The Future of the Economy
and Social Security
December 16, 2004
Thank you all. (Applause.)
Thank you all for coming. Last night I had the honor of
attending a reception for those who have participated in
these series of panels, and I had a chance to thank them.
I said something I think is true, which is, citizens can
actually effect policy in Washington. In other words, I
think people who end up writing laws listen to the voices
of the people who -- and can be affected by citizen participation.
So I want to thank you all for doing this.
We're talking about significant
issues over the course of these couple of days. We'll talk
about an important issue today, which is, how do we keep
the economy growing; how do we deal with deficits. And
I want to thank you all for sharing your wisdom about how
to do so.
One thing is for certain: In all we do, we've got to make
sure the economy grows. One of the reasons why we have
a deficit is because the economy stopped growing. And as
you can tell from the previous four years, I strongly believe
that the role of government is to create an environment
that encourages capital flows and job creation through
wise fiscal policy. And as a result of the tax relief we
passed, the economy is growing. And one of the things that
I know we need to do is to make sure there's certainty
in the tax code -- not only simplification of the tax code,
but certainty in the tax code. So I'll be talking to Congress
about -- that we need to make sure there is permanency
in the tax relief we passed, so people can plan.
If the deficit is an issue -- which it is -- therefore,
it's going to require some tough choices on the spending
side. In other words, the strategy is going to be to grow
the economy through reasonable tax policy, but to make
sure the deficit is dealt with by being wise about how
we spend money. That's where Josh comes in -- he's the
-- as the Director of the OMB, he gets to help us decide
where the tough choices will be made. I look forward to
working with Congress on fiscal restraint. And it's not
going to be easy. It turns out appropriators take their
titles seriously. (Laughter.)
Our job is to work with them, which we will, to bring
some fiscal restraint -- continue to bring fiscal restraint
-- after all, non-defense discretionary spending -- non-defense,
non-homeland discretionary spending has declined from 15
percent in 2001 to less than 1 percent in the appropriations
bill I just signed, which is good progress. What I'm saying
is we're going to submit a tough budget, and I look forward
to working with Congress on the tough budget.
I fully recognize, and this administration recognizes,
there -- we have a deficit when it comes to entitlement
programs, unfunded liabilities. And I want to thank the
experts, and the folks here, who understand that. The first
issue is to explain to Congress and the American people
the size of the problem -- and I suspect Congressman Penny
will do that, as well as Dr. Roper -- and the problems
in both Social Security and Medicare.
The issues of baby boomers like us retiring, relative
to the number of payers into the system, should say to
Congress and the American people, "We have a problem." And
the fundamental question that faces government, are we
willing to confront the problem now or pass it on to future
Congresses and future generations. I made a declaration
to the American people that now is the time to confront
Social Security. And so I am looking forward to working
with members of both chambers and both parties to confront
this issue today before it becomes more acute.
And by doing so, we will send a message not only to the
American people that we're here for the right reason, but
we'll send a message to the financial markets that we recognize
we have an issue with both short-term deficits and the
long-term deficits of unfunded liabilities to the entitlement
And I want to thank the panelists here for helping to
create awareness, which is the first step toward solving
a problem. The first step in Washington if you're interested
in helping is to convince people that there is a problem
that needs to be addressed. And once we have achieved that
objective, then there will be an interesting dialogue about
how to solve the problem.
I've got some principles that I've laid out. And, first,
on Social Security, it's very important for seniors to
understand nothing will change. In other words, nobody
is going to take away your check. You'll receive that which
has been promised. Secondly, I do not believe we ought
to be raising payroll taxes to achieve the objective of
a sound Social Security system. Thirdly, I believe younger
workers ought to be able to take some of their own payroll
taxes and set them up in a personal savings account, which
will earn a better rate of return, encourage ownership
and savings, and provide a new way of -- let me just say,
reforming -- modernizing the system to reflect what many
workers are already experiencing in America, the capacity
to manage your own asset base that government cannot take
So with those principles in
mind, I'm open-minded -- (laughter) -- with the members
of Congress. (Laughter and applause.)
Anyway, thank you all for coming. I'm looking forward
to the discussion.
DIRECTOR BOLTEN: Mr. President, thank you. Thank you for
convening us. It warms my budget heart -- (laughter) --
that you've taken the time to come and talk about fiscal
responsibility, which is so important, especially at this
time. We've come through some tough years, Mr. President,
during your tenure.
As you entered office the economy was entering recession,
we had the attacks of 9/11, we've had the war on terror,
we've had corporate scandals that undermined confidence
in the business community. All of those, together, took
a great toll on our economy, and especially on our budget
situation, as you mentioned. And we've started to turn
it around. The economy is well out of recession, it's growing
strongly, as I think our panelists will talk about. And
as a result of that we are seeing a dramatically improving
We originally projected our 2004 deficit to be about 4.5
percent of GDP, and when we got the final numbers just
a few weeks ago, it was down to 3.6 percent of GDP, a dramatic
improvement. Now, that's still too large, but it's headed
in the right direction. You mentioned, Mr. President, the
2005 spending bills that you just signed last week. I think
those have to be regarded as a fiscal success, because
you called on the Congress almost a year ago to pass those
spending bills with growth of less than 4 percent overall,
and especially to keep the non-national security related
portion of that spending below 1 percent, and they delivered.
And that's the bill that you signed just last week. We're
working now, Mr. President, as you know, on the 2006 budget.
And I'm hopeful that we will keep that momentum of spending
What I think we will be able to show when we present your
budget, about six or seven weeks from now, is that we are
ahead of pace to meet your goal of cutting the deficit
in half over the next five years. And I think that's very
important. And I think our panelists will talk a little
bit about why that is.
So let's step back a little bit from the Budget Director's
preoccupations and talk more broadly about the economy.
Our first panelist is Jim Glassman, who is senior U.S.
economist at JP Morgan Chase. He's a frequent commentator
in the financial press; I think well-known in the financial
And Jim, let me open it with
you and ask you to talk about how the budget situation
is related to the economy overall, because that's really
what people care about.
MR. GLASSMAN: All right. Thanks, Josh. Thanks, President
Bush, for inviting us here to participate in this discussion.
