CONCORD COALITION PRESS CONFERENCE:
Saving For The Future: Budget Policy, Tax Cuts & The Surplus
TOPIC: BUDGET POLICY, TAX CUTS, AND THE SURPLUS
EXECUTIVE DIRECTOR OF THE CONCORD COALITION ROBERT BIXBY, FORMER SENATOR SAM NUNN (D-GA), FORMER TREASURY SECRETARY ROBERT RUBIN, FORMER SENATOR WARREN RUDMAN (R-NH), FORMER TREASURY SECRETARY PETER PETERSON, AND FORMER CHAIRMAN OF THE FEDERAL RESERVE PAUL VOLCKER
LOCATION: THE NATIONAL PRESS CLUB, WASHINGTON, D.C.
TIME: 9:05 A.M. EST
DATE: MONDAY, MARCH 12, 2001
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THIS IS A RUSH TRANSCRIPT.
MR. PETERSON: Good morning, all.
A word of background: The Concord Coalition is a bipartisan, grass-roots organization that was established in 1992 by Warren Rudman, who's of course with us today, the late Paul Tsongas, and myself. Paul was succeeded by Senator Sam Nunn, who, as you can see, is also with us.
We're also joined by two fellow directors: here in Washington, Secretary Bob Rubin, and, I hope, in London by Paul Volcker, who I think will be here in a moment. This makes a group of five, two Republicans, two Democrats, and Paul Volcker, who has to be the most independent person that I know.
And finally, we're now joined by our executive -- able executive director, Bob Bixby.
The Concord Coalition was set up in '92 to encourage fiscal responsibility. It was era of huge and growing deficits as far as the eye can see. Over $2 trillion had been added to the public debt in the previous dozen years, more than tripling over this period. Debt and interest costs were choking off investment, productivity, and economic growth.
Now for the last few years, as we all know, the budget is in surplus and projected to remain so for several years. Interest rates and costs are lower; investment and productivity are higher.
Obvious question: What are we concerned about?
First, there is the danger of over-committing on projected surpluses and finding ourselves back in deficits within a few years, or at least leaving -- having to use the Social Security and Medicare surpluses to pay for other spending. This would risk a return to the spend-and-borrow vicious cycle, which we have now happily gotten beyond.
Then there is the fundamental long-term challenge, which the Concord Coalition has always stressed, of setting aside sufficient resources to meet the huge retirement and health-care costs associated with the coming senior boom. The surpluses provide an opportunity to help meet this challenge, but only if we are careful to preserve them.
These principles guide us today as we stand before you. First, fiscal discipline is just as important in times of surplus as it is in times of deficits. Second, faith in unreliable long-term budget projections may lead to renewed deficits and squander the opportunity to use the prosperity today to help fund tomorrow's needs. Third, today's prosperity has not fundamentally changed the coming senior boom and its related fiscal and retirement challenges, which are as large as they ever were. America is not putting aside anywhere near enough to pay for these costs. Fourth, increasing national and personal savings is the single most effective policy the government can pursue to ensure long-term economic growth and retirement security. Budgetary proposals should be assessed in that context.
The first subject we shall discuss today is the unreliability of the long-term budget projections. First, some history. As a general matter, long-term budget surpluses are highly unreliable. Indeed, the further out the projections, the more unreliable they have been. Bob Bixby will present, I think, some interesting specific evidence of 20 years of experience with these projections, from 1980 to 2000.
There is also a unanimity of expert opinions on the lack of reliability. Chairman Greenspan, CBO -- and speaking of the CBO, it's not a secret that the CBO has been very reluctant to even make 10-year forecasts -- and, recently, the GAO. You will see in the materials in your press kit today how restrained the enthusiasm is of each of these various parties in these long-term forecasts. Now, as today's projections, we believe that today's projections may substantially overstate the size of the likely surplus. Bob Bixby, our executive director, will show you some reasons we feel that way.
So the obvious question is, How much should we be willing to gamble on 10-year projections that the CBO itself says could be off by trillions of dollars? The answer: We of the Concord Coalition believe it is unwise to rely on these projections to commit ourselves to tax reductions over a 10-year period, particularly in advance of addressing the huge and daunting future deficits of Social Security and Medicare. To do otherwise is to rely on the unreliable while we ignore the inevitable.
The next point we will try to make today is how we always seem to spend substantial portions of any surplus. The Concord Coalition believes that today's budget surpluses have led to a breakdown in fiscal discipline. You shall see in the material we gave you the history, the recent history, of spending unified budget surpluses. There is, of course, the longer-term history of spending Social Security surpluses that's well-known by all. Incidentally, I remind you that these are the surpluses that were allegedly going to be saved for the retirement of the baby boomer generation but instead were spent for other purposes.
Given this history of squandering surpluses, we of the Concord Coalition believe, one, that new, realistic and enforceable spending caps should be put in place immediately and, two, to the maximum extent possible, these surpluses should be set aside to fund the much-larger liabilities of the entitlements and retirement savings challenge. Next, today we shall discuss the daunting entitlement and retirement savings challenge.
To really grasp the enormity of these challenges, it is essential that we consider a couple of realities. First, you may be surprised, in the material we're going to present, to see that vast numbers of Americans approaching retirement have minimal and totally inadequate retirement savings of their own. Too many rely on Social Security alone. We shall show that the Social Security and surpluses and the projected surpluses between now and 2010 are but a very small down-payment on these unfunded liabilities.
