i do not think name want to focus on the jimmy beating up joey. i think there is a hidden agenda here. as a parent of three children, i would rather see a focus on working to save children's lives. there are 4000 teens killed every year for lack of fervor education in schools and i see no summoned on teen safety or anything like that. host: we will leave it there because we are out of time. guest: we work closely with deputy secretary jennings in addressing our concerns with the obama administration's approach. it is important to realize, and i assume that you are talking about secretary jennings's relationship to gliston, so you raise the question about the sexual orientation of students. keep in mind, as i mentioned

earlier, the legislature's oliver the united states, including florida where i used to be in school board attorney, has legislation requires school districts to have policies to protect students based on sexual orientation. those issues have already been decided on the state level. school districts are implementing them. of course, stalled projects -- school districts want to make sure that are sick for all students. that is the mission of public -- are safe for all students. host: fransisco negron is the general counsel for the national school boards association. coming up to maurer, a political roundtable -- coming up tomorrow, patricia murphy and laura meckler. we will talk about recent developments. ian vasquez from the cato

institute. he will give his perspective on the calls. michael doonan from brandeis university. we will talk about the massachusetts health care system. that the requirements in place to have adults and children covered within the state and we will get an update on how that program is doing as it is being touted as a larger model for president obama's health care plan. that is it for "washington journal." we will see you tomorrow. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] . .

>> this hearing is two hours and 25 minutes.

[background conversations]

i want to welcome everybody and especially our two witnesses today. the co-chairs of the president's national commission on fiscal responsibility and reform. our hearing today will focus on the commission's plan and how it would address the nation's long-term debt crisis.

i want to begin by thanking the witnesses for the really outstanding job they did leading the fiscal commission. we never would have accomplished as much, if it would not have been for their extraordinarily gifted and determined efforts. they made a significant personal sacrifice to combat the to lead this commission and we owe them a deep gratitude. and i believe when the history of this period is written their names will wring out as being leaders as getting the country back on track. i also want to thank them for starting the moment of truth for pushing for a bipartisan solution to the debt threat that we confront. nfront. >> he succeeded in putting this issue in the national spotlight. there is the commission provided a

bipartisan roadmap for moving forward. i believe we need to seize this opportunity. i believe we need to act this year and that is why i have been part of a bipartisan group of centers who have been trying to turn the essence of the fiscal pran into legislation. to legislation. if we can reach some kind of bipartisan agreement in the senate, we hope it will provide more momentum to move toward a broad agreement this year. here is what the chairman of the joint chiefs said about the threat. our national debt is our biggest national security threat. that is coming from the chairman of the joint chiefs of staff. make no mistake, we are at a critical juncture. we are borrowing about 40 cents of every dollar that we spend. spending is the highest it has ever been in 60 years. the revenue as a share of our

national income is the lowest it has been in 60 years. no wonder we have record deficits. if we look at the gross debt as a share of the economy, we will see that it will reach 100% of the year, well above the 90% threshold that many economists hold as the danger zone. they studied the impact of debt on the economies. they looked over a 200 years span at 44 countries. this is their conclusion. we examine the experience of 44 countries spending up to data inflation, and growth. our main finding is that across both advanced countries and emerging markets, high debt to gdp levels above 90% gross debt

to gdp, those levels are associated with lower growth outcomes. so if people wonder what this is a barrel, this is a about our economic future. this is about opportunity. this is about jobs. this is about the economic strength of the nation. this is not just numbers on a page. this is not just about a bar chart showing deficits and debt. this is about the economic future of america. and the conclusion of the study is that when you get a gross debt above 90% of gdp, your future economic prospects are compromised. there are reduced. there are reduced substantially. that is why this matters. i believe the only way we are going to solve the nation goes a

long term fiscal imbalances by a long-term debt reduction planned. the proposal would reduce the does -- debt over the next decade. it would get it stabilized and brought down as a share of gdp so we would be in a position to handle future shocks that none of us can anticipate. i believe the plan at the commission plan should include entitlement changes, tax reform that simplifies the tax code, lowers rates, and raises revenue. the commission plan provided such a budget approach. the savings come from non discretionary, mandatory spending, and revenue. it is worth emphasizing that savings from social security reforms are used only -- and i emphasize "only," not for

deficit reduction. if there is one message i'd like to get out there as clearly as i can, the savings in social security were redirected to social security, and to extend its solvency. this chart highlights the key elements of the tax reform including the plan. it scales back tax expenditures and lower tax rates. tax expenditures are now running over 1.1 trillion dollars a year. tax expenditures are as big as all of domestic discretionary spending. it makes the tax code more progressive, it promotes economic growth, it improves the global competitiveness. one thing we have to have in mind is the competitive position of the united states. we are no longer so dominant that we do not have to worry

about the effect of our tax code on the competitive position of the united states. notably, the commission goes the report included a blocked shot -- the commission included a report. instead of six tax brackets for individuals, the plan included three brackets of 12, 22, and 20%. capital gains and dividends would be taxed as ordinary income. the mortgage and terrible deductions would be reformed, better targeting their benefits. the income would be retained to help working families. the alternative minimum tax would be repealed. the commission goes to plan also increases revenue to 21% of gdp by 2022. over time it actually balances

the budget. that is the kind of tax reform we will need to adopt. it-along with the spending reductions is what is required to actually succeed. let me just conclude by showing the different paths forward of the various plants. you can see that the course we are on. 233% of gdp on the current course, much higher than that if we look at gross debt. the right road map to access to a place i do not think we want to go because that is over 90% of public debt on a gross debt basis. the plan by the commission takes us to 30% of gdp. that would be about 60% of gdp. that is to meet a responsible target.

to get down to 60% of gdp on the gross debt would allow us to handle any teacher shocks that we might experience as a nation. so that is why we went a little further than just a stabilizing the debt. we actually brought it down markedly as a share of the economy so we could handle future shock. with that, i am going to turn to my excellent colleague, a sessions for any thing he wants to state. >> the key for those wise remarks.

