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Senator Snowe.

Senator SNOWE. Thank you, Mr. Chairman.

Mr. Walker, continuing on the Medicare issue for a moment, how much worse is the Medicare program with respect to so-called surpluses? The fact is, as you know, a few years ago we shifted home health care services from Part A to Part B, so I think it camouflages, essentially, the real condition of the Medicare program with respect to the Part A fund.

Mr. WALKER. Senator, your point is outstanding. I mean, the fact of the matter is it reinforces the fact that we cannot focus solely on the trust fund issue, and we cannot focus just on Part A versus Part B. We need to look at Medicare on a consolidated basis. We need to look at it as a percentage of the budget. We need to look at it as a percentage of the economy.

These are metrics that are more meaningful than the trust fund. The trust fund just deals with solvency. It does not deal at all with sustainability or, stated differently, affordability.

Senator SNOWE. What would be the timeframe necessary to affect the position of both Social Security and Medicare in the years when it begins to have a negative revenue effect, in the year 2016, as you mentioned? So how many years in advance would we have to effect that date, in terms of a change of policy, that would begin to have a more positive outflow?

Mr. WALKER. Obviously, it is the old story; the sooner the better. As you know, Senator, is it is difficult to make changes to these programs. Historically, what has happened is there has had to be some type of a compelling event or condition that existed where Congress was forced to act. That is what happened in 1983 with the Greenspan commission. The checks were not going to go out. Well, needless to say, that is not an acceptable outcome for a variety of reasons, and so therefore that commission was formed to try to deal with an impending solvency problem. The checks were not going to go out.

We face a different problem today, and that is we do not have an immediate problem, but we have a major long-range problem, and we are much better off to try to start dealing with it earlier.

My personal view is, Senator, having been a trustee of Social Security and Medicare, having been involved in this for years, we can actually exceed the expectation of all generations of Americans for Social Security. The way you can do that is because, for current retirees and near-term retirees, if the Congress decided you were going to give them everything they have been promised, because, that is arguably the right thing to do since they do not have time to make adjustments, and from a practical standpoint, politically, it would probably be difficult to do anything else, and if you decided to restructure the Social Security program progressively, more changes for baby boomers, more changes for Generation Xers, then you will be able to exceed the expectations of all generations of Americans because baby boomers and Generation Xers are discounting what they think they are going to get under this program. Now, in many cases, they are discounting it more than they should be discounting it. So there is a window of opportunity to restructure that program to make it not only solvent, but sustain

able, and affordable, and exceed the expectations of all generations of Americans. We just have to get on with doing it.

On health care, that scenario does not exist. The gap between promises, and affordability and the expectation gaps, unfortunately, go in the other direction.

Senator SNOWE. On the issue of economic growth because, obviously, that had a significant effect on projected surpluses over the next 10 years, and, frankly, I think it was rather startling what we saw. I mean, with the reduction of economic growth in years 2002 and 2003, that led to a reduction in surpluses of $1.6 trillion over the next 10 years. So, even a minuscule adjustment in economic growth could work for us or against us.

I guess, what are your projections for economic growth over the next 10 years in the long run?

Mr. WALKER. We use CBO's.

Senator SNOWE. You use CBO's.

Mr. WALKER. We do not compete with CBO. They are the agency that Congress has chosen to make those types of assumptions, and we basically build upon what they do.

Senator SNOWE. Well, I think that in looking at this entire issue, and I do not know how we can do it differently, but I think it really does magnify the problems that we face with the tenuous nature of these projections in predicating, you know, a number of programs and expenditures on illusory projections because these revenues have not materialized. Just the spending that we have agreed to over the last few years has had an impact of more than $1.2 trillion in surpluses over the next 10 years.

So it may be that we do this, but having some sort of impact on the surplus on some of these programs that we pass, so that we have a clear idea of what we are doing each and every time in reducing the surpluses. The aggregate impact, I mean, was astonishing for the spending that we agreed to over the last few years. Mr. WALKER. Senator, we need some new metrics because the current ones are expiring this year, and we in GAO have done work, to look at what other countries have done, and we have made it available to Congress, and I am happy to make it available again as to how to do that.

