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23–912 2005

PRESIDENT’S FISCAL YEAR 2006 BUDGET WITH 

U.S. DEPARTMENT OF THE TREASURY 

SECRETARY JOHN SNOW 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED NINTH CONGRESS 

FIRST SESSION 

FEBRUARY 8, 2005 

Serial No. 109–1 

Printed for the use of the Committee on Ways and Means 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

ROB PORTMAN, Ohio 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

CHRIS CHOCOLA, Indiana 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

Allison H. Giles, Chief of Staff 

Janice Mays, Minority Chief Counsel 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

iii 

C O N T E N T S 

Page 

Advisory of February 1, 2005 announcing the hearing ........................................ 2 

WITNESS 

U.S. Department of the Treasury, Hon. John Snow, Secretary ........................... 5 

SUBMISSIONS FOR THE RECORD 

Embassy of the Government of Peru, statement .................................................. 68 

Investment Company Institute, Stevens, Paul, statement .................................. 70 

Williams, Janie, Ridgecrest, CA, statement .......................................................... 74 

(1) 

PRESIDENT’S FISCAL YEAR 2006 BUDGET 

WITH U.S. DEPARTMENT OF THE TREASURY 

SECRETARY JOHN SNOW 

TUESDAY, FEBRUARY 8, 2005 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, DC. 

The Committee met, pursuant to call, at 10:10 a.m., in room 

1100, Longworth House Office Building, Hon. William M. Thomas 

(Chairman of the Committee) presiding. 

[The advisory announcing the hearing follows:] 

2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

February 01, 2005 

No. FC–1 

Thomas Announces Hearing on 

President’s Fiscal Year 2006 Budget with 

U.S. Department of the Treasury 

Secretary John Snow 

Congressman Bill Thomas (R–CA), Chairman of the Committee on Ways and 

Means, today announced that the Committee will hold a hearing on President 

Bush’s budget proposals for fiscal year 2006 within the jurisidiction of the Committee on Ways and Means. The hearing will take place on Tuesday, February 

8, 2005, in the main Committee hearing room, 1100 Longworth House Office 

Building, beginning at 10:00 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from the Honorable John Snow, Secretary of the Treasury. However, 

any individual or organization not scheduled for an oral appearance may submit a 

written statement for consideration by the Committee and for inclusion in the printed record of the hearing. 

BACKGROUND: 

On February 7, 2005, President George W. Bush is expected to deliver his fiscal 

year 2006 budget to Congress. The budget will detail his tax proposals for the coming year. The Treasury plays a key role in many areas of the Committee’s jurisdiction, including taxes and customs. 

In announcing the hearing, Chairman Thomas stated, ‘‘The President’s budget 

will include tax and other proposals related to Treasury functions within the jurisdiction of the Committee. I look forward to receiving the President’s budget and discussing his proposals with Secretary Snow.’’ 

FOCUS OF THE HEARING: 

Secretary Snow will discuss the details of the President’s budget proposals that 

are within the Committee’s jurisdiction. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘109th Congress’’ from the menu entitled, 

‘‘Hearing Archives’’ (http://waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

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and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Tuesday, February 22, 2005. Finally, please note that due to the change in House mail policy, 

3 

the U.S. Capitol Police will refuse sealed-package deliveries to all House Office 

Buildings. For questions, or if you encounter technical problems, please call (202) 

225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

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1. All submissions and supplementary materials must be provided in Word or WordPerfect 

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hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

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The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

Chairman THOMAS. Good morning. Today marks the first in a 

series of hearings to examine President Bush’s proposed budget for 

the Fiscal Year 2006. Secretary John Snow of the United States 

Treasury Department is our guest today. Mr. Secretary, we welcome you back, and we look forward to your testimony. Since your 

appearance before the Committee about a year ago, the economy, 

in the Chair’s opinion, has performed extremely well. More than 

2.2 million jobs were created last year, aftertax income rose nearly 

9 percent, and average economic growth was 4.4 percent. Americans now keep more of their paychecks, and America’s businesses 

are better positioned to compete in the global marketplace and create more jobs at home. These positive outcomes, I believe, are the 

result of well-timed tax relief proposed by the President and modified and approved by Congress. 

During the past 4 years, we have done a great deal to improve 

the Tax Code. We have lowered marginal income tax rates, reduced 

the tax burden for families and job creators, lowered the tax rate 

on capital gains and dividends and enhanced savings incentives in 

pensions and Individual Retirement Accounts. But, clearly, much 

more needs to be done. The Chair compliments the President in initiating a commission to examine more fundamental tax reform, and 

we look forward with working with the Administration on that effort. During the State of the Union message last week, President 

Bush firmly framed Social Security in policy terms instead of political ones, and I commend the President for opening the Social SeVerDate Aug 31 2005 02:29 Mar 11, 2006 Jkt 023912 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 E:\HR\OC\23912.XXX 23912
4 

curity debate to ensure that Social Security remains safe and secure for our children and grandchildren. 

In the coming weeks, this Committee will engage in an even 

broader discussion about retirement security. Our society is aging, 

and we have a responsibility to address its changing needs. Social 

Security, as in its initial creation, is a key component of that retirement security. It is not, however, the entire need of seniors, especially today. Medicare, long-term or chronic care, pension reform, 

savings incentives are critical pieces as well and will be examined. 

Our goal is to develop a bipartisan approach that helps protect the 

future of our children and grandchildren, while providing them 

with greater opportunities to build nest eggs for their anticipated 

golden years. Mr. Secretary, thank you. As managing trustee of Social Security and Medicare, we are very interested in hearing your 

perspective on how to tackle the challenges facing this Nation. Now 

it is my pleasure to recognize the gentleman from New York, Mr. 

Rangel, the Ranking Member, for any comments he may wish to 

make. 

[The opening statement of Chairman Thomas follows:] 

Opening Statement of The Honorable Bill Thomas, Chairman, and a 

Representative in Congress from the State of California 

Good morning. Today marks the first in a series of hearings to examine President 

Bush’s proposed budget for Fiscal Year 2006. Secretary John Snow of the U.S. 

Treasury Department is our guest today. Mr. Secretary, we thank you for coming 

and look forward to your testimony. 

Since your appearance before the Committee a year ago, the economy has performed extremely well. More than 2.2 million jobs were created last year; after-tax 

income rose nearly 9 percent, and average economic growth was 4.4 percent. Americans now keep more of their paychecks and America’s businesses are better positioned to compete in the global marketplace and create more jobs at home. These 

positive outcomes are the result of well-timed tax-relief proposed by President Bush 

and approved by the Congress. 

During the past four years, we have done a good deal to improve the Tax Code. 

We have lowered marginal-income tax rates, reduced the tax burden for families 

and job creators, lowered the tax rate on capital gains and dividends, and enhanced 

saving incentives in pensions and IRAs. The Committee looks forward to working 

with you to continue down this path of tax reform. 

During his State of the Union address last week, President Bush firmly framed 

Social Security in policy terms, instead of political ones. I commend the President 

for opening the Social Security debate to ensure that Social Security remains safe 

and secure for our children and grandchildren. 

In the coming weeks, this Committee will engage in an even broader discussion 

about retirement security. Our society is aging and we have a responsibility to address its changing needs. Social Security is an important piece of retirement security. Medicare, long-term and chronic care, pension reform and savings incentives 

are critical pieces that also should be examined. Our goal is to develop a bipartisan 

approach that helps protect the future of our children and grandchildren, while providing them with greater opportunities to build nest eggs for their golden years. 

Mr. Secretary, thank you for coming today. As managing trustee of Social Security 

and Medicare, we are very interested in hearing your perspective on how to tackle 

the challenges facing this nation. 

I now recognize the gentleman from New York, Mr. Rangel, for any opening statement he may have. 

f 

Mr. RANGEL. Thank you, Mr. Chairman. 

Mr. Secretary, I think that the Chairman would advise you that 

we want to accommodate your very busy schedule. So, therefore, instead of reading a lengthy opening statement, what I would want 

5 

to do is to share with you that I intend to put out a press release 

saying that the Social Security proposal that the President is talking about is dead, that it is not coming here, it is all over. One, 

because if we don’t get it this year, certainly the President wouldn’t 

ask my Republican friends to even touch that third rail in an election year; and, second, if you were serious about it, certainly it 

would be included in the budget. So, I will tell them to put in my 

press release there is no money in there for the budget, and maybe 

we might get into the fact that the war is over, since that is not 

in the budget. I may get a chance to say, and don’t put any faith 

with those bonds that are in the Social Security Trust Fund, because the President said that is not money either. So, I will tell my 

Communist friends in China, be careful what they buy, because it 

is not cash that they can depend on. So, generally speaking, I will 

be going in that direction. I yield back the balance of my time in 

an effort to keep this short. 

Chairman THOMAS. Mr. Secretary, as you can see, it is a new 

year, but some things don’t change. If you have a written statement, without objection it will be placed in the record; and you may 

address us in any manner you see fit. 

STATEMENT OF THE HONORABLE JOHN W. SNOW, 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

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

Member Rangel, Members of the Committee. It is always a pleasure and a great honor to appear before this Committee, which does 

so much to shape the contours and outlook for the American economy by your actions. I want to begin by complimenting you for the 

leadership the Committee has shown in the tax legislation that you 

put in place, which is clearly at the very core, at the very center, 

at the very heart of the fact that the American economy is now the 

best-performing industrialized country in the world, the best-performing major industrialized country in the word. 

That wouldn’t happen by accident. It happened because of conscious leadership, Mr. Chairman, you and Members of this Committee took in putting into place the lower marginal tax rates that 

you referenced, the reductions in capital gains, the reductions in 

dividend rates, the expensing, and I don’t need to go on. You know 

what you did. But I think it is only fair to say that it is because 

of your action in doing that that the American economy is now performing so well, with the highest growth rates, gross domestic 

product (GDP) growth rates we have seen in some 20 years, with 

the unemployment number down, 5.2, with jobs being created, with 

inflation low, with productivity high, with the American economy 

back on its feet and strong, expanding, with a very bright, very 

bright future ahead. We need to keep that going. The President’s 

budget is designed to do that. That is why it calls for a number of 

measures to strengthen the economy, including, importantly, making the tax cuts permanent. I would urge to you act on that. 

The President’s budget also, though, frames the issue of the deficit, calls attention to the deficit, says the deficit is unwelcome, 

says the deficit is too large, says it needs to be addressed. There 

are only two ways to really deal with the deficit, as you know. One 

6 

is continue to have strong growth, because with strong growth we 

see government receipts rise, and we are seeing that now. The rising receipts lie at the very center of why the deficit situation is improving. We need to keep those receipts strong. That means jobs, 

that means business is growing and expanding and investing. The 

other part of the equation, though, obviously is spending and 

spending restraint. The budget calls for tight spending restraint, 

just as it did last year. Many—Congressman Rangel pronounced 

the call for spending restraint dead on arrival last year, and yet 

the budget that came out, approved by the Congress, reflected the 

very sort of tight spending controls that the President called for. 

I very much think and hope that will be the case again this year. 

The President has also said, though, that we can’t simply worry 

about the next 5-year budget window, we need to think about the 

longer-term budget window. 

We are on a path to reduce the deficit in half over the course of 

the next few years. That is in the budget. I think it is very doable. 

The larger issue is the unfunded mandates, the obligations that we 

have to the future generations, and there the President has called 

for action on Social Security. I think it is an act of great leadership 

on his part and courage on his part to confront that issue that, as 

you say, Congressman Rangel, some people call the third rail of 

American politics. Why does the President want to do it? Why does 

he say it is an urgent issue? He wants to confront it for two very 

important reasons. One, the future health of our economy depends 

on dealing with the $10.4 trillion deficit obligation that hangs over 

us, an obligation that, if we don’t deal with it, grows every year, 

becomes larger and larger and more difficult to confront. I think we 

have an obligation to future generations to deal with that. As the 

President said, this shouldn’t be a partisan issue. The future of our 

children’s well-being should be an issue that we can all collectively 

act on. 

It is also important, though, because the longer we wait, the 

larger the problem is for future generations. By acting on it now 

we can perform an act of intergenerational fairness to the future 

generation. The longer we wait, the larger the burden on future 

generations. Let me say that this is clearly an issue of basic arithmetic, not ideology. The numbers you all know well. When the system was put in place back in the thirties, there were some 40 

workers for every retiree, people didn’t live as long, and they had 

more children. In 1950, that ratio was 16 to 1, 16 workers for every 

retiree. Today, it is about 3 to 2. With the baby boomers coming 

on stream in just a few years—2008 is the first retirement year for 

the baby boomers. With the baby boomers coming on stream, that 

ratio is going to go to about 2. A pay-as-you-go system works all 

right when you have got 16 workers. It doesn’t work very well 

when you have got 2 workers for every retiree. This is fundamentally a problem of basic arithmetic, and we need to confront the 

math of the problem. 

The President has proposed that, in confronting it, that people 

who are 55 or older not be affected, their benefits not be taken 

away. That is a deep commitment the President has made. He has 

also said that, for younger people, they should have an opportunity 

to do better than they would under the promises that Social SecuVerDate Aug 31 2005 02:29 Mar 11, 2006 Jkt 023912 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HR\OC\23912.XXX 23912
7 

rity has made but can’t keep. Can’t keep because they are not—the 

system is not sustainable. That is why these personal accounts are 

so important. Through the personal accounts, younger people have 

an opportunity to invest and build a nest egg to use what Albert 

Einstein called the most powerful force in the universe to their advantage, the power of compounding. A 20-year old, a 25-year old 

who puts away some of their payroll taxes into these accounts can 

count on a much better retirement than would otherwise be the 

case under Social Security. I would urge you to move forward on 

that critical initiative. So, Mr. Chairman, I am delighted to be 

here; and I look forward to trying to address the questions that the 

Committee will have for me. 

[The prepared statement of Mr. Snow follows:] 

Statement of The Honorable John W. Snow, Secretary, 

U.S. Department of the Treasury 

Good morning and thank you Chairman Thomas and Ranking Member Rangel 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 

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 rate 

of inflation. Non-discretionary spending in this budget falls by nearly one 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 that we are 

dealing with, 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 so that I could recover from a bad cold—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. After-tax income is up by over ten 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. 

8 

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

cuts are geared toward improving incentives the long-term benefits can far outweigh 

the short-term discomfort, 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 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 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 40year 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 look at, and 

deal 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 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 have begun to live longer and have 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 the 1950s, 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 but 

it is offering empty promises to future generations. 

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. 

9 

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. 

f 

Chairman THOMAS. Thank you very much. 

The Chair would indicate that, given the time constraints and 

the number of Members that we have on the Committee, that the 

Chair will place himself under time constraint and would urge all 

Members to stay within the 5-minute timeframe. That doesn’t 

mean perfecting the art of the 5-minute question and then assuming that the Secretary will have time to answer beyond the 5 minutes. If a question does consume a major portion of time and the 

Secretary’s short response doesn’t seem satisfactory, I have indicated to the Secretary and his staff that they should anticipate answering your questions in writing. Mr. Secretary, it is almost ironic 

that you are meeting here in this particular room to discuss Social 

Security. If you will notice, we have recently remodeled the room. 

We went through five layers of paint to get to the original colors 

which were placed on those walls about the same time that the 

Committee was considering the Social Security Act. It is also rather ironic that there are 41 Members of the Ways and Means Committee, which means, in the graphic example that you just gave, if 

you were the retiree at the time these walls received their first 

fresh coat of paint, the entire Committee would be paying into the 

Social Security fund to support you. 

Today, it is about three Members. If I were to select randomly 

three from the Committee, I might choose myself, the gentleman 

from New York, Mr. Rangel, and the gentleman from Illinois, Mr. 

Emanuel. If we were to discuss the issue that you just outlined, 

you would currently have two noes and one yes, in part because the 

minority leadership decided to impose a litmus test for Membership 

on this Committee—— 

Mr. RANGEL. Point of personal privilege. 

Chairman THOMAS. I didn’t mention anyone. 

Mr. RANGEL. Okay. Go ahead. 

Chairman THOMAS. Thank you—and that this Committee hopefully is atypical of the Members in terms of their need to respond 

to the problem that you outlined. In fact, I think you will find that 

very few, if any, of the Members to my left would be able to agree 

that it is a problem. So, you need to appreciate the job in front of 

us, and that is not only are they not going to be supportive of your 

answer to the problem, they are going to argue—I hope not—that 

there isn’t even a problem. So, I applaud the President personally 

going out and using the power of the Presidency to focus on an 

issue that I believe is a real problem. At one time, the entire Committee supported you, and now we are down to three, and we will 

be down to two shortly. But that if in fact they don’t believe that 

the President’s approach to the problem is the most effective way 

10 

to deal with the problem, first of all, I assume they have to admit 

that there is a problem, that they would be willing to engage an 

examination of alternatives which might address the problem. The 

Chair in his opening comments stressed that we were going to be 

looking at retirement in a broader context. Just as even during 

FDR’s Presidency when they addressed the question of income support for seniors, Social Security was seen as a part of the solution, 

we are going to be looking at other parts that are 21st century and 

necessary for today’s seniors in the significant profile. 

I want to urge the Secretary to understand that the argument 

of whether or not there is a problem is before the Committee, and 

solutions to that problem. I want to underscore that I want to 

thank the President for his presentation of the problem and the 

fact that he has offered a solution to that problem. Mr. Secretary. 

Mr. SNOW. Thank you very much, Mr. Chairman. I hear you. I 

know what you are saying. We are in the phase of this effort—I 

think it is an historic effort—to secure and strengthen Social Security, which has been one of the great hallmarks of our country for 

a long time. The fundamental fact, and I think it is undeniable, is 

that the system as currently constituted isn’t sustainable. Now that 

is not the President’s view. That is the view of the Actuary of the 

Social Security Administration, the nonpartisan Actuary. That is 

the view of the CBO. It is the view of the GAO, is the view of any 

number of commissions that have been asked to look at the facts. 

I think the facts tell the story. The President is, as you said so 

well, open to a real dialog on finding the answers. But, as Senator 

Moynihan famously said when he opened the chairmanship of a 

Committee some years ago, we have Republicans and Democrats 

here, we have Independents, we have liberals, we have conservatives, we have Libertarians. Before we address the issues before 

the commission, can I ask that we put aside our partisan views and 

get the facts and, after we get the facts, approach it with our political views in mind? I think that is critical to this debate, Mr. 

Chairman. 

Chairman THOMAS. Thank you, Mr. Secretary. The gentleman 

from New York wish to inquire. 

Mr. RANGEL. Mr. Secretary, we don’t have any debate, because 

we don’t know when we expect to get the President’s proposal. Can 

you enlighten me on what timeframe we are going to get a proposal 

from the President on Social Security? 

Mr. SNOW. The President in the State of the Union message—— 

Mr. RANGEL. Mr. Secretary, time is such a big problem that 

this guy has me under a 5-minute rule. Can you tell me whether 

or not you know? Any guess? 

Mr. SNOW. The President outlined the proposal for personal accounts. He also cited four or five, five or six options that he—— 

Mr. RANGEL. That is enough. So, we will be getting recommendations. Now, besides dead Democrats, do you know of any 

alive Democrat that is working with the President on this, with all 

due respect to Pat Moynihan. 

Mr. SNOW. I think—— 

Mr. RANGEL. Just one. I don’t care. Not even on the Committee. 

Anyone on Commerce or anything. Because you are the one talking 

about bipartisanship. The Chairman said the problem is on this 

11 

side. So, give me the name of anybody that is alive, that has been 

elected to the Congress, that is working with the President as he 

gives his outline for where we go from here. Anybody. 

Mr. SNOW. Well, I thought Congressman Stenholm showed a lot 

of openness on the issue when he—— 

Mr. RANGEL. But he is not here with us. You said anybody alive 

I thought. He is still alive. 

Chairman THOMAS. He is half-way there. He is still alive. 

Mr. RANGEL. Now, the President said in his State of the Union, 

by the year 2042 the entire Social Security system would be exhausted and bankrupt. You being the trustee and following these 

things, do you agree with the President? 

Mr. SNOW. Yes, I agree that the system goes bankrupt—— 

Mr. RANGEL. Now why do you think the Social Security system 

would go bankrupt in 2042? 

Mr. SNOW. Well, for the same reason that a company that becomes insolvent files for Chapter 11. The in-flow of revenues isn’t 

adequate to meet the obligation. That is the definition of bankruptcy. 

Mr. RANGEL. Okay, then. Would you say that the incoming revenues that we receive in the United States of America does not 

meet the amount of money that we are spending today? 

Mr. SNOW. Do we have a deficit, are you saying? 

Mr. RANGEL. No, I am asking the same thing that you said 

about why we would be bankrupt, is that are we spending more 

than we are taking in now in the United States of America? The 

next question will be, so that we can maintain this friendship, is 

the United States of America, the leader of the free world and the 

most exciting economy that you can discover, are we bankrupt? 

Mr. SNOW. Far from it. We are the strongest economy in the 

world. It is because we can meet our obligations. We are able to 

meet our obligations. 

Mr. RANGEL. Tell me the difference, for purpose of education, 

the difference between the bonds that we have in the Social Security Trust Fund and the bonds that you are so confident are going 

to get us through this deficit that we are going through? What is 

the difference? Why is the Social Security Trust Fund bankrupt 

and the United States is not bankrupt? 

Mr. SNOW. Well, the IOUs, the bonds in the Social Security 

Trust Fund, are just like the bonds that are issued and held by 

many, many Americans and non-Americans all across the world. 

Mr. RANGEL. Including the Communist Chinese. 

Mr. SNOW. They are backed by the full faith and credit of the 

United States. The problem is that, in 2042, that surplus in the Social Security Trust Fund represented by those bonds is exhausted. 

Mr. RANGEL. Why is it exhausted? Because we have taken the 

money out of it. If we put all of the money that we had, as President Clinton was trying to do, we would not have this problem. So, 

right now, there is more money being paid into the Social Security 

Trust Fund than we are paying out. What happens to the rest of 

that money, Mr. Secretary? 

Mr. SNOW. Well, the money is recognized as an obligation of the 

United States, with every penny that has been paid in pledged to 

be paid back to the Social Security retirees. 

12 

Mr. RANGEL. That is my point. Now what is the difference between the bonds that we promise the Chinese that we are going to 

pay back and the bonds that we promise the future Social Security 

retirees we are going to pay back? Is there a difference between the 

bonds that make Social Security bankrupt and not our great Nation? 

Mr. SNOW. The distinction is this, Congressman. All bonds, all 

paper issued by the United States is backed by the full faith and 

credit—the Social Security system, though, in 2042 reaches the 

first year in which it is not able to fulfill its obligations, its promises. That is the definition of not being sustainable. That is the definition of bankruptcy. 

Mr. RANGEL. Okay. Could you tell me in writing why we cannot 

fulfill our promise to Social Security retirees but yet we can fulfill 

our promise to Communist China? 

Mr. SNOW. We are talking very different things there. I will be 

happy to elaborate on why they are so different. 

Chairman THOMAS. I will indicate to any Member whose interest is piqued by a written response to a question that may be 

asked—pretty obviously, if it were presented here, it would be on 

the public record, and any Member can have access to the written 

answers provided to questions in open session. We will make those 

available to all Members. 

Mr. RANGEL. That is great. 

Chairman THOMAS. Does the gentleman from Florida, Mr. 

Shaw, wish to inquire? 

Mr. SHAW. I sure do. Mr. Secretary, it is a pleasure to have you 

back in front of this Committee and have your good words with regard to the future of Social Security. As a grandfather of 14, soon 

to be 15, I am very concerned about their future. In fact, I am more 

concerned about their future than I am the 2006 election, and I 

think everybody here should be. I would like to bring up a couple 

of questions, following up on Mr. Rangel. The gentleman from New 

York asked you how many Democrats you are working with. I 

heard very clearly in the President’s State of the Union address, 

I heard him reach out for any ideas, any good ideas that would be 

considered. How many good ideas have you heard from Democrats 

in the House of Representatives or the Senate? 

Mr. SNOW. Congressman—— 

Mr. SHAW. Just name one, Mr. Secretary. 

Mr. SNOW. Well, I thought Allen Boyd, your fellow Floridian, 

apparently has offered some good thoughts on it. But we are still 

hopeful, let me put it that way. We still are hopeful that this can 

be approached in a bipartisan way. That is the way that the President wants to approach it. As he said in the State of the Union 

speech, and you alluded to it, our children’s retirement security is 

more important than partisan politics. I think we need to rise 

above partisan politics on this one. 

Mr. SHAW. It is interesting to note that a Democrat-leaning 

PAC has already gone after Mr. Boyd for speaking up, which I 

found despicable, and I am very concerned about that. Now let’s go 

talking about the solvency of the program. You said it is going to 

go bankrupt in 2042, but in which year are we not going to have 

enough money coming in, actual cash—I am talking about cash 

13 

flow—to pay the dividends, and we are going to have to go into the 

trust fund and start cashing those bonds? 

Mr. SNOW. Congressman, the system becomes negative on a 

cash-flow basis—that is annual in-flow and annual out-flow—in 

2018. 

Mr. SHAW. So, the Congress is going to have to get the money 

to pay off the bonds to pay beneficiaries after 2018. What is the 

cash shortfall between 2018 and 2042? 

Mr. SNOW. The cash shortfall is very, very—it is in the trillions 

of dollars. 

Mr. SHAW. I think it is somewhere around $2 and a half trillion. 

Mr. SNOW. That is correct. 

Mr. SHAW. If I am correct on my figures—— 

Mr. SNOW. That is right. I can give you that number precisely 

in a second. 

Mr. SHAW. I think that would be very, very helpful, because this Congress is going to have to come up with approximately $2 and 

a half trillion, beginning in 2018 to pay the benefits. Now let’s continue to talk about cash flow, because this is terribly important, because that is the way our budget goes here. Now I have been told 

and I understand that, in terms of today’s dollars, that over the 

next 75 years—and we must look at a pension plan over the full 

term of the life of today’s workers or the young children that will 

be coming into the work force—that there is a cash shortage, in 

terms of today’s dollars, of $10.3 trillion. Or if we actually see what 

is the actual cash flow, the out-go, I have been told that it is $26 

trillion. Am I correct on those figures, Mr. Secretary? 

