House Ways and Means Committee - Board of Trustees 2004 Annual Reports
Federal News Service March 24, 2004 Wednesday
March 24, 2004 Wednesday
HEADLINE: HEARING OF THE HOUSE WAYS AND MEANS COMMITTEE
SUBJECT: BOARD OF TRUSTEES 2004 ANNUAL REPORTS
CHAIRED BY: REPRESENTATIVE WILLIAM M. THOMAS (R-CA)
WITNESSES: PANEL I:
JOHN W. SNOW, SECRETARY, DEPARTMENT OF THE TREASURY;
PANEL II:
RICK FOSTER, CHIEF ACTUARY, CENTERS FOR MEDICARE AND MEDICAID SERVICES;
STEPHEN C. GOSS, CHIEF ACTUARY, SOCIAL SECURITY ADMINISTRATION; DOUGLAS HOLTZ-EAKIN, PH.D., DIRECTOR, CONGRESSIONAL BUDGET OFFICE LOCATION: 1100 LONGWORTH HOUSE OFFICE BUILDING, WASHINGTON, D.C.
BODY:
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REP. THOMAS: I believe as we get to the actuaries and we've begun looking at it, fully up to two full years were lost off of the solvency table by virtue of the economic performance for Part A Medicare.
The gentleman from Illinois wish to inquire?
REP. PHILIP M. CRANE (R-IL): While I have said that I would pass my questioning, I did not mean that the Democratic side would not be entitled to question after you have finished yours.
REP. THOMAS: And they certainly are.
Does the gentleman from California wish to question? Mr. Stark.
REP. FORTNEY PETE STARK (D-CA): I will yield.
REP. THOMAS: The other gentleman from California.
REP. ROBERT T. MATSUI (D-CA): Thank you. Thanks very much, Mr. Chairman, and thank you, Mr. Ranking Member, for allowing me to go next.
And thank you, Mr. Snow, for being here with us. I just would like make one observation about Medicare, not in the form of a question. But the acceleration of the unfunded part of Medicare will accelerate by some seven years for the cash flow problem. But what you failed to mention is that two of the years is because of the legislation that was passed last December, mainly because we're shifting people away form the traditional Medicare system into HMOs by subsidizing HMOs, and secondly, obviously, by the rural health issue. So about 30 percent of the deterioration is due to that legislation.
What I really want to focus on, however, is Social Security, because you've spent your very early part of your comments regarding it. Assume for a minute that I favor privatizing, as the president does, part of the Social Security system. Assuming for a minute that I want to make, as he does, sure that current recipients and immediately future recipients will undoubtedly maintain their full level of benefits, there's going to be, as the three plans set forth in the president's commission recommendation, an unfunded liability. That is it will have to be made up in spending cuts or tax increases or borrowing, perhaps.
For example, plan one has a $1.5 trillion deficit in the first 10 years. Plan two, $1.8 trillion in the first 10 years, and plan three $1.4 trillion in the first 10 years. Mr. Shaw's legislation-and I would obviously prefer to have him comment on it, but I think it's important just to talk about it, because it is offered by a chair of our subcommittee. In the first 10 years, Mr. Shaw's plan will have an unfunded liability of $1.4 trillion. The borrowing peak will be in 2048, 44 years from now, when $7.6 trillion will be either in the form of deficits or tax increases or spending cuts in Social Security.
Which one do you think that I should support? And if not any of those, then what plan do you propose to come up with in order to make sure we don't increase the deficits, we don't increase taxes, and we don't cut benefits, as the president, in fact, has promised to do.
MR. SNOW: Congressman, of course the administration has not picked one of those three or any other option at this point. In appointing the commission, I think the president advanced the subject enormously by calling public attention to the underfunding and the need to find some --
REP. MATSUI: We all knew about it before he talked about, so don't assume we got it from him. We knew about this because we've seen actuarial over the last 20 years.
MR. SNOW: What I'm saying-and to help engender a broad national dialogue on this vitally important subject. The issue you raise of transition costs is really the recognition of the contingent liability. It's there. It's there, and since it is there, I would argue it's better to make it explicit than implicit. It's better to --
REP. MATSUI: If I may just interrupt because you --
MR. SNOW: -- make it transparent, rather than to hide it.
REP. MATSUI: -- I don't think you answered my question, but that's all right. It's not about a contingent liability, it's diverting money from the current payroll tax to private accounts. So how are you going to make that up in the next 10 to 75 years, which you're going to do by talking about this and by advancing this. If it ever became law, you're going to deteriorate the Social Security system. In fact, you're going to advance the cash flow problem. You're going to actually make the problem that you and I are really concerned about much worse.
MR. SNOW: What the commission's plans do-and I think commission plan two is laid out in some detail in the report of the President's Council of Economic Advisors. What it does, of course, is to provide a transition mechanism to fund the loss of revenues to the retirement system.