>> we live in an ordered universe, the laws of finance are as immutable as the laws of gravity. nothing comes from nothing, government debt has the same kind of consequences that individual, family debt does. deficits do matter. they always have and always will. too much debt is always brought destruction, and it always will. some of our great mines have thought that they knew better. they say, well, we did not mean that much debt. now our financial masters say it is all congress's fault and it is a lot of congress's fault. but you have to clean it up, congress. we do. do not be too quick, be careful, do not go too far. do is just right. for sure, do not take any

actions that might affect my programs, my interests. it is the other programs that are wasteful, not mine. your commission rose above that. pour the most part, it was not without a compromise. your recommendations, i think, should have gone even further. but it was a bipartisan effort, and it left no doubt that our debt problem is not imaginary but very real, even the media. former chairman alan greenspan told the "washington journal" our nation has a little better than a 50/50 chance. surely we can take the hint that something serious must be done. they are warning us that they could downgrade our debt in less than two years if we do not take action.

so the nation and much of the world is in a serious financial fit. if you read the comments of wall street, the fear there is real anchor his real among the wall street people. their words combined concern for our nation's future and short- term self-interest. some of our best people are producing contradictory ideas for action. you help us cut to that confusion in my view. so the house proposes meaningful debt reduction, meanwhile the president advances his investment agenda. his budget calls for us to live within our means and pay down our debt. what world are they living in?

are we now through the looking glass a post-modern world where words have lost all meaning? if so, our beloved nation are in greater danger than many think. i do not think so. american people get it. we can do this. this is not impossible. leadership at this time is most precious and in short supply. it seems to me when confusion, uncertainty, short times, even fear abound that good leadership like your report should call us to return to the tried and true, first principles. we are a vigorous, healthy people. we can accept the truth and get on with fixing problems. the people know that the blast folks in washington at the right road will be difficult but it will lead to prosperity and progress and preserve our

heritage of freedom and limited government. the current road leads to debt and the decline. we have to start telling the truth. the truth is that this budget we have been presented does not live within our means but doubles the entire gross debt of the united states from $ 13 trillion. it assumes no recession, low interest rates, and no new war or military conflict. it cannot stand -- it will not stand. for the time and effort you have given this cause, we are much obliged. you have worked hard giving a clear picture of the danger we face, and the message available to overcome that danger. this nation is grateful for your service. thank you. >> thank you so much, senator sessions. we will turn to our witnesses, two people of real courage and

character. i would say to other members, the senator served on the commission, as did i. the leadership of these two was really textbook. it could not have been done better. at the end of the day, 11 of the 18 members endorsed the findings, five democrats, five republicans, and one independent. that is as bipartisan as it can be. welcome to the budget committee. thank you for your leadership. i do not know who wants to go first. >> thank you very much. thank you senator conrad and sessions. the key for your remarks and explaining to those wonderful charts that we have been watching for many months. they have been very helpful, and you are very informative.

it is a great honor and privilege to be here and to be in this chamber in these offices, and not be always inspired by the democratic experience. if that feeling ever leaves you, you want to leave. it is a great for. we have left our witness protection program, we make sporadic appearances in various locations as is today. the people are waiting for us to go back and to sequester when we leave. let me just say this. it is a treat to look around this room and see friends of both parties that i thoroughly enjoyed what i was here. and over there is mike. he replaced me and people said "thank god that he did that." it was a selfless effort.

he is an old and dear friend, he and diana are very dear friends. this guy over here was a staffer when i was on the select commission on immigration and refugee policy. now look at him. ron portman, i worked with all of them. but on with the business. i know it is five minutes or something like that. this forum is were the most frustrating and irritating, cumber some work of legislature is performed. as an old cowboy would say, "it ain't pretty." if you hire on to be a cowboy and you get a bucking bronco,

you cannot complain. we drew that critter. he is a splendid man. he is a remarkable man, a creative and positive fellow of great integrity. an absolute joy to work with. we have thoroughly enjoyed our time together and work is what we do. we do work together. folks say to us, "what are you doing this?" i say we have 14 reasons. he has eight grandchildren and i have six. it cannot be simplified anymore than that. that is what this is. it is about my grandchildren and yours, it is not about us. it all started for me when i got a cheerful call from joe biden in january. he said "i have a real deal for you." i said let me get in on the phone so she can laugh along with me and we can get out of this. he said he and i work together on so many things, and we are here together.

and i said, "who is the co- chair?" the first call i get is from elizabeth dole and bob. you need to serve in both of those capacities. it is very helpful. if you're in the minority for a while and you are in the majority for a while. it sobers you out. anyway, the goals called and said this is one of the finest men i have worked with. it took us three months in this commission to establish trust. it just plain trust. trusties to be the coin of the realm around here. let me tell you, the coin of trust is severely tarnished in this place. s that. i work with so many on the other side of the aisle -- kennedy --

we trusted each other. i hope that that can come back. it came back and our commission. once we got through the initial hammering which was "who is the biggest spending president in the history of the world?" "george bush. then the other side your guy has o one.e him twp tp then a remarkable group can audit, and of course the chairman. 60% of the commission bodice. that is pretty good. 60% is kind of a big number around this place. it fits well with the filibuster activities.

when we go around the country, we just tell people -- this is a numbers guy. if you have any percentages you want to grow, this is your man. and he does numbers. it works. we still do things together if we can. i have one more minute. i yield to myself whenever we get there. i tell people is very simple. people in america are very ahead of all of you. they know what is going on. when you say, why do you not go back and think what people are doing at their kitchen table? they know that if you spend more than you earn, you lose your but. they know if you spend a buck and bar 40 cents of it you must be stupid. they have figured out this government is stupid. forget the gdp and all the rest

of it. >> his son called him and called"thanks, pop,." that is what this is all about. we thought this is what it is all about. without these guys had the guts to attack -- that is a. it is a phony. it is wrong. it is untrue. we are doing it so it has it own solvency, in your chart showed it. so i just want to give you a couple of quotes. and let me just say about social security, i have a lot of the e-

mails. social security is not a retirement. it was never intended as a retirement. it was an income supplement after the depression. the average age of life was 63 and that is why they said the retirement age was 65, at the beginning of the largest ponzi of all time. then there were 10 came in. today there are three pankin and one taking out. in 10 years there will be to pain in and one sticking out. how long do you think that kind of thing can sustain? the money has not been stolen by you greedy people. it is all choice stuff. but of thrills and stuff on the side paper. it is paper. they were not going to leave that kind of cash, nor did

roosevelt want it. that is why the city can get in there and give full faith and credit to get it out. if you have to go through the language, remember that everything in this place, it is my experience that you have to use fax. -- facts. two "and then i will turn it to the numbers guy. it says 55b.c. -- the budget should be balanced, arrogance of officialdom should be tempered and controlled and assistance to foreign lands should be curtailed less rhombic, bankrupt. " " at what point is danger of supposed to be expected, it must

bring up among us. if destruction is our lot, we must be its author and finisher. as a nation of free men, we must live through all time or die by suicide. and finally, i do not know where this baby came up, i do not want any copyright infringement on itinfringement"gold is the money of king's, barter is the money of peasants, and debt is the money of slaves." go look at alexander hamilton and his statue. everything this country met had to do with getting rid of its debt. here is your hands full. god bless you. >> thank you senator simpson. >> thank you, sir. i spent a long time trying to get here.

