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Senator DOMENICI. But it is true that the numbers in the outyears would change with lower unemployment and slightly lower inflation.

Mr. CRIPPEN. They could in the next year or two, though in the long run it still depends critically upon the long-run trend for productivity and growth in the work force. And we haven't seen anything yet that would make us change that forecast from last January.

Senator DOMENICI. I am sure that we are going to hear as a result of your testimony today that the President's budget has cut non-defense discretionary spending over $188 billion over the next decade, and that number appears on the first page of your testimony. And let's see if we have this correct. This is a reduction from a baseline that the Budget Act mandates you produce and that mandates that the total discretionary_spending be constructed by taking the last appropriation act in Congress, including one-time emergency supplementals, and taking that number and inflating it all the way into the future. So the $20 billion in fiscal year 2002 emergency appropriation, following the September 11th attacks, is included in your baseline inflated all the way out to 2012. Is that correct?

Mr. CRIPPEN. That is correct, Senator.

Senator DOMENICI. And if the staff that has prepared me on this are correct, that accounts for over $200 billion in discretionary spending in your baseline.

Mr. CRIPPEN. That is correct.

Senator DOMENICI. About $40 billion for defense and $160 billion for non-defense.

Mr. CRIPPEN. That would be correct.

Senator DOMENICI. So this cut supposedly proposed by the President in non-defense discretionary spending is not really 188, but, in fact, is an increase in non-defense discretionary spending in 2003 by about $3 billion, and indeed a cut over the decade, but more like $30 billion, not $188 billion. Is that correct?

Mr. CRIPPEN. That would be correct from your numbers, yes. Senator DOMENICI. I thank you very much. Thank you, Mr. Chairman.

Chairman CONRAD. Thank you, Senator.

Director Crippen, I would like to direct your attention back to page 18 and the question of how big the deficits are if Social Security is not counted.

Mr. CRIPPEN. Right.

Chairman CONRAD. In 2003, as I read your table, the deficit, not counting Social Security, would be $297 billion if the President's budget proposals were adopted. Is that correct?

Mr. CRIPPEN. Right.

Chairman CONRAD. The next year the deficit, not counting Social Security, would be $245 billion.

Mr. CRIPPEN. Right.

Chairman CONRAD. And the next year, $187 billion. And going right out through the entire 10-year period, there is never less than $100 billion of deficit if Social Security is not counted. Is that correct?

Mr. CRIPPEN. Correct.

Chairman CONRAD. And, in fact, over the entire 10-year period, the total deficits, not counting Social Security, are $1.8 trillion. Is that correct?

Mr. CRIPPEN. Correct.

Chairman CONRAD. Let me just repeat that. If Social Security surplus funds are not included in the calculation, during the entire 10-year period the cumulative deficits are $1.8 trillion. That is correct?

Mr. CRIPPEN. Correct, yes.

Chairman CONRAD. How big was the tax cut over the 10-year period that was passed last year?

Mr. CRIPPEN. I am going to have to rely on my colleagues. $1.3 trillion.

Chairman CONRAD. Yes, and how much would the debt service cost of that be as well?

Mr. CRIPPEN. As I recall, over $300 billion, so it rounded up to $1.7 trillion for the total impact on the budget.

Chairman CONRAD. Total impact on the budget over the 10 years of the tax cut is $1.7 trillion, and the cumulative deficits, not counting Social Security, are $1.8 trillion. My ranking member said he doesn't see any connection between the two. I think there is a direct connection. The amount of the tax cuts the President pushed, proposed, pushed through Congress last year, is almost directly equal to the cumulative deficits over the 10-year period if Social Security funds are not included in the calculation.

Now, there has been a lot of talk about whether the tax cuts contributed to a shorter deficit. I certainly hope so because on both sides here we supported tax cuts last year, substantial tax cuts last year, to give lift to the economy. Isn't that the case?

Mr. CRIPPEN. Yes.

Chairman CONRAD. And we did so on the basis that tax cuts at a time of economic slowdown would give lift to the economy, would increase consumer demand. Isn't that the theory?

Mr. CRIPPEN. That is the theory.

Chairman CONRAD. And, in addition to that, we increased spending in response to the attacks on this country, and increased spending would also give lift to the economy at a time of economic slowdown. Isn't that the case?