Mr. SNOW. Yes, you are, according to the Social Security Actu- ary, Congressman. It is $10.4 trillion present value going out, and 

the 26 is the nominal. 

Mr. SHAW. I also understand that, according to the actuaries, that the longer we wait, it is going to cost us $600 billion a year. 

Is that a correct figure? 

Mr. SNOW. Yes, indeed it is. 

Mr. SHAW. Mr. Secretary, we are faced with a dilemma at this 

particular point. This is a historic occasion. I can tell you, from just 

looking at my kids and my grandkids, they will turn our pictures 

to the wall if this Congress doesn’t act to do something. They are 

going to be required to pay into a system that we know will not 

be adequate upon their retirement to pay full benefits. The Congress is then going to be faced with a dilemma of either increasing 

the tax tremendously on the backs of the working people or cutting 

benefits, and that is something we do not have to face if we were 

to act now and act responsibly. I think there is still hope. I will 

repeat what you said: Hope is still there that we will get good bipartisan support. Because I think this is terribly important. This 

is much more important than any of our reelections. It is about our 

children and our grandchildren. Thank you, Mr. Chairman. 

Chairman THOMAS. Thank the gentleman. Does the gentlewoman from Connecticut wish to inquire? 

Mrs. JOHNSON OF CONNECTICUT. Thank you very much, Mr. 

Chairman; and welcome, Mr. Snow. Given the rules, I want you to 

know I have two questions I want you to comment on. So, I will 

make them brief and hope that you will make your answers brief 

14 

so that we can get through both of them. First of all, I was very 

disappointed in the President’s budget this year. He did not include 

the $25 billion for long-term care that he included in last year’s 

budget. He did, however, continue to include support for the reform 

of Medicaid. Now you can’t really reform Medicaid unless we begin 

to build an alternate source of funding for long-term care. While we 

are doing Social Security reform, we really ought to be looking at 

how do we help people protect themselves from literally being 

wiped out by long-term care costs. So, if you have any comment on 

the willingness of the Administration to really look at the comprehensive approach to long-term care reform, which does include 

the Tax Code, I would be interested in those comments. 

Mr. SNOW. Well, the issue of the Code and health care is a matter that will be addressed, Congresswoman, by the panel that the 

Chairman alluded to. Obviously, the Code has a heavy bearing on 

the health care delivery system; and in my conversations with 

panel Members, it is clear that those issues—in fact, all of the 

great issues of our time in terms of the Code—will be on the table. 

So, I fully anticipate the issues you are talking about, the health 

care tax credit and others, being addressed by the panel. 

Mrs. JOHNSON OF CONNECTICUT. I think that is relinquishing an extraordinary amount of responsibility and creativity 

to a nonelected group, but I will be interested in what they do. 

My second concern was to, first of all, compliment you on taking 

up the issue of currency manipulation with China. But I am very 

concerned that China continues to peg its currency to the value of 

the Dollar. It is giving its businessmen a tremendous advantage 

over our businessmen, and between the currency peg and their cornering of the steel market and driving the price of steel up, we are 

really facing some very great challenges to our industrial base and 

the ability of America to manufacture the quantity and the diversity of products necessary to sustain a strong defense industrial 

base. So, I think this issue of currency manipulation is big, and it 

is particularly big with China, because China couples it with an inability to enforce its obligations under the intellectual property protection provisions of the World Trade Organization (WTO). 

Mr. SNOW. The whole issue of the Chinese peg is one that we 

have taken very, very seriously. I have engaged all of the senior 

political and economic leadership of the country on the question. 

We made it clear to them that they need to move to a flexible exchange rate, to let the market set the currency, rather than do it 

through administrative fiat. We have received from the political 

leadership of the country and economic leadership a positive response on that. They have indicated that they agree that they need 

to move to flexibility, but they can’t move to it until they modernize 

the financial infrastructure of the country. Of course, they have 

had huge problems with nonperforming loans, with the absence of 

a market-based financial system, with the absence of the sort of institutions, of the financial marketplace that we know and rely on 

in all developed countries. 

They are making great progress, Congresswoman, let me say 

that. We are not satisfied, but they are making great progress. I 

would cite the fact that recently they entered into an agreement 

with the Chicago Mercantile Exchange to put in place a forward 

15 

hedge on their currency, a derivatives market on their currency. 

Now there is no reason to hedge a currency that is pegged. So, I 

am encouraged. They know where we are coming from. They know 

that we are intent on seeing them move there, and I think they understand it is in their interest to do so as well. I am very sympathetic to your question. On the long-term health care, we are not 

going to abdicate the ultimate responsibility to a nonelected body. 

They will report back to us, of course, and the President ultimately 

will make the decision. I hope we will have legislation proposed to 

this Committee and to the Congress shortly after the Committee 

reports, which is this summer. 

Chairman THOMAS. Does the gentleman from California, Mr. 

Stark, wish to inquire? 

Mr. STARK. Thank you, Mr. Chairman. Mr. Chairman, is it 

proper—I have some questions on health care, which is a new topic 

for the Secretary, that I would like to submit them in writing and 

see if he would respond to them. 

Chairman THOMAS. Without objection. To the degree the Secretary, in the capacity of Secretary of the Treasury, couldn’t be as 

responsive as we would like, I assume you would like him to try 

to get the Administration to respond to your question, not having 

seen the questions? 

Mr. STARK. Thank you, Mr. Chairman. 

Chairman THOMAS. Without objection. 

Mr. STARK. Thank you, Mr. Secretary, for being with us here 

today. I just wanted to reaffirm something with you. I have a problem at home. My son will be 10 shortly, and he received from his 

grandparents a thousand-dollar savings bond, which will mature 

shortly after his 10th birthday. With all of this discussion, the 

Budget Committee—the majority of the Budget Committee spokesmen suggested that the trust fund was going bankrupt because it 

is just IOUs from the government. I was trying to explain to my 

son that what he has is an IOU from the government, and can I 

go home and tell him that the Secretary of the Treasury assures 

him that that thousand-dollar U.S. savings bond is gilt-edged and 

will be honored by the United States and the full faith and credit 

of the United States? 

Mr. SNOW. Yes. Yes, you can. Those are full faith and credit obligations. 

Mr. STARK. Is it not true then that all of the assets in the Social 

Security Trust Fund are as gilt-edged and secure as my son’s U.S. 

savings bond? 

Mr. SNOW. As I said to Congressman Rangel, they are all 

backed by the full faith and credit of the United States Government. There has never been a default. 

Mr. STARK. There has been some question raised here. I thank 

you for that answer. Now you have argued that Social Security, or 

the Administration has, is unsustainable. But the budget you give 

us extends the President’s tax cuts and makes them permanent. 

The total cost of those tax cuts is three to five times more than the 

cost of shoring up Social Security without any benefit cuts. How 

can one policy be unsustainable and the other not? 

Mr. SNOW. Congressman, the budget we have submitted, which 

includes making the tax cuts permanent, does so within the PresiVerDate Aug 31 2005 02:29 Mar 11, 2006 Jkt 023912 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\23912.XXX 23912
16 

dent’s budget reduction parameters. As you look at the out-years 

on that, on the budget we have submitted, you will see that it 

comes down, I think, to 1.7 percent of GDP, which is low by historical standards. We can incorporate and will incorporate the tax permanence in the budget numbers you see. There is total transparency there. While incorporating them into the budget we also 

achieve the President’s objectives of reducing the deficit—— 

Mr. STARK. I understand what you have said in the budget, Mr. 

Secretary. But when you have got tax cuts for the top 1 percent of 

the households, with average incomes over a million bucks, and 

they exceed—those tax cuts alone exceed the cost of shoring up Social Security, without any benefit cuts, what are the President’s 

priorities? Tax cuts for those of us who are wealthy, or repaying 

the trust fund for those who have contributed throughout their 

working lifetime? I want to know what your priorities are. 

Mr. SNOW. Congressman, our priorities, I want to underscore, 

are to keep the American economy strong and prosperous, growing 

and creating jobs. Because of those tax cuts, as the Chairman said, 

there are some 2.7 million additional Americans working today. I 

think it is important we keep the economy strong and capable of 

creating jobs. That is where the tax cuts are so important. That is 

why sustaining the tax cuts is so important. 

Mr. STARK. So, you think that giving all of that money to 1 percent of the households, those who make over a million dollars, is 

what is going to drive our economy, rather than keeping senior citizens out of poverty and providing them decent health care. That is 

your opinion as to how we will have a better society. Is that correct? 

Mr. SNOW. Congressman, I don’t see this at all as an either/or. 

I think we need the tax cuts made permanent, because that allows 

the American economy to grow and expand and create jobs. 

Mr. STARK. But it is that. Social Security, it is either/or, Mr. 

Secretary. 

Mr. SNOW. Well, no, Congressman. There are ways to fix Social 

Security as laid out by many people, including the President’s Commission on Social Security. There are ways to fix Social Security in 

ways that are fair to future generations and put the system on a 

sustainable basis and secure and save it for the future. We can do 

that. 

Mr. STARK. Your plan is to cut benefits for Social Security, Mr. 

Secretary, and not—and cut taxes for the rich. That doesn’t seem 

to me to be very fair. That is all, my concern. I just wondered how 

that fits in with your priorities. Is it moral? Is that a good thing 

to do? 

Mr. SNOW. Congressman, it is critically important that we keep 

the economy on the right path. It is critically important that people 

who are looking for work find work. I think we have an obligation 

to people who are looking for jobs to give them the ability to find 

a job. Lower tax cuts clearly make that possible. So, lower tax cuts 

are critical. At the same time, we need to address Social Security, 

and we can, and there are ways to do it that are fair and equitable. 

Mr. STARK. Mr. Chairman, I think I have just been given a 

snow job. That is all. 

17 

Chairman THOMAS. I can’t believe you would be that stark in 

your comment. 

Does the gentleman from California, Mr. Herger, wish to inquire? 

Mr. HERGER. Thank you, Mr. Chairman. 

Mr. Snow, I want to thank you for appearing before this Committee; and I particularly want to thank President Bush for the 

courage that he has shown in stepping forward on addressing this 

incredibly crucial issue affecting our children and our grandchildren. If I understood you correctly, the major part of the essence of the problem is that, when Social Security began back in 

1935, we had 41 workers paying in for every 1 receiving it. Today, 

we are down to a little more than 3 paying in for every 1 receiving 

it, and that drops even lower than that. That very soon we will actually—we can see where, when the baby boomers begin retiring in 

2008, we begin having a very major problem. It is—being aware of 

that, I am amazed that there are so many on the other side of the 

aisle, my good Democrat friends, who don’t even see a problem 

here, who think that everything, evidently, is just fine; and I want 

to thank you and the President for stepping forward. 

Now the President has been accused of proposing to cut Social 

Security benefits to pay for a, quote, risky scheme. However, the 

personal accounts proposed and detailed by the President during 

his State of the Union address is modeled on the Thrift Savings 

Plan (TSP) enjoyed by all Members of Congress and all U.S. Federal employees which enables them to invest a portion of their 

wages in a government bond fund, corporate bond index fund and 

equity index fund at a very low administrative cost. Would you review the investment options and administration of the proposal accounts President Bush proposes and steps that would be taken to 

protect workers’ investments? 

Mr. SNOW. Yes, Congressman, thank you. Thank you very 

much. 

The idea that is being put forward here by the Administration, 

by the President, is simply this: The system can’t pay the benefits 

that it has promised. We know that. That is what those numbers 

you just went through tell us. 

In 2042, the people who seek to get their benefits that year, if 

we don’t do anything in the interim, will face a very sizable reduction in the benefits, because the system can’t pay the benefits. That 

is what the bankruptcy is all about. It has nothing to do with the 

IOUs, it has everything to do with the amount of revenue flowing 

into the system. The President has said, given that fact, let’s give 

people a chance to do better than they would under the system that 

can’t fulfill those promises. How do you do that? Well, you do that 

by allowing people to invest and build a nest egg over a long working life, applying the laws of compounding, the powerful laws of 

compounding. At the same time, though, we recognize that these 

have to be very safe investment vehicles. This has to be a secure 

investment. This is not going to the roulette wheels. It isn’t going 

to the race track. These are safe and secure investments. 

The investment vehicle, as you point out, will be very much patterned on the TSP available to government employees and Members of Congress. It will have a limited number of options, all secure, all broad-based. Nobody will be allowed to invest in hedge 

18 

funds or derivatives or put and call options. There will be treasuries—I think there will be treasuries that are inflation protected, 

all in funds, funds of treasuries, funds of safe corporate bonds, 

funds of large cap stocks and funds of, I think, foreign stocks and 

funds of mid-cap stocks. But funds. So, that the individual won’t 

be buying the shares of the ABC company. He will be buying a 

fund of shares of companies. So, the risks get highly diversified. 

You also asked about administrative expense. These will be administered in a way that minimizes administrative expenses. I think 

the estimate is 30 basis points of administrative expense, which is 

very, very low. The whole point here is to give people a chance to 

do better than they otherwise would do with promises that can’t be 

kept. 

Mr. HERGER. Thank you very much, Mr. Secretary. 

Chairman THOMAS. Does the gentleman from Louisiana, the 

Chairman of the Social Security Subcommittee, wish to inquire? 

Mr. MCCRERY. Thank you. 

Mr. Snow, welcome. Nice to see you again. 

Mr. Herger touched on some who criticized the President’s proposal for personal accounts as a risky scheme. Here is an ad, a recent ad, from the American Association of Retired Persons (AARP), 

saying if we wanted to gamble we will play the slots. You may have 

read or heard, Mr. Secretary, that I recently spoke to the Board of 

Directors from AARP. If you missed it, I will send you some copies 

of the press releases. 

Mr. SNOW. I actually read the real—what you really said, not 

what was reported. 

Mr. MCCRERY. Glad you got that. Well, actually I had a very 

pleasant, constructive discussion with the Board of Directors of the 

AARP about Social Security; and at that meeting I congratulated 

them on winning the first round. Because, in fact, these ads did 

some good. The President obviously listened to the AARP and in 

his proposal that he made, in his State of the Union address, in 

fact, as Mr. Herger pointed out, followed the advice of the AARP 

and constructs a system for investment of personal accounts in a 

very safe manner, wouldn’t you say? 

Mr. SNOW. Absolutely. 

Mr. MCCRERY. Based on the history of the TSP, which is very 

similar to the President’s proposal, I would say it is a very safe bet, 

wouldn’t you? 

Mr. SNOW. Yes. Yes, I would. It is a safe bet, but it is a bet that 

will allow the workers who put the money into those accounts to 

sustain much higher rates of return than they would through the 

traditional Social Security system. 

Mr. MCCRERY. Exactly. Which helps us in the long run to save 

Social Security and to prevent it from going bankrupt in the traditional sense of that definition. Now, speaking of that, I just want 

to underscore you gave the right answer, Mr. Secretary, to Mr. 

Rangel’s question about the bonds in the trust fund. Indeed, they 

are as good as gold. They are backed by the full faith and credit 

of the U.S. Government, safest investment in the world. They are 

going to be paid. No one questions that. But the point is, in 2042, 

there will be no more bonds in the trust fund, is that correct? 

Mr. SNOW. That is precisely it. The surplus is exhausted. 

19 

Mr. MCCRERY. There are no more bonds in the trust fund, there 

are no more bonds to redeem, there are no more IOUs. At that 

point, revenues, if we don’t change anything, revenues coming in 

through the payroll tax will be sufficient to pay only about 72, 73 

percent of promised benefits. Is that correct? 

Mr. SNOW. That is precisely the point. In 2042 the trust fund 

can only pay out, in accordance with the revenues that it brings in, 

all of the bonds; all of the IOUs have been paid off, there is no 

more stash of IOUs or bonds that the Social Security Administration has that they can present to the Treasury. 

Mr. MCCRERY. Exactly. 

Mr. SNOW. So, the Social Security system is entirely dependent 

on its inflow, and its inflow is only some 72 percent of its then-projected outflow. So, it has to reduce. 

Mr. MCCRERY. So, by anybody’s definition, even if you are looking at Social Security in isolation, that is a problem. That is a big 

problem. But we are talking today about the President’s budget. 

So, let us look at Social Security not in isolation but in terms of 

the overall budget of the United States and where we are headed 

down the road. I am looking at a Congressional Budget Office 

(CBO) document that estimates that if no changes are made, Mr. 

Secretary, in Social Security, Medicare, Medicaid, just those three 

programs—all of which will soon suffer from the same malady, the 

retirement of the baby boomers, my generation—if those three programs stay the same, no changes, Mr. Secretary, CBO estimates 

that in the year 2050 they will represent 27.4 percent of GDP. 

Mr. Secretary, do you know what the total budget of the United 

States today represents? Total budget, defense, everything. 

Mr. SNOW. Yes. It is—— 

Mr. MCCRERY. Last year was 19.8 percent of GDP. Wasn’t it? 

Mr. SNOW. The unfortunate thing is that these mandatory programs are taking a larger and larger share of that total budget. 

Mr. MCCRERY. Mr. Secretary, if those changes are made, they 

won’t take a larger share, they will take the whole budget, plus 

some. 

Mr. SNOW. Well, that is the course we are on. 

Mr. MCCRERY. So, if you don’t look at Social Security in isolation, then you have got—the sky will be falling soon, Mr. Stark, if 

we don’t do something. That is the point. I think it is an irrefutable 

point, and I commend the Secretary and the President for taking 

note of that and urging responsible Members of Congress to do 

something about the problem before it is too late, before the solutions are too drastic. 

Thank you, Mr. Secretary. 

Chairman THOMAS. I could tell my colleague, if it had been the 

gentleman from California, he would have used the analogy of the 

Earth opening up. Those of us from California are familiar with 

that. I believe it was the gentleman from Washington who hasn’t 

seen the sky for a long time, and they had thought it had fallen 

some time ago. 

Mr. MCCRERY. I apologize, the gentleman from California. The 

gentleman from Washington often sounds like the gentleman from 

California, so I got them confused. So, I apologize. 

20 

Chairman THOMAS. Does the gentleman from Michigan, the 

Ranking Member on the Social Security Subcommittee, wish to inquire? 

Mr. LEVIN. The skies are always clear in Michigan. So. 

Indeed, Mr. Secretary, we are very happy to let the facts tell the 

story. One fact is, in 1983 when there was a problem, the Democrats provided two-thirds of the votes to address it, two-thirds in 

the House. This notion that we don’t understand there is a shortfall is a pure canard. The shortfall, you used 2042; the CBO says 

2052, 72, 73 percent of the benefits would be paid. I also ask you 

to look at the dependency ratios. You mentioned about 16 workers, 

and so forth. Look at the dependency ratio, which for the baby 

boomers will be about the same when they retire as when they 

were kids. I think you are trying to create a notion of bankruptcy 

when that really is not an accurate description. So, let me ask you, 

in the White House briefing last Thursday, it was acknowledged 

that the private accounts would not do anything to address the 

shortfall; do you agree? If you could give me a quick answer. 

Mr. SNOW. Yes, I will. No, I think they are an integral part of 

any resolution. 

Mr. LEVIN. No, but the private accounts by themselves as described by the President, would that do to anything to relate to the 

shortfall? Will it reduce the shortfall? 

Mr. SNOW. It is part of any—— 

Mr. LEVIN. No, it by itself; will private accounts address the 

shortfall, yes or no? The White House said no on Thursday. 

Mr. SNOW. I didn’t see that. 

Mr. LEVIN. You didn’t see the briefing of the White House? 

Mr. SNOW. No, I didn’t see the comment that you are referring 

to. The three plans that were produced by the Commission all had 

the Social Security system being fixed in the sense that it was permanently sustainable and they all had the private accounts. 

Mr. LEVIN. Okay. Let me—— 

Mr. SNOW. Personal accounts is an integral part of that solution. So, I view the personal accounts that give people a chance to 

build this nest egg and do better than they otherwise would do as 

an integral part of any solution. 

Mr. LEVIN. Good. I am glad you mentioned the three, because 

the accounts, the private accounts, do nothing by themselves. I 

could quote what the White House said. You then go over to the 

three plans. The plan the President says is a good blueprint, does 

it have benefit cuts in it? Yes or no? 

Mr. SNOW. I think both plan two and plan three do have— 

change the index, which has the effect of slowing the growth rate. 

Mr. LEVIN. Is that a cut in benefits from the present structure? 

Yes or no? 

Mr. SNOW. Well, it slows the rate of growth of future benefits. 

Mr. LEVIN. You know, one of the problems is this White House 

won’t give a straight answer. The answer is it reduces the benefits 

for younger workers over 40 percent, plan two, which the President 

called a good blueprint. I think you ought to just say yes when the 

answer is yes. Now I want a yes or no answer to this. Why isn’t 

the transition cost in the budget? Vice President Cheney said this 

just a few days ago: The government would have to borrow 754 bilVerDate Aug 31 2005 02:29 Mar 11, 2006 Jkt 023912 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HR\OC\23912.XXX 23912
21 

lion over the next 10 years, and conceded that the price tag would 

involve borrowing trillions of dollars more in subsequent decades. 

That is right, the Vice President said, trillions more after that. 

Why isn’t the 754 billion in the budget? 

Mr. SNOW. The 750 has been acknowledged. 

Mr. LEVIN. Why isn’t it in the budget? 

Mr. SNOW. Well, it is reflected in the budget in 2009 and I think 

2010, the last 2 years of the budget, as a two-tenths of 1-percent 

increase in the ratio of GDP to the deficit. It adds 2 percent to that 

ratio. 

Mr. LEVIN. Two-tenths. 

Mr. SNOW. Two-tenths, I am sorry. 

Mr. LEVIN. Is 754 in the budget fully? 

Mr. SNOW. Yes. It is reflected in the table that shows the ratio 

of the deficit to GDP. 

Mr. LEVIN. But in the budget itself when the numbers are 

there, is there a number that says Social Security transition costs 

754 billion? 

Mr. SNOW. Whether it is in the budget, Congressman, I don’t 

know. It is a number we acknowledge as the number going forward 

for the 10-year period. We acknowledge it. Whether it is formally 

in the budget or not, I don’t know, But we have been transparent. 

Mr. LEVIN. Why not? 

Mr. SNOW. I don’t know. But we are transparent. We are telling 

you what it is. 

Mr. LEVIN. But it is not in the budget. 

Chairman THOMAS. The gentleman’s time has expired. Does the 

other gentleman from Michigan, the gentleman Mr. Camp, wish to 

inquire? 

Mr. CAMP. I do, Mr. Chairman. Thank you very much. Thank 

you, Mr. Secretary, for being here and for your testimony, certainly 

about the strength of our economy. My question, though, is really 

about the idea of voluntary personal accounts. In 1983, the Democrat Congress increased the retirement age for Social Security. In 

your view, is that a benefit reduction or benefit cut? 

Mr. SNOW. It would be scored as that, certainly. 

Mr. CAMP. All right. Does borrowing—obviously to establish personal accounts in a large sense would require some borrowing in 

the near term, and add—and that would add to the publicly held 

debt in the short term. But does borrowing to establish personal accounts have the same economic impact as borrowing to finance 

other government spending? 

Mr. SNOW. No, it is entirely different. Borrowing to finance the 

personal accounts creates savings in the owners of the personal accounts. It in effect prefunds an obligation. Therefore, unlike traditional borrowing which leads to spending, this is borrowing that 

leads to savings. 

Mr. CAMP. Would that borrowing, then, that leads to savings, as 

you describe it, which has a better impact certainly on our economy 

and on individuals as well, would that also allow Congress then to 

spread the impact of transitioning to a Social Security system that 

starts paying out more than it brings in, in almost 10 years, would 

that allow us to spread that impact of transitioning over a longer 

22 

period of time, thereby lessening any effect on any single generation of workers? 

Mr. SNOW. Yes. That is one of the great merits of the approach 

is that spreading out across many generations. 

Mr. CAMP. So, we would be able to borrow in a way that had 

some positive effect by increasing savings, and also lessen any impact on any particular generation of workers? 

Mr. SNOW. Yes. The borrowing is turned into savings; and as 

the workers put the money into the accounts, they reduce the future claims on the system by an amount which is in present value 

terms equivalent to the money they take out. 

Mr. CAMP. And also would boost retirement income, which is not 

something we have talked about. 

Mr. SNOW. Well, that is the key to it. The reason that these accounts are so important is they give younger people the chance to 

have a better retirement than they would in the current system, 

a system that can’t pay the full benefits beginning in 2042, if you 

rely on the actuary, or 2052 if you rely on CBO. 

Mr. CAMP. Thank you, Mr. Secretary. 

Thank you, Mr. Chairman. 

Chairman THOMAS. Thank the gentleman. Does the gentleman 

from Maryland, Mr. Cardin, wish to inquire? 

Mr. CARDIN. Thank you, Mr. Chairman. Mr. Chairman, first let 

me assure you, the Democrats understand the math of Social Security and understand the need to strengthen Social Security, but we 

do not believe it is in crisis nor do we believe it is heading toward 

bankruptcy. Mr. Secretary, let me thank you for clarifying the date, 

2042, a critical date when there would not be enough assets to pay 

full benefits in the Social Security system according to the current 

projections. But let me just remind you that in 1996, the same actuaries made a projection that gave solvency 13 additional years 

than we have now. 

So, my point is that these are very uncertain. The Administration, as I understand it, is very reluctant to do more than 5-year 

budgeting. I might ask you, when I complete comments, if you 

could tell me any other program in government that is as well 

funded for 37 years as Social Security is. I can’t think of another 

major program that is that well funded. Let me also point out that 

these projections take into consideration the changes that were 

made in 1979 and 1983 when we recognized the demographic 

changes of the Nation and created the Social Security Trust Fund 

to generate a lot more in assets. As I understand it, the current 

projections of 2042 is based upon a 1.8 percent economic growth, 

and yet you seem more optimistic that we will exceed that, and 

that the economic activity is greater than you are saying, and then 

the solvency dating will be much greater than 2042. 

