manageable, sustainable, that we see our total 

Federal debt run up 60 percent in the next 5 years, an increase to 

60 percent, but it is actually a lot worse than that. We can add on 

$2 trillion more debt unless we have a wild increase in income 

somehow or a $2 trillion reduction in offsetting expenses somewhere else. 

We also have the potential at least of a much greater deficit arising, and debt, if we extend the reduction in revenue arising from 

the tax cut extension, right? 

Mr. WALKER. That is right. 

The bottom line is that we face large and growing structural deficits due primarily to known demographic trends and rising health 

care costs; and it is not just on the revenue side, it is also on the 

spending side. 

There are a number of spending items—for example, the new 

Medicare prescription drug bill is going to cost a tremendous 

amount of money. The related costs will escalate beyond the 5-year 

horizon. 

To help let us take last year. Last year the unified budget had 

a deficit of $412 billion, so the Government had to borrow that. But 

the Government also borrowed the $151 billion Social Security surplus and the $4 billion in surpluses elsewhere. 

So the ‘‘on-budget,’’ largely non-Social Security budget deficit was 

much bigger, and that is one reason why you have a difference between debt held by the public, trust fund debt, and total debt. 

When we have trust fund surpluses the Government spends it all 

on operating expenses and replaces the excess cash with IOUs. 

That affects the total number for the debt ceiling, but it is not 

shown as a liability on the financial statements of the U.S. Government. 

Mr. CASE. I am afraid my time has expired. I was just getting 

going. Thank you. 

Chairman NUSSLE. Let me take a quick round, and then I understand that Gen. Walker has to get to another hearing. 

My very good friend, Mr. Baird, earlier was talking about this 

notion that was brought up before about the difference between 

borrowing to spend and borrowing to save. I was trying to think, 

because when I first heard this by the administration, I have to 

say, similar to my friend, I thought, well, wait a minute, borrowing 

is borrowing, you know. There really—is there really a difference? 
76

Then I got to thinking, now, wait a minute. I do it all the time—

or, not all the time—I did it once when I bought my house. I mean, 

I borrowed to invest in something I couldn’t afford right off the bat 

in cash. So we do borrow. 

My guess is my friend from Washington has probably a similar 

situation. He can’t afford his house either. None of us can. But we 

borrow to save and invest in that home. 

We do the same thing for our kids, interestingly enough. I can’t 

pay for my son to go to the college I went to. So I borrow, and I 

am going to make him, you know, work as well to pay for his fair 

share. 

The point is, is that I am willing to borrow to invest in something that is going to come back with a—maybe not a financial rate 

of return for me, but something I know is a pretty strong investment, or at least I hope it is. If it isn’t, I am going to—like I said 

yesterday—build a woodshed. 

The same is true for business, and small business. I was reading 

here in an article in ‘‘Entrepreneur Magazine’’ recently, that in 

order to start your own Subway—not subway system but the new 

franchise, which is evidently one of the hottest-growing franchises 

in the country—you need, I think, $175,000. But it is a pretty good 

investment right now, with the low carb and diets and all that kind 

of stuff, to go out and sink and borrow and invest in a business 

that you want to get a rate of return. So borrowing for operating, 

as you indicated, is different than borrowing for savings or borrowing for an investment vehicle. 

So I understand that there are—you know, to borrow to go to 

Vegas, that is not interesting to me—and it certainly wouldn’t be—

according to what Mr. Holtz-Eakin just said, borrowing possibly to 

sink it into a security might also be a little bit riskier than I want 

to go. But businesses do provide that kind of function all the time. 

We do have a personal connection with this notion of borrowing 

in order to invest. So I see a difference between borrowing for 

spending in the operating budget versus borrowing for savings or 

investment. I just want to put that out there. 

The expected thing was this whole notion of rate of return. This 

is going to be a big challenge, because depending what number we 

pick and how we come up with that, it is going to be a huge debate, 

because some are going to say, wait a minute. Some are first of all 

going to say, this isn’t the way to do it. 

Let us assume for a moment that they are not part of this discussion. Let us assume that it is a matter of do you take the high or 

the medium or the low. What advice would you have with regard 

to rate of return and how we go through the discussion of making 

this determination? You are going to give us advice, the actuaries 

are going to give us advice, the markets are going to give us advice, 

our constituents are certainly going to give us advice. What process 

would you suggest we go through in determining the rate of return 

for this vehicle that we want to set up, which is, as I said, it is 

similar to investing in our kids’ education or investing in our home; 

which is borrowing some money, knowing full well that you are 

taking some risk, but it is a pretty good investment. People do it 

all the time. It is the No. 1 way people save for their retirement 

is in their home. 
77

So how would you help us through this process of going through 

this issue of rate of return? 

Mr. HOLTZ-EAKIN. I would offer a couple of observations. The 

first is that you do not place great emphasis on differences between 

the CBO and SSA. We believe the long-term real return to Treasury is 3.3. They say it is 3 percent—that is, given the standards 

of economic science over these durations, the same estimate. 

We have corporate equities at 6.8 percent. Their estimate is very 

similar. So I think qualitatively these are the same kinds of perceived returns to different investment vehicles that have different 

levels of risk, be they Treasuries, the least risky; corporate bonds, 

a bit more risky. Corporate equity is the most risky out of the 

broad sets of choices. So that is number one. 

Number two, I don’t think that there is any great disagreement 

about the historic returns, as I said, or, as a result, the possible 

outcomes that one could get if you held a portfolio over 50 years, 

again and again and again. On average, we think the corporate equities will turn out to be 6.8 percent. That is what people historically have gotten and would likely continue to receive in the absence of large changes in the economy. 

The real tough question is to make sure that people understand 

the difference between looking backward and, right now, looking 

forward in doing the valuation exercise that financial markets do 

every day. Every day, financial markets and the participants look 

at return opportunities and their risk, and they value those opportunities. They evaluate them by putting their money in or selling 

them off because they decide that that the risk/return trade-off is 

unacceptable. 

This Congress and participants in this debate are making that 

same valuation decision. They are looking at potential risk and return—and we hope that we have displayed that to people in our 

analyses—and they can make a judgment as to whether it constitutes good public policy in the area of Social Security. 

The CBO, in my final observation, simply follows what we think 

of as bread-and-butter budgetary practice in doing this. When we 

value things on the budget, we look to the market. We ask what 

would it cost to buy these supplies for the military? We ask what 

would it cost to provide this aid to schools and education? 

In this instance, we ask what is the market’s valuation of a dollar put out there for investments in the financial market, and markets equate $1 for Treasury and $1 for equity in a very particular 

way, which reflects the average tolerance for risk out there in 

American financial markets, and that is what we are going to use 

to do that valuation exercise. 

It is an extraordinarily difficult area. I anticipate that it will continue to be an area of great confusion. I once made a vow I would 

not talk about modern finance in public, and I have violated that 

vow several times now. 

I would be happy to work with the committee as we work 

through the understanding of the different risks and returns that 

are present in the current system and in any reforms. 

Chairman NUSSLE. Mr. Walker. 

Mr. WALKER. Mr. Chairman, I would say two things. One, I think 

you need to consider input from a number of sources in analyzing 
78

what is an appropriate assumption to make with regard to rates 

of return. But I think you ought to give heavier weight to professional, objective, and credible organizations that do not have a 

vested interest in the outcome, like CBO, GAO and the Social Security actuaries. 

Secondly, I think you have to also understand to what extent is 

the rate of return relevant. We have to keep in mind this is a social 

insurance system. 

Rate of return is something that is interesting for an individual 

to understand how well they are doing, and it may be relevant in 

determining what type of offset there might be in order to be able 

to pay for the individual accounts. If there is a standard offset, for 

example, the example that Mr. Jefferson gave, then the rate of return is only relevant for purposes of determining what kind of deal 

the individual is going to get. 

On the other hand, if there is not a standard offset, it could be 

relevant for determining what the—you know, what other costs to 

the Government might be. 

Thank you. 

Chairman NUSSLE. Thank you. 

I understand, Mr. Walker, you need to leave for your——

Mr. WALKER. I need to leave in about 10 minutes, 

Mr. Chairman, if I that is OK. I wanted to make sure——

Chairman NUSSLE. OK. 

Then Mr. Spratt is recognized for 5 minutes. 

Mr. SPRATT. Has everybody had a chance? 

Chairman NUSSLE. On this panel, as I understand it, yes. What 

we are doing, we went around one time, now we are going to go 

around again. 

So, Mr. Spratt, quickly. 

Mr. SPRATT. First of all, with respect to the time frame for talking about solvency, 75 years is the common standard—the actuaries have established that—but Treasury and others sometimes 

use an infinite timeframe. The dollar difference is significant, it is 

$3.7 trillion for the 75-year-period. It is over $10 trillion for the infinite time period. 

Which is a better index? 

Mr. WALKER. I personally use 75 years, but I think the important 

point is this: irrespective of what period of time you use, you want 

to try to make sure that whatever solution you come up with deals 

with the problem, hopefully indefinitely. In 1983, they solved the 

problem, but they knew on day one that they had only solved it for 

at most 75 years because of demographics. So whichever period you 

use, try to make sure you are achieving a solution that doesn’t 

automatically require you to come back and deal with it again. 

Mr. HOLTZ-EAKIN. I don’t like either. I prefer to look at these in 

the cash-flow context that we displayed in the charts at the outset. 

If one is realistic about the fact that this will take place in the context of a larger set of budgetary demands, I think it is important 

to note not just the number, which is divorced of timing, but how 

fast things get big, and which things hit first. The demographics 

drive Social Security, it is true. 

The demographics also drive Medicare and Medicaid, but the 

health care costs also drive them so they get bigger and they get 
79

bigger quicker. Using these present-value horizons divorces the 

analysis of timing and makes it hard to examine budgetary tradeoffs. 

For that reason, I would encourage you to think about the cashflow futures, the qualitative information you get from the notion 

that the promised benefits lie above the dedicated revenues for as 

far as I can see. So you can pick a horizon and pick a number, but 

qualitatively the policy number is that cash-flow. 

Mr. SPRATT. Well, given the problems we are projecting way into 

the future—longevity, fertility, productivity, and the factors that 

underlie that—isn’t an infinite time frame terribly tenuous? 

Mr. HOLTZ-EAKIN. The uncertainty increases as time goes out, 

which is a reason why we don’t prefer it. Even if it arises at the 

CBO, we try to display the uncertainties because we think they are 

important. But mechanically, we calculate year by year numbers, 

so infinity is a problematic concept for us. 

I think you should look at this not in terms of a right-or-wrong 

issue, but a risk-management issue, and know that making decisions about longer horizons involves greater uncertainty. 

Mr. SPRATT. We had an exchange with the Secretary about the 

likely cost additions to the deficit and to the debt to move to, say, 

partial privatization. 

Our back-of-the-envelope analysis indicates that in the first 10 years of implementation, the costs would be $1.4 trillion. In the 

second 10 years, the cost would be $3.5 trillion. Therefore with 20 

years, the first 20 years of implementation, the cost would be $4.9 

trillion. And of course it wouldn’t stop there, it would continue at 

least past the midpoint of the 21st century. 

Do those numbers sound as if they are roughly in the ball park 

to you, number one? 

Number two, if the Government has to borrow that kind of 

money, are there consequences for the Federal Government, for the 

economy? 

Mr. HOLTZ-EAKIN. Let us just stipulate the numbers are right. 

We haven’t had a chance to scrub them. I would say there are a 

couple of things that are important. 

The first is that this is borrowing that will be put right into savings. So from a national saving perspective, this is a wash. That 

is the difference between a budgetary view of the world and a 

broader economic view of the world. 

Number two, in any reform analysis, the borrowing for individual 

accounts is step two of a two-part process. Step one is what happens to the underlying program. Without knowing the answer of 

what happens to the underlying program, it is not possible to calculate the net borrowing with any real precision. Neither can you 

calculate the economically important impact, which is what will 

happen to net national saving, and, as a result, the ultimate 

growth in the economy. So to be honest——

Mr. SPRATT. You have to make behavioral assumptions amongst 

other things, don’t you? 

Mr. HOLTZ-EAKIN. You have to know the plan. Without knowing 

that, it is not possible to say with any great precision. 

Mr. WALKER. Mr. Spratt, having individual accounts funded from 

the existing payroll tax revenue, even with other reforms, will ac-
80

celerate the negative cash flow, because obviously the other reforms are likely to save money in the outyears, whereas the individual accounts are going to cost money in the near-term years. 

