FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, Mr. Ranking Member, Members of the Committee, I appreciate the opportunity to appear before you today to discuss the President's plan for preserving Social Security, which I know to be of great interest to this Committee and others in Congress.

During the last six years, the United States has made enormous progress toward putting this country's budget on a sustainable long-term path. The core principle underlying the Social Security legislation recently put forward by the President is that we should work to preserve and extend that progress -- and ensure that its benefits are devoted as much as possible to meeting this country's long-term priorities.

In this context, I would like to address three topics:

• First, the dramatic fiscal progress that has been achieved in the 1990s and the benefits for the American people that have resulted;
• Second, the President's plan for maintaining this progress and ensuring that the savings it brings will not be dissipated; and
• Third, the broader significance of the President's plan and our further economic and fiscal priorities going forward.

It is fair to say that fiscal responsibility has been the centerpiece of this Administration's economic policy from its very beginning. In conjunction with strong economic growth, difficult and sometimes unpopular choices that we made in 1993 and 1997 have helped to turn years of unified budget deficits into a surplus.

In 1992, the unified deficit was $290 billion and projected to rise; in 1998, we achieved a surplus of $69 billion, and in the fiscal year just completed, the surplus increased to $123 billion. During the past two years, we paid down $140 billion of debt held by the public, the largest decrease on record. As a result, the debt that was held by the public at the end of fiscal year 1999 was $1.7 trillion less than was projected when President Clinton took office.

The result for the American economy is that we have moved from a vicious circle of rising debt and lagging economic performance to a virtuous cycle of fiscal discipline and continued strong economic growth. An additional $1.7 trillion that would have been absorbed by government borrowing has instead been invested in America's future -- in its businesses, workers, and communities.

With the resources that this progress has made available, business investment has surged, with purchases of equipment and software growing at double-digit rates for six years in a row. A rising capital stock, in turn, has contributed to a rise in workers' productivity: productivity in the nonfarm business sector has accelerated to a 2.1 percent annual average rate since the end of 1995 from the 1.4 percent that prevailed from the 1970s through the early 1990s.

And higher productivity, in turn, has helped produce higher real wages and higher standards of living. For the first time in a generation, we are seeing real wages rise. Most encouraging, real wage increases seem now to be reaching a broader spectrum of Americans, with low- and moderate-income workers benefiting in addition to workers further up the economic ladder.

When the Federal government reduces its draw on the pool of savings, interest rates fall. This decline not only lowers the cost of capital to businesses; it makes it easier and cheaper for people to borrow money to purchase houses, to buy cars and to send children to college. For example, a family with a home mortgage of $100,000 might expect to save about $2000 in mortgage costs each year. As housing has become more affordable during the past six years, an additional 8.7 million families have become homeowners, and the homeownership rate has risen to a record high.

A smaller debt also means lower interest costs for the Federal government. Net interest payments since 1993 have been a cumulative $191 billion lower than projected in 1993, which amounts to roughly $2700 per American family.

In all of these ways, our strategy of fiscal responsibility is producing tangible benefits for American workers, homeowners, and taxpayers.

A similar improvement has taken place in the stance of the government budget excluding Social Security. From a record high of $340 billion in 1992, the non-Social Security deficit, just like the unified budget, has improved in every year of the Administration. Building on the achievement of a balanced unified budget, the President, in his June budget review, highlighted the importance of setting a higher fiscal objective -- balancing the government's books without using the surpluses generated by the Social Security system.

Balancing the on-budget account would mean that the bonds accumulating in the trust fund would be matched very nearly dollar-for-dollar by a reduction in debt held by the public. Put differently, accumulations in the Trust Fund will truly represent accumulations of a national asset -- an increased capacity to meet our obligations to tomorrow's retirees.

This is the responsible way to prepare for the retirement of the baby boom generation: increasing the productive capacity of the economy and thus making tomorrow's workers more productive and better able to meet the benefits obligations that are promised under current law. The increment to national saving from following this approach would be dramatic: under current projections the debt held by the public would be completely paid off by 2015.

 II. The Right Principles for Preserving Social Security

This discussion brings us to the crucial question: If we achieve this degree of fiscal success, how should we use the interest savings that result? Should we use them for a tax cut, for additional spending, or for Social Security? The responsible answer to this question needs to take into account two important facts about the future.