I just mention all that because I don’t want to see us rush to get 

it wrong. I think we have got to get it right, and Democrats believe 

we should get it right. I think it is a matter of simple math. I think 

the first thing you could do is help us by carrying out what you 

said in your opening statement about this budget causing attention 

to the deficit. I think it would be helpful if you would tell the deficit next year to be not $390 billion under your projected budget 

but 560 billion, because that is the only budget deficit. Once again, 

23 

we are using the Social Security Trust Funds to mask the size of 

the real deficit. If we really had a lockbox, if we really kept that 

Social Security Trust Fund for Social Security and invest them 

wisely, invested them wisely, we would have a much less problem 

than we have today. 

So, I do agree with Mr. Herger; I want people in my district to 

have the same benefits as a Federal employee or a Member of Congress. I am very privileged to be able to participate in Social Security, to be able to have a good pension plan that my employer helps 

pay for, and—a TSP or a private retirement plan that I put money 

in, and it is at risk. But I know that I have, and Americans have 

on average, a core benefit in Social Security that protects one-third 

of their income when they retire. 

My question to you: If I am under 55, under the President’s proposal, and I don’t participate in a private retirement plan, as I understand it, my benefits are going to be reduced. I am not going 

to get one-third of my replacement when I retire. If I am 27 today 

and retire when I am 65, under the President’s proposal, if I don’t 

participate in a private account, my benefits are going to be less. 

That is guaranteed. I am not going to get one-third of my replacement, on average. Even if I participate, you have got to pay for this 

somehow. We don’t know what is going to happen. There is no 

guarantee that I am going to be able to get that core benefit. So, 

my question to you: Aren’t we talking about benefit cuts and dramatic benefit cuts for those under 55 and a real question mark to 

people who are disabled, survivors, and so forth, as to whether they 

are going to be able to get the same type of protection that they 

have under current law under the President’s proposal? 

Mr. SNOW. Congressman, the current system, unless addressed, 

will result in a major reduction in benefits. That is what lies ahead 

unless this situation is addressed. When 2042 comes, according to 

the Social Security actuary, there will be a 27-percent reduction, I 

think is the number that he uses, in the benefit levels. It will get 

larger and larger and larger with future generations, because the 

trust fund can only pay out what it has coming in. Therefore, it 

seems to me we have an opportunity now to address it and put in 

place savings accounts for people that will allow them to make up 

for some of that shortfall and do better than they would under the 

current system. 

Mr. CARDIN. I would just appreciate it if you would get to simple math. It seems to me simple math is, if you want to improve 

the system, you strengthen it by putting more in, you don’t take 

money out, one-third of the payroll taxes. 

Thank you, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Minnesota, Mr. Ramstad, wish to inquire? 

Mr. RAMSTAD. Thank you, Mr. Chairman. Thank you, Mr. Secretary, for your important leadership. Certainly the President and 

the country are well served by your being in this critical position. 

I want to ask you a question with respect to Social Security reform, 

if I may. As you know, our country has long financed Europe’s social assurance by paying value-added taxes (VATs) on our exports, 

while European exports to the United States are exempt from 

VATs. Doesn’t it make good economic sense to link Social Security 

24 

reform with overall tax reform to find a better method of financing 

Social Security other than the payroll tax? 

Mr. SNOW. Well, Congressman, the whole issue of the tax system is one that we are going to be addressing in a direct and forthright way. Right now we have asked the panel to look at all options 

for improving the performance of the tax system, including VAT 

taxes, sales taxes and so on. They are all on the table. I don’t want 

to prejudge where they will come out, but I do know that this is 

a very able panel with very accomplished people, Chaired by 

former Senator Connie Mack, former Senator John Breaux, both of 

whom served in the House. We will be working closely with them. 

I just don’t want to try to foreshadow where they might come out. 

But that issue is on the table. 

Mr. RAMSTAD. So, given the timing of that panel—by the way, 

my distinguished predecessor and mentor, Bill Frenzel, is also on 

that panel. 

Mr. SNOW. He is indeed. 

Mr. RAMSTAD. Doesn’t it make sense, given the timing of the 

panel’s recommendations—which I understand the panel was 

charged with coming up with the recommendations by July 31— 

doesn’t it make sense to defer action on Social Security until we get 

the tax reform recommendations, and then do Social Security reform within the comprehensive context of tax reform? 

Mr. SNOW. No, I don’t think so. I think Social Security needs 

to be addressed. The ideas that come from the panel will be available, by the latest, by July of this year. I would hope that the Congress would continue to move forward with Social Security reform, 

would look at the options, would help define the nature of the problem. We are having some difficulty right here defining the nature 

of the problem. I think it is going to take some time to get together 

on what the nature of the problem is before we get to the fix. But 

I would not want to see us deflect attention from this critically important issue. 

Mr. RAMSTAD. But the Administration isn’t necessarily wedded 

to continuing to finance Social Security with the payroll tax. 

Mr. SNOW. Well, the Administration wants to see what the 

panel comes up with in terms of options. What we are primarily 

working for is a way to put Social Security on a sustainable basis. 

There have been any number of efforts to reform Social Security, 

to fix Social Security in the past, and none of them have put it on 

a permanently sustainable, financially financial basis. So, that is 

the real objective here, is to put Social Security on a financially 

sustainable basis while giving younger people the chance to take 

advantage of the ability to invest and have a higher rate of return. 

Mr. RAMSTAD. I certainly commend that compelling objective, 

and it is compelling that we act. Let me shift gears quickly to the 

alternative minimum tax (AMT). As you know, this AMT is staring 

more and more middle-income taxpayers for whom it was not intended. Now, I know the President has asked Treasury to study the 

AMT problem and make recommendations for reform. What is the 

status of that study? Am I correct in assuming that because the 

study is not yet completed, that is why AMT relief is not included 

in the budget? 

25 

Mr. SNOW. Precisely, Congressman. Precisely. Again, the AMT 

relief is a matter that has been under review for some time at the 

Treasury. When we met with the panel chairman and cochairman 

we asked them to include AMT as one of the issues they review 

and look at and give us recommendations on. So, the issue is being 

worked very, very hard. You are right; this is a tax that burdens 

millions and millions of Americans, it will burden many, many 

more millions of Americans. It is a duplicative tax, it isn’t fair, it 

isn’t growth-oriented, and it isn’t simple. The objectives of the 

President are to make the Code simpler, fairer, and more growthoriented. The AMT needs to be fixed because it doesn’t serve those 

two objectives. 

Mr. RAMSTAD. As one of my accountant friends caught, this 

really is a ticking time bomb that needs to be dealt with. I appreciate your sense of urgency as far as the dealing with it is concerned. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Ramstad follows:] 

Opening Statement of The Honorable Jim Ramstad, a Representative in 

Congress from the State of Minnesota 

Mr. Chairman, thank you for calling this important hearing today to review the 

President’s fiscal year 2006 budget proposals. 

We are fortunate to have Secretary Snow with us today, who is not only responsible for helping shepherd the many tax proposals outlined in the President’s budget, but also the daunting but essential efforts to reform our federal tax system and 

ensure the solvency of our Social Security system. 

With Americans spending some 6 billion hours and $100 billion per year trying 

to comply with our complex tax system, I applaud the President for working to 

make the system simpler and fairer for taxpayers and better for jobs and our economy. 

I also applaud the President for tackling the problems facing Social Security, 

which will face $10.4 trillion in unfunded liabilities if we do nothing to save it. 

I look forward to working with my colleagues and Secretary Snow, both on the 

proposals already outlined in the President’s budget and the broader issues of tax 

and Social Security reform. 

Again, Mr. Chairman, thank you for convening this important hearing. 

f 

Chairman THOMAS. Does the gentleman from Washington, Mr. 

McDermott, wish to inquire? 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Snow, we 

have all read your predecessor’s book, ‘‘The Price of Disloyalty,’’ so 

we know that we are going to hear the line from the White House, 

unadulterated. It gets a little Orwellian in this room when we listen to the word ‘‘transparency’’ from the first line in your speech, 

and you have used it at least 12 times since: We are very transparent, we are very transparent, we are very transparent. I know 

if, you say something enough, people will start to believe it. It is 

like Coca-Cola, its advertising. We understand. 

But the fact is that this budget that you put before us that you 

say is a transparent budget has nothing in it for the Iraq War. 

Now, you don’t think that the Iraq War isn’t going to cost something. Oh, well we don’t know how much it is, is what you are 

going to say. Well, then you hear about the AMT. The AMT cost 

$25 billion to extend what was in the last budget last year. You 

don’t even put in the extension, it just drops dead. You know that 

26 

there is at least $25 billion that doesn’t show in this budget. Then 

you go to the privatizing or permanent cost of the taxes. You fold 

it into the baseline. Then you take the privatizing funds and that 

is not shown at all. 

Now, I know you are going to say, well, we haven’t written the 

bill. This process started 25 years ago when Cato put out a resolution, or put out a paper saying how this should be done. The President has been saying it since 1978 that bankruptcy was around the 

corner. You don’t have a bill to lay in front of us. Now, how can 

you call this a budget that leaves out the privatization cost? How 

can you call that transparent when you have the war, the AMT, 

the privatization, sitting there and you know it is going to be costly? What is the deficit really going to be this year? 

Mr. SNOW. Well, it is as laid out in the Office of Management 

and Budget (OMB) document, the President’s budget proposal. On 

each of those issues, let me just make a brief comment. On the 

war, we have indicated that the supplemental would be a 

supplementalMr. MCDERMOTT. Does that count in the budget as part of the 

deficit? 

Mr. SNOW. Would be $80 billion. We have been transparent in 

saying that. 

Mr. MCDERMOTT. But does that add to the deficit? 

Mr. SNOW. Yes, that is included in the deficit number. 

Mr. MCDERMOTT. Okay. In that 500 figure that you just gave? 

Mr. SNOW. The effects of that are incorporated in the total deficit number. The AMT is, as I have indicated in response to the 

previous question, is being looked at and will be addressed by the 

panel. We don’t know how they will address it, so, therefore, we are 

not including the so-called patch this year. The tax cuts being 

made permanent are included in the budget window. 

Mr. MCDERMOTT. So, we see everything. You are willing to 

stand behind this deficit number that is in that budget as the one 

that we are going to finish the year with? 

Mr. SNOW. I think it is the best estimate anybody has. It is very 

similar to the estimate that CBO has. 

Mr. MCDERMOTT. Let me ask you a question about the problems with Social Security. You are a trustee; you sit there, and 

they present you with three options. The trustees always select the 

lowest option. This is based on a 1.8-percent growth. Now, when 

was the last year the United States economy grew 1.8 percent? 

Mr. SNOW. Congressman, we are looking at 40 years. Remember, we are not dealing with Social Security in 2007 alone, we are 

dealing with it over the—— 

Mr. MCDERMOTT. But what was the year that it ever was that 

low? 

Mr. SNOW. Well, that is the Social Security actuary’s estimate. 

Mr. MCDERMOTT. That is their low estimate. What about their 

medium estimate? What if we said 3 percent; what would that do 

to the extension of the Social Security? 

Mr. SNOW. Almost nothing. 

Mr. MCDERMOTT. Nothing? 

27 

Mr. SNOW. Almost nothing. Because the growth in wages translates into growth in benefits and absorbs the effects, so that the obligation of Social Security rises at the same rate, basically. 

Mr. MCDERMOTT. So, your testimony is that the growth in 

wages means absolutely nothing in terms of increasing the longevity of the fund? Is that what you are testifying here? 

Mr. SNOW. Not absolutely nothing. It means very little, and over 

the long term means almost nothing. 

Mr. MCDERMOTT. Would you put that in writing? I would like 

to see that. Show me the 3 percent and the 1.8 percent, and show 

me how it works out. 

Mr. SNOW. I would be delighted. This is mysterious, but it is 

correct. Social Security is basically a function not of GDP but of demographics. 

Chairman THOMAS. That is one of the reasons when you focus 

on wages versus prices, the multiplier on that basis produces very 

much the effect the Secretary is talking about. That information on 

paper will be presented to all the Members. 

Mr. MCDERMOTT. Mr. Chairman, could I just ask, are you saying his answer is based on shifting from wages to prices? 

Chairman THOMAS. No. I am saying that, under the current 

law as you extrapolate out, based upon increasing the benefit based 

upon the wage adjustment formula, and the amount of money that 

it costs versus what comes in on the productivity increase, creates 

the very minimal difference between the increase. That is how it 

gets eaten up. You will see it when you see the numbers. 

Mr. MCDERMOTT. I would be glad to look at it. 

Chairman THOMAS. That is an area that we do want to focus 

on, at least in terms of understanding the relationship between the 

formula that determines how much you get paid and the multiplier 

that increases the amount that has been determined under the formula. This Committee at the very least is going to understand how 

the system works if we are going to examine making changes to it. 

Does the gentleman from Pennsylvania, Mr. English, wish to inquire? 

Mr. ENGLISH. Thank you, Mr. Chairman. 

Mr. Secretary, it is a privilege to have you here today. I have 

been listening very carefully to your answers, and I apologize if 

some of mine prove to be a little repetitive. I welcome the fact that 

in the President’s budget there is a clear move to get us in the direction of lower deficits. But, frankly, I am haunted, sir, by a deficit that seems to attract too little attention within the Washington 

Beltway, and that is the fact that we are running a trade deficit 

against the rest of the world that is comparable to 5.5 percent of 

our GDP. 

Now, I know you understand that. For a lot of people in my district, which is a manufacturing district, they less understand that 

abstraction than the fact that we have recently had roughly 200 

steelworkers with their jobs at risk because of imports in the pipe 

and tube industry. There are a number of factors that have come 

into this situation, but I would like to pursue the line of questioning raised by Mrs. Johnson earlier, and that—and, frankly, ask 

you to elaborate a little further. In your budget, first of all, how 

28 

do you envision us moving to a lower trade deficit and sustainable 

trade deficit over time? 

Number two, given that our largest problem in trade, in my view, 

is our trade relationship with China, and given that China entered 

the WTO making a series of commitments, one of them implicitly 

that they were going to follow currency standards, and since their 

economy is a little more substantial than that of, say, Sudan or Somalia, I think it is important that they follow these standards, recognizing, Mr. Secretary, that you and members of the Administration have been jawboning the Chinese to float the yuan for the last 

year and a half, and with, may I respectfully suggest, with very 

limited results, through no fault of your own. The fact is the Chinese continue to give us rhetoric. As you said in your answer to 

Mrs. Johnson, they express an understanding of our position, but 

they do not move in the direction of floating their currency the way 

they should and the way the WTO, by a common understanding, 

obliges them to do. Is the Administration prepared to confront 

China on its currency policies and the other elements of its mercantilism, and how can Congress help? 

Mr. SNOW. Well, thank you very much, Congressman. The 

whole issue of the current account deficit is one we are spending 

a lot of time on, and a big part of the current account deficit is the 

result of the fact that the American economy is growing so much 

faster than our trading partners. As we grow faster than our trading partners, we generate more disposable income. Some part of 

that disposable income gets spent in purchasing imports from those 

countries. So, we are urging—urging the trading partners of the 

United States to adopt policies that will allow their economies to 

grow faster. As they grow faster, they will be in a position to buy 

more from us. Now, that means taking political action among our 

trading partners to take down barriers inside their economy, structural barriers to improve performance. 

Secondly, we are pressing the yuan. It has been a matter of great 

importance to this Administration. The President has talked to the 

leadership of China about it, I have talked to the leadership of 

China about it. Former Secretary Evans has been in the forefront 

of market opening issues, I know you are aware of that, with 

China. I think that our course of quiet diplomacy, financial diplomacy, is better calculated to produce the desired outcome than are 

the alternatives like the 301s that were proposed by some last 

year, the trade sanctions. But we are not satisfied. It is critically 

important that China, as such a large part of the global trading 

system, play by the rules and have a transparent open economy 

where its currency values are set in the marketplace, just as ours 

are, and not the product of artificial manipulation. 

Mr. ENGLISH. Thank you, Mr. Secretary. Please tell the Chinese that in Congress, among your allies, patience is running out. 

Thank you. 

Mr. SNOW. Thank you. 

Chairman THOMAS. If the Chair might very briefly. In that discussion, clearly asking the Chinese to float the yuan at the current 

time is a very difficult decision for them to make. You also rightly 

indicated that you wanted to see some economies improve, do better. One of the problems with the Chinese economy is that it is not 

29 

only doing better, the money is so cheap, it is I think somewhat 

overheated. One of the things you might ask the Chinese to do is 

to at least look at their interest rate, and not provide as cheap of 

money as they do, as a first step, to indicate they understand that 

we expect to allow some things to be realistic, and a real interest 

rate would be the first step toward a real currency. That hadn’t 

been discussed in that exchange, and I wanted to put that on the 

table. That is far easier for the Chinese to do in the short run to 

show some good faith. 

Mr. SNOW. Mr. Chairman, I agree with you. In our continuing 

dialog with the Chinese, there are a whole number of issues, including opening up the marketplace, using interest rates to allocate 

capital, and so on. So, you are onto a very good point there. 

Chairman THOMAS. I thank the gentleman. Some are long 

range, some are much closer, and we expect the ones that are closer to be done. Does the gentleman from Massachusetts, Mr. Neal, 

wish to inquire? 

Mr. NEAL. Thank you, Mr. Chairman. Mr. Secretary, you indicated in your opening comments that we should pay great attention 

to basic arithmetic. I think you mentioned that a number of times, 

and you said that we should put partisanship aside in our discussions here as they relate to Social Security. Let me see if I can get 

you to clarify the response you offered to Mr. Levin earlier. For 

that 40-year-old, does the President’s plan cut the Social Security 

benefit? 

Mr. SNOW. Well, the President at this point doesn’t have a plan. 

He is offering a lot of ideas, he is helping to define the problem, 

he is inviting others. 

Mr. NEAL. Well, let me follow up on that question then. I have 

read and I have listened and I have watched the President use the 

phrase, ‘‘the personal account.’’ So, for that 40-year-old that I just 

described, would the personal account, in your judgment, fix his Social Security problem? 

Mr. SNOW. Congressman—— 

Mr. NEAL. To ensure that the Social Security benefit would not 

be reduced? 

Mr. SNOW. The personal account for a 20-year-old, 30-yearold—— 

Mr. NEAL. I said a 40-year-old. 

Mr. SNOW. A 40-year-old would give them an opportunity to do 

better than they otherwise would. 

Mr. NEAL. That is not the question, Mr. Secretary. I am asking, 

would they be guaranteed the same benefit, assured the same benefit as they are now with the personal account? 

Mr. SNOW. Assuming they go into the account? 

Mr. NEAL. Assuming they go into the account. 

Mr. SNOW. Well, if they earn better than 3 percent on the 

money that they put into the account, which would be expected, 

they would do better. 

Mr. NEAL. Could they foresee a reduced benefit under the current Social Security benefits? 

Mr. SNOW. In the unlikely circumstance that the money taken 

out of Social Security—— 

Mr. NEAL. Is it possible? 

30 

Mr. SNOW. And put into these accounts earned less than 3 percent, it would be possible. That is very unlikely. 

Mr. NEAL. Mr. Secretary, the President indicated that permanent accounts, private accounts on their own would not fix the Social Security problem. So, can you assure that 40-year-old that they 

are going to derive the same benefit as currently promised under 

Social Security? 

Mr. SNOW. The—— 

Mr. NEAL. Why is it so hard to get a yes or no answer, Mr. Secretary? You would give a yes or no answer in your previous life as 

a chief executive officer, and you would do it flatly and you would 

do it with great confidence. 

Mr. SNOW. I am trying to answer the richness of the question 

with the intention that you—— 

Chairman THOMAS. The Chair would indicate that if we could 

not go there, to personal references, the Chair would appreciate it. 

Mr. NEAL. Mr. Chairman, he indicated there was a richness to 

my question. 

Chairman THOMAS. I understand. But you made representation 

of the way he responded in a different situation. 

Mr. NEAL. Well, if I could perhaps get a straight answer, Mr. 

Chairman, just a yes or no. I am talking about that 40-year-old. 

Chairman THOMAS. I would tell the gentleman you have every 

right to ask a question; he has every right to answer it the way 

he sees fit. If he won’t allow you to put words in his mouth, that 

is your problem, not his. 

Mr. NEAL. Mr. Chairman, there is no attempt here to put words 

in his mouth. There is an attempt to extract words from his mouth. 

Chairman THOMAS. We will discuss the dental plan later. 

Mr. NEAL. So, we are not doing very well on that count. Let me 

ask you this. Are you familiar with Lawrence Lindsey? 

Mr. SNOW. Yes. 

Mr. NEAL. Do you have a pretty high opinion of him? 

Mr. SNOW. Yes; I am a personal friend of Larry Lindsey. I think 

he is a good fellow. I don’t agree with him on everything, but I 

think he is a very able person. 

Mr. NEAL. Would you agree with him that the war in Iraq was 

going to cost between 200 and $300 billion? 

Mr. SNOW. Going forward? Or what time frame are you talking 

about? 

Mr. NEAL. He indicated that the war in Iraq would cost between 

200 and $300 billion before we were done. Is that your position? 

Mr. SNOW. Let us see. The war in Iraq is laid out in the 

supplementals. I would have to go back and look at the 

supplementals to see what that sums to. 

Mr. NEAL. Let me ask you this, then. We are not doing very well 

in this question-and-answer period, obviously. The AMT is not included. I have talked about that for a long time. Time and again 

we have had this same sort of reference with the Administration. 

There has been a willingness on this Committee to take up the 

issue. We can’t do it very well without the Administration’s cooperation. The transition costs for Social Security are not included 

in the budget. The cost of the war in Iraq is going to be between 

200 and $300 billion, probably more, and a simple yes from you 

31 

would go a long way toward helping those of us on this side refrain 

from the partisanship that you so carefully worded at the outset of 

your opening remarks. 

Mr. SNOW. Congressman, I would be delighted to give you a 

simple yes if a simple yes would answer the question. Unfortunately, it doesn’t. Therefore, I am not going to render a simple yes. 

What the war in Iraq will cost going forward is not at this point 

determinable. To the extent we do have a sense of that, it is reflected in the supplemental. 

Mr. NEAL. Mr. Chairman, could I make a quick rejoinder? 

Chairman THOMAS. Tell the gentleman that the Chair anticipated this and indicated that there could be a response in writing. 

I know Members are frustrated because they have worked on these 

questions for hours, indeed days. When you spring them on someone—— 

Mr. NEAL. Mr. Chairman, that was not the case with me at this 

moment. 

Chairman THOMAS. I will tell the gentleman that when you 

spring them on someone and they don’t give you the answer that 

you hope you get, a little bit of reflection I think is entirely appropriate. That is why we indicated the written response. If the gentleman wants a lengthy response to a question he asks, he might 

submit his questions in writing ahead of time so that someone 

could take as much time in their answer as he does in framing the 

question. Therefore, when we run out of time in our 5 minutes, it 

will be a written response which will be shared with the rest of the 

Committee. If the gentleman has additional questions, he certainly 

can submit those for additional written response. Does the gentleman from Arizona, Mr. Hayworth, wish to inquire? 

Mr. HAYWORTH. Yes, I do. Thank you, Mr. Chairman. Mr. Secretary, let me add my words of welcome among other words that 

have been offered from the Committee today. We have heard any 

number of concerns, putting it mildly, about the future of Social Security. A couple of things perhaps we need to clear up and amplify. 

I heard my friend from Maryland mention the challenges confronted by individuals with disabilities. Some concerns have been 

aired about how the introduction of permanent accounts and some 

other possible changes to Social Security could affect benefits for 

individuals with disabilities and survivors. Would you now take 

some time and clarify the Administration’s position on this issue? 

Mr. SNOW. Yes, I will, Congressman. I am delighted to do it and 

delighted to have the chance to clarify that. The President has 

made clear that disability benefits will be sustained going forward, 

that people on disability will not be adversely affected because of 

the actions that are taken to put Social Security on a long-term 

sustainable basis. In fact, by putting it on a long-term sustainable 

basis they are going to do better, because the risk that those benefits won’t be there, which are real risks today, will be addressed. 

Mr. HAYWORTH. Mr. Secretary, we have heard a lot of other 

concerns shared today, and there have been desires expressed by 

some in this town on some of the Sunday morning news programs 

that the tax relief that we have enacted through this Committee, 

through the Congress, the President has signed into law, the tax 

relief that you again reaffirmed today should be made permanent, 

32 

if we were just to get rid of that, to get rid of the tax relief and 

the permanence of it, we could take those funds and dedicate that 

tax increase to Social Security and that would solve the problem. 

It seems to me that is viewing this in a vacuum. While there are 

those who would advocate major tax increases, let me point out for 

the record I am certainly not among them. To put that on the 

table, what effect would tax increases of this magnitude have on 

our economy, have on our American families, and ultimately on the 

Social Security program? 

Mr. SNOW. Congressman, I think it is pretty clear that higher 

tax rates of the sort that would result from that action, the tax increases that would result, would have a very harmful effect on the 

American economy. We are in a good strong recovery now because 

of the lower tax rates. We have the 2.7 million jobs because of the 

higher tax rates. We have capital spending rising because of the 

higher tax rates. We have the best housing market we have seen 

because of the tax rates. We have the unemployment rate at 5.2 

because of the tax rates. We risk all of that. We risk the prosperity 

and the job creations that have occurred if we reverse course. So, 

I would strongly urge us not to reverse course. I spend a lot of time 

talking to counterparts, central bank Governors and finance ministers from the rest of the world, the G–7, the G–20. We are the 

envy of the world. The performance of our economy strikes awe on 

the part of the finance ministers of the rest of the world. The Euro 

zone has growth rates less than half of ours. They have much higher tax rates. The Euro zone has unemployment rates double ours, 

triple ours. They have much higher tax rates. I think the lessons 

are clear here. To sustain the strong performance of the American 

economy, we need low tax rates. 

Mr. HAYWORTH. Mr. Secretary, I thank you. Mr. Chairman, I 

thank you for the time. I yield back. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Louisiana, Mr. Jefferson, wish to inquire? 