It's a privilege.
The federal budget is tied very closely to the fortunes
of the economy. When the economy is down, revenues are
down. When the economy comes back, revenues come back.
In the last several years, we've seen that link very closely.
The economy slowed down, revenues dried up, the budget
deficit widened. It's happened many times before. And in
Wall Street, Wall Street understands this link between
the economy and the budget, and that's why -- we anticipate
that these circumstances are going to be temporary, and
that's why long-term interest rates today are at the lowest
level in our lifetime, even though we have a budget deficit
And in fact, now, with the economy on the mend, the revenues
are coming back, and the budget deficit appears to us to
be turning the corner. So I think the prospects are looking
quite good for the budgets going into in the next several
Now to me, the link between the economy and the budget
tells you there's an important message here, and that is:
Policies that enhance our growth potential are just as
important for our long-run fiscal health as are policies
to reform Social Security and health care reform. We know
how to do this, because over the last several decades,
we've been reforming our economy -- deregulating many businesses,
breaking down the barriers to trade. And it's no surprise
that countries all around the world are embracing free
market principles. Free markets is the formula that has
built the U.S. economy to be the economic powerhouse that
Now, I realize the last several years have been challenging
for a lot of folks, and it's hard for folks to step back
and appreciate the amazing things that are going on in
the U.S. economy when they're struggling with this, with
the current circumstances. But I have to tell you, what
we are watching around the U.S. economy is quite extraordinary,
and I would like to highlight two things in particular
that are important features of what's going on in the U.S.
economy, because it tells us -- that basic message is it
tells us that we're on the right paths, and number two,
it tells us how we might build on the policies that are
helping to encourage growth.
The first important observation: productivity. Productivity
in the U.S. economy is growing almost three times as fast
as the experts anticipated several years ago, a decade
ago. Now, we know why that's happening: Economic reform
has strength competition; the competition has unleashed
innovation; that innovation is driving down the cost of
technology; and businesses are investing in tools that
allow us to do our jobs more efficiently. Why that's important?
Because most of us believe that what's driving this productivity
is information technology.
Now, in my mind when we're at an extraordinary moment
like this with rapid changes in technology, it opens up
a lot of frontiers. Who is it that brings that technology
and creates growth? Who is that drives the economy? It's
small businesses. That's where the dynamic heart of the
economy is. And so policies that focus on making the business
environment user-friendly for small businesses, like the
tax reform, are an important element of building on this
productivity performance that's going on, and building
on the information technology.
Second important aspect of what's going on in the U.S.
economy -- everybody knows we faced an incredible number
of shocks in the last several years. These shocks, which,
by the way, destroyed almost half of the stock's market
value in a short period of time, for a moment, were potentially
as devastating as the shocks that triggered the Great Depression.
And yet, the experts tell us the recession we just suffered
in the last several years was the mildest recession in
modern times. That tells you something about the resilience
of the U.S. economy. It tells you that we have a very flexible
economy to absorb these kinds of shocks. And I personally
think that this is the result of a lot of the reforms that
we've been putting in place in the last several decades.
It has made us much more resilient.
I find this an even more incredible event because when
you think about it, we had very little help around the
world. The U.S. economy was carrying most of the load during
this time. Japan, the number two economy, was trapped by
deflation. Many of our new partners in East Asia have linked
the U.S. economy, and they're depending on their linkage
with the U.S. economy to bring -- in hopes of a better
future. The European region has been very slow growing.
They've been consumed by their own problems. So, frankly,
we've been in a very delicate place in the last several
years; the U.S. economy was the main engine that was driving
this. And yet, we had this incredible performance. I think
it's quite important.
Now, when you ask economists to think about the future,
where we're likely to go, it's very natural -- the natural
tendency is to believe that we're going to be slowing down
eventually -- and we can give you all kinds of reasons
why this is going to happen -- demographics, productivity
slows down. My guess is we would have told you this story
10 years ago, 20 years ago, 100 years ago.
And I think what's quite incredible -- I'm, frankly, somewhat
skeptical of this vision that we all have, because, if
you think about it, we've been growing 3.5 percent to 4
percent per year since the Civil War. If we can match that
performance in the next 50 years -- and I don't see why
that's so hard to do, given the kinds of things we are
discovering about our economy and the kinds of benefits
we see from all this reform -- then I think the fiscal
challenge that we see in our mind's eye will be a lot less
daunting than is commonly understood.
So, of course, I don't want to say that growth can solve
all our problems. It won't. There clearly are challenges
on the fiscal side, and it's important that we strengthen
the link between personal effort and reward. And that's
why it's right this forum should be focusing on Social
Security reform and health care reform. Thank you.
THE PRESIDENT: May I say something?
DIRECTOR BOLTEN: Mr. President. (Laughter.)
THE PRESIDENT: Thank you. (Laughter.) Who says my Cabinet
does everything I tell them to? (Laughter.)
You know, it's interesting, you talked about the Great
Depression, and if I might toot our horn a little bit,
one of my predecessors raised taxes and implemented protectionist
policies in the face of an economic downturn, and as a
result, there was 10 years of depression. We chose a different
path, given a recession. We cut taxes and worked to open
up markets. And as you said, the recession was one of the
And the reason I bring that up is that wise fiscal policy
is vital in order to keep confidence in our markets and
economic vitality growing. And that's one of the subjects
we'll be talking to Congress about, which is wise fiscal
policy. And that is the direct connection between the budget
and spending and confidence by people who are willing to
risk capital, and therefore provide monies necessary to
grow our job base.
DIRECTOR BOLTEN: Mr. President, let's talk a little bit
about how investors see those issues that you and Jim Glassman
have just been talking about. Liz Ann Sonders is chief
investment strategist to Charles Schwab and Company. She's
a regular contributor to TV and print media on the market
issues that investors care about.
And Liz Ann, let me just open it to you and ask you, how
do investors see those broad macroeconomic issues that
Jim was just talking about?
MS. SONDERS: Thanks, Josh. Thanks, Mr. President. I do
spend a lot of time out on the road talking to individual
investors. And I will say that the deficit issue is probably,
if not the number one, certainly in the top three questions
I get. I think there is a terrific amount of misunderstanding,
though, about the nature of deficits, how you get there,
how do you get out of a deficit situation, the cause and
effect aspects of it, and I'll talk about that in a moment.