But to a certain extent it is a timing difference. Because if you 

do nothing and if you want to deliver on the promised benefits, it 

is only a matter of how much and when you will have to borrow. 

The other thing is if we end up having to go to the markets to 

borrow more debt from the public rather than borrowing from ourselves—i.e., from the trust funds—then that could have an effect on 

interest rates, because obviously there is going to be more competition for capital. Now, whether or not it would, I don’t know. I am 

not a Ph.D economist, but——

Mr. SPRATT. But this is going to occur in 2020, for example, as 

we begin to liquidate those trust fund bonds in a matter of ordinary course, the ones that have already accumulated, and the Social Security administrator has to go to the Treasury window, 

present their bonds for redemption. That is going to require that 

internally held debt be converted to externally held debt. So you 

have that burden in the market, several trillion dollars for that 

kind of conversion. 

Then you load on top of it $3, $4, $5 trillion more, plus the debt 

we are accumulating in the operating budget of the United States. 

It seems to me that sooner or later we hit the wall. I mean, there 

is a limit beyond which we can go and borrow without convincing 

the world’s markets that there is a high risk that we will try to 

inflate our way out of it, that this somehow disavows some of the 

debt. 

Mr. HOLTZ-EAKIN. Let us do all three in order. 

First, the operating or budget deficit. I won’t repeat all the 

things I have said about what I view as the sustainability of our 

fiscal condition. 

Step two, redemption of bonds in the trust fund. Absolutely, 

those bonds will be redeemed. They are backed by the full faith 

and credit of the Federal Government. The question is how they 

will be redeemed; if indeed they are redeemed by simply borrowing 

from the public, that will represent essentially de facto increases 

in the operating borrowing, and we will have the same consequences. 

Step three, additional borrowing, which is immediately funneled 

into individual accounts. That, I think, is qualitatively different. I 

believe financial markets will be well equipped to see the difference. They will see additional Treasury borrowing; they will see 

a simultaneous increase in the demand for that same borrowing if 

individuals put Treasuries into their portfolios. If they don’t, there 

will be a broadly defined increase in the demand for financial market investments. 

Mr. SPRATT. Well, it may be perceived differently to some extent 

by the financial markets. But with respect to the Federal budget 

and how the debt affects its operation, it still has to be serviced, 

it still has to be paid. To the extent those things are honored, it 

displaces something else. It takes precedence. If anything, it is 

obligatory in a Federal budget that we have got to pay the interest, 

and we have got to pay the debt. 
81

Mr. HOLTZ-EAKIN. I will be the last person to disagree with focusing on the budgetary consequences of Social Security reform. I 

mean, I think looking at the broad budget context is exactly right. 

My point is simply that financial markets will be in a position 

to see both the additional borrowing and any additional investments. They won’t have to speculate about it. It will happen at the 

same time with observable cash flows, and that will make it easier 

for them to discern the net demands that the Nation makes on 

their capital markets. 

Mr. SPRATT. One final question to Dr. Holtz-Eakin. Can we expect your analysis of the President’s budget early in March, the 

first week in March? 

Mr. HOLTZ-EAKIN. You will have the numerical analysis in time 

to mark up the budget resolution. You will get the full-blown analysis with the words shortly thereafter. 

Mr. SPRATT. One other question. Do you have enough data now 

to do a financial markup of the President’s proposal? 

Mr. HOLTZ-EAKIN. No. 

Mr. SPRATT. Thank you. 

Mr. PORTMAN [presiding]. Thank you, Mr. Spratt. 

I missed my questions earlier, so I will take my questions now, 

and then we will go on to Mr. Cooper. 

First of all, I appreciate your testimony today, as always. Both 

of you give us additional insights that are helpful. And we had an 

interesting discussion earlier, the Secretary of the Treasury, about 

so many of these issues. 

The one I focused on, of course, was the fact that we have this 

trust fund that is sometimes described as being available for retirement benefits without paying, in other words, without having to either borrow more, tax more, or cut spending. And that is simply 

not the case, because we have spent it. 

You talked about the personal accounts as being qualitatively different, Mr. Holtz-Eakin, and you focused on the fact that net national savings should be a wash, because you are taking funds in 

for investments. 

Some of those investments, as you rightly state, will actually go 

directly into Treasury; others will go into equities; others will go 

into corporate bonds. And in a very regulated way, the President 

has laid out a program, you know, that is not outside of Social Security. It is very much regulated by the Government and within Social Security. 

Can you talk a little about that aspect of it? In other words, 

when we are borrowing for whatever the number is—and Mr. 

Spratt has a number—it may be correct for personal accounts—

aren’t we both adding to our savings—and this is capital that will 

be available out there in the municipal—therefore also helping the 

economy. In other words, your economic growth numbers that you 

need to come up with, your projections I assume would be affected 

by that. 

Then finally this notion of whether we have a long-term liability 

or not with regard to the trust fund. Couldn’t you say in a sense 

that some of that liability is being prepaid—and this is what Mr. 

Walker indicated earlier—that in effect, what we are doing with 

part of this is we are prefunding a part of the Social Security obli-
82

gation, and in a sense, therefore, we are deferring some future liabilities. 

I guess my specific question would be to you, you know, how 

would you analyze all of this? What would your economic growth 

projections be? How would they be affected by this? How would you 

analyze it in terms of your impact on the budget deficit as compared to other kinds of borrowings; and, you know, how you believe 

this—what you termed as qualitatively different kind of borrowing—would affect the economy? 

Mr. HOLTZ-EAKIN. With the caveat that the details will matter, 

the rough template by which one would go through the analysis, 

I think, is fairly straightforward. The first would be to look at the 

difference from current law in the nature of the traditional benefits 

under Social Security, and what that looks like to individuals on 

a forward-looking basis: Are they getting a better or worse deal 

from the traditional program compared to what they could have expected under current law? That will inform their saving and labor 

supply decisions from that perspective alone. 

The second would be to add in any individual accounts, and they 

would then make their decision about whether on the whole they 

have been made better or worse off in a financial sense by the reform. To the extent that every individual, say, on average, felt that 

they were better off, they would actually save less. By that, I mean, 

if they had more in their future and they were wealthier, they 

could consume more. If they felt that this increased their desire to 

save, we would see increases in personal saving. Then we would 

balance that against any change in the overall Government borrowing to look at what happens to national saving. 

That, in the end, is the key determinant in the ability to finance 

capital accumulation, that grows the size of the economy. So we 

would have to trace through for individuals and for the Government the net impacts on their financial futures and look at the economic feedbacks, and we would do that. Starting with a projection 

of the future, you would layer on it the new program, you would 

analyze at the individual level the benefits they get out and taxes 

they would pay. 

As you can imagine, all of this hinges critically on the nature of 

the reform, number one, but it also hinges critically on the baseline—in particular, for financial markets—the baseline perception 

of the outlook for Social Security. 

To give you the outer bounds, one could think that the baseline 

perception of financial markets is the gap between benefits promised and benefits—revenues dedicated. That gap is wide and forever. That would be a daunting thing for financial markets. 

Or they could take current law at face value and assume that 

after 2052 that closes. There is a very different baseline view of the 

outlook for Social Security depending on where you come down on 

that. We are actively engaged in talking with the financial markets 

and talking with experts in this area to see what their expectations 

are about the current program before you can analyze how they 

would react to any change. 

Mr. PORTMAN. That is an interesting point and the behavioral 

model is interesting, too. But let me ask two questions. 
83

One, with regard to the Social Security proposal as it has been 

laid out, whether it is the President’s proposal or others that have 

been talked about in the past—Senator Moynihan’s commission 

laid out a few different options—is it your sense that financial markets would react favorably or unfavorably to those kinds of options? 

And this is relevant not because financial markets determine what 

our entire economy is going to look like, but they do have a big impact on interest rates. You say you are going to run some of these 

ideas past some people who might reflect for you the financial markets. Don’t you already have a sense of that one way or another, 

and what is it? 

Mr. WALKER. Mr. Portman, if I can excuse myself. 

I had mentioned to Chairman Nussle that I have got an oversight hearing before an oversight committee. 

I would be happy to answer any questions that anybody might 

want to——

Mr. PORTMAN. Thank you for your testimony, Mr. Walker. 

Mr. WALKER. Thank you. 

Mr. PORTMAN. If you want to take a crack at this question before 

you leave, you certainly may. 

Mr. WALKER. No, that is OK. I think I will let Doug answer it. 

Mr. HOLTZ-EAKIN. We have some sense of it, but I would hesitate 

to give it a convenient summary. Here is the hard part—and this 

is shared by the financial markets and the CBO and anyone who 

with will look at this area ultimately—with a voluntary election reform—the real money depends on how many people participate. 

The details then at the individual level about how this looks in 

terms of what they are going to get with their individual account, 

first, the unspecified-at-the-moment traditional program is a key 

part of how many people will take it; as a result, how much borrowing will be necessary to finance it and what the ultimate financial implications will be. 

I would say the financial markets in the CBO are roughly in the 

same place at the moment, which is—we would really like to see 

the details before we make that call. 

Mr. PORTMAN. If you assume that two-thirds of those people who 

would be available would take advantage of the personal accounts, 

you indicated that you would have to make certain assumptions 

about their saving behavior, so on. Wouldn’t they feel safe—or less 

safe, and therefore save more or less—but wouldn’t it have an independent impact on economic growth simply that by having the savings out there—it would be, as we know probably, in bonds, corporate bonds or in Treasuries or in some kind of an index Treasury 

account—doesn’t have that have an impact on the economy independently? 

Mr. HOLTZ-EAKIN. To a first-order effect, no, because it will be 

balanced by the borrowing at the Federal level and then borrowings in the financial market would be unchanged. 

Mr. PORTMAN. Thank you, Mr. Holtz-Eakin. 

We now have at least one more questioner, Mr. Cooper. 

Mr. COOPER. Thank you, Mr. Chairman. 

I apologize, I had a simultaneous hearing with Armed Services. 

First, I think Republicans and Democrats would both agree that 

four of President Bush’s primary initiatives, probably four initia-
84

tives that he will be judged by history on, would be the Iraq war, 

tax-cut permanency, Social Security reform, and the Medicare drug 

bill. 

My chief of staff, Greg Hinote, thought this up. What do those 

completely different major initiatives have in common? The answer 

is, sadly, maybe tragically, none of those is accurately reflected in 

the President’s budget. 

We learned today that the Medicare drug bill was seriously underestimated. Social Security reform is completely ignored in the 

budget. The Iraq war is not funded beyond September 30th of this 

year. And for tax-cut permanency, apparently they are thinking 

about changing the budget rules, so the cost of that scored a zero. 

Mr. HOLTZ-EAKIN. If I could, I would like to point out that Mr. 

Spratt and Chairman Nussle were given a copy of the testimony we 

wrote to Chairman Thomas of the Ways and Means Committee 

today about this question of whether the Medicare drug bill is, in 

fact, more expensive than originally estimated. 

The answer to the question basically is no. I think that if one did 

an apples-to-apples comparison over the same budget windows, 

with the same components, we would estimate that it is about $6 

billion more expensive than we anticipated. I don’t think that the 

CMS estimates are radically different from that. 

So I think for the record it is important to recognize that there 

has not been a lot of clarity about these cost estimates from the 

beginning, but it doesn’t look like the bill is any more expensive at 

the beginning than it was at the outset. 

Mr. COOPER. Even if we concede that point, three out of the four 

President’s major initiatives are met, representing the budget, 

which almost makes a travesty of the operations of this committee. 

You know, we can talk about whether we are seeing 150 programs 

the President promises to cut and things like that; that is the small 

potatoes. 

The big stuff, none of it is accurately represented in the budget, 

with the possible exception of the Medicare amendment. On Medicare, did you anticipate that Medicare was going to cover Viagra 

and other things like that in their medical benefits package? That 

was just in the news a week or two ago. 

Mr. HOLTZ-EAKIN. Well, in our review of Medicare, to date we 

haven’t changed our estimate very much. The most important, even 

in the young life of the MMA, is the issue of the final regulations. 

We are reading through the thousands of pages to see if the implementation matches what we envisioned when we did the cost estimate. The answer to that question will arrive with our estimate of 

the President’s budget in March. 

Mr. COOPER. Different line of questioning. I asked Secretary 

Snow if he had a valuation for the disability component of Social 

Security benefits. He did not give me an answer; said he would try 

to supply one. Do you have a valuation for the disability component 

of Social Security benefits or the survivorship death benefit component of Social Security benefits? What would that be? 

