interest in this issue, which does affect the young very definitely. thank you to the university of maryland for hosting us today. it is a recognition that the difference of wise or unwise fiscal policies will

make for the future of our country and the people who live in it. uh, i'm going to start by just doing a little budget 101 to give you an idea of where the budget is today and what are some of the demographic and health care challenges that face the budget and then others will look at where we're projected guard and then hopefully we can get into a good talk about solutions, what we do about it. so the first thing to recognize about the federal budget is that this year we're going to run a big deficit, somewhere around 1.25 trillion or a little bit more. one thing i would note about the deficit -- just on the spending side oaf this chart is the amount of net interest. slightly over 200 billion. that's the interest that the government pays on the debt on its borrowing. to give you some

perspectives, it's considerably more than we're spending on the wars in iraq and afghanistan this year. deficits run up interest costs, which is an suspense to the taxpayers. another thing to notice about that on the spending column is social security, medicare, and medicaid take up around 40% of the federal budget right now. those programs, unlike say defense or the other appropriations programs, are -- they're called entitlement programs, sometimes called mandatory spending. the key point is they grow by benefit formulas and population and they're not annually appropriated which makes it a little more difficult to keep control. that gives you an idea of the size of social security, medicare, and medicaid in the context of the current budget. a lot of economists like to look at the budget in terms of the percentage of the

economy so it gives you some better context than just looking at the dollar figures alone. the importance of a chart like this is showing you what federal revenues and spending and the resulting deficits of surplus are in relation to the size of our national economy. we've expended the federal level around 20% of g.d.p. and tax a little over, leaving a deficit somewhere in between. the key thing to take out of this is really the trend line. not so much, you can see right now we're way off the charts because of the recession primarily and the bailouts and attempts to deal with the recession. revenues have dropped considerably. spending has gone way up. in the past people would say deficits are always caused by recessions and war. as the recession fades and

we presume the war costs will be winding down, won't we get back to some sort of normal? the answer is no. in the congressional office projections, anybody that does, this when you look out, even assuming that we have a robust economic recovery and war costs fade, we're on on an unsustainable track. the lines never come even close to coming back together again and that's part of our problem. we have a structural built-in deficit rather than a cyclical one caused by the economy. a consequence of deficits -- one is we're doing more borrowing from abroad. a growing part of our national debt is owned by foreign investors. the benefit of that flows abroad and not to our own domestic economy so it acts

like a mortgage on future national income and it makes us vulnerable to decisions made elsewhere. another consequence of deficits is running up interest costs. the interest of $200 billion or so this year is projected to go to around 800 billion within two 10 years. that would be more than we spend on national defense. that's quite a lot. having interest costs get up more than we're paying or all of the rest of government you would say besides national defense, it would be more than we're spending on that. so it really is a problem. and why is this going to be happening? two factors. one is the aging of the population. demographics. we're going to have people living longer and the baby boomers are getting set to retire. that alone is going to drive up the cost of programs like social security and medicare but

that's hardly the only problem. the other thing is health care costs. and the representative had a lot of discussion about that this year. rising health care costs we really have to get ahold of. aging of the population, rising health care costs and that's why our budget is on an unsustainable track, even with a strong economic recovery. so we've been doing fiscal wake-up tours with lots of people. often the brookings and heritage organizations are involved as well. and what we've found with our fiscal wake-up tour or solutions tour is there are certain points that everybody agrees to. it's not a matter of ideology, it's a matter of alittle bit matich. the current fiscal possible is unsustainable. there are no easy answers for it. we should do everything we can to grow the economy,

cut waste, fraud, and abuse but the problem is much bigger than that. it is going to retire bipartisan cooperation and a willingness to look at these things without preconditions. public engagement is very, very important. the public is going to have to be aware of what the choice are. that's why we're out on the road. we encourage members of congress to have discussions with this about their constituents. even though we talk about a lot of numbers and show lots of charts, this is really not a numbers issue. it is a moral issue, about the legacy we're leaving to future generations and right now that legacy doesn't look so good. so it's really up to my generation and the people that are in charge now to leave a better, more prosperous nation boiled. .

>> i have been asked to speak just for a few minutes on federal financial responsibility, and since this is at 01, and wanted to know that this is not an april fool's joke, that we really do mean that we need to restore federal financial responsibility. it is not a joke, and it is not an oxymoron in statement. what i would like to do is help

you understand how profoundly the budget has changed and then talk about the future and where do we go from here. in the last 40 years, federal spending net of inflation has grown almost 300%. it has gone from defense dominating the budget in 1970 to where it is now no. 2, and it will soon be no. 3. exceeded by medicare and medicaid, and soon to be exceeded by social security. there are three key messages about spending. when you spend more money than you make on a recurring basis, that is irresponsible. when you spend somebody else's money irresponsibly, that is unethical for a fiduciary breach, if you are a fiduciary. and when you spend somebody else's money irresponsibly, and they are too young to vote, or not born yet, that is immoral.