And we know that higher deficits are a burden on future
taxpayers, but I think what, in particular, the market
would like to see is the process by which we go about fixing
this problem. And I think the markets are less concerned
about the number itself and don't have some grand vision
of an immediate surplus, but the process by which we solve
There's a lot of ways to do that. It is all about choice.
And certainly, there's one theory, that the only way to
solve it is to raise taxes. I don't happen to be in that
camp, and I would absolutely agree with Jim and certainly
with this administration that the policies absolutely have
to be pro-growth.
And I think the other benefit that we have right now,
and Marty Feldstein talked about this yesterday, the difference
between the Waco Summit and this conference today as representing
a very strong economy right now versus a couple of years
ago. And what that allows you to do is have this much stronger
platform from which you can make a sometimes tougher decision.
And I think that's a very important set of circumstances
right now. I would agree with Jim, also, at the bond markets
perception of this, the fact that long-term interest rates
are low so we have at least have that camp of investors
telling you that maybe the risks aren't quite high as some
of the pessimists might suggest.
Forecasting is also difficult. I know your Administration
suggested that going beyond five years is a tough task.
And it is. The market, however, builds itself on making
forecasts for the future, and often times will develop
a consensus about something, and I will say that I think
the consensus is one maybe of a little bit -- maybe not
pessimism, but not a lot of optimism from a budget deficit
perspective. So, I think the opportunity comes with showing
some effort. And you can really turn the psychology of
the market very, very quickly under a circumstance where
maybe market participants are actually pleasantly surprised
by the turn of events.
Typically, when you look back in history, and you look
at processes by which we've improved a deficit situation,
those that have been accompanied by better economic growth
have typically been those where the focus has been on spending
restraint, entitlement reform. Those times where we have
improved the deficit, but it's been in conjunction with
weaker economic growth are typically those periods where
tax increases have been the process by which we have gotten
And I also think that many investors misunderstand the
relationship between deficits and interest rates, and there
is a theory building now that higher deficits automatically
mean higher interest rates. Well, case in point, it's just
the most recent experience, but we can even go back to
the late '90s -- the reason why we went from deficit to
surplus was because the economy was so strong. Because
the economy was strong, the Federal Reserve was raising
interest rates, the reason why we went into deficit was
because the economy got weak, which is the reason why the
Federal Reserve had to lower interest rates. So you have
to understand, again, the cause and effect here.
The path of least resistance, of course, is to make everybody
happy. But something has to give. You've all talked about
this, the "no free lunch" idea. But I'm just
a strong believer that entitlement reform and long-term
priorities take precedent right now over short-term fixes,
certainly if it required tax increases. And I think that,
Mr. President, you talked about having political capital,
I'll go back to this idea that we now have economic capital
that allows us to not disregard the short-term fixes for
the deficit here, but really take this opportunity for
long-term structural reform.
I'm a big believer in personal accounts, empowering investors.
My firm built by "the Man," Chuck Schwab, is
all about empowering individual investors. And I think
these long-term adjustments that need to be made, which
is really a part of this whole conference, are so important
right now. And I think that's absolutely what the market
wants to see.
THE PRESIDENT: Good job. You're not suggesting that economic
forecasts are as reliable as exit polling, are you? (Laughter.)
MS. SONDERS: I'm not going there. (Laughter.)
DIRECTOR BOLTEN: Mr. President, I'm going to move on.
(Laughter.) I'm glad that Liz Ann raised the distinction,
as you did in your opening remarks between our short-term
picture and our long-term picture. Our short-term picture
is, indeed, looking a lot better. I think we'll be able
to show a very clear path toward your goal of cutting the
deficit in half over the next five years. But the long-term
picture is very challenging. We're very honored to have
with us Tim Penny, who is a professor and co-director of
the Hubert Humphrey Institute of Public Affairs. He's also
a former Democratic Congressman and an expert on a lot
of the long-term issues we're talking about.
And, Congressman, let me turn it over to you and ask you
to talk a little bit about what are these entitlement programs,
and why are they important for our long-term budget picture?
CONGRESSMAN PENNY: Well, I think -- thanks, Josh, and
Mr. President. I think the first thing to note is that
the long-term picture is rather bleak, that the status
quo is unsustainable. And when you talk about the difference
between discretionary and entitlement spending, that tells
Discretionary spending, as you referenced earlier, is
the part of the budget that we control annually. It comes
out of the general fund; it's education, it's agriculture,
it's defense, it's a whole lot of stuff that we think about
as the government.
But the entitlement programs are those that are on automatic
pilot. They're spelled out in law and the checks go out
year in and year out, based on the definitions in law.
So if you're a veteran, you're entitled to certain health
care benefits under this system. If you're a farmer and
you grow certain crops, you're entitled to subsidies. There
are some that are means-tested. In terms, we give them
to you only if you need them; and that's where our welfare
programs and much of our Medicaid spending comes into play.
And then there are the non-means tested entitlement programs,
and among those are Medicare for the senior citizens and
Social Security for senior citizens. So, they're age-based
And those entitlement programs are the biggest chunk of
the federal budget. I think it's constructive to look back
over history. In 1964, all of these entitlement programs,
plus interest on the debt, which is also a payment we can't
avoid, consumed about 33 percent of the federal budget.
By 1984, shortly after I arrived in Congress, they consumed
57 percent of the federal budget, and today they consume
61 percent of the federal budget.
Now, let's look forward a few decades and see where we're
going to be with entitlement spending. By the year 2040,
just three -- well, actually four of these sort of mandatory
programs are going to eat up every dime -- income taxes,
payroll taxes, all other revenues that we collect for the
federal government: Medicaid, Medicare, Social Security
and interest on the debt will eat up everything. There
won't be a dollar left in the budget for anything else
by the year 2040. That tells you the long-term picture,
and it is bleak. So something has to give. Doing nothing
is not an option.
Let's look at Social Security alone. And this is something
that my colleague, Mr. Parsons, will speak to in a few
minutes. There are huge unfunded liabilities here. We haven't
honestly saved the current Social Security trust fund.