Mr. HOLTZ-EAKIN. Our analysis includes all three components of 

the program. It includes the dollar values. I don’t know them off 

the top of my head. We can certainly get them to you. They are 

buried in our reports. 
85

I will point out that our numbers are the answer to the question: 

What do you get after the fact, given that you are disabled? The 

real valuation question is the insurance value if you don’t know 

how it is going to turn out. We are still working, trying to put the 

best number on that. 

Mr. COOPER. So you at CBO still do not have a valuation, an insurance valuation of those benefits? 

Mr. HOLTZ-EAKIN. Not a broad social insurance value that—of 

the type that would be appropriate. 

Mr. COOPER. As far as you know, are those benefits commercially 

available from any company in the United States? 

Mr. HOLTZ-EAKIN. Not the type of benefit offered in the broad 

pool at Social Security. 

Mr. COOPER. So, right now, would it be available for purchase nowhere else other than through the Social Security system? 

Mr. WALKER. That benefit, no. 

Mr. COOPER. Final question. What if in a Social Security compromise reform package some part of the corpus of the Social Security Trust Fund was invested in some sort of safe market investment as opposed to just Treasury securities? That would achieve 

some of the goals of the folks who advocate privatized accounts, 

wouldn’t it, by enabling a better rate of return possibly to be 

achieved, rather than just the ultraconservative investment and 

Treasury instruments? 

Mr. HOLTZ-EAKIN. It would have the same implications as the 

analysis of individual accounts. You have higher return at higher 

risk, risk is present. 

Mr. COOPER. Only the risk would be spread across the society, 

as opposed to perhaps subjecting an individual who may have chosen unwisely—the risk would be spread, as opposed to individualized, right? 

Mr. HOLTZ-EAKIN. The same total risk would be present. It could 

be distributed in many ways. 

Mr. COOPER. Has the CBO done a study of that sort of Social Security reform? 

Mr. HOLTZ-EAKIN. In the late 1990s, there were a series of studies looking at Social Security reforms, including looking at investments in private accounts. I don’t know the names off the top of 

my head, but we would be happy to get what we have to you. 

CBO PAPERS ON PRIVATE ACCOUNTS AND RELATED ISSUES

Social Security Privatization and the Annuities Markets (February 1998)

Letter to the Honorable Bill Archer regarding Professor Martin Feldstein’s proposal 

to set up personal retirement accounts financed by tax credits (August 1998)

Social Security Privatization: Experiences Abroad (January 1999)

The Budgetary Treatment of Personal Retirement Accounts (March 2000)

Social Security: A Primer (September 2001)

Evaluating and Accounting for Federal Investments in Corporate Stocks and Other 

Private Securities (January 2003)

Social Security Reform: The Use of Private Securities and the Need for Economic 

Growth (January 2003)

Acquiring Financial Assets to Fund Future Entitlements (June 2003)

Administrative Costs of Private Accounts in Social Security (March 2004)

Long-Term Analysis of Plan 2 of the President’s Commission to Strengthen Social 

Security (July 2004)
86

Long-Term Analysis of H.R. 3821, the Bipartisan Retirement Security Act of 2004 

(July 2004)

Mr. COOPER. I thank the Chairman. 

I see my time has expired. 

Chairman NUSSLE [presiding]. Thank you, Mr. Cooper. 

Mr. Davis for 5 minutes. 

Mr. DAVIS. Thank you, Mr. Chairman. I don’t mean to prolong 

Mr. Holtz-Eakin by coming in late, but I had multiple hearings 

going on also. 

Let me go back to the line of questions I had with the Secretary, 

and I think it is an important policy to debate with this committee. 

Obviously, I think there is very broad agreement if we wanted 

to fix, quote-unquote, the Social Security shortfall, we would have 

the fiscal capacity to do it by dipping into the tax cuts, if you will, 

by suspending a portion of the tax cuts. The argument against 

doing that is based on the theory that if we walk away from the 

tax cuts that it will retard the great rate of growth. 

What I was exploring with the Secretary is that that has not empirically been the case in our economic history. In the 1990s—well, 

today as I understand it, the rate of corporate individual taxation 

as to GDP is around 15 to 16 percent; is that about right? 

Mr. HOLTZ-EAKIN. I am sorry, say it again. 

Mr. DAVIS. The rate of corporate individual taxation as to GDP 

is 15 to 16 percent of GDP today. 

Mr. HOLTZ-EAKIN. We are at about 15 to 16 percent Federal receipts, a fraction of GDP. 

Mr. DAVIS. OK. So about 15 to 16 percent, very low levels historically, lowest since World War II. 

Now, we have also had—what has our growth been for the first 

half of this decade; growth of GDP for the first half of this decade? 

Mr. HOLTZ-EAKIN. I don’t know the number off the top of my 

head. It runs through a recession, then a recovery. 

Mr. DAVIS. But you would certainly say less than the 1990s when 

we had a robust recovery. 

Mr. HOLTZ-EAKIN. Yes. 

Mr. DAVIS. And in the 1990s, we had a taxation rate—combined 

corporate rate plus income—of around 21 percent, 22 percent; you 

would agree with that? 

Mr. HOLTZ-EAKIN. Only at the end. Tax receipts as a fraction of 

GDP edged above 20 percent toward the end of the 1990s, largely 

driven by the equity-based income taxation. 

Mr. DAVIS. Was there any point where it dropped as low as 16 

percent during the 1990s? 

Mr. HOLTZ-EAKIN. No. 

Mr. DAVIS. At the time of greatest growth in the 1990s; what 

would those years have been, 1996 to 2000 roughly, or 1996 to 

1999? 

Mr. HOLTZ-EAKIN. Yes. 

Mr. DAVIS. What was the rate of taxation from 1996 to 1999 as 

to GDP? 

Mr. HOLTZ-EAKIN. Well, it rose during that period. 

Mr. DAVIS. OK. 

Mr. HOLTZ-EAKIN. Receipts as a fraction——
87

Mr. DAVIS. OK. So obviously higher than the 16 percent we have 

today, conservatively higher. You would agree with that. 

Mr. HOLTZ-EAKIN. Yes. 

Mr. DAVIS. So we can conclude from the 1990s that a higher tax 

rate did appear to retard growth. Go back to the 1960s, when you 

and I were born, we had a very high—what some people thought 

was a confiscatory rate of taxation—corporate-based income was 28 

or 29 percent in the 1960s, wasn’t it? 

Mr. HOLTZ-EAKIN. Rates were much higher in the 1960s. 

Mr. DAVIS. So as to GDP it would have been 28 to 29 percent. 

Mr. HOLTZ-EAKIN. No, as a fraction of GDP it wasn’t that high. 

Mr. DAVIS. OK. Was it higher than 16 percent? 

Mr. HOLTZ-EAKIN. The GDP number will be the average taxes 

raised. Economic behavior is going to be driven by marginal tax 

rates. We have seen big shifts across this period in average rates 

between individuals and corporations and the structure of the individual rates across that. 

So I am sympathetic to your point that not just taxes drive economic performance. I think that is absolutely right. I guess what 

I would also point out at the outset is in thinking about this in the 

context of Social Security, it is important to discuss what constitutes a fix. 

The reason I raise this is that in our projections scheduled benefits are about 2 percentage points above scheduled receipts as a 

fraction of GDP. On the long term, the tax cuts are about 1.4 percentages points of GDP. 

So if one wants to fix Social Security in a cash-flow sense, so that 

it never intervenes with the rest of the Federal budget, it requires 

a larger fix than the one you are discussing. 

If one wants to fix it in an actuarial sense, those numbers are 

typically smaller, but they require a simultaneous effort on the 

part of this committee, and in particular on the Congress in general, not to touch funds that are dedicated from the remainder of 

the budget to Social Security. 

Mr. DAVIS. So let me cut you off, because my time is expiring. 

Mr. HOLTZ-EAKIN. So I know what the fix means here. 

Mr. DAVIS. Yes, I think that is an important distinction. 

But since my time is low, let me ask another point. Let us assume hypothetically we were to take the short-term approach as 

you describe it, and that we were to draw down the tax cuts, if you 

will, to deal with the temporary shortfall projected in Social Security. 

Wouldn’t there be a commensurate rise in consumer and investor 

confidence that might make up for any lost confidence because 

some of the tax cuts were being repealed? 

Mr. HOLTZ-EAKIN. First of all, we will have to figure out what 

‘‘temporary’’ means. But let us leave that aside. I think the problem is as far as the eye can see. 

Mr. DAVIS. I guess I am asking a fairly narrow proposition, then. 

Mr. HOLTZ-EAKIN. But if you ask what will happen to financial 

market confidence, you know, long-term interest rates reveal no 

lack of confidence at the moment in U.S. Treasury securities. 

Mr. DAVIS. Let me slip in another quick question in the last 15 

seconds. 
88

Another thing that I asked the Secretary about was the basis for 

the projections around the shortfall by 2042. I thought the Secretary initially agreed with me and with the Social Security Administration that the projected growth of the GDP over that period 

of 30-some years was around 1.8 percent. Then he seemed to say 

that it wasn’t the GDP, it was the level of productivity. 

Can you weigh into that and tell us what is accurate? Is the 

President’s estimate of the shortfall based on 1.8 percent productivity or 1.8 percent GDP between now and 2042? 

Mr. HOLTZ-EAKIN. Long-term GDP projections are usually put together by counting the number of bodies that will be available, 

growth in the labor force, and then how much more productive 

each body will be. Those are the two basic building blocks. 

Mr. DAVIS. OK. 

Mr. HOLTZ-EAKIN. Over the long term, the key movement is not 

in productivity which remains, in those projections and in ours, 

pretty solid over the long term and similar to history. The key aspect is the slower growth in the labor force. That is present even 

in our 10-year budget projections where GDP growth averages 3.4 

percent up to about 2010 and then drops to 2.7 percent. That is the 

retirement of the baby boom, that is fewer people coming into the 

labor force. It reflects the fact that over the long term the native 

population is below replacement fertility. 

So it is true that the fundamentals are in the same good historical shape they were, but the bodies to which they were being applied are diminishing as we go forward. 

Mr. DAVIS. Let me—and I don’t want to push my luck on the 

time—but just to push this to its logical conclusion, taking all of 

that aside—and that is not exactly what Secretary Snow said. I 

have probably been on your accuracy over his, given your impartiality as opposed to his. 

But let us assume that 1.8 percent number over 30-some years—

would that not be a lower number than the growth that we have 

enjoyed, for example, than we have enjoyed over the last 30 years? 

Mr. HOLTZ-EAKIN. Yes, it would be. 

Mr. DAVIS. OK. And would that not likely indicate that the stock 

market possibly would not perform as robustly as we would want 

it to? I mean, he argued that there was—he rejected that correlation. Can you comment on that? 

Mr. HOLTZ-EAKIN. Yes, I think there is no reason to automatically assume there is a bad stock market going forward. The fundamentals——

Mr. DAVIS. There is no reason to assume either way, is there? 

Mr. HOLTZ-EAKIN. No, I think that there is no reason to dramatically change your view of the future of returns to equities based on 

that number in any way. I mean, if the productivity numbers are 

about the same, if the productivity numbers are about the same, 

productivity drives profitability and the pricing in the market. 

While we can fiddle at the edges with the number, I think qualitatively those projections and the ones we do are all in line. 

Mr. DAVIS. OK. Thank you Mr. Chairman. 

Chairman NUSSLE. Thank you, Mr. Davis. 

There has been a discussion—while you are still here to be able 

to respond—we did discuss yesterday this issue of the percentage 
89

of Federal receipts as to GDP and determined that, in fact, if the 

permanence goes forward—in other words, there is no change in 

our current tax policy—which is assumed in the budget, by the 

way, per Mr. Cooper—that the percentage would rise. I believe it 

was to 17.2 percent. I can’t remember the number. So you will have 

an increase in your percentage of GDP, even with tax permanence. 

Thank you, Dr. Holtz-Eakin for your testimony today. We appreciate your coming before us again. We look forward to working with 

you on Social Security and the budget. 

No further questions for you. 

We are going to move on to the next panel. 

Mr. HOLTZ-EAKIN. Thank you. 

Chairman NUSSLE. We are pleased to be joined now by Dr. Peter 

Orszag. 

Dr. Orszag is a senior fellow at the Brookings Institution. He is 

also a retirement policy expert, one with whom I have agreed and 

disagreed, but always respect his work. 

Dr. Orszag, thank you for being with us. We have had a long 

day. As you can see, we have lost a few members to other hearings. 

But if you would please proceed after we have an opportunity for 

my colleague, the ranking member, to make any introductory remarks. 

Mr. Spratt, I already welcomed him. 

