you can see the drop for 2012 that bring it down to low under 60%. right down to the level of the average physician payments for medicaid parents with that is currently. it will keep on going. if a physician, growth and physician services, utilization in intensity is greater than the targets then you have to further reduce the parent updates. they would continue to happen. you can see the medicare curve continues after the big doubt. it would eventually represent 25 different to drop 45% of the private health insurance rates again assuming private health insurance doesn't go higher or lower because of what is happening with medicare. ..

as projected the medicare rate would be about only a little over 25% of private health insurance and would be less than half of the medicaid rate, the current level of medicaid rates. obviously that would have severe consequences and less providers can adapt to all this in some ways. we will take a quick look at the projected income and expenditures over the next ten years for part b of medicare. you can see on the cost incurred

for the outgrowth kerf the drop in the total expenditures in 2012 that is because of the position reduction affecting the entire program and then you can see the growth rate which is in fact a good bit lower than what we have seen his slickly for part b. almost all of the part to be providers outside of physicians -- almost all of the part b providers are also affected by the productivity adjustments to the payment rate updates. now over the last five years, part b costs have grown by an average of just under seven per cent per year and the projection over the next five years is about four and a half percent. that is because of the sgr, predicted the adjustments and affordable care racked savings. now, with the sgr by itself, if congress were to provide payment

updates for physicians equal to the medicare economic index in diffusing the sgr formula, then at the end of the ten years part b costs would be about 20% higher than shown here just because of the sgr. this is the short-range outlook for part moody and the least interesting graf in my whole presentation. that might be saying a lot actually. [laughter] you can see the the annual cost is almost exactly met each year by the annual revenues. that's because given the amount of premiums from beneficiaries we have a given amount of special state payments would call back payments and and we get whatever else we need from the general revenue. so this program, much like part b should always be in very close balance financially from year to year under the current law.

it is interesting to note that the projected cost growth for the part d expenditure is high year than for a or b. in fact we project 9.7% per year on average the next ten years. the reflects further growth in enrollment, it reflects faster drug costs growth. in the last few years we have seen just a huge acceleration in the use of generic drugs. and right now for part of the, the generic use percentages about 75%. now at some point, people keep telling me it can go higher than that and i believe it can but i figured when it's a problem hundred 10% or 115% it's got to slow down. [laughter] and that contributes to the faster growth. also, of course we are phasing out the coverage of the doughnut hole for part d, said that contributes a little but also to the faster growth rate. finally, remember how part d is

financed, it's financed the plan submitted bids coming and we pay them based on the bench marks. so, there's nothing equivalent to a payment rate update for part d, there is the adjustment because it is a competitive bidding assessment to the custom d are not by the way the productivity adjustments. in long run this chart shows the total expenditures for part b and d of medicare as well as how much of those are financed by premiums in the enrollees. notice on the part b curve in the middle, is supposed to be dotted but it is the middle one part b expenditures just like we saw for the party in the long range. this is as a percentage of gdp. and they level off again because the productivity adjustments. the part d portion continues to

grow indefinitely over time. so, again, the part d cost projection depends critically on the viability of the long-range viability of the product of the adjustments. on the final charge, i've shown the total projected cost for medicare as a percentage of gdp, and the bolack curve of the bottom is under current law, and you can see that right now the total cost of medicare is about 3.6% of gdp. and this would go over time in the long run to about 6.2% under the current law. that is a significant degree of growth. but if the product of the adjustments and other provisions are viable in the long run, i would argue that is manageable, not usually manageable but you could deal with it. and it's certainly a huge

improvement if you look at the 2009 projection on the red curved before the affordable care act, they are the projections over a 11% of gdp in the long run. so, 6.2% is far more manageable than 0311%. it's a huge improvement. now, we also show the blue curved under the illustrative alternative i mentioned before. this assumes the physicians kit updates equal to the economic index growth and it assumes the product of the adjustments are phased out gradually after 2019. in this instance the cost of the program would approach 11% of gdp in the very long run. and again, it illustrates the critical dependence on this particular feature of the affordable care act. now, the productivity adjustments are not likely to be

valuable in the context of today's health care world. if today's world continues without major change i don't see how they can work. they might be valuable. it's possible that they will work if we have innovative new approaches to the delivery of health care and how it is paid for. it would still be very difficult to achieve but would be possible. there are scenarios at work. overall, the projections show that we still have a continuing need to address remaining financial challenges. the hospital insurance financial imbalance under the current law as well as the growth rate for medicare and it's faster than gdp. it also shows the projections of developing new innovative approaches to the treatment of health care problems. the support in the portable

cared for the innovation center, for all the research and development and testing of innovative new ideas i can't overstate how important it is i can't overstate how important it is. [laughter] it's really important. this is a gold-plated opportunity for us to find out what might help the health care that we want high-quality effective health care for all of us and loved ones to make it affordable in the future. new technology, new techniques and so forth so this is a really good opportunity. now, people ask me and i say i am pretty optimistic about this, pretty optimistic all this will work out a very well and then they ask me why i'm from and i tell them i'm not sure my optimism is justified. [applause]

>> thank you very much. we have three discussions today and let me start now with my colleague joe antos is a richard tayler scholar in health care here at a ely and he has had a long career as the congressional budget office and is even currently a hospital regulator here in the state of maryland. >> you did have to bring that up. [laughter] thank you any way, and thank you, rick for your usual upbeat message. the reason for my title, a call to action there may be in an action is pretty clear. this is not the first time that we have heard a similar message from the trustees.

we have heard it for probably the last 40 years or so. but now maybe it's getting serious. let's see if i can make this work. the ground is rushing up to lead us, and eventually the free-fall will stop. we will reach fiscal stability one way or the other. let's not be hasty that really is the political message. it's obviously the case of this year, the presidential campaign has already started and so we have various candidates are potential candidates positioning themselves away from taking actually any real action on medicare. so i'm afraid -- let's not be hasty is probably the rule of the day. as rick said, that least two of

these words are a direct quote and the rest of it can't be held against him -- the health reform bill creates -- and this is the quote -- incredible improvement in medicare, medicare's financial situation, and indeed i think the emphasis is on the word incredible. [laughter] the bad news is, or one of the pieces of bad news is these are the good years. we just have gone through a period of time where overall health spending has been relatively stable, except during certain periods that seem to coincide with economic downturns. but the population thinking about the population growth. medicare really has been in kind of the golden era, the baby bust

generation, the generation that was born in the 40's and 40's are the main medicare clients so far, and so it's really been a relatively good period of time, in spite of all the bad news we've had over the years. so, so, with the baby boomers coming on board, well, we can only expect more fiscal pressure. so, just i'm going to repeat some of the things that rick put in but i am going to give you numbers rather than graphs, and i am not going to read the numbers to you. you can -- you can read them at your leisure. i think an interesting comparison between last year's report and this year's report, which i don't think, rick, you emphasized, is that -- will get the green figures.

medicare as a percentage -- medicare spending as a percentage of gdp in 2020 printable little bit compared from this year, from last year's report to this year's report. however, in 2020 it went down a little bit. it seems like it's good news. and even under the alternative scenario, which is i think a bit more realistic about spending you see that between last year and this year's report, 2020 looks a little bit worse, and 20 he looks a little bit better. but of course that's not really good news. that's just an artifact of the assumption that many of the cuts would actually be taken. and as rick said, productivity enhancement will occur. by the way, the definition in the case of medicare for productivity enhancement is we will take the money whether to become more productive or not.

so, and that's a questionable assumption, because as we have seen with a physician payment, while that sustainable growth rate isn't necessarily tied to productivity per say, nonetheless, we have seen that congress has been generally unwilling to take those kind of cuts and almost certainly would be unwilling to knock 30% off of the payment next year. there is a report that came out last week, i think it came out on wednesday, and then i would just like everybody's attention. it cannot from the cms website. i'm not sure who actually wrote it. but according to this report, on the affordable care act it's going to save nearly

$120 billion for medicare over the next five years, and with all sorts of policies concluding the physician payment policy that i think is assumed in here, and in particular it claims that this will be -- this is a quote, to sustain the promise of medicare to the future generation of seniors. well, maybe but what sustain the medicare in a future generation of taxpayers? i think that's one of the questions i have in mind. fortunately, being a representative of the baby boomer generation, and one of the older representatives, i want to assure the younger people in the audience that we are going to make sure that we get a full value for your dollars. [laughter] okay, let's see. the question is can we really trust the trust fund numbers?

this is from a part of the trust fund reports that people usually don't look at, but occasionally on this continuing series of conferences over the years, occasionally people bring this out and i thought this was my turn to bring this out. what it basically shows is the difference between budget accounting and trust fund accounting. budget accounting reflects the flow of funds during the year and isn't confused by whether or not there is an accounting device called a trust fund if money goes out it's an outlay, if money comes in it's a revenue. that's the budget. with a trust fund, there is a confusion about what happens to that money if they're happens to be some year.

the answer is, in budget terms, that if you are running an overall federal budget deficit than that surplus in the medicare trust fund is just routed to pay for other things. so that's what this shows. so clearly the sign of where we are is vastly different depending on whether you do the use of budget approach or trust fund approach at least for part b. under the budget approach it in packs for part b of the programs for the social security and medicare is - whereas under the trust fund in pact h and i. is - but s and i social security is positive. if you look at the long term, we are talking about an order of magnitude greater, but the

picture is very similar that using a trust fund calculation tends to confuse the picture substantially. we need -- i would argue that we need to pay close attention to the budget. it's helpful to have the trust fund report because it gives a somewhat different perspective. but in the end, what really matters is the flow of funds and the expectation of the flow of funds over the next few years. again, without this artifice of a separate trust fund that doesn't really help finance and. so here we are, this is all in the context of the fiscal crisis that the country is going through. ryckman schenker interest on the bonds and that made me think well the bond market right now

is probably in unsettled states. i don't know whether we are going to reach the limit in terms of the debt limit. the latest prediction is that sometime in early august according to the treasury department we will have gotten to the point where we can't issue more debt. that has nothing to do with the trust fund. this is, again, something that is closer to the real fiscal policy. but, a tyson to the medicare program. it ties into the entitlement in general. the reason -- one of the reasons we are in this situation is certainly the bad economy, the bad economic conditions we have had in the last two years and the failure of the economy to revive the itself the way that we all hope it would. but another big factor which has been a constant is the rapid rise in health care costs

especially in the medicare program. so, you know, that leads to some discussion about what we should do about it. we have seen all sorts of plans come out and so why borrowed some of the analysis from the committee for the responsible federal budget just to show you how easy it is a to come up with different interpretations of numbers depending how you do it and this as much as i think the trust fund view is not useful. this illustrates the budget review isn't that useful unless everybody uses consistent assumptions and similar time period. i'm not going to go through this in detail because i will run out of time to do so but when it does is show you clearly that depending on which you assume about underlining, the

underlying economy what you assume about the likely response to policy of of the health sector and other economic factors depending what you assume about the time period that's relevant for analysis can get widely different estimates of how good or how bad your proposals are in reducing the federal deficit. so you need to look at all these things with a skeptical view but what it clearly says is that two things it seems to me, what it says is there's a lot of talk this year and a lot of numbers are being thrown around, some of them if you dig hard enough you can actually sort of believe.