Even though extra payroll tax dollars are coming in each
year, they're not honestly being set aside for this program.
Just by the year 2040, there's about $5 trillion of unfunded
liability in that program. Now, we've got to come up with
the money somehow to replace those promised dollars. And
it's no easy task. And I know that a million, a billion,
a trillion sort of gets lost on the average listener, so
I always like to explain that if you're looking at a trillion
dollars, just imagine spending a dollar every second, and
it would take you 32,000 years to spend a trillion dollars.
So even in Washington, that's big money. (Laughter.) Or
as we say in farm country, it's not chicken feed. (Laughter.)
So the other way you can look at this is your Social Security
statement comes in the mail every year, and it gives you
some sense of your promised benefits in the Social Security
system. But on page two of this statement, there's an interesting
asterisk. And the asterisk says, "By about the year
2040, we're not going to be able to pay you all of the
benefits that we're promising you. We're going to be about
25 percent short of what we need to pay those benefits." So,
what does that mean we would have to do if we wait until
the last minute to fix this program? We'd either have to
cut benefits dramatically, or we'd have to impose the equivalent
of a 50-percent payroll tax increase on workers to get
the money into the system to honor the promised benefits.
So huge benefits cuts or a huge tax increase -- I don't
think that's where we want to go, especially since 80 percent
of Americans now pay more in payroll taxes than income
taxes. I don't think that's a solution that they're going
to applaud. But, frankly, it is the kind of solution we're
left with if we wait too long to fix the mess. We waited
too long 20 years ago. When I first arrived in Congress
in 1983, we had a Social Security shortfall. We were borrowing
money out of the Medicare fund to pay monthly Social Security
checks. So what did we do, because we were already in a
crisis? We cut benefits by delaying cost-of-living adjustments;
we cut benefits by raising the retirement age, first to
67 and -- 66, and ultimately to 67; and we increased payroll
taxes, significantly, during the 1980s. And so we basically
said to future workers, based on that legislation in 1983,
you're going to pay more and get less.
I mean, to me, that's the problem with waiting until the
last minute to fix this, is that you give people a worse
deal. So my view on this is that, for the long-term --
we can't wait until the crisis hits to address the issue.
We have to look at these challenges now and give the next
generation a better deal. And if we plan ahead and plan
appropriately, we can do that.
So we need to act before it's too late. And then I think
we send all the right signals, and we do a better deal
for younger workers then -- sort of the same old, cut benefits
raise taxes, a solution that's been imposed in the past.
THE PRESIDENT: I appreciate that. I think the issue has
shifted. I think there are more people now who believe
they'll never see a check than people are worried that
they'll have their check taken away. And I think it's important
for Congress to understand that. And my attitude is, exactly
like Congressman's, and that is, is that now is the time
to deal with it. And it's going to be very important that
we reassure our seniors who depend upon Social Security
that nothing will change as -- and that's been part of
the political problem. And any time anybody mentioned the
word, Social Security, the next thing that followed was
-- yes, he's saying that because he's going to take away
your check. And really what we're talking about is a new
generation. I appreciate you pointing that out, Tim.
CONGRESSMAN PENNY: If I can just add this one point, if
we had saved these surpluses honestly in personal accounts
over the last 20 years, we'd be well on the way to fixing
this problem by now. And so we may be a little late in
getting this done, but it's still important to move in
THE PRESIDENT: Thank you.
DIRECTOR BOLTEN: Somebody who's been directly involved
in -- and a leader in trying to formulate a solution for
the Social Security problem is Dick Parsons, who is CEO
and chairman of TimeWarner. And he was chairman of the
President's commission on Social Security, co-chair with
late Senator Patrick Moynihan, whom I know we all miss
at this time.
Mr. Parsons, we're grateful that you're here, and I wonder
if you would follow on Congressman Penny's remarks and
talk a little more specifically about your commission's
work, what problems you saw, what solutions you saw.
MR. PARSONS: Thank you, Josh, Mr. President. The President
said earlier that we have to recognize that we have a problem
with Social Security. I think everybody does. And I don't
know that they share the urgency that Tim just spoke to,
and the President just spoke to, or really understand the
nature of the problem. So, let me take a step back and
talk about -- approach it from a slightly different angle,
talk about what is the problem with the Social Security
system, which was created in 1935 as what they call a pay-as-you-go
Now, most people here know that, but it was amazing to
me when we had our Social Security Commission, they were
all around the country, we had a number of public hearings,
and the people would come and say, "Well, what are
they doing with my money?" Well, what most people
didn't know is they were taking your money that you pay
in every day, or every week when you get a paycheck, and
within a very short period of time it's going out the other
door to pay benefits, pay-as-you-go -- money comes in,
it goes out to pay the benefits.
Now, that system was created at a time when for every
person who is eligible to participate, retirees, let's
call them, there were 40 people in the work force. There
were 40 people working to support one. It was also created
at a time when the average life expectancy for males was
such that the average man would not live to see the day
that he could qualify for Social Security. So, you would
pay in -- and the system was built in part -- this is not
cynical, this is just fact, on the notion that half the
people who paid in would never get anything out because
they would be dead.
So, where are we today? Today there are three people in
the work force for everybody who's eligible for Social
Security. Today life expectancy is expanded anywhere from
five to seven years, depending on gender, since the time
the system was created, so that the great majority of people
who participate will live to see benefits. The fastest
growing part of our population is 85 and up. So, we have
a totally different set of circumstances that we're dealing
with. And it's only going to get worse in the sense of
-- or more distant from the way the situation that existed
when the system was created. By the year 2020, you'll have
two people in the work force for every person eligible
to receive benefits. And life expectancies will be even
So the whole factual basis that underlies this pay-as-you-go
system has changed. And what happened is, and Tim mentioned,
that we have huge underfunded shortfalls in the system.
If you -- they usually do this on an actuarial basis out
75 years. If you look out 75 years and say, how
much does the system promise it will pay, and you look
out 75 years and say, under the existing tax scheme, how
much money are we going to be able to have to pay it, in
current dollars, in actual dollars, it's about an $11 trillion
to $12 trillion shortfall over 75 years. If you roll that
back into the current dollars and you say, what would it
take today to close that, it's about $4 trillion. So that's
The problem is we've promised more than the revenues that
we have, or that we can look to, to pay. So what's the
solution? The traditional solutions are, as Tim just indicated,
either we increase the taxes so you get more revenues in,
or you decrease the benefits so you get less money out.