I should emphasize again, these are unfunded liabilities, and two, that these liabilities also belong to the American people. Thus, we of the Concorde Coalition believe, one, an immediate moderate tax cut is justified and reasonable in light of near-term economic and budgetary prospects. However, there is no reason to lock in a large 10-year tax reduction to give short-term fiscal stimulus, particularly at the expense of the urgent long-term needs to fund our senior entitlements and retirement savings needs.
Second, any future tax cut should be tied to prevailing economic conditions and the likelihood of actually realizing surpluses. In other words, the concept of surplus dividends. And two, they should be postponed until full consideration of Social Security reform that makes the program fiscally sustainable on a long-term basis.
Three, we remain committed to debt reduction. In addition, we believe that a substantial amount of the non-Social Security surpluses and all of the Social Security surpluses should be available to fund Social Security private accounts or mandated private retirement accounts. I urge you to read Chairman Greenspan's recent comments on this specific proposal.
There are several reasons that I have favored using surpluses to help fund these private accounts. In the first place, they do respect the principle that a substantial portion of these surpluses would be returned to the American people. Second, if these accounts are in people's hands, Washington would not be able to spend them. Third, there would be built-in political incentive to attain the surpluses, since the public will share in them. Fourth, such accounts would represent some additional and badly needed funding that the Social Security and retirement challenge desperately requires.
Next, such accounts would alleviate the concerns of those who assess the dangers of paying too much off of our public debt. And I guess I should add, it would also alleviate the concerns of people that are wondering about the government investing too much in equities of this country.
Fourth, given the magnitude of the projected and the unthinkably large projected payroll taxes and/or deficits that would be inflicted upon our children and our grandchildren and their economy, we of the Concord Coalition believe that our recommended program is not only a matter of fiscal responsibility but a matter of moral responsibility, as well. We believe that while much has been said about the fairness of the proposed tax cuts as between rich and poor, we suggest urgent attention should be paid to a much less-discussed but profound moral question: Are we being fair to our own children and grandchildren? Incidentally, it was Paul Tsongas who insisted that a small child be part of the Concord Coalition's logo, as you can see, to remind us of our moral responsibility to future generations. So the Concord Coalition applauds President Bush's decision to set up a Social Security Commission, and we urge that he give the commission a tight deadline.
Next, I'd like to turn the meeting over to Bob Bixby, who we hope will present some interesting discussion and chart material for you to consider.
Bob Bixby, our executive director.
MR. BIXBY: Thank you, and I welcome Paul Volcker and -- can you hear me? This is Bob Bixby.
All right. Thank you. And what I'd like to do is just present a few charts to back up some of the points that Pete Peterson made.
The first chart simply states the obvious, which is that long-term budget projections are very uncertain. The Congressional Budget Office has been very helpful in pointing this out -- let me just move this back a bit so you can see it -- and they have done three alternative baselines, all of which, they say, are reasonable over a 10-year period. There is a $3 trillion variation over 10 years in these scenarios, one they call a more optimistic scenario, and the one they call the more pessimistic scenario. What is important to remember about this so-called "pessimistic" scenario is that it basically assumes that the economy and spending on health care, a lot of factors, will revert to the pre-1996 trend rather than continuing on an optimistic trend. So this is far from being a catastrophic scenario; it's just sort of returning to where we were a few years ago. Let's see the next chart.
A lot of people think of these surpluses as if they were money in the bank or some sort of a lottery pay-out, and what this chart is showing is that when people talk about a $5.6 trillion surplus over the next 10 years, most of it comes in the out-years. In fact, 84 percent of it comes after the next presidential election; or, if you want to look at it another way, two-thirds of it come in the second five years of the 10-year projection. And how accurate are five-year projections? Let's see the next chart.
The Congressional Budget Office again has gone back and assessed its own track record of five-year projections, and what they have found is that five-year projections have, on average, been off by approximately 3 percent of GDP. If you put that into today's baseline it means that in 2006, they're projecting a total budget surplus of about 500 billion. They could be off by about 400 billion, given the previous track record. And by the way, the non-Social Security surplus that year is projected to be 267 billion, so you can see that short-term on-budget surpluses are no sure thing. Let's see the next chart.
This is showing somewhat of the same thing in a different way. It's CBO's fan chart. Looking at their track record of their five-year projections, they look at what the range of possibilities is for their current projection for the year 2006. What this chart is showing is that there is a 90 percent chance that somewhere within this range is where the surplus or, indeed, the deficit, will be. Obviously, the closer in, they feel, the higher the probability, but they can't rule out the outer fans.
One of the key assumptions, a very key assumption -- this looks boring. It's economics stuff, but it's really, really, really important to all of this: productivity growth. As you can see, there was a 20-year trend, 1951 to 1973, of roughly 2.7 percent annual growth. People didn't foresee a drop-off, but there was a drop-off. In the '70s and through 1995, productivity plummeted and stayed there, growing at about 1.5 percent annually, on average. Then, without again being expected, there was a great surge in 1996, and the economy grew much faster, incomes grew, more revenue came in. It's basically what's been driving the surplus.
The 10-year projections assume that this new favorable trend in productivity is permanent, that it's a new trend, that we've gone back to the '51 to '73 period. If this turns out to be an aberration, just sort of a short-term blip, these surplus projections over the next 10 years will be very, very different, losing a trillion dollars or more.
MR. PETERSON: If I might jump in and say the following, I've interviewed a lot of economists about their productivity growth assumptions. I have found none that predicted either the collapse in the '80s nor the recent increase. So the obvious question is, why should we have this much confidence on the next 10 years' projections of productivity growth?