Mr. JEFFERSON. Thank you, Mr. Chairman. I want to see if I 

can give Chairman Thomas some support this morning from this 

side. He has made some comments, he made some early on comments. When the President announced his plan for Social Security 

or part of the plan for it, that we really could look at this thing 

in isolation. As my colleague from Louisiana, Mr. McCrery, has 

said, it is tied up with demographic problems of an aging America 

and an aging world. He said, Chairman Thomas has said that we 

need to look at this not only in the paradigm of the existing Social 

Security system, but we must look beyond that and to the totality 

of retirement security issues. Do you agree or disagree with the 

Chairman’s statement in that regard? 

Mr. SNOW. I agree with the Chairman. The issue we are dealing 

with here is really retirement security and how to promote retirement security. 

Mr. JEFFERSON. If you agree with that, then, wouldn’t it—isn’t 

it incumbent upon the Administration to talk about this budget in 

those terms, to talk about what would happen with Medicare, what 

would happen with Medicaid for the elderly, and what should happen with Social Security in this budget document so that we can 

see how we can approach the Chairman’s objective here? 

33 

Mr. SNOW. Congressman, in the budget we have submitted talks 

about enhancing savings vehicles for retirement, so-called retirement savings accounts, which are an awfully good idea. It talks 

about—— 

Mr. JEFFERSON. If I might cut you off there. We are talking 

about a problem with aging population and the Medicare, Medicaid, and the Social Security as all being part of a bundle of problems. The Chairman has said we should address these, and the 

budget doesn’t seem to tell us how to get there. 

Chairman THOMAS. Would the gentleman yield briefly? 

Mr. JEFFERSON. Yes, sir. 

Chairman THOMAS. The Chair is anxious to provide the gentleman with more time based upon his direction of questioning. But 

the Secretary is here to present the President’s budget. The President has every right to structure his budget as he sees fit to 

present to us. We, however, have every right to examine that budget and deal with it as we see fit. So, the Chair appreciates the gentleman’s attempt to get the Secretary of the Treasury to say that 

they should have written a different budget, but I think they have 

every right to write the budget that they choose to write, just as 

we have every right to deal with the issues as we see fit. So, the 

Chair thanks the gentleman. 

Mr. JEFFERSON. Of course, I hope that the Chair would appreciate my concern for his position, and I believe that the Chair has 

stated a wise position. The other point I want to make—I hope it 

didn’t take away from my time as we were going through that. The 

other point I want to make is that if you agree that the Chair is 

on the right track, then it opens up a lot of possibilities that we 

have to talk about either in this context or later on. It seems to 

me that this budget ought to talk about how we get to the issue 

of new revenue sources for the Social Security system, if we follow 

the Chairman’s line of thinking here. Mr. McCrery also talked 

about the need for a new revenue source there. 

We have taken everything off the table here, we have taken the 

payroll taxes off the table, but there are many other revenue 

sources that ought not be off the table that we ought to take a look 

at. I am hoping that in this debate and discussion that we will 

come forth honestly with a plan to deal with all these issues that 

deal with the demographics of our country and our whole retirement system. I don’t think, Mr. Chairman, and I know you don’t 

want me to help you out anymore along this line, but I do believe 

that it is important to get, to find out why the Administration 

won’t acknowledge the fact that you have made a wise statement 

here and that this Committee ought to be working, the Administration ought to be proposing along the lines of your—— 

Chairman THOMAS. Would the gentleman yield briefly? I think, 

in all fairness, had the Chair made his statement sometime last 

year while they were beginning the process of putting the budget 

together, that we could indicate why you didn’t respond to what we 

had to say. But the Chair made its statements after the budget 

was pretty well locked up. So, we have a document that is being 

presented; then we can move on in terms of Congress dealing with 

the budget that is presented. That is the area that I especially hope 

the gentleman from Louisiana continues to talk the way he does 

34 

with the additional time the Chair is willing to allow him because 

of the Chair’s interventions. 

Mr. JEFFERSON. I am hopeful that if we are going to reach a 

bipartisan result, then we can’t take a starting point—we can’t 

take the ending point as the starting point for the President nor 

for the starting point of where some of us may be on this side. But 

we have to have an open discussion about where we ought to go. 

I am confident that if we look at this whole panoply of things the 

way we can—the blocks that we can use to fix Social Security, 

there will be many ways to fix it outside of this property account 

business. One point, it really doesn’t do the job anyhow on property 

accounts; it doesn’t bring solvency to the system. It may add some 

retirement security if you exceed the 3 percent that you talked 

about, which is another whole notion here. It doesn’t work like a 

401 account where all the money is yours really; it is not your nest 

egg; you take away the 3 percent, it is like a loan you borrow from 

the government with 3 percent adjusted for inflation down the line, 

and you end up with whatever is left, if there is anything left over 

and above it. 

So, there are a lot of complicated issues related even to that. If 

you believe the stock market is going to work beautifully, and then 

there will be a hitch in it, and everything is going to work and personal accounts are going to grow. At the end of the day it is a loan 

from the Government, administered by the government, with the 3 

percent, inflation-adjusted, paid back to the government for retirement; and, whatever is left, you end up keeping; minus you are 

going to take something from the guaranteed benefits to even make 

that work. So, it has got to be an open discussion about this. I appreciate the Chairman’s suggestion in that regard, and I hope we 

can find a way to support our Chairman as we move along to a 

much broader discussion of private accounts and this whole business. 

Chairman THOMAS. I would tell the gentleman that our job is 

to legislate, get to a conference that the House and the Senate can 

agree on; then the next step in the legislative process is to have 

the President sign the bill. That needs to be part of the process as 

we move forward, because without it we won’t make law that all 

of us want to in the area of an aging society. The Chairman thanks 

the gentleman’s comments, and hopes that he won’t be abused too 

much by his side for his admittance. 

Mr. JEFFERSON. Mr. Chairman, I hope you recognize how committed I am to this whole process. I missed Mardi Gras in Louisiana today just to come here to support—— 

Chairman THOMAS. No one else can up that in terms of the 

commitment that has been made. The Chair appreciates it. Although it may be a contribution to your continued aging by not 

going to Mardi Gras. You will live longer. Does the gentleman from 

Illinois, Mr. Weller, wish to inquire? 

Mr. WELLER. Thank you, Mr. Chairman. Mr. Secretary, thank 

you for your time before us today. It is good to see you. Let me 

begin by commending you, and particularly President Bush, for 

your leadership on addressing the need to change our Tax Code 

and make it more simple and more fair, but also more competitive 

in today’s global economy. 

35 

One thing that is really handicapping American manufacturers, 

particularly Illinois manufacturers and other Illinois employers, is 

our Tax Code which is holding us back. I am looking forward to the 

recommendations of the Commission that the President has appointed soon, and look forward to working with you on that. This 

past year—and I have got two subjects I would like to ask you 

questions about, Mr. Secretary, and I appreciate your response. 

This past year with the leadership of Chairman Thomas, the American Jobs Creation Act of 2004 (P.L. 108–357) was moved through 

this Congress and signed into law. Of course the primary goal in 

that legislation was helping simplify the Tax Code as it impacts 

manufacturing and other sectors of our economy. 

One of the areas that I worked with the Chairman on and others 

on this Committee was helping our maritime industry, U.S.-owned 

international shipping, to be more competitive. We included in the 

legislation, it was in section 415 of the Jobs Creation Act regarding 

subpart (f), tax treatment for U.S.-owned shipping, a provision designed to give American companies the opportunity to be more competitive. I was concerned when I learned that there are some within your Department that are actually—the way they are interpreting the legislation as it was passed and signed by law. The interpretation and the implementation of this law under Treasury 

rules would actually place U.S.-owned shipping in a less competitive position than they were prior to the enactment of this law. I 

was wondering, number one, can you just tell me what your view 

of this is? Where is the Department? 

Mr. SNOW. Congressman Weller, we will work with you and 

your staff. I know you have got an issue here, and I was advised 

about it. Treasury is intent on implementing all the provisions of 

the Jobs Act in a way that fulfills the congressional intent, and we 

always try and do that. I know from time to time Members of Congress think we don’t get it right and we hear from you. We will always be attentive to those comments. But our intent is to get it 

right and interpret that legislation, that provisional legislation, in 

a way that fulfills your clear intent. 

Mr. WELLER. Thank you, Mr. Secretary. We do want to work 

with you. I appreciate your commitment to work with us, because, 

again, our goal is to give American-owned shipping firms the opportunity to be competitive in today’s global economy. 

The second issue I would like to raise with you is one that has 

been hanging out there for 6 years. For thousands of middle-class 

investors, people who want to invest in a little piece of land or a 

rental property or a storefront for some income, the ability to do 

a like-kind exchange is an important opportunity for them to protect what for them is their nest egg for their retirement. Six years 

ago, in 1999, the Treasury Department—and this, of course, began 

in the previous Administration—proposed regulations relating to 

like-kind exchanges. For 6 years now, those who make this type of 

investment have been waiting for those regulations to be finalized 

and put forward. I was wondering, Mr. Secretary, can you tell us 

the status of those regulations? How soon do you expect them to 

be issued and what do you expect them to say? 

Mr. SNOW. Well, I can’t tell you what I expect them to say at 

this point, Congressman. But I am aware of the 468(b) project 

36 

rules, and Treasury and the Internal Revenue Service (IRS) are 

both working to complete the project and hope to release those 

rules fairly soon. So, we are making progress on them and expect 

to see them out here before too long. 

Mr. WELLER. Thank you, Mr. Secretary. I certainly encourage 

a timely conclusion to this process. Six years is far too long for middle-class investors to wait. So, thank you. 

Mr. SNOW. I agree. 

Mr. WELLER. I yield back, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Tennessee, Mr. Tanner, wish to inquire? 

Mr. TANNER. Thank you very much, Mr. Chairman. I will try 

to be brief. I have got some questions in writing I would like to 

submit, Mr. Secretary, in the interest of time. When you were here 

in 2003 before the Committee, I asked you about the debt, part of 

the publicly held debt held by foreigners. 

Mr. SNOW. Right. 

Mr. TANNER. In 2001, that was about 30 percent of our outstanding debt; in 2003, it was 37 percent. Now it is 44 percent. I 

wanted to ask you, is there any point at which foreign holdings of 

U.S. publicly held debt pose a problem, in your opinion? 

Mr. SNOW. Not at the current levels, Congressman Tanner. 

Mr. TANNER. At what level, sir, would you say? 

Mr. SNOW. I don’t know that I want to draw a line there and 

identify any particular level. 

Mr. TANNER. Well, it is something less than a hundred, I would 

assume. 

Mr. SNOW. Sure. But I do not think it is helpful for me to draw 

a line and say, anything above that is where the alarm bells go off. 

Foreign governments are interested in holding U.S. paper for reasons we talked about earlier. I think Congressman McCrery laid it 

out well. It is the best paper in the world. It is the safest, most 

secure investment in the world, and foreign governments have investment profiles that cause them to want to hold this gilt-edge 

paper in the United States. 

Mr. TANNER. I agree. The reason I asked that question is, there 

have been some comments in the London Financial Times and from 

Asia recently that, really, prior to 4 or 5 years ago, 3 or 4 years 

ago, there was not an alternative for Reserve currency to the dollar. We are now seeing people talk about the euro being an alternative. The reason I ask, at what point do you see this, and I understand why you cannot answer in this forum, this not—this being 

a problem, is, because once they shift or begin to shift, if they do, 

from the dollar to the euro, we have got a major problem in refinancing that debt. I want to follow that up with you at some point, 

and not in this setting. Let me move quickly to—— 

Mr. SNOW. I would be happy to do that, Congressman. 

Mr. TANNER. One other question. Under this budget, we will 

incur an additional $1.3 trillion of publicly held debt under the 

budget that you have submitted. In 2001, the privately held debt 

upon which we write interest checks every year was about $2.96 

or about $3 trillion. Of that number, we were paying about $120 

billion in interest. Today, it is $4.42 trillion. We are now up to 

about $160 billion a year that we write checks for in interest. You 

37 

are going to add to that another $1.3 if your budget is true. Now, 

Mr. Secretary, at what point is the interest that is coming out of 

the current tax base going to impact, or is it already impacting directly our ability to meet the obligations of the United States Government with regard to investments in human capital and infrastructure? We are diverting billions of dollars from productive, 

hopefully, expenditures to interest. 

Mr. SNOW. Right. Congressman—— 

Mr. TANNER. This is a matter of real of concern to me. We have 

talked about it before, about what we are doing is creating a tax 

that cannot be repealed called interest. 

Mr. SNOW. Well, I am glad you raised the whole issue. Despite 

the rising debt of the United States, which we need to keep focused 

on, I agree with you, interest obligations as a fraction of the deficit 

are falling, reflecting the very favorable interest rate environment 

we enjoy today, and which we would expect to enjoy for the future, 

because we have such low inflation in the United States. Inflation 

is low. Interest rates are low. That has created a very favorable environment. Even as the debt levels rise here in the years ahead, 

in the budget that we put forward, you will see that the interest 

obligation portion of the deficit remains fairly modest, because of 

low interest rates. But it is something that we very much need to 

keep attuned to. I agree with you. 

Mr. TANNER. I just hope you are right about that assumption, 

because if you are not, this thing can explode on us. As interest 

rates rise, there is nothing that we can do about it. 

Chairman THOMAS. Thank the gentleman. The gentleman from 

Kentucky, Mr. Lewis, wish to inquire? 

Mr. LEWIS OF KENTUCKY. Thank you, Mr. Secretary. In 2042, 

my daughter is going to be right at the age of retirement. My 

granddaughter is going to be paying for her retirement. If we do 

nothing, how is that going to affect my daughter’s benefits and my 

granddaughter’s ability to pay? 

Mr. SNOW. Well, your granddaughter is one of those two that 

the Chairman opened with. Your daughter, assuming nothing is 

done, will have her benefits much lower than the benefit that is 

available today, because the system cannot pay the benefits that 

are scheduled today. That is, I think, a simple and undeniable fact; 

the system is going to be unable to pay those benefits 

Mr. LEWIS OF KENTUCKY. Without massive increases in the 

payroll tax? 

Mr. SNOW. Without a massive increase in the payroll tax or a 

huge amount of borrowing, neither of which is consistent with 

keeping the American economy on the sort of course that you want 

to see it for your daughter and granddaughter 

Mr. LEWIS OF KENTUCKY. You probably could not even increase the retirement age to even affect it in any way? 

Mr. SNOW. Increasing the retirement age alone, while it has 

some effect, does not have a major effect on sustainability. It helps, 

but it is far from the major factor 

Mr. LEWIS OF KENTUCKY. So, with the exception of Mr. Jefferson, it seems like my colleagues on other side, they do have a 

plan. I would call it the do-nothing plan. The do-nothing plan 

would increase the payroll tax significantly, maybe by as much as 

38 

50 percent. The do-nothing plan would cut benefits. The do-nothing 

plan would increase retirement. So, when I see people wringing 

their hands and worrying about what the President is trying to do 

and what we are trying to do as a Congress to make sure that my 

daughter and my granddaughter are going to have a sustainable 

retirement plan, one that is even going to provide benefits greater 

than what is being received today, I have to wonder, what is the 

problem here? I think it is certainly better to do something now 

than to stick our head in the sand and wait for a disaster to happen to our kids and our grandkids. 

Mr. SNOW. That is why the President has put this issue before 

the American people and before the Congress, Congressman Lewis, 

because now is the time to act. Every year we wait it gets more 

difficult. By acting now, we can secure for your daughter and 

granddaughter a much better retirement future than otherwise 

would be the case. 

Mr. LEWIS OF KENTUCKY. Thank you, sir. 

Chairman THOMAS. Thank the gentleman for yielding back a 

minute and a half. The Chair intends to ask the Secretary to stay 

until 1 p.m. He has other commitments on the other side of the 

Capitol shortly after that. That will even rush it. If every Member 

who is left takes the full 5 minutes, not every Member will have 

the ability to inquire. So, if Members could show some focus and 

willingness to share, everyone will be able to ask at least a question. The gentleman from California, Mr. Becerra wish to inquire? 

Mr. BECERRA. Yes, Mr. Chairman. Thank you very much. Mr. 

Secretary, thank you for coming again. Mr. Secretary, we went into 

this whole idea of a plan again and the discussion about plans. As 

far as I can tell, there is no plan from anyone that the President 

has accepted or adopted; the President himself has not issued a 

plan. You yourself just said the President does not have a plan. It 

would be much better for this debate if, at some point, the President would give us a plan so we have a sense of what he would 

like to see done. Congress, otherwise, is going to be debating with 

nothing to look at from the President, who is the one who is initiating this discussion. So, I hope that, at some point, we will get a 

plan with specifics in writing, because we know the devil is in the 

details, from the President. I would like to just ask a series of questions, because I want to make sure there is clarification on some 

of these issues. Today, the Social Security trust fund has assets. 

My understanding is that they total about $1.7 trillion in the bank. 

Would you agree with that? 

Mr. SNOW. Yes. 

Mr. BECERRA. By the year 2018, if I have these numbers correct, the trust fund, the Social Security trust fund, will have in the 

bank, in assets, about $5.3 trillion. Is that correct as well? 

Mr. SNOW. I would have to check that. But it will have substantial assets. 

Mr. BECERRA. Everything I am looking at from the actuary 

says that, by 2018, we are looking at about a $5.3 trillion surplus 

in the Social Security trust fund. 

Mr. SNOW. Yes. There will be a surplus, and then it gets drawn 

down over the next decades. 

39 

Mr. BECERRA. If you are not sure about 2018, you might not 

be sure about the next date. 

Mr. SNOW. Oh, no. I am sure about the 2018. I was not sure 

whether it was $5 trillion or $5.5 or whatever in the account at 

that time. 

Mr. BECERRA. $5.3 trillion. Some 9 years later, 2027, we are 

told that the Social Security trust fund will have assets projected 

to be around $6.6 trillion. Do you agree with that number? 

Mr. SNOW. Well, if you are taking it from the actuary, I will 

stipulate to it. 

Mr. BECERRA. Actually, these are my notes from all the information provided by the actuary and others. You mentioned 2042 as 

the date when we expect those trust funds assets to be depleted. 

If I read your budget that has been submitted by the President correctly, this fiscal year, 2005, you are projecting a unified budget 

deficit for this 2005 year of $427 billion. Correct? 

Mr. SNOW. Yes. 

Mr. BECERRA. Now, if you were to extract the $162 billion from 

the Social Security trust fund surplus that you are using to reduce 

the size of the deficit, the actual size of the deficit for this operating year, 2005, would be $589 billion. Correct? 

Mr. SNOW. If you did the math that way, yes. 

Mr. BECERRA. So, over the next 5 years, the President’s budget runs up a deficit, cumulative deficit, of approximately $1.4 trillion. 

If you were to exclude the Social Security surplus money that you 

are using, you are spending each of these next 5 years for something other than Social Security, the actual size of the government’s operating budget deficit would be closer to $2.5 trillion. To 

me, the question becomes, and this is perhaps what I would like 

to ask you, how is it that a trust fund and a system that is running 

surpluses, where up until the year 2027, some 20 years from now, 

we find that the system itself will have in the bank more than $6 

trillion, that there is a crisis and a need to act so immediately to 

dismantle that program that is running a surplus, where the Federal Government, under the President’s own budget is running 

massive deficits today, and yet there is no need to change a course 

when it comes to tax cuts that go principally to wealthy folks? 

Mr. SNOW. Well, Congressman, you are correct that the Social 

Security trust fund will continue to have substantial assets in it 

after 2018. The point is, though, that those assets will be depleted 

over the next several decades. 

Mr. BECERRA. I think, Mr. Secretary, all of us agree with that. 

Mr. SNOW. Good. We made progress. 

Mr. BECERRA. Do you disagree with the statement that was 

made earlier by one of my colleagues that, in fact, if you were to 

take just the 1 percent wealthiest American households in this 

country, that you can actually use that savings and preserve Social 

Security forever? 

Chairman THOMAS. The Chair thinks that is an excellent question to respond to in writing. 

Mr. BECERRA. I would appreciate a response, Mr. Secretary, in 

writing if you could. 

Chairman THOMAS. The gentleman from Florida, Mr. Foley, 

wish to inquire? 

40 

Mr. FOLEY. Thank you. Welcome back, Mr. Secretary. I understand the budget contains language on a bill I offered, along with 

Senator Bond. The IRS recently has taken the opinion that a Federal Emergency Management Agency mitigation grant could be 

considered taxable income. I understand the budget does contain 

language that would keep those from being taxable. Am I correct? 

Mr. SNOW. Yes. 

Mr. FOLEY. I also understand in this budget that the President 

has chosen to make the 15 percent tax on capital gains on stocks 

and dividends permanent? 

Mr. SNOW. Yes. 

Mr. FOLEY. Good news for investors. Let me give you the following returns on our Thrift Savings Accounts: G fund, which is 

the bond, 6.04 over 10 years, averaged; the F fund, fixed income, 

6.95 percent 10-year average, compounded; C fund, the equity in 

the markets, 10.99. The S fund, the small cap fund, 9.70, 10-year 

average, including the bad years, we had 3 bad years; 4.32 in the 

international fund, a more recent addition to the portfolio. Are 

these returns better than we are currently achieving in the Social 

Security fund? 

Mr. SNOW. Yes. 

Mr. FOLEY. Those returns, if aggregated, would in fact enhance 

the well-being of the program? 

Mr. SNOW. Yes. The individuals who would be the beneficiary 

of the investments in those programs. Yes. 

Mr. FOLEY. We have got a lot of new beneficiaries coming online, don’t we? 

Mr. SNOW. Yes, and fewer workers. That is the basic problem. 

Demographics is the problem. 

Mr. FOLEY. If you would indulge me, let me read a few quotes. 

1998, Bill Clinton: The fiscal crisis in Social Security affects every 

generation. Dick Durbin, Senator of Illinois. Durbin said, due to 

the increasing number of baby boomers reaching retirement age, 

Social Security will be unable to pay out full benefits. Unable to 

pay out full benefits. Harry Reid, Senate Minority Leader: Most of 

us have no problems with taking a small amount of the Social Security proceeds and putting it into the private sector. In fact, on 

Fox News’ With Tony Snow, he says, are you opposed to be letting 

people make investment decisions, in other words, having some 

component where they say, I will save the money rather than letting Uncle Sam do it for me? Senator Reid: I think it is important 

that we look, and I am totally in favor of doing this. Senator Baucus: I think the problems we are facing with Social Security are 

going to be upon us a little more quickly than I think some people 

realize. Chuck Schumer, Senator from New York, 1999: We have 

to move on now and start fixing Social Security and preserving it. 

Senator Dorgan: Fixing Social Security is an urgent priority. It 

ought to be at the top of both parties’ agendas. Former Representative Dick Gephardt: Why should Social Security recipients be disadvantaged by not getting to be able to have high returns out of 

the stock market? President Clinton: Investing will earn a higher 

return and keep Social Security sound for 50 years. The President 

proposes—Clinton: I propose to limit the aggregate amount of our 

investments to about 4 percent. It will never get over 4 percent the 

41 

next 20 years. Let’s just drop here a few more. The financial crisis 

in Social Security affects every generation. I have said that. Senator Clinton, New York: Clearly, it is in all of our interests to preserve and strengthen Social Security into the next generation. If we 

do not want to burden our children and grandchildren, if we want 

to make sure that Social Security remains solvent well into the 

21st Century, we must make bold decisions now. That, again, is 

1999. Gene Sperling, White House Economic Advisor: Over a long 

period of time, there is every reason to believe that people will get 

higher returns if government invests part of the Social Security 

surplus. Vice President Gore: This whole national discussion, one 

of the single most important salient facts that jumped out at everybody is that, over a 10-year period in American history, returns on 

equities are just significantly higher than these other returns. Fairly compelling statements. Wouldn’t you agree? 

Mr. SNOW. I would agree. 

Mr. FOLEY. All from Democrats, all indicating that Social Security needs to be fixed. My hope is, representing the fifth largest 

senior population in America, that we put everything on the table, 

that we look at these programs in context to their survivability, if 

you will. 

Now, a lot of people have questioned you today about the sterling 

nature of our bonds, and they are first to pay. That is the nature 

of Treasuries. Our first obligation is to pay our debt. So, we will 

always back up the bonds. But you made a poignant example of a 

corporation. You can only go so long taking in less income and paying out more before you are subjected to Chapter 7 or 11. Isn’t that 

correct? 

Mr. SNOW. That is absolutely right. 

Mr. FOLEY. We are heading in that direction? 

Mr. SNOW. Without any doubt, that is where we are headed. 

Chairman THOMAS. The gentleman’s time has expired. The 

Chair would indicate that continuing along with the full 5 minutes 

until the red light will deny some of our colleagues the opportunity 

to inquire. The gentleman from Texas, Mr. Doggett, wish to inquire? 

Mr. DOGGETT. Thank you, Mr. Chairman. Thank you, Secretary. Mr. Secretary, the figures that I have here suggest that, 

over the next decade, Social Security will actually generate a surplus of about $2.6 trillion. Does that sound about right? 

Mr. SNOW. Yes. The system—— 

Mr. DOGGETT. Do I understand that the budget that you are so 

proud of, and the administration’s proud of here this morning, proposes to borrow every penny of that $2.6 trillion from the Social Security trust fund and use it for non-Social Security purposes? 

Mr. SNOW. Well, the obligations in Social Security, Congressman, as I have said over and over, will be honored. Every 

penny—— 

Mr. DOGGETT. Yes, sir, you are going to honor them, but you 

are going to borrow from Social Security and use it for non-Social 

Security purposes. Correct? $2.6 trillion worth of borrowing? 

Mr. SNOW. That is correct. They will be backed by the IOUs and 

obligations of the U.S. Government. 

42 

Mr. DOGGETT. I appreciate the fact that they will be honored 

and backed up, even though you are going to borrow from them for 

purposes that people did not pay into Social Security. You are raiding the trust fund. Let me ask you about the accuracy of one other 

thing. Last Friday, the Washington Post, under an article entitled, 

‘‘Benefit Cuts Would Offset Contributions, White House Explains 

the Proposal Further,’’ there was an indication by the White House 

that there would be an offset, dollar-for-dollar reductions in Social 

Security statutory guaranteed benefits, for the new personal investment accounts. That is, every dollar that goes into personal investment accounts, there will be a dollar-for-dollar cut in the guaranteed benefits. I have not seen any correction requested from the 

White House to that story since last Friday. Are you demanding a 

correction of it this morning? 