The problem with that is it's a BAND-AID. And given these
demographic shifts that we're talking about that we see,
it simply can't last. You might be able to put one more
BAND-AID on the wound and patch us over for another five
or six years.
But for example, some people say, why don't you just life
the wage cap? Only the first $90,000, as of the beginning
of the year, is subject to Social Security taxes. Well,
even if you eliminate the wage cap, that only buys you
four, five, six more years, and then you're back in the
same problem. We have to face up to the fact that the country
is in a different place than it was when this system was
created. And the fix needs to be structural. It needs to
be fundamental. We need to change the architecture of Social
And what I mean by that is we gradually have to move from
a system that is based on a pay-as-you-go basis when you
had 40 people in the work force for everyone not, to a
system that is on a fund-as-you-go basis, where people
can begin to start to fund and put away the money that
they will look to in their later years for their support
Now, this is not unprecedented. This is exactly what's
happened in the business world. Every corporation in America,
mine included, has been engaged over the last 20, 25 years
in a migration from pay-as-you-go kind of pension arrangements,
to funded arrangements. Now, nobody has gotten there --
very few have gotten there -- probably Charles Schwab has
gotten there -- in terms of fully funded arrangements right
now. But putting the money away now to pay liabilities
in the future. This is what private accounts is all about.
And that's why the Commission came down recommending in
all of the options that we put forward, private accounts.
It's the beginning of shifting from complete pay-as-you-go
to starting to fund some of our future liabilities now.
And that's -- at the end of the day, while the government
is, in law and in sort of a forced social reality, a different
entity than the business community, economically, it's
not. Economically, it's going to have to step up to the
same reality that business had to step up to, that we can't
continue a system that puts a huge burden on future generations
that they're not going to be able to meet. We're going
to have to start saving and funding our responsibility
to ourselves on a current basis.
And that's why we made private accounts as a beginning
step -- this is not privatization of Social Security. What
it really is, is -- and again, this isn't unprecedented;
this is what business has done -- it's beginning to have
a hybrid system where you have a floor, a base, below which
no one can go that is funded on what they call a "defined
benefit" basis -- that you will get this money, this
minimum amount of money, no matter what. But then you have
an ability above that to enhance that on a defined contribution
basis -- i.e., you put money away now, invest it wisely,
and it will come back to you and give you an even better
standard of living in a future time.
So that's essentially the nature of the problem and why
we thought that it was time for structural, architectural
change to Social Security, not just tinkering. You can't
-- you know, tinkering can't work anymore. The demographics
-- this was Pat Moynihan's point. He would say, demography
is your destiny. We just can't do what we've done in the
past any longer. We've got to do something different, and
this was an idea that made sense.
DIRECTOR BOLTEN: Mr. President, you mentioned that for
current seniors, this is not a debate for them, that those
at or near retirement, this discussion that's going on
now, should not affect what they -- what they've been promised
and what they can expect to get. It's the next generations
that this is debate -- that this debate is about, and who
should be concerned about it. You mentioned, Mr. President,
that a lot of the next generation doesn't think that there
will be benefits there for them.
Sandy Jacques is somebody, obviously, from that younger
generation. She's a single mom from West Des Moines, Iowa,
and she's active in a group called, Women for Social Security
Choice. And Sandy, let me ask you to speak for the -- speak
for regular folks and younger regular folks -- (laughter)
-- and tell us why you got involved in this organization,
why are you active on Social Security issues?
MS. JACQUES: Sure, Josh. Well, I think the President stated
it the best when he said, most people in my generation
believe that we're more likely to never get a benefit than
to have our check taken away from us. I guess it would
be nice to get to the point where we had a check and then
we're worried about it being taken away.
So I guess I'm here because I want to make sure that we
do get to the point where my generation retires and we
do have Social Security around and intact for us. But more
importantly, as you mentioned, I have a daughter at home.
Her name is Winter; she's 10 years old. And I want to make
sure that she has Social Security when she retires, as
And I believe that the only way to really get to that
point is with personal retirement accounts. They're really
the only way to update or modernize Social Security in
a real way without tinkering it, as Mr. Parsons talked
about and as Congressman Penny when they were in Congress,
because then you only resort to a tax increase or benefit
cut. With personal retirement accounts you have money in
an account and that money is allowed to grow, and it's
that growth that actually will help to fix Social Security
for future generations.
Without that, if we wait, we will have to resort to raising
payroll taxes or cutting benefits like they did in the
'80s. To speak to raising payroll taxes on a personal level,
I can't afford a payroll tax increase. In fact, I think
I definitely pay more than enough right now, and that's
another reason why I support Social Security reform. I
am not one of these young people that is willing to give
up on that money I'm already paying into the system. I
want to see the system fixed so that I can get that money
back when I retire.
And as Tim mentioned, by 2040 -- I actually retire in
2044 -- unless the retirement age is raised again, but
in 2044 we're already at the point if we do nothing, I
will get 25 percent less than what I should get under the
current system right now. So, that is why this issue is
very, very important to me.
But I also want to talk about current seniors right now.
My grandma is already retired, my dad actually plans to
retire next year, and my mom a couple years after that.
It's very important to me to make sure that their benefits
remain intact for them. It's too late for them to invest
in a personal retirement account. But because of that we
need to make sure that we guarantee their benefits through
their retirement, because it's something that they've been
relying on. And it's, I think, our duty to make sure that
we make sure that happens.
But at the same time, I also think it's the country's
duty to make sure that we fix Social Security now so that
it's around for when future generations retire because
personal accounts are really the only way to give us retirement
security in the future for me, and more important, my daughter.
Because if I am faced with a 25-percent benefit cut when
I retire they may be looking at raising payroll taxes on
my daughter and younger generations at that time. So really,
that's why this is very important to me, Josh.