First, the retirement of the baby boomers in coming decades stands to put great stress on Social Security, which is the cornerstone of our retirement system. Social Security benefits are the largest source of income for two-thirds of Americans over age 65 and the only source of income for 18 percent of them.

The system has enjoyed dramatic success in reducing poverty among retirees, helping to lower the elderly poverty rate from 35.2 percent in 1959 to around 10.5 percent in 1998 -- although poverty among certain groups, such as elderly widows, remains high. Without Social Security, nearly half of today's elderly would be in poverty. We should not forget that it is also a major family protection plan: nearly one third of Social Security beneficiaries is under the age of 62 and receiving either disability benefits or survivors' benefits.

The aging of our population will challenge all of these accomplishments. In fact, the Social Security trust fund is predicted to be exhausted by 2034.

Second, in making our budget plans we need to remember that the savings that would result from continuing on the current path of fiscal discipline would be very large indeed. If we follow the President's budget framework, the amount that the Federal government spends on interest payments, relative to the interest payments that would prevail if the government balanced the unified budget, would be $107 billion lower in 2011 and more than $200 billion lower per year by 2016. We believe that we should earmark those savings to meet the commitments to future retirees that are implicit in our existing Social Security system.

Let me now describe the four main principles underlying the President's approach:

The first principle is that we should respect the integrity of the Social Security Trust Fund. By ensuring that all of the Social Security surpluses are used to pay down debt, rather than finance other government activities, the President's approach enhances the Trust Fund's ability to contribute to the government's and the nation's capacity to meet its promises.

The legislation that we transmitted to Congress embodies this principle in specific rules. The legislation extends the discretionary spending caps and pay-as-you-go rules that have been very helpful in achieving fiscal discipline over the past decade. It also goes one step further, by creating a new point-of-order to protect the Social Security surplus.

The second principle is that the interest savings from the debt reduction coming from Social Security surpluses should be channeled into the Social Security Trust Fund. These transfers are the central link between our overall budget framework and Social Security reform. Essentially, we devote the savings we have earned from reducing one liability -- the federal debt held by the public -- to meeting another government liability, namely promised Social Security benefits.

According to the Social Security actuaries, the transfers we propose would extend the solvency of the Social Security system to 2050, compared with 2034 under current law. This approach of earmarking the interest savings from debt reduction can be distinguished from the lockbox proposals that have been discussed in Congress this year. These do not extend the solvency of Social Security by even one day -- since they do not direct those savings to Social Security and thereby help to prevent them from being used for other purposes.

In considering these issues it is worth thinking about the steps that a private company would take to address a financial shortfall in its defined-benefit pension plan. Clearly, the firm would look at ways to modernize and update the pension plan. But if it were enjoying extraordinary profits, and expected to continue to do so, then its first step would be to devote some of those profits to meeting the shortfall in its pension plan.

In much the same way, we believe there needs to be broad-based and bipartisan reform of Social Security. But we also believe that our first step should be to use the opportunity presented by budget surpluses to strengthen the program's finances today.

The third principle is that we should make provision for devoting the increased resources to Medicare that are likely to be necessary in the context of any responsible approach to assuring its future. Medicare has been a great American social policy success -- but there is now widespread agreement that the program requires basic changes if it is to continue that success in a new century. In fact, the Medicare trust fund is now projected to be exhausted by 2015, nearly two decades before the projected insolvency of the Social Security Trust Fund.

The reform of Medicare poses a wide range of difficult issues. The President has put forward a plan containing his proposals for modernizing Medicare and realizing the quality and cost advantages that increased competition within the system would offer. A number of other constructive reform proposals have emanated from Congress. But whichever route this country ultimately takes, most independent observers agree that even with reform, Medicare will require increased funding to extend substantially its solvency without damaging benefit cuts or tax increases. That is why we believe that we should combine reform with steps to assure the availability of increased resources for the Medicare system in the future.

The legislation that the President just submitted to Congress would reserve one-third of the projected surpluses from any use except for reform that extends the solvency of the Medicare program. To repeat, the President wants to work with Congress to achieve comprehensive Medicare reform, but we know that reaching an agreement on this complicated issue will not be a simple process. In the meantime, we should preserve the resources that will be needed to strengthen and modernize Medicare as outlined in the legislation that the President just submitted to Congress.