Mr. SNOW. Congressman, I have been traveling so I did not see 

the story. 

Mr. DOGGETT. Yes, sir. Well, you do not disagree that, under 

the general principles, you said that, although there is a crisis, the 

President does not have a plan to address the crisis, but under the 

principles that he has announced, the plan is that, every time you 

take a dollar out of your Social Security for these investment plans, 

you are going to have a reduction in your guaranteed statutory 

benefits? 

Mr. SNOW. On the other side—— 

Mr. DOGGETT. You may have some gain, you may have some 

loss; it is up to the market. 

Mr. SNOW. You are going to have an account. 

Mr. DOGGETT. Let me ask you about advice that you have received from Mr. McCrery, who has already questioned, Mr. Shaw, 

as reported in that same Friday issue of the Post, a suggestion, according to the Post, that Mr. McCrery thinks the President’s plan, 

and I guess he assumes the President has one, must be changed 

in a fundamental way, and that we need to scrap the idea of funding the private accounts with money earmarked from the Social Security trust fund. Why is the Administration rejecting the advice 

of Mr. McCrery and Mr. Shaw on this important point? 

Mr. SNOW. I do not think that the coverage that you read properly characterized the comments of the very distinguished Member 

from Louisiana. 

Mr. DOGGETT. You think I mischaracterized the comments? Let 

me just read it to you . . . 

Mr. SNOW. No. No. I said, I do not think the newspaper coverage that you are citing properly and authentically covered the 

comments that the—— 

Mr. DOGGETT. Well, it was not just one. I mean, it was repeated in a number of papers, that they thought the idea of funding accounts with money earmarked for Social Security from the 

trust fund was not a good idea. You think it is? 

Mr. SNOW. Oh, yes. Yes. Absolutely. But you say the President 

does not have a plan. On the—— 

Mr. DOGGETT. No, sir. You said that earlier this morning. I am 

just repeating your words. 

Mr. SNOW. The President has put forth quite a detailed plan on 

how the personal accounts would operate. 

43 

Mr. DOGGETT. Well, Mr. Secretary, the record will speak for 

itself, but you told this Committee a few minutes ago the President 

does not have a plan. I know he has some principles, and those 

principles are based on the fact that you all think the Social Security system is about to go bankrupt. Is that because the Social Security system cannot fully fund all of its future obligations? 

Mr. SNOW. That is precisely what bankruptcy means. 

Mr. DOGGETT. If you use that definition, don’t you have bankruptcy in many private pension plans of major corporations in 

America? 

Mr. SNOW. Congressman, no. I would not say that. 

Mr. DOGGETT. Well, don’t you have many private pension 

plans, I mean the Pension Benefit Guaranty folks put out a report; 

many private pension plans that are not fully funded to meet all 

of their future obligations? 

Mr. SNOW. There are some that are not fully funded. But there 

is a major difference between not being fully funded and being 

bankrupt. 

Mr. DOGGETT. Yes, sir, there surely is. 

Mr. Secretary, the House Republican Study Committee has said 

that your approach is too timid at just 4 percentage points of Social 

Security, and you ought to go to 6 percentage points in almost all 

of the employees contributions to Social Security. Why aren’t you 

doing that? 

Chairman THOMAS. The gentleman’s time has expired. That 

will be a written answer submitted by the Administration. The 

other gentleman from Texas wish to inquire? 

Mr. BRADY. Yes. Thanks, Mr. Chairman. Let’s have a quick reality check. One, the Washington Post article was corrected the 

very same day; the key point of that article being discredited. Secondly, Congress has borrowed from the Social Security trust fund 

since President Johnson initiated it way back when. Finally, if the 

President has no plan, why is everyone so critical of it? The fact 

of the matter is, the President laid out a plan to the Nation. Today, 

I see in one of the local Capitol Hill papers, Democrats will offer 

no Social Security reforms. On one of the most serious matters affecting our future, our kids’ future, Democrats will offer no Social 

Security reforms for now. Let’s stay on the issue of hypocrisy. People back home always ask me, especially since this debate has 

started: Why is it that Members of Congress are able to put their 

hard-earned savings into personal accounts that are safe and secure for their families, but you deny it for average Americans? Why 

do Members of Congress and their staff and our coworkers put $15 

billion a year from our paychecks into personal accounts like, as 

has been proposed, that it is good enough for our families, but it 

is not good enough for the average people who pay our salaries. 

What would you tell my folks back home about why we are allowed 

to do that and embrace it as safe and secure, but we call it a guaranteed gamble for regular families. Can you give me an answer? 

Mr. SNOW. Congressman, I think if I was the sitting Member 

from your district, I think I would say they ought to be given that 

opportunity. 

Mr. BRADY. Well, a lot of my folks say, maybe Members of Congress ought to lead by example. If all personal accounts are so 

44 

risky and a guaranteed gamble, why don’t we withdraw from them? 

Why don’t we set the example and live like everyone else in America? It seems to me, Mr. Secretary, that in this proposal by the 

President, we are giving younger workers a choice. They can choose 

real money in a real account, building up over time, or they can 

accept an IOU in an imaginary ledger; hopefully, it will be paid by 

a generation once removed from them. It seems to me, if we are 

serious about preserving Social Security, if we can take good ideas 

instead of offering no Social Security reforms, getting good ideas 

from your Democratic friends, taking the best ideas from the country and from the Republican side, I am just convinced, if we will 

set aside the politics and the petty stuff in here that we actually 

can come up with a plan that can preserve Social Security once and 

for all, and for every generation. If we will call time out on the silliness and just get serious. 

Mr. SNOW. Congressman, I think you framed the issue very well 

there. With the personal retirement accounts what really happens 

is this: Americans have the opportunity to become owners of their 

own retirement, rather than merely being creditors in a promise 

that the government cannot keep. That is the essence of this situation. 

Mr. BRADY. Thank you, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman for the 1 minute 

and 30 seconds that he was kind enough to yield back. Does the 

gentleman from North Dakota, Mr. Pomeroy, wish to inquire? 

Mr. POMEROY. Mr. Secretary, I would like to follow up on the 

preceding line of questions. The TSP is essentially a defined contribution plan available to employees of the Federal Government. 

Is that correct? 

Mr. SNOW. Yes. 

Mr. POMEROY. That is not like some alternative Social Security 

program, Members or staff members of the Federal Government 

today are part of the Social Security program. Is that correct? 

Mr. SNOW. Yes. 

Mr. POMEROY. So, I think you would be a little confused listening to my Texas colleague. The TSP is essentially a 401(k). Now, 

that is not unique to people in the Federal Government. There are 

401(k)s all over the country, indeed about $2 trillion is invested in 

401(k) accounts. Is that correct? 

Mr. SNOW. Yes. The 401(k)s are a very popular investment vehicle. 

Mr. POMEROY. Mr. Secretary, if I might. We need to make this 

clear. The 401(k) is an account on top of Social Security. So, you 

have the Social Security providing the foundation of retirement income, and I am informed that, in my State, the average Social Security check is about $834 a month. The 401(k) proceeds the worker may have and be drawing down on retirement, that would be on 

top of Social Security. Is that correct? 

Mr. SNOW. Yes. 

Mr. POMEROY. For example, when you have a market correction, and you go from the late nineties valuations in the stock market to after the correction in the early part of this decade, very substantially smaller amounts in 401(k)s. The old joke: My 401(k) became a 201(k). Even though there would not be as much retirement 

45 

assets available to the retired worker because of the stock market 

fluctuation relative to their 401(k), Social Security continues to pay 

that annuity every month. That was not effective; was it, Mr. Secretary? 

Mr. SNOW. No, it was not. But it will be in 2042 when you cannot pay it out any more. That is the whole point. 

Mr. POMEROY. Well, 37 years from now, if we do not do anything, there would be a 25-percent reduction. I think we need to 

do something. In fact, the comments made by my Florida colleague 

about Democrats saying we should address Social Security; when 

we had a surplus, we wanted to use that surplus to address the 

long-term issues about Social Security. 

Unfortunately, decisions made by this panel, the majority, have 

spent that surplus on tax cuts and other things and driven us to 

the deepest deficit position in the history of the country. You, who 

presided over that decline. The issues that I want to get into, and 

that I think are critically important, involve this change of the 

price index to the price index from the wage index. Are you familiar with the strategy memo written by a member of the White 

House staff, Peter Wehner, Director of Strategic Initiatives for the 

Bush Administration? 

Mr. SNOW. I have seen it. 

Mr. POMEROY. I will quote to you from it. We simply cannot 

solve the Social Security problem with private retirement accounts 

alone. If we borrow $1 to $2 trillion to cover transition costs for 

personal savings accounts and make no changes to wage indexing, 

we will have borrowed trillions and will still have unfunded liabilities. Is that your position, too, Mr. Secretary? 

Mr. SNOW. My position, as I have said repeatedly here, is that 

the personal accounts are an integral part of any solution to this 

Social Security feasibility problem. 

Mr. POMEROY. Now, Mr. Secretary, do you believe that changing from a wage index to a price index is also an integral part of 

long-term sustainability for Social Security? 

Mr. SNOW. It is not a necessary condition to put Social Security 

on a feasible course. 

Mr. POMEROY. Mr. Secretary, this is critically important. 

Mr. SNOW. There are a number of ways to do that. 

Mr. POMEROY. Mr. Secretary, on the index, which is critically 

important, on this future inflation adjustment to Social Security, 

the wage index to the price index. Are you saying in your testimony 

today that we do not need to make that change; we do not need 

to change the price index going forward as part of Social Security 

reform? 

Mr. SNOW. I am saying it is one option. It is an option that 

should be looked at. There are a number of options. 

Mr. POMEROY. Mr. Secretary, is it an integral part? You have 

said private accounts are integral parts. Is the wage index to the 

price an integral part? 

Mr. SNOW. Not in the same sense, because it is one of a number 

of options. The objective here has to be to put Social Security on 

a sustainable permanent course. Whatever the answer is, and the 

President has suggested a number of options in his State of the 

Union address, whatever it is, it has to achieve—— 

46 

Mr. POMEROY. The price index change would steeply cut benefits going forward, even if you count the value of the private account. I would—— 

Mr. SNOW. Well, according to the Social Security Commission, 

both model two and model three, you can come out ahead of where 

you would be with Social Security if you have the private accounts. 

Chairman THOMAS. The gentleman’s time has expired. The gentleman from Wisconsin wish to inquire? 

Mr. RYAN. I do. Mr. Secretary, I do have a few questions. I notice that you are hearing a lot of rhetoric on the other side. This 

is essentially the plan that is being offered by the other side: Nothing. Now, I would like to get to the question of whether there is 

a problem or not, because we have been distributed 5 pages of 

quotes from then-President Clinton and leading Democrats all in 

1998 and 1999 saying, Social Security is going broke; there is a 

problem; we have to act to fix it now. The more we delay, the more 

painful the options become. We can go on and on about that. The 

point is, let’s get to this whole trust fund idea. It has been said 

that we have $1.7 trillion of assets in the trust fund; that we will 

have by the time 2018 rolls around something like $5.3 trillion in 

assets. What are those assets in the trust fund? Is there a bank 

account with money in it? Are there tradable bonds or stocks that 

we can just draw on, once 2018 rolls around, that will take us to 

2042? What are those assets? 

Mr. SNOW. Well, those assets are IOUs from the United States 

Department of the Treasury to the Social Security Administration. 

Mr. RYAN. So, when 2018 comes, and according to the trustees, 

of which you are a member, we have less revenues coming in than 

benefits being paid out, is there, all of a sudden, money that we 

can draw upon from these assets, or do we have to come up with 

the money somehow? 

Mr. SNOW. No. You have to come up with the money. It will be 

a sizeable amount of money. It will have a major impact on the deficit. 

Mr. RYAN. So, there is no cash behind those assets, we have to 

either raise taxes, cut spending, or borrow more money starting in 

2018 to continue paying benefits for Social Security in 2018. Is that 

correct? 

Mr. SNOW. Unfortunately, Congressman, those are the only options. 

Mr. RYAN. That is right. So, I think this notion that we are fine 

for 37 years, no problem until 2042, is really quite misleading. 

That is wrong. We will, in 2018 have to come up with money, 

which we do not have right now, to continue paying seniors’ benefits. The question then that I think we are trying to get at is, can 

we do a better job than we are doing right now for Social Security? 

My generation is looking at about a 1-percent rate of return. My 

children are getting a negative-1-percent rate of return. No one is 

talking about depriving people who are in or near retirement of 

any promised benefit. It has been taken off the table. The President and Congress have all been saying, if you are in or near retirement, you will have exactly the same Social Security benefits 

with no benefit change whatsoever. The question is, can we take 

this debt that we owe, this unfunded liability, which is really $12 

47 

trillion in present value terms, and convert it into a real asset 

where workers can get a better rate of return, retire with better 

benefits and wipe this liability off our books? So, even if the critics 

who are saying this plan will cost $2 trillion, let’s just give them 

face value and say the plan does cost $2 trillion. If we have a plan 

that costs $2 trillion and, in doing so, it gives workers personal retirement accounts where they can own and control their money, 

they retire with better benefits, and it wipes off the books a $12 

trillion debt, I will take that deal any day. So, the question I have, 

Mr. Secretary, is, starting in 2018, what is the debt that we owe? 

What is the money that we will have to start paying out on that 

day? What are the differences between payable and promised benefits starting at that time? 

Mr. SNOW. Well, in—if you go to 2028, you will have to come up with about $250 billion. 

Mr. RYAN. In that year alone? 

Mr. SNOW. In that year alone. This is the chart, if you can see 

it. This is 2018. Every year thereafter, you can see a huge Federal 

deficit being developed as a result of the shortfall between the inflow and the out-flow, and it can only be met in the ways you addressed. 

Mr. RYAN. So, are the alternatives to either raise taxes, cut benefits, borrow more money or grow the rate of return coming to Social Security? Are those essentially our four alternatives? 

Mr. SNOW. Those are the alternatives. Unfortunately, as we discussed earlier, higher growth rates for the economy as a whole do 

not fix this problem, because with the way the Social Security system works, they just get translated back into higher compensation 

levels to the retirees. 

Mr. RYAN. So, is it correct to say that, if we do not have personal retirement accounts as part of the reform, then you would 

have to resort more toward either more borrowing, deeper benefit 

cuts or higher tax increases? 

Mr. SNOW. I think it is safe to say that the situation that retirees face will be much worse if we do not have personal retirement 

accounts. Absolutely. 

Mr. RYAN. Thank you. 

Chairman THOMAS. The gentleman’s time has expired. The gentlewoman from Ohio, Mrs. Tubbs Jones wish to inquire? 

Mrs. JONES. Mr. Secretary, thank you for coming to our Committee this morning. My first question is, is it a fact that the tax 

cuts for just the top 1 percent of households, with average incomes 

of more than a million dollars, exceeds the cost of shoring up Social 

Security without any benefit cuts? 

Mr. SNOW. Congresswoman, I do not know that. I would have 

to check on the facts of that. I do not have that readily available. 

Mrs. JONES. Well, assume it for the purpose of my question. 

Would you please, sir? 

Mr. SNOW. I will for the purpose of your question. 

Mrs. JONES. Then that is the proposal that the Democrats are 

offering to shore up Social Security, that you take the money from 

those tax cuts, and they will pay for the Social Security costs, just 

so that the record is clear, that Democrats are offering a proposal. 

Let me go to this. It is in your statement. It says in the interests 

48 

of honesty and transparency. In the interests of honesty and transparency, Mr. Secretary, is it not a fact that the personal accounts 

that you propose are not like a 401(k) plan? Isn’t it a fact that if 

I were to get to the point where I would get an annuity, I would 

get money from the personal accounts that you are proposing, that 

I would be forced to be put it into an annuity, I could not get a 

lump sum payment? 

Mr. SNOW. Well, the lump sum option, I think will be available, 

where an individual can demonstrate that they will not outlive the 

anxiety. 

Mrs. JONES. Mr. Secretary, in fact, that is not the proposal that 

is on the table. Every proposal that I have seen for the personal 

accounts says that it will be turned into an annuity, and an annuity cannot be directly passed on, you could not give it to your child 

immediately? 

Mr. SNOW. Congresswoman, I think, perhaps, we have not made 

available all of the materials that we should, or you have not had 

a chance to see them. But, it is my understanding that the Administration proposal here does contemplate the opportunity for a lump 

sum payment once some means test is met, because you do not 

want people to take a lump sum—— 

Mrs. JONES. But you have to meet a means test. I do not have 

to meet a means test for my 401(k). I can take it and do whatever 

the heck I want to do with it. Right? 

Mr. SNOW. Well, I am agreeing with you that—— 

Mrs. JONES. If so, therefore, I must meet a means test, it is not 

like a 401(k). 

Mr. SNOW. Well, it is, and it isn’t. It has some things in common 

with it and some things that are different. 

Mrs. JONES. Mr. Secretary, if I have to meet a means test, I do 

not have the ability to take that money and do what I want to do 

with it. Correct? Yes or no, sir? 

Mr. SNOW. Unless you meet the means test. 

Mrs. JONES. You know what, I do not think you are responding 

to my questions appropriately. In the interests of honesty and 

transparency, answer my question, Mr. Snow. That you cannot, if 

you have to meet a means test, then the ability that I have to take 

my annuity is not the same as a 401(k). Yes or no, sir? 

Mr. SNOW. Well, it is if you meet the means test. 

Mrs. JONES. Okay. Mr. Snow, let’s move on. I hope the whole 

world is seeing that you are not answering questions in the interests of honesty and transparency. Let me ask you also, part of the 

proposals, of the Government’s proposals on Social Security are 

suggesting that African-Americans would fare better under the proposed changes than they do under current programs. Is that correct, sir? 

Mr. SNOW. Yes, I think there has been some suggestion to that 

effect made. Yes. To that effect, yes, that both with respect to 

women and with respect to minorities, the current system works in 

some ways that one can question the fairness. 

Mrs. JONES. On the other hand, it works in some ways that are 

in the greatest, best interest of African-Americans and women with 

regard to wage indexing, with regard to the survivor benefit and 

also with regard to the tenet from Social Security that, if I am disVerDate Aug 31 2005 02:29 Mar 11, 2006 Jkt 023912 PO 00000 Frm 00052 Fmt 6633 Sfmt 6602 E:\HR\OC\23912.XXX 23912
49 

abled, my children are able to get funds from my disability, or I 

die and my children are able to get funds from my disability, that 

I can never purchase in the open market because I do not have 

enough money. That is a fact, isn’t it, Mr. Snow? 

Mr. SNOW. Well, I think all of those facts depend on individual 

circumstances. 

Mrs. JONES. Well, if we look at the income that women and African-Americans receive as compared to white men in this country, 

sir, it is clear that they make less money, and it is clear that they 

are often in the work force less—a shorter period of time than 

white men. So, therefore, the fact is, that under a disability or survivor benefit, most women and most African-American children receive a greater beneficiary from Social Security disability than they 

could ever receive from an annuity that they would attempt to purchase out in the world. 

Mr. SNOW. Congresswoman, they are more dependent on it and, 

therefore, have a bigger stake in seeing it sustained. 

Mrs. JONES. I thank you for your responses. 

Chairman THOMAS. Does the gentleman from New York wish 

to be recognized? 

Mr. RANGEL. Thank you. I just want to clarify the position of 

the Democrats as it relates to Social Security. The Democrats are 

anxious to put everything on the table in order to resolve this 

issue. When the leadership met with the President not too long 

ago, the President asked—and Mr. Secretary was there—the President asked us to hold our fire until such time as he presented us 

with a plan and not to be critical of it. The Treasury Department 

is saying that there are proposals and suggestions. But, so far we 

have not gotten a plan. So, there is no Democrat—of what Congresswoman Jones is suggesting, that these things on the Democratic table to respond at the time that is appropriate. But, I think 

the Secretary said he was there when the President requested of 

us not to be critical and not to come up—he did not say not to come 

up with anything, but at least to wait until he put these pieces together. That is what we are doing. 

Chairman THOMAS. The Chair thanks the gentleman for the 

clarification. The record shows that the gentlewoman from Ohio is 

in favor of raising taxes in substitution of the President’s program. 

The gentleman from Georgia, Mr. Linder wish to inquire? 

Mrs. JONES. Mr. Chairman, I would like to object to your interpreting what my responses were, or what I said. 

Chairman THOMAS. The record will speak for itself. The gentleman from Georgia has the time. 

Mr. LINDER. Thank you, Mr. Chairman. Mr. Secretary, welcome. Nice to see you again. Isn’t it true, that if we were to go and 

rescind the tax increase on the top 1 percent of the tax cuts, we 

would be increasing taxes? 

Mr. SNOW. Absolutely. 

Mr. LINDER. Isn’t it further true that when we increase taxes 

we tend to slow the growth of the economy? 

Mr. SNOW. Yes. 

Mr. LINDER. Isn’t it further true that when you slow the growth 

in the economy you cost jobs, reduce the revenues to the Federal 

50 

Treasury, and you reduce the revenues to the Social Security Administration? 

Mr. SNOW. No question about it. 

Mr. LINDER. Our Chairman has spoken some time ago, and recently, and I agree that trying to save this system predicated on 

workers paying for retirees is going to be difficult to do. We will 

have to look at a bigger picture. We are going to increase the number of retirees in 25 years by a hundred percent. We are going to 

increase the number of workers paying for them by 15 percent. 

Maybe we ought to look at a broader picture. Maybe just the payroll tax is insufficient to the challenge. But this structure of income 

taxes also, and I am going talk about something you and I have 

talked about, drains on our economy in other ways. We know that 

22 percent of the price system represents a tax component. But it 

makes us very uncompetitive in the global economy. Add to that 

the VAT, when we export something, we are doubly less competitive. We know that we have somewhere in the range of $200 to 

$500 billion per year in just compliance costs. That is a huge tax 

burden on our economy. We now know that we have driven $6 trillion offshore because of the Tax Code, and to euro-dollar markets 

and to offshore financial centers. Do you have a working group in 

your Department looking at fundamental tax reform and tax simplification? 

Mr. SNOW. Yes, we do, Congressman Linder, and we have for 

some time. We will share our research and analysis with the tax 

panel. Some of the tax experts are right behind me here who have 

done their best to give me an education on the options available. 

I am not sure what grade they give me, but at least I have been 

a diligent student. 

Mr. LINDER. Could I have access to some of that research? 

Mr. SNOW. Sure. We would be delighted to share it with you. 

Mr. LINDER. Let me ask you one further question, and you may 

answer it in writing. Dr. Kotlikoff of Boston University has recently written a study that says that the unfunded liability over 75 

years in Social Security and Medicare is $51 trillion. The Social Security Administration says the unfunded liability is about $13 trillion. Would you ask somebody to look at those two studies and, in 

writing, explain to me what the shortages are? 

Mr. SNOW. Sure. 

Mr. LINDER. Thank you, Mr. Chairman. I yield back. 

Chairman THOMAS. Based upon the time saved on the Republican side, it is over 5 minutes, the Chair will call on the gentleman 

from Colorado, Mr. Beauprez. 

Mr. BEAUPREZ. I thank the Chairman, and I thank the Secretary for being here for enduring this rather tortuous, sometimes, 

exercise. I think the gentleman from Ohio a moment ago hit on the 

key subject here. Simple question: Can we, I am paraphrasing, can 

we do a better job of Social Security in the future than the current 

system provides? At about, I do not know, 2042, I do not know if 

it is some other year, but in and around that time, I know I have 

got four children that I brought into this world that are going to 

reach retirement age; just a little bit before that and a little bit 

after that. I asked them that question. They said, ‘‘Dad, you had 

better do something better with the system in the future than it 

51 

currently provides or we are not going to have one.’’ They get it, 

Mr. Secretary, and I think most people out there in the real word 

get it, too. We throw the word around: Unsustainable. I think it 

fits. I think it fits. 

As luck would have it, yesterday, in my office, I had four representatives of PERA, that is a public pension fund in Colorado, 

the 23rd largest in the country I am told, that represents public 

employees, that is what it stands for, Public Employees Retirement 

Association. It has got municipal workers, State troopers, teachers—typically our teachers belong to it, State employees. It has 

about 361,000, I think, members, again the 23rd largest pension 

fund in the Nation, I am told, public pension fund. They seem to 

understand what a better plan might be, because the message they 

gave me loud and clear was: Do not mess with our retirement account. There is a reason. Because it is theirs. It is a personal account. They own it. They can transfer it. They enjoy the benefits 

of compound interest with it. 

Now, question for you. I suppose there is one other way we can 

do this. We have heard that you can cut benefits dramatically. 

Don’t want to do that. I submit that no Congress will. We can raise 

taxes rather dramatically as well. Difficult choice as well, with serious economic implications. Or we can whack away at the other 

things that the Federal Government spends money on, like National Defense or Homeland Security or our intelligence community 

or affordable housing or our veterans or we can get around to Education and Medicare and Medicaid, but I think Congress will find 

that very difficult to do. In fact, I think, if we face the real music, 

Medicare and Medicaid, our other large entitlements, we are headed to a very serious day of reckoning with our major entitlements. 

Isn’t that what we are about here, Mr. Secretary, is simply, as the 

Gentleman from Ohio to my right, a moment ago pointed out, 

aren’t we challenged with, can we do a better job than the wonderful job that those who came before us did in providing a benefit, 

but can’t we do a better job? 

Mr. SNOW. That is the whole question, Congressman. You put 

it well. He put it well. I think we can. But the option to do that 

gets diminished as we put it off, as you put it off, as Congress puts 

it off. So, the sooner you act, the more options that are available. 