i sometimes think got four unanswered prayers. i want to thank senator conrad. he is not here but senator gregg. without their leadership, none of us would be here today to talk about this. hawaii thank you for having the courage, you and the group that stood up some years ago and said we are not going forward unless we have a commission to deal with this. it would not have happened without you. the key for meeting this morning, and thank you for your kind words. i also want to thank senator durbin for having the courage to support what is a politically very difficult plan to support. i want to thank senators warner for your work in trying it to

turn what is a 67-page plan in plain english to a legislative language and bring together a bipartisan group to make this happen. i am not going to use any notes today. i am just going to talk to you. i am really concerned. i think we face the most predictable, economic crisis in history. a lot of the sitting in this room did not see this last crisis as it came upon us. this one is really easy to see. the fiscal plan we are on today is simply not sustainable. this debt ended these deficits that we are incurring on an annual basis are like a cancer. they are truly going to destroy this country from within unless

we have the common sense to do something about it. i was with former senator kerry about a year ago exactly. he said "look at the nation goes to current income statement and let me tell to what you will see. you will see that 100% of the revenues that this nation produces today are being consumed by are mandatory spending and the interest on the debt to." that means that every single dollar that was spent on these two and wars, on our military, on national security, on homeland security, on education, on added research, is borrowed and half of that is borrowed from foreign countries. that is a formula for failure. if we do nothing, if we just

take the ostrich theory in this room, we will be spending a trillion dollars a year in interest costs alone by the year 2020. think about that. that is $one trillion that will not educate our children. it is $1 trillion that will not bring broadband infrastructure to rule south carolina. that is $one trillion that will not create the next new thing in this country. it will create something over there from the people we are borrowing money from. it is crazy. this is not a problem we can grow our way out of. you could have double-digit growth for the next two decades and not solve this problem. so do not think we can grow our way out of it. this is not a problem we can tax our way out of. raising taxes does not do a

darned thing to slow the rate of growth of health care or to change the demographics of the country. if you want to try to solve this with just taxes, you will have to raise the highest marginal rate to around 70%, the corporate rate to 80%, the capital gains to 50%, and what kind of country we have? you are not going to have businesses started or growing with that kind of stacks -- a tax structure. we cannot simply tax our way out. we cannot cut our way out of this problem. when i see people go on the sunday shows and they say, oh, we are going to cut our way out of this problem, but we are not going to touch medicare, medicaid, and we are not going to deal with social security, and we here are not going to take $1 out of defense. we have to pay the interest on

the debt. he know, if we exclude all of those things, you have to cut everything else by 65% to 70%. that is not going to happen. that is not a realistic world. what al and i tried to do was to present a realistic plan. a plan that turned out to be a bipartisan plan. it is based on six basic principles. the first is, we did not want to do anything that would disrupt a very fragile economic recovery. the economy is in a recovery. israel today. but, boy, we can lose it quickly. when we look at cutting spending, most of our spending cuts, in 2013.

that is where we get back to 2008 levels, to a pre crisis level. i believe we can do that. i expected that the republicans will be getting back to 2008 levels in 2012. we simply were afraid to do that because we did not want to disrupt what is a very fragile economic recovery. we have real cuts in 2012, but we get to 2008 levels in real terms in 2013. we did not want to do anything that would harm the truly disadvantaged. that is why if you look at the cuts we made in mandatory spending, we did not touch things like food stamps, unemployment, ssi -- we left that off the table. when you look at medicare, we

did a couple of things that made our job more difficult. we increased the minimum payment up to 125% of poverty to protect the truly disadvantaged. we give that 1% bond of a year to what is people between 81 and 86. both of those costs money. we wanted to do the right thing. when we raise the retirement age, we did put in a hardship provision to protect people who have those back breaking jobs, as many will label jobs that cannot work as long as we raised. we tried to protect the truly disadvantaged. third, we do want to keep this country safe and secure. i am not personally one who believes we can afford to be the world's policemen. i will put in more basic terms. i do not think this country can

afford national defense than the next 14 he had largest countries combined and have enough money to invest in education, infrastructure, and research which we have to do in order to be competitive in a knowledge base to global economy that we all compete in today. fourthly, i do think we have to make these investments in education, infrastructure, in high-value research. it does not mean we have to spend money willy nilly. it is a university system. i saw where some of your research dollars go. today we have 375,000 research projects that you are all funding. his is on 3000 separate

university campuses. all of that is not great research. some of it keeps us from going down a lane and it ends up dying. it is good research because it keeps you from making a bad decision. some of it ends up in something that is great. some of it is not high-volume research. in a time of limited resources, we have to spend our money more wisely. fifth, for god's sake, let us reform the tax code. the tax code is archaic. it was created when america dominated the world. we live in a global economy today. you saw it today. it is a fact. what we proposed was broadening the base, simplifying the code, eliminating were greatly reducing these tax expenditures, bringing down rates, and using

some money to reduce the deficit. we went to what is called a zero based plans. if you eliminate all of these 1.1 trillion dollars worth of tax expenditures, i contact your marks, -- i call them tax year marks, we have $1.1 trillion that we are spending in the tax code. but if you eliminate those, you could actually take rates to 8% up to $70,000, 14% up to $210,000, and a maximum rate of you could take to 26% and go to a territorial system that would bring trillions of dollars or billions of dollars back to the country that is captured overseas and bring jobs over here. so i hope we will reform the tax

code. lastly, we have to cut spending. we have to cut spending whenever we find it. we cannot just deal with discretionary spending. the democrats, as near as i can tell from reading the paper, are talking about cuts of $10.5 million in discretionary spending and republicans are talking about $61 billion worth of cuts. let me tell you something. $61 billion out of a 3.7 trillion dollar budget is 1.6%. i can cut my budget 1.6% tonight, tomorrow morning. if i took $625 million out of a $3 billion budget at the university of north carolina. 1.6% is nothing. the problem is that you are all focusing on taking 1.6% out of a very narrow part of the budget, 12% of the budget, so some of

the cuts are having a dust proportionate adverse affects on certain groups of people. but if you are talking about the gross amount of $61 billion, it is nothing. we take 1.7 trillion dollars out of discretionary spending. we take $430 billion out of health care spending. we take $215 billion out of other mandatory spending, and we get social security solvent for 75 years. our plan reduces the deficit by 4 trillion dollars, it takes the debt to gdp ratio to 65% by 2020, and to 60% by 2023, it cuts the deficit in half by 2015 to 2.3% of gdp. it takes it to 1.2% of gdp by