MR. BIXBY: Now this chart is showing the breakdown of the projected 10-year surplus. And I will just quickly mention, everybody agrees that the 2.5 trillion of the Social Security surplus should be set aside and not considered available for other means, aside from Social Security reform. The Medicare Part A surplus is 400 billion. While technically on budget, there's -- many people believe that that should not be available for other spending. There are a couple of expiring tax provisions, some technical things that would add about a hundred billion, and -- or subtract about a hundred billion from the deficit. And the key thing here -- I mean the surplus. The key thing here is the discretionary spending assumption. The baseline assumes that the discretionary spending will grow only at the rate of inflation over the next 10 years, and I don't know anybody in town who believes that that will happen.
If you plug in a more realistic assumption about discretionary spending -- say, that it grows roughly at about 4 percent a year, as in fact the president is proposing for this coming year -- it knocks off about 400 billion over the 10-year projection. More importantly, if discretionary spending grows at 5 percent a year, roughly keeping pace with GDP, you'd knock off about a trillion dollars. So -- and that's perhaps not an unrealistic assumption. It's not what the Concord Coalition would recommend; it's just that we need to keep in mind that discretionary spending may grow a lot faster than the baseline. So that leaves an available surplus somewhere around $2.2 trillion.
This is a conservative estimate of the tax cut that's being proposed. Basic policy is about $1.6 trillion. Recent estimates indicate it may be higher than that, but that is the number that the president has said he wants to stick to, $1.6 trillion. If you change the alternative minimum tax so that more -- under this proposal, about thirty -- about 15 million more Americans would be subject to the alternative minimum tax than would happen under current law.
The Joint Committee on Taxation says that if you try to fix that -- and many people think you really would have to fix it -- it would cost about $300 billion. And debt service from using the money for a tax cut or for reducing revenues rather than using it to eliminate the debt, or pay down the debt, adds about $400 billion to the cost. So the total cost of the tax cut is somewhere around $2.3 trillion. That, obviously, you're going to get a lot of different estimates. But basically what it's showing is that this tax cut would eat up all of the realistically available surplus over 10 years, provided that that surplus all materializes, that the projection is accurate.
Next chart, please.
Now, we worry about the future. And as Pete Peterson said, how can we use these surpluses for future use? What this chart is showing is that most workers are not saving enough for their own retirement. Virtually a third have saved away either nothing or they don't know how much they've saved. So, at the same time we have a national savings problem, we certainly have a personal savings problem as well
Next chart, please.
The reason that's important is that looming out beyond these 10-year projections is the retirement of the baby-boom generation and the associated costs with that. Whenever I look at this chart, I think of people that have a hurricane party at the beach. If you look at the first 10 years, the next 10 years, things look pretty good and we may be tempted to have a party with the surplus. But looming out just beyond there, offshore somewhere, are those big deficits. And this is just Social Security in current dollars. And by the way, this is just taking it out to 2037, when the Social Security trust fund is still, quote-unquote, "solvent." So what it's showing is that there will be huge liabilities to the government out beyond that, and of course people haven't been saving enough on their own to fund their retirement. So we have a retirement security challenge facing us, and the more we can do to use today's surpluses to help plug that gap, the better.
Next chart, please.
Finally, this is another way of showing -- one of the ideas that seems to have bipartisan support is the Social Security lockbox, and we think that's a good idea. However, even if all of the Social Security surplus is saved, it's but a very small down-payment on the future liabilities to the program. So, Pete, did you have a comment on this chart?
MR. PETERSON: It seems to be the glib and benign assumption around town that even if we save all these Social Security surpluses in the lockbox -- and no one has yet designed one that couldn't be picked, but let's even make the assumption that they're set aside -- that somehow the Social Security problem is taken care. This shows in today's dollars that the future liabilities are many times that surplus over the next 10 years; many times.
MR. NUNN: I think, Pete, Bob, it might be interesting to point out why we have more confidence in these long-term projections than we do the 10-year revenue projection. Bob, could you point that out?
MR. BIXBY: Yeah. I mean, one of the reasons that we worry more about these long-term deficits is that they're driven by demographics, which are much easier to project, much more reliable than long-term budget projections, because the people who are going to be collecting the benefits are already born. You have benefit formulas in place, tax rates in place. So there certainly is variation in those projections as well. It's just nowhere near as large as in the budget projections. And so that's why these demographically driven deficits of the future are more real in that sense.
So anyway, the bottom line for us is to go slow, be cautious, both on the tax cut side and the spending side -- fiscal discipline affects both --cautious on tax cuts. And certainly we're going to have to be very restrained on the spending side. Otherwise, these surplus projections simply melt away.
I'd now like to turn things back to Pete, and he'll try to bring in Paul Volcker, I guess.
MR. PETERSON: Thank you.
Paul, my friend, our friend, you may not have --
MR. VOLCKER: (From London.) I hear you. I don't know whether you hear me.
MR. PETERSON: Yeah, we're hearing you. And I introduced you in the beginning as the most independent person I know. I hope you don't get too carried away with that image, but please say whatever you'd like to say, sir.
MR. VOLCKER: Well, what I'd like to say is that this budgetary analysis I just heard is one that I agree with. I don't think we're in a position to confidently project 10 years ahead and in effect enact a permanent tax program, increasing in scope over a 10-year period, against the uncertainty that's out there and the risks that the projected deficit will disappear. You've described all that. I agree with it.