THE PRESIDENT: You know, one of visions of personal savings
accounts is that Sandy will be able to pass her account
on to Winter as part of Winter's capacity to retire, as
well. It is a novel concept, clearly different from the
current system where you don't pass anything on.
MS. JACQUES: That's a great point. That's also very important
to me because if you do get to the point where you're raising
payroll taxes, or cutting benefits to make Social Security
solvent at that time, you still don't own your benefits.
With a personal account, you own the money that's in that
account. And I'm sure Winter will be hoping that I have
a very modest retirement so that there is some left for
her -- (laughter) -- when I die. But -- so that's a very
important aspect, as well.
THE PRESIDENT: One of the things on personal accounts
that listeners must understand is that you cannot take
-- if a personal account, in fact, exists, you can't take
it to the race track and hope to really increase the returns.
(Laughter.) It's not there for the lottery.
In other words, there will be reasonable guidelines that
already exist in other thrift programs that will enable
people to have choice about where they invest their own
money, but they're not going to be able to do it in a frivolous
fashion, which will mean two things. One, it's more likely
there will be a rate of return higher than that which is
in the Social Security trust; and secondly, more likely
to be actual money available when you retire.
DIRECTOR BOLTEN: Mr. President, we've been focused on
-- principally so far on the retirement security of today's
and future seniors. It's also very important that seniors
have some security about their health care situation. And
so we're privileged to have with us Dr. Bill Roper, who
is Dean of the School of Medicine at the University of
North Carolina, in Chapel Hill. And he's also head of the
UNC health care system. Dr. Roper also served in a previous
Bush administration as, among other things, as the head
of the Medicare system. So he knows a lot about this stuff.
And let me just ask Dr. Roper to bring us out of the retirement
system and into the health care system, and tell us what
are the challenges we face there, and what do they mean
for our budget situation.
DR. ROPER: Thanks, Josh. And thank you, Mr. President.
I think that is my role, is to say, remember health care;
remember Medicare. Surely, the focus on Social Security
is important, but there's this other large and, indeed,
faster-growing entitlement program called Medicare. Just
a few numbers to make the point: This year the Medicare
program is one-eighth of the entire federal budget. Ten
years from now, that's projected to be one-fifth of the
federal budget. And by 20 years from now, Medicare will
be larger than Social Security, so it will be the largest
federal entitlement, under current growth rates.
Another point: This year, 2004, the trust fund that our
payroll taxes go into that pays for hospital and related
benefits in Medicare, more money is going out of that trust
fund to pay for current needs right now for seniors and
others in the Medicare program than payroll taxes are going
into it. So the balance in the trust fund is beginning
to go down, and it's projected to be entirely exhausted,
under current spending patterns, by the year 2019.
All of that is driven by changing demographics. We're
aging as a society and we have a more expensive health
care system. Now, a lot of times we in the health policy
community beat up on ourselves, saying that's a terrible
thing that we're devoting so much to health care. I think
it's important to point out that health care is something
that we value tremendously as a society. The ability to
spend so much on health care is part of our being a very
healthy economy and a society that says, we want to invest
in our health, especially to help seniors.
And many good things result from health care. A very careful
study a few years ago by some economists showed that if
you look carefully and count the costs and count the benefit
that technology -- technological advances in health care
are worth the cost. The benefits far outweigh the costs.
And so we ought to continue to feel good about that, especially
those investments in prevention that end up paying rich
dividends down the line.
Projections about how much we're going to spend in Medicare
is more difficult than the projections for Social Security.
Everybody who is going to be a senior citizen 50 years
from now has already been born. So we know how to project
Social Security numbers. But we don't know what medical
advances are going to occur, what new technologies, new
treatments, new drugs, whatever, are going to be there.
We don't know how much they're going to cost. Some will
surely save money; some will cost more. The benefits there
are substantial. But the simple point is, the growth rate
for Medicare is unsustainable. We just can't devote the
entire federal budget to health care.
So the question becomes, how do we constrain that growth?
What do we do about it? And broadly speaking, we face two
options. One is to do what Medicare has done over the last
several decades, and I was there in the '80s and the '90s,
and we put in place what are called, administered price
systems, which is the government deciding how much to pay
hospitals and how much to pay doctors, and running those
systems so that we try to restrain the rate of growth to
the extent possible.
The alternative, which many people, myself included, and
you, sir, are advocating is a much greater reliance on
individuals and empowering them to make choices, helping
them see the value of investing in preventive behavior,
better health for themselves long-term, providing information
on who are the quality health care providers so that people
can make choices about where to go for themselves, and
moving us towards a time when we will see head-to-head
competition between alternatives to Medicare and the traditional
Medicare program. The Medicare Modernization Act of last
year took us important steps in that direction. But we
have much more to do.
In general, we need to see that the philosophy of private
accounts applies to Medicare just as we've been talking
about Social Security. So we need to move towards more
choices for individuals, more competition in market forces
and health care, and more organized integrated care --
especially for people with chronic illnesses, because they're
the ones who end up costing so much. If we can intervene
early with preventive techniques, as I said, we can lower
that rate of growth in spending and end up with a program
that we value just as much as the one that we value today,
but doesn't cost as much.
THE PRESIDENT: Thanks for mentioning the Medicare bill.
One of the reasons I was strongly for it was because it
did begin to interject a sense of choice for seniors into
the marketplace. And secondly, it recognized that medicine
has changed. And when you have a kind of a static system
where government makes the decisions, it's hard sometimes
to get bureaucracies to adjust to the reality. And the
reason why I believe the prescription drug benefit was
a vital component of a new and modern Medicare system was
so that we could prevent hospital stays, for example, by
the judicious use of prescription drugs. And Medicare --
I've said this a hundred times around the country -- Medicare
would pay for hospitalization for a heart attack, but wouldn't
pay for the prescription drugs the could prevent the heart
attack from occurring in the first place, which didn't
seem like a very cost-effective way to try to provide good
And the reforms in the modernization program that we've
got there has begun, I think, to address the inadequacies
of Medicare as a result of decisions being made at the
federal level. But you're right, we've got more to do.
DR. ROPER: A lot more to do, but it's a step in the right
THE PRESIDENT: Thank you.