The fourth principle is that this nation's budget plans should be based on realistic discretionary spending plans. The discretionary caps have been very helpful in achieving fiscal discipline over the past decade. The President's plan extends them. But it would use some of the surplus, as part of a plan that extends Social Security solvency, to provide realistic levels of appropriations for the fulfillment of government's core functions.

This is a necessary and prudent response to the unrealistic spending levels envisioned, for example, in the current Congressional Budget resolution, which by 2009 would reduce nondefense discretionary spending by approaching 50 percent, assuming that defense were funded at the level requested by the President.

It is important, in considering the President's spending proposals, to remember that this is not a debate about making government bigger. It is about ensuring that government has the resources to fulfill its core functions. The executive branch non-postal federal civilian workforce has declined by about 16 percent since 1993 - representing more than 357,000 positions. Non-defense discretionary spending today is at its lowest level in 35 years. And for a family of four with median income, the burden of Federal income and payroll taxes is the lowest it has been in 20 years.

The President's plan would increase defense spending slightly in real terms, in order to ensure military readiness and an effective national defense. However, the plan would reduce inflation-adjusted nondefense spending, leaving it more than 10 percent below its current real level by 2009.

Overall, the growth of discretionary spending proposed in the President's plan would remain slightly below inflation as currently forecast. We believe that such cuts are feasible, if the spending is targeted at our critical needs. Deeper cuts, in our view, are not feasible if core government functions -- the services that every American taxpayer expects -- are to be maintained.

Some have said that any modest increase in discretionary spending is fiscally irresponsible. I would suggest that the opposite is true. The irresponsible course would be to build the nation's budget plans on the foundation of spending plans that we can safely predict will not be achieved.

As we have seen in this year's budget debate, unrealistic discretionary caps will be exceeded -- through emergencies that expand the term "emergency" well beyond its accepted meaning, or through other budgetary gimmicks. If we base large tax cuts today on the promise of unspecified deep cuts in future spending, we may create a situation in which the spending that ultimately occurs will lead to additional and unneeded government borrowing. The result would be to erode the enormous fiscal progress that this country has made -- and the enormous economic benefits that have come with that progress.

Respecting the integrity of the Social Security trust fund; channeling the interest savings from debt reduction to the Social Security trust fund; making proper allowance for Medicare; and budgetary realism -- if we could agree to respect these four principles going forward it would make a major contribution to America's economic and fiscal future.

It would be an important step for our economic future because it would continue the paydown of our publicly-held national debt, with a projected elimination of that debt by 2015. We would establish the principle of using the Social Security surplus to pay down debt rather than financing other government activities. And we would free up substantial new resources for business investment and housing, further reducing interest rates and the cost of capital, and boosting productivity and American living standards.

Respecting those four principles would be an important step for our fiscal future because we would realistically provide funding to help us meet the existing obligations of the Federal government that are not yet funded. We would extend the solvency of Social Security by earmarking for the Social Security Trust Funds the savings gained from using Social Security surpluses to pay down the debt held by the public.

Thus, the principles embodied in the President's budget and Social Security plan can provide a crucial foundation for our long-term economic and fiscal future. But they are just that - a foundation, not a completed edifice. Going forward we would need to build on this foundation, because even after passing this plan, important national challenges would remain.

Notably:

• We would still need to increase personal retirement savings, especially for the 73 million American workers who do not participate in employer-sponsored pension plans. In 1994, less than half of all individuals aged 65 and over received any private pension benefits.
• We would also still need to make further reforms of both Social Security and Medicare. As I have mentioned, the President hopes that his comprehensive Medicare reform proposal could help to provide a basis for bipartisan discussions of this critical issue in the near future.

 IV. Concluding Remarks

Mr. Chairman, as I have discussed, I believe that our strong economy and dramatically improving fiscal condition offer us an historic opportunity to address some of the core long-term challenges confronting our nation. Certainly, we may have very different views about how to respond to these challenges, but I hope we can all agree that this opportunity should not be wasted.

I look forward to working with you, Mr. Chairman, Mr. Ranking Member, and others in this committee and with others in Congress as we work to progress further on these critical issues in the months to come. Thank you. I would now welcome any questions.