MR. PETERSON: Okay. Thank you, sir.
How about the rest of you? Bob Rubin, Warren, Sam, would you like to say anything?
MR. RUDMAN: Well, actually, I think at this point, Pete, we've laid out the program that we believe in. I'm sure the press has some specific questions. And I don't have any comment, other than to say that I hope that you will look carefully at the charts in your press packet. We've developed them so that you may look at them, hopefully reproduce them, use them. They are very accurate, and they are based on solid data.
MR. PETERSON: All right.
MR. RUBIN: You know, I think the only thing I would say -- I concur with everything that's been said -- is that I think this is an issue of immense seriousness. I think it's enormously important that people understand this, because what we do this year on this subject is going to affect us for years and years and years to come.
MR. NUNN: Pete, let me just say a word. I'd like to talk about risk assessment, because I think that's what policymakers that are really deciding the fate, the fiscal fate of our nation for the next decade, are really doing. They are trying to balance risk and look at different assessments, different projections, listening to different people that have different views, and I think it's important to have a framework for deciding that.
If you look at the risk of a 10-year tax cut, based on forecasts which the CBO themselves would be the first to say are much more of guesswork than they are a real prophecy, then the way we see it, at least, this is a very large gamble. And as Bob Rubin just said, it has huge, huge consequences.
If things don't work out, then we know the result, because we've seen that before in the fiscal history of our nation -- huge deficits. That has a negative effect on savings, it has a negative effect on investment, and the lack of savings and investment has a huge effect, downside, on productivity, which is the very heart of what these budget forecasts are based on, is increased productivity. So if they are wrong, you're going to get in a spiral of decreased productivity because you do not have the investment. And I think that the whole subject that Pete Peterson's talked about, the Social Security obligations, Medicare obligations of the future when the baby boomers retire, gets much more severe.
Now, if you look at that kind of risk, and it is a huge risk, if you look at it, what can be done to correct it if things go wrong? Correcting on the downside of that is going to be very difficult. Anyone watching the first Bush administration, the first President Bush, would realize that the history of that indicates that this administration, based on the campaign, based on philosophy, sincere beliefs, would have an extremely difficult job and probably not be able to reverse course and start increasing taxes if the tax cuts go too deep. So I think that risk is huge, and I think the ability to correct it, politically, is very minimum.
Now, on the other side, if we go for a more modest program, a one-, two- or three-year tax cut that Bob has described, then what are the risks there? There are probably a couple of risks there. One risk is that the surplus is spent. Now, we have to avoid that. If the surpluses are spent, then of course that is very much against what Concord stands for. Now, the way to avoid that, though, is to put on budget caps, and you have a president who certainly can exercise his veto. So I believe that he will exercise that veto if the Congress starts spending a lot more than is warranted. So I think that risk of runaway spending is minimized with President Bush in the White House with a veto.
Now, the other risk is piling up surpluses, that Chairman Greenspan has mentioned. I don't see any political risk to that at all, because you've got a president who wants to cut taxes. If this tax cut is two years, does anybody think that he won't come back, if the surpluses are piling up, and have further tax cuts? And also, as Pete Peterson has said so ably, you can take care of that problem with the private savings accounts, which I think are so important. So I see, bottom line, the risks that we're advocating being very, very minimum. The risks, on the other hand, of a 10-year tax cut and the consequences and the inability to handle the downside if things go wrong, I see as very, very large.
MR. PETERSON: Thank you, Sam.
Questions, please? Any other questions?
MR. VOLCKER: And if I could just reinforce that. I think this is a kind of risk assessment thing and it's just been assessed correctly. It would be so much harder to repair this if things go worse than to repair it if the very optimistic picture comes out. What can you do with the estate tax once you've announced you're phasing it out completely? Very hard to reverse that. I don't understand why we want to phase that out completely anyway; it needs some reform. But how would you ever change that once you put it in on a 10-year phase-out and everybody's planned on that basis?
MR. PETERSON: Other questions? Please.
Q -- You talk, all of you, about the trigger. I'd like to hear you talk about it both in economic terms and -- ?
MR. RUDMAN: Let me take that one, Pete. I probably have more experience with triggers than anyone in the room. (Laughter.) We had a trigger in Gramm-Rudman, as some of you may recall. It then went to the United States Supreme Court, and the trigger remained, but the person who decided the numbers changed. But the essential trigger mechanism was there. In '85 we pulled the trigger and I believe $2 billion or $3 billion was reduced from the budget that year. In '86 we pulled the trigger and more money was saved. In '87, Congress was getting nervous about the amount of reductions and so it misfired, and in 1988 they took our gun away, and Gramm-Rudman essentially had remaining only the budget caps itself.
Let me simply say that, you know, I don't know specifically what the group up in the Senate has in mind for the trigger, so I don't want to criticize it and say it won't work because I don't know what the trigger is. But I can tell you from my experience that it's easy to mess around with triggers because people can fuss around with the numbers, they can ignore them. I mean, there was no criminal penalty for not pulling the trigger. If you didn't pull the trigger, the members of the Budget Committee weren't carted off to the federal penitentiary, so there was no forcing mechanism.
A better thought, in my mind, rather than a trigger would be essentially to turn it around and to essentially put a more moderate tax cut in place over the next several years, and then, as has just been stated by Sam, if these surpluses pile up, no reason not to renew it and expand it. That would make a great deal of sense. It's certainly less riskier. Certainly the president would be living up to his intentions of a tax cut.