Mr. SPRATT. Dr. Orszag, Mr. Orszag, thank you very much for 

coming, and, more than anything, thank you for your forbearance. 

We are sorry you had to wait so long. We will let you be the cleanup hitter and we expect you to hit it out of the park. 

Thanks for your interest and thanks for coming and your excellent contributions. 

Chairman NUSSLE. Dr. Orszag. 

STATEMENT OF PETER R. ORSZAG, PH.D., SENIOR FELLOW, 

THE BROOKINGS INSTITUTION 

Mr. ORSZAG. Thank you. I want to make four or five points, and 

I would emphasize that there are a lot of details that have not been 

filled in yet, but those that we do have are insightful—and even 

more insightful when I turn on my microphone. 

First, under the administration’s proposal, workers who opt for 

individual accounts would pay back that diverted revenue plus 3 

percent interest at retirement through reduced Social Security benefits. 

In many ways this is quite similar to a loan. The worker receives 

cash up front, gets to invest that money, but then has to pay back 

the principal plus interest later. In many ways, again, this is quite 

similar to a loan. The form of repayment is not critical to the underlying nature of the transaction. 

Let me give you a specific example. Someone in high school 

today, who would turn 21 in 2011, could put $500 in 2011 into his 

or her account, $1,000 in 2015, et cetera—these are all inflationadjusted dollars—but would also owe a debt back to Social Security 

at retirement at age 65 in 2054 of roughly $150,000. 

So that worker, just like with borrowing money, that worker 

winds up better off only if his or her account exceeds that $150,000. 

It is worth noting that under the administration’s assumptions, if 
90

the worker did invest in bonds, in Government bonds, that account 

would only grow to $142,000, less than the $150,000 debt owed 

back to Social Security. The reason is that the administrative costs 

on the accounts open up a wedge between the Government bond 

rate and the net return to the individual. 

Of course, this is not a—this analogy should not be taken literally. There is not a contract involved in this transaction. But 

nonetheless, it is a very useful analogy. Basically the outcomes are 

equivalent to someone borrowing money at a 3 percent real interest 

rate, with the repayment undertaken through reductions in traditional Social Security benefits. 

Second point. The administration itself has said that there is a 

net neutral effect from this proposal on the solvency of Social Security. And viewing it from the prism of a loan, one can see why the 

Treasury rate is assumed to be 3 percent. If you loan money at 3 

percent, and you are borrowing at 3 percent, it is a wash as long 

as the loan is fully repaid. But I want to emphasize that that is 

actually the best possible outcome, because there are many situations in which these implicit loans will not be fully repaid. Let me 

give you a few examples. 

First, the administration has highlighted that if you would die 

before retirement, your account will pass to an heir. A key question 

is what happens to the liability associated with that account? Does 

that also pass to your heir, in which case the bequest is a mixed 

blessing; the young will inherit both an account and a debt. 

Under the President’s Commission models, all that happened 

was the account was passed along, not the debt. That means Social 

Security and the Federal Government is out that money. 

Similarly, there are many workers who work for less than 40 

quarters or 10 years. They don’t have any traditional Social Security benefits because they are not eligible for retirement benefits 

under the current program. They have no traditional benefit under 

which to offset the cost of the diverted revenue plus interest. And 

you can keep going down the line. 

There are a variety of situations in which—at least based on the 

specification we have seen to date—the situation, the accounts 

would actually make solvency worse, not better, even over the infinite horizon that the administration prefers. That conclusion is 

only strengthened over the 75-year horizon that is traditionally 

used. 

Third point. It has already been emphasized that there is a significant increase in public debt associated with these accounts. 

I want to point out that that increase is a permanent increase 

in the very long term if just the accounts by themselves raise public debt as a share of GDP by about 25 to 30 percent of the economy. The reason is that even if each individual loan is eventually 

repaid through reductions in Social Security benefits, at any point 

in time there are always some loans outstanding. That means that 

public debt is always higher than in the absence of the accounts. 

Now, there was a discussion earlier about whether this matters, 

about whether that is just trading one form of debt, public debt, for 

another form which is future benefit promises. 

I would argue that it does matter. I don’t know any country that 

has gotten in trouble or had trouble, a financial crisis, because of 
91

a high implicit debt; that is, large future benefit promises. I know 

of many that have gotten in trouble with a large explicit debt. 

Trading implicit debt for explicit debt is not a neutral transaction. Explicit debt has to be financed in the financial markets. It 

has to be rolled over. Arguing that a dollar of debt today doesn’t 

really matter, because we will have a dollar less public debt in 

present value in 50 or 60 years, I think is a problematic argument 

in the real world. It works in economic theory; it doesn’t work in 

real-word financial markets. 

My final point is that because the accounts do not do anything 

to improve long-term solvency, and likely harm it, there are other 

changes that will be necessary to restore solvency to Social Security. If there is no additional revenue dedicated to the program, 

there are very severe benefit reductions that have to occur in order 

to eliminate the deficit. 

So if you combine the benefit reductions that are tied to the accounts, and then add on top of that the benefit reductions that are 

necessary under the administration’s type of approach to eliminate 

the long-term deficit in Social Security, the traditional program 

truly withers on the vine over time. 

Take that young worker I already talked about. The traditional 

benefit would go from replacing 36 percent of previous wages to 7 

percent of previous wages, a dramatic decline, roughly a fifth of the 

current-law benefit. Now, that worker would have an account 

which could make up part of the difference. But if you use the Congressional Budget Office analysis, it does not make up the full difference, so there are very substantial benefit reductions that are 

entailed in these accounts, plus trying to eliminate the long-term 

deficit in Social Security. 

My final point would be—my view is that we do need individual 

accounts. We already have them, they are called 401(k)s and IRAs. 

Mr. Portman has been one of the leaders of building savings in the 

areas of those vehicles. I think that is where our attention should 

be in terms of building wealth and ownership. There is a growing 

body of evidence about what works there. It is not necessary to 

mortgage future Social Security benefits to increase account ownership. 

PREPARED STATEMENT OF PETER R. ORSZAG, JOSEPH A. PECHMAN SENIOR FELLOW, 

THE BROOKINGS INSTITUTION1

Mr. Chairman, thank you for inviting me to testify before you this morning. On 

February 2, the Bush Administration released some details about its proposal to replace part of Social Security with individual accounts. Even with these admittedly 

incomplete details, several points now appear clear: 2

• Under the Administration’s plan, payroll taxes deposited into an individual account are essentially a loan from the government to the worker. The Administration’s proposal is the equivalent of a loan that mortgages future Social Security benefits: Workers opting to divert payroll taxes into an account today would pay back 

those funds, plus interest, through reductions in Social Security benefits at retirement.3 In other words, just as with a loan, the worker receives cash up front and 

then owes money back, with interest, later. Someone who borrows money to make 

an investment benefits if the assets purchased with the borrowed funds grow faster 

than the debt; the person is worse off if the debt grows faster than the investment. 

Similarly, under the Administration’s plan, workers wind up with higher retirement 

income if the income from their accounts exceeds the benefit reductions that pay off 

the loan, and vice versa. 

• The accounts not only fail to reduce the Social Security deficit, but will likely 

increase it. Even an Administration official has acknowledged that the accounts pro-
92

posed by the President would have a ‘‘net neutral effect’’ on Social Security’s financial condition over the long term. The reality is likely to be even worse, however: 

The accounts will likely harm Social Security’s long-term deficit. The reason is that 

not all the ‘‘loans’’ from diverted revenue will be repaid in full; in several situations, 

which I will describe below, subsequent benefit reductions will be insufficient to offset the cost of the diverted revenue plus interest. As a result, even over the ‘‘infinite 

horizon’’ that the Administration favors, the accounts not only fail to reduce the deficit in Social Security; they make it worse. Over the traditional 75-year horizon used 

to evaluate Social Security solvency, this conclusion is only strengthened. 

• The accounts by themselves entail a significant and sustained increase in public 

debt. By themselves, the individual accounts would increase public debt by more 

than $1 trillion during the first decade they were in effect and by more than $3.5 

trillion during their second decade. The increase in public debt, moreover, would be 

permanent: Even if each individual ‘‘loan’’ were eventually repaid in full, public debt 

would remain higher than in the absence of the accounts over the long term. The 

reason is that even if each loan were eventually repaid, some loans will always be 

outstanding. As a result, the government will never, at any point in time, yet have 

been paid back for all the revenue diverted into accounts—and therefore public debt 

will always be higher than without the accounts. The bottom line is that the Administration’s account proposal would raise public debt by more than 30 percent of GDP 

over the very long term. And even if the account proposal were combined with other 

measures that (unlike the accounts) would reduce the deficit in Social Security, public debt would remain higher than in the absence of the plan for several decades. 

Such higher levels of public debt are problematic because they increase the exposure 

of the government to a collapse in financial market confidence. 

• The Administration’s ultimate plan will have to rely on severe benefit reductions to eliminate the Social Security deficit. Since by the Administration’s own admission the accounts do not reduce Social Security’s deficit, and since the Administration is opposed to dedicating additional payroll taxes to the program, the Administration’s plan to eliminate the long-term deficit in Social Security must involve severe reductions in benefits (or introduce some new revenue source for the program). 

In particular, any plan that closes the deficit, includes the accounts the Administration has already proposed, and fails to dedicate additional revenue to Social Security 

must involve substantial cuts in traditional benefits beyond those required to pay 

back the loans to workers opting for individual accounts.4 The combined effect would 

be a stunning decline in the defined benefit component of Social Security over time. 

For example, if one prominent type of benefit reduction (often referred to as ‘‘price 

indexation ’’) were combined with the loan repayments necessary under the Administration’s accounts, traditional benefits for a young average earner today could decline drastically—instead of replacing more than a third of the worker’s previous 

wages, Social Security’s defined benefits would replace well under a tenth. 

Building ownership and wealth should not come at the expense of mortgaging future Social Security benefits. Nor should Social Security reform be associated with 

a significant increase in public debt: such an increase is not necessary to reform Social Security or even to create individual accounts. Furthermore, the accounts in the 

Administration’s plan by themselves would not increase national savings, and could 

end up reducing it (if individuals decide to contribute less to their 401(k)s and IRAs 

because they see other money accumulating in their individual account).5

A better approach would shore up the existing Social Security system while raising saving in addition to Social Security. Several common-sense steps could substantially boost saving outside of Social Security. 

THE LOAN ANALOGY

Under the Administration’s proposal, the individual account system would involve 

two components: the individual account assets, which would contain a worker’s deposits and the accumulated earnings on them, and a ‘‘liability account.’’ If a worker 

chose to participate in the individual account system, 4 percent of payroll taxes (initially up to a limit of $1,000, with the limit gradually eased over time) would be 

diverted into the account, accumulate during the worker’s career, and be available 

to the worker upon retirement.6 Since the revenue diverted to this account would 

reduce the financing available to the traditional Social Security system, a ‘‘liability 

account’’ would also be created. This liability account would track the amounts diverted, and accumulate them at a 3 percent real interest rate. The liability account 

would determine the debt owed back to Social Security at retirement because of the 

diverted funds. 

Upon retirement, the worker’s debt to the Social Security system would be repaid 

by reducing his or her traditional Social Security benefits—that is, the monthly 
93

check paid to a retiree. Specifically, the monthly benefit reduction would be computed so that the present value of the reduction would equal the accumulated balance in the liability account. In other words, the reduction in monthly benefits 

would be just enough, in expected present value, to pay off the accumulated debt 

to the Social Security system. 

This system is quite similar to a loan: As under a loan, the worker receives cash 

up-front and can invest the money. The worker pays back the borrowed funds, with 

interest, later. The specific form of the repayment, through a reduction in traditional Social Security benefits, does not alter the underlying nature of the transaction.7

To take a specific example, consider a medium-earning worker aged 21 at the beginning of 2011 who elects to participate in the accounts. In inflation-adjusted dollars, the worker would divert about $500 in payroll taxes into his or her account 

in 2011, about $1,000 in 2015, about $1,500 in 2020, and so on. Those funds would 

build, along with the investment returns on them, and be available to the worker 

upon retirement. This worker would also, however, incur a debt to Social Security 

that would accumulate to more than $150,000 by the end of 2054, when the worker 

would be 65.8 Repayment of the $150,000 debt to Social Security would consume 

roughly half of the worker’s retirement benefit under the current benefit formula.9

If the assets in the worker’s account upon retirement exceed $150,000, the worker 

would experience a net increase in retirement income, and vice versa, compared to 

not participating in the account.10 Thus the worker’s retirement income, on net, increases if the account yields 3 percentage points per year above administrative costs 

and inflation. The worker’s retirement income declines if the account yields less 

than that. 

