I am very pleased to have this opportunity to discuss the President's plans for ensuring the long-term health of Social Security and Medicare and its implications for the American economy.

The responsible fiscal choices we have made over the past six years have helped put the American economy on a path of unrivaled economic performance -- and now a new era of surpluses. But the need for difficult choices does not stop here. At a time of looming demographic challenges, how we decide to use those surpluses today will determine the future of our most important social programs, the choices available to future policy makers, and in no small part the future of the economy as a whole.

The President has made his choice clear: we should invest the surpluses in a way that supports our highest priorities: saving Social Security and Medicare and improving the productive potential of the economy. What matters now is that we all work to achieve that goal.

I would like to spend most of my time today describing the President's proposal and its strengths relative to other suggestions that have been put forward in recent weeks. I will end by addressing several concerns that have been raised with regard to our plan.

I. The President's Proposal

According to forecasts from the Office of Management and Budget, the federal government will accumulate more than $4.5 trillion in surpluses over the next 15 years. The president's budget proposal devotes 62% of these surpluses to the Social Security system; 15% to Medicare; 12% towards the creation of retirement savings accounts for American workers; and the remaining 11% for defense and other high priority investments. Of the roughly $2.8 trillion in surpluses that will go to Social Security, four-fifths will be used to purchase Treasury securities and one-fifth will be invested in an index of private-sector equities.

Substantial as that accomplishment would be, it is critical that we do more. Historically, the traditional standard for long-term solvency of the Social Security system has been the 75-year actuarial balance. A 75-year horizon makes sense because it is long enough to ensure that virtually everyone currently participating in the system can expect to receive full payment of current-law benefits.

Attaining this objective will require additional tough choices. But the objective is both important and obtainable. To reach it, the President has called for a bipartisan process. We need to work together, eliminating the need for either side to go first.

The solution that we reach through this process needs to ensure the health of Social Security in the future -- in a way that preserves its core strengths today. In particular, while all elderly Americans benefit from Social Security, it will be vital to remember the particular support it provides those with low incomes. More than three-quarters of the money income of households in the bottom two income quintiles comes from Social Security. More than 40 percent of those over 65 would be in poverty in the absence of Social Security. And, rightly, Social Security benefits are progressive: those with lower incomes get higher replacement rates.

The eventual bipartisan agreement for saving Social Security should also find room to eliminate the earnings test, which is widely misunderstood, difficult to administer, and perceived by many older citizens as providing a significant disincentive to work. And it must not lose sight of the important role that Social Security plays as an insurance program for widows and children, and for the disabled. That is why the President has proposed that the agreement should also take steps to reduce poverty among elderly women, particularly widows, who are more than one and one-half times as likely as all other retirement age beneficiaries to fall below the poverty line.

Although much of the attention on retirement savings focuses on Social Security, it is important to remember that Social Security is only one albeit an indispensable one -- leg of the three-legged stool on which the security of our retired population sits. Improved pension coverage and increased private savings will also have a critical role to play in meeting the demographic challenges ahead.

The president's plan addresses directly the broader challenge of expanding individual access to retirement saving, with the proposal to devote 12 percent of the surpluses to establishing a new system of Universal Savings Accounts or USA accounts. These accounts would provide a tax credit to millions of American workers to help them save for their retirement, and provide added momentum to the push to raise personal savings as the population ages.

II. Core Strengths of the President's Proposal

In effect, the president is proposing to use the Social Security and Medicare Trust Funds as lock-boxes, storing away about three-quarters of the surpluses for debt reduction or asset accumulation, and ensuring that they are not used for other purposes. Under the president's plan, publicly held debt would fall to about 7 percent of GDP by 2014 -- the lowest level since the United States entered World War I. Before 2020, we will have retired every dollar of that debt.

Paying down debt in this way will bring three critical benefits:

• It will relieve future generations of the burden of servicing yesterday's debts.
  

• It builds a direct link between fiscal virtue today and increased capacity to meet our Social Security and Medicare commitments in the future.
  

• It builds a politically sustainable framework for ensuring that the surpluses actually materialize.

Benefits of debt reduction

When President Clinton took office, interest payments on the federal debt were projected to eat up 27 cents of every budget dollar by the year 2015. As a result of the course we have charted, only 2 cents of every dollar of outlays will be needed to cover interest expenses 15 years from now -- a saving of about $1 trillion in that year alone. Indeed, the reduction in interest expense will more than offset the demographically induced rise in Social Security benefit payments through the first half of the next century.

No one here needs to be reminded of the benefits to our economy of paying down the debt and thus freeing up room in investor portfolios to hold productive private capital. It is no accident that these 6 years of renaissance for American business and the economy at large have been a period of unprecedented fiscal responsibility.

As a result of the deficit reductions we have seen in this decade, more than one trillion dollars in capital that would otherwise have been absorbed in public borrowing has instead been invested in our country's future: in our productive businesses, in our workers, in our cities and in our homes. This has been reflected in a more than doubling in our net national saving rate.

On the other hand, even today's higher net savings rate, of 7.5 percent, is still low: low relative to the rates that the United States achieved in the 1950s and 1960s, low relative to the majority of other industrial countries today, and, critically, low relative to the long-term needs of an aging population.

By paying down debt held by the public and investing in equities, the president's program will create $3.5 trillion more room in private portfolios for productive capital in place of government paper. The effect will be to "crowd in" private capital instead of crowding it out as was the norm in the 1980s.