REP. MATSUI: Reduced benefit.
MR. SNOW: That's right.
REP. MATSUI: Reduced benefit.
MR. SNOW: (Cross talk) -- for some period of time. But then longer term, deficit and the budget are better.
REP. MATSUI: Well, but for some period of time-for some period of time, Mr. Secretary, means that those that were currently retired will have a reduction in benefits.
MR. SNOW: Well, they will not, no. The president --
REP. MATSUI: It's not like people are receiving this money for 75 years.
MR. SNOW: The president stipulated in appointing the commission that there would not be, for those who are retired or near retirement, any reduction in benefit.
REP. MATSUI: That's the president's position.
REP. THOMAS: The gentleman's time has expired.
The gentleman from Florida, the chairman of the Social Security Subcommittee, Mr. Shaw, wish to inquire?
REP. E. CLAY SHAW, JR. (R-FL): Yes, sir. Thank you, Mr. Chairman. And I appreciate the gentleman from Illinois letting me go out of turn here in order to ask a couple of questions and also respond to the chairman of the DCCC, who just characterized my plan as a huge deficit. And what the gentleman from California fails to point out, he does not recognize that the funds that are put in the individual accounts are an investment, an investment that is going to stand for future payments to future beneficiaries of the Social Security Trust Fund.
Also, my plan does not take a dime out of the Social Security Trust Fund, nor does it divert any of the payroll taxes. And I might say that under Mr. Clinton, President Clinton, it was scored in the long run, over 75 years, of not only saving Social Security for all time but it also was scored as creating about a $3 trillion surplus, instead of over a $25 trillion deficit that we are looking at now if we do nothing.
So I think to mischaracterize or to continue to play politics with Social Security is very bad strategy to be used, and particularly at this particular time.
And I might also say that when I think that the direction of this committee should be looking at the warning signs that are being thrown up, whether they're correct or incorrect, there's still warning signs that we have a huge problem here and we need to go and start talking about it. Now, the cash flow problem with Social Security is a huge problem, and it's one that we're facing beginning in 2018. And, Mr. Secretary, I'd like to ask you, the chart that's in the report shows Social Security cash annual flow deficits growing from $16 billion in 2018 to $787 billion in 2078. That's just one year. How can there be a cash flow deficit in Social Security when the trust fund balance in 2018, as represented by Treasury bills, is $3.7 trillion in today's dollars, the same for 2030, when the cash flow deficit is $256 billion but the trust fund balance is $3.2 trillion?
MR. SNOW: Well --
REP. SHAW: This is the chart I'm referring to that was in the report. I beg your pardon.
MR. SNOW: Yeah, sorry.
REP. SHAW: And I'm asking that it be passed down.
MR. SNOW: All right. Well, obviously what's happening here is we have the baby boom starting in 2010. We have people coming out of the denominator of the equation, and going into the numerator. And the fundamental math there is expenditures rise and payments don't rise at the same rate, they rise at a much lower rate, and the consequence is that wide gap that produces the un-sustainability of the system that you're trying to address with your legislation.
REP. SHAW: Yes, sir. I think it's very important to realize that this is the plan of doing nothing. And I'm sorry, but I think in looking after my children and my grandchildren, I don't want them facing a $20 trillion some deficit. And that's a negative cash flow and somebody's going to have to come up with the dollars, beginning in 2018. Now, that's a moving target. But to sit back and say, well, we're not going to run out of Treasury bills, all right, fine. You've got to get the cash to pay the Treasury bills.
And this Congress and a future Congress is going to have to start coming up with it. And if we start planning now and start investing money and forward-funding Social Security, we can solve this problem without cutting benefits and without running in the red in the long run. But we've got to plan ahead. And, Mr. Secretary, you can comment on the balance.
MR. SNOW: Well, I would only comment to say that there isn't a lot of uncertainty about these numbers. We know the names of the people who are in that cohort of retirees over the period 2010 to 2030, and if they retire, as we expect them to do, then we're going to produce these numbers. There's nobody coming in behind them to be the workers to fund their retirement. And that ratio, which is the all- important ratio of people paying in and people drawing down, worsens and worsens and worsens over that long period of time, and we have people living longer. And that combination of the baby boomer retirement and people living longer produces this set of numbers about which there can't be much argument.
REP. SHAW: Thank you.
MR. SNOW: This is basic math.
REP. SHAW: And thank you, Mr. Chairman.
REP. THOMAS: The gentleman's time has expired.
The chair understands the gentleman from Maryland, Mr. Cardin, wishes to inquire.
REP. BENJAMIN L. CARDIN (D-MD): That's correct, Mr. Chairman. Thank you very much.