Mr. BEAUPREZ. You held up a page earlier that I think I have 

seen before, that simple graph. Doesn’t that show that, as we go 

forward into the future, if we do not fix the system somehow so it 

is sustainable, then those funds, unless we raise taxes or dramatically reduce the benefits, we are going to have to find them somewhere, and the only other somewhere would be to essentially reduce or eliminate these other programs of the Federal Government, 

parts of the Federal Government that we have become very dependent upon. 

Mr. SNOW. Congressman, you have stated it well. In fact, cutting them will not be enough. If this trend continues the entire 

budget of the United States will be absorbed by Medicare, Medicaid 

and Social Security. 

Mr. BEAUPREZ. I thank you and the President for having the 

courage to bring forward what obviously is going to be a difficult 

52 

question, but a necessary question, for us to answer. Thank you, 

Mr. Secretary. 

Chairman THOMAS. Does the gentleman from California wish to 

inquire? 

Mr. THOMPSON. Thank you, Mr. Chairman. 

Mr. Secretary, could you just help me in clarifying the amount of the deficit in this budget. On one figure, I see $427 billion. Is 

that—— 

Mr. SNOW. That is the number. That translates into the 3.6 percent of GDP. 

Mr. THOMPSON. If we add up all of the things that we have been talking about, for instance the $754 billion to pay the transitional cost to privatize Social Security; the extension on the AMT 

of $25 billion; the war supplemental of $80 billion; and the fact 

that this budget borrows $160 billion from Social Security, we have 

a real deficit of about $1.2 trillion, $1.3 trillion? 

Mr. SNOW. Well, Congressman, the deficit is as reflected in the 

document that you have from OMB. 

Mr. THOMPSON. Thank you. Can you tell me, does that include, 

and I think Mr. Tanner, my colleague from Tennessee, brought this 

up earlier, the amount that we borrow from foreign governments, 

from foreign countries? Specifically, over the course of the last 

year—you talked to me last year when I was on the Budget Committee. This year the venue is different but the topic is the same. 

Are growth and debt to foreigners, we have borrowed $139 billion 

more from Japan; $43 billion more from China; and $15 billion 

more from the OPEC nations. Is this included in that? 

Mr. SNOW. Oh, sure. All of the borrowing of the United States 

will be reflected. 

Mr. THOMPSON. Thank you. Then it has been discussed here 

today that the full faith of our U.S. Government provides this guaranteed benefit to anyone who is collecting Social Security benefits 

today. That has been brought out a number of times. So, our Government stands behind, even if we are borrowing money from the 

Social Security trust fund to run our everyday government operations as we just talked about, our Government stands behind that 

borrowing, that obligation to those on Social Security? 

Mr. SNOW. Yes. The Government stands behind all of the obligations. Yes, it does. 

Mr. THOMPSON. After the privatization, and money is taken 

out of an individual’s Social Security account and put into the private sector, the private accounts, if there is any loss in that, does 

the full faith of our Government stand behind that? Or is that just 

money that will be lost from the Social Security benefactor? 

Mr. SNOW. Congressman, our Government stands behind with 

the full faith and credit that surplus that is currently in Social Security, the IOUs. 

Mr. THOMPSON. That is not my question. If you take money 

from my Social Security account and invest that in the private sector, and that investment loses, does the full faith of the Government still stand behind that, or do I get the amount from the loss? 

Mr. SNOW. Well, you—this is a personal account. We did not 

propose to guarantee it, because if you guarantee—— 

Mr. THOMPSON. So, there is no guarantee? 

53 

Mr. SNOW. That is right. I would not propose to guarantee it. 

Mr. THOMPSON. As pointed out by the gentleman from North 

Dakota, the private accounts themselves will not be enough to sustain the program. So, we can realize the risk in regard to the private portion, and we can also expect to see some other manipulation of whatever is left over. 

Mr. SNOW. Well, yes. The President, when he talked about that, 

indicated that there were some options that needed to be considered by the Congress. He invited you to come out with others. But 

he also—— 

Mr. THOMPSON. One last question I want to get before the light 

turns red. This budget also proposes eliminating 150 programs to 

realize some considerable savings. But last year the budget that 

you proposed to us suggested we eliminate 65 programs and save 

$5 billion. In reality, we eliminated 5 programs and saved about 

$290 million. Believe me, I think if there are ways to become more 

efficient or get rid of programs that aren’t doing what they are supposed to be doing, we should do that, and $5 is a good savings. But 

how realistic is it that we can get rid of 150 programs given what 

happened last year when you proposed the modest 65-program reduction? 

Chairman THOMAS. The Chair believes that is an excellent 

question to respond in writing, because, frankly, any kind of a response in the 10 seconds left wouldn’t do it justice, and we do need 

to examine that. 

Mr. THOMPSON. Mr. Secretary, thank you. 

Mr. SNOW. I would be happy to respond. 

Chairman THOMAS. Does the gentleman from Indiana Mr. 

Chocola wish to inquire? 

Mr. CHOCOLA. Yes. Thank you, Mr. Chairman. Thank you, Mr. 

Secretary, for being here today. Mr. Secretary, I have the privilege 

of having some ads run in my district right now that leave the impression that Social Security benefits will be cut significantly for 

current retirees. Don’t you think it is safe to say that, under the 

principles that the President has offered, or really under any plan 

that is offered right now, that those about to retire and current retirees benefits will be safe and secure? 

Mr. SNOW. Absolutely. We have tried to make that just as clear 

as possible, reiterating over and over and over again that Social Security benefits won’t be changed for anybody 55 and over. 

Mr. CHOCOLA. In your opening comments, you pointed out that 

the most powerful force in the universe is compound interest. I 

would offer the argument that the second most powerful force in 

the universe is the power of ownership. I have seen the magic of 

ownership in personal accounts, having run a business with a 

401(k) and profit-sharing accounts, and seen people retire after a 

great career having built wealth and a nest egg, that they really 

achieved retirement security. One of the criticisms I have heard of 

personal accounts is that the administrative fees would eat up the 

return. Our experience, with about 1,000 people in our account, 

was less than one-half of 1 percent administrative fee. The TSP has 

one-tenth of 1 percent administrative fee. Do you have any idea on 

personal accounts what we might see? 

54 

Mr. SNOW. Yes, Congressman. We have looked into that and feel 

confident that the personal accounts will have an administrative 

fee no higher than about 30 basis points. 

Mr. CHOCOLA. Just finally, in 2018, if we do nothing, we won’t 

have to worry about raiding the Social Security Trust Fund anymore, will we? 

Mr. SNOW. No. The trust fund will be on a straight downward 

course which exhausts all the obligations by 2042. 

Mr. CHOCOLA. In other words, it would exacerbate the deficit? 

Mr. SNOW. Well, absolutely. In that chart that we show, that is 

how much it gets exacerbated in each of those years, reaching by— 

just to take the year 2042, about 400 billion added to the deficit 

in that year. 

Mr. CHOCOLA. Thank you, Mr. Chairman. I will yield back. 

Chairman THOMAS. The Chair is pleased to say that there is 2 

minutes and 30 seconds returned back. I know that I indicated to 

the Secretary that we would end at 1:00. We have two additional 

Members who I assume wish to inquire, and if we could be mindful 

of the fact that we are overtime and that it was possible for other 

Members to return a portion of the time, the Chair would inquire 

if the gentleman from Connecticut wishes to ask questions? 

Mr. LARSON. Thank you. Yes, I would. 

Chairman THOMAS. The gentleman is recognized. 

Mr. LARSON. Thank you, Mr. Chairman. What an honor to 

serve with you, and the distinguished Member from New York Mr. 

Rangel, and my colleague Mrs. Johnson. Mr. Snow, thank you for 

your service to our country. Let me cut to the chase. I am going 

to pick up where Mr. Rangel began. What is on the minds of a 

number of my constituents is a lot like the conversation went with 

Mr. Brady. They have questions that they want to ask, and I will 

pose these in four quick questions, and then you can answer them 

in writing. That will allow time. 

The first question that is on the minds of a number—people who 

meet with my mother, they are called The Golden Girls, and they 

are from the greatest generation. What they wonder is why we just 

don’t pay the money back. They are concerned about all this talk 

about surplus and deficit, and they have been a generation that 

witnessed a great deal of sacrifice. They want to know in plain language why don’t we just pay that money back that we owe. 

Secondly, they want to know, and it is especially important given 

Mr. Rangel’s concerns about—and mine and others about the Social 

Security, the transition costs not appearing in the budget, the cost 

of the war currently and ongoing not in the budget. They want to 

know is the war being funded with the Social Security surplus? Because, in their generation, they sacrificed, and there were funds 

that were created especially, and they specifically went on drives 

and they paid as they go for this effort. They see this as contrary 

to all the kind of sacrifice that they had. 

Thirdly, and the question was posed by many Members here 

about thrift savings and the idea that—even as was mentioned before about possibly with the AARP sitting down to make sure that 

these go into safe accounts if the President’s plan were to be followed. Well, the question is why don’t we take the existing account 

of Social Security within the context of Social Security and apply 

55 

those same financial tools without having to take it outside of the 

system and privatize it? Wouldn’t that give them greater assets 

and greater return with a greater amount of money? Those are the 

questions that my constituents pose. The final question is more one 

of a little bit—I know that there is no discussion of politics and ideology, but the question that they have is it seems to them, at least 

a generation that believed in the common wealth going toward the 

common good, that the ownership society smacks of a ‘‘me society,’’ 

and where we are exalting the individual at the expense of the collective good. I know that that is somewhat philosophical and ideological, but I would appreciate your comments. I thank the Chairman. 

Chairman THOMAS. I thank the gentleman very much for the 

expeditious use of the time. The Chair would ask the gentleman 

from Illinois if he wishes to inquire for a modest period of time. 

Mr. EMANUEL. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. I will be real quick. I think it is interesting that since a lot of projections and discussions have been 

about the year 2018 and 2042, it is on the day that you were here 

to talk about the budget that last year we were told that prescription drug bill would cost about 396—over 10 years, and today’s 

budget submits that it costs $395 billion over 5 years, and over a 

10-year period of time it will cost a total of $800 billion. So, just 

last year, 1 year away, not 2018, not 2042, the projections of those 

in this room was that it would only cost 400 billion, and you were 

off by only 400 billion. So, when it comes to one’s credibility about 

projecting into 2018 or 2042, just last year one’s credibility is not 

exactly what I would say rife with a lot of heft. It chopped through. 

If you are looking for a crisis, I would suggest you look at a crisis 

that was self-made in just last year, because the crisis exists in 

what has happened to Medicare by weighing it down, and those of 

us who told you it was going to cost twice as much were right. This 

hearing was about the budget. You submitted a budget with a prescription drug benefit plan that over 5 years costs what you said 

it was going to cost in 10 years, and you have yet to correct it, and 

you put more greater weight on Medicare because of foolish politics. 

Second, as it relates to those who wanted to quote President 

Clinton, I would like to remind them that it was President Clinton 

who said, save Social Security first. He created three surpluses in 

a row and was part of creating an economy that was dynamic, 

which is highly different from the type of economy that we have, 

which has 4 years in a row of record deficits. If you are looking for 

a crisis to help people save, I believe we have a savings crisis, not 

a Social Security crisis, a savings crisis where 80 percent of the 

employees of small businesses have no employer-based retirement 

plan, unlike you did at CSX that did have a savings plan in addition to Social Security. Forty percent of the American people rely 

on Social Security for their only retirement. The idea that we 

would take that guaranteed benefit of their retirement benefit and 

trade it for a guaranteed fee for Wall Street is not a trade worth 

making, as somebody who has spent little time on Wall Street. I 

look forward to discussing the budget as it relates to any entitlements. But the notion that we are going to talk about a crisis and 

56 

look at one that was submitted today that was $400 billion off the 

mark just last year so one’s projections about what the future will 

bring is highly susceptible—— 

Mr. SNOW. Congressman, thank you. If I could just make one 

comment. There is, it seems to me, maybe you would agree, a big 

difference between trying to forecast take operates take-up rates on 

prescription drugs, which is at the heart of that issue, and the demographics of the country, which are known to a much higher degree of certainty. 

Mr. EMANUEL. Mr. Secretary, not only—and I know we are all 

sensitive here to time. As Mr. Greenspan said in the Budget Committee last year and others have said, the real issue we have and 

the challenge we have is in Medicare, not in Social Security. Thank 

you. 

Mr. SNOW. That is not to deny, though, and I think Mr. Greenspan would agree, there is a serious sustainability issue and therefore a serious issue for the future of this country implicit in Social 

Security as well. 

Mr. EMANUEL. Again, I want to be sensitive to your time and 

the Chairman’s time, and you have been very generous. Unbelievably, Mr. Chairman. But the truth is the one that comes front and 

center that we are going to hit on is Medicare. We have created a 

bigger burden for that problem. To the issue of Social Security, the 

issue in front of the American people is that when we used to have 

employer-based savings, individual savings, and Social Security, 

you are knocking two legs out and trying to have that stool stand 

on one leg, and you are doing it in a risky way on Wall Street. If 

the economy is growing by 1.8 percent as you projected, and you 

think somebody on an individual account is going to get 5 to 6 percent, my slight recommendation is they maybe should be setting up 

a hedge fund, not an individual retirement company, because when 

the economy is growing 1.8 percent, the only way you make that 

type of return is if you are shortening it. 

Mr. SNOW. Could I make just one response to that? This could 

go on. The 1.8 is the growth of productivity. It is the growth of productivity per capita. The Social Security trustee actuary has found 

that there is a high correlation between productivity growth per 

capita and equity markets and capital markets. 

[The prepared statement of Mr. Emanuel follows:] 

Opening Statement of The Honorable Rahm Emanuel, a Representative in 

Congress from the State of Illinois 

Mr. Chairman, the President’s budget is much harder on the middle class than 

on the deficit. First, he proposed shredding the safety net of Social Security. Now, 

he wants to pull the rug out from under the middle-class. 

When it comes to cutting the deficit, President Bush has declared, Women, children and middle-class families first. 

If this were the Superbowl, the President’s budget would be flagged for unnecessary roughness on middle-class families. 

The President’s FY 2006 budget proposal includes: 

• $4.3 billion cut from 48 education programs; 

• $960 million cut in direct student loans; 

• $540 million cut from police grants; 

• $361 million cut from clean water programs; 

• $355 million cut from Safe and Drug Free Schools; 

• $225 million cut from the Even Start literacy initiative; 

• $215 million cut from firefighter grants; 

57 

• $200 million cut from job training programs; 

• $100 million cut from community health centers; 

• $100 million cut from land and water conservation; 

• Neglecting the cost of $774 billion 10-year cost of reforming the Alternative 

Minimum Tax; 

Following four consecutive budget deficits—including the last three record-breaking deficits—the Administration’s economic policies should focus on cutting the deficit, not cutting middle class priorities. 

With his tax cuts continuing to favor the wealthiest individuals and special interests, middle class families deserve more balanced tax and spending priorities to help 

them keep up with rising costs in health care, education, and retirement. 

Middle-class families deserve more than accounting gimmicks, budget sleight of 

hand and cuts to critical programs to pay for unnecessary, unwise tax cuts. The Administration should scrap this budget, start over, and work with the Congress to 

put this government back on the path of fiscal responsibility. 

f 

Chairman THOMAS. The Chair would recognize the gentleman 

from New York. 

Mr. RANGEL. I just want to thank the Secretary, especially in 

light of the harsh questions that we felt compelled to ask, because, 

as you know, the President said wait until he has a plan, and we 

don’t have that plan, so that there is no Democratic position until 

the President comes forward with something. We all have to admit 

that this particular subject matter, as with tax reform, it screams 

out for a bipartisan approach. So, I just do not want you to walk 

away thinking that we did not believe there was a problem. We 

know there is a problem, and we thank the President for not saying there is a crisis. Thank you. 

Mr. SNOW. I thank you, Mr. Rangel. 

Chairman THOMAS. The Chair would also like to thank the Secretary. Of course the 1.8 percent is one line that the trustee has 

offered. There are two others. But, most importantly, the President 

has decided to assist us in being out front in Social Security. He 

assisted us in being out front in Medicare in the last Congress. We 

were successful. We look forward to at least as much bipartisan cooperation in dealing with Social Security as we had with Medicare. 

If there are no further questions, the Committee stands adjourned. 

[Whereupon, at 1:13 p.m., the hearing was adjourned.] 

[Questions submitted from Messrs. Rangel, Stark, Herger, 

McDermott, Tanner, Becerra, Doggett, Thompson, and Larson to 

Secretary Snow, and his responses follow:] 

Question Submitted by Representative Rangel 

Question: Mr. Secretary, I appreciate your comments during the hearing 

that indicated the full faith and credit of the United States stood behind 

the bonds held by the Social Security Trust Funds. However, at other 

points in the hearing you agreed with questioners who disparaged those 

holdings as IOUs and spoke as if they were somehow different than the 

bonds sold to China and other overseas investors. 

It is true that the bonds are not cash and that the Federal Government 

will have to either raise taxes, cut spending, or increase borrowing in 

order to redeem them and repay the Trust Fund in order to finance future 

benefits. But, even if we did not have to redeem bonds and repay the Social 

Security Trust Fund after 2018, we will still run large deficits in those 

years under current policies. Isn’t it true that the same actions—raising 

taxes, cutting spending, or increased borrowing—that will be needed to redeem the bonds held by the Social Security Trust Funds, will also be needed to repay the bonds currently being sold to overseas investors? 

58 

Those bonds being issued today are being used largely to finance the President’s policies, which have reversed the $433 billion surplus that CBO 

projected for this year when the President took office, and instead produced a deficit of over $400 billion. Much of the bonds being bought by 

overseas investors today are being used to finance tax cuts and the war in 

Iraq. Why are they, and our obligation to repay them, somehow different 

than the bonds in the Social Security Trust Fund? 

Response: 

First, we need to clarify what the sources of change have been in the fiscal outlook. The U.S. economy had a recession which began in March 2001, then endured 

the terrorist attacks, then faced the revelation of corporate wrongdoing. These unforeseen factors of course had a large impact of the revenues of the Government. 

Additionally, American policymakers wisely increased spending on defense and 

homeland security to win the war on terror. This also increased the deficit, but was 

an absolute necessity. 

By proposing tax cuts in 2001 and 2003, the President sought to increase the 

economy’s prospects, both short and long term, by removing some of the barriers in 

the Tax Code to increased work, savings and investment. Since the enactment of 

those tax cuts, the economy has grown at almost 4% per year and the American 

people have created 3 million jobs. 

The markets have recognized that these deficits are short term, are not large relative to the economy, and that the tax cuts, if made permanent, will spur long term 

growth. Market set interest rates have stayed at moderate levels, and net interest 

on the debt last year (the Government’s annual cost of borrowing) was the lowest 

in 30 years. 

As to the similarity between the publicly held debt and Treasury securities in the 

trust fund, it is accurate to say that the publicly held debt owned by domestic and 

foreign investors must be redeemed by either rolling over the debt, increasing tax 

revenue, reducing spending below what it could otherwise be, or some combination 

of the three. In that sense, it does not differ from the debt held by the Social Security Trust Fund. 

However, it is precisely because the government must generate funds in order to 

redeem debt that does not, in and of itself, help the government to fund the Social 

Security system. To the extent that a bond in the trust fund is an asset to Social 

Security, it is a debt to the remainder of the Federal Government. 

That’s why it’s time to strengthen and modernize Social Security for future generations with growing assets that workers can control, that they can call their 

own—assets that the government cannot take away. 

If the President’s proposals are adopted, workers who choose PRA’s would personally own the assets within those accounts. 

While Social Security can continue to pay scheduled benefits until the trust fund 

is exhausted, it would be irresponsible to wait until the exhaustion date to modify 

the program to make it solvent. The longer reform is delayed, the more difficult it 

will be to make Social Security solvent. 

Question Submitted by Representative Stark 

Question: 

The FY 06 budget includes $74 billion/10 for tax credits to purchase either ‘‘traditional’’ individual coverage or a high-deductible health plan 

(HDHP) with an HSA. Yet, even this level of spending leaves significant financial gaps for these families. 

How much of the $74 billion do you estimate will be spent on each of 

these options? 

How many people do you estimate will enroll in each of these options? 

How many of those enrolled do you estimate were previously uninsured 

and what is the data source for these estimates? 

Current law requires deductible limits to be a minimum of $1,000 for an 

individual, $2,000 for a family, and a maximum of $5,000 for an individual 

and $10,000 for a family. However, many plans are not clear about what is 

covered, which leads to spending that does not count toward either the deductible or the out-of-pocket limit. How will consumers know in advance 

what out-of-pocket costs do and do not count toward their policy? 

In the non-group market, can issuers use medical underwriting to refuse 

to sell a HDHP? Can they charge certain applicants higher premiums, 

based on their health history? Can they exclude certain body parts or conditions, based on the applicant’s health history or history of someone in 

59 

their family? If so, how will people be assured there is an affordable product available on the open market? 

Please provide examples that would fall under the IRS’ definition of a 

‘‘qualified medical expense’’ for HSAs. For example, how are prescription 

drugs treated? Would air filters or other non-medical devices be covered? 

The President claims that HDHPs will control costs. 

What are your underlying assumptions for this policy? 

What are your estimates of necessary vs. unnecessary spending by individuals currently? 

How do you define unnecessary spending? 

How much will aggregate health care spending be reduced as a result of 

high-deductible plans? 

If you project aggregate savings, how much will come from underuse of 

services vs. a reduction in prices vs. ‘‘more careful shopping’’ by patients? 

What are your data sources and assumptions for making such estimates? 

What effect would unmanaged chronic conditions or deferred treatment 

of illnesses have on future Medicare costs? 

How many HDHP policyholders are projected to actually use their benefit (vs. simply pay premiums for coverage they cannot afford to access)? 

Previous independent analyses from the Academy of Actuaries and others have indicated that widespread adoption of HDHPs/HSAs or similar 

policies would dramatically increase premiums for traditional insurance. 

What does the Administration assume happens to premiums for traditional 

policies? 

Administrative costs for the Health Care Tax Credit are approximately 

$35 million per year, while payments for insurance coverage are $62 million. It’s a remarkably inefficient system to help people maintain coverage. 

Yet, enrollment in the Health Care Tax Credit program is low, at just over 

13,000 individuals. Given the additional complexity of income verification, 

identification of eligible persons, and the much larger number of potential 

enrollees, can the IRS realistically implement this program by 2006? If so, 

how much does the IRS plan to spend on administration of the new tax 

credit proposals? How much will outside contractors receive? 

Advanceable credits are based on the last year’s income tax filing. If income increases during the year, will the IRS make an attempt to collect the 

overpayment? If so, what is the administrative cost associated with this activity? Is it reflected any where in the budget? 

Because HSAs are exempt from all taxes, including payroll taxes (e.g., 

contributions by employers are not taxed), they reduce funding for the 

Medicare and Social Security trust funds. How much does the Administration estimate is lost to each Trust Fund as a result of (1) current law and 

(2) adoption of the President’s HSA proposals in this budget? 

The budget provides $28.5 billion to allow individuals an above-the-line 

deduction to offset the cost of premiums for a high-deductible health plan 

sold in conjunction with an HSA. 

How many people do you estimate will take this deduction? 

What is the estimated take-up by AGI and/or income tax bracket? 

How many people taking this deduction were previously uninsured? 

Why is the President proposing a special additional tax break for these 

plans when even conservative analysts have indicated that the extra tax 

preference will distort the health insurance market? 

As you are well aware, many states are facing tight budgets, and as a result are being forced to cut back on Medicaid, S–CHIP, and other programs 

that help vulnerable populations. Yet, the President’s health tax proposals 

and other tax cuts in the budget will decrease state revenues. Will you 

please specify the effect the President’s tax proposals will have on state 

budgets? 

Response: 

Why is the President proposing a special additional tax break for these plans 

when even conservative analysts have indicated that the extra tax preference will 

distort the health insurance market? 

The credit is designed to provide an incentive to purchase catastrophic coverage 

while giving consumers flexibility in choosing the kind of plan that best meets their 

needs. The HDHP combined with an HSA provides individuals with an additional 

choice. Given the uncertainty of how people will choose between the myriad of plans, 

we do not have an estimate of how many will choose the HSA option versus the 

non-HSA option, although it is likely to be small. 

60 

The Administration strongly supports allowing consumers to choose the plan that 

best fits their needs. One aspect of ownership and choice requires that individuals 

take the responsibility for reading their plan documents and checking with their 

doctors to become informed about what is paid for by insurance as well as to become 

informed about the most effective way to take care of their medical needs. 

Under current law, states regulate the non-group market. Depending on the state 

law, HDHP issuers can use medical underwriting, charging some applicants higher 

premiums and rejecting other applications. Without underwriting, insurers would 

have to charge higher premiums discouraging many individuals from obtaining any 

coverage. For those with the highest risk, many states have high-risk pools that cap 

premiums or partially subsidize coverage. 

Generally, as provided under the statute, qualified medical expenses for HSA purposes are qualified medical expenses under section 213(d) of the Internal Revenue 

Code—amounts paid for the diagnosis, cure, mitigation, treatment or prevention of 

disease, or for the purpose of affecting any structure or function of the body. Thus, 

the costs of prescription drugs would generally be a qualified medical expense. For 

purposes of HSAs, qualified medical expenses are in some ways broader than those 

expenses allowed as itemized deductions, in that nonprescription drugs may also 

qualify as a reimbursable expense. At the same time, the definition is somewhat 

narrower, in that except for certain situations, health insurance premium costs may 

not be paid by an HSA. 

You also ask about whether amounts paid for an air filter or other nonmedical 

devices would be qualified medical expenses. This issue existed prior to the enactment of the HSA law; the IRS and the courts have been addressing this issue with 

respect to the itemized medical deduction since its enactment, and those rulings and 

decisions are generally controlling for purposes of HSAs. 

Whether or not a particular expense that was not medical on its face would be 

allowed as a medical expense is a facts and circumstances determination. Under the 

regulations relating to section 213 in existence prior to the enactment of HSAs (and 

still applying for purposes of HSAs as well as the medical expense deduction), a capital expenditure which is related only to the sick person and is not related to permanent improvement or betterment of property, if it otherwise qualifies as an expenditure for medical care, shall be a qualified medical expense; for example, an expenditure for an air conditioner which is detachable from the property and purchased 

only for the use of a sick person. (The IRS has issued a number of rulings addressing this question with regards to air conditioners.) On a related matter, the IRS has 

ruled that a vacuum cleaner purchased by an individual with allergy to household 

dust would is not a medical expense, and the Tax Court has ruled that the cost of 

installing a dust elimination system in a home is not deductible as a medical expense. 