this again seems like a political campaign rather than serious policy-making. perhaps the debate between the representative paul ryan and the president on medicare best illustrates the nature of this political approach to the health policy. even though republicans have backed away from the house budget resolution that they voted for just a few weeks ago. former house speaker new gingrich refers to the plan as social engineering and he's against social engineering. i would argue medicare is social engineering. it is one of the biggest social engineering projects of the 20th

century and its social engineering isn't going to make it through the 21st century. how is it social engineering? if you look at the traditional medicare it's a fee-for-service program is an uncapped entitlement, well, some people say to the services but i like to think of it as an and capped entitlement to the head of the health sector and so when you have those kind of economic incentives you get the kind of system we have. we have essentially trained ourselves to have patients ask for more services and have providers offer them. the economic incentives push you in that direction. the result is a program and a health sector that arguably is inefficient and doesn't produce a good value for the dollar's big and as i say for younger people don't worry, the baby

boomers will take care of that for you. so the fundamental difference between the two is the difference between kind of a top-down approach, the traditional approach would argue that has been taken in medicare to use price limits and other kind of mechanisms that operate centrally to try to control health care spending in medicare as opposed to the approach to our left and not blame it on ryan, let me blame it on possibly this goes back me to adam smith and the idea putting medicare on the budget but putting medicare on a budget such that individuals received premium support payment

subsidies for their insurance and let them find a plan that they like the best. we could argue about that. there's not enough time to argue about all of those things but one thing is completely clear and that is the assumed savings because the productivity improvements under the president's approach and the assumed savings let's leave aside the exact dollar amounts under the premium support approach are savings that somehow we have to achieve. so i guess that isn't exactly the good news. so how do you do that? there are all sorts of ways you can do that. there are three ways. you can either reduce the outlays and fears of a bunch of ways to reduce the outlays. you can increase revenues and there's a bunch of ways to increase revenues. nobody likes those two choices you can tell, just read the paper. everybody says those are

terrible. so the other choice which everybody increases is faster economic growth that's going to do it. the other problem is that a program of this size pulling in as many resources as it does and other productive uses in the economy is itself a break br 80 ebe economic growth so we have a real problem. the question about whether in fact rican achieve reductions in outlays willing to increase revenues of the program i think is a debatable one. it's not just a debate at -- is at the details. how we don't really know whether i'm not going to call the new ideas because i don't think there are new ideas but the idea

is listed in the affordable care act of the direct the innovation center to develop new approaches to payment and delivery. it's not clear they're going to work. the poster child is the accountable care organization. we've seen that the major health plans everybody points to as the models, don sinner, mayo clinic, cleveland clinic etc., they have written a letter in the past week basically saying they are not interested in becoming the accountable care organizations. what it boils down to is the government has specified conditions that make it a bad business deal. and so it is not just about whether you can deliver health care efficiently. it's whether you can actually make a business out of it and we shouldn't forget that that is an

issue something i think is often overlooked when washington people talk about health policy. you want us again this is the sixth consecutive year of excess general revenue funding. i have written down what that means. it's easy to understand. you might take a few minutes to study it. it's just intuitive with that term means. and then of course if you have two consecutive years of excess general revenue funding i have to look at my notes to make sure i get the words right, then the medicare funding warning and what does that mean? that means the president is required to submit legislation within 15 days of next year's budget submission to do what we are not exactly sure. dole says submit something. and so in february of 2012,

given the fiscal emergency we are in we will eventually get to something submitted to congress. the thing is the president is not required to reduce medicare spending in his proposals or increase medicare revenue. it's just supposed to promote something and it's supposed to have in the title of the legislation words that indicate that it is to fulfilling the requirement. the first time the medicare warning was issued, president george bush was president and the white house decided that there would be some constitutional problems if he actually did that so is a not even clear that any president will follow through. but in any event if any president did the congress would have to consider it and wouldn't necessarily have to take action. so, i suspect this isn't going

to work too well but it is and the long line of i'm going to call them administrative gimmicks that attempt to put discipline into the policy-making process. some of them work for a short time. those that work are usually moved out of the way. so we had paygo. i think that worked pretty well. it has been changed, it was dropped, it's come back in a different form and is weaker now. we had the sequestration approached the worked a couple of years and went away. the president's debt trigger is in that same tradition and i don't think we can count on much, so the question is is this report i would say that it's sort of a whispering in the years of policy makers. but we have seen this before, and is anything moving?

by the way, this is the trigger. triggered by quite a few years ago but he lives on and in fact you will notice that he has been posed in a rather awkward position for a horse and that is exactly what i think the trust fund report does it is pointing in a very awkward position, and but the problem is that it's not really moving. >> okay. thank you. more optimism, right? >> we now go to roger feldman who is the blue cross professor of health insurance, professor of economics at the university of minnesota and author of several books among other things. roger? >> thank you, bald, for inviting me for an academic perspective outside of the policy world.

here's a couple highlights of the trustees' report that i saw the insurance trust fund is exhausted in 2024, five years earlier than last year's report. and 75 years solvency of the trust fund requires a 17% cut in the schedule of benefits if we were to solve the financial problems by cutting benefits we would have to cut them down by 17%. general revenue contributions to the supplementary medical insurance fund will double from 1.5% of gdp to 3.1% in 25. medicare was already front and center in the policy world before the trustees report was issued last friday. representative paul ryan from wisconsin proposed a controversial premium support system for medicare but he received little public support and it appears very unlikely

that the congress will pass that bill. by the way i mentioned that representative for ghanian and i share something in common. we are both graduates of the same high school in james phill wisconsin. >> the democrats and republicans are split over what to do about medicare. i'm going to spend most of my time talking about what i would call moderate proposal for a premium support that might colleagues and i at the university of minnesota have been working on now for many years and that's because we've had plenty of time to do a. no one seems particularly interested but i'm going to talk about. the reading here is a book that bob, brian and i published for the american enterprise institute two years ago. in our proposal, all medicare plans would bid on a standard benefit package. private plans and fee-for-service would be included in the system. the government would take the lowest bid from the qualified plan of each market area and

that would become the level of the government's premium support. plants could offer more benefits if they wanted for an extra beneficiary premiums. i'm going to contrast this proposal to the representative ron and's plan. his plan is for private organizations only. we would retain fee-for-service medicare for a number of reasons. first of all, private plans won't serve all regions of the country unless i will say they are bribed to do so. it was only a few years ago that the private plans became available in all counties of the united states and they remained so only because they are paid up to 40% more in the fee-for-service medicare in some areas. second, fee-for-service is less costly than the private plans and parts of the country because it has certain advantages including the power to set the prices. and finally, and probably most important for the

market-oriented economist some people like fee-for-service medicare and they would be willing to pay extra for it so why shouldn't we let them have the opportunity? in our proposal the contras would determine the standard benefit package all plans would bid on. that could be done by an independent agency but we don't think the congress could resist the temptation to micromanage the benefit package and representative ron ne's proposal, the office of personnel management will set the standard possibly similar to the federal employees benefit plan. now let's talk about the level of premium support. in our proposal, plans would bid on the standard package and the government contribution which is the premium support would be set equal to the lowest bid in each market area and representative ron iain proposal it is initially set at 100% of the

projected fee-for-service costs when the plan becomes effective ten years from now. that is higher than our proposal overtime however the rate of premium support increase? in our proposal the rate of premium support would increase as the same rate as the lowest bid from a qualified plan would increase. in the representative ryan's proposal premium support is tied to the rate of increase in the consumer price index so the beneficiaries out-of-pocket premium would rise over time. in a recent article in the new england journal of medicine, gail wilensky has suggested that the level of premium support should grow slightly faster than the cpi possibly 1% faster. this mirrors a proposal made earlier by the debt reduction task force chaired by senator pete domenici and dr. alice rivlin who also recommended

bedle loveless premium support should grow at the rate of gdp plus 1%. now when we start the way these percentages, the real question you hear is how much new technology should medicare pay for? the rise in the medicare costs for beneficiaries above and beyond the rate of inflation is primarily due to new technology. doctors are able to do more things now for more people and that drives the beneficiary cost so the question is how much of the new technology should medicare pay? in representative ron ne's proposal, medicare pays for much of the cost of the new technology. in gail wilensky proposal's medicare pays for some of that cost and in our proposal medicare pays for all of the cost of new technology and the most efficient health plan. in all of these proposals, the plans would be able to manage

technology and it is possible that beneficiaries might be willing to give up access to some new technology in order to save premium costs. how much what our proposals eight? on the use data from 2005 to estimate the savings for the competitive bidding. the baseline is the 2010 affordable care act as if it had been fully implemented in 2005. as i am assuming the current law baseline the reason i am using 2005 data is because like joe, i am not able to handle much more than an excel spreadsheet and that was the latest i could get. [laughter] i calculated that competitive bidding would save 7.7% of medicare cost verses caci so keep that number in mind. a savings of close to 8% from

competitive bidding versus the baseline. now for a minute let's talk about medicare supplements. private supplementary insurance which most beneficiaries hold reduces the out of pocket cost sharing and that leads them to spend more money which medicare pays for in large part. midrange estimate from the private supplementary plans is that it increases the medicare cost by 10.4%. and i would say that every published estimate of the spillover is positive and i chose one that is kind of in the middle. competitive bidding and requiring supplements to become a bidding plans and other words not to allow them to supplement medicare but require them to be responsible for 100% of medicare costs would save 15.6% of medicare costs so the combination of the competitive

bidding and requiring supplements to take risk would save 15.6% of medicare costs. representative ryan's proposal would be the curtain for a private medicare supplement so i think this is a little noticed feature of his plan because the private health insurer would never allow another insurer to step in and pay the cost sharing under its policy. as if his proposal were adopted it would certainly mean the end of the private supplementary insurance as we know it. now i want to talk about the savings and the baseline plan which is the affordable care act. under this act, as you know, medicare and it plans will be paid on a sliding scale of the fee-for-service costs. the congressional budget office estimates a savings of $26.1 billion per year in 2019

and $131.9 billion over the next ten years. rich foster talked mainly about the savings that are going to come from reducing provider payments but a significant share of the savings is also coming from reductions in payments to private health plans. the cbo projects that that savings is close to $132 billion. i think that number is too high and i'm going to do the math. i could be sticking my foot in my mouth, but i think that they are being overly optimistic. in 2019, medicare advantage enrollment would drop from the baseline of 13.9 million to 9.1 million because you're not paying as much not as many people would be joining the private plans and cbo estimates that about 4 million people who otherwise would be in private medicare plans were it not joining them under the c.a..

they also predict the average monthly subsidy for medicare advantage plans will fall from the baseline of $135 to $67 as a result of the payment cuts. let's take those two numbers. $135 per month times 4.8 million averted medicare advantage enrollees times 12 months is $6.6 billion. in other words, you're saving that for overpayment on all the people who no longer join medicare a vantage. on the people who still join, the 9.1 million you save a difference in payments which is 135 - $67 per month. carryout that calculation and the savings is $7.43 billion. add those and to get a savings of 14 million compared to the cbo estimate of 26 billion.

so somewhere i am missing $12 billion per year and if we project that out into the future it becomes a non-trivial amount of money. furthermore, when i do my own calculations of the proceeding law in 2005 if they had been fully implemented in 2005i estimate the savings would have only been $1.5 billion, which is very, very small. so somewhere in this calculation, i think that we are talking up to much savings for the accountable care act, the county the to affordable care act, excuse me. even if we implemented the competitive bidding and eliminate medicare supplements we wouldn't save as much money as we need to. 15.6% is not enough to make medicare solvent in the long

run. the trustees as i said earlier estimates that the cut of 17% in the benefits would be needed to achieve actuarial balance over 75 years. this could be done by a mix of a number of different policies. for example, we could slightly slowed the rate of increase in premium support which is the proposal. we could raise the eligibility age for medicare. we could reduce the standard benefit package or increase the part b premium the premiums or benefits. fortunately the list of possible solutions is long and policymakers could mix and match from among the list. finally, i am going to talk about a tsunami. we could think of medicare as being responsible for covering a certain number of people for a certain number of years. we could write that as an equation.

the expected person years of medicare coverage is equal to the number of beneficiaries times their life expectancy, past age 65 or why for person years equals in the number of beneficiaries times their life expectancy on medicare. now, take the equation and asked what changes over time. there are two terms. the first term is the change in the number of beneficiaries at a constant life expectancy and the second is the change in the life expectancy for the constant number of beneficiaries. i would submit that the first term has received almost all of the attention. this is the so-called baby boomer retirement. more beneficiaries will be coming on to medicare in the next two years. the second term which is the changes life expectancy has largely been ignored but this also contributes to the medicare tsunami. here's an interesting picture

for you. this is the medicare age in red versus the u.s. life expectancy in green. when medicare was enacted in 1965, the average person could expect to spend five years being covered by medicare. in 2011 the average person could expect to spend close to 15 years being covered by medicare. and this increase shows no sign of either slowing or stopping. i did the calculation and found that over the next 14 years, in the year 2025, medicare will become responsible for covering an additional 460 million years of benefits. that's in addition to what it's paying for now. another 460 million of benefits.

