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THE LONG-TERM BUDGETARY OUTLOOK
WEDNESDAY, FEBRUARY 27, 2002
COMMITTEE ON THE BUDGET,
The committee met, pursuant to notice, at 10:05 a.m., in room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad (chairman of the committee) presiding.
Present: Senators Conrad, Stabenow, Corzine, Domenici, and Snowe.
Staff present: Mary Ann Naylor, staff director; and Sue Nelson, deputy staff director.
For the minority: G. William Hoagland, staff director.
OPENING STATEMENT OF CHAIRMAN CONRAD
Chairman CONRAD. I will bring the committee to order. There has been a vote scheduled for 10 or somewhat after that time, but we can anticipate a vote soon. But I wanted to begin with my statement and then defer to Senator Domenici, if he arrives. He may well be at the floor anticipating the vote right at 10 o'clock. If that occurs, Bill, will you just have him go ahead and reconvene us and assume the Chairmanship until I return. I would appreciate that.
First of all, I want to welcome Comptroller Walker to the panel. He has appeared here before. He is somebody that enjoys, I think on both sides of the aisle, strong credibility. I know I never fail to benefit from your thoughtful analysis, and we very much appreciate the thinking and the energy that you have put into helping us evaluate the long-term challenges that this country faces as we look to the future, understanding that what we are facing now is unlike anything we have ever seen before.
I think one of the problems Washington is having with this new fiscal environment is that it is substantially different than anything we have ever faced before. Always before, the following generation has been bigger than the one that was retiring, and that is about to change in a dramatic way. And it is very hard to fully understand how dramatic these changes are, and that is the reason we wanted to have this hearing today.
When you met with us last year, you advised that no one-and this is a quote "No one should design tax or spending policy pegged to the precise numbers in any 10-year forecast." How I wish more people would have listened to your wise counsel then. We could have avoided perhaps some of the very serious fiscal problems we now confront.
They say bad news comes in threes, and I am afraid that may be the case when it comes to the budget outlook this year.
First we learned from CBO in January that the surpluses we worked so hard to achieve have all but disappeared. Last year, CBO projected there would be some $5.6 trillion in surpluses over the next 10 years. Twelve months later, CBO reported to us that the surplus for that same period had dropped by $4 trillion, and that projection does not count the President's defense buildup, his request for homeland security or an economic stimulus package. It also presumes that the tax cut sunsets in 2010 as required under current law.
The second piece of bad news came in the form of the 2003 budget submittal from the President, which reduced the $1.6 trillion remaining surplus even further, reducing it by another approximately $1 trillion. And I suspect that when CBO does their re-estimates of the President's budget that they will tell us the circumstance is even worse than that.
Under the plan proposed by the President, we return to non-trust fund deficits for as far as the eye can see. These are CBO's numbers, and they show non-trust fund deficits for the entire next decade.
And I don't expect your news to be particularly good either, although we certainly can't blame the messenger. Since you did your level best to warn us about overcommitting the surplus last year, I expect to hear from you that the tax cut, the recession, and the attack of September 11th have taken their toll on the long-term budget outlook as well as on the short-term projections, making the task of addressing our long-term needs even more difficult.
The hard reality is that last year we were told that the non-trust fund surpluses over the next decade would be $2.7 trillion. And now we are told the non-trust funds can anticipate a $2.2 trillion deficit. Of course, where does that money come from? It comes out of the trust funds of Medicare and Social Security. There is no alternative but for that to be the case.
The decisions that were made last year and the current state of the budget have enormous implications for our long-term fiscal future. Really, that is the message of this hearing.
In your testimony last year, you advocated growing the economy through increased national savings and principally through running surpluses to pay down debt. Reducing deficits and running surpluses has propped up a steady decline in personal savings which stood in the year 2000 at seven-tenths of 1 percent.
In the United States, net national savings has risen substantially over the past 7 years, from 3.3 percent of GDP in 1993 to 5.5 percent in 2000. But the improvement in Federal savings more than explains the entire improvement in national savings. In other words, it is because the Federal Government has been running surpluses that our rate of national savings has increased.
Personal savings has been going down. National savings we got going up, and we got it going up by the Federal Government running budget surpluses.
Why is national savings important? National savings is important because that is the pool of money that is available for invest
ment. And it is investment which makes us able to grow the economy. It is these connections that are critically important.
You know, I think sometimes that when those of us who have talked for a long time about the need to be fiscally responsible and the need to run budget surpluses, especially in light of the baby boomers about to retire, I think some people in the public say, well, that a bunch of green-eyeshade guys who are worried about accounting and they are worried about things adding up.