Mr. CRIPPEN. It is generally thought to be, yes, depending on what you spend it on.

Chairman CONRAD. And so the one thing we agreed on last year is that we needed to do both those things. We needed to give tax cuts in the short term and we needed to have increased spending to respond to the sneak attack on this country, and that combination would give lift to the economy.

At the same time, many of us-I certainly argued that the magnitude of the tax cuts over the 10 years were too high and would threaten the Social Security Trust Funds. Some mocked me for that, said, no, these surpluses are so large that we can have a tax cut of this magnitude and not endanger the trust funds. That argument was made repeatedly. In fact, I had members on this committee tell me you are worried unnecessarily. These surpluses are too small. I was told that repeatedly, that there was even going to be more money than was forecast.

We didn't get more money. We got a lot less money. The result is we have got a tax cut that was put in place over the 10 yearsthat is the argument I have over the 10 years that is almost equal to the non-trust fund deficits we have over the next 10 years.

That means to me surpluses in the trust fund accounts are being used to pay for the tax cut and other spending. It is just as clear as it can be. The consequences of that are serious because the baby boomers start to retire in 6 years. And we know the whole thing doesn't add up.

And I want to make clear, I don't believe saving Social Security and Medicare Trust Funds solves the problem. I don't want to mislead anybody on that account. That is why the budget proposal I made last year not only saved those funds for the purposes intended, but also transferred money from the general fund, $900 billion to deal with these long-term liabilities, to in effect prepay some of that liability.

Director Crippen, have you analyzed what other countries are doing who face the kind of demographic change we are facing? Have you looked at any other countries who have got the same demographic profile that we do?

Mr. CRIPPEN. Not in a thorough way that I would be able to report on. I think the truth is that in many countries-and Japan, of course, comes to mind first—the outlook at the moment is even worse, for two reasons: first, they will have more of an elderly overhang, fewer workers supporting elderly, in part because they live longer; and second, without economic growth, which hopefully they are now just beginning to experience again, they won't have the kinds of resources we hope our country will have when the time

comes.

But that is an anecdotal, not a complete, look. We have not looked at other countries thoroughly.

Chairman CONRAD. I wonder if you would be willing to assign some people, if we were to make a formal request to you, that is, this committee, to look at a number of other countries that have the demographic profile we do and look at how they are addressing these long-term fiscal imbalances. You would agree, I take it—and I don't want to put words in your mouth, but would you agree that we face long-term fiscal imbalances that are serious and require our attention?

Mr. CRIPPEN. Yes, absolutely.

Chairman CONRAD. And how serious would you characterize those long-term fiscal imbalances as being?

Mr. CRIPPEN. Well, I have fairly consistently said that the changes, no matter what they are, that we need to make are going to be unprecedented, and that they will occur in a very short period of time, and that our budget will look different and the financing of it very different than it ever has.

So the changes are going to be quite stark. It is not a matter of saying that there is necessarily a pending crisis, certainly not to say that anybody currently on Social Security and Medicare needs to be concerned in the short run. But ultimately we are going to have to change our fiscal policy to accommodate the obligations, or at least the promises, we have made to our generation.

Chairman CONRAD. Is it true, in your judgment, that although all the payroll taxes are credited to the trust funds, credited to the Social Security Trust Fund, even though that is certainly the case, and there are assets in the Social Security Trust Fund, that is, Government bonds that are bearing interest, backed by the full faith and credit of the United States, that still a future Congress and a future President will face very difficult choices because those labilities will have to be redeemed out of the income, the future revenue of the Federal Government at a time those liabilities come due?

Mr. CRIPPEN. That is absolutely correct, Mr. Chairman. In 2011, or thereabouts, when the actuaries think that payroll taxes will be insufficient to cover benefits for Social Security, at that point the Social Security Administration will go to the Treasury with interest demands on the debt that is in there, and Treasury will then have to produce cash to pay those interest payments in order for the checks to be cashed. And in doing so, the government has only the usual three choices: raising taxes, increasing borrowing from the public, or cutting spending somewhere else.