70% of this will be accounted for by their growth in the number of beneficiaries of the retirement. what 30% of it will also be accounted by the increasing longevity of medicare beneficiaries. i will conclude that the tsunami is not approaching us it is already here and we are knee deep. okay? thank you very much, roger. i now -- it's not supposed to be in wisconsin but so kind of what you're seeing is all of us is medicare recipients are above average [laughter] bob reischauer is well known to all of you in this town and certainly on this panel in the past years he's participated many times and we appreciate it. in addition to being a former director of the congressional budget office he's not the president of the reuters

institute but as it has already been mentioned one of the two new public trustees of the trust funds. so, bob? >> with the record show that the leak is in minnesota. [laughter] and that if you can only be me deep in a tsunami you are in pretty good shape. [laughter] as bob has mentioned i have appeared at the gathering quite a few times and let the record show why it's been on time every other time. [laughter] if we average over the seven or eight times i've done this, it's really on time and the blame goes to anyone who starts something at 9:15. either the half-hour or the full hour. my role in the past has always

been to comment critically sometimes very critically on rick foster's presentation that now being one of the two public trustees i'm on the team also when he said he was projecting that generic drugs might reach 110% of the total drug usage by treating the affiliation. as a public trustee but all of us as taxpayers and citizens owe a debt of gratitude to rick and his staff, who are incredibly dedicated, skilled and hard-working individuals are relished in sending the trustees, e-mails at 2 a.m. in the morning and then again at 6 a.m. wondering why you haven't commented on the 2 a.m.. having just gone through this

process it's anything like that on a normal basis. it's understandable why the tell you nothing about the responsibilities when they are for this position of what might happen. i'm going to spend a few minutes just elaborating on a bit of what rick has already told you and then making a few comments about the presentations by the other speakers. the first message that i want to transmit is that when it comes to health care, we live in very uncertain times. and so, there is really a wide confidence are not any set of projections, including those of the trustees. we don't really know how to measure that confidence in intervals so we can remained ignorant and happy as a result. but clearly in the midst of a

period of unprecedented change and capability of the jeneane beck revolution and microtechnology of the various kinds and a revolution in the way the we deliver and pay for health care services and these resolutions are being spurred not just by public policy changes like the affordable care act, but also by the many efforts that are occurring within the private-sector which in my many here's of doubling in these areas are new and different. a lot of what is going on in the private sector and much of what is called for by the affordable care act represents experimentations. and therefore we don't know what will happen. we don't know what will work. some of these experiments will work, some of them won't. if a number of them work my

guess is that the impact will turn out to be much greater than the sum of the individual parts which is by and large the way the estimates are made. i mean, it will be a growing wave. if they don't work we know what happens and we have thanks to rick and his staff alternative scenarios that project sort of one case where that occurs. the second point i think that needs to be made is the uncertainty that surrounds the trustees' report estimates and all others really grow in the future the further we look ahead of the more the uncertainty is. we know the path we are all right now within the public and private sector are unsustainable we know the change will occur. the change might take the form

of policy changes and what those are, nobody knows, or they might turn out to be changes in the attitudes and behaviors of employees years and employees, of tax payers and so on. so you know, notwithstanding the fact that we provide a 75 estimates and an infinite horizon estimate and the offer a valuable perspective i don't think anybody should spend sleepless nights worrying about whether you're grandchildren or you're great-grandchildren will have a medicare program to rely on. i think we should all be worried instead about how we are going to get through the next 15 years, how we are going to get from where we are now until the age i trust fund is exhausted because at some point in that

period some pretty profound changes are going to have to take place. the fourth point i would like to make is to reiterate something that rick and the others have mentioned as well, which is even in the very short term projection the trustees' report has a certain degree of unreality about it. by law as rick said the trustees basic set of estimates has to estimate the impact of the current law, but it's almost inconceivable that we would adhere to the current law because as it has been pointed out the current law requires in january of 2012, 29% reduction in the physician fee schedule. and such cuts would undoubtedly create serious access problems for beneficiaries as many providers would decide not to

service medicare beneficiaries. we know that when faced with smaller reductions in the past with one exception, congress blinked and canceled the cuts and in fact in most of these instances substituted a small increase or at best free is looked it over the intermediate term the projections assume as they should and adherence to the cost, discipline of the affordable care act. and the two aspects of this, the both of which or one of which has been discussed will be challenging. the first is the and you will provide your payment updates reduced by an amount equal to the estimate of the economy wide multi factor productivity increase, which has rick said is a 1.1 percentage points. so hospitals and nursing homes and other providers are going to see their updates not keep pace with the input costs that day

face every year. as a former member of mid pack which recommended a similar policies many times on like this element of the affordable care act and fully supported it. but one can question as rick has how sustainable or viable is over a very long period of time for it to be viable the providers have to generate productivity increases in excess what they have achieved in the past and this will require in my opinion very significant changes in the delivery system which to incentivize we are going to have to see very significant changes in payment methodologies and most likely if we are talking about the public sector, that means further legislation. it's not going to occur in a natural way. the sort of one scenario one

could see this occurring without future legislation would be of all of the experience in the private-sector so radically transformed the way the terrie state for were delivered in the private sector and that brings down underlining costs that might be transferred onto medicare the productivity increases can't be achieved it is likely that that aspect of the affordable care act will go the way that the sgr has gone. in other words, the discipline will be waived and the cost reductions have been forgone and that's why the alternative scenario that rick and his staff has provided and are available on their web site are so important to look at. second, and i don't think anybody is mentioned this and that might be because i'm wrong

sobriquet can correct me there is the ipad committee in independent payment advisory board which will play a very minor role in the trustees based projection can be seen as a backstop to the productivity related payment adjustment. so if the collapse you have the ipad there and if you went along with the president and lowered the threshold from the gdp plus one to plus half, it would have more strength and at. one could see it playing a more prominent role. but i feel it's right to raise questions about whether the ipad will get off the runway. there are some huge challenges to simply select the individuals who would be willing to take a battle of poverty and a serve on

this. you can't as far as i read the law can't even have a paper route [laughter] to supplement your income, and then the idea if you could get 15 folks to agree to this, the idea that the senate would confirm these individuals is another question and once confirmed whether they could put together a package when in a sense at least in the short run their hands are tied, their feet are tied and they are gagged in the since the tetris premium content change the deductible, can't do this, can't do that, but cut spending, you know, is really an open question.

with that, let me just say a few words about joseph roger's presentations. joe says the trust fund perspective isn't worth squat i think is the technical term for it. [laughter] and that we should really be looking at cash budget perspectives. ..

you know, if we are talking about the big budget picture and how we are going to have to deal with it as we face the debt ceiling and all that, you are right, but i am looking at this as an individual society who wants to provide some kind of assurance with respect to retirement. i am in the trust fund camp and you can come at me now. [laughter] i just want to talk about savings and there are a lot of pictures with the word savings. savings, you have to ask where does it come from? what we are hoping for is that it comes from greater

efficiency, but you know the savings sometimes comes from the generated quality and that can be quality very broadly defined. in some ways, quality i'm not going to lose a lot of sleep over if it is fewer potted plants, fewer h. rams, even choice that is associated with quality. we are a society that wants choice and everything. sometimes we exercise it and sometimes we don't. sometimes a lot of choice makes quality worse. sometimes it can make it better, so you want to be very careful about choice. savings can also,, as joe was suggesting, from increased premiums or increased cost-sharing or greater burdens

on the beneficiary and of course that is the hallmark of paul ryan's savings and you have to ask yourself are we going to get carried away by saying we are saving government, but while we save government we put beneficiaries in the face of pasted now may which is not just knee deep. so there is that. there is also a reference to means testing and since there is a lot of talk about this in the various larger budget proposals, i just want to remind everybody that we do have means testing in medicare in the form of higher premiums for those with incomes $85,000 or more for singles, $170,000 for couples and once

you get up much higher than those numbers those individuals are paying 80% of the actual cost of the benefits that they are receiving. so it is not minor. we can talk about lowering those thresholds. some of those thresholds are not indexed for the next nine years or six or seven years or something. you could continue that policy but it is not that we don't have means testing characteristics to these programs already. one also might mention, with respect to hi, we have for a number of years since the mid- 1990s eliminated the cap on the payroll tax on earnings. so if you are a basketball star making $10 million a-year you are paying your 1.4 or five are

sent on all $10 million when you look at the likely, you know, paid and benefits out situation it is conceivable to me that those people aren't making a huge contribution to support the rest of us. moving to rogers presentation, he has what might be called a kinder, gentler version of paul ryan's plan and with henry aaron written about a similar approach longer ago than i care to admit, 1995. i have a lot of sympathy for it and think they have done really quite a good job thinking through this approach.

and i just raise one thing with him and this comes for the criticisms henry and i got. roger said that the government's contribution would be based on the lowest bid in your area, and of course this creates two potential problems. one is the lowest bid plan like not have the capacity to cover everybody and so he really have to think about well, maybe it should the wind you sum up the capacities of the plans, the plan that is at the margin so you could cover all of the beneficiaries in the area. if you did that the savings would be lower, but so would the

outrage by the public. you know the other thing is, and this might be covered in your book, which i confess i haven't read, there is the issue of quality and you want to make some kind of adjustment for differential quality and as i said before, defining quality is not an easy thing. you really want the core measure of quality but you do want to make some kind of adjustment in that sense. so, final comment. i am red/green colorblind so i am not sure i could kick off the life expectancy chart, the numbers with precision but from my eyeballing of it, i think

roger had life expectancy increasing 7.5 years between 1965 and 2010, and i would think think. >> a little bit more. >> a little bit more. that makes my point stronger. thank you. that relevant life expectancy at age 65, which i looked up on the cdc web site and from 1960 through 2006, it only went up 4.1 years. the point is right. there is a huge problem there, but magnitude is about half of what roger suggested. >> thank you, bob. i do want to get to the audience. first i want to keep this brief. there've been some challenges

here among the panel, but first i want to go to rick and anything you want us to immediately respond to from the others? >> really, just two minor things. first of all, back to my friend joe and his lack of preference for the trust fund perspective, as best i can tell joe is geared by a trust fund when he was a child. [laughter] >> may be the last one. [laughter] >> all i want to say in that regard is the trust fund perspective is completely legitimate for its purpose. does the trust fund have enough assets and revenues for whatever sources to enable the timely payment of and if it's? that is a fairly narrow definition but it is relevant and you cannot answer that question from the budget perspective. at the same time the budget perspective is very useful. we have the budget of the united states for that purpose and you can't answer budget questions

from the trust fund perspective so they are both valuable and they are both useful. did you write that entire paper on that? i thought so, thank you. there is a paper on the cms web site that talks about budget perspective, trust fund perspective and sustainability and which concept is which so i would recommend that to you if you are at all confused by the differences. the only other thing i wanted to say was, i don't know why, i have this terrible urge -- whenever i am with bob and maybe it is because we are both tall and maybe it is a tizzy is even a little bit older than i am, but i can't help poking fun at him. and he pays it back, you know so that is fine. bob said in his opening remarks that back in the days when he was on the panel here he would often have comments, and back fairly critical comments of the worker was done on the trustees report. lest anybody get the wrong impression i just wanted to say in fact how valuable and how

constructive that criticism was. t. help us in the late 1990s work into a much more modern, more perfect place to be in terms of our long-range projections. so i am tickled pink that lob is now one of the new public trustees and whether it is through the trustees process or in one of these panels, feel free to keep criticizing. we got a lot out of that. thank you. that is all i have to say. >> okay, roger, go ahead. >> i would like to thank bob reischauer for pointing out the issue of quality. anytime you cut payments that are not matched by productivity increases weathered the payments to doctors or medicare advantage plans, you run the risk of reducing quality. for that reason, i thought that the original plan to pay private plans more if they achieved high-quality scores was a good one. we can argue about the measures

of quality, but it was a good start. however, that plan got watered down to the point where it has simply become a way of restoring some of the budgeted payment cuts so it was someone step forward and at least one backward. now on the question of the relevant life expectancy for calculating the medicare obligations, i disagree with you. if you want to ask how much am i going to get out of medicare, at age 65, then you should look at life expectancy past age 65 but if you want to take a societal perspective, how much is society going to have to pay for additional medicare and then the right perspective is life expectancy at earth. >> thanks. thanks above for your comments and everybody. three quick points. on trust fund accounting. by the way i did this budget

accounting and politics out of policy. it would be much better but that won't happen. the trust fund perspective first of all was invented in the new deal as i remember the history. fdr's guys were standing around during characterizing and said it will give people more confidence. the question is the competence more justified and that roils down to bob's point about the broader fiscal situation. if you are living in an economy that has serious fiscal problems then you don't really, the trust fund really doesn't have an easy call on those resources and that is the issue. number two about where the savings come from here, i completely agree with bob. it matters what you get for the money. that is ultimately the issue, right? but, so can we get what we want?