2020. i came here today to simply ask you to act. i know these cuts are politically difficult. but this is not a decision that we can propose -- postponed. we have got to act, and we have to act now. if we do, the future of this country has never been brighter. we can compete with anybody. we have to get our fiscal house in order. thank you mr. chairman for allowing me to come. >> i think you have made the case about as clearly and persuasively as it can be made. i went to thank you you both for the leadership that you have provided. let me ask you this. what happens if this does not get done? in other words, i did not give

all the bonafide when i introduce them, but this is a man who was chief of staff for the united states, he has been the administrator for the college system at the university system in the state of north carolina. a pretty good set of bona fides. and every place that he has served he has produced results. let me ask it again. what happens in your judgment to the united states if we fail to get an agreement in the range of what the commission concluded was necessary? >> here is what he said reminds me of when my uncle sam died in north carolina. the obituary editor called up to ask about him. i can't kind of went on and on

about all of the things he had done. finally he said, you know we charge $5 award for everywhere we put in the paper. she said, no, i did not know that. in that case, just put in their "sam died." look in the casket and see if that is really your old man. you know, i used to say that i got into this thing for my grandchildren. i have eight grandchildren under 5 years old, i will have one more in a week. my life is wonderful and it is wild. but this problem is going to happen long before my grandchildren grow up. this problem is going to happen like the former chairman of the

fed said. it is a problem we will have to face up to in two years, maybe less or more. but our bankers over there in asia began to believe that we are not going to be solid on our debt, that we are not going to be able to meet our obligations, and to stop and think for a second what happens if they just stopped buying our debt? what happens to interest rates? what happens to the u.s. economy? in the markets will absolutely devastate us if we do not step up to this problem. the problem is real, the solutions are painful, and we have to act. >> alan, do you want to add to that? >> i would just a -- i know it is repetitive, if you can

understand hear what the people of america as we travel around and we do stuff. we go to the business council, we go to the conservative group in dallas, the economic club of new york, and wherever we go, people get it. then we tell them that if they just go to the internet and to go www.fiscalcommision.gov, it is 67 pages. if we leave that out they will never read it. it was not written for patents or politicians or panderers, it was written for the american people. it uses terms like "groing broke" and "shared sacrifice." there has never been any sacrifice required of the

american people since world war ii except for our military, and god bless them, and they chose to do it. they are volunteers. so when somebody says, you cannot use that word. well, the american people are using that word, it is called " shared sacrifice." it is a puzzling thing. it is the right and the left, they are not involved in social issues deeply. now this has risen to no. 1. jobs -- very important. this number one or number two is the debt. the i understand debt. in their own home they have been wiped out by debt. the first thing that anybody did in this crash was to gather their loved ones around and said we have to get out of debt. that is first. you know my wife and and said "

pay it off, al." so i said "it is a deal." i think it will become before two years. i think that when the people that hold of this paper look around and all you have done is cut waste, cut, abuse, and all this and congress pay, they know if you did not get anywhere. you got the 5% or 6% of the hole and they will say you did not do it. when the debt limit extension comes up, you have 85 guys over there saying, hey, i will never vote for that under any circumstances. then you will hear the cracking of knuckles and elbows as they say, if you do not do this, you will impair the fear credit of the u.s. and might even have to shut down the government.

some will say, that is why i came here. there will be sound of bone against flesh. at that point, i cannot imagine of shutting the government. our party tried that once and it was about the biggest disaster that i had ever seen. so i am just saying that at some point, i think within a year, if they just thought we were playing with fluff, 5% 7% of this whole, they will say i want some money for my paper. if there is anything money guys love, it is money. and the money guys when they start losing money panic. let me tell you that they will and it will matter what the government does. they will say, "i want my money." do they have a better place for it? who knows. >> you know, i do not see how we could not face up to it. he showed a chart, senator

.onrad he says it is our greatest national security problem. think about that. if you do not want those people crating the next big thing over there but over here, there will not be any money for it. if you are a business guy like me, small businesses cannot grow and cannot create jobs without money. you know, they will be starved for capital if this budget continues to grow as it is today. >> thank you. my time is expired. we will go to 5 minute rounds. we will make an exception for senator sessions. five minute rounds because of the number of people we have. senator sessions. >> the remarks you have just made are very sobering.

it goes beyond the academic or theoretical to a warning of an immediate and dangerous threat is before us. the language you use in your written statement, i noticed it was pretty stark. "we believe if we do not take the site -- divisive action, we face the most predictable crisis and history." i cannot dispute that. the more i read about it, the more i believe that is true. i believe we need to take action. let me ask you to just share with us your thoughts about the president goes the budget if you had a chance and if you think it is decisively enough to alter the protection we are on.