Note that because of administrative costs, it is impossible for the worker to break 

even while holding government bonds and for the government to be held harmless 

on the transaction. The reason is that one party or the other must bear the administrative costs of the investment. Under the Administration’s assumptions, for example, the real interest rate on government bonds is 3 percent per year. Under that 

assumption, the system would hold the government harmless as long as the worker 

reached retirement and paid back the loan (the government would be held harmless 

since the loan carries the same real interest rate as the projected government borrowing rate). The worker, however, would be worse off if she opted for an account 

and held government bonds in it. Such an account would have a net real yield of 

2.7 percent per year (the 3 percent real return on government bonds minus the assumed 0.3 percent per year in administrative costs), leaving the worker with a net 

reduction in retirement income. The worker’s account in this case would grow to 

only about $142,000, or almost $10,000 less than the worker’s debt of more than 

$150,000 back to Social Security. 

Although the loan analogy is insightful in understanding the basic effects of the 

proposal, there are some important distinctions between a conventional loan and the 

proposed system. For example, under the Administration’s proposal, workers must 

make a one-time decision to participate in the accounts; after that initial decision, 

they are required to continue diverting revenue over the rest of their careers.11 (The 

ability to invest the additional borrowing in Treasury bonds does not necessarily insulate the worker from the effects of the borrowing, given administrative costs and 

the possibility that the realized interest rate on government bonds may in the future diverge from the interest rate on the ‘‘loan. ’’) Conventional loans do not typically require the borrower to continue borrowing over time. In addition, the proposed accounts carry restrictions that are not typical of conventional loans: The Social Security loan can only be used for purchasing assets such as stocks held until 

retirement, and can only be repaid in a specific form (through a reduction in future 

Social Security benefits).12 Finally, unlike a conventional loan, this transaction 

would presumably not involve a contract.13 Despite these important distinctions, the 

loan analogy is useful in evaluating the impact of the proposal. 

ACCOUNTS DO NOT IMPROVE SOLVENCY AND LIKELY HARM IT

The loans to workers opting for the accounts carry a 3 percent real interest rate. 

This rate is equal to the expected real interest rate on government bonds projected 

by the Social Security trustees in their intermediate cost assumptions. Since the interest rate on the loans is equal to the interest rate that the Social Security system 

is assumed to earn on its own funds, the system is held harmless on each individual 

loan, under the trustees’ assumptions, as long as the loans are repaid in full. This 

is why a senior Administration official was quoted on February 2 as saying, ‘‘So in 

a long-term sense, the personal accounts would have a net neutral effect on the fiscal situation of the Social Security and on the Federal Government.’’ A reporter than 
94

asked: ‘‘And am I right in assuming that in the way you describe this, because it’s 

a wash in terms of the net effect on Social Security from the accounts by themselves, that it would be fair to describe this as having—the personal accounts by 

themselves as having no effect whatsoever on the solvency issue?’’ The senior Administration official replied: ‘‘That’s a fair inference.’’ 14

Two crucial points are worth noting about this statement. First, even the Administration now acknowledges that the accounts do nothing to reduce the long-term 

deficit in Social Security. In other words, according to the Administration itself, individual accounts are simply a non-answer to the question of how the deficit in Social Security will be addressed. 

Second, the statement by the Administration official is likely to be incorrect: The 

accounts are likely to harm Social Security’s solvency. The reason is simply that 

there are several likely situations in which the loan repayment back to Social Security (through reduced Social Security benefits) would be insufficient to offset the cost 

of the diverted revenue. Only if repayment is always made in full will the Administration official’s statement prove to be correct. If repayment is incomplete in some 

circumstances, the accounts not only fail to reduce the Social Security deficit, they 

actually widen it.15

Several likely scenarios suggest that at least some of the loans will not be repaid 

in full, and therefore the accounts will harm the system’s long-term finances: • Pre-retirement deaths. If a worker dies before retirement without a living 

spouse, the amount in the individual asset account may be distributed to heirs, but 

the amount in the individual liability account could be extinguished. This is how 

the system worked under the proposals put forward by the President’s Commission 

to Strengthen Social Security in 2001; the Administration has apparently not clarified whether the same approach would be adopted now. Under this approach, some 

loans are not paid off—and the system is thus made financially worse off. The effect 

may be significant, since roughly one-seventh of workers die before retirement. (The 

alternative is to have the debt inherited along with the account. In that case, the 

Administration should clarify that the pre-retirement bequests facilitated by the accounts may be a decidedly mixed blessing: the heirs will inherit both an account and 

a debt.) • Backsliding on loan repayments. The benefit reductions necessary to pay off the 

‘‘loans’’ from Social Security—especially if combined with additional benefit reductions to improve solvency—may be so large that they could prove politically untenable over time. For example, retirees may pressure the government to reduce the 

loan repayments during periods of weak stock market performance. If such pressures were accommodated and full loan repayments not enforced, the actuarial effect of the accounts could be negative over an infinite horizon. • Traditional benefits insufficient to finance loan repayment. Even without political pressure to reduce loan repayments, some repayments may be curtailed simply 

because the traditional defined benefit component of Social Security is too small to 

pay back the loan in full. In other words, for some workers, the required benefit 

reductions may exceed the size of the traditional defined benefit part of Social Security that is supposed to provide the repayment financing.16 In such a situation, the 

loan would apparently not be repaid in full; in other words, workers would apparently not be forced to repay debts back to Social Security that exceed their traditional benefits. An extreme version of this could arise for workers with less than 

10 years of covered earnings, who do not even qualify for Social Security retirement 

benefits. Such workers would have no traditional benefit against which to apply the 

loan repayment. If someone working for, say, 5 years were allowed to keep his or 

her account, the loan may never be repaid, since the worker would not have any 

traditional benefits with which to repay it. Again, the net result from these types 

of situations would be that the accounts harm Social Security solvency over the long 

term. 

• Interest rate on Trust Fund more than 3 percentage points above inflation. The 

interest rate on the loan to workers is apparently specified as 3 percentage points 

above inflation. That holds the Social Security system harmless on each individual 

loan, assuming each is repaid in full, as long as the interest rate actually turns out 

to be 3 percentage points above inflation. But if real interest rates turn out to be 

higher than 3 percent, the system would not be compensated sufficiently for the diverted funds, and the accounts would widen the Social Security deficit. It is therefore noteworthy that the Congressional Budget Office assumes a long-term real interest rate on government bonds of 3.3 percent.17 In other words, under CBO assumptions, the Administration’s proposal (with a 3 percent real rate charged on the 

loans to workers) would harm solvency even over an infinite horizon. If real interest 

rates on government bonds turn out to be lower than the 3 percent rate applied to 

the loans, the opposite would be true. 
95

These effects mean that even over the problematic infinite horizon preferred by 

the Administration, the accounts may harm solvency. That conclusion is only 

strengthened over the 75-year horizon traditionally used to evaluate Social Security 

solvency. Over that 75-year horizon, the accounts unambiguously widen the deficit 

even if all loans are ultimately repaid in full. (The reason is that some loans issued 

over the next 75 years will not have been repaid by the end of the 75th year.) 

ACCOUNTS ENTAIL A SIGNIFICANT INCREASE IN PUBLIC DEBT

According to a memorandum from the Office of the Chief Actuary, the Administra- tion’s accounts would raise debt held by the public by $743 billion as of the end of 

Fiscal Year 2015.18 The increase in debt, moreover, would not subside thereafter: 

If the accounts were continued past 2015, they would raise debt by more than $3.5 

trillion by 2025.19 Over the first 10 years that they were in existence (2009-2018), the accounts would raise debt by more than $1 trillion; during their second decade 

(2019-2028), they would raise debt by more than $3.5 trillion.20 (There has been 

some confusion over $743 billion figure and the more than $1 trillion figure. The 

$743 billion figure applies to the next 10 years. The more than $1 trillion figure 

applies to the first 10 years the accounts would be in existence, from 2009 through 

2018.) 

The loan analogy helps to explain this increase in debt, and it also provides insight into a surprising result: The debt increase would be permanent. To finance a 

loan to a worker (provided in the form of revenue deposited into an individual account) under the Administration’s proposal, the government borrows funds. If the 

worker repays the loan, the additional government debt on that transaction is extinguished, so public debt returns to the same level as if that worker had not opted 

for an account. But note that at any point in time, even if all loans were eventually 

repaid, some loans would always be outstanding. As a result, public debt at any 

point in time would forever remain higher with the accounts than without them. 

Figure 1 illustrates the impact of the Administration’s accounts on debt held by 

the public. Three aspects of the figure are noteworthy. First, debt increases sharply 

as a share of Gross Domestic Product (GDP) for roughly five to six decades. Second, 

the higher level of debt is perpetuated, rather than eliminated, in the long term. 

Finally, the additional, ongoing higher level of debt in the long term is substantial—

the increase in debt outstanding of more than 30 percent of GDP is only somewhat 

smaller than today’s level of publicly held debt relative to GDP (38 percent).

Even if the accounts were combined with proposals to eliminate the underlying 

deficit in Social Security, the increase in debt is likely to be extended and substantial. For example, the leading proposal from the President’s Commission to 

Strengthen Social Security in 2001 would have changed the determination of indi-
96

vidual benefits to incorporate what is commonly—but somewhat misleadingly—referred to as ‘‘price indexing.’’ 21 The change may sound innocuous, but as explained 

below, it would dramatically reduce benefits over time. For the immediate purpose, 

note that price indexation is sufficient by itself to more than eliminate the long-term 

deficit in Social Security. Yet even if the accounts proposed by the Administration 

were combined with this price indexing proposal, debt held by the public would remain higher than in the absence of the combined proposal for roughly five decades. 

Some advocates of the Administration’s plan argue that the debt shown in Figure 

1 merely creates ‘‘explicit debt’’ in exchange for ‘‘implicit debt’’ that the government 

has already incurred (in the form of future Social Security benefits). From this perspective, advocates argue that the loan transactions merely trade more explicit debt 

for a reduction in implicit debt (since the loan repayments will reduce future Social 

Security benefits). The argument is then put forward that these two types of debt—

‘‘implicit debt’’ and ‘‘explicit debt’’—are essentially the same, so that converting one 

into the other does not represent an increase in Federal liabilities and should not 

raise concerns. 

This argument is, however, flawed. The two types of debt are not equivalent. The 

explicit debt that the government would incur as a result of the Administration’s 

proposal for individual accounts would have to be purchased by creditors in financial 

markets. When the additional debt matured, it would have to be paid off or rolled 

over. By contrast, the implicit debt associated with future Social Security benefit 

promises does not have to be financed in financial markets now. A government with 

a large explicit debt thus has less room for maneuver and is more vulnerable to a 

lessening of confidence on the part of the financial markets than a government with 

a large implicit debt. Converting implicit debt into explicit debt is thus problematic. 

SUBSTANTIAL BENEFIT REDUCTIONS NECESSARY TO ELIMINATE LONG-TERM DEFICIT

Since the accounts do not reduce Social Security’s deficit (and may expand it), and 

since the Administration appears to be opposed to dedicating additional payroll tax 

revenue to the program, the Administration’s approach to eliminating the long-term 

deficit in Social Security must involve some new source of revenue dedicated to the 

program or rely on severe reductions in benefits beyond the loan repayments linked 

to the accounts. In other words, any plan from the Administration that closes the 

deficit, includes the accounts it has already proposed, and fails to dedicate additional revenue to Social Security must entail two types of benefit reductions. The 

first type of benefit reductions would repay the loans to workers opting for the accounts. The second type would be intended to eliminate the long-term deficit in Social Security. The combined effect of these two types of benefit reductions would be 

a stunning decline in the defined benefit component of Social Security over time. 

To examine the impact of relying solely on benefit reductions to eliminate the underlying deficit in Social Security, consider the proposal from Model 2 of the President’s Commission in 2001. This proposal would have changed the determination of 

individual benefits to incorporate ‘‘price indexing,’’ instead of the wage indexing that 

is currently used to determine initial benefits. Had this ‘‘price indexing’’ rule been 

fully in effect by 1983, at the time of the last major reform to Social Security, benefits for newly eligible retirees and disabled workers now would be almost 20 percent 

lower and continuing to decline relative to current law. These benefit reductions 

would apply regardless of whether a worker elected to participate in the individual 

accounts. 