the question beyond that is, is what we want realistic? i think what we have trained ourselves, thanks to medicare, is to want things that are completely and realistic, that are unsustainable. the third , means testing is not means testing. it is a term people usually use but nobody with the possible exception of the heritage foundation, telling people that there isn't going to be some kind of support for health care in their old age, and i don't think a politician would endorse that so it is really income related. thanks. >> okay, with that response i want to go to the audience. i know we have got some very informed people out here asking good questions, so let's go to the woman in the back please and please if you will, stand up and

recognize yourself and keep your question to a question and relatively short. thank you. >> bonnie watt. and porcelain that don't fall in the category is of very informed people, so for health students here may know the answer to this question but to mr. foster, i was intrigued by your comment with respect to the stance and productivity savings. at one point you said that you had seen some studies and which they might work. i believe that was the most optimistic statement made in the presentation today, and i wonder if for those of us who aren't heavy duty students of health care, could you just enlighten us as to maybe one, two or three of the approaches that are currently known which it is expected if they were implemented would make a large change? >> sure, i would be glad to. i don't think i said studies. i think i said scenarios. i will give you one example. and this could work.

i am still a little skeptical but you can judge for yourself. suppose the world converts to more integrated care through say accountable care organizations. and as a result of this all of the doctors and other professionals are talking to each other. there is electronic health records such that you don't have to order the test that you think you need because you can look and easily find it if it was just ordered three days ago. moreover if you are using best practices in terms of treating given diseases, and you know the best way to proceed, then you have got a fighting chance in several things happening. one is that you would not have to perform a lot of services that today are performed but unnecessarily so. you get an efficiency out of

that. you could not have to do repetitive counts. you would have a better chance of avoiding unnecessary hospital readmissions. he would have everybody working on the same team for the same purpose and there is certainly efficiency to be gained. now the estimates of inefficiency in the health care system range anywhere from 10% to i have heard completely serious legitimate researchers, one person say 90% of all that current spending is wasted. i don't know that i would go quite to that extreme, but fifth team to 20 to 30% is probably pretty realistic. how would this work in practice? in real life, you can't have providers calling up their energy companies and saying i can only pay you 15% less than what you are charging because medicare is only paying me 15% less. that doesn't work. it doesn't work for us and doesn't work for anybody else.

so that providers ultimately will have to pay going rates for wages and salaries to attract good employees, for energy costs. they are going to have to pay the going rates. but, can they scale back enough on the unnecessary care can they reduce utilization up without harming quality that they can achieve an equivalent savings to what is otherwise mandated by medicare through the productivity adjustments? that can happen without question for some period of time and that some period of time maybe 10, 20 to 30 years. that is the kind of scenario that i had in mind. >> yeah. i just want to make a comment which will probably confuse more than anything else and rick and i have thought over this issue many times.

and that is the notion of productivity in the health sector. productivity is generally the change in resources needed to produce a quality, a constant quality unit of output and the problem in health is quality is improving so phenomenally and we can can do things today that we couldn't do 10 or 15 years ago, so what you know in a sense it is implement in -- improvement in quality that i can have hip implants. i can go out and play tennis or whatever with this and you couldn't before. an awful lot of the sort of apparent inability to get productivity gains is because it

is embedded within qualitative improvements and you can't say you know, i don't want that. if you think about productivity in car production, what happens is you get a basic car and then somebody comes along and puts a side view mirror on it. that is an extra. you pay extra for it and so when government figures out qualitative improvement, when a bundle that -- those outside mirrors with the basic rights of the car, you can't get the car without those, they know how to adjust quality. it is the price that they were charging individually for the mirrors. but we don't have an ability to do that in health care sector. i think if we sort of treated the definitions the same, we would see very rapid gains in productivity but for the

purposes that we are talking about, it is in a way it relevant. >> i want to go to -- please. >> thank you. dave with a question for mr. foster. in the beginning, you mentioned the effect of the affordable care act reform and i wonder if you could speak to i guess one, whether you can use those same things to fund the system and to fill the fund and two how the picture changes if there is no affordable care act. does that extend the viability or does it not change it at all? >> yes, those are both good questions. let me answer the second one first. under current law including the affordable care act we are estimating that the hi trust

fund would be exhausted in 2024. in the absence of the savings under the affordable care act the corresponding date of exhaustion would be 2016. so the affordable care act in the new projection extends or postpones the exhaustion by eight years. that is down from 12 years and last-year's projection as a consequence of the economic changes and so forth. now let me go back to your first question. i don't know why like this question so much, but maybe it is the troublemaker and me. but you are really asking a double counting question. is it legitimate or fair? is it legitimate or fair to count the affordable care act and medicare savings as both being used to help pay for the coverage expansions elsewhere in the affordable care act as well as extending the life of the

hospital insurance trust fund? it is legitimate, but let me tell you how it works and you can decide for yourself whether it is double accounting or not. so, to use a simplified example, let's say you as an individual have to pay an extra $100 in hospital insurance payroll taxes because of the change in the affordable care act. so, an extra $100 in cash comes from you through the treasury and it is credited to the hospital insurance trust fund because we get ponds of $100 for it. the cache itself will be spent like that. money does not sit around long in the treasury. it may well be spent to help pay for other affordable care act provisions or anything else it can be spent on. your $100 is spent, but i have a promise for the hospital insurance trust fund that anytime i need that money back i can get it. so let's say we spent for other

coverage expenses, and three years later i need it back to help pay for hospital insurance costs. so i let treasury no and they come up with $100 in cash plus the $5 in interest they owe or whatever it might be. they gave me that cash and i spend it so so far we have a need for $200, $100 over here for the coverage expansion and $100 for hi. we spent $200 i got my money back but you only paid $100. when i got my money back treasury had to raise that money some of the way. they are to spend your $100 they had to raise it by further borrowing or not spending some other $100 or raising a new tax. so, on the one hand all this is nothing new. that is traditional trust fund accounting. this is just the way it works through the landing and three gaming operation.

on the other hand, if you are going to spend $200, you need $200. >> can i just suggest a simpler way of looking at this? what if there had have been two bills in the first public in the long was the medicare bill and it had all the cuts in the payments and everything like that and saved a whole bunch of money. six months later along comes another bill which says lex to expand access for health care in america, and let's pay for it out of an increased deficit. we have done that before. would you be asking this question? and my guess is the answer would be no. these things are packaged together and rightfully you can argue will the politics of this, to get one increasing coverage, we had to show that we weren't deficit enhancing it.

>> okay, let's go right in the middle here. we have probably time for one more question. >> richard use the word rent which when you think of rented is different than economic rent. what we think that will go on with productivity adjustment as potentially affecting trying to recover some of the economic rents to the extent it makes is that workers had been the health sector have and what is going to want here is that wages will fall emphasis where we attempt to find out where their economic rents for these people who stay in the health care sector are no these really were efficient market clearing wages and we are going to see a lot of people leave that sector. the thought that occurs to me is -- and how would you respond to that? >> a simpler way of asking that is our health care workers at large to overpaid? this is not an efficient market,

and i don't know a good answer to that. >> we can have an experiment though. >> oh yeah, without question. all i would say is you didn't mention your profession but regardless of what it is, suppose in your profession your boss comes to you and says okay your wage rate is going to go up by 1% less than our competitor next door and we aren't going to do this forever. not forever for crying out loud, bob, not yet. [laughter] >> only until you retire. >> now, you as an employee of your company may be a little unhappy with this arrangement. you might think about checking next-door to see if they need anybody in your line of work. my point is overlong period of time, you can't pay a given profession lower payment updates

here at your-year to the point that they are getting paid 30% less or 50% less than everybody else with equivalent kinds of skills. that won't work, period. >> i am sympathetic to the argument that you have to put it in perspective. the most overpaid workers in our health care system are the doctors. they account for about 20% of all medical care expenditures and i think most estimates suggest that the rate of return is about 20%. in other words it would take 20% and 20% of that in the get 4%. that that is one-time savings that you could expect eliminating rents. that ain't going to do it. >> okay, with that, our time is up so i want to thank all of you for participating and i especially want to ask you to join me in thanking our panel for an excellent discussion. [applause]

[inaudible conversations] now an analysis of this-year's governor port of social security. the chief actuary at the social security administration talks about how the government plans to meet its obligations as the national debt ceiling deadline approaches. this is a little more than an hour. >> technology.olog that may start before we get to the first slide by just saying w word which is on one of the skru slides about the social security trustees and their staff. the trustees report we are talking about today and the new findings from it is an annual report that has come out everyda

single-year starting t in 1941.s there is never been one ms.. is required by law, and the principle thing that is required to have the board of trustees report to the congress is the actuarial status of the social security program, and the actuat status is basically the financial status or answering the question are we going to have enough money to pay the benefits? that is really what this reporth is all about. our trustees ase i think is dy you know we have six trustees, secretary of treasury is the managing trustee, secretary of labor, health and human services managing trustee. secretary of labor, health and human services, the commissioner of social security, and finally, we have two public trustees who we have not had had for the last three reports prior to the 2011 report. and they are bob reichauer, and chuck wallhouse. so we are happy to have a full complement of trustees. the other point i would like to make is the trustees' report

doesn't just happen from the trustees and the will of congress. it happens from career staff at social security and is all of the social security of trustees' offices. labor, treasury, hhs, a lot of dedicated folks who put a lot of time and effort in, and really have in general made careers working in this area. there is a tremendous amount of institutional knowledge. we do draw on information continuously from the rest of the world, from academia, from where else elsewhere, and advisory boards in terms of providing information. but the extent of institutional knowledge that exists within the federal government, within these agencies, and contributes towards these reports, both for social security and for medicare each year is really quite impressive. and i think the good part of that is that it speaks to what is really essential, these reports, that they're done objectively and straight up, every single year. these are not documents that

should be thought to have, nor do they have, any sort of political bias or leaning. what the -- what is one of the most impressive things to me about these trustees' reports over the years is the extent to which they lack any kind of political bias, and the extent to which trustees, even though four of them are appointees of the president at any given time, when they put on the hat as a trustee, they look at the world differently. they look at it from the point of view of the fiduciary responsibility for these trust funds and for these benefits that are coming up for essentially all of the american people. so let's see. the -- i guess we go forward. there's the word. okay. so the first real slide here, i want to get into, is really just what are the real highlights of what came out in the social security trustees' report. one of the metrics, one of the measures we tend to look at quite readily is the long-term actuarial deficit, which is just

how short, if it's a deficit -- how short are we on money over the next 75 years as a whole, as a percentage of the tax base, payroll, over the next 75 years as a whole. and to the extent that this number is a deficit, it indicates one way of fixing it would be to simply raise our 12.4% tax rate that we pay, half by the employee, half by the employer. by the amount of that deficit over each of the next 75 years. and that would give us enough money to pay all of the scheduled benefits. well, in this year's trustees' report, that actuarial deficit did he ceased from 1.92% to 2.22% of taxable payroll. and we'll get a lot more into exactly what it was that caused that in just a couple of minutes. it was primarily due really to changes in the demographics. you've all heard the term demographics is destiny, and is the case for lots of reasons.