>> the president's budget, i think, the domestic, discretionary spending does a pretty good job if you look at it over eight years. it has some gaps in it like they talk about investing in transportation, but they do not tell you how we are going to pay for it. we say you have to cut transportation spending back to the level of income coming in, or you have to spend at the level you are at today, and we propose a $0.15 a gas tax to pay for it. your choice.

the total deficit reduction in the president's plan is somewhere between $1,000,000,000.2000000476 dollars. we proposed four billion dollars. -- 1 billion and $2 billion. we proposed $4 billion. if you look health care, we proposed $410 billion in cuts. he proposed $350 billion, but only part of it is specific. we said how we would pay for all of our cuts. on other mandatory spending, we had about two hundred $15 billion in cuts for 11.2% of that time period, and he has

about $60 billion for waste, fraud and abuse. we could not find anybody who could support more than $20 billion for any of that. i do not know where the other amount is going to come from. on social security, we have a real plan that leads to 75 years of solvency. they talk about us doing something for solvency and also making sure that we up the minimum payment and protect the basic payment and assaulted in the long run, and of course, our plan does -- solved it in the long run, and of course, our plan does its -- does exactly that. on revenue, they eliminate some tax expenditures, but they spend the money that they create by eliminating those tax expenditures.

we take those tax expenditures and the vast majority of the wheat used to reduce rates and to lower the deficit -- we used to reduce rates and to lower the deficit. the president's plan i think falls short of what the country needs to do right now. i think the president has done a lot of good things. i think appointing this commission was a bold step. i think in the state of the union he showed the way of some of the things he would cut. in the budget he went a little bit further. i hope he will show strong support to what senator chambliss and warner are trying to do. but it is going to take efforts from both houses and both parties.

>> well, the way we calculated it is not the four trillion dollars you proposed. i think it is insignificant. with regard to discretionary, i just want to push back a little bit. we calculated this out. reducing the base line by $61 billion over 10 years, assuming some steady growth or no growth, however you calculate, but taking that baseline down $60 billion would result in saving $850 billion, pushing $one trillion. you propose that 1.7 trillion dollars.

the $61 billion would amount to, as you noted, 1.6% of the overall budget, and if you take it only on discretionary, it is about 6%, so i do not think that is harsh or extreme, especially in light of the fact that the administration has achieved a 23% increase in discretionary spending baseline in the last two years. i believe you're on the right track. i believe you are sharing with us the fundamental truths of the financial condition we are in. i do believe that the american people would benefit from social security and medicare and they want to see us bring washington spending on control -- under control too. it should not be off the table. it could result in trillions of

dollars in savings if we let data. combine that with entitlement reforms, and we could do pretty well altering the trajectory. >> thank you. you correctly say that you cannot do serious deficit reduction just by cutting, and you cannot do serious deficit- reduction just by taxing. what i want to do is make sure that as part of this debate we see that to really drive the deficit down we have to do some serious and growing. to me, that is what the tax reform debate is all about. in the two years after the 1986 tax reform bill was passed, we created 6.3 million non-farm jobs. twice as many as were created between 2001 and 2008, so we are

clear. you all have done an excellent job. isn't the heart of your interest in tax reform that it will help us create more good paying jobs and is key to growth? >> unequivocally, yes. as you know, our plan has been called reagan on steroids. it was modeled after the wyatt gregg bill. i believe that if we take such steps and we get rid of some of the inefficiencies in the tax code and bring down rates and reduce the corporate rate and get rid of this territorial system, i think we have a chance to really create a lot of jobs in this country. >> let me ask the two of you as a technical question. i am very appreciative of all the work you have done. if you proposed an important

budget enforcement mechanism, you did not include a mechanism that would keep us from backsliding on tax reform. what concerns me is that when you go back and look at the history of 1986, practically as soon as the ink was dry, as soon as democrats and ronald reagan came to this historic kind of compromise, what you saw was the lobbyist went back to work and they kept asking in a break after a break after a break, and pretty soon it added up to 15 belsen new brakes added to the tax code between 9 -- 15,000 new brakes added to the tax code between 1986 and 2005. do the two of you agree that this time, regarding tax reform, it is going to be important to

have a mechanism in place to know launder have this easy backsliding so that a few years at -- no longer have this easy backsliding so that a few years after we put in place major tax reform we do not end up in the same boat? >> i agree with you totally, senator. it has been so interesting to talk to people about the tax code. we have people -- one person came and testified that one all reagan was his hero -- that ronald reagan was his hero. i said, that is dead. he was my hero too. -- that is good. he was my hero too. i said, ronald reagan raised taxes 11 times in his eight years. he said, i did not like that at all. i said, it is not whether you liked it or not, why do you think he did it?

he did it to make the country run. we have to put traders in there. we have to do things. -- put triggers in there. we have to do things. i cannot understand how distorted things can get that we would put a pack tax on top of the present tax code. if you did dam it, you have to scrub everything off the board that, if you havepe to scrub everything off the board. at some point, we felt that only 2% of the american people, the wealthiest in the america, the connected, are using these 180 tax expenditures. that is to is using them.

the little guy does not even know what they are. he does the standard deduction. i will not mention this. the bonds will fall. oil depletion allowance, mine land reclamation, it comes from wyoming. if it came from the country, we would be the largest coal producing industry in the world. unless you do something, these things are like the zombies that rise from the grave. this city is lined with people who make big bucks to go get it back. this time, they cannot bring home the bacon. the pig is dead. >> thank you. a mechanism to make sure we have tax enforcement from backsliding to make sure -- like we're going

to do with the budget. >> absolutely. the top earners in the country pay a marginal rate of 16%. warren buffett talks about how he pays a lower rate than his secretary does. that is what will happen. will benefit people who are by and large in the upper-income bracket. >> senator simpson told man need to put my money where my mouth is and get into politics. i ran as american -- i ran for mayor as a result of that. he has been a tremendous mentor to me over the years. i appreciate that both he and mr. ball's were willing to take on this task, -- both he and mr. bowles were willing to take on this task. i was one of the co-sponsors of the conrad-greg bill.

but but the was essential. i was disappointed when it did not pass an elated when the president decided to do it anyway. i thought that was a good step. i was disappointed when the president missed the opportunity in the state of the union to say exactly what you of been saying here today, to inform the people of this country of just how desperate the situation is so that we can take some positive action. i was disappointed when the budget proposal came out because i think that was another opportunity for him to put some of those things into effect. the biggest thing he did in there was take the tax expenditures and use them for new programs instead of reducing corporate debt. the american people have figured it out, with your help, and they are getting clearer and clearer every day. we have got to get congress to catch up. there is a question in there somewhere. [laughter] both of your recommendation --

you broke your recommendations into six areas. i know they your task was to have a single vote on all of that, but given the fact that congress has trouble doing comprehensive legislation, would it make sense for us to break this into six areas separately, or do you think we should do it in one big piece of legislation? >> allen can probably speak to that better than i can. what i can tell you is based on our experience. i want to address one of the things you said, that we had shown how desperate the situation is. it is only desperate if we do not act. if we do act, the future of this country is so bright i cannot believe it. if we just have the guts and courage to stand up and do something that israel today, on all six of those areas -- that is real today, on all six of