Let me give you an analogy that I talked to Senator Corzine about just a few minutes before the hearing started, and that is our budget situation is very similar to what Christopher Columbus faced in his day. That was there was great debate about whether the Earth was flat or whether the Earth was round. Christopher Columbus thought it was round. Many others bet that it was flat, and he was going to go off the end of the Earth.

We have to recognize that, while there is inherent difficulties in even projecting 10 years, clearly, that is difficult enough, and while there is even greater uncertainty when you go further out, the fact of the matter is the Earth is round, and there is a tidal wave beyond the 10-year horizon. That tidal wave is called the baby boom generation, and that is not going away, and we have got to start dealing with it.

Senator SNOWE. Thank you.
Thank you, Mr. Chairman.
Chairman CONRAD. Thank you.

Senator Stabenow.

Senator STABENOW. Well, thank you, Mr. Chairman, as usual, for holding these hearings and giving us an opportunity to hear what is facing us. I appreciate, Mr. Walker, your public service and willingness to come forward and talk exactly about the facts of the situation.

Senator Snowe was talking about spending and how we have projected spending increases and impacts on the budget from decisions that have been made. I was sitting here doing some numbers, and when we look at the impact of the tax cut that was passed last year, and we look at what you are projecting in terms of unfunded liability, I find it interesting, at this point, we not only have choices about spending, we have choices about tax policy.

In the next 10 years or between now and the end of this decade-we are looking at $1.7 trillion coming out of the Federal budget as a result of the tax cut, and in the next 10 years, $4 trillion. You indicated to us there is a $3.8-trillion unfunded liability; is that what I understand?

Mr. WALKER. As of today. That is just for Social Security.

Senator STABENOW. So we are looking at $3.8-, in terms of Social Security unfunded liability, $4 trillion on the other side. I do not see how we can escape having a discussion about all of the decisions that have been made, not just part of the decisions that have been made, and the impact of that when we look at the fact that you were projecting a $2-trillion gap out into the future, and when you look at $4 trillion in lost revenue in the second 10 years of the tax cut. That is part of our challenge.

I know, Mr. Chairman, that you know that and have spoken eloquently, on many occasions, but there is a direct impact between what was done last year, not only spending, but I would argue even more so on the tax policy side and what you are talking about.

Given that, you have mentioned in your testimony that fiscal targets may be helpful as a new kind of budget mechanism, and I am wondering what you hand in mind. I am surprised that Senator Snowe did not mention what we usually talk about here, in terms of our working together on some kind of a budget trigger mechanism. But I am wondering, when you mention in your written testimony about fiscal targets, what you had in mind and if you feel there is a way to craft some kind of mechanism that would slow down the phase-in on either spending or tax cuts if we do not generate growth in the economy to be able to pay for that without going into debt.

Mr. WALKER. Thank you, Senator. Two things. On your first point, we advocated last year, and continue to advocate, the total portfolio management approach. You need to look at the tax side, the spending side, you need to look at it all and consider the fiscal risk.

Second, in my statement and also some other reports we do talk about some possible metrics or measures that the Congress could consider once the current ones expire; certain things as, for example, the percentage of debt to GDP. I know, Mr. Chairman, you expressed concerns about where they are going if we do not do something. So there are several ones that we have specifically laid out.

There are other ones that we would be happy to talk with you and the Committee about.

I think it is important that we have something. I think the other thing that is important is also to make sure that we do not just use those measures with regard to where we stand today.

We need to consider what are the longer term implications of current policy choices; in other words, not just where you stand on these metrics today, but if these were to become law, where is that going to take us in trying to deal with our longer range challenges because that is really the problem. There are a lot of things we can afford to do today, but in all likelihood we are not going to be able to sustain and afford them tomorrow.

Senator SNOWE. Thank you. I would just comment, in conclusion, for the record, because I always feel compelled, when we are talking about the tax cuts, to reiterate the fact that I support tax cuts. I think we all support tax cuts. The question is to whom and what impact they have on the economy, how they fit in the overall discussion on priorities.