DIRECTOR BOLTEN: Mr. President, I want to bring our economists
back in now, because we've heard about some daunting challenges
in the Social Security system, in the health care system
-- and let me ask Liz Ann first, what are markets and investors
looking to the federal government to do at this point?
MS. SONDERS: Let me stay on Social Security reform from
a minute. NBC/Wall Street Journal just had an interesting
poll out this morning, that was reported showing about
50 percent of the surveyed population was not for private
accounts. What I found more interesting was a little bit
later in the report, there were more questions asked than
just that, and there was another more general question
asked about, if these same folks had the opportunity to
put more money in the stock market, would they? And 80
percent said, yes.
So I think this goes back to this idea of a lot of misunderstanding,
I think. One of the problems that we're dealing with now
is because many in the Wall Street community very much
believe in private accounts, there's this natural assumption
that it must only be because Wall Street is going to be
a huge beneficiary of these private accounts. And certainly
what I think makes the most sense -- and the person for
whom I work, Chuck Schwab, thinks makes most sense, is
that you are very controlled. As you said, Mr. President,
a thrift savings plan kind of program where your options
are very limited, it's very index in nature. The fees are
structured to be so minimal that in fact even the studies
have show that under any set of proposals Wall Street doesn't
make any money on this for another seven or eight years.
I think there is this natural assumption that if Wall Street
is for it, it must mean that they are going to be big financial
beneficiaries of it.
I just think, again, it goes back to what I know you're
a big supporter of, which is the democratization of the
markets for individuals, putting more control in people's
hands. And I think this, much like 401(k)s did as we moved
from a benefit part of the non-Social Security retirement
to more of a contribution style -- it's really been one
of the reasons why net worth has gone up. And I think Sandy
made some wonderful points about the power that that puts
in your own hands. And the fact that you can actually pass
it on to future generations makes all the sense in the
world to me.
DIRECTOR BOLTEN: Liz Ann has focused on those personal
accounts in particular. Let me ask Dick Parsons to say
a little more in detail about what your commission concluded
about personal accounts, and what's the right way to do
MR. PARSONS: Fair enough. The point I was making earlier
is that we've got to migrate from an unfunded plan, right,
that assumes there are always going to be enough people
in the work force to take care of those who are not, to
a funded plan where folks who are out of the work force
have had a chance, over the course of their working lives,
to take care of themselves.
Now, that can be done one of two ways. The government
could do it. In other words, the government could hang
on to the money and actually save it instead of spend it,
or you could give people the power to do it on their own
behalf. And after -- we went around the country, we talked
to, literally, scores of people representing scores, and
scores, and scores more. And clearly, I think, the sense
of our fellow Americans and our sense as a Commission was,
the better of those two choices is to begin to let people
fund their own programs so that they, A, had a sense of
ownership, of wealth creation. The object ought to be,
at the end of the day, to put everybody in America in a
place where, while the government is the place of last
resort when everything goes wrong, there are fewer and
fewer of them because more and more of us can take care
of ourselves, right? So that's the objective; that's the
direction the commission felt that this migration to a
funded world should go.
Now, there are lots of examples of how you can do that.
Sure, the President just said you don't want to say everybody,
well you just -- you can hang on to 2 or 3 percent of your
money, and just put it in your pocket, do what you want
with it. There's some people who would go to the track.
People aren't ready for that just yet. But there are lots
of examples of ways in which this can be done cost effectively.
The Federal Thrift Savings plan which the President referred
to and which Liz Ann just talked about is a great example.
That is a program that exists for people who work for the
federal government who have this right. And it's been run
for a number of years. This result is superior, particularly
compared to the returns you would get leaving that money
with the government. And the beneficiaries of that are
the people who participate in that plan.
So we think that there ought to be, at least initially,
limitations on how much discretion you have in terms of
investing the funds and creating some kind of trust arrangement
where there -- where there are people who are investment
professionals who help structure and manage the costs of
the initial options. But clearly, people ought to be able
to start to save on their own behalf to create wealth for
themselves so that they have that wealth to look to in
their later years, as opposed to a government promise only,
which at some point in time is going to have to come up
empty because you won't have a big enough revenue base
to draw from to satisfy the problems.
DIRECTOR BOLTEN: Congressman Penny, the -- one of the
critiques I've heard about taking some of the steps that
Dick -- Dick Parsons is talking about is that -- look,
this isn't the problem for decades to come. It may be a
problem by the time Sandy retires, but certainly not a
problem now, why do we have to wrestle with this tough
political issue now? How do you answer that?
CONGRESSMAN PENNY: You can pay me now, or pay me later.
Wasn't there a commercial on TV once where -- and the purpose
of the commercial was to say that you can spend a little
bit now and fix this thing permanently, or you can just
pay me forever. It's sort of like a credit card where you
can pay it off now and be done with it, or you can pay
the minimum payment forever. And that's sort of the choice
we're facing here.
And if we choose not to address Social Security reform
now, and we let this thing drag along until we do get to
a point of crisis, then we're going to be cutting and pasting,
and cutting and pasting year after year after year well
into the future. It's going to unsettle the markets, because
they're going to look at a fiscal house that is not in
order. So that's the reason it's important to address this
I gave an example during my initial remarks about what
did happen when we waited until the crisis was already
upon us. We've now got a window of opportunity to address
this issue, and I think we ought to take it.
And I do want to just add one point about polling data,
because depending on how you word the question, you get
widely disparate responses. But I've seen polling data
that indicates that for younger people like Sandy, support
for Social Security reform that includes personal accounts
is about 80 percent.
THE PRESIDENT: That's right.
CONGRESSMAN PENNY: So it's huge. And, frankly, the support
for personal accounts as part of the solution -- and it
has to be part of a package. And that's what we tried to
address in the commissions -- how do you put this all together
in order to make it work for the long-term, in order to
pre-fund as much of this as we can while retaining a basis
safety net under the traditional system. It has got to
be a package. But when you talk about reform that includes
personal accounts, it's strongly favored by everyone that
currently is ineligible to join the AARP. (Laughter.)
And it seems to me this is really who we're talking about,
because, as you've said, we're not talking about any changes
in the near-term; people who are eligible to join the AARP
today are going to be protected under the traditional system.