My sense is that if you were to do that, if there were problems in the economy, you can probably live with a more moderate tax cut. If you put the whole tax cut into place and the problems develop, you would have a serious problem. So my sense is that if they have a trigger that they think will work, I would not want to be against it, because I don't know what it looks like, but a better way would be to have a rolling tax cut that was at a lower level, which I think everyone here would support. I know Bob Rubin and I have talked about that. He might want comment on it.
MR. PETERSON: Bob, do you want to comment?
MR. RUBIN: I think the only place I would maybe slightly -- well, let me just add a comment to that. I do agree with you, Warren. I think a far better proposal -- a trigger sounds good conceptually. I think once you get into the practicalities of it, it seems to me there's a pretty good probability it's not going to work. Therefore, I agree with Warren, you start with a moderate tax cut, and two, three, four years down the road, if the projections materialize, you can decide what to do. I guess for my money, at that point, you could either have another tax cut or you could set aside savings accounts or you could do something else.
MR. PETERSON: Senator, I appreciate your history. I always learn something from you. We've made more progress on gun control than I had realized. (Laughter.)
Q I would like to ask Mr. Rubin, do you now support the notion of using the surplus for the transition to private accounts under the Social Security System, as I heard from Pete Peterson? Also, what is your view of what appears to be the latest conversion of your success with the tax cut -- ?
MR. RUBIN: I think what Pete said, if I understood Pete correctly, which I think I did, on the setting up of private accounts, is you could do that, as Alan Greenspan has said, either within Social Security or outside of Social Security. And it was not our intent today to get into the debate of which it should be, but simply that there's enormous shortfall in terms of retirement security, and one very good use of part of the surplus would be to set up mandatory savings accounts. That did not address the issue of whether it should be inside Social Security or outside Social Security.
In terms of Paul O'Neill's views, I think I'd prefer to let him speak for himself. I don't think I should be commenting on his views. My views are simply as have been stated by the Concord Coalition.
MR. PETERSON: Bob, I might add, in your materials we have the chairman's comment on this point. Let me read it, briefly. "Eliminating unified surpluses by transforming Social Security into a defined contribution system with accounts held in the private sector would likely better maintain national savings levels. Alternatively, unified surpluses could be used to establish mandated individual retirement accounts outside of Social Security system, also mitigating the erosion ion national saving."
Other questions. Please.
Q Yes. Some of the panelists have mentioned a more moderate tax cut. Exactly what would be the price of a more moderate tax cut in five or ten years? Or what would be the -- ?
MR. RUDMAN: Well, one of the things that you'll find in your material, I believe, is -- you know, we know what the surpluses are for last year and we have a pretty good idea for this year, so my own view, and I think everyone here joins, is that we might, in terms of the recession that might be coming on, have a larger tax cut than the president is proposing in the initial years, based on surpluses we know exist. I mean, that's something that Congress could decide to do. And we're not going to come up with specific numbers; we're simply going to say they ought to be tied with known surpluses. It well might be that an earlier, larger tax cut would be more beneficial and have less long-term risk, as Sam has pointed out, than a long-term cut, which essentially has so little in the first few years it would probably do very little in terms of helping the economy.
MR. NUNN: Let me reinforce that point. I think that to call a 10-year tax cut, with most of the cuts coming in the last five years, in the time frame where the budget projections are the least certain, to call that a short-term stimulus to get us out of whatever we're getting into right now, to me is a real mismatch, because if you need stimulus cuts, you need them up front.
There's a justification, as Warren said, for a larger cut in the first year because of the state of the economy, and it can be based soundly on the surpluses we had last year. I think the non-Social Security surplus last year was $86 billion. I think you could justify that. That's much more like a dividend because, in effect, we've earned it. But to have the 10-year projection, to me, would be something with analogy of the business community, of a company having a 10-year forecast on earnings so they, therefore, declare a 10-year dividend policy right then and lock it in. No sane company in America would do that.
MR. VOLCKER: Bob, you might give us the number, if you have it, of the amount of dollars in the Bush tax cut in the first year, if it's not retroactive; taking it as they've proposed it.
MR. BIXBY: The non-retroactive, as they've proposed it, is $31 billion in the first --
MR. RUDMAN: Thirty-one billion. And what we're simply saying is that based on known surpluses, you could have a much more substantial front-loaded tax cut that might help the economy do what the president wants to do, but have less risk long term.
MR. PETERSON: And not only is it very small, but if it should be enacted, it wouldn't probably take effect until the last half of the year.
MR. BIXBY: I should mention that Paul Volcker can't hear our questions, so I'll try to repeat them into the microphone so he can hear them.
MR. VOLCKER: I might say, just following that discussion, I agree with what's said. I don't think we can be carried away with making the tax cut limitless in the first couple of years. We do have to worry about making it too excessive before we know what the expenditures are. But I agree with the general point.
Q Senator Nunn, you said that -- you cited the long-term Social Security deficit as a more reliable number. But hasn't the new census report cast some uncertainty the other way about that as a result of the much higher than expected immigration level over the last few several years. The United States routinely imports younger workers. Doesn't that affect the long-term picture?
MR. NUNN: Well, right. Good question. The question is the long-term forecasts on Social Security, Paul, and whether that's accurate, because we may have more workforce. I think that is a valid point. We are not certain of these projections. We believe they could be accurate, they could be off one way or the other.