those areas, our future could not be brighter. we started out saying that one of the easiest things to do, since it was part of the president's request, was social security, because you can kind of figure out how to get it to 75-year solvency and make it safe for the next 75 years. we thought that was morally important. second, we thought we could do some of the discretionary stuff, and thought we could make some progress there. as we went on through this process, we found that the bipartisan group really did coalesce around doing something that was comprehensive, and we got more support rather than less support when we were bolder and did something more comprehensive, rather than trying to break it up into individual pieces. i think we also felt that, you know, it is tough to keep

anything together year. i remember that so well. but if we could just stabilize the situation, just stabilize things, so that they know it is not just on automatic pilot, that alone would be worth everything. you would not challenge that, would you? of course you would not. you would try, but you would not. let me just say this. if you cannot get social security solvent for 75 years, and this congress cannot do that, you can forget everything. you will never get to medicare, medicaid and defense. you will have failed what we see is the easiest thing to do, which is to restore solvency of social security for 75 years. it is very clear what we do. we do not privatize it. we do not steal from old people. we are not throwing bedpans out

of hospitals. that is not what we do that. people who use that are involved in massive fakery ad wars. i do not use those boards. -- those words. i have many other words. [laughter] i want to answer the questions about social security, but if you cannot solve that, you are gone. forget the rest of it. it will not work. it just will not work. he will not touch it with the stick. >> i appreciate your comments about having transition rules in the tax reform. i think that will make it possible to get it done. i am anxious to work on all of the ideas you put forward. >> if we only do social security, we have not come close to solving the problem. if we only do domestic, discretionary spending -- you could get rid of all

discretionary spending and you would still have a $one trillion deficit. you have to look at all of it in order to really solve the problem you are facing. >> i still think we will have to do it one at a time with the agreement to do all of them so that we can get the trust of the american people. they do not think we are going to do anything. my time has expired. >> your skills and bipartisan work -- i saw how you work with ted kennedy. you did about 40-50 pieces of legislation. nobody realized that. you always work with the other side. your guests will be heavily called upon. >> thank you. -- your guesses -- your gifts will be heavily calderón. thank you. >> after we lost the vote on our proposal, we had 53, but we

needed 60, i was called to the vice-president's residents to negotiate the executive order commission. senator nelson volunteered to go with me and i readily accepted. i just want to say, we would not have gotten the executive order commission without bill nelson hanging in there and being tough. also, i will forever be grateful for his assistance in negotiating the executive order commission because that was a pretty tough negotiation as well. senator nelson. >> thank you. senator ensign, the problem that if we try to do these things one at a time, we will not get it done. you have to take a comprehensive approach, and i do not know how bad it has got to get before we

can get everybody to the point upbeing all willing to paulull and hitch up their belts to do a comprehensive approach. you mentioned the six major components. well, you know, one of them was health care cost containment. well, you know, why should medicare be paying the premium price for drugs instead of the discounts that the u.s. government gets in at the drugs for medicaid? well, we know why. why is their royalty payments that is not being paid for the extraction of oil from the gulf of mexico? that is a tax expenditure. well, we know why.

so, if you try to take individually items on, you are not going to be able to get -- you are going to get duped, because the powerful interests are there that can always beat you on an individual basis. so, now i want to ask a question. you all have put social security as part of this overall reform, and i agree that it has to be, but you also are quick to point out then nothing in the way of social security savings here goes to help the deficit. so, other then the symbolic value of tackling social security for the long term, which is a notable goal and

which, by the way, is one of the finest achievements in the u.s. government back in 1983 when social security was down to about six months of solvency, before going into cardiac arrest. everybody came together in a bipartisan way, and reagan antonio got it done. got it done.l but why the social security have to be so much a part of it since it is not actually helping the deficit, which is what we are trying to get to ride year, other than the symbolic value? >> -- get to right here, other than the symbolic value? >> first of all, we had no choice. if you look of the president's mandate, the second part required us to look at long-term entitlement and the effects they

have on the country. in addition, we really felt like we had a moral obligation to face up to social security. we are not making this up. the trust fund is exhausted. all of the interest earned on the trust fund was lent to the general fund. it is exhausted and 2037, probably before that now because of what we did at the end of last year, and benefits will have to be cut by 22%. that is under current law. that is not something we made up. it happens. in addition, it is a fact backing -- i will just leave it at that. we made promises as a country that we cannot meet.

what we tried to do was restore the solvency of social security for 75 years while protecting the most disadvantaged and in fact giving them higher benefits so that they can have some kind of quality of life. i think too, that we seen -- at least i saw in my 18 years here, sometimes, for budget purposes or gimmick figures, they will use the $2.5 trillion of social security as not counting it against the budget. then sometimes they will counted. when you have a figure, dollars sign2.5 trillion in -- a figure surplus,utrillion in it -- i think you still leaole

am the only guy living you ever had a hearing on the first aarp. they're still looking for me. you cannot play games with it unless you want to go up to all of these people on the other side saying, you rotten things are going to touch my social security. waddle up to the window in 2037 and get 20% less. there is no way to avoid that. it only pays payable benefits. it will not pay schedule benefits. if everybody will wake up and figure that the thing they get from social security when they're 65 will not be there because you did nothing.

>> thank you both for what you have done. if we are wise, we will take what you have done, add a little of our own wisdom, if we have any, and get something done. otherwise, we will be out of a job. can you imagine any scenario where we can save social security from in pending massive cuts, 30% or more, or any entitlement program without been adjusting the age for eligibility taxes -- without adjusting the age for eligibility? >> you can do it without adjusting the age, mathematically, so yes.