Secretary Snow, thank you very much for being with us. And you have many responsibilities as secretary of the Treasury, and one of those, of course, is as trustee of the Medicare Trust Fund. So I'm just interested in finding out the information that you knew as regards to the information on the impact that the Medicare bill that we recently passed and the president signed into law had an effect on the solvency of the Medicare Trust Fund. As that bill was working its way through Congress, it became clearer to many of us with through financial information or scoring we were receiving that the impact on solvency would be minimal, since the $400 billion cost was primarily in the prescription drug provisions, and the other provisions had offsets.
We now find, through the information that's been made available to us, that it's affecting the solvency of the Medicare Trust Fund by two years by the action we took in the last bill. One of the major differences was the number of Medicare beneficiaries expected to participate in private health insurance. That number is dramatically different than what we were operating in Congress. We originally estimated that the current 9 percent that are in private insurance plans would go up to around 12 or 13 percent. We now find that the actuaries are projecting that to be as high as 32 percent. A significant difference.
We also now know that for every person who enrolls in private healthcare plans, it will cost the Medicare Trust Fund additional funds, since we are paying more than the cost if that person would have stayed in for additional Medicare. My question to you is that, were you aware of those numbers before Congress acted on it, that is the participation rates and cost to the Medicare Trust Fund, as trustee to the Medicare system? And if you were aware of it, were you aware that that information was not made available to Congress?
MR. SNOW: Yeah. Congressman, I was not aware of the detailed information that you laid out there in your question to me, and didn't become aware of the differing estimates in the CBO, for whom I have a very high regard, and the actuaries at CMS, in whom I also have a high regard. I didn't become aware of that until some time in January, as we began to put the president's budget to bed.
REP. CARDIN: Well, Mr. Secretary, I respect your answer to that, and I find that just as troubling to you as it is to us that information that's important for us to make judgment was not made available to us. You have responsibilities as a trustee to make recommendations to the administration and to Congress as to the impact that legislation could have on Medicare solvency. And this is a significant difference, a significant amount of money that was involved here.
I also believe that at times the department made-that they were using numbers that were generated by the actuary to show participation, but then were using CBO numbers-I mean using CBO numbers which were lower on cost in order to make it appear to be less expensive than the bill really was. And it would seem to me that by taking the more generous numbers from the actuary and from CBO, but not being consistent and using the same information for all of your analysis would be something that none of us would want to condone, and I hope you would agree with that.
MR. SNOW: The fine points of the differences between these two estimates I must say are beyond my ken. I understand that small changes, though, as you know, in those assumptions-for instance, CBO's assumption on participation being a few percentage points lower than the administration's-than the OMB's and the actuaries' estimate of participation rates produced a very substantial part of that disparity.
REP. CARDIN: It wasn't the administration. It was the difference between-it was substantial, 12 percent versus 32 percent, which is a huge difference. It was not the-the administration I believe was with the actuaries. It was the Congressional Budget Office's numbers that were substantially different than the actuarial assumptions.
MR. SNOW: No, I'm saying that. We used those numbers in the budget. We used the actuaries' numbers in doing the budget, and that's when I became aware of the difference.
REP. CARDIN: Well, Mr. Chairman, I would just point out that many of us in Congress are very concerned, that the information would have been important for us for action. It's also important that this information get to the right agencies.
REP. THOMAS: I thank the gentleman.
And, Mr. Secretary, we appreciate the time. We're slightly over.
But to recognize the second Republican to balance out the questioning of the secretary, the gentleman from Illinois, Mr. Crane, is recognized.
REP. CRANE: Thank you, Mr. Chairman.
Mr. Secretary, some have claimed that Social Security is not going bankrupt because in 2042, payroll tax receipts will be able to finance about three-fourths of the benefits too. Many of those making such claims have also attacked the idea that individuals should be able to invest even some of their payroll taxes in personal accounts. Individuals retiring at 2042 are already paying into Social Security, and I am against cutting benefits that have been promised to people paying into the system. Do you see any way to preserve current benefits without allowing individuals to own retirement that does not lead to a tax increase?
MR. SNOW: Congressman Crane, you're right, that there's an automatic reduction in the level of payments at the point at which the fund can no longer pay the full level of benefits. And that's 2042. We can't let that happen. And that's why moving to these personal accounts now makes so much sense, to find a way to augment the financial condition of the Social Security plan and take some of the burden off of it. But that's precisely what would happen. There is no legal obligation to pay at the current level, the obligation is to pay the funds that are available as benefits, and that results in that 74 percent declining over time, level of payments. We shouldn't-we can't let that happen.
REP. THOMAS: If Congress does not make changes to Social Security, specifically no individual retirement accounts, no benefits cuts, no tax increases and no increase in retirement age, what do you think would be in the impact on the Treasury?