But you also have the other side of the equation -- and Pete Peterson's the expert on this -- you have people living longer, and there are a number of forecasts that would say that we're going to have a lot longer longevity, which is a blessing to our people and a tribute to the health care we have now, and that would tilt the other way. So you have uncertainties in both directions. Valid point.
MR. PETERSON: Let me just elaborate that last point. The longevity assumptions that are used assume that America's longevity in 2050 has already been reached or exceeded by Japan. Given some of the biogenetic breakthroughs, it would certainly seem quite possible and perhaps likely. That strikes me as a remarkably conservative assumption, and I guess some of the senior citizens can hope that's the case.
MR. VOLCKER: Let me just make a related point, here. We are now relying on our national savings by borrowing from abroad. And against the kind of outlook you have, demographically and otherwise, we can't count on that source of savings forever. And we're going to have to assess our whole fiscal program in terms of improving the savings rate, or maintaining the savings rate of the country without relying indefinitely on very heavy savings from abroad.
MR. PETERSON: Thank you, Paul.
Q Most of you were, you know, talking about the ten year forecast. But we're already in an economic slowdown. I was wondering how do you see the economy growing this year? And also, particularly with the stock market falling so much, there's been a lot of discussion whether the stock market has created a lot of revenues. Do you these tax rates coming down as result of that?
MR. RUBIN: I think one of the many problems with relying on the five- and 10-year forecasts is we still don't fully understand why the tax revenues were as they were over the last eight years. Obviously, the stock market and the bonuses that were triggered by it and the capital gains were part of it, but I can tell you, having seen a lot of analyses of it, there is still less than a full understanding of what created the large tax revenues. And as you correctly say, we now are having a slower economy -- my instinct is to think it may be difficult for a while -- and that should all cause us to be more cautious about the projections that the these tax cuts are based on. Is that responsive to the question?
MR. RUBIN: Oh, I think it'll be difficult until it ceases being difficult. (Laughter.) And that, I think, time will tell. (Laughter.)
MR. PETERSON: You haven't lost your touch, Bob. I'm glad to see that.
Q Mr. Nunn, in 1995 you co-sponsored a broad-based tax plan. How does that tax plan change? Why are you not supporting this one? And as kind of a follow-up, do you think larger tax cuts will encourage more -- ?
MR. NUNN: I couldn't hear the last part of that question. Could we put the mike up a little bit? I heard the first part, but --
Q The second part is that do you believe that there is one tax bracket --
MR. NUNN: Well, on what we called the Nunn-Domenici Tax Plan, it basically was neutralizing the effect of the tax code on savings versus expenditure by letting people, in effect, be taxed on their income less their savings, their financial savings, including stock investment and including savings accounts. That would have addressed the problem that Paul Volcker just alluded to, which is the lack of savings in this country and the fact that we're not going to be able to import the savings from Germany and Japan and other countries that have their own serious demographic problems, which Pete Peterson has outlined.
So, the Nunn-Domenici tax plan was a structural change in the way we tax in this country. It would have been a very fundamental change in taxation. It would not have started with the debate on rates. You can have any rate schedule to it you want to, you can have any degree of progressivity that you need in the country politically or in an equity sense. And so it would really have changed the whole method of taxation. The business tax would have been changed fundamentally also.
I don't want to get too far off into that because that's not something the Concord Coalition is talking about today, but I believe there were kind words toward that proposal by the Concord Coalition when Martha Phillips and Bob were there. But I don't think it's ever been an official part of their agenda.
MR. PETERSON: I might add that if you read my statement and the other statements carefully, you'll see we used the word "mandated." And this comes out of my own experience on this matter. I told Bob Rubin this morning that I was asked to chair a committee on the subject of capital formation in America that was part of this Competitiveness Council that was set up by the White House and the Congress. And I assembled a big cross-cut group of the leading savings economists in the United States. And I was very much interested in why our savings rate was as low as it was. So the question was, does somebody have a magic bullet that will, at low cost to revenues, dramatically increase savings? And we had economists there all the way from very Democratic to very Republican. I didn't find one single expert in savings economics who told me that when you consider the cost of the tax, added in a profound way to savings in this country.
And the unanimous conclusion was that America, over the last 50 years -- we used to be the biggest saver in the world; now we're the lowest saver -- has become such a consumption-oriented, I-want-it-now economy, that we would probably have to move to some sort of mandated savings in order to get the bump we need.
MR. PETERSON: Dr. Rubin and Paul Volcker probably are the leading experts on that subject.
MR. RUBIN: I can take a shot at that. There's a dispute about that.
MR. VOLCKER: What's the question?
MR. RUBIN: Gary Gensler, who was the former undersecretary of Treasury when I was secretary, and has been a partner in an investment banking firm before that, was quoted in the New York Times as saying he thought it was about $500 billion. I think the Congressional Budget Office at one point said some number around $800 billion. Either of those numbers -- take the $800 billion number -- creates a very serious -- if the $800 billion number is right, then the proposed tax cut puts us in very serious risk of not being able to retire all of the fully available -- all of the available debt.
I think Bob ran those numbers. And what it left you was that the tax cut and the available surplus, not counting Social Security and Medicare, are roughly a wash, although if you take into account prescription drug benefits and some of the other things that congressional -- that have broad bipartisan support, you could actually start out with a deficit on the non-entitlement side of the budget. But even if it's a wash, it would leave you with a Medicare surplus and the Social Security surplus which are $2.9 trillion, and a tax cut which is generally estimated to be somewhere between $2 trillion and $2.6 trillion; if you do the arithmetic, you just barely can pay down the available debt. And so if there's anything, any shortfall with respect to the expected surpluses, you are then not fully paying down your debt. And if you get anything like the kinds of possible shortfalls of the surplus that Bob Bixby's chart showed, you would be way short of paying down the available debt.