the other highlight on the trust funds that's oftentimes very note be is the year in which the two trust funds, together on a combined basis, even though they're legally separate, at what point would they become exhausted? and when they become exhausted, all that means is that the reserves are gone, but payroll taxes would continue to roll in, and therefore we would have enough money at that point to pay most of the benefits, but not all of the benefits in a timely basis. so trust fund exhaustion is important. and the year, this year is projected to be during the year 2036 that the combined trust funds would become exhausted. that's one calendar year earlier than projected last year. a second metric that people oftentimes look at is the year in which our cash flow or our noninterest income, income excluding interest, falls below the cost of the program. and at that point, we have to

start tapping into trust funds to some extent of interest earnings. this happens in 2010. it happened in 2010, and it's projected to continue under current law through the remainder of the projection period. another way to look, though, at this cash flow is to look at the total income of the program and see the first year in which the cost exceeds the total income of the program. that, of course, is the year in which the dollar amount of the trust funds would start to actually go down. because as long as interest is more than enough to cover any shortfall of tax revenue, then the trust funds continue to grow. this occurs two years earlier than in last year's projections in the year 2023. so we still have a ways to go before the trust funds even reach their peak. in the near-term, there are some other changes. in the near-term, the principle effect that we really had going on this year was in a slightly slower economic recovery that had been -- than had been

assumed in last year's trustees' report, and as you'll see in a couple of the slides to come, in particular, effects on the level of average earnings in the economy. the oesti assets by year 2020 are projected to be about 15% of the annual cost lower than they were last year. still very substantial. but a little bit older than last year. and the di trust fund in particular, one of the two, is projected to become exhausted on its own in the year 2018. and that's the same year as last year. this chart is one of our favorites for really showing what solvency is all about under social security. solvency is really defined as having enough money at any given point in time to be able to pay all the benefits. because the way the social security trust funds work, and they are real, absolutely in this sense, that social security benefits can be paid and administrative costs can be paid, only to the extent there is money available in the trust

funds to pay them. benefits and administrative costs cannot be paid from anything other than the trust funds. nor can those trust funds be used for any other purpose. so it's really a very dedicated revenue source. as long as the trust funds are above zero, as long as they're -- they still have money in them, the benefits can be paid and be paid in a perfectly timely basis. you can see in this chart the solid lines are where we are on this year's trustees' report, and the dashed lines where we were on the last year's trustees' report. and what we're showing as the fact that the exhaustion dates are a little bit earlier in each case, not enough to cross over a year on the di fund, but on the oesi trust fund, the projected exhaustion date is moved from 2040 to 2038. two years earlier. and as i mentioned before, the combined theoretical combined two funds together moves one calendar year earlier from 2037 to 2036. it's worth noting in the last 17

reports, 1995 through 2011, there has been a lot of variation in the year of the combined trust fund exhaustion, now projected to 2036. it's varied between 2029 and 2042. so the 2036 is right about the middle of where it's projected to be over the last 36 years. you might say. so why hasn't it just been in the same place? every year, we change assumptions. we have different experience in the economy. and is in the population. and we reflect all of these things. and it makes small changes. but oftentimes, they move back and forth from one year to the next. another picture that's really, really useful in terms of looking at what social security is going to be doing for us in the future is this next slide, which shows the income and the cost of the social security program and compares them on an annual basis. this is no longer just the level of the trust fund to see if it's above zero, but it's showing you what the cost of the program would be, and that is the blue line. and the continued dashed line is

what the cost of the program would be out beyond the year of trust fund exhaustion. and the reason we only put a dashed line on that is because of a very specific rule in the law about social security trust funds. remember that benefits can only be paid with money from the trust funds if the trust funds were to become exhausted. there is no borrowing authority for this program. this program is really tight hee operated. it cannot go out and start borrowing from anybody to pay benefits if there is not money available in the trust funds. so if, in fact, we were to reach the point where the trust funds become exhausted, members of congress had not done their job, and we know they will, by 2036, to make changes sufficient so that we'll get the income and the outgoal lines back into balance, we literally would have this drop-off in what could be paid. and we estimate in 2036, at the point of this trust fund exhaustion, we would be able to pay only 77 cents out of every dollar of scheduled benefits. that is what would happen.

and if you want to come up with a better way to motivate congress to act, than to say that next year the benefits are going to be dropping by 23% for everybody, whether it's 62-year-old retirees or 90-year-old widows, this is probably a pretty good answer. and i can just tell you that historically, this works. the fact that the trust funds you wanted borrowing authority -- we would hit a wall if we run out of money does motivate action. we are hoping we will motivate action well before 2036 so we could have more options and the options enacted will move in much more gradually than to have something as sudden as is shown in this picture. you can see the income rate and the red line stays fairly flat because our income is largely a 12.4% tax rate. and these -- this graph here is expressed all the dollars as a percentage of our tax base of taxable payroll. so the income rate stays pretty flat. the cost rate rises up for reasons that i'm assuming are

very familiar to everybody here. the fact that we oftentimes refer to the baby boom retiring, and that's going to cause a big surge in the number of retirees. but the real key is that behind the baby boom is not going to be a commensurate surge of younger people in the work force. because the baby boomers had only two kids per woman. whereas prior generations had three kids per woman. so that means when the baby boomers retire, the generations following behind will be relatively smaller than has been the case in the past. and that's really why this blue curve shifts up from the level of about -- of about 10.5% of payroll that you can see that it was back around 2005, and it moves on up to a level of about 17% of payroll over time. it's simply because of the demographi demographics, and really because of the drop in the birth rate. the curve is relatively flat after that. the dashed line of what the actual cost of the program is. assuming coming up with revenue

to pay for it, indicating that longevity matters, but it's the change in the birth rates that has driven everything. now, just to give you a further feel of the change between the two trustees' reports, this little graph shows you the annual cash flow balances that are projected. these are as a percentage of taxable payroll, just as the earlier items were. and the annual cash flow balance is simply the tax income coming into the program minus the cost of the program. you can see we're -- we have been positive on that for a little while, but you can see that these annual cash flow balances are going negative and in this year's trustees' report, which is blue, we're somewhat more negative. we are, in fact, negative in even the early years of the projection this year, that's because of the slightly deeper recession, but more the slower recovery that we have from the

recession. and in the outyears, you can see the blue line is lower after about the year 2025, largely because we had some changes in our projected mortality or life expectancy atled older ages. we will get more into that in a second. okay. sustainability. for entitlement programs in general for all programs. highly important item. and we think that expressing the cost of the program, and the noninterest income of the program as a percentage of gross domestic product should be helpful. because after all, social security does not live in a vacuum. social security does one of several federal programs. and programs of various types that have to be funded out of gross domestic product. that's the source of all moneys that can be available for paying everything we want and everything we need. and you can see that social security has in the past been about 4.3% of gross domestic product, as its cost. but again, because of the baby

boomer retiring and followed by the smaller generations from lower birth rates, we see that this 4.3 is rising up to about 6% of gdp. and it basically flattens out at that level, even with very -- with continuing increases in longevity thereafter. but the main thing is this flip that we have in the birth rates having been dropped to only 2 since about 1970 versus 3 or higher in 1960 and earlier. so this is really what we're confronting. and i guess it always raises the question to me, if the blue curve, the cost were rising up and just kept going, and it was rising up and up and up over time, that would start to look potentially sustainable, especially if it got up towards 100% of gdp. but the fact that it flat lines at 6% gdp does raise the question, is 6% too much to pay for, or is it too little? it does raise a question for the members of congress and the

presidents of what they will want to do in the future. but the fact that the cost of the program as credible currently structured rises only because of the drop in birth rates and then flat lines thereafter suggests that it should not be taken to be an unsustainable structure. but we need our adjustments in either the revenue coming in, or in the benefit levels paying out. to get a better sense of really why that cost rate is rising, you can see the middle line -- this has an ii on it. that's for our intermediate assumption, the projection. alternate. we do three basic projections. alternative one, you can see the cost is -- well, not the cost, but the ratio of beneficiaries to workers is relatively low, which is favorable for financing. that's our alternative one or low-cost. alternative three. or high cost is the opposite. but the one that is focused on most is the alternative to the intermediate projection. you can see the shape of this

curve here is almost identical to the shape of the cost curve. and that's because for social security, which is more than anything else retirement benefits, and benefits to aged folks, the more aged folks we have in the population, the more benefits we have. and as that number rises relative to the number of people who are at working age, obviously, that changes the cost as a percentage of payroll. because the payroll comes from the workers, and the benefits come from generally the older folks in our population. the next slide we should probably move through real quickly. but what i want to really emphasize on this are just toward the items in red. i mentioned earlier that our actuarial deficit increased by 0.30% of payroll from last year's trustees' report to this year's trustees' report. you can translate that into my pal pai roll tax, if it went up to 6.35, that would be half

that .30 and then your employer picked up the other half of that .30, that would be enough to cover the changes between the two trustees' reports. but in this chart here, which you might want to peruse in greater detail later, this breaks down what the changes were in this year's trustees' report that added up to this .30 of payroll. the first thing, we change our 75-year period, moving it forward. because we start at whatever is the current year and add in the next 74 years on top. so this year, in doing the next 75 years, we added in a new 75th year, 2085, which has a relatively large annual deficit. because of the way the population is moving on us. and adding in that one extra year, added .05 out of the .30 percent of payroll increase. so that's just automatic. so what we have left to explain is really .25% of payroll. and it turns out that the lion's share is because of the demographic changes.

there was no legislation that had significant effects on the projections this year. demographic data and assumptions. largely what happened here is we had new final data on mortality for folks over 65. and the good news is, that death rates were lower. the bad news is that death rates were lower. and when death rates are lower, that means people live longer, and they get to enjoy receiving their benefits for longer, i with is a wonderful thing. but that costs the trust funds more money. so and increasing the deficit or increasing the cost is not all a bad thing. that simply means people are living longer and hopefully enjoying the benefits for a longer period of time. we also had an impact from the immigration. we had slightly lower net immigration, especially from the other -- sometimes other legal immigration. in the projection over the last few years, based on some numbers from department of homeland securities, and our projection. on the economic assumptions and

data, and we'll get more detail on this as we move through the remainder of the slides, we had about a .06% of payroll effect, a split between the slower growth rates and gdp and in wage and earnings levels. and also a slightly lower real interest rate. that was assumed in the early years of the projection period. the disability assumptions oftentimes are a big deal. we did not have big changes in disability assumptions this year. >> we did have some updating in some of our analysis for -- disabled worker mortality rates and for termination rates. and those contributed towards a very slightly higher actuarial deficit of .01. finally, we always have the ack areas coming up with new and improved methods. and we did indeed have some methodological changes this year. i won't go into all of the detail about what those are in the bottom portion of this. but they also contributed another .05 to the deficit in total. and these then add up, and

you'll see, because much of that .05 -- in fact, at least the sum total of it, were really demographic changes, if you add that to the .1 4% of payroll change we had under the demographic date, you'll see the lions share were on the basis of demograp demography. but there were no changes in the ultima ultimate assumptions. we often talk about the ultimate unemployment rate assumption change. the mortality change. was the ultimate birth rate, which is 2.0 children per woman, would that change? none of the ultimate assumptions changed. what changed was more recent data and oftentimes having that be a different starting level we applied then the same growth rates as last year. so the levels of some items are shifteded. but not the growth rate. one item that is of such an

incredible importance in terms of these projections and that really did have a change this year is, of course, the death rates, and particularly the death rates for people over 65 of the after all, that's where most deaths occur. and also, it's very critically important, because people receiving our benefits by then, and the longer they live, that is the lower the death rates are, the longer the life expectancy is, the more the cost of the program is. and in this slide, you can see for men and women separately, as we move from the black line, which was the 2008 trustees' report projected life expectancy at 65, to the green, which was from the 2009 trustees' report, to the blue, the 2010 trusteeses' report. and finally, the red line, which is our current 2011 trustees' report. we have been progressively moving up a little bit in terms of life expectancies as we project out into the future. this is in recognition in large part to the changes that we have seen in very, very recent years.