Low deductible health insurance that covers smaller more routine spending as 

well as coverage for catastrophic events provides a moral hazard to consume medical 

care that may be of little value because someone else is paying for it. In addition, 

coverage for smaller more routine expenses increases health insurance premiums. 

By separating smaller more routine expenses from catastrophic coverage, premiums 

are reduced and individuals are given the right incentive to be cost conscious on the 

smaller ticket items. As a result, each individual together with their doctor will decide what care is necessary. On the other hand, some individual may receive better 

catastrophic coverage because of the out-of-pocket limits. These limits could potentially help some individuals with high cost chronic conditions to receive better coverage than under other products. 

True insurance is designed to protect against very high cost low probability 

events. Individuals benefit from insurance even if they do not have a high cost event 

in a particular year, just as homeowners benefit from insurance even when their 

house does not burn down. 

HDHPs can also cover preventive care before the deductible is met. Insurers have 

an incentive to cover preventive care that is medically effective but not care that 

is of questionable value. 

As part of the estimation process, the Treasury department uses health insurance 

premium forecasts provided by the Office of Management Budget. 

Although premium increases have implicitly been taken into account with a number of other interacting factors in the analysis, they have not been explicitly estimated. The potential for premium increase or decrease depends upon the specifics 

of the HDHP/HSA rules as well as the insurance markets, nongroup or employer, 

and the structure of alternative choices. It is too soon to tell the result of HSAs. 

We have been learning much about the administration of tax credits from the 

HCTC program experience, and this experience will be enormously helpful in implementing a new tax credit for lower income individuals. Under the budget proposal, 

61 

the advance payment component of the new credit would not become operational 

until July 2007. Given the knowledge and experience we have from the HCTC, we 

believe that July 2007 is adequate time to prepare for the new tax credit. 

The administration does not at this time have a formal projection on the administrative cost for the proposed tax credit. We are still refining the HCTC operations 

to be more efficient, and we believe that these improvements will be transferable 

to the new program. Finally, you ask about the potential use of contractors for the 

new tax credit. This will depend very much on the final structure of the new credit. 

For the HCTC, because of the newness and the uniqueness of the concept and the 

short timeframe for implementation, it was essential that we recruited contractors 

to provide the necessary skills and services to meet the legislative requirements. 

However, we will have to consider the administrative costs and approach for the 

new credit as the mechanism is designed. 

The credit amount if taken in advance is determined by the previous year’s income so there is no need to make adjustments for current year income. 

Although the exemption of HSA from payroll taxes reduces funding for the Medicare and Social Security trust funds, reductions in employer contributions due to 

lower premiums and a shift in compensation to taxable wages has an offsetting effect. Overall, the changes are not expected to materially affect the trust fund balances. 

The budget provides $28.5 billion to allow individuals an above-the-line deduction 

to offset the cost of premiums for a high-deductible health plan sold in conjunction 

with an HSA. 

Although the proposal will increase coverage, the proposal also changes the health 

care insurance market in two key ways. First it provides a tax preference for 

nongroup insurance. Unlike self-employed individuals and individuals who are covered by employer-provided health plans, individuals purchasing nongroup health insurance generally do not receive favorable tax treatment. Providing tax preferences 

in the individual market will give many individuals wider choice of affordable 

health insurance. Many other individuals, particularly those who work for small employers, do not have any tax preferred health insurance options under the current 

system because their employers cannot afford to offer coverage. The proposal will 

make insurance more affordable for these individuals. Secondly, by linking the tax 

preference to high deductible health insurance, the tax preference encourages consumers to be more cost conscious buyers of health care. 

We are unable to determine the effect of the President’s tax proposals on state 

budgets. We would note that Federal tax proposals generally will impact both state 

receipts and state spending. For example, Federal budget proposals that increase 

health coverage for currently uninsured individuals reduce potential demands for 

health benefits from state programs. Also, as noted above, the Federal tax preference for HSAs will increase, not decrease, the Medicare and Social Security receipts as lower premium costs for employers tend to shift compensation to taxable 

wages. This shift would increase taxable wages for purposes of State income taxes. 

To the extent that States, as many do, rely on the Federal income tax law as a 

starting point for State taxable income, States are free to (and, in the past. often 

have) adjust the State tax base by rejecting some Federal inclusions or deductions 

or incorporating additional changes. Because of these potential adjustments to State 

tax bases, we cannot predict the impact of Federal budget changes on the State 

budgets. 

Question Submitted by Representative Herger 

Question: Mr. Secretary, the Administration’s budget includes a provision 

that would impose an excise tax on non-profits that do not enforce the 

easements that they hold. We have recently seen a number of articles in the 

Washington Post—one entitled ‘‘Loophole Pays Off on Upscale Buildings’’— 

that raise great concerns about tax abuses relating to conservation easements. It is my understanding that the Senate Finance Committee is considering a more aggressive approach to stop this abuse and the Joint Committee on Taxation recently included in its report Options to Improve Tax 

Compliance and Reform Tax Expenditures a proposal that would disallow any 

charitable deduction taken with easements relating to a personal residence. Do you have a view on the Joint Tax Committee’s recommendation 

and would Treasury consider such an approach to clamp down on tax 

abuses relating to conservation and facade easements? 

Response: 

62 

The Administration believes that the current law policy of encouraging gifts of restrictions on real property that protect ecologically sensitive lands and preserve historic properties is a good one. However, we share many of the concerns expressed 

by the Joint Committee on Taxation in its report. As you mention, examples of flagrant abuse of the tax benefits of donating conservation and facade easements have 

been reported in the press in the past year, most involving inflated deductions and 

phony appraisals. 

The Administration’s budget proposal would address non-compliance by imposing 

a penalty on a charity that fails to enforce a donated easement. The penalty would 

be based on the appraised value of the easement. An organization that accepts a 

donated conservation easement has a duty to monitor and enforce the restrictions 

for which a charitable contribution deduction was allowed. We will continue to consider the JCT proposals in our effort to balance the important goals of preventing 

abuses and encouraging easement donations that preserve nature or heritage, especially in areas not protected by local zoning. 

The Internal Revenue Service also is taking steps to address the abuses under 

current law. In Notice 2004–41, the IRS warned taxpayers that taxpayers claiming 

improper easement deductions face a disallowance of the deduction and possible 

penalties. The IRS also plans to revise tax forms and instructions to provide more 

detailed instructions on proper valuation of donated easements and to require additional reporting about these gifts. 

Questions Submitted by Representative McDermott 

Question: When the actuaries at Social Security estimate the system’s solvency they provide a range of estimates, once of which relies on a prediction that our Gross Domestic Product (GDP) will rise by an annual rate 

of 1.8 percent. When was the last time GDP grew only by 1.8 percent? Is 

there any 10-year stretch in our history in which our economy grew only 

by 1.8 percent? If GDP grew by 3 percent each year, how long would Social 

Security be able to pay current benefits without changes to law? If the system could not, at some point, pay current benefits without changes to law 

if GDP grew by 3 percent per year, how much money would need to be injected into the Social Security Trust fund to ensure solvency for 75 years, 

or forever? 

You mention several times in your testimony that our economy is growing, is strong, and is the envy of the world. In fact, you even say that the 

reason we have a record high trade deficit is because our economy is growing too fast, compared to the rest of the world. The Federal Reserve raised 

interest rates for the sixth straight time last week to curb inflation by making sure the economy doesn’t grow too fast. Why do you insist that the 

economy needs stimulus and needs to grow through further tax cuts when 

the Federal Reserve insists the economy needs to slow down? Please explain why these are not conflicting policies. 

Response: 

You mention several times in your testimony that our economy is growing, is 

strong, and is the envy of the world. In fact, you even say that the reason we have 

a record high trade deficit is because our economy is growing too fast, compared to 

the rest of the world. The Federal Reserve raised interest rates for the sixth straight 

time last week to curb inflation by making sure the economy doesn’t grow too fast. 

Why do you insist that the economy needs stimulus and needs to grow through further tax cuts when the Federal Reserve insists the economy needs to slow down? 

Please explain why these are not conflicting policies. 

First of all, I’d like to restate the problem. It is not that the U.S. economy is growing too fast, but rather that other major economies are growing too slowly. For example, in the fourth quarter of last year, while our economy expanded at a healthy 

3.8 percent annual rate, the economies of three of our G–7 partners (Japan, Germany, and Italy) were actually in decline. 

While I don’t want to speak for the Federal Reserve, I don’t believe they are trying to slow the economy down. They have repeatedly characterized recent increases 

in the Federal funds target rate as a move from stimulus toward a neutral rate, 

not one which restrains growth. Chairman Greenspan, in his recent Monetary Report to Congress, said he still regarded interest rates as fairly low. Now that the 

economy is on solid footing, monetary policy accommodation can be removed. 

The goal of the Administration’s fiscal policy is the permanence of existing tax relief—not additional stimulus. Many important provisions of the tax relief passed in 

the past several years are scheduled to expire between 2007 and 2010. Among the 

63 

expiring provisions are marriage penalty tax relief, the current more generous child 

tax credit, reduced marginal tax rates, lower taxes on dividends and capital gains, 

and estate tax relief. We want to make sure these provisions continue to benefit our 

economy in the years to come. If these provisions were allowed to end, as is required 

by current law, it would amount to a series of tax increases that would be a serious 

drag on real growth. 

Real GDP growth equals the growth of hours worked plus the growth of real GDP 

per hour worked (productivity). As shown in the Table below, relative to the 3.3 percent annual rate of real GDP growth experienced during the 8-year period 1995 to 

2003, the slowdown in real GDP growth projected in the 2004 trustee Report (TR) 

for the 2016–80 period is about half because of lower growth in hours worked and 

about half because of lower productivity growth relative to recent levels. 

Real GDP Growth = Hours Worked Growth + Productivity Growth 

Time Period 

Annual Growth Rate 

Hours Worked 

Real GDP 

Per Hour Worked Real GDP 

1948–74 1.18 2.81 4.00 

1974–95 1.65 1.21 2.86 

1995–03 0.91 2.36 3.27 

2003–15 * 0.96 1.81 2.78 

2015–80 * 0.24 1.60 1.84 

* Projected in the 2004 TR. 

The projected slowdown in the growth of hours worked reflects the retirement of 

the baby boom generation. There is some debate about the extent to which individuals at retirement age may continue to work in some capacity, but the larger question is whether the productivity growth assumptions are too pessimistic, and how 

changes in those assumptions would alter the outlook for Social Security finances. 

As shown in the Table above, productivity growth averaged only 1.2 percent between 1974 and 1995, but has averaged 2.4 percent between 1995 and 2003. The 

trustees have been slowly raising projected productivity growth over the past several years in response to the persistence of the recent pickup in productivity growth. 

The ultimate productivity growth assumption was raised to 1.5 percent from 1.3 percent for the 2000 TR, and was raised to the current 1.6 percent assumption starting 

with the 2002 TR. This assumption is roughly consistent with the most recent forty 

years of historical experience surveyed in the trustees’ report. 

The 2004 TR estimates that a 0.5 percentage point increase in productivity 

growth would reduce the 75-year actuarial imbalance from 1.89 percent of payroll 

to 1.35 percent of payroll, and would delay the insolvency date by 6 years. An extrapolation of this finding to a 0.8 percentage point increased in productivity growth 

that would bring the ultimate assumption to the level experienced for 1995–2003 

suggests that the actuarial balance would be reduced to about 1 percent of payroll. 

The insolvency date for this case cannot be reliably extrapolated. 

However, the 75-year projections are an extremely misleading indicator of the effect of productivity growth on Social Security’s finances. Under current law, initial 

Social Security benefits tend to grow with economy-wide average real wages. 

Hence, a sustained increase in productivity growth would result in an immediate 

increase in payroll tax revenue that is followed much later by increased benefit payments. The 75-year scoring window captures a much larger share of the increased 

revenue than it does of the increased benefit payments. 

Beyond 75 years, a sustained increase in productivity growth does not significantly improve Social Security’s finances. 

The trustees’ report contains a stochastic analysis that shows how the future 

might be different from current projections. This year’s analysis shows a 95% probability that the program will enter into permanent cash flow deficits some time between 2013 and 2023. 

Questions Submitted by Representative Tanner 

Question: At the hearing, I asked about the increase in foreign holdings 

of United States debt. As you know, foreign holdings of U.S. debt have increased from approximately $1 trillion to nearly $2 trillion in only 4 years. 

64 

Considering foreign central banks control the bulk of foreign ownership of 

U.S. debt, their ability to affect our economy seems very real. I think this 

poses an economic and national security threat, should these governments 

choose to sell large volumes of U.S. securities on the open market resulting 

in valuation issues and interest rate escalation. 

As of November 2004, foreigners owned 44 percent of the debt held by the 

public. I asked you at what point foreign holdings of U.S. debt could become a problem for the U.S. economy and our National security. You responded that you wanted to avoid answering my question in a public 

forum. Therefore, I ask you to provide me with information regarding the 

Administration’s view of what, if any, percentage of foreign ownership of 

our publicly held debt creates a financial vulnerability with national security implications. 

It has been the Administration’s position that the current U.S. budget 

deficit is manageable and not large as a percentage of U.S. Gross Domestic 

Product (GDP). In 2004, the deficit as a percentage of GDP was Ø3.6%, in 

2003 it was Ø3.5%. Since the end of World War II, the U.S. has only accumulated deficits greater than Ø3.6% of GDP ten times. Is it the Administration’s position that the structural deficits of the Federal Government, especially given our future demographic challenges, are manageable as a percentage of GDP? 

Federal Reserve Chairman Alan Greenspan recently stated, [the deficit] 

‘‘situation suggests that international investors will eventually adjust their 

accumulation of dollar assets or, alternatively, seek higher dollar returns 

to offset concentration risk.’’ 

It seems to me Chairman Greenspan is saying, we can’t go on like this 

much longer. A borrower who runs up huge debts will become a bigger risk 

to lenders. Presently, the U.S. is a huge borrower. Last Friday, the Russian 

central bank confirmed that it has started pegging the ruble to a basket of 

currencies rather than solely to the dollar. This action will likely provide 

a major source of long-term euro buying. For the first time in almost 70 

years, the dollar has a rival currency in the euro. During the past 2 years, 

the world has gone from having only 12% of global bank reserves in euros 

to 35% today. 

It appears that the Administration has abandoned the ‘‘strong dollar’’ policy. Do you think that the United States runs the risk of the global economy loosing faith in the dollar and what is the Administration doing to ensure that the value of the dollar does not continue its sharp decline? 

Response: 

It appears that the Administration has abandoned the ‘‘strong dollar’’ policy. Do 

you think that the United States runs the risk of the global economy loosing faith 

in the dollar and what is the Administration doing to ensure that the value of the 

dollar does not continue its sharp decline? 

The Administration faces two distinct deficit challenges. The ways to address 

these two separate problems are different. It would be a mistake to mix the two 

problems and two solutions together by talking only about whether the ‘‘deficit’’ is 

manageable as a percentage of GDP. 

We have a ‘‘short-term’’ deficit problem, which we are addressing in our FY06 

budget proposal. We have argued that deficits are sometimes appropriate, and we 

have been in one of those periods recently. We have had to ramp up defense and 

homeland security spending to prosecute the war on terror and to improve our domestic security. We cut taxes to stimulate the economy as it struggled through the 

after-effects of the stock market decline and the uncertainty generated by the initial 

phases of the war on terror and revelations of corporate malfeasance dating back 

to the nineties. 

In the FY2006 budget, we’ve made a strong commitment to spend the public’s 

money appropriately and rein in spending to make long-lasting improvements in the 

deficit. The FY06 budget proposes a 1 percent cut in non-security discretionary 

spending and holds overall discretionary spending to 2.1 percent—below the rate of 

inflation. If we hold the line on spending we expect the deficit to decline to well 

below 2 percent as a percentage of GDP. 

We think that if we don’t hold the line on spending and revenue grows as projected then our ‘‘temporary’’ budget deficits will remain with us for a very long time. 

In that sense, our deficits could become structural, and not just related to the recent 

weakness in the economy. 

The Administration firmly believes that long-term structural budget deficits do 

matter. A long string of structural budget deficits strongly suggests that government 

spending is out of control. Too much government spending for too many years actuVerDate Aug 31 2005 02:29 Mar 11, 2006 Jkt 023912 PO 00000 Frm 00068 Fmt 6633 Sfmt 6621 E:\HR\OC\23912.XXX 23912
65 

ally slows the long-term growth of the economy, by diverting resources away from 

the private sector, which is the source of the goods and services and jobs that keeps 

our nation prosperous, strong, and resilient. 

Our longer term deficit challenge is related to the expected increases in outlays 

for the Social Security and Medicare Programs, which will balloon in the coming 

decade as the Baby Boom generation retires. OMB estimates that outlays for these 

two programs alone will rise from 6.6 percent of GDP in 2005 to 16.8 percent of 

GDP in 2075. Traditional fixes to budget deficits—like cutting discretionary spending and/or raising taxes—simply cannot do the job of balancing the budget with the 

current expected increases in outlays for these two programs. 

Putting Social Security on a sustainable path is the first step to dealing with the 

long-term deficit challenge facing the U.S. The administration firmly believes that 

some form of personal retirement accounts (PRAs) is needed to keep Social Security 

secure for future generations. 

Holdings of U.S. Treasury securities by all foreign residents, as described in the attached table, are estimated to have been $1.9 trillion, or 52.8% of privately held 

public debt, at the end of December, 2004. The total holdings of all foreign official 

institutions is estimated to have been $1.1 trillion, or 32.0% of privately held public 

debt at the end of December, 2004. Foreign holdings of Treasury securities are distributed among many official and private foreign investors. 

To put this in perspective of U.S. capital markets, privately held public debt is 

only about 15% of the domestic nonfinancial credit market. The U.S. capital market 

is the deepest, most liquid, and resilient in the world. 

Our policy remains one of a strong dollar. A strong currency provides a reliable 

medium of exchange and serves as a stable store of value, which are very much in 

the interest of Americans. 

The increase of the U.S. current account deficit over more than a decade has been 

linked to domestic U.S. capital formation increasing more than U.S. saving. 

U.S. economic fundamentals—with low inflation, flexible labor markets and vigorous productivity growth—are extremely strong, especially in international comparison. This combined with an efficient and secure U.S. capital market make the 

U.S. an attractive foreign investment destination. The Administration is committed 

to growth enhancing, economic policies that keep U.S. fundamentals strong and 

maintain the confidence of U.S. and foreign investors in our economy’s future. 

Questions Submitted by Representative Becerra 

Question: Do you disagree with the assessment made earlier during the 

hearing that the amount of revenue generated by not making tax cuts permanent for the wealthiest 1% would be sufficient to make Social Security 

solvent for the foreseeable future? 

Response: 

Question: Do you disagree with the assessment made earlier during the hearing 

that the amount of revenue generated by not making tax cuts permanent for the 

wealthiest 1% would be sufficient to make Social Security solvent for the foreseeable 

future? 

The recent tax cuts have had no effect on Social Security’s finances. Social Security benefits are financed entirely from payroll taxes and there has been no change 

to the payroll tax system since the Administration took office. If non-Social Security 

taxes were raised, those moneys would not be available to fund Social Security benefits. 

Program revenues, including Trust Fund accumulations, are used exclusively to 

fund outlays. Since the enactment of those tax cuts, the economy has grown at almost 4% per year and the American people have created 3 million jobs. Repealing 

those tax cuts would harm the economy in the short and long term, and that is not 

going to provide any sensible fix to Social Security. 

Questions Submitted by Representative Doggett 

Question: The House Republican Study Committee has said that the Administration’s approach is too timid by allowing worker’s to invest 4 percent of their pay in private accounts and that it ought to go to 6 percent, 

which would be almost all of the employee’s contribution to Social Security. Why isn’t the Administration proposing that? 

Response: 

Question: The House Republican Study Committee has said that the Administration’s approach is too timid by allowing worker’s to invest 4 percent of their pay in 

66 

private accounts and that it ought to go to 6 percent, which would be almost all 

of the employee’s contribution to Social Security. Why isn’t the Administration proposing that? 

The Administration settled on a 4 percent contribution rate as sufficient and appropriate. A major advantage of PRAs is that they ensure that pre-funding of retirement incomes occurs in personal accounts rather than the Social Security Trust 

Fund. The Administration believes that any attempt to pre-fund retirement incomes 

in the trust fund encourages excessive spending in the non-Social Security budget, 

which has the effect of making the pre-funding illusory. The accounts proposed by 

the Administration are sufficiently large as to make real pre-funding of retirement 

incomes possible, and to build substantial nest eggs for millions of American workers. 

Questions Submitted by Representative Thompson 

Question: We are told that this budget has identified about 150 programs 

for elimination to save the government money. Last year, the Federal budget identified 65 programs for elimination—and that was supposed to save 

us about $5 billion. But, Congress only eliminated 5 of those programs for 

a net savings of $292 million. I agree that non-performing programs should 

be reviewed and when appropriate eliminated—and I agree that any dollars we can generate in savings are critically important. However, is it realistic for this Administration to base this budget in part upon the savings 

generated from program cuts—when it has never successfully gotten those 

program cuts through Congress? 

Response: 

Question: We are told that this budget has identified about 150 programs for 

elimination to save the government money. Last year, the Federal budget identified 

65 programs for elimination—and that was supposed to save us about $5 billion. 

But, Congress only eliminated 5 of those programs for a net savings of $292 million. 

I agree that non-performing programs should be reviewed and when appropriate 

eliminated—and I agree that any dollars we can generate in savings are critically 

important. However, is it realistic for this Administration to base this budget in 

part upon the savings generated from program cuts—when it has never successfully 

gotten those program cuts through Congress? 

The President’s FY06 budget, like budgets submitted by all presidents, is his administration’s set of proposals for the fiscal year and beyond. The administration’s 

proposals are the result of careful planning and thought, representing the best estimates of the costs and benefits available. They reflect the President’s goals. It would 

be inappropriate for the proposed budget to limit proposals only to those that had 

already been backed by a majority of Congress. 

In this budget, we propose more than 150 reductions, reforms, and eliminations in non-security discretionary programs, saving about $20 billion in 2006 alone. We 

were guided by three major criteria for evaluating programs: (1) the program should 

meet the nation’s priorities, (2) the program should meet the President’s principles 

for using taxpayer resources, and (3) the program should produce the intended results. 

By holding government spending to these accountability standards, we are trying 

to make sure that tax dollars are spent wisely and that the essential business of 

the government be carried out by taking the least possible amount of money from 

American taxpayers. 

The FY06 budget proposes a 1 percent cut in non-security discretionary spending 

and holds overall discretionary spending to 2.1 percent—below the rate of inflation. 

If we hold the line on spending we expect the deficit to decline to well below 2 percent as a percentage of GDP. 

The Administration firmly believes that structural budget deficits do matter. A 

long string of structural budget deficits strongly suggests that government spending 

is out of control. Too much government spending for too many years actually slows 

the long-term growth of the economy, by diverting resources away from the private 

sector, which is the source of the goods and services and jobs that keeps our nation 

prosperous, strong, and resilient. 

Questions Submitted by Representative Larson 

Question: The first question that is on the minds of a number—people 

who meet with my mother, they are called The Golden Girls, and they are 

from the greatest generation. What they wonder is why we just don’t pay 

67 

the money back. They are concerned about all this talk about surplus and 

deficit, and they have been a generation that witnessed a great deal of sacrifice. They want to know in plain language why don’t we just pay that 

money back that we owe. 

Secondly, they want to know, and it is especially important given Mr. 

Rangel’s concerns about—and mine and others about the Social Security, 

the transition costs not appearing in the budget, the cost of the war currently and ongoing not in the budget. They want to know is the war being 

funded with the Social Security surplus? Because, in their generation, they 

sacrificed, and there were funds that were created especially, and they specifically went on drives and they paid as they go for this effort. They see 

this as contrary to all the kind of sacrifice that they had. 

Thirdly, and the question was posed by many Members here about thrift 

savings and the idea that—even as was mentioned before about possibly 

with the AARP sitting down to make sure that these go into safe accounts 

if the President’s plan were to be followed. Well, the question is why don’t 

we take the existing account of Social Security within the context of Social 

Security and apply those same financial tools without having to take it outside of the system and privatize it? Wouldn’t that give them greater assets 

and greater return with a greater amount of money? Those are the questions that my constituents pose. The final question is more one of a little 

bit—I know that there is no discussion of politics and ideology, but the 

question that they have is it seems to them, at least a generation that believed in the common wealth going toward the common good, that the ownership society smacks of a ‘‘me society,’’ and where we are exalting the individual at the expense of the collective good. I know that that is somewhat 

philosophical and ideological, but I would appreciate your comments. 

Response: 

The President has made it clear that Social Security will remain unchanged for 

anyone who was born before 1950. 

The Social Security Trust Fund’s bonds represent obligations to pay Social Security benefits. When those IOUs need to be redeemed, future generations will either 

have to raise taxes, reduce Social Security benefits, cut other programs, or run larger budget deficits. 

It is important to remember that even with every bond held in the Social Security 

Trust Fund being repaid, Social Security would still become insolvent in 2041. So 

the issue confronting us is much more serious than simply the repayment of bonds 

held by the Trust Fund. 

The existence of bonds in the Social Security Trust Fund does not by itself answer 

the question of where the money will come from to redeem those bonds and fund 

future benefits. If it did, then all we would need to do to fix Social Security is to 

issue more bonds to the Social Security Trust Fund. 

Unfortunately, the bonds in the Social Security Trust Fund do not represent any 

real saving that the government has done. They only represent our obligation to 

generate funds in the future. 

That’s why it’s time to strengthen and modernize Social Security for future generations with growing assets that workers can control, that they can call their 

own—assets that the government cannot take away. 