but we thought you should adjust the age. you are not eligible for social security at 65 today. you are eligible at 66. under current law, it goes to 67 at 2037. >> can you imagine any scenario of saving social security or medicare, or getting our debt under control without adjusting the age of eligibility? >> it is impossible. they used to be the 63 was life expectancy and 65 was retirement. now, if you retire and 65, you may live 20 more years. how is the supposed be -- that is supposed to be when there were 16 people paying yen and

now there are only to people paying index i know is tell people to read the trustees' report on social security. -- 16 people paying in and now there are only two people paying in? i always tell people to read the trusties report on social security. >> but the view talk about sacrifice. we like to pat ourselves on the back and talk about how great we all are. i bet nobody in this room is doing anything near like going to afghanistan. let's put this in perspective. all we're asking people to do is to do things that make sense. the sooner we do it, the better off we all are, because if we do it sooner, the solutions are not as draconian. so, let's talk about means testing and sacrifice. if you took the idea that if you

make $50,000 or less, your social security benefits will not be adjusted, what does that mean for people who make over $50,000? >> you would probably have to slow the rate of growth. >> when i was 21, my mom died. at 22, my dad died. my sister was 13. social security benefits came to my sister. it made the world of difference. i am 55. i do not have any kids. i make $175,000 per year. i am going to have a military retirement. what would it mean for someone at my income level, a difference between what is being promised and what would be paid? would it be $100 a month, two hundred dollars a month? >> i cannot tell you exactly. >> could you get me that number,

because i believe it is going to be very small. >> one thing i can tell you is that your benefit actually would not be cut. the rate of growth in europe benefit -- >> means testing is not cutting anything, it is paying what you can actually afford. >> it grows up the rate of inflation rather than a higher rate. >> senator simpson, do you think that is a smart idea? >> i am 79. i have seen these people in the room with their signs and all sorts of activity. i say, wait a minute, pal. i put five bucks then when i was 15 and worked at the bakery. i could in when i was in the army. you did put it in then, not now. i never put in over $874 per year, and neither did any guy in the united states. this is fakery.

then i got stuck for 1200, 1400, two thousand dollars. you are going to get it all back. when i left in 1983, we found out a guy got everything back plus 6% interest in 3.5 years. >> will both of you it urged congress to take up social security reform? >> absolutely, unequivocally. >> thank you. let me thank both of you for your work. i think you have the right formula. each element will be controversial. we understand that. let me deal, with the limited time we have, with the revenues. and now you have already had some discussion in regards to consumption taxes, but i want to make a point here.

we get around to tax reform, if we are lucky, about every 25 years, so it is important that we get this right. in your report, the goal is to have revenue equal to 1% of our economy. that is the revenue goal that could be achieved through the reforms in income tax that you have outlined, or it could be by using some consumption taxes as well as our income tax, but the revenues would be the same. i mention that, because since we pass the last major tax reform in 1986, our chairman frequently point out that there are now 140 provisions that have been added temporarily and need to be reviewed for extension on a regular basis. my concern is that if we were to pass the recommendations of the commission, it is unlikely that would stand for very long before

congress would once again, for reasons of political expediency, use the tax code rather than the revenue code in order to carry out policy. i think we are safer if we use less income tax revenues and have more consumption revenues to equal the dollars that we want to bring in. i also point out the realities of competitiveness. the fact that, during the best of times, this nation did not save enough, and our policies do not reward in savings. our tax code certainly has not been terribly helpful in rewarding savings. lastly, we know that corporate income taxes are not adjusted whereas consumption taxes are adjusted in international trade, which puts american

manufacturers and producers at an economic disadvantage. the argument i year the most is that we cannot make -- i hear the most is that we cannot make consumption tax is progressive. but we can. my goal is to bring in revenue in a moral productive way it than we currently do. having said all that, and knowing that you did your best to put forward policy suggestions that we all need, and knowing that your proposals would be politically controversial wherever you went, could you just share with me why we should not be considering, as a matter of policy, less reliance on income and more on consumption, knowing full well the history of congress in changing the tax code? >> let me tell you why it is not in our plan.

for example, about a week before we started, the u.s. senate voted 85-14, and it did not look like the odds were too great we would have a consumption tax. >> let me stop you on that. a lot of us were tempted to put in similar resolutions on social security, a similar resolutions on every one of your proposals, and i dare say we could've gotten 85 votes on each one of those individual recommendations. i think it is terribly irresponsible. >> i am just telling you why we did not do it. there was no opposition on the commission, as near as i could tell, to a vat tax or consumption tax in theory. most people believe that it is much better for tax consumption if you can do it on a progressive basis than it is to tax wages, investment or

savings. you have to make it progressive, but there was not a lot of opposition, in theory, on either side of the aisle. where there was enormous concern was that we would end up with two engines of revenue. we would end up with income tax that would be escalated and consumption tax and there would be two engines feeling revenue and feeling the tax rate. that is why -- fuelling revenue and fuelling the tax rate. that is why there was not support for it. >> i feel better getting that explanation. i would just conclude on this point. we want the best policy objectives. future congresses are going to act regardless of what we do in this congress with these recommendations. i just think we are safer having a tax code that is less likely to be changed in the future for social reasons than we currently

do under the income tax. >> you should look at the report that had the courage to put that out there. we felt that because of the resolution in the senate that we would be raming our heads into the wall. >> let me just say on this point -- exercise the privilege of the chair for a moment. i argued strenuously for a vat tax or a consumption tax to be part of the package. i did so in part based on the recommendations the commission received. we brought in the best tax experts in the country, republicans and democrats, progressives and conservatives. their recommendation was to go to a part income tax, part consumption tax system, not later one on top of the other, but displacing part of the

income tax system so that we could lower rates, especially corporate rates, to help america be more competitive. we had a proposal to adopt a is a hybrid system, with part of it being consumption tax, and to take 100 million americans off of income tax rolls completely. 100 million americans would no longer have to file income-tax returns at all, and you would achieve the same amount of revenue, but you would do it with a hybrid system. we understand the politics of it, but i did want to take this moment to explain the position that debt least i took. >> i want to thank both of you for your service. on behalf of the people of ohio,

most reports and debt collecting dust on a shelf somewhere, and there is an opportunity -- end up collecting dust on a shelf somewhere, and there is an opportunity year to really change the direction of the country. it depends on what congress does. alan simpson inspired me to take a shot at a elected office, which means you will be blamed for something additional now. that witness protection program will have to be even better. erskine, and thank you courier service. when you were chief of staff at the white house -- thank you of for your service. when you were chief of staff at the white house, we did some work together. i recall your willingness to step around partisanship and come up with solutions, and that

is what you have done in this report. thank you. i have three quick questions, just to get your thinking. two we have discussed briefly, a tax reform and social security. on tax reform, quickly, do you think from the testimony you have heard, that the proposal you have will not just have the impact that the committee would indicate from the scoring, but will also make our economy more competitive? >> yes, without question. >> that is an intangible that is really not represented in the numbers you are providing. on social security, we will hear later today, and we have heard all along, that social security is not adding a dime to the deficit and is in good financial condition. do you agree with that? >> is $45 billion cash-today and