shifted us to somewhat higher levels and also projection methodologies which pick up in the most recent experience, and extrapolate that to a degree in the future. so we're getting a little bit more optimistic in terms of life expectancies. again, we all want to live a nice long life, but, of course, that does have stressful implications for the cost of social security that we'll have to pay for in the future. to give you a sense of what the real impact of this is, you can see on this particular graph, the numbers of retired workers. the numbers of retired workers are, of course, folks all 62 and over. and you can see that this really hasn't shifted all that much. in the early years, and this graph only goes out through 2019, in the years 2008 through 2014, you can see the number of retired workers for not only this year's report, were elevated somewhat from the earlier reports. and that's because of the recession. and we did have an increase in the number of people filing for retirement benefits in the recession. not dramatic, but a little bit

of a bump up. in the longer term, you can see the red line is starting to separate itself a bit from the other lines, and that is from the increased life expectancy that we had built into this year's trustees' report. this is a more expanded chart that runs all the way out to 2085. and i think we're maybe chopped off a little bit of something on the end. that's not the year 2008, that's actually 2085 on the last points. and you can see also the elevation of the number of retired worker beneficiaries relative to the other years, which is slightly above it. so even when we have fairly significant increases in life expectancy, it does not have explosive impacts. but fairly subtle impacts on the number of retired worker beneficiaries. so we do have one other kind of worker beneficiary under the social security program. of course, the disabled worker beneficiaries from the law having been amended back in 1956 to folks who have severe medically determinable parents and impairments and unable to

work. and here we thought it would be interesting for you to see a black line, 2008, which was our last trustees' report projected with no anticipation of a recession. even though the recession was by the time of the 2008 trustees' report actually sort of under way, it was not projected at the time. so you can see what the trajectory of the number of disabled worker beneficiaries was at that time, and then what it came to be in succeeding trustees' reports. and in the 2009 trustees' report in green, you can see we elevated the numbers considerably on the anticipation of unemployment rates, a dip in the economy and understandingsing as in historical periods, when you have a recession, when work is harder to find, there will be some increased numbers of people applying for and getting on the disability rolls. you can then see also between the 2009 and the 2010 '11 trustees' reports how our assumptions got revised in last year's report to have a somewhat

deeper and longer recession and that's why the number of disabled workers jumped up. they did not further jump up this year, even though we had a slightly worse recession. and that is wonderfully because in the year 2010, we had somewhat lower disability applications, and disability benefit awards than we had anticipated for 2010, even though the economy did not perform quite as well as we had anticipated. now, here's a really interesting slide. and this is one of the other items that -- and i'll let you all be the judge as to how interesting it is. but one of the other items that did have an effect on our projection this year was change in immigration. we have made a lot of changes starting in 2008 in projecting immigration. a truly challenging area. any time you don't have really good data, which is truer probably for the undocumented alien population in this country than anything else you can imagine, it becomes very, very challenging. and you can see the sort of jagged lines here, what these

represent are net other immigration. net other immigration in any given year is really of the total number of folks coming into the country in that status minus the number of people leaving that status. so it's really in effect the net increase or decrease in numbers of people in that status. and we have been used to, as you can see in the past in 2008, having estimates in the black lines of a little less than 400,000 net increase back in the '80s, and a little less than 600,000 ban in the '90s. but more recently we have been doing some furthered modeling, and we have been getting some better estimates from department of homeland security and other entities, and that's resulted in the somewhat more jagged pattern that you see on the red curve. this is something that really is a to-do in the future to work further with dhs to try to understand better what's going on. but you can see in the year 2005, by comparing their total

number of people in the country who were, other than legal aliens, but from the beginning of 2005 at the end of 2005, there was a big jump up. so we had not on the order of 600,000, but about a million increase in the number of folks in that status. in 2008, then we had the reverse. 2008, was, of course, the first year of a recession. and you can imagine that first year of recession when unemployment rates are starting to rise rapidly t becomes harder for a lot of people to find jobs, if you were residing in a country other than legal status, you might find yourself wanting to find another place to go, because it might be hard to get benefits to carry you through. if you've been working especially in the underground economy. okay. we're moving along in time here. so let me move quickly on a couple of these slides to get to now what happened in terms of the slower economic growth in this year's trustees' report. here you can see on this next slide about gdp. again, the black line is the no recession scenario of 2008.

this year, the red line, the 2011, you can see it's a little bit lower. not much. we -- slightly more extended and slower recovery. a little bit more dramatic is what is happening in the unemployment rate. actually, the unemployment rate in the year 2010 was lower than anticipated in last year's trustees' report, which is the blue line. but it's slightly higher through the remainder of the period through 2018, again, showing slightly extended recovery. osti covered employment. we have a similar situation. we were actually a little bit higher for the number of workers paying taxes into the system in 2010. but we have it falling a little bit below. and this is to a great extent due to the fact that we actually have a slightly smaller projected population under 65 as we go forward into the future. the -- and part of that production is, of course,

because of the decreased immigration. but one thing that had a very significant impact on our trustees' report and also had an impact on the medicare trustees' report this year was the level of average earnings in the u.s. economy. and you can see that by the year 2010, the level of earnings in real terms, relative to inflation, is 3.1% below what had been anticipated in the 2010 trustees' report. we largely get this back by 2020, but we have really quite a big dip in real earnings. and this does have negative effects in terms of the tax revenue coming into the system early, but if there's any good news to this at all, it also means the indexation for new benefit levels follows that lower earnings growth to the benefits while the taxes are lower, the benefits will also be somewhat lower too, which helps keep the system somewhat more in letnce. .. which i think will be of some significant interest.

this particular slide is one that we enjoy a lot, because it puts in perspective these two concepts of cash flow. or of net income into the trust funds. the blue lines here are really the net income on a year by year basis, under this year's trustees' report of the total income minus the total outgo from the system. so it's the dollar amount in effect by which the trust funds are growing. ask you can see it's positive all the way out through 2020 to a substantial degree, and it's positive until 2023 as we project this out. the red line is something which is looked at probably a little bit more often when people talk about social security. which is the cash flow deficit which is the income excluding interest minus the cost of the program. ask & you can see we are already negative on that in 2010 and '11. and by the way, both of those are as negative as they are to some degree -- actually to, a significant degree because of adjustments made for estimates made in earlier years of the

amount of revenue we should get. and then we actually get the data at a later time and are able to rectify the accounts. so we had actually some money given back to the treasury for years 2010 and '11 on the basis of those adjustments. you can see over the years 2012, '13, '14 and '15, we're about a negative $20 billion in each of those years for this cash flow. last year we were -- 2012, '13 and '14, a small positive, so it's a small change, but a little bit down. on this slide, we have one minute, okay, pressure. okay. so let's try to hopefully convey something of use here. which is this is -- was sometimes referred to as the primary deficit or the primary surplus for social security. and you can see that in last year's chart this illustrates those years, 2012, '13 and '14 when our tax income minus our cost were slightly positive and now are a little bit lower.

again, largely because of that slightly slower economic recovery, but principally, because earnings dropped by even more than gdp for those years. and that is what we have going on. still not a dramatic item, but worth noting. let me show you a graph which we like a lot. which is about the cost of living adjustment. and the good news is that we are going to have a cost of living adjustment this year, december 2011. we haven't had one since december of 2008. the question is, how big will it be? and you can see on this graph, we have illustrated what the level of the cpiw is, which is the cpi series that uses the basis for cost of living adjustments. you can see that funny spike way back there in 2008. that was a spike when oil last time got to $4 a gallon and gives our 5.8% cost of living adjustment. by december of that very year,

cpi dropped by 5% from the peak that it had been in the third quarter. and that's why it's taken us so long for the cpi to grow back up enough to exceed the level of that first spike to finally give us a c.o.l.a. you can see by the third quarter of 2011, which would be the determining quarter for this year's december '11 cost of living adjustment, we're projecting the trustees' report based on assumptions developed last december that that will be a 0.7% increase over the third quarter of 2008. actually, the level as of the first quarter of this year actually recorded is already 1. 2% above the level of the third quarter of 2008. so unless crude oil comes back significantly from where it is now, we will almost surely have a little bit more than the 0.7%. certain events have happened in egypt and elsewhere post the time when the assumptions were set for this year's trustees'

report which obviously were not anticipated. we'll just sort of show you these benefit replacement rates. benefit replacement rates are simply the level of the benefit that a person can receive when they first filed to receive benefits, divided by the average level of earnings they have had during their working lifetime. and we havel i straig illustrate for several different levels of earners, anywhere roughly $20,000 per year to a maximum earner level of $106,800. for people retiring at 65, you can see these numbers reached a peak around 1980, have been coming down as virginia indicated earlier, and ultimately you said current law, scheduled benefits. these are projected to reach a little bit less than 50% for relatively -- low earners, those making $12,000 per year all the way down to just about 23, 24% for our highest earners. but it is worth looking also at

what this looks like for people retiring at 62, which after all, more people retire at 62 than at 65 in this day and age. and you can see the percentages are lower, because of the actual reduction to the monthly benefit that they would receive starting at 62, relative to their career average earnings for this low earner, 20,000 is now not 50%, but 40% of pay and relatively straight out in the future. again, remember, this is on the basis of scheduled benefits, and not on the basis of what will actually be payable if we do nothing, which would be 25% lower than this. okay. so we already saw this graph, and in summary, the real key for the future in this year's trustees' report and quite a few trustees' reports now is social security is in pretty good shape, but the cost and the income are just simply not in perfect alignment. they're not going apart from each other. but they're not in perfect alignment. and what we need is some

combination of either some reductions in the cost of the program to the tune of about 25% in the outyears, or an increase in the revenue to the tune of about 33%, or some combination of those two. and we have a little example on the last slide, but i'll hold off on that, because we are moving ahead on the time frame here, and i'll sit down. and i know virginia wanted to have a chance for you all to come up with some good questions. and i hope you will. and the very final thing i really want to say is, in addition to the trustees and the trustees' staffs, i just want to say that for the social security administration, we have an amazinging group of people there. not only in my office -- of course i kind of brag too much about the people in my office. you know, i have alice waite, one of our deputy chief ack areas, docker is the other, karen gwen, our executive officer. we have 55 people, and get a lot done. but we also work very closely with many, many other office, including the offices responsible for making sure all of you in congress get your

congressional affairs. and kim is here representing that office here today. so thank you all very much. el well, thank you, steve, that was great. we are delighted to have -- take time for questions, an so i may have to repeat your questions but please, let us know if you have a comment or he question you'd like to raise. >> daniel gerrans from social security works and it's interesting to me how minor changes and demographics can change from year to year and i am wondering since it seems yea. and i'm wondering, since it seems like the go-to estimates or the intermediate estimates usually are the way it's

presented, what would have to be different economically, you know, and demographically, to give a few key indicators for either the low cost or the high cost estimates to be realized? and for instance, i know that the low-cost ones, the funding gap is -- is there even a funding gap? i'm not even sure. but what employment levels would we would to reach, what gdp growth? what would have to change? i'm sort of curious. >> in brief, the question was, what would -- what would have to happen to significantly change the long-range projections more toward the optimistic or the low cost or the high cost? >> really good question. well, to a great extent, and one way to kind of answer this is, actually, if we stayed at birth rates of 3.0, we wouldn't be talking about the funding cap, because actually, with birth rates at 3.0, if that had persisted after about 1965, the age structure of our population

would be such that the 12.4% tax rate would be just fine for paying for the level of scheduled benefits. so we really do need changes. so that is one possibility, if we simply, you know, were to retroactively go back 35 years and have higher birth rates. well, that's not going to happen. another thing that people oftentimes look at is, well, can we grow our way out of this? with a 2% of payroll shortfall, we would have to have about a 2% faster average annual growth rate and average earnings. now, average real wages are projected to grow at about 1.2% in the trustees' report. that's our baseline assumption. and we've had that for quite a number of years. that's right around what the average has been. growth and output per four and real terms for our work force. that's right around the growth

and productivity has been for a century. to have it increase by a full two percentage points would be quite implausible. now, the alternative one, you're exactly right. the low cost does have a projected trajectory that would look to be in balance. but it's important to point out the alternative one is a combination of having more optimistic results of all the major assumptions. having the birthrate instead at 2.0, it's 2.2 for the birthrate. having mortality rates decline quite a bit administrator slowly than they are now, having employment rates higher, having the unemployment rate instead of 5.5%, be at 4.5%. so every single component all moves in the right direction, it's often times stated that's probably not real likely and it's probably not.

