The Tax Proposals in the President's Budget Have the Biggest Effect in the Last Two Years Despite the Economic Boom of the 1990's, Social Security's Long-Term Financing Gap has Actually Widened Social Security 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 Calendar Year 1992 Trustees' Report: Long-term Projections 2001 Trustees' Report: Long-term Projections Source: Social Security Administration The Concord SOCIAL SECURITY AND MEDICARE PART A IN CONSTANT 2001 DOLLARS 2001-2040 2001 2010 2020 2030 2048 Calendar Year Source: Social Security Trustons Raport, March 2001 lasermediate Projections 60% 50% 40% THE CONCORD The Current Trend in Entitlement Spending is Unsustainable* 30% 26.7 percent 18.2 percent 20% 10% 52.7 percent *Note: This chart reflects GAO's "Eliminate Unified Surpluses" simulation based on the CBO August 2001 baseline. In this simulation unified surpluses through 2011 are eliminated through permanent tax cuts and spending increases in equal proportions. Social Security, Medicare and Medicaid grow to such large shares of the economy [compared to what the actuaries project) partly because GDP growth slows dramatically as the deficits projected under this scenario subtract from national savings. The Concord Chairman CONRAD. It was excellent testimony. What I would like to do is kind of enter into a dialog here with you on the series of issues facing this committee as we attempt to write a budget resolution for the year. Let me start with something that you mentioned, Mr. Bixby, and that Mr. Lew mentioned as well, and that is the whole question of using Social Security Trust Fund money for other purposes. As you know, that has become an area of debate now. Does it matter? Some assert that it really doesn't matter because the way the system works, the funds that come in from the payroll taxes for Social Security get credited to the trust fund, and then how the money is used, some say, really doesn't matter. The money is owed to the trust fund. It will have to be paid at a future point. And so how the money is used in the interim is not a relevant question to the long-term viability of Social Security. What would your answer be to that, Mr. Bixby? You are focused here on maintaining the integrity of the trust funds or returning to a time of respecting the integrity of the trust funds. Why is that important? Mr. BIXBY. I think it is very important. We are running a deliberate surplus in the Social Security system right now. It is not an accident. The payroll tax is set at a higher rate than is needed to pay current benefits. That is done to attempt in some way to prefund future obligations, and the only way you can really do that is to use that money to increase savings. Paying down debt, for example, is a way to increase savings, increasing the resources the Government will be able to help-increasing the resources the Government will be able to use in the future to pay these benefits. You know, many have suggested personal retirement accounts. Many have suggested using the money to invest in some way collectively on behalf of the trust fund. Whatever method you use with that Social Security money, it ought to be going to prefunding current benefits. Now, if you are just using it to fund other operations of Government or to offset tax cuts for the income tax, then it is a misuse of the payroll tax because you are using a regressive system of taxation that applies on the first dollar to everybody, basically not for the purpose-you are breaking faith with the people you are taxing. In other words, you are taxing them at a higher rate than you need, and you are saying we are going to use this to help fund your benefits in the future, but we are really not. We are using it-we are spending the money now. We are crediting it to a trust fund, which is something of a hoax if you are not really doing something to set the money aside. If you are going to take in the money, spend it, and then credit a bond to the trust fund, you are not doing anything to help the Government pay off that bond in the future. So I think it really does matter. Now, I look at it as a national savings account, and if you are dipping into it-you might have to do it in an emergency, like we have now. I think that is understandable. But you shouldn't continually get into the habit of using your savings account to buy your groceries, and that is the sort of problem that we face. Chairman CONRAD. Mr. Lew, what would your answer be to the question of why does it matter whether you use the Social Security Trust Fund money to pay for tax cuts or other Government pro grams? After all, you have got more money coming in than going out-not this year and not next year, but over time. So since you are crediting the money to the trust fund, what difference does it make? Mr. LEW. Mr. Chairman, I think the real issue has to do with savings, as Mr. Bixby said, and paying down the debt enabled us to see a trend that was really going to make a difference in terms of our cash position at the point when the baby boom retires. If you think about the $3 trillion of national debt, if you are left with $3 trillion of debt instead of zero, at a 5 percent interest rate you are going to be paying $150 billion a year in interest. By saving, paying down the debt, you avoid the need to have that annual expenditure, and at the point in time when you need that $150 billion to pay Social Security benefits, it is really there if you have paid down the debt, and it is not really there if you haven't. I agree that it is dangerous to get too mechanistic about the year-to-year issue. We are in a recession-we are coming out of a recession, I hope. We have seen an attack on the country that required emergency expenditures. But that is very different from charting a whole new course that says it doesn't matter if we pay off the debt. It is going to be exceedingly difficult to pay the benefits that are due under Social Security out of current cash-flow. Now, what does that mean? It means that when you get to the retirement of the baby boom, there will be legal obligations owed to the Social Security Trust Fund. But if you are not running a surplus, in order to pay them you will either have to raise taxes or cut spending. That is a very, very different situation from having a forecast where you are running a surplus and you can pay the Social Security benefits out of your running rate. I would hope that we get back on the path. I am not as optimistic as Bob that a 5-year plan will do it. I think that it will be very difficult to get back on the path. One thing we learned over the period of time when we were paying down the debt was that saving the Social Security surplus was the only hard line people could understand. If it were possible to have another-a path that got us back toward there, economically it would serve a lot of the same purpose. The problem is that if you don't save it all, it looks like we can't save any of it. That is what this budget shows. We have to get ourselves away from spending all of it and be on a path toward saving, if not all, most of it. Chairman CONRAD. Let me ask you this. Another question that has come up is: Is there a Medicare Trust Fund? Put up the last chart there. If you look at the President's budget, it shows over the next decade that nearly $2.2 trillion of trust fund moneys are going to be used for other purposes: nearly $1.7 trillion of Social Security Trust Fund money, about $500 billion of Medicare Trust Fund money. So now a novel argument has been devised in which people say, well, there is really not a Medicare Trust Fund; there is no Medicare Trust Fund because there is Part A and Part B, and one part is in surplus, and that is the trust fund; the other one is spending general fund money. Therefore, there is really no trust fund. What say you on that question, Mr. Lew? Mr. LEW. Well, Mr. Chairman, I would respond, this was something that last year's budget asserted as a principle, and I know I personally was one who took issue with it, because it is contrary to current law. Current law divides Medicare into two parts. There is a hospital part and a doctors' part. The hospital part has a trust fund, and that trust fund runs a surplus. The doctors' bills have always been paid and by law will continue to be paid largely out of general revenue. To assert that that general revenue expense draws down the trust fund is contrary to the way the program is set up. One could change the program. One could say we want to take the Medicare Trust fund for hospitals and spend it on the doctor bills. But that is a change in law. It is not just something one can assume through projections. I think that given the fact that in 1997 you and I and many others worked together to put Medicare, the Medicare Trust Fund, on a path toward long-term fiscal solvency, it is actually a fairly dangerous idea to just wave a wand and make that go away. If you go to any hospital in this country, there is serious change, and pain in many cases, because of the law that was enacted in 1997. To now say that the surplus is not really there is not a responsible way to run the program. You can't ask for partnership from the providers to take cuts in order to provide solvency for the |