My biggest concern right now, as it relates to what is unfolding with the tax cut, is that too many people, too many of my constituents, in fact, members of my own family now that are doing their taxes are finding out that the $300 they were given in the tax cut last spring or summer were actually advances on their tax liability. They are not very happy about that. And then when I explain to them that most of the rest of the tax cut, they will not be receiving, they are not very happy about that either.

When we put that in context, when we look at who is going to receive those tax cuts versus who benefits by Social Security, and Medicare, and the other funds that are going to be paying for that tax cut, I think it is very disturbing. I know you cannot comment on that, but I would just indicate that I think we have some very important choices to debate.

Mr. WALKER. Thank you, Senator.

Chairman CONRAD. Senator Corzine?

Senator CORZINE. Thank you, Mr. Chairman.

Mr. Walker, I am going to just take a step along the line that Senator Stabenow was talking about. She talked about in the next 20 years the 1.7 in the first 10 years and 4 trillion in the next 10 years, of the cost of the tax cut. If our people are doing this right, and actually I would love to have GAO do one of those lines breaking out discretionary spending and tax cut issues on that chart that you talked about, if you had it, if you did not have it, because I think those actually would give us some of the tradeoff judgments that we have to make, not a perfect tradeoff, but it allows us to see the policy implications of the tax cuts' costs to revenues and the discretionary spending's cost to revenues and implications for the economy.

But if we are doing it right, over the next 75 years, the timeframe that this footnote is addressing with regard to Social Security and Medicare, the tax cut is going to cost $7.7 trillion, and the addition here of the two pieces that you talked about on Social Security and Medicare are 6.5 trillion. I know that does not allow for Medicare, Medicaid and Part B, but we did make a choice that we have pulled away revenues. We made choices when we spend


money too, I understand, but we ought to understand what the implications of what that foundation is. It is very clear if we had not made that choice, we had the ability at least to cover the discounted values of the obligations that we had coming forward. And it is a matter of policy choice. Could have done that with spending as well, but

Chairman CONRAD. Although, of course, as you know, Senator Corzine, those would not have been dedicated revenues to Social Security and Medicare, and so whether or not the Congress would have spent that money for those programs is

Senator CORZINE. There is no question of that, but we did have the resources to meet these unfunded liabilities at our discretion, subject to self help, if we looked at those obligations and said that we wanted to at least dedicate those. And I think that is what the debate about the Social Security Trust Fund is about, is that there are those, as the Chairman has repeatedly stressed, that setting that aside leads to the kinds of implications that we might potentially have had the ability to meet those unfunded liabilities over a period of time. We clearly do not have that ability with the $7.7 trillion cut in taxes.

We have got, as you suggest, a portfolio of choices that we have to deal with here. One of the things I would love to see in that portfolio of choices is that same chart that you had, the very first one. You talked about both discretionary spending, how that chart would look if that was held the same, and then without those tax cuts, I think you would see a substantially-you would see a clear breakout of the choices.

Let me talk about something that is less controversial, about the value of tax cuts or not. Do we, anywhere in Government actually provide the transparency of what we are paying or what we are charging ourselves with regard to tax expenditures as opposed to cash expenditures? It seems to me that as we sit and debate policy choices in the Congress, it is very easy to identify what our expenditures are on programmatic issues where dollars go out the door. But when it comes to tax expenditures, whether it is for an individual tax break for a company or whether it is for 401(k) programs and pension retirements, it is very difficult to understand the discretionary choices we have made because those things are enacted into a tax code.

Is there a place where we could get a perspective on what we are actually doing with regard to tax expenditures, so that we could make the choice of whether tax expenditures were sensible relative to cash expenditures, which we are making on spending?

Mr. WALKER. Senator, that is an excellent question. My understanding is the Joint Committee on Taxation does periodically come up with the estimates of the amounts associated with current tax preferences. They call them expenditures. I would argue in certain circumstances that might be a fair term; in other circumstances it would not be.

For example, some of those tax preferences are timing dif ferences, as you know. The tax preferences that are provided to pension plans represent a timing difference. The employer gets the deduction today. The trust gets income exclusion-pardon me

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