the reason for the alternative 1 in 3 are just to indicate across a very, very broad range of possibilities what could potentially happen. that's why we think the alternative probably proeltly is what people think of most often. we think we're about equally as likely for the jut come to tern out to be higher or lower. and historically, that has turned out to be the case. so we wish there were things that would sort of drou grow us out of this, but the thing is the people in this building and nearby building to make these changes to respond to fft that our country has changed. we're living longer but also having fewer children. and the combination of those kem

graphics really make the difference. one comment i want to make is the way the system is set up, you're probably all familiar with the wage index benefit formula. the system is set up if there are changes in the rate of growth or average real earnings, the system actually is fairly resilient in response to these. it is adjusted to a number of these factors. what it does not adjust to, though, are the gem graphic factors. when the birthrate drops from three down to two, how would we automatically adjust to that. have the tax rates go up by half again over the level? if we only have two kids out there for each parent when we used to have three kids for each parent, do they have to pay half more money in order to support two parents? that's why we have the challenge

we have for social security. it's about the demographics. we have to have this increase and the taxes we're paid or the reduction and benefits in some combination. >> i just want to make sure i understand the cola. what you're saying is that when the trustees set the assumption about inflation, that was before the arab spring and rise in oil prices. if the cola war were call cue collated, the only way to get down to the 0.7 brs, it would have to be something like massive declines in gas prices or something? but right now we're above -- okay, i just wanted to understand. >> that's the average level for the cpi of the quarter of this year. we've had a continued increase in cpi even after the first quarter. could it happen? this is one of the wonderful

things about uncertainty. in the third quarter from 2008 to december a couple years later, there was a 5% drop in cpi. could things change and all of a sudden oil drop from its current level, it was just a week or so ago, $113 a barrel. if it drops back, we estimate somewhere around 08 or a little less than 80, that would be consistent with our initial estimate back in december. >> any other comments or questions? >> yes. >> it looks like from the worths where you're at a point now where the interest -- some of the interest is needed to pay benefits. so i assume treasury cannot pay all the interest with additional bands, government bonds. so they'll have to have some cash. if there's no increase in the employment taxes in the near term, and then by 2022 or 2023,

all of the interest, i guess, would have to be paid in cash then some of the bonds will be redeemed, does treasury have a plan to come up with the cash they have to pay this year or next year? and do they rereport that? >> does treasury have a plan to come up with the interest due to pay the trust funds? >> not to be glib, but the answer is absolutely yes. the plan, of course, is whenever a bond matures and is redeemed, the treasury will pay the money. now, when the treasury pays off any redeeming bond, whether it be a aa bound or whether it's a security held by the trust funds, treasury comes up with the money. it has to either raise some taxes or lower some of the

spending somewhere or issue some other bonds to cover it. there is this thing called the debt ceiling. it pays a lot of attention to the debt subject to kreeling. and that's both publicly held debt and the debt that is owed by the general fund of the treasury to the trust funds. whether it's the public directly or indirectly. if the trust funds, a tremendous rebound in the kbhi, if we have to start having net redemptions of bonds held by the frus funds that will lower the amount of debt that then is owed to the

trust funds in order to come up with the cash for us to pay the benefits when we reteem those bonds, the treasury would presumably issue more debt to the public. if we redeem $1 billion of bonds in the trust funds, and there's another $1 billion of funds in the public, then the total amount is unchanged. the result would be to simply issue more sdet to the public as we diminish the amount of debt owed to the trust funds. >> thank you for the presentation. >> one, curiously missing from the presentation was the 2011 payroll tax cut. if you could briefly touch on

how the transfers are occurring. what does the social security administration do with the excess revenue coming in. is treasury still selling securities to the trust fund? has deck tear geithner said when they're going to stop selling securities? are you now holding cash? at what point before the presumed rising of the debt ceiling does the administration start holding cash? >> two questions, one on the implications of the payroll tax holiday this year and the other, what actually happens when we hit debt ceiling day.

>> excellent question. first of all, on the payroll tax holiday, it's actually the second of two t one after the other. it allowed employers not tot pay their whole share of the payroll tax for certain folks they hired during 2010 who had been out of work for a while. and similarly, the payroll tax holiday, which has all employees and self-employed individuals paying two percentage points less payroll tax. they're paying 4.2% throughout all of this year. hopefully that will be a stimulative factor. people have more money in their pockets and they'll go out and buy more money. the thing that might not be quite as well known is in both of those bills, they had the exact same other feature, the trust funds would be made completely hole with reimbursements with the general fund of the treasury. and both bills have suggested that the trust funds should be reimbursed with as close as

possible, the same timing as if the payroll taxes had not been lowered in the first place. >> as it turns out, that's very, very easy. in the estimates we make, we tell treasury how much money ougtd to be transferred in a day by day basis to the trust funds. we do the calculations as if the tax rates had not been altered. that does mean the general fund of the treasury is receiving less money and that the trust funds are made completely whole. the second part of the question, with respect to the debt ceiling, there, as we understand it, there is actually -- there was legislation back in, i believe, it was 1996, the contract with america legislation actually had very, very explicit language in it

saying that all revenues coming into the trust funds must be issued as securities to the trust funds and issued essentially immediately. and there's no expectation of that being different. you'll have to get everyone from treasury to answer this question more fully. but i believe this is debt ceiling day. secretary geithner did announce about a week ago, there were further measures they were going to extend the viability of the debt ceiling until, i believe, it was august 2. so we're not really at the crunch moment yet. but because of other measures that are being taken, but there is new expectation that there westbound any nonissuance of the securities to the trust funds. >> other comments? questions? yes. >> [ inaudible ] tt cost curve

bend down? >> perfect question. we won't tell everyone that we set this up beforehand. this really helps us explain it's really the drop in birthrates that matters. if all we had was the sort of lump going through the python, the baby boomers were this big bunch of people that used to be workers and now they're going to transition over into being retirees in instead. we would have a big surge in the costs. but then it would move through the python of when they got passed away. in truth, the baby boom generation would not even be called that and not even be noticed if they continued to have had three children per woman.

we would have continued to have three children for every couple as we moved into the future and things would not have looked different. the cost curve would not be rising under a baby boom scenario if the baby boomers had, in fact, all had three k s kids. president birthrate during the baby boom generations, 1946 to 1965, 3.3 children per woman. didn't bring the slide today because it's not a change from prior reports. but over the last century or so, the average birthrate has been on that same order for a long time. the baby bust occurred and it's a persistent baby bust. we went from three children per woman down to two children per woman and that's really what's causing the shift.

because you -- imagine you have a flow of people who are aged and you're used to having for 100 of them, you're used to having 150 younger people around to support them. you don't have to have a boom in the number of aged people. you just need to have a relative reduction in the number of younger folks to support them. and that's what the baby boom generation felt by baby bust generation and the reduction in the birthrates is all about. so it's not just about a lump that moves through. it's about the fact that we had a drop in birthrates that we're estimating to be permanent. ff it goes back up, the cost

rates could come back down. lest we feel too terrible about this shift in the gdp, let's be happy, we're not japan with a 1.25 children per woman birthrate, some countries in europe have really rebounded back. france and sweden to having birthrates much similar to ours now, two children per woman. so there was a long time when we were discussing, so what's going to change. the u.s. dropped down to a really low birthrate like japan or italy? or would they eventually come back up? we felt pretty confident they're going to eventually come back up to something closer to two children per woman or they're going to disappear as a nation. because two women per children is what you need to replace your population. if you're lore than that for a

very long period of time, your population actually begins to diminish and you get smaller and smaller. that's exactly what japan is doing. japan is having a shrinking population. we we're not at risk for that, as long as we have 2.0 birthrate and positive immigration. >> my question is, if immigration reform were to take place anytime in the next 5 or 10 year, what would be the effect of the solvency of the trust fund? >> the question is, how would immigration reform affect social security solvency? >> that's a really good question. if we could have a crystal ball and know what reform was going to be affected. >> currently undocumented, say 11 million or so.

if all of them were to gain their legal status and join the covered earnings part of employment sector. >> this is really a two step question. what if we were to have the roughly 11 million or so people in the country now in an undocumented status. be declared to be legal residents. if we were to do that, the first step would be that we would have a lot more people who would be legal in our population now. the work sna ear doing would be much to a greater extent above ground. we would presumably recognize it. we would be able to tax and and we would have more revenue coming in. the question, though, and what i was really referring to about the nature of immigration reform would then be the second part of the question, so how about future immigration? would we also be allowing much more legal immigration in the

future? or would we put up a big wall and not let anybody new in the future? what really matters ability immigration is not just the folks we have in the country today. that's extremely important. and by the way, immigration, whether people have come in legally or illegally, the most important aspect of it is really that they have kids once they're here. it's all about the birthrates. if we have more people in the country to generate more births those are the future workers and future generations to sustain our economy and way of life. the second part of the question would be, even if we come along and legal a's a large portion as we did, of the folks who are undocumented today. it would be a boost to revenues and a boost to the payouts, the cost of the system. and might those relatively balance each other? there could be a timing shift. the real question is, would those people stay in the country

longer? would they have more children as a result? but the very most important question is what would happen to the in flows of folks in subsequent years. great question. >> question? >> when the fund became depleted we reallocated percentage of the payroll tax. what percent would have to be deallocated to make the fund whole? >> wonderful question. and unfortunately,'ll lis and her people have done some estimates on that quite recently. back in 1994, we reached a similar point. the d.i. trust fund was headed down rapidly. the total tax rate, not change in total tax rate but shifting a bit of it frosi over to d.i.