MR. PETERSON: Paul, do you have a comment on that subject, if you heard --
MR. VOLCKER: Well, I didn't hear the question precisely.
MR. BIXBY: The question was, did you have a view on the amount of debt that is retirable, public debt.
MR. VOLCKER: Well, you can answer that question fairly technically, which I guess Bob did, in terms of what's outstanding. The more general question is, does the government need a body of government debt out there to function well? Do the markets need it? And I think if you really eliminated the debt, you would have some kind of adjustment problem, but the Social Security funds are going to be disgorging debt in the future, and markets have a way of inventing the kind of debt they want. And we've got lots of people borrowing money and we've got lots of institutions that ought to be able to convert that into liquid high-quality debt. So I don't think we necessarily have to have government debt outstanding, although it's been convenient.
Q --political questions. Do any of you support the administration's decision [inaudible]?
And secondly, could you give your assessment as to where we are likely headed in terms of an overall budget and tax package? Is it likely to be like 1993 or more like '81 -- ?
MR. PETERSON: Since three of us here have been elected to nothing, I would suggest that our two senators comment. (Laughter.)
MR. RUDMAN: I was going to say that, you know, on the first part of it -- what was the -- just restate the first part of your question again.
Q Do you support the administration --
MR. RUDMAN: I understand. Right. Right.
Q -- This is the tax cut you referred to --
MR. RUDMAN: Concord Coalition historically doesn't get involved in answering those kind of questions. You know, we're not political. We are totally bipartisan. We individually might have, you know, personal views on that, but our strength has been that we don't vary from our fundamental belief, which is that we want to talk about these issues, not about the politics of them.
Your second question -- my sense is, from talking to my friends -- and this is a personal view -- that this is not going to be straight party-line when it finally gets down where the rubber meets the road. I think this is going to be heavily debated, people from both sides of the aisle taking similar views on certain parts of this. And my expectation is that the most important thing that will be difference between the Senate and the House is the Senate will have a budget resolution in place, and that will start to focus on some of the things that we talked about this morning.
Q To use broad economic terms, some of your worst-case scenarios, can you put a human face on what's the U.S. going to look like? What's going to happen to the old folks that go under?
MR. NUNN: Well, the implications of these charts, if you take the more pessimistic assumptions on budget projections, you have a big funding problem for Social Security and Medicare, which means that you either have to start cutting benefits, which I think no one would want to do, or you have to raise the payroll tax. And the payroll --
MR. PETERSON: Substantially.
MR. NUNN: Substantially. I mean, we're talking a payroll tax that could be 16 to 20 percent. Now for an average worker, that's a higher tax than the income tax. We crossed over that point a long time ago, where the Social Security tax is more than the income tax for most average workers out there. It has huge implications for those people.
It has huge implications for small business. So as you take a 16, 18 percent payroll tax -- small businesses usually pay both parts of that -- you're talking 36, 38 percent. I think the question is whether the economy can stand that kind of taxation.
And certainly we do not want to see a precipitous cut in benefits. That's why we make such a strong and powerful, we hope, case that you need to start on that Social Security and Medicare reform now, and why you need to begin planning for that by setting aside a portion of whatever surpluses we have, both for debt retirement as well as for individual savings accounts.
Q If I might follow up, what happens if the economy does not -- ?
NUNN: Well, you have -- as Bob says, you have a problem, and the problem continues until it ends, which means you got serious problems.
MR. RUBIN: But it does make -- it does, as Sam said, make the strong brief for getting the debt down as swiftly as possible and for, as Greenspan said, setting up mandatory savings accounts, leaving aside the question of whether inside or outside of Social Security.
MR. RUDMAN: The ironic happening would be to have a major tax cut go in effect this year over a long period and have a president in the year 2005 or '6 have to go to the Congress and say, "Repeal it." I mean, that politically would be very difficult. We just suggest that ought to be done in a gradual way.
MR. PETERSON: I call your attention to Chart number 19 and 21, in which we try to respond to your question. These are the official estimates of how much payroll taxes would have to be to cover Social Security and Medicare. And you see a staggering number there of 32 to 47 percent of pay. The other way of looking at it is how much would benefits have to be cut. And you notice that it implies a major cut in benefits.
Now, I call attention to the fact that roughly half of the people getting Social Security today make less than $20,000, and about half or more of what they get comes from Social Security. Part of a deeply moral principle here is not only the principle of how we're going to treat our kids -- because I am very uncomfortable with the idea that a fat cat like me should get a huge tax cut at the same time that my children and six grandchildren are going to be confronting this kind of payroll tax increase, which, ironically enough, falls largely on the middle class that we all say deserves a tax cut.
In the Nixon administration we had a humorist, which will strike some of you as an oxymoron of sorts, but it was Herb Stein, who once said if something's unsustainable, it tends to stop. And he said, if you don't like that one, if your horse dies, we suggest you dismount.
What we're trying to suggest here is that these numbers are unsustainable, and that argues for taking the resources we now have -- it argues in two directions. One, start your reforms early and make them as gradual and benign as you can. Secondly, increase savings so that people have alternative sources of retirement.