and all three things are going on today, and all of us on the podium are dedicated to changing that. if you look at the total liabilities, unfunded promises, that the federal government has made, that have more than tripled in the last nine years. they have gone from 20 trillion dollars to 62.5 trillion dollars as of last september 30. medicare alone was underfunded by over 38 trillion dollars as of last september 30. these numbers go up by $2 trillion to $3 trillion every year even on autopilot even with the balance budget. that is over $200,000 per person, over $500,000 per family. median household income in america is about $50,000 a year.

that means that under our present imprudent, status quo, do nothing path, the typical american household has a second or third mortgage equal to 10 times their household income, but no house to back that mortgage. this is our fiscal future under our do nothing path. the line represents revenues as a percentage of the economy. the bars represent spending. if the bar is above the line, which is in every time period, that is the deficit. the fastest-growing cost is interest on the federal debt. within 12 years, the single largest line item in the federal budget without an increase in interest rates will be interest on the federal debt. if interest on the federal debt increases by 200 basis points or 2%, then the only thing the federal government will be able to in 25 years is pay interest on the federal debt. that is how bad the numbers are.

it is a simple four-letter word called math. this is what our debt as a percentage of the total economy has been in the past, and what it looks like in the future. this is not possible. we must demonstrate that we understand that we are on an imprudent path and start making choices sooner rather than later. we are increasingly relying on foreign lenders to finance our debt, and if they lose confidence in our ability to put our house in order, then interest rates will go up dramatically. the dollar will decline dramatically, and that will call something much worse than a recession. we must avoid that. yes, we can help to create a better future. yes, we can put ourselves on a more prudent and sustainable path, but it involves tough choices. it involves reimposing tough

statutory budget controls to address both discretionary spending as well as some type of triggers for mandatory spending and tax preferences. ball's performing so security. -- involves reforming social security. stabilizing health care as a percentage of the economy. it involves making sure that all health care legislation focuses not just on coverage but also cost, quality, and personal responsibility. it involves the need for comprehensive tax reform that can help make our system more streamlined, understandable, and gravel, and a competitive, while generating adequate revenues to pay our bills and deliver on the promises we intend to keep. balls reviewing and re- engineering -- it involves many other areas of government, and many programs and tax policies

that just do not work. yes, we are going to need special processes in order to achieve this, because the regular order is broken. and we should act sooner rather than later, because the longer we wait to act, the greater the chances have to be. we need to make decisions sooner so that the miracle of compounding can work for us rather than against dust as it is now. this shows you how much you have to cut federal spending if you waited until these various dates. these percentages are totally unrealistic. this shows you how much she would have to raise federal taxes if you wanted to solve the problems protected. these percentages are totally unrealistic. so yes, everything has to be on the table. we need to act sooner rather than later. in closing, this is not just about numbers. this is about people. my children, my grandchildren,

and yours. this is about the future of the united states of am#í@ ? good afternoon, everybody. we just heard about the unsustainable fiscal situation in which we find ourselves at this point in the 21st century.

creating solutions to this enormous problem is an absolute imperative. bob bixby pointed out that the aging of america is one important factor in analyzing and dealing with this dilemma. when i was the ceo of aarp, i was given a talk once in kentucky. obama and razor head and said, did you know that women live longer than men? -- f-bomb and raised her hand and said, did you know that women live longer than men? she said, what are you going to do about it? what i am going to talk about is the critical need to reduce our long-term debt crisis for today's and tomorrow's older generations. fixing the problem of annual deficits and stabilizing federal debt must be done in tandem with major social needs.

among those needs is a secure retirement. we can have both, if we have the courage to face up to what has to be done. a secure retirement is built on four pillars, a sovereign social security system, individual retirement savings and employer pensions, the ability for people to continue to work and to earn, and adequate and affordable health care coverage and long- term care. while we still have a long way to go, is an important step toward that fourth killer. health care access and affordability congratulations to leader hoyer on that. i want to focus on that first pillar, on social security. it is not our biggest problem, but as bob said, along with

medicare and medicaid, it constitutes a large percentage of the federal budget. it is important to understand that we can achieve social security's solvency. we can do so in an equitable way, and in doing so, we can score a big win for fiscal reform, put some points on the board, and build momentum for other a bipartisan basis. we have to address both the revenue side and the benefits side of social security. we cannot just raise revenues and fix the problem. neither can we just cut spending and find a good solution. our social security program is out of long-term fiscal balance by about 1.7% of taxable payroll, according to the 2008 social security trustees report. this means that revenue

increases and benefit adjustments equal to that amount are needed to bring it back into long-term balance. among many others, senators kent conrad and judd gregg of the senate budget committee have said that we can solve our social security problem. as someone said, after all, it is just math. >> but of course, it is also politics. water some reasonable ways to address social security's solvency? a slick at the revenue side. we could raise the taxable -- let's look at the revenue side. it was last attained in 1983, up from about 85% of wages today. it would eliminate about half of the 75 year it shortfall. we might impose a new tax on wages and salaries above the

maximum taxable amount. there are a variety of ways to come at this. right now, some 90% of eight millionaires earnings are exempt from the social security tax, whereas 94% of all workers' pay taxes on every dollar of their earnings. we could cover all new state and local workers. some 25% of state and local government employees who have other pension systems are not in social security. shouldn't that the system be universal for all americans? including those who change jobs. if we think that, we could cover newly hired workers in those states where they are not presently covered, so as not to disrupt the other pension systems of existing workers. we could raise revenues by investing social security trust fund money in other instruments