Well, that is important, but that is not the real importance of the exercise. The real importance of the exercise is having economic growth in the future so that America can meet its long-term obligations.
Some say, well, you don't have to worry about it. The money is being credited to the Social Security Trust Funds. And that is true. The money is credited to the trust funds when it comes in in the payroll taxes. And then we have a special certificate, a treasury bond, if you will, that is in the trust funds. But there is no money there and those obligations are going to have to be redeemed in the future out of the revenue stream of the Federal Government.
Of course, we know the Federal Government has never reneged on its obligations. But that doesn't reduce the hard reality that a future Congress and a future President are going to face very difficult choices.
I am also very concerned that the dramatic decline in surplus resources leaves us little room to address the solvency of the Social Security Trust Funds. The President has put forth a budget that spends the Social Security surpluses in each year over the next decade. Further, his budget fails to account for the substantial implementation resources, some $1 trillion, according to Social Security actuaries, required for his Reform Commission Social Security private accounts plans. Each of the recommendations of his commission will cause significantly higher deficits than the President's budget currently acknowledges.
You know, a number of weeks ago I said this reminded me of Enron accounting. And I did it because on the way in that morning I heard a description of what got Enron in trouble, and what caused the problem for Enron was that it was hiding its debt-hiding its debt from its creditors, hiding its debt from its investors, perhaps even hiding its debt from themselves.
I am very concerned that the Federal Government is on that same path, that we are understating our long-term obligations, that we are, in effect, fooling the American people, I think even fooling ourselves.
This talk of surpluses to me is totally misleading. There are no surpluses. All the money is fully committed-in fact, it is overcommitted. And unless we face up to that reality, I am very concerned about what a future Congress and a future President will find when they go to the cupboard and the cupboard is bare.
All of this has been made more complicated by the tax cut passed last year, by the economic recession, and by the attack of September 11th. But we are going to have to face up to this as a society. Putting our heads in the sand, making believe that it is not there, making believe that these debts are not going to come true is not going to solve the problem.
So I hope very much that today, General Walker, you will give us the longer-term outlook, where we are headed as a country, and help us to understand how that fits in with our current budget deliberations.
The vote is now occurring on the Senate floor. There are about 5 minutes left. So I will recess the Committee and return. Again, I would ask that if Senator Domenici gets here before I return that he reopen the Committee and make his statement, and then we have an opportunity to hear from General Walker. I would ask that we wait until I return for Mr. Walker to begin his statement, if we could. [Recess.]
Senator DOMENICI. I ran into the Chairman en route. He suggested that I open the meeting and proceed with my opening remarks. He said he would be back soon, perhaps about the time I am finished. I had planned to yield to you, Senator, if you had some opening remarks, as soon as I am finished here. Senator CORZINE. Thank you.
OPENING STATEMENT OF SENATOR PETE V. DOMENICI
Senator DOMENICI. First of all, I want to say thank you to you again for joining us. I note that the title of this hearing is longterm budgetary issues, and I appreciate hearing GAO's assessment of the long term.
I do, however, want to be honest and say I suspect that it is not very different from what we have known for a decade, and you have presented the evidence that you are going to present in a slightly different way to us heretofore, indicating the demographics that confront this country with reference to the future.
When we look out 20, 30, even 40 years from now, the pressure from the demographic changes, especially of the baby-boom generation, will strain this Government if nothing is done to reform Social Security or Medicare. And I understand you told us that the last time you were here, and we had a little discussion about what it meant to reform them. Of course, in your position you were not talking about detailed reform within the programs but, rather, generally giving us some of your thoughts, which were very helpful.
But the story isn't new. There have been three commissions over the past decade whose missions have been to address long-term fiscal issues, and I assume that you and your people, as good as they are, have looked at all those and that the conclusions and the good thoughts have been incorporated in your discussion here today.
There was one commission on Entitlement Reform. I think we all remember it. It was led by Kerrey and Danforth. They were put on that to chair that with people having great enthusiasm that there would be major changes. Then there was the commission on the Future of Medicare, led by Senator Breaux and Representative Thomas, and then President Bush's commission to Strengthen Social Security. I see that all these reports contained information that is being summarized by you, Mr. Walker, and in a sense, given kind of a unity of understanding.
This Senator has always approached fiscal policy from a balanced viewpoint. Do what is best for the economy and the American people, both in the short term and the long term. That is getting more and more difficult to do. There is no question about it.