MR. SNOW: Well, if no changes are made and we hit the year 2042 and the benefit levels are allowed to fall in accordance with the income levels, then it will have a very serious impact on the recipients who I think will feel cheated. They've made their payments in, they're now not able to-the retirees who made their payments in, would not then be able to draw down the expected amount of money. If we fund it at current levels, we produce that horrific deficit number that you saw reflected in Congressman Shaw's chart.
We're the victim here of plain simple mathematics, inescapable math and we can't dodge it, we can't hide from it. It's the numbers that were shown are the real numbers in that report and the only way to deal with this is find the means to supplement the income that Social Security has, that people have who would otherwise draw on Social Security and that's where this idea of the personal accounts makes so much sense.
REP. THOMAS: Thank you, Mr. Secretary. I appreciate your attendance here today, too.
MR. SNOW: Thank you.
REP. THOMAS: The committee thanks you and understands the pressing engagement that you must go to and looks forward to your next testimony before the committee.
MR. SNOW: Thank you very much.
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REP. THOMAS: The gentleman's 15 minutes has expired.
The gentleman from Illinois wish to be recognized?
REP. CRANE: Yes, Mr. Chairman.
REP. THOMAS: Would the gentleman yield briefly?
REP. CRANE: Certainly.
REP. THOMAS: Mr. Foster, I have not done this before but, based upon a series of questions and the answers, I would ask you, did you and I have a telephone conversation in regard to the concerns on your professional integrity in this administration?
MR. FOSTER: Yes, sir, we did.
REP. THOMAS: Could you convey the gist of the telephone conversation?
MR. FOSTER: Yes, sir. It was back in June following the first of these instances which involved a request that your staff had made to me for an estimate which was ordered to be withheld which I provided anyway because I had not in fact received that order. My understanding is that Mr. Scully was-I know that he was deeply unhappy.
REP. THOMAS: What was the gist of our conversation?
MR. FOSTER: Yes. I apologize. You called and asked me whether the information in the memo I sent to you represented my best estimate, my best judgment and I said yes, that it did.
REP. THOMAS: And I said what then?
MR. FOSTER: You also said that you would be talking with some folks about the threats that you had heard of toward me and that I should not worry about it.
REP. THOMAS: Did we have a similar conversation? Was that a bit of a d?j? vu for you?
MR. FOSTER: I'm sorry I --
REP. THOMAS: Did we have a telephone conversation on a similar subject matter at a previous time?
MR. FOSTER: Back in 1987.
REP. THOMAS: Yeah. When there was an administration of a different party putting pressure on you not to release information and the gist of my conversation to you at that time was that?
MR. FOSTER: That's a little further back and a little bit more forgotten.
REP. THOMAS: That if it was in your professional opinion, if the information you provided was your professional opinion, I would defend you in presenting your professional opinion; i.e. identical telephone conversations in two different administrations. Apparently the idea of following the law, as you indicated, in terms of the flow of information, was present not only in Republican administrations but in Democrat administrations. And as a matter of fact, if you look at report language in the 1997 act, we underscored your ability to make those kind of statements.
So I supported you then, I support you now and if you choose to continue this position as your professional prerogative, I'll support you in the future. That doesn't mean I'm always going to agree with your estimates, but I certainly believe the service of providing those estimates is a valuable assistance in making law. And I want to thank the gentleman from Illinois for yielding.
REP. RANGEL: Mr. Chairman, I have a misunderstanding here. This exchange allows me to believe that Mr. Foster gave you his estimate before he was told not to do it, so you had information that we Democrats couldn't get and did not share it with us.
REP. THOMAS: No, that isn't what he said.
REP. RANGEL: Well, I --
REP. THOMAS: The gentleman from Illinois.
REP. RANGEL: That's what it sounded like.
REP. CRANE: Please, may I reclaim my time?
Mr. Goss, several members have exuberantly claimed that Social Security is fiscally sound by citing the report's short term projection that ends in 2013. That claim conveniently allows them to ignore the longer term projections that show that by 2018, just five years later, Social Security will no longer be able to rely solely on its tax revenue to cover benefit payments. What would be the consequences of ignoring Social Security's financial challenges and not modernizing the program while it still has a surplus, by putting off reform for some future Congress to deal with when the trust fund begins to shrink?
MR. GOSS: We clearly at a point where we do well understand that Social Security does have financial shortfalls coming in the future. By acting sooner, we clearly have agreed a range of possibilities that can be considered and if action were taken relatively soon, it would allow these opportunities to be put into effect, to be put into the law so that they could grade in, they could phase in on a more gradual basis. I think a perfect example of this was the 1983 Social Security amendments where, for example, the normal retirement age was legislated to be increased with a 17 year delay.
The increase did not in fact start till 2000, even though the change was enacted in the year 1983. Therefore, in my judgment the cost of delaying substantially a serious discussion and movement towards really deciding on what should be done for Social Security will limit possibilities and perhaps make it more difficult to get the job done.
REP. CRANE: Thank you, Mr. Goss.
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