besides treasury securities. other systems like canada's already do this. there are some concerns that this could dominate our capital markets, but if we invested 15% of trust funds in a broad stock market index fund, that would only be about 2% or so of today's market capitalization. in addition to bringing in more money, it would have the added benefit of keeping those funds away from the temptation of politicians to spend them on things other than social security. the other side of the letter, the benefit adjustments side, the older population is already working longer. facilitating an accelerating that helps create a more sustainable balance between the number of years that people spend working and the number of years they spent receiving benefits. it helps older workers by

reducing the total assets needed in retirements. benefits our economy with experienced workers, and it helps our fiscal situation by generating more tax revenue. next, we need to take increased longevity into account if we are going to make social security solvent. one way to do this is to benefit -- index are benefits to longevity, so that living longer would not automatically mean greater lifetime benefits. another way to deal with longevity is to raise the normal retirement age, which is now moving up to 67. pushing into 68 or higher would present employment and policy and political challenges, but it should be on the table, as everything else should be on the table for discussion. we could also raise the early retirement age for social security from 62 to something

higher, perhaps 65. this would not directly affect solvency, but it would increase people's income retirement security, and it would be an important signal to employers and employees about work life expectations as longevity increases. another possible benefit reduction is to change the formula to scale benefits back for higher earners and possibly middle wage earners as well, while maintaining benefit levels for lower burners. there are other options to consider. in conclusion, we have a fiscal crisis staring aus in the face. we can deal with it if we engage the public and our policy makers, and if get serious about it. in doing so, we need to take into account important social goals, including retirement

security. thanks very much. [applause] >> thanks very much for having me today. i am resident scholar at the american enterprise institution. we had such a good introduction about all the issues we are facing going forward. the federal budget is facing two main problems 31 as the aging of the population. more returns are dependent on social security, medicare, and medicaid. the second is higher or rising healthcare costs. when you combine those two things, we have a tidal wave of spending coming over the budget and we have to find some way to do with it. the congressional budget office says that to bed it -- balance the budget over the next 30 years would require a 30% increase in all federal taxes.

that is not going to happen. we have to think creatively about how we handle these issues. i will first talk a little bit about social security. when we have an aging society, we want three things to happen. we want them to work more, save more, and retire later. i would propose several different things. the first is to reduce benefits for medium and high wage earners while retaining and strengthening the safety net for people below -- at the low end. doing that would tend to encourage people to work more so they can generate more savings for themselves later on. second is institute universal savings accounts outside of social security, such as automatic enrollment in 401k plans. by building more savings out saddam so security, we reduce the burden on the program, making it easier to meet its goal. third is, i would increase the retirement age for social

security while reducing payroll taxes on lower earners. it is a way of using both the carrot and stick, saying we would like you to work longer, but making it worth your while to stay in the labor force. i think of these three goals one reason i would try to minimize the use of tax increases. increased taxes, people tend to work less, because the after-tax reward for working is smaller. they will have less after-tax wages to say, and they will require earlier because social security benefits will appear higher relative to the take-home pay they have when they are working. we are born to have to look at some tough choices. mostly for social security, you want to focus on the bid if it into an increase individual

savings. moving on to health care costs, a lot of the increase in health- care costs is totally justifiable. there is new technology out there that is great, that people want. people want to spend more on healthcare. much of the rise in wasteful spending comes from the fact that patients and doctors to they have no real incentive to monitor costs and to care about cost effectiveness. in 1960, half of health care spending was paid out of pocket. you paid 50 cents of each dollar out of your pocket. today that is only about 12 cents out of reach health care dollar paid out of pocket. asking why we spend so much and waste so much is like asking someone at an all you can egress from what they are eating so much food. there's no reason not to. there is evidence that if we shift from a system of high premiums and low deductibles to low premiums and high deductibles, giving people some

skin in the game, they will try to save more on their spending and try to spend a little more effectively. what are our prospects for success? " we have seen here is how crucial these goals are. i am naturally optimistic person. but i have never been gloomier than i am today. the sad thing is, health care had to be reformed, but there is a point where it spending a couple of trillion dollars on new programs when we have not balanced the programs that we have. we have expanded medicaid. we have taken chuck be too tough choices on medicare, cutting benefits and increasing taxes, but that money is going toward other spending, not towards fixing the program. when you go back to participants and say we are going to cut your taxes and -- cut your benefits and raise your taxes and more, don't be surprised if they are not keen on doing that.

i am skeptical were gloomy about the prospects for success. in "the new york times" last week, an anonymous obama administration officials said that because we worked on the health bill and medicare and medicaid, they are probably going to be off the table for the commission. it tells me that in congress and there are too many people with a lack of seriousness and a lack of maturity about these issues. these are existential threats to the federal budget, and you have people who are simply willing to dodge things. i saw an interview on television last weekend with the republican running for the senate. they asked him, how will you fix social security? he said let's focus on waste fraud and abuse. when someone says they are going