If the President’s proposals are adopted, workers who choose PRA’s would personally own the assets within those accounts. Younger workers would not have to wonder whether the Government will ‘‘cut’’ the PRA’s, because they would own the assets themselves. 

The DOD budget has had no effect on Social Security’s finances. Surpluses generated by Social Security must by law be invested in U. S. Treasury securities. 

This process of crediting the trust fund with payroll taxes occurs regardless of 

whether the overall budget for the Federal Government is in surplus, in perfect balance, or in deficit. 

The President opposes investing trust funds directly in private markets. He favors 

the establishment of personal accounts within the current Social Security system. 

The personal accounts would be a part of Social Security, a way of making sure that 

some Social Security money is saved. 

Investing the trust fund directly in the private markets has two fatal flaws. First, 

it would be extremely difficult for the government to invest Trust Fund assets in 

a manner that all asset sellers would regard as fair, and the government would likely feel pressure to politicize the trust fund investment process. 

Secondly, a major advantage of PRAs is that they ensure that pre-funding of retirement incomes occurs in accounts that workers personally own, and would have 

68 

the ability to personally pass on to their loved ones at death, which is not the case 

with a collective fund. 

The Administration supports a progressive Social Security system whereby Social 

Security remains a better deal for low-wage workers than it is for high-wage workers. Making the Social Security system sustainable over the long run and letting more 

workers enjoy the benefits of financial asset ownership would enhance the common 

good of the United States. 

f 

[Submissions for the record follow:] 

Statement of the Embassy of the Government of Peru 

The Embassy of Peru congratulates the Ways and Means Committee of the House 

of Representatives for holding a hearing and receiving written statements regarding 

the President’s Fiscal Year 2006 Budget. 

We understand that the Office of Management and Budget (OMB) has presented a budget in the framework of the Andean Counter-drug Initiative of US$ 734.5 million ($ 3.5 million more than Fiscal Year 2005). Unfortunately, in said initiative the 

amount assigned for drug cooperation to Peru is US$ 97 million or a proposed reduction of more than US$ 18 million (-16%) in comparison to Fiscal Year 2005 (US$ 

115.37 million). 

Within the full respect for U.S. legislation, the Government of Peru would like to 

express its utmost concern about the proposal to reduce the amount for bilateral 

anti-drugs cooperation with Peru in the U.S. Budget for Fiscal Year 2006. We see 

this proposed reduction as counter productive, particularly if we take into account 

the significant progress made in the fight against drug-trafficking and the challenges we must face. 

Peru and the United States share the same interest to cooperate against illegal 

drugs as they see this matter as a grave menace to national and hemispheric security. That is the reason why the fight against drug-trafficking has been placed as 

one of the high priorities of the Government of Peru in the last years. Positive results based on this effort are at hand, where close to 30,000 hectares have been 

eradicated in the last three years and almost 14 tons of cocaine and basic paste of 

cocaine have been seized from drug traffickers in the same period. These results 

would have not been achieved without the commitment of our Government and the 

support provided by the United States. However, to continue with this effort, the 

valuable and important support of the United Stated is needed. 

Furthermore, the reduction of these cooperation funds will have a negative effect 

in the progress we have obtained in the fight against drug-trafficking. Due to the 

success of ‘‘Plan Colombia’’ on the eradication of coca crops, a ‘‘balloon effect’’ has 

developed, where new coca crops have started to grow in neighboring countries. We 

have to realize that from a regional perspective facing this problem will have a negative correlation effect for the interdiction and eradication success in other countries 

of the region. Issues like security, drug trafficking and terrorism are closely related 

and the support of the United States is vital to continue facing together, as partners, these new challenges. 

We believe that the House of Representatives has an important role to play in 

this matter. We also believe it has the power to re-examine the Administration proposal for Fiscal Year 2006 in regard to the Andean Counter Drug Initiative and, 

particularly, the proposed amount assigned for the cooperation with Peru. Therefore, we respectfully request that the proposed anti-drug cooperation funds for Fiscal 

Year 2006 be reconsidered or, at least, the amount provided by the U.S. Congress 

for Fiscal Year 2005 be maintained. 

Co-responsibility is relevant because drug-trafficking affects both countries. We have to stop the demand as well as the supply. 

The U.S. Congress is aware and very supportive of the efforts carried out by Peru 

in the fight against illegal drugs in the Andean Region. In 1991, U.S Congress approved the Andean Trade Preferences Act (ATPA) which was renewed and expanded 

by the Andean Trade Promotion and Drug Eradication Act (ATPDEA) of 2002. 

These U.S. laws have significantly contributed to coca eradication efforts in Peru by 

providing farmers and other populations at risk, with alternative economic activities 

to the highly profitable illegal crops. 

Thanks to the benefits provided by the ATPDEA, in 2004 our exports to the 

United States grew by more than 51.8 %. Textiles and apparel, agro-products and 

69 

gold jewelry lead the expansion of sales to the US, generating thousands of new jobs 

and improving the livelihood of peasants and workers in Peru, especially in rural 

areas. 

Our government is firmly committed to the fight against drug trafficking. It created the National Commission for Development and Life without Drugs (DEVIDA), 

to design, conduct, and supervise the anti-drug policy and rehabilitation programs 

in Peru. 

On January 21, 2005, the Peruvian Government approved an updated version of 

the Peruvian National Strategy to Fight Drugs 2002–2007, which focuses on four 

major actions: 

Reduction of the drug consumption and rehabilitation 

Interdiction 

Alternative development and protection of the environment 

Eradication and auto eradication of illicit crops 

These four actions have to be sustained in time and executed in a coordinated 

manner. 

It is very difficult to tell a ‘‘cocalero’’, a farmer who grows coca leaves, to cease 

his activities if we do not provide him with an alternative crop. A licit crop may 

generate sufficient profit for him to stop growing coca plants. In the areas where 

coca is grown there is not just one crop that may be harvested, but several like coffee, palm oil, cocoa, cotton, corn, peanuts and fruits. We currently have several 

projects for all these products. 

As stated previously, we have to give farmers a chance to develop alternative 

crops and protect the environment. The production of alternative crops is only feasible if they can be delivered to major markets, either in Peru or abroad, where they 

can be sold. In this regard, the U.S. Government is cooperating in the rehabilitation 

of the important road between Juanjui and Tocache, in the Peruvian rainforest, 

through the U.S. Agency for International Development (USAID). 

As far as the environment is concerned, we know that drug traffickers do not care 

about protecting the environment. All the chemicals used in the elaboration of cocaine and its derivatives, many of them highly toxic, are thrown into the rivers of 

the highlands and jungle of Peru, contaminating clean waters and endangering wild 

flora and fauna. 

Current drug cooperation between the two countries has led to important results 

in the fight against drug trafficking. The efforts of Peruvian authorities have been 

very important, and the projected goals or eradication have been achieved in the 

last two years. As shown in the following chart, in the last three years, almost 

30,000 hectares of coca crops have been eradicated, either through forced or voluntary eradication. 

Coca Crops Eradication (Hectares) 2002 2003 2004 

Forced eradication 7,134 7,022 7,605 

Voluntary eradication 0 4,291 2,733 

Total 7,134 11,313 10,338 

Source: DEVIDA 

Interdiction 

Alternative development and eradication are not the only actions that our Government has taken to fight against drug trafficking. Our National Police, in cooperation 

with foreign enforcement agencies, have been able to seize great amounts of cocaine 

ready to be shipped to the United States, Mexico and Europe. In comparison to 

2003, there was an increase of 71.69% in the amount of illegal drugs seized in 2004. 

Illegal Drugs (kgs.) 2002 2003 2004 

Seized: 

Basic Paste of Cocaine 10,439 4,366 6,329 

Cocaine 4,129 3,574 7,303 

Total 14,568 7,940 13,632 

70 

1 ‘‘The Seismic Shift in American Finance: Mutual Funds,’’ The Economist, October 21, 1995. 2The Mutual Fund Industry: An Overview and Analysis, Joint Economic Committee, United 

States Congress, February 2002. 3 Ibid, page 22. 

Security 

It is undeniable that there is a criminal link between terrorists and drug-traffickers, not only in our country but also in other parts of the world. Illegal profits 

obtained from drug-trafficking may be used to buy weapons, bombs, etc. for terrorists. This ‘‘alliance’’ must be considered a threat to security, not only on a national 

level but on the hemispheric and global arena. Currently, the actions of terrorist 

groups, as well as drug-traffickers are not limited by official borders of countries. 

We must take into account that these groups move and act in less protected places 

where they still feel safe. The way they are organized, they are able to transcend 

those borders, and become a threat to security. We must be prepared to face and 

fight this new threat. 

Due to the new and enormous challenges that we must face in the fight against 

drug trafficking, our Government truly and respectfully considers that anti-drug cooperation should be increased and not reduced. 

The above mentioned positive results in the fight against illegal drugs, based on 

the cooperation between our two countries, prove that there has been important 

progress in the last years. Consequently, we need to continue working together to 

face these challenges with the valuable support of the United States. 

f 

Statement of Paul Stevens, Investment Company Institute 

Chairman Thomas, Members of the Ways and Means Committee, I am Paul Stevens, President of the Investment Company Institute, the national association of 

mutual funds. On behalf of our many members who manage more than eight trillion 

dollars on behalf of nearly 90 million individual investors, I thank you for the opportunity to address the important tax, savings and retirement policy proposals the 

President has put forward for the coming year. 

I. The Mutual Fund Industry’s Role in Expanding Americans’ Access to 

Ownership 

Nearly half of all U.S. households—and nearly two-thirds of middle-income households—invest in mutual funds. Individuals from every walk of life choose to invest 

in mutual funds for the diversification, professional management and varying investment objectives that funds provide. Americans may invest in mutual funds 

through taxable accounts, retirement accounts, or qualified tuition programs (more 

commonly known as ‘‘529 Plans’’). 

The powerful impact that mutual fund popularity has had on the economy, on 

jobs, and on access to the markets for workers and small business is equally significant. Several years ago, The Economist reported that mutual funds had emerged as 

‘‘the biggest source of capital for American companies . . . giving small and medium-sized businesses unprecedented access to capital markets and thereby financing nearly all of America’s employment growth.’’1

In its 2002 study of the mutual fund industry, Congress’ Joint Economic Committee found that mutual funds provide increased savings opportunities for Americans and ready and stable sources of capital for America’s financial markets:2

The size and flexibility of mutual fund complexes, and of some individual funds, 

enable them to choose among a much wider range of investments than individual 

investors can. Mutual funds make markets in those investments more efficient by 

allocating capital so its marginal product tends to be substantially the same for different users. Mutual funds are just one of a few institutions that can, at the margin, 

bring supply and demand together for different types of financial instruments to 

maximize the aggregate real return on capital in society.3

In short,mutual funds are both an essential vehicle for enabling middle-income 

Americans to reach their long-term savings goals and an important source of capital 

and growth for the American economy. 

II. The Mutual Fund Industry’s Role in Preparing for Retirement 

Mutual funds play a particularly important role in helping millions of Americans 

prepare for a financially secure retirement. Funds are an important investment medium for employer-sponsored retirement programs (e.g., section 401(k) plans) as well 

71 

as for individual savings vehicles (e.g., individual retirement accounts (‘‘IRAs’’)). Of 

the $2.9 trillion in 401(k) plan and other defined contribution assets accumulating 

for American workers as of December 31, 2003, $1.4 trillion—almost half—was invested in mutual funds. Similarly, of the $3 trillion in IRAs, $1.3 trillion was invested in mutual funds. In addition to their role as important savings and investment vehicles, mutual fund companies also provide a broad range of services to defined contribution plans, such as 401(k) plans, and individual account plans, such 

as IRAs. These services include recordkeeping, tax compliance and reporting and 

participant education services. 

Intertwined as we are with Americans’ retirement savings, the mutual fund industry believes it can offer a helpful perspective on the urgent retirement security 

issues now central to so many challenges—challenges facing Washington lawmakers, regulators, businesses and working families. 

The President has launched a historic debate on both Social Security reform and 

retirement security proposals needed to strengthen the other legs of the retirement 

income stool—private pensions and individual savings. The President’s budget sets 

forth a number of specific provisions that we believe hold great promise for encouraging the growth and retention of individual savings, strengthening the economy, 

promoting the adoption and continuation of employer-sponsor pension plans to supplement savings and Social Security, and much more. We welcome the opportunity 

to assist policymakers in addressing these issues. With the growth of defined contribution pension plans, retirement planning increasingly involves individual decisions and individual education about alternatives that can seem quite complex and 

overwhelming. In fact, an ICI household survey found that about a third of those 

offered but not participating in a 401(k) plan did not participate because of confusion about plan features. We want to work with you to break through the complexity 

and to expand savings opportunities as the President has challenged us all to do 

together. 

III. Social Security 

To set our comments on specific tax initiatives in context, let me begin by addressing Social Security. The Institute believes it is imperative to ensure the permanent 

solvency and sustainability of the Social Security system. To this end, ICI commends the Bush Administration’s effort to develop and propose appropriate reforms 

of the system. And the Institute commends the Chairman’s leadership in encouraging all parties to be broad and creative in analyzing this challenge and seeking 

constructive solutions. 

The Institute strongly supports maintaining Social Security as a universal system, 

and one that provides a floor benefit to those many Americans who rely principally 

on Social Security for retirement income. Preserving the fiscal soundness and fairness of the Social Security system will help ensure Americans’ continued faith in 

and support of the program. 

The Institute thus strongly supports the Administration’s close and timely attention to Social Security reform. All credible reform options should be considered carefully. Under one such proposal, younger workers would have the option to place a 

portion of their Social Security contributions into a personal account invested in a 

government-sponsored fund or funds similar to those available to federal employees 

under the Thrift Savings Plan (‘‘TSP’’). The Institute believes that any proposal for 

personal accounts should be judged by whether they will bolster the permanent solvency and sustainability of the Social Security system. 

Personal accounts could provide other benefits in addition to retirement income. 

They would introduce many more Americans to basic principles of saving and investing. Encouraging American workers to focus more broadly on these basic principles could have very positive effects—including, for example, prompting them to 

make additional provisions for their retirement security through individual savings 

and employer-sponsored plans. 

If reform of the Social Security system entails opportunities for younger workers 

to invest in personal accounts, then care must be taken to protect them as investors, 

through measures similar to those in the federal securities laws, and to educate 

them about investing. The Institute has substantial expertise concerning such 

issues. Several federal agencies have important and intersecting roles to play in 

these areas and are hard at work with them currently in various initiatives aimed 

at improving disclosure to investors, making more comparable the information pension plan managers must analyze, and strengthening the tracking systems that will 

restore and enhance investor confidence in complicated systems needed to implement individual decisions in today’s changing retirement plan landscape. We look 

forward to working with the Administration and Congress as they consider a range 

of proposals to enhance retirement security. 

72 

4 Americans will be better positioned to build adequate retirement plans if they know now 

whether, for example, they will be able to contribute $2,000 or $5,000 to an IRA in 2011 and 

whether they will be able to make catch-up contributions. 

We welcome the ongoing efforts of Congress and the Administration to expand private retirement programs and savings opportunities and to simplify the rules governing them. As noted above, these private programs, such as IRAs and employersponsored plans, are also essential to Americans’ retirement security. The greater 

their success and the more widespread their use, the less pressure the Social Security system will be under in the future. 

Million of retirees today receive income above Social Security thanks to their employer-sponsored pensions and their savings. We know, too, that IRAs have been a 

tremendous success, particularly in the years in which decisions to save were not 

inhibited by the complexity of changing deduction and eligibility limits. However, 

we also know that much more is needed. Of the 151 million Americans working 

today, only 63.5 million, or less than half, are earning benefits under an employer’s 

retirement plan. We also know that savings opportunities through IRAs and other 

options have been constrained over time, often for revenue raising reasons, and in 

time those constraints may appear increasingly costly, so to speak. The President 

proposes several important initiatives promoting greater retirement security for the 

future and we welcome the opportunity to work with the Committee to bring them 

to fruition. 

IV. EGTRRA Permanence 

The Institute strongly supports the President’s proposal to make permanent the 

retirement and education savings provisions enacted by the Economic Growth and 

Tax Relief Reconciliation Act of 2001 (‘‘EGTRRA’’). Among the important improvements to our retirement system, EGTRRA: 

Increased contribution limits to IRAs—limits that had not been increased (even 

for inflation) since 1981; 

Increased the contribution limits to employer-sponsored retirement plans, such as 

401(k) plans, 403(b) arrangements, and governmental 457 plans; 

Provided for ‘‘catch-up’’ contributions to be made by individuals age 50 and over 

to employer-sponsored plans and IRAs; 

Made retirement assets significantly more portable, especially among different 

types of retirement plans, such as 401(k) plans, 403(b) plans, 457 plans, and IRAs; 

and 

Created additional long-term savings incentives for education savings vehicles 

such as section 529 Plans and Coverdell education savings accounts (formerly, education IRAs). 

Unless EGTRRA’s retirement and education savings provisions are made permanent, the restrictive savings rules that applied in 2001 will once again be law in 

2011. Making EGTRRA’s provisions permanent will promote economic growth and 

individual savings and financial security. For individuals to plan appropriately for 

their retirement years, they must be able to rely on predictable rules—rules that 

apply now and throughout their career and retirement.4 The future termination of 

these provisions could affect the long-term savings strategies of working Americans, 

undermining the purpose of these reforms and jeopardizing saving and long-term 

growth. 

V. JGTRRA Permanence 

The Institute strongly supports the President’s proposal to make permanent the 

important savings and investment provisions enacted by the Jobs and Growth Tax 

Relief Reconciliation Act of 2003 (‘‘JGTRRA’’), including reduced tax rates on capital 

gains and qualifying dividends. JGTRRA reduced the tax rate on long-term capital 

gains. The 20 percent rate has been reduced to 15 percent; the 10 percent rate has 

been reduced to 5 percent through 2007 and will be reduced to zero in 2008. Unless 

the changes enacted by JGTRRA are made permanent, the higher rates will be reinstated for tax years beginning in 2009. JGTRRA also reduced the tax rate on qualified dividend income (as defined in the Act) to the 15 percent and 5 percent capital 

gains rates. These lower rates expire after December 31, 2008. 

Just as employer plans and individual retirement savings habits are best served 

by consistent and predictable retirement laws, corporations and individuals are also 

best served by consistent and predictable expectations. Both individual investors 

and the financial markets need certainty in order to plan for the future. It is therefore imperative that the provisions of JGTRRA be made permanent 

73 

5 ICI Memorandum 18530. 6See Profiles of American Households Saving For College, ICI Research Series, Fall 2003. 

VI. Simplifying & Strengthening Private Savings Opportunities 

The Institute has long supported initiatives to enhance financial security by advocating efforts to encourage retirement savings through employer-sponsored plans 

and IRAs, to simplify the rules applicable to retirement savings vehicles, to enable 

individuals to better understand and manage their retirement assets, to encourage 

college savings, and to reduce the tax burden on other long-term investing through 

mutual funds. 

The President’s budget includes several important savings incentives. One bold 

initiative is the proposed creation of Retirement Savings Accounts, Lifetime Savings 

Accounts and Employer Retirement Savings Accounts. These three new retirement 

and savings vehicles would both enhance the ability of Americans to save for their 

future and simplify the current rules governing retirement plans. The Institute 

strongly supports savings and simplification initiatives that would bring long-term 

savings and investment opportunities within the reach of every working American. 

Comprehensive reform like the President’s proposals will significantly reduce the 

overwhelming complexity of our current savings system. Today’s rules governing retirement and education saving are simply too difficult to understand and too unwieldy and costly to administer. Simple universal savings vehicles, without age and 

income limits and other burdensome restrictions, will give Americans of all income 

levels and in all workplaces greater opportunities to achieve retirement security. 

There are other important retirement savings proposals that can enhance the effectiveness of those discussed above. They include proposals to automatically enroll 

employees in 401(k) plans, to offer new ways of efficiently managing small accounts 

for missing accountholders, to expand access to the investment advice that defined 

contribution plan participants need as their choices expand in number and complexity, and more. On many of these initiatives, the Administration has already 

taken the lead and we welcome the opportunity to work with the Congress as the 

entire retirement security discussion moves forward. 

VII. Clarifying Section 529 Qualified Tuition Program 

Helping American families save for the ever-increasing cost of college is a longstanding and important policy goal. Congress furthered this goal by enacting Code 

section 529 as part of the Small Business Job Protection Act of 1996 and granting 

certain federal tax benefits to these state-sponsored ‘‘529 Plans.’’ In 2001, EGTRRA 

significantly enhanced 529 Plans by allowing tax-free treatment of distributions 

used to pay for qualified higher education expenses. 

Congress’ efforts, particularly the EGTRRA enhancements, increased investor 

awareness and participation dramatically. Assets in 529 Plans more than doubled 

since 2002, increasing from $26.8 billion at year-end 2002 to $57 billion by September 2004. During the same period, the number of 529 Plan accounts rose to more 

than 7 million, and the average account balance was approximately $8,000.5 Although these statistics are encouraging, many Americans who want to save for college still do not save enough.6 Legislation making permanent the tax-free treatment 

of qualified deferrals from section 529 plans will remove uncertainty, encourage 

long-term savings for education, and enhance economic growth and productivity. 

The Institute supports prompt enactment of legislation making permanent this important savings program. 

The President’s budget includes proposals to clarify the gift and estate tax consequences of contributions to 529 Plans. Among other things, the Administration’s 

proposal would impose an excise tax of as much as 50% on certain distributions 

above $50,000 (computed on a cumulative, lifetime basis for each designated beneficiary). While the proposed clarifications are intended to eliminate transactions designed to avoid gift and estate tax consequences, they have the unintended effect 

of making 529 Plans significantly less attractive for American families saving for 

college. We look forward to continuing our dialogue with the Treasury Department 

to address its concerns without significantly compromising this important college 

savings tool. 

VIII. Deferring Taxation of Reinvested Mutual Fund Capital Gains Distributions 

The Institute strongly supports legislation that would permit the deferral of the 

payment of tax on capital gains realized by a fund until the fund shareholder receives the gain in cash, such as by redeeming fund shares. This proposal would remedy the result, misunderstood by many fund shareholders, that capital gains realVerDate Aug 31 2005 02:29 Mar 11, 2006 Jkt 023912 PO 00000 Frm 00077 Fmt 6633 Sfmt 6621 E:\HR\OC\23912.XXX 23912
74 

ized by the fund are taxed currently to the fund’s long-term shareholders—who continue to hold, rather than sell, their shares. 

If this type of legislation were enacted, the millions of fund shareholders investing 

in taxable accounts would benefit. These investors are mainly middle-income investors who are providing capital necessary for continued economic growth—their own 

and the country’s. At a time when the retirement community is struggling to prevent leakage of retirement savings, to encourage portability among retirement investments, and to address tax provisions that present obstacles to the retention of 

sufficient retirement savings to last through the much longer retirement many 

Americans now experience, it’s right that this idea, too, should be put forward in 

the tax and retirement debate. 

By reducing current tax bills and allowing earnings to grow tax-deferred, this 

change would boost long-term savings. The proposal would not result in these gains 

being excluded from tax. Instead, the gains would merely be deferred, albeit, in 

some cases, outside the relevant budget-scoring period. The proposal’s boost to longterm savings would have little, if any, long-term cost and would provide benefits to 

the economy in both the short run and the long run. It would eliminate an event 

that threatens to prematurely interrupt long-term savings, as would proposals to 

delay the minimum required distribution ‘‘start-date’’ that forces savings out of 

IRAs. 

IX. Conclusion 

The Investment Company Institute thanks you, Mr. Chairman, for this opportunity to be heard. We also thank you for your interest in related policy issues— 

for example, health care reform and additional savings opportunities for health care 

expenditures—that will be important complements to other savings initiatives and 

will help make retirement security an achievable goal. The Institute is proud of its 

research capacity, its expertise in economic analysis and its educational efforts to 

reach special populations with savings and investing tools, and we welcome the opportunity to work with you on the challenges ahead. Thank you for the opportunity 

to present our views. 

f 

Statement of Janie Williams, Ridgecrest, California 

Members of the Committee, 

I don’t have a ten page letter. I don’t have anyone else standing as a witness to 

the letter. I do have a reason to voice my opinion. I do have a right to voice my 

opinion. I just hope this request doesn’t fall on deaf ears. 

The way our nation is taxed needs to be changed. A person in Congress told me 

once ‘‘by its roots’’ is how you should pull our tax system up. That was a nice term 

to use. I think that the House and Senate need to stop putting off what can be done 

today. Maybe instead of just pulling by the roots, we need to use some Roundup 

too, just to top it off. 

With our taxes, the decisions need to be made in the present time. Not a few 

years from now. If the House and Senate were scientists, we’d never learn anything. 

You can’t judge something only my theories and statistics. It eventually has to be 

put into the laboratory. If the House and Senate were a laboratory and waited this 

long to find out if something works or not, the rats would all be dead! Okay, that 

isn’t a good comparison, I know. But, this isn’t only like the laboratory not doing 

anything, but the House and Senate decision making skills are a lot like the United 

Nations and the Sudan situation. Getting paid for no progress. To sit on decisions 

for such small arguments between parties is not acceptable. We need to get things 

rolling. I hope this doesn’t offend you all. I just want the guys and gals in the government to understand how much pressure there is on people to do their jobs and 

money is needed to do so. I am a teacher. With my job, money is very limited. We 

need more tax dollars for education. We need to decide where our tax money goes. 

If we had that Sales Tax, that would make everyone help pay the bill, even foreign 

visitors. 

There was the bill passed for No Child Left Behind. Now that it was passed, give 

us the REAL money to pay the bills it’s left us with. I hope that all those who work 

in the House and Senate will vote for the Sales Tax. It makes people remain responVerDate Aug 31 2005 02:29 Mar 11, 2006 Jkt 023912 PO 00000 Frm 00078 Fmt 6633 Sfmt 6621 E:\HR\OC\23912.XXX 23912
75 

sible for what they spend their money on and makes us the money instantly. We 

won’t have to waiting for the IRS to lose it. 

Æ