As a result, interest rates will be lower than they otherwise would have been: indeed, a rough estimate is that the difference in our fiscal position today compared to 1992 may be worth as much as a 2 and a half percentage point decline in long-term Treasury rates. Lower interest rates mean lower mortgage rates, cheaper school loans -- and lower borrowing costs for businesses to continue the high level of investment in plant and equipment and other critical resources that has been such a hallmark of this present recovery. And that, in turn means a larger private capital stock, higher productivity, reduced budgetary pressures and higher standards of living for the nation as a whole.

A direct link between fiscal virtue and meeting future commitments

It is a mark of how far our national debate on these issues has come that there is now broad agreement -- as reflected in recent House and Senate budget resolutions -- with the critical thrust of the president's plan. Namely, that we should not fritter away the coming surpluses but use the bulk of them to lower the burden of servicing the national debt.

The consensus that now exists on this principle is no small achievement. But good intentions are one thing. The critical thing is to create a realistic and sustainable framework for ensuring that they translate into practice.

This brings me to the second core strength of the president's plan one that is not contained in other proposals that focus solely on drawing down debt. By paying down the debt, we create the fiscal capacity to help meet future commitments. But it is by placing Treasury securities in the Trust Funds that we ensure that Social Security and Medicare benefit from that increased capacity -- so that we meet our existing obligations before developing any new uses for these funds.

The President's proposal -- when applied to the latest estimates of their respective Boards of Trustees -- would extend the lives of the Social Security and Medicare trust funds until 2059 and 2015, respectively. By contrast, the House and Senate-passed budget resolutions do not improve the solvency of the Social Security and Medicare by one cent.

A politically sustainable recipe for ensuring the deficits materialize

By more directly linking the maintenance of the surpluses to the long-term health of Social Security and Medicare, the president's plan would also greatly increase the probability that the projected surpluses will actually materialize.

This point needs to be taken to heart. Already we have seen in recent budget debates that surpluses almost invite their own dissipation in demands for new spending and tax cuts. The direct link between the surpluses and the continued health of our most important social programs adds a crucial political underpinning to the goal of ensuring that the surpluses are not squandered as soon as they appear.

III. Response to Recent Questions about the President's Plan

In the weeks since the president's proposals were put forward there have been a number of important questions raised about them. Let me comment briefly on some of these.

Do the benefits of equity investment in the Trust Fund outweigh possible risks?

As I noted earlier, an important element of the president's framework is the proposal to invest part of the transferred surpluses in equities. This offers the prospect of raising the rate of return on the Trust Fund relative to the past practice of investing every cent in government bonds.

This is important because any step that raises the rate of return on the Trust Fund directly reduces the need to meet future demands on the system in other ways. Even the modest equity investment proposed in the president's plan would achieve as much, in terms of improving the 75 year actuarial balance of the Fund, as a 5 percent cross-the-board cut in benefits starting in 2030, or raising the normal retirement age by an additional year and a half.

We believe equity investment in the Trust Fund should be part of any overall framework for saving Social Security. On the other hand, we recognize that -- carelessly structured -- such investment could raise the possibility of political interference or abuse. That is why we have developed an institutional framework with a number of important safeguards.

Notably:

• With an apolitical independent board that would select private sector investment managers through competitive bidding;
  

• With investments limited to broad-based, widely-used funds;
  

• With purchases and sales strictly dictated by the cash needs of the Social Security system and no scope for market timing;
  

• And by limiting the share of Trust Fund assets that could be invested in equities so that they never account for more than a small fraction of the stock market;
  

• With this overall framework of constraints, or one like it, we are confident that these concerns can be overcome and the benefits of a higher rate of return can be realized.

Counting Your Chickens?

We all know that boom-times are times for mistakes of over-optimism and historically governments have scarcely been immune to this risk. This has led some to question whether, by making plans for investing future surpluses today, we are counting our chickens before they are hatched. To be clear: the President is proposing that we make the specified transfers into the Trust Funds regardless of whether our current forecast of the budgetary outcome proves accurate.

In fact, it is precisely because of the uncertainty of budget forecasts, especially those which extend several years into the future, that we believe we should substantially pay off the debt held by the public over the next 15 years rather than commit today to consuming them.

Put simply, in the event of any shock down the line, we will much better off having committed ourselves to saving the surpluses rather than committing ourselves to spend them or give them away in tax cuts. In addition, as I mentioned earlier, we believe that by tying the maintenance of the surpluses so directly to the future of Social Security and Medicare we can significantly raise the prospects of the predicted surpluses actually materializing.

Or Yesterday's Problem?

Ironically, perhaps, in recent weeks we have been beginning to hear doubts from the other direction: along the lines that the president's plan is being excessively pessimistic in calling for action to save Social Security and Medicare, where none is needed.

To be sure, with the federal surpluses now predicted, and particularly with the recent good news from the Boards of Trustees of the Medicare and Social Security Trust Funds -- suggesting that the lives of these Trust Funds have been extended several more years -- there will be a growing temptation to believe that we do not need to act to secure these programs for the future. But we cannot delude ourselves that the danger is passed or the challenge of preparing for an older society has been overcome.

As President Clinton has said, the correct lesson of these reports is precisely the opposite -- that with tough disciplined action we can extend the life of both these programs at the least cost to future workers and recipients. Now is the time to finish the job -- by dedicating today's surpluses to tomorrow's Social Security and Medicare needs. The desirability of the goals cannot be in question. Nor is our capacity to meet them. But we will all need to work together to make it happen. Thank you.