expected to stay cash negative for the foreseeable future. >> that is based on the congressional budget office report? >> yes. what some people that sometimes forget is that when somebody my age goes to collect social security, and i want money, cash. i present that obligation to the social security trust fund, and it does not have cash. what it has is a government i owe you, and the government has to go out to the marketplace and borrow the money, so it increases the national debt. in essence, since half the money is borrowed from foreign countries, at least half of the money i am getting is coming from some foreign country to pay my social security. >> that is a very good way to put it. i am glad you addressed the issue in the report and also

talked about it today. the final one is the toughest of all. what is the economic impact of this? if we reduce discretionary spending it will result in job loss. that is a keynesian model, where government spending being reduced = less economic activity. these people looked up the stimulus package and said that $800 billion would cause unemployment to be 8% last year and 7% this year. that has not happened, but now they're saying that if we reduce spending by 1.6% that you mentioned earlier, that there would be a great loss of jobs. you looked at this carefully, and earlier you talked about the financial crisis, small businesses being starved for

capital if we do not do something. what do you think the economic impact would be of reducing spending along the lines the u.s. recommended? >> i am not an economist, and do not want to pretend that i am. i am a pretty good business guy. i can tell you from getting the small business administration that small businesses cannot grow, you cannot create jobs, without money. and if we do not tackle this fiscal mess that we have today, then small businesses will be crowded out of the marketplace and there will be fewer jobs, not more jobs. if you are really concerned about jobs, then we have to tackle this sysco problem head- on. and we did -- this fiscal problem head-on. >> and we did consider throughout the fragile nature of

the economy. when you are all through when -- when you're all through with what we have done, i do not think people will say this is a failed commission like all commissions. we did two major pieces of legislation on legal immigration and illegal immigration, and brought two 0.9 million people out of the dark to obtain legal status in america. i was on the iraq study group. that was not a failure. 50 plus of those recommendations have been adopted. this is not going away. this is a stink bomb at the garden party. >> thank you all for your work on the commission. i want to ask some questions

about an area i do not think anyone has touched on. if they have, i apologize. addressing the health care provisions and the deductibility for businesses of the costs they spend on health care, you have laid it out that the deductibility is limited to the 76% in 2014 and then will be phased out over the following -- percentile in 2014 and then will be phased out over the following 20 years. employees will pick up a lot higher copays, a lot more of their insurance and so forth. that sounds an awful lot like an immediate and very regressive tax on working americans. i wonder if you could touch on not for a moment.

-- on that for a moment. >> i do not think that is the case. i mean, what i think you will see is, first of all, every business in the world, whether it is a small or large business, has raised the deductible rate, the copiague, reduced the pay, its -- raised the copiagu- reduced the benefits, in order to meet their costs. that is a fact of life the we have all had to live with. i do not think businesses want to do it. but we have been forced to do it. if we do nothing, if we take the ostrich theory, we will see that continue into the future. health care is the biggest single problem that we face from a fiscal viewpoint. if you just look at medicare and medicaid, it is about 6% of gdp

today, and it is going to go to 10% before you know it. that does not even count the dollar sign276 daily -- down to $276 it takes to fix the class act. we think we have to stand up to that, and we have proposed some pretty aggressive proposals. we haven't addressed the things we felt were responsible in order to -- we have have addressed the things we felt were responsible in order to meet the fiscal challenges. we have made promises and we of not delivered on them. >> in normal business, you increase costs to workers or

that benefit is likely to decrease. they have increased the share being picked up by the employees. the other reason i am concerned about this is that in the context of health care reform, of companiespresmise continuing to provide health care. if indeed you set up a situation where employers say, without the tax deductibility of these benefits we are simply going to shut that down. we will provide benefits and other ways, that results in a huge shift, actually increasing the size of the deficit. i am wondering if you have modeled this out into the future. it sure looks like something that is going to increase public deficits and public debt into the future, rather than reducing them.

>> this is a monster, and we could not even wrap our arms around it. that is where health care is. all you have to do is look your own family or the family down the street for the last 10 years of your life. in two weeks, you can run up a bill for $400,000. that is just in wyoming. there is a way to do this. you cut the riders, and you reduce physicians' fees. you increase co-pays and you get one set of books in the hospital, and you do tort reform. you do not want any of that. but leave them like -- leave it like it is, and you will see a giant hole in the discretionary budget.

>> the house passed a bill to exemption fromtthe antitrust. there was a lot of discussion of public option. my colleagues in rhode island said it increased costs. it the ability to negotiate the price of drugs. many approaches other than a short-term transfer onto working americans. >> thank you. welcome back. you did a terrific service with your work. although i did not agree with every piece of it, it was a body of work that i think was exceptional.

i think you gave us, if we want to follow it, a pathway to start to get this fiscal situation under control. because you were attacked by both the right and the left, i assume you were trying to find a spot right there in the middle that might be able to attract the level of support that might be necessary to actually enact something around here. i do want to ask a couple of questions, and i think it has been talked about a little bit already, but maybe you can elaborate. if we were to adopt the president's budget -- it did not address what many of us thought it should have, which were these issues of title meant reform. if we were to adopt the -- of entitlement reform. if we were to adopt the president's budget, how does that address the long-term issues that you have identified in your work? some of the recommendations included in your work seem to be absent from the president's

proposals. >> i can answer that pretty straightforwardly. first of all, i do not think anybody on our commission agreed with every part of the commission report. i sure didn't. allen didn't. i know the chairman didn't. we all held our nose and swallow it some of the things in the report for the good of the country. again,sident's budget, as i said earlier, does a relatively good job of dealing with domestic discretionary spending cuts. it does not step up to nearly to the extent i believe it should with the defense cuts that are necessary or the cuts that are needed in health care or reforming social security so that it is solvent for the next 75 years. much like the republican response which, both of them are

just like budget efforts -- light budget efforts. >> alan greenspan recently said that the u.s. could face a bond market prices if politicians do not start acting soon to cut the nation's debt. he said the probability of that happening is 50%. do you agree with that assessment? >> i do not know what the percentages, but let me tell you how crazy