And that is true whether or not there are trust funds and whether or not there are assets. So come 2011, what is going to happen in the fiscal situation of the country is identical with or without trust funds at that point. What is important is what happens between now and 2011 to make it easier to pay off those obligations, whether they are debt held by the trust funds or whether they are obligations, moral or otherwise, to sustain the elderly in these programs.

Chairman CONRAD. You are saying that the trust fund of Social Security goes cash negative in 2011?

Mr. CRIPPEN. I believe that is the right year.

No, actually we think it may be 2016.

Chairman CONRAD. 2016 is the year that we have been using, and I just wanted to check to make sure we are on the same wavelength. They go cash negative in 2016. The thing that is important about that, it seems to me and I would be interested in your take on it-right now the trust fund of Social Security is throwing off substantial surpluses. Is that not the case?

Mr. CRIPPEN. Yes.

Chairman CONRAD. That is going to change when we hit 2016. Mr. CRIPPEN. Correct.

Chairman CONRAD. What is allowing us as a Nation to foot these bills? That is, if you don't count Social Security, we have just gone through the numbers. We will be spending over the next decade $1.8 trillion more than is coming in. Isn't that the case if we are not counting Social Security?

Mr. CRIPPEN. Without the excess payroll taxes, yes.

Chairman CONRAD. Without the Social Security surpluses, they aren't counted and part of the calculation, we will run $1.8 trillion of deficits over the next decade. That is the run-up to the time that you have indicated the trust fund will start going cash negative. Then all of this changes, doesn't it?

Mr. CRIPPEN. Yes, Senator, in the sense that the obligations that we have to retirees at that point will not be fully funded by the tax system currently in place.

Chairman CONRAD. So what would that mean? In order to keep the promises made on benefits, you would have to have a dramatic tax increase, wouldn't you?

Mr. CRIPPEN. Tax increase, borrowing increase, or cut in other Government spending.

Chairman CONRAD. And we will be talking by large amounts. large tax increases, large increases in borrowing, large cuts in other programs. Isn't that the case?

Mr. CRIPPEN. Yes.

Chairman CONRAD. The Comptroller General testified that as they look ahead, under any of their scenarios, we are headed for at different time periods-they have three major scenarios. As they look ahead, they have different periods at which the situation becomes most dire, but under any of the three, the Comptroller General indicated we are headed for, with current law, with the tax cuts extended, that we are headed for deficits as a percentage of gross domestic product of 20 percent. Twenty percent of gross domestic product as a deficit. If we had deficits today of 20 percent of GDP, that would be a $2 trillion deficit, would it not?

Mr. CRIPPEN. Right.

Chairman CONRAD. How big is the total Federal budget?
Mr. CRIPPEN. $2 trillion.

Chairman CONRAD. $2 trillion.

Mr. CRIPPEN. Yes.

Chairman CONRAD. So if we had deficits of the magnitude that the Comptroller General of the United States is forecasting in our future because of these demographic changes, we would face deficits this year that are as big as the entire Federal budget. Isn't that the case?

Mr. CRIPPEN. Roughly. Think about it this way (at least, I find it a little easier) we are currently spending 18 to 19 percent of GDP for all Federal programs. The President's budget would have spending, I believe, at about 19.5 percent for next year. If our projections are anywhere in the ballpark, we will be spending 15 or 16 percent of GDP on Federal health retirement programs alone. So the Chairman CONRAD. When would that be?

Mr. CRIPPEN. By that point, it would be 2030, but the ramp-up is pretty significant, of course, between 2010 and 2030. So all of that is to say everything the Federal Government does today from defense on down spends about 19 percent of the economy. That is what it takes to fund it. Sixteen percent will be required to fund programs for the elderly in 2030. So the difference obviously is roughly 3 percent of GDP for everything else.

Chairman CONRAD. And that would only cover, as the Comptroller General told us, interest on the debt.

Mr. CRIPPEN. That could well be. So the point is

Chairman CONRAD. Right about everyone else, there would be no money for Medicare, there would be no money for Medicaid, there would be no money for defense.

Mr. CRIPPEN. Medicare and Medicaid were included in our 15 to 16 percent number, but everything else the rest of the Government as we know it-will obviously be squeezed into the 3 percent, if you didn't borrow or you didn't raise taxes.

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