Under current law, benefits for new retirees roughly keep pace with wage 

growth.22 Successive generations of retirees thus receive higher benefits because 

they had higher earnings—and paid higher payroll taxes—during their careers. This 

feature of the Social Security system makes sense, since a goal of Social Security 

is to ensure that a worker’s income does not drop too precipitously when the worker 

retires and ceases to have earnings. A focus on how much of previous earnings are 

replaced by benefits (which is called the ‘‘replacement rate ’’) recognizes the realworld phenomenon by which families, having become accustomed to a given level 

of consumption, experience difficult adjustment problems with substantial declines 

in income during retirement. 

Under what is called price indexing, by contrast, initial benefit levels upon retirement would increasingly lag behind wage growth. In particular, real benefit levels 

would be constant over time, rather than increasing in line with real wages. Since 

real wage growth is positive on average, the change would reduce initial benefit levels and the size of the reduction would increase over time.23

Under this proposal, if average real wages were 10 percent higher after 10 years, 

the roughly 10 percent benefit growth to keep pace with this wage growth would 

simply be removed. The provision thus is more accurately described as ‘‘real wage 
97

growth negating’’ than as ‘‘price indexing,’’ since it simply cancels the benefit increases from real wage growth.24

Several commentators have underscored the troubling consequences that would 

result from ‘‘price indexing.’’ Edward Gramlich, a leading economist who chaired the 

Advisory Commission on Social Security in the mid-1990’s and who is now a governor of the Federal Reserve System, has been quoted as saying that if this methodology had been adopted when Social Security was created, [retirees] ‘‘would be living 

today at 1940 living standards.’’ 25 An earlier analysis of the proposal underscored 

that: ‘‘This is like saying retirees who could afford indoor plumbing when they were 

working should, in retirement, not be able to afford indoor plumbing because their 

parents’ generation could not afford it.’’ 26 Even some leading proponents of the Administration’s broad approach have acknowledged this point. For example, John 

Goodman, president of the National Center for Policy Analysis, recently commented 

about the price-indexing proposal: ‘‘What people are forgetting is why the system 

is there in the first place. The reason is that people don’t want to reach retirement 

age and have their standard of living cut in half.’’ 27

Two implications of reducing benefits to cancel out real wage growth are immediately obvious. First, the longer the ‘‘price indexing’’ provision stays in effect, the 

larger the benefit cuts, assuming ongoing real wage gains. Second, the more rapid 

real wage growth, the larger the benefit cuts.28

The bottom line is that under ‘‘price indexing,’’ the role of the Social Security system in allowing the elderly to maintain their standard of living after retirement 

would decline sharply over time. 

Consider the effect of the price indexing proposal combined with the loan repayment for workers opting for the accounts put forward by the Administration. Specifically, as above, consider a medium earner who is 21 in 2011, and assume the worker claims benefits at age 65 in 2054. Given the economic assumptions used by the 

Congressional Budget Office, price indexing would first reduce this worker’s retirement benefit by more than 35 percent.29 Then the loan repayment for the revenue 

diverted into the worker’s account would consume about half of the benefit provided 

by the current benefit formula. As a result, the worker would have a traditional 

benefit equal to less than one-fifth of the benefit provided by the current benefit formula.

To be sure, the worker would also have an individual account. But the Congressional Budget Office has correctly emphasized that the projected income from such 

accounts must be adjusted for its riskiness. With the type of risk adjustment adopted by the Congressional Budget Office, the income from the individual account 

would make up about half of the initial benefit under the current formula.30 The 
98

net result would leave the worker with total combined benefits that were roughly 

35 percent lower than under the current benefit formula. 

Perhaps more surprisingly, the reduction in benefits even including the account 

income is roughly twice as large as would be required if benefits in 2054 were simply reduced to match incoming payroll revenue in that year. This level of ‘‘payable 

benefits’’ is about 20 percent higher than the income from the account plus the remaining traditional benefit after price indexing and the loan repayment, under the 

type of assumptions used by the Congressional Budget Office. 

Figure 2 illustrates these effects in terms of the replacement rate at retirement 

in 2054. Financial planners suggest that a comfortable retirement requires income 

during retirement equal to about 70 percent of pre-retirement earnings. The current 

benefit formula would provide about half the necessary amount, requiring the worker to save enough in addition to Social Security to replace roughly 35 percent of preretirement earnings. If benefits were reduced to match incoming payroll revenue in 

2054, traditional benefits would replace a little under 30 percent of pre-retirement 

wages, requiring the worker to save a little more than 40 percent of previous earnings.31 If the Administration’s accounts were combined with price indexing, however, the traditional benefit after both price indexation and the loan repayment 

were applied would replace less than 10 percent of previous wages. The income from 

the individual account would replace a little under 20 percent of previous wages. 

The net result would be that the worker would have to save substantially more in 

addition to Social Security; such savings would have to be enough to replace almost 

half of pre-retirement earnings. 

Figure 2 shows that combining price indexing with the loan repayments on individual accounts would cause the traditional benefit to wither on the vine over time. 

CONCLUSION

Individual accounts that mortgage future Social Security benefits raise a number 

of troubling questions, as this testimony has highlighted. A better approach involves 

raising saving above and beyond Social Security. As illustrated in Figure 2, individual accounts—in the form of the 401(k)s and IRAs—have a critical role to play 

in filling the hole between the foundation provided by Social Security and a comfortable retirement. Many Americans, however, have not accumulated enough financial assets on top of Social Security. Half of households on the verge of retirement 

have only $10,000 or less in a 401(k) or IRA. Yet we now know what works to get 

people to save in 401(k)s and IRAs, and we’re not doing it. 

Individual accounts can and should be strengthened outside Social Security, 

where they belong. Social Security itself can then be shored up through a combination of benefit and revenue changes that would retain the program’s critical role in 

delivering a solid foundation of financial security.32

ENDNOTES

1. The views expressed here are those of the author alone. This testimony draws 

upon joint work with Peter Diamond, Jason Furman, William Gale, and Robert 

Greenstein. For a detailed discussion of the issues involved in payouts from individual accounts, see National Academy of Social Insurance, Uncharted Waters: Paying Benefits from Individual Accounts in Federal Retirement Policy, 2005. 

2. The Administration still has not specified many important aspects of the accounts. I have tried to reflect the proposal as I understand it, based on official White 

House documents and on the memorandum from the Office of the Chief Actuary. 

In some cases, however, these documents contradict each other. As more details 

about the proposal become available, some of the specific figures cited in this testimony may be slightly affected, but the fundamental points will not be. For other 

analyses of the Administration’s proposal, see Jason Furman, ‘‘New White House 

Details Show the Proposed Private Accounts Would Worsen Social Security’s Finances,’’ Center on Budget and Policy Priorities, February 4, 2004; Jason Furman 

and Robert Greenstein, ‘‘An Overview of Issues Raised by the Administration’s Social Security Plan,’’ Center on Budget and Policy Priorities, February 3, 2004; and 

Jason Furman, ‘‘How the Individual Accounts in the President’s New Plan Would 

Work: Plan Would Allow Individuals to Mortgage Half of Their Social Security Benefit,’’ Center on Budget and Policy Priorities, February 4, 2004. 

3. Although the system operates like a loan, it is not literally a loan because the 

transaction does not involve a contract. For some purposes, such as budget scoring, 

the fact that the transaction does not involve a contract and therefore is not legally 

a loan may be determinative. For further discussion of the budget scoring issues involved in proposals of this type, see Jason Furman, William G. Gale, and Peter R. 
99

Orszag, ‘‘Should the Budget Exclude the Cost of Individual Accounts?’’ Tax Notes, 

January 24, 2005. 

4. Such a plan would entail two types of benefit reductions: those that would 

apply only to workers opting for the accounts, which would be intended to repay the 

loan to the worker, and benefit reductions that would likely apply to all future 

workers, regardless of whether they opted for an account, which would be intended 

to eliminate the long-term deficit in Social Security. 

5. Specifically, if individuals understand that the individual accounts are equivalent to a loan, they may not reduce their other savings. But if they do not understand the nature of the offsetting benefit reduction, then they may mistakenly consider the individual account an asset and reduce other asset accumulation accordingly. 

6. The limit would increase by $100 above wage inflation, at least through 2015. 

The Office of the Chief Actuary, in its memorandum on the proposal, indicated that 

the parameters of the system past 2015 had not been specified. It is noteworthy, 

however, that the White House Fact Sheet indicates that: ‘‘Under the President’s 

plan, personal retirement accounts would start gradually. Yearly contribution limits 

would be raised over time, eventually permitting all workers to set aside 4 percentage points of their payroll taxes in their accounts.’’ Given this statement, the analysis in this testimony assumes that the threshold would continue to increase more 

rapidly than wages until all workers could contribute 4 percent of taxable earnings. 

None of the qualitative conclusions are affected by this specific assumption. 

7. In effect, the individual accounts proposed by the Administration represent a 

‘‘Social Security line of credit.’’ Workers drawing upon that line of credit receive payroll revenue in their individual account today, but must pay back the funds at retirement. 

8. Since the worker was 21 at the beginning of 2011, he or she would turn 22 

during 2011. The worker would therefore turn 65 during 2054. 

9. Note that the worker would be diverting less than one-third of the Social Security payroll tax into the account, but the benefit reduction would total roughly onehalf of the benefit under the current benefit formula. The reason is that the loan 

is correctly charging the marginal return on funds within the Social Security system, not the average return. 

10. The outcome is identical to the worker borrowing from future Social Security 

benefits at a 3 percent real interest rate. The worker benefits only if the return to 

the assets purchased with the borrowed funds exceeds 3 percentage points above inflation. As emphasized in the text, because of administrative costs, the worker 

would have to earn more than 3 percentage points above inflation on the underlying 

investments in order to break even; the net return above inflation and after administrative costs must be 3 percent per year to break even. 

11. As the White House Fact Sheet put it, ‘‘At any time, a worker could ‘‘opt in’’ 

by making a one-time election to put a portion of his or her payroll taxes into a 

personal retirement account. Workers would have the flexibility to choose from several different low-cost, broad-based investment funds and would have the opportunity to adjust investment allocations periodically, but would not be allowed to 

move back and forth between personal retirement accounts and the traditional system.’’ (See below:) 

http://www.whitehouse.gov/infocus/social-security/200501/socialsecurity3.pdf. 

12. It is unclear whether these restrictions would be sustainable. Most workers 

currently enjoy some form of access to the balances in their 401(k) accounts prior 

to retirement. A critical question regarding the Administration’s proposal is whether 

Congress would sustain the prohibition on pre-retirement access even if it were initially adopted. Workers will likely argue that they should indeed have earlier access. 

At the beginning, such an argument may be made only in hardship cases—such as 

a terminal disease. Over time, this might evolve into withdrawals for education or 

first-time home purchases, or into an ability to borrow against an account. Such preretirement liberalization would then severely undercut the role of Social Security as 

financing retirement. 

13. As noted in a footnote above, this distinction may be determinative for the 

purposes of budget scoring. 

14. Transcript of briefing as posted on Washington Post website: 

http://www.washingtonpost.com/ac2/wp-dyn/A59045-2005Feb2?language=printer. 

15. In theory, one could construct the system so that those actually repaying the 

loans overpaid, in order to compensate for the losses from those who underpaid. But 

this would impose even greater costs, beyond the administrative cost issue noted in 

the text, on workers who elected the accounts and then held bonds in them until 

retirement. 
100

16. The example provided in the text above suggested that a medium-earner’s 

loan repayments back to Social Security could represent about half of the benefit 

under the current benefit formula. For higher earners, the pay-back on the loan 

would be an even higher share of benefits under the current benefit formula. Compared to the reduced benefits that would exist under the Administration’s approach 

to restoring solvency in Social Security, furthermore, the loan repayments would be 

even larger. 

17. Congressional Budget Office, ‘‘Updated Long-Term Projections for Social Security,’’ January 2005, Table W-5, http://www.cbo.gov/Spreadsheet/6064—Data.xls. 

18. ‘‘Preliminary Estimated Financial Effects of a Proposal to Phase in Personal 

Accounts—INFORMATION,’’ Memorandum from Stephen C. Goss to Charles P. 

Blahous, February 3, 2005. 

19. These figures, like the ones in the memo from the Office of the Chief Actuary, 

assume two-thirds participation in the accounts. 

20. Such increases in debt would occur even if the maximum account size were 

capped at its (wage-adjusted) 2015 level, rather than continuing to be increased 

more rapidly than wages after 2015 to ensure the White House goal that all workers 

could eventually contribute 4 percent of payroll to the accounts. 