Q [Inaudible.] You're waving red flags, but how do you --
MR. RUDMAN: Well, I would disagree with the predicate of your question. I've talked to enough people on the Hill to know that people are very nervous about looking at these 10-year projections. Even some of those who publicly are supportive of the plan, as submitted, very uncomfortable with looking at a 10-year projection.
They know these charts as well as we do. And so essentially, what they're talking about when they talk about a trigger, they're talking essentially about what we're talking about; the difference is, we're saying front-load it more, we're saying -- so it won't be contra-cyclical, go ahead and if you're going to -- if you believe this economy is headed in the wrong direction, make it larger at the beginning.
But at the same time, there are many folks up there who are concerned about the fact that if it's just put on autopilot for the 10 years, we're probably going to have a problem. So I don't think there's anything that we're saying here today that is any different than a number of people in the Congress are concerned about today, particularly in the Senate.
Q The President proposed his tax plan in December of 1999, essentially as it is today, and he ran on it for a year. During that time, it was subjected to the same sort of criticisms as everybody in this ballroom today. Then he was elected on that plan, and he obviously feels he has an obligation to enact it. How is he going to reverse course?
MR. RUDMAN: I don't think the Concord Coalition is in the business of giving presidents political advice. But personally, I believe that he can live up to what he said by having a larger tax cut early on, with a pledge to renew it if the surpluses continue.
MR. PETERSON: If I were asked to present this to the president -- I'm not asking for that honor -- one argument I would use is: Mr. President, you also ran on the very important principle of Social Security reform and moving toward some system of privatized retirement. You also ran on the idea that money ought to be returned to the people. In a sense, what we're talking about today by taking surpluses and putting them in such accounts, is a very important step toward achieving his objective, because unless we start building funds -- and I disagree strongly with those who believe that you can solve this problem without new, additional funding -- you're not going to get to his objective. And I would argue that a legacy of genuine Social Security reform could be a very important permanent legacy for this president.
MR. BIXBY: I'm going to just mention it's 10:00 now, and I know some of our panelists have busy schedules ahead of them today, so let me ask whether anybody has any comments and summation that they would like to make.
MR. NUNN: There was one question that Warren was asked, and let me just make a personal comment. This is not a Concord Coalition position at all. We haven't talked about this.
But in terms of whether the budget should precede, get in front of the framework budget, the tax cut, I would say that generally speaking on any kind of long-term program, three to five years, the budget should precede the tax cut. If you had a sort of an emergency stimulus program that was geared to a one-year reduction, not a 10-year, not what we're talking about now. And this is personal view only. I think one of the keys to this economy is what's happening to the average American's pocketbook out here with energy costs. If you had one that was geared to try to compensate somewhat for the huge increase in gas and electrical prices people are going through now all over the country, having that up front, based on last year's surplus as already a known fact, it seems to me, could come in front of the budget process, because it would have a stimulus effect, stimulative effect, and it would help people gain -- regain some confidence.
I think we're at a stage now where the economy -- this is just my opinion, personal -- the real key is consumer confidence. And one of the things that's really hitting consumer confidence is the huge increase in energy prices.
MR. PETERSON: And obviously, Sam, you're arguing for whatever we do being implemented immediately, rather than in the third or fourth quarter of the year.
MR. NUNN: I'm arguing for immediate, and I'm arguing, in that case, I'd make an exception and move it in front of the budget resolution. And I'm arguing tying it to the surplus last year and not making it a 10-year -- that's a personal view, and I'm not speaking for --
MR. PETERSON: I would agree --
MR. RUDMAN: But I don't -- I agree with you, Sam. I don't disagree with you at all.
MR. PETERSON: Yeah, Bob?
MR. RUBIN: A couple of comments, if I may, Pete. If one wanted to have a limited, immediate tax cut for stimulus purpose, I'd agree with you, Sam. If you're going to have a full-fledged tax program, I think, in my view, at least, you'd do it in the context of a budget, because --
MR. NUNN: I agree with that.
MR. RUBIN: -- and Warren said that before, because there are all kinds of trade-offs, and you're never going to identify the trade-offs unless you do it in the context of a budget.
Secondly, it seems to me there are two separate issues we've addressed today. One is that this tax cut, for all the reasons that have been described, is fiscally unsound, and that means you could have deficits on the -- could well have deficits on the non-entitlement side of the budget, and it could mean that within this budget window, you could fail to pay down the debt that is available to get paid down.
A second question, which has gotten a little bit conflated with this, is, what would you do about a tax cut? And a number of thoughts have been thrown out. One is to have a moderate tax cut. Another would be to have something that looks a little bit more like a dividend. Another would be to have a moderate tax cut now and then revisit a tax cut later on, a further tax cut.
This now becomes a personal view. My personal view would be, if you had a moderate tax cut now, within two or three years from now, you can have another moderate tax cut proposed. You could also argue that two or three years from now, if in fact surpluses eventuate, put them into mandated savings accounts, which at least I, as an individual -- and this is not a Concord Coalition position -- probably think would be a better use of that additional fund.
MR. PETERSON: The other point, Bob, is that Bob Bixby reminds me that the size of the tax cut this year -- do I understand you? -- is about $6 billion.
MR. BIXBY: That's roughly --
MR. PETERSON: And we've got roughly a $10 trillion economy. And it wouldn't come until later in the year. I think, on grounds of fiscal stimulus, we could probably come up with a program that addressed that problem in a much more meaningful way.
Well, thank you all very much for coming. We deeply appreciate it. And I thank Paul Volcker for his contribution, and thank you all.
[END OF EVENT.]