But we ought to, on a voluntary basis, give people working
today the option of pre-funding part of their retirement,
and then owning that retirement in a way that the government
can't take it away from them.
DIRECTOR BOLTEN: Tim, the other thing I've heard -- and
I'm going to ask Jim Glassman to come in here -- the other
thing I've heard is, well, maybe you do have to deal with
the problem now because it just gets harder to deal with
it later -- but we can deal with this Social Security problem,
and in fact, we can deal with most of our fiscal problems
by raising taxes. How do you react to that as an economist?
And how do you think markets would react to that kind of
MR. GLASSMAN: Well, I think markets would worry about
that, because markets would worry about, what does that
do to growth incentives, and investment incentives, and
savings incentives. And I think, in the markets, we're
interested in -- we know it's a structural problem, and
we know that if you come up with structural changes and
structural reforms, we're going to be much more impressed
by that, because we don't need promises to cut this and
that; what we need is to see that the reform that's taking
place will be changing behavior and will be bringing market
discipline into the process. And I think people would be
pretty disappointed if the only solution you could think
of was raising taxes.
THE PRESIDENT: Why do markets matter to the person out
there looking for work?
MR. GLASSMAN: You know, the markets are a barometer of
this -- this is where we, collectively, think about the
future. And the markets are a taste test of what people,
collectively, think is going to be happening in the future.
So it's -- for one thing, it's a barometer of what we think
of your policies. And for another thing, it affects us
when we go to take out a mortgage loan. Interest rates
go up -- because we don't like what's happening, or we're
worried about a policy that's not going to be fixing the
problem then we home-owners pay a price.
DIRECTOR BOLTEN: Sandy, what -- there has been talk about
personal accounts here, and you've been around Iowa, I
guess, campaigning for them. Tell me a little more specifically
what it is that attracts you about them, what you would
do with it, and whether you have any concerns about the
safety of that, of making an investment in a personal account,
rather than letting the government keep your money.
MS. JACQUES: Well, Tim already mentioned earlier, by the
time I retire I should expect a 25 percent reduction in
what I should expect to get. So I have a hard time thinking
that I could do worse in a personal account than I could
with the current system. So I guess I'm not worried at
all about the security of my investments in a personal
account. Because, as others have mentioned, the choices
would be limited. I'm not going to be able to invest the
money at the race track or invest it -- you know open up
the paper and pick one stock and cross my fingers and hope
that it does well. I will be given limited options for
how to invest that in very diversified funds. So I'm not
worried one bit that I would do better in a personal account
than I would do under the current Social Security program
because of the demographic changes that will take place
before I retire.
But on a more broader sense, why personal accounts are
important to me -- it's very important to me because I
think they're the only way to give me security in my retirement
and my daughter's retirement without raising payroll taxes.
I can look at paying the same percentage in payroll taxes
until I retire, but have a bigger account when I retire,
because of the growth that will take place over the next
40 years that I work. I have 40 more years to work before
And if you raise payroll taxes you're just going to be
asking me to pay more, but give me less when I retire.
But with a personal account I can pay the same amount in
payroll taxes and use a portion of that go to into my personal
account -- so I can pay the same and get back more. Now,
paying the same and getting back more when I retire, I
don't know why anyone else is considering any other option
than that because I can't think of a better deal than that.
DIRECTOR BOLTEN: Dick Parsons.
MR. PARSONS: Yes, just -- the other thing that I think
people need to consider when Tim talks about a window of
time to operate is -- the statistics we saw and the commission
say by about the year 2020, you're going to have about
two people working for every person retired. But that's
still two to one. And where I come from that's a majority.
And you've got to ask yourself, are those two going to
let the Congress tax them sort of into oblivion to pay
for the one that's not in the work force. I don't think
I think the limit -- there is a limit to how much you
can tax, which means that either benefits will have to
come down. That's inevitable. And people who have been
promised something and who believe that they're entitled
to something and who planned on getting it aren't going
to get it; or, essentially, you sort of monetize it that
you just issue more money to pay those promises. But by
doing that, a dollar buys 50 cents of what it used to buy,
so that we're on a collision or a train wreck course. And
Tim is 100 percent right when he says that time to start
to deal with that -- you can't fix this problem with no
pain, without making some sacrifices. But the time to start
making those sacrifices is now, so that they're manageable,
so that the markets can have confidence that we're on a
course that is going to avoid the train wreck. Because
if we wait until later, it will be -- it will be a huge
train wreck for our whole economy.
DIRECTOR BOLTEN: Mr. President, we're reaching the end
of our time, and I'm going to do the smart thing and give
you the last word. (Laughter.)
THE PRESIDENT: Thank you, Ambassador. (Laughter.)
I love the idea of people being able to own something.
You know, one of the most hopeful statistics in America
is the fact that more and more people are owning their
own home. It is a -- it's just -- I met a lot of people
on the campaign trail that said, I just bought my first
home. And there's just such joy in their voice, that they
were able to say, this is my home.
I love the fact that more and more people are starting
their own business. I think one of the unique things about
America is that the entrepreneurial spirit is so strong
that people are willing to take risks. People from all
walks of life, all income levels are willing to take risks
to start their own company. And it's a fantastic experience
to meet people who say, my business is doing well. I'm
trying to do the best I can with my business.
And I like the idea of people being able to say, I'm in
charge of my own health care. In other words, if I make
a wise decision about how I live, I end up with more money
in my pocket when it comes to a health care savings account.
I particularly like the idea of a Social Security system
that recognizes the importance and value of ownership.
People who own something have a stake in the future of
their country and they have a vital interest in the policies
of their government.
And so I want to thank the panelists who are here for
helping to illuminate the need to fix problems, but at
the same time, recognizing the inherent optimism about
promoting an ownership society in America. And I want to
appreciate you helping advance this issue -- these issues,
so that when we begin the session after the new year, these
will be foremost and forefront issues for the Congress
to consider. Now is the time to solve problems and not
pass them on. This is my message today; it'll be my message
to members of the United States Congress. We have come
to Washington to serve, to solve problems, and do the hard
work, so that when it's all said and done, they'll look
back and say, well done, you did your job.
Thank you all for coming. (Applause.)
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