the same thing is entirely possible. i believe the numbers are that beginning in another couple of years, if we were to shift to payroll fax pay, right now, 0.9, 9 out of 6.2 goes to the d.i. fund. i've heard a shift of the 1.0%. and for a few more years up to 1.1, just on a temporary basis. that would be sufficient from something like 10 or 15 years. relatively easy fix. it was done back in 1994 with

es essentially little fanfare. we think that would be a likely fix if we don't have a change between now and 2018. >> [ inaudible ] help, you know, decrease in the number of disability applications. is there any chance of ensuring 30 million more people might prevent a certain number of those from not having to apply for disability? >> we did the affordable care act last year. the excise tax and health insurance premiums was diminish the premiums to wages nar subject to tax. the extent to which affordable care act will result in more availability of health care and

greater health for folks will really obviously have a mixed blessing. . it will presumably have an impact on disability rates. for people who do become disabled more availability in the first two years of their disability receipt when medicare is not available now. somewhat of a reduction for people who meet our version of disability. but people who receive care would expectedly live longer and

there would be some extra costs on that side. >> radio steve, i had one observation on the chart before the one showing up, backing up one. these are the scheduled benefits for an age 62 retiree, but the replacement rates when you look at this average earner, so to speak, this person making 40,000 to 45,000 a year, the replacement ask scheduled to be down around 30%, though it's -- they're pretty modest by international standards. it strikes many e. i hadn't -- i just appreciate your putting it up there because i hadn't really seen it modelled in this way before. >> we think this is important to look at just you should the context of what social security is. there may 3w some in the audience too young to hear the

story about the three-legged stool. but savings have to all work hand in hand to provide you an adequate retirement income. it has a cost of liing adjustment. and more and more, employers are no longer really providing a defined benefit pensions. social security does provide a significant role in providing a rite lifetime. >> but these rates do reflect the full implementation of the higher retirement ages and the lower reductions that we see in current law? >> they do, absolutely. and if you look at this, it may

be somewhat subtle, from 2017 through 2022, those where when people will have the gradual next step increase in the normal retirement age, which is 66 now for people reaching 62 in the year 2017. it will jump up to 66 in two months and then in each year succeeding that, it will jump up two months a year until we reach 2022 and later. people will have a normal 67 retirement age. and if you consider people wanted to retire at 62, raising the normal retirement age by one full year effectively lowers your benefits by 6.5% from what it would otherwise be. your monthly benefit. was the good news is it doesn't lower your -- i'm sorry. if you raise your retirement age and retire at the aim stage, it

will lower your monthly benefit by 6.5% roughly. if you listen to what's being said about raising normal retirement age and say okay, i'll work a year longer, you then can get the same monthly benefit for the rest of your life, but for one year less. as it turns out, that's a 6.5% reduction in the total lifetime benefits also. so raising the normal retirement age is certainly something that can be argued to be sensible as people are living longer, but it's clearly a way of reducing the level of benefits that are paid from the system to make it more viable under the circumstance we are in. which, of course, is the lower birthrates requiring either some benefit reductions or some revenue increases. >> other comments or questions? if not, i think weave come to the end of our scheduled time, but i do ask you to look again at the evaluation form.

fill out the backside on topics that might be of interest for future briefings and please join me in thanking steve for doing a wonderful job of explaining this. >> thank you. >> thank you for the opportunity.

now federal communications commission chairman julius genachowski les ought to insider security ideas for small businesses and at a roundtable discussion. some of the panelists include former homeland security secretary michael chertoff and industry and government leaders in the cybersecurity. this is an hour and a half. >> welcome, everybody. i'm happy to welcome you to the fcc's forum on the cybersecurity with a focus on the small businesses. i appreciate everyone here joining us today. this is being streamed live on

c-span and on the internet so i appreciate all of you joining as well. this is an important topic for the country. let me give a special thanks too each of rafah participants whore are here as a part of the forums and the panel. e they will lynch be introducingac themselves shortly but i do want to particularly thank former homeland security michael chertoff for joining as a uniqu. a unique experience and background. you stay engaged in these issues. we are fortunate to have you at the sec as part of this forum. -- the fcc as part of this forum. as many of you may know, this is national small business week. we have gathered to talk about an issue that is critical to our economy. small businesses and their ability to seize the benefits of new technology and protect against cyber security threats. the fcc is releasing a tip sheet

for small businesses and lodging -- and launching a page on our website to help them protect themselves against threats on the internet. american small businesses are key drivers of innovation, economic growth, and job creation in our country. small businesses employ more than half of all private-sector workers. they generate 2/3 of net new jobs over the last 15 years. at a time when we have to focus on job creation, making sure we have technology platforms that are conducive to small businesses creating jobs can make a big deal in our economy.

small businesses drive innovation, whether it is small businesses here in d.c., or in cities around the country or in rural america or in silicon valley, small firms produce 13 times more patents per employee than larger ones. broadband information technology is increasingly important for the success of our economy, to jobs and to the future of small businesses. broadband is high-speed internet. online business tools. we are using a lot of terms that you're going to learn more about on this panel today. all of these tools and information that are available online, can enable businesses to

grow and jobs to be created anywhere. they allow small businesses to market their products and reach customers in the next neighborhood, in the next city, in the next stage. it is not just limited to big businesses. this can be small businesses as well. it is not just small businesses in big cities. it is small businesses in rural america is as long -- rural america as long as they have been activity. blue valley meats doubled its employees and boosted its sales force to% even in the rough economy of the last few years after setting up a website and starting to sell its beef onl

ine. there are many examples of that. there is a cup cake bakery in washington, d.c. that has been able to go from zero stores to over ten stores employing new people with each new store. when i asked the owner of the shop how he was succeeding even though the economic was so challenging, he said the answer is technology. you have got to go to where the customers are. the customers are online. you've got to reach them there. that is what i am focusing on. he has 10 stores in the washington, d.c. area. another thing. cloud base services, internet based services can lower the cost for a small business, increase efficiency for a small business and boost a business'

bottom line. this could be products to run customer relations management or run others that we will hear examples of from the panel. lower costs from cloud based services that are more expensive, more profit, more jobs. having a broad band connection makes a $200,000 per year positive difference our revenues for small businesses by helping them reach new markets. the opportunities for broadband for small businesses are real and so are the challenges. we are here to focus on the cyber security challenge. it is not the only challenge we have before us. we are working on the of d.c.. -- the fcc. we have a deployment gat. we are -- deployment gap.

we face a expect from -- spectrum gap. demand for spectrum is the increasing -- is increasing exponentially. the demand for spectrum is outstripping supply. we have to do something. we don't, it will affect our economy. small businesses are saying, i can use some of these devices to communicate with my sales force. i can use these mobile devices to move more people out onto the road to respond more quickly to service calls, to respond more with -- more quickly to sell a

product and to communicate directly with a client or each other. a plumber who is at someone's house who can take a picture with his ball and have people at the office looked at it and say, i cannot figure out what is wrong with this. to be able to check inventory. all of these uses of mobile technology can help drive the efficiency and productivity with small businesses as long as we have enough spectrum to do all this. it is going to be a challenge. this is why we are working with congress to free up more spectrum. that is the stuff we are not talking about today. we have convened this round table to discuss what of the biggest challenges our country faces, a growing threat to cyber security. almost two years ago, the president declared that securing

cyberspace was a vital strategic goal. the white house delivered a road map to protect critical u.s. industries from cyber threats. this afternoon, there will be more announcements on government-wide cyber security efforts. there was a new position created by president obama two years ago. his name is howard. i would like to it knowledge the axle of work being done by the leadership at the department of homeland security -- acknowledge the excellent work being done by the leadership at the department of homeland security. they are working to tackle these threats that require the expertise and participation from a number of agencies around government, including the fcc. congress is looking at doing its part, which is important.

congress has been considering legislative proposals that would include increased information sharing between the government and the private sector to rapidly respond to cyber security threats and attacks. it is vital that small businesses be parts of the cyber security equation. -- be part of the cyber security equation. they have the most to gain by addressing the cyber security threats and increasing the trust on this platform. small businesses that do not take protective measures are vulnerable targets for cyber criminals. a recent study found that american businesses louis billions of dollars annually through cyber attacks -- businesses lose billions of dollars annually through cyber attacks. the average cost to these attacks is about $200,000 per

attack. in a moment, you will hear from a local businessman. he will talk about the benefits of the internet and about how his r criminals hurt is ♪ construction business. 42% of small and medium businesses reported a loss of continental and private data in the last 12 months. or is it% experienced a net across as a result. -- 40% experienced a loss as a result. we are here today to help small businesses overcome the security challenges and sees the benefits of online commerce. i expect today's discussion will reveal many small but significant steps that small businesses can do to protect

their company and their customers. let me announce a number of steps that the fcc is taking today to help in this educational endeavor, to promote a safe and secure internet and to promote security for small businesses. we are launching a small business security page on our website. you can go to the front page of fcc.gov and you will see a place you can click. we will be releasing a one-page tip sheet to help businesses understand cyber security precautions. we are working with macafee and

symantec and s.c.o.r.e. we have a representative from s.c.o.r.e., mcafee and the national urban league. s.c.o.r.e. did a great job interacting with small business all over the country. we did a national broadband plan. we developed a successful partnership, bringing our complementary expertise to the table to help small businesses around the country accelerate their moves online. we are focusing on how small businesses can protect themselves. we are working with s.c.o.r.e. to distribute this material in the effective ways s.c.o.r.e. has developed over many years. we have partnered with organizations like the national urban league, the national black

chamber of commerce, the national hispanic chamber of commerce to distribute these materials. we have a partnership with an organization called n.i.c.e., which runs the stop, think, connect campaign, designed to raise awareness about the need to strengthen cyber security and generate and communicate new approaches and strategies to help americans increase their safety and security online. all these initiatives are collaborations with the people in this room. as the fcc's broadband plan emphasize, there is tremendous power in the government and private sector coming together to help solve some of our nation's toughest problems.

ciba security for small businesses is an area where i am -- cyber security for small businesses is an area where i am convinced we can make a difference. i want to thank all of our partners for their partnership. i look forward to working with you to protect small businesses and our economic. we are going to move to our panel. what i would like to do first is ask each of our palace -- our panelists to briefly introduce themselves. we will jump from there into a discussion. why don't we start here. dr. phyllis schneck. >> i am dubie chief technology officer for the global public sector of mcafee public sector. >> i am dave notch.

i work with thomson reuters. >> i am the vice president for national security at the u.s. chamber of commerce in washington, d.c. >> good morning. thank you, mr. chairman, for having us here. i am michael chertoff. i am the chairman of a group called chertoff group. i was the homeland security secretary. >> i am chanelle hardy. >> good morning. i am ken yancey. i am the ceo of s.c.o.r.e. >> my name is maurice jones.

i am been ceo up a local construction company. we have experienced a situation with ciba security. for our company, i want to let you know that what is out -- without the broad band, we would have suffered a lot of inefficiency without being able to communicate with our superintendent and things of that nature. without the benefit of high- speed technicians -- high-speed connections, we would lose money in ways we would not be able to quantify and i would not be here in front of you today. with that being said, cyber security has its growing pains. one of the issues we experienced was due to those

growing pains. our experience started with getting a phone call first thing in the morning from a reporter asking us if we knew we had experienced a financial loss. at that time, we had no idea what happened. as the present and i started to sit down and go through certain things, we realize the bank had been attacked by a cyber criminal. to give you an idea of what happened, there was an e-mail that came. we thought the e-mail was coming from a valid source. on clicking on things related to the e-mail, we gave the cyber criminal act the way to access our database. by the time we realize it, we were missing quite a bit of funds. by working with different organizations, we were able to recoup some of the losses, but not all of them. we experienced financial losses without the benefit of broadband

technology. we would not be able to function today. these things are essential for us to grow without we depend on businesses and things of that nature. we have come to a better way of doing business, interacting better with the broadband technology with our structure and style -- structure inside the company. hopefully, we will not be a part of that type of financial loss again. >> thank you. i want to ask you one question and then open it up for broader discussion. talk a little bit about the ways that you use the internet to help grow your business. >> sure. of course, we use the website to attract new customers, new clients. it is a way of expressing to people what we do, a way of reaching out to bigger general contractors.

we are a subcontractor. at the same time, we use the technology to constantly send information. without being able to send information on line, we would really behind -- be behind the business curve. we would not be able to sell applications online, submit financial data. we can log onto bank accounts and verify information now in real time. without it, we would really be at a loss. it allows us to take a business that might take 15-20 people to run to be run with 10 people from an overhead iperspective. we can come out positions that are dire, especially during times when costs are so hard to control. sometimes, the revenue is out there -- is not out there, so the best thing you can do is try to control costs