21. This approach has also been employed in legislation introduced by Senator 

Lindsey Graham. As noted below, it is more accurately called ‘‘real wage growth negating’’ than ‘‘price indexing,’’ since it removes the impact of real wage growth on 

benefit levels, rather than incorporating a price index directly into the benefit formula. 

22. Initial retirement benefits are based on a worker’s average indexed monthly 

earnings. Average indexed monthly earnings, in turn, are determined by taking 

earnings in previous years and scaling them up by subsequent national average 

wage growth. The wage indexing occurs through the year in which a worker turns 

60, with later wages used on a nominal basis (unindexed). The initial benefit level 

is thus indexed to wage growth through age 60. After initial benefit determination, 

benefit increases are indexed to price growth. Price indexing of benefits begins after 

the year in which a worker turns 62. Thus there is a gap with no indexing to either 

wages or prices, which should be corrected—and could be addressed on a revenueneutral basis if desired. The formula relating full benefits (the so-called Primary Insurance Amount) to earnings is also indexed to average earnings. In 2005, the Primary Insurance Amount is equal to 90 percent of the first $627 of AIME; 32 percent 

of AIME over $627 and through $3,779; and 15 percent of AIME over $3,779. The 

‘‘bend points’’ at which the 90, 32, and 15 percent factors apply are indexed to wage 

growth. 

23. The 2004 Trustees Report projects long-run growth of prices of 3.0 percent per 

year and long-run growth of taxable wages of 4.1 percent per year, resulting in a 

growth of real wages of 1.1 percent per year. But real wage growth may turn out 

to be larger or smaller than this amount. 

24. More precisely, the proposal would multiply the 90 percent, 32 percent and 

15 percent factors used to compute the Primary Insurance Amount by the ratio of 

cumulative price growth to cumulative wage growth between the start date and the 

year in which a worker becomes entitled to claim benefits. It is thus important to 

note that wage indexing would still be part of the determination of benefits. 

25. Greg Ip, ‘‘Social Security: Five Burning Questions,’’ Wall Street Journal Online, December 19, 2004. 

26. ‘‘Price-Indexing the Social Security Benefit Formula Is a Substantial Benefit 

Cut,’’ prepared by the minority staff of the Social Security Subcommittee, House 

Committee on Ways and Means, November 30, 2001. 

27. Cited in Edmund L. Andrews, ‘‘Most G.O.P. Plans to Remake Social Security 

Involve Deep Cuts to Tomorrow’s Retirees,’’ New York Times, December 13, 2004. 

28. This second implication may not be widely understood: The proposal reduces 

benefits more if real wage growth is more rapid than expected. Yet if real wage 

growth is more rapid, the actuarial deficit over 75 years in the absence of this provision would be smaller, not larger. The use of real wage negating is thus even more 

troubling than simply reducing benefits based on expected real wage growth today. 

The larger actual real wage growth turns out to be, the smaller the need for benefit 

reductions—but the larger those reductions actually are under the real wage negating approach. In other words, the approach introduces variation in benefit reductions relative to scheduled benefits that are larger the less the financial need of Social Security for such reductions. 

29. The figure assumes that price indexing applies to workers who are 54 years 

old and younger in 2005. 

30. The risk adjustment implemented by the Congressional Budget Office is consistent with the approach adopted by the Administration in evaluating stock invest-
101

ments by the National Railroard Retirement Investment Trust. As the Analytical 

Perspectives of the Administration’s Fiscal Year 2006 budget notes (page 421), ‘‘Economic theory suggests...that the difference between the expected return of a risky 

liquid asset and the Treasury rate is equal to the cost of the asset’s additional risk 

as priced by the market.’’

31. The CBO assumptions show a cost rate in 2054 of 6.39 percent of GDP and 

an income rate of 4.95 percent of GDP. A benefit reduction of 23 percent (1-4.95/

6.39) would thus reduce cost to income. A reduction of 23 percent compared to the 

current benefit formula would leave this worker with a replacement rate from Social 

Security of roughly 28 percent (.77*.36). 

32. For one plan that achieves sustainable solvency without the severe benefit reductions implied by price indexing, see Peter A. Diamond, and Peter R. Orszag, Saving Social Security: A Balanced Approach (Washington: Brookings Institution Press, 

2004).

Mr. PORTMAN [presiding]. Thank you, Dr. Orszag, for your testimony. I appreciate the fact that you have spent so much time on 

not just the Social Security side but retirement security generally. 

And I, as you know, happen to agree with you that we need to do 

both additive. I also find I disagree with you with regard to the 

possibility of doing something within Social Security as well. 

Just a couple of quick questions about your testimony, first with 

regard to administrative costs. You indicate that that is the major 

reason you would see the 3 percent, which you note is the bond 

rate that has been used in some of the analysis, not being—not 

leading to someone with a personal account to have a much higher 

rate of return than someone, say, entering the workforce today, 

which I think the estimate is about 1.8 percent return. What do 

you assume by the administrative cost? Do you believe the administration’s numbers that they had out last week of a 30 to 40 basis 

point administrative cost. 

Mr. ORSZAG. In that calculation, I did assume the 30 basis point 

number that the administration has used. So that is the assumption that I used. I do want to comment on that for a second, 

though, because that administrative cost assumption assumes a 

very centralized type of account in which investment choices are restricted. There are a variety of restrictions. It is not clear to me 

that that ultimately will be sustainable given the way these accounts are being sold, And if you have a more decentralized system 

where you can hold the accounts at any financial services firm, the 

administrative cost could be much higher. 

Mr. PORTMAN. But you basically take the Thrift Savings Plan 

model and think that, assuming that they were that regulated and 

that centralized, that that administrative cost could be that low. 

With regard to your second point, I agree with you, there are 

some unanswered questions here. You didn’t mention the 

annuitization of the funds but you talked about the liability that 

is reflected in the choice to take a personal account and if someone 

were to predecease their retirement age that that account would 

then be, as some have said, available for kids and grandkids, family. It is also relatively easy under the Social Security system to determine what that liability would be, isn’t it? In other words, 

couldn’t you come up with a calculation as to what the liability is 

with regard to that account going forward at any particular age 

and be able to provide that personal account as a lump sum in addition to whatever the liability was? 

Mr. ORSZAG. Yes. My only point there was—and again we are 

talking about roughly 14 percent of the workforce dying before re-
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tirement. To talk about only the bequests either raises the question 

of these accounts actually harming the solvency of Social Security 

even over an infinite horizon or the hidden subtext that there will 

be a debt passed on along with the account. That was my only 

point. 

Mr. PORTMAN. But it is not impossible to make that calculation? 

Mr. ORSZAG. That is correct. 

Mr. PORTMAN. The 40 quarters issue is an interesting one, because some people don’t make 40 quarters, therefore they don’t get 

the traditional benefit. Do you think it would be appropriate for 

those people to have a personal account at all? 

Mr. ORSZAG. Again, an unanswered question. I mean, presumably what would happen is that the accounts would not be delayed 

until after you had worked 40 quarters. So I guess the question is, 

are you confiscating the accounts, or are the deposits not going in? 

Mr. PORTMAN. That is a good point. 

Mr. ORSZAG. I was going to say, there is another situation that 

I think is worth paying attention to in which the traditional benefit 

would not be sufficient to pay back the diverted revenue plus interest. That is, if you combined this proposal with price indexing, 

which is the leading way of actually—leading proposal apparently 

to restore solvency within the traditional program for the top end 

of the income distribution (and it is not a trivial share, we are still 

working on the numbers but it is not 1 or 2 percent of the workforce, much higher than that), the traditional benefit would not be 

sufficient to offset the cost of the diverted revenue plus interest. 

That means the system would actually lose money for any high 

earners who went into the accounts because the traditional benefits 

just wouldn’t be there—be sufficient to pay back the diverted revenue plus interest. And there are a wide variety of these kinds of 

situations that could arise. 

Mr. PORTMAN. Your third point was that with no new revenue 

you need to look at the benefits side. Do you have a favorite proposal? 

Mr. ORSZAG. I think there are a variety of proposals on both the 

benefit and revenue side. I have co-authored a plan with Peter Diamond of MIT. That is one way of doing it. We tried to balance or 

combine benefit and revenue changes. One can move beyond just 

talking about the payroll tax, and I know there is some discussion 

of that. One could talk about dedicating a state tax revenue or 

dedicating various different kinds of revenue to the system. 

The key point is without any additional revenue dedicated to the 

program you are looking at very substantial reductions in replacement rates or reductions relative to the current benefit formula to 

restore solvency to the program beyond, in my opinion, what is justified for that core tier of retirement security. 

Mr. PORTMAN. One of the interesting things as you look at our 

tax system and how it relates to Social Security is the fact that, 

as you know, many workers, low-wage workers, even some low to 

middle wage workers do not have a personal individual income tax 

liability; some in fact get a tax check back from the Government 

through the EITC, earned income tax credit. Therefore, to look at 

retirement as you and I have from the outside as it affects Social 

Security, it is difficult without offsetting payroll taxes in the way 
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the President is talking about to affect those people who you most 

want to encourage to save, and that would be lower income workers, middle income workers who do have a payroll tax liability. And 

so my challenge to you would be, as much as I agree with you on 

the individual accounts, as you know, and even on the savers credits and so on, how do you get at the solvency of Social Security 

with these outside accounts? And, number two, how do you really 

help the low wage worker who for the most part does not have an 

income tax liability, therefore a tax deduction, a tax credit is not 

useful? 

This is one thing that I think needs to be looked at. And as you 

know, I believe in the individual accounts, I also believe we ought 

to do much more on the 401(k) and the IRA side and even some 

new vehicles. But using that payroll tax does provide certain advantages that you don’t have given the fact that increasingly under 

George Bush’s leadership fewer people are paying Federal income 

tax and the burden is shifting more to the upper end. So it is harder to use the income tax, Federal income tax to effect savings 

among lower and middle income workers. Can you give us a response to that? 

Mr. ORSZAG. Sure. Let me answer that second question first and 

then come back to solvency. I actually think the whole way that we 

have been trying to encourage savings in the United States, private 

savings, is wrong, that trying to do it through financial incentives 

is not the most auspicious mechanism for raising savings. The fact 

of the matter is most families are busy, they don’t focus on the decision. The decisions to save are complicated, and so there is a lot 

of inertia and just delaying the decision. If you put in plans where, 

for example, you are automatically in a 401(k) plan unless you opt 

out, which alters that inertia decision, participation rate even at 

the very bottom, below $20,000 in income, jumped from about 7, it 

shows, from 15 percent to 80 percent. Similarly, outside of 401(k) 

plans I think we just need to make it more automatic. Get those 

tax refunds automatically into an IRA, set up payroll deduction 

IRAs in a more universal way. I will even say, I mean, even at 

Brookings—give you an example, a little personal example. Because of changes in the 2001 tax law, the amount that—the maximum amount that can be put in a 401(k) or a 403(b) is increasing 

each year and increased this year. We got a form at Brookings saying if you wanted to put in the maximum amount this year you 

need to fill out this form. If you don’t fill it out, you are going to 

stay at the lower level from last year. I would bet that half of my 

colleagues have not filled out that form. They just lose it. We need 

to make the whole process more automatic so that the default is 

that you are always saving. I would sign up for saving the maximum amount for the rest of my life until I tell someone otherwise, 

and I think many of my colleagues would also. The same thing. I 

think we just need to make it more automatic. We are looking in 

the wrong way when we—families that are too busy to focus on the 

decisions will still be too busy to focus on the decisions when we 

throw more financial incentives at it. 

So that is my answer. I don’t think that we should attack the 

problem primarily through financial incentives. They can help, but 

the big thing is to get the structure right. 
104

And in terms of the solvency of Social Security, the way I think 

about it is the following. Financial planners say that we need 70 

percent of preretirement income to live comfortably in retirement. 

Social Security for the average earner is providing about a half of 

that, 35 percent; the other half happens to come from the sorts of 

things we were just talking about. I think that bottom tier, that 

foundation should be provided in a form that lasts as long as you 

are alive; that is, protected against inflation and that doesn’t fluctuate with the stock market. And that is exactly what the current 

program does. So in my view, while there might be some benefit 

adjustments that are necessary, taking that 35 percent replacement rate and going all the way down to 20 for young workers and 

then even further below that, which is what would be happening 

under price indexing, is not a very sound approach. So I have a 

proposal that avoids that kind of outcome. There are lots of ways 

of avoiding that kind of outcome. But I don’t see individual accounts within that core tier as providing the kind of benefit that 

they can provide above that core tier. 

Mr. PORTMAN. I appreciate your answer. I know that at least one 

proposal that you support it, and I admire your courage, raises 

payroll taxes which, as you know, is something the President has 

ruled out and I don’t think would be very popular here on the Hill. 

And also it has some negative economic impacts. Others have 

talked about using general revenues, which is in essence not allowing the taxes to become permanent that are currently in place, the 

tax relief. So I do appreciate your stepping forward with a proposal. 

But I would just say I think the challenge we have got is how do 

you link this notion of higher private savings and the private vehicles with our solvency? And with that I will turn to my colleague 

and ranking member, Mr. Spratt. 

Mr. SPRATT. Mr. Portman, I don’t know if you have seen the 

book, but Peter Orszag has worked his way through all of these 

problems in a very commendable fashion to come up with a proposal that I think has been reduced to legislation. Hasn’t it, Peter? 

Mr. ORSZAG. Not to my knowledge. It has been scored by the Social Security actuaries and also by the Congressional Budget Office 

though. 

Mr. SPRATT. In it you develop the idea of a legacy debt, that Social Security owes for the overpayment of benefits in past years, 

particularly when the early employees retired after not having put 

a full 40, 35 years into the system but nevertheless drew, relatively 

speaking, pretty substantial benefits. Would you elaborate upon 

that? 

Mr. ORSZAG. Sure. And, in fact, this comes back to Mr. Portman 

has asked about the rate of return for current generations of 1 or 

2 percent on Social Security, why is that any lower than the Government bond rate of 3 percent. And it has to do—precisely to do 

with the legacy debt that you mentioned. Early retirees under Social Security were given rates of return that were well above market rates of return. Think about it, someone had paid in for 5 or 

10 years and then received benefits for perhaps 20 or 30 or 40 

years. By the way, that decision was probably a good one. These 

people had lived through the Great Depression, fought in World 

War I and World War II, that that decision probably from society’s 
105

perspective made sense. But because we gave away excess returns 

early, we all now collectively face the prospect of having to pay off 

again what we call that legacy debt. 

The legacy debt comes because we gave away excess returns 

under the program early, and there is nothing that we can do to 

erase that debt. I mean, a lot of these comparisons of rates of return pretend that we can just erase that debt. Right now what that 

would mean in practice is cutting off current beneficiaries. That is 

the only real way that we can erase the debt. And then of course 

their rates of return would be harmed. We gave away that money 

or we made a decision as a society to provide super normal rates 

of return. That is now water under the bridge and we all must face 

it. 

That is the difference, and I think economists on both sides of 

the aisle agree on this. That is the reason that Social Security provides a 1 to 2 percent rate of return and the Government bond rate 

is 3 percent, and there is nothing we can do at this point to take 

back the money that we had given away early on. 

Mr. SPRATT. You propose, however, a rectification in your book. 

Mr. ORSZAG. Well, I think the key thing is that is water under 

the bridge. We all now collectively have to face the fact that we are 

all going to have to finance that in some way, and the key question 

is how do we share that burden. There are extremes. You could put 

off reform for a long period of time and have far distant generations bear an undue burden. You could move immediately to a fully 

funded system which would require current workers to bear the 

full burden. We think those two extremes don’t make any sense 

and that something in between does. 

So I guess there are really two points here. One is, this is a key 

underlying issue in Social Security reform. And it is not issue—it 

is not sort of—it doesn’t bubble to the surface enough how different 

generations are sharing that burden. 

The second thing is any plan will distribute that burden in some 

way, and it is very important to look at how the burden is being 

distributed. 

And just a final point, and I guess this come back to the individual accounts. Individual accounts are often pitched as helping 

young workers today. That is sort of where the natural pitch is 

made to. But the fact of the matter is if the individual accounts 

were honestly financed; that is, through additional revenue or offsetting changes today, the young workers today are the ones who 

bear that legacy debt. They are the ones who bear that transition 

cost. Or another way of putting it is they are the ones who have 

to pay twice. They will have to pay for current beneficiaries and 

then for their own retirement. So focusing on the legacy debt illuminates questions like that; much of the rhetoric surrounding the 

debate obscures it. 

Mr. SPRATT. Let me ask you about the 75-year time frame as opposed to the infinity time frame. You deal with that in your book, 

and you come down on the side of sticking with the 75-year time 

frame primarily because projecting so far over the horizon and into 

the future is terribly tenuous. 

Mr. ORSZAG. I think it is illuminating that out of the $10.4 trillion infinite horizon imbalance, more than 60 percent of it occurs 
106

after 2078; that is, between 2078 and eternity. And while I think 

it is important that we are aware of how sensitive the projections 

are out in 2100 or 2200, I don’t think that it is the best basis for 

policy making. It is just too sensitive. If we change the discount 

rate from 3 percent to 2.9 percent or the interest rate from 3 percent to 2.9 percent, and that number swings all over the place. So 

if that is the goal that you are trying to hit, I worry that reasonable changes in the parameters cause you to be chasing your tail. 

Mr. SPRATT. Extended out over a long period of time? 

Mr. ORSZAG. Extended out beyond the traditional 75-year window. 

Mr. SPRATT. Discuss with us for a minute what happens to disability payment if we have the significant disability and survivorship benefits. You may have heard the exchange earlier with Secretary Snow. 

Mr. ORSZAG. I did. 

Mr. SPRATT. If indeed you recompute the primary insurance 

amount, indexing the income streams to prices rather than wages 

as they are indexed today, and over time reduce the replacement 

ratio by 50 percent, what does this do to the 30 percent of those 

who are on Social Security and are drawing either survivorship or 

disability benefits? 

Mr. ORSZAG. Well, let me answer the question in two different 

ways. Under the President’s commission model 2 and model 3, the 

reductions that you are describing were assumed to apply, or at 

least in their numbers they assume that they applied to disabled 

workers, to young surviving children, to a whole variety of other 

very vulnerable beneficiaries. The implication of that is very severe 

reductions in benefits for the most vulnerable set of beneficiaries 

under Social Security. 

Now, the administration currently says that there will be no 

changes in the disability component or the survivor’s component of 

Social Security. I would just warn you that to say that there are 

no changes in the disability component is not necessarily to say 

that there are no changes in disability benefits, and the President’s 

commission danced around that question. I think it is a very important topic and something that policymakers like all of you need to 

pay a lot of attention to, to look in the fine print about exactly 

what is happening to those beneficiaries. 

Mr. SPRATT. Now, let me ask you about the proposal in model 2, 

which I presume will be an integral part of the President’s proposal 

once it is fully formulated, to recompute the primary insurance 

amount using prices instead of wages to index the income streams. 

We showed a chart earlier that shows how the replacement ratio 

for the median beneficiary declines by about 50 percent, from 43 

percent of preretirement income to 22 percent of preretirement income over a period of 40 or 50 years. That also includes the return 

that would—the net return that that beneficiary would receive in 

his collateral savings account, whatever it is called. With a return 

at a rate equal to the bond rate, which is 3 percent real rate of return, how much would the rate of return have to be in the collateral account for the PIA or the replacement ratio to remain constant? 
107

Mr. ORSZAG. First, just to give you the numbers, the Congressional Budget Office analysis of model 2, which is the one that you 

are referring to, makes it very clear that even including the individual account and even comparing to payable benefits, not scheduled benefits, model 2 pays less than what the system could afford 

even after the trust fund is exhausted and benefits were reduced 

to match incoming payroll revenues. So, in particular, table 2 of 

their analysis shows that in the middle household earnings quintile, or for basically the typical household in the middle of the distribution, that lower level of payable benefits would be $19,900 a 

year. Model 2 would give $14,600 a year, including the individual 

account as analyzed by CBO. So that is roughly a $5,000 a year 

differential, a very substantial amount for a typical family. To 

make up that difference would require an implausibly large rate of 

return on stocks as long as you are assuming some mix between 

stocks and bonds. 

Mr. SPRATT. Of what magnitude? Can you give us a ball park figure? 

Mr. ORSZAG. Above 10 percent real on a sustained basis, assuming a 60/40 split. 

Mr. SPRATT. So to be held harmless, so to speak, the account 

would have to make above 10 percent, and that is after the 

clawback of 3 percent real? 

Mr. ORSZAG. Just to be clear, that is on the stock component, and 

then of course there is the bond component, too. Stocks would have 

to be yielding well in excess of their historical average. 

Mr. SPRATT. But is that after the deduction of 3 percent——

Mr. ORSZAG. Yes, I am sorry. That is net of the benefit offset. 

Mr. PORTMAN. OK. So you have to make well above 10 percent 

on the whole account? 

Mr. ORSZAG. Again, just to repeat, you need to make more than 

10 percent on the stock component. The bond component would 

then be accruing at the interest rate that CBO assumes. After all 

of that, subtracting the benefit offset, you would just make back up 

to the 19,900 only if stocks were yielding well above 10 percent 

real, which again is substantially higher than their historical average. 

In other words, under CBO’s assumptions it is unlikely that you 

would get back the payable benefits. And in fact you can see that 

in the CBO analysis. If you look at figure 3B, they show you the 

range of uncertainty over benefits compared to the payable benefits 

baseline. And out in the outyears, even with 80-percent probability, 

one would—plus or minus 40 percent on either side, you are not 

getting back to payable benefits. So it is a very small probability 

that you will get back even to payable benefits let alone to the current benefit formula under CBO’s assumptions. 

Mr. SPRATT. Now, let me ask you. Have you had an opportunity 

to run the numbers on what amount of debt accumulation would 

be necessary, at least in the first 20 years, to float model 2 or to 

float a proposal based upon that, particularly if the diversion is 

four points off FICA as opposed to two points off FICA? 

Mr. ORSZAG. Yes, and I think this chart actually shows you. This 

shows you as a percent of GDP. But just to give you the numbers 

in dollars, starting from when the accounts actually begin in 2009, 
108

the first decade they are fully—or, in effect; they are not even fully 

in effect. The first decade they are in effect the additional debt 

would be more than $1 trillion. And then in the second decade it 

would be more than $3.5 trillion. The details will matter—will depend a little bit on whether we should take a briefing from a senior 

White House official at face value in suggesting that the accounts 

will ultimately grow to 4 percent of earnings and exactly how that 

happens. But that is the order of magnitude that we are talking 

about. 

Mr. SPRATT. About $4.5, $4.6 trillion over the first 20 years of 

implementation? 

Mr. ORSZAG. Correct. 

Mr. SPRATT. OK. Do you have any opinion as to what that would 

do to—you have heard the discussion today. Is that debt, or is that 

something else, since we supposedly have a wash here, that we are 

only prepaying future obligations and that financial markets will 

treat this differently? What is your view of what that sort of debt 

accumulation will do to the budget and to the economy? 

Mr. ORSZAG. I think we are running an increasing risk over time 

of running into problems, rolling over our debt, and maintaining 

the confidence of investors. Implicit debt and explicit debt are different things. Implicit debt does not have to be rolled over in financial markets. By issuing the trillions of dollars in additional explicit 

debt, we are increasing the risk that we run into problems with financial market confidence, in my view. 

And just to rephrase that, the consequences of a collapse in financial market confidence are more extreme, and the probability of 

that diminution in financial market confidence seems to me higher 

when we trade future implicit debt for current explicit debt. 

Mr. SPRATT. Thank you very much. 

Mr. PORTMAN. Well, I believe Mr. Cuellar has now left us, so Dr. 

Orszag, thank you very much for your testimony. It was an interesting exchange. I will say that you talked about some CBO numbers that we don’t have yet, and we are eager to get them. When 

we look at the potential range of benefits as a share of GDP, we 

are getting some different numbers based on some projections that 

we have, but we do not have all the numbers you have. So we are 

looking forward to those. 

Mr. ORSZAG. This is with regard to model 2. 

Mr. PORTMAN. I am not sure that we would entirely agree with 

the 80 percent range of uncertainty number that you listed based 

on model 2. But in any case we will have more of those figures as 

this debate goes forward. 

Mr. SPRATT. Mr. Chairman. 

Mr. PORTMAN. Mr. Spratt. 

Mr. SPRATT. Can I take a second to tout his book, Saving Social 

Security, published by Brookings, Diamond and Orszag. I guess 

you can find it on their web page. 

Mr. ORSZAG. You can indeed. 

Mr. SPRATT. An excellent discussion of all of this. 

Mr. PORTMAN. Mr. Spratt, you really should be holding up a 1-

800 number. That would be more——

Mr. SPRATT. If I had it, I would. 

Mr. PORTMAN. Or something dot.com. 
109

Anyway, Peter, thank you very for your testimony today, and 

with that our hearing is adjourned. 

[Whereupon, at 2:41 p.m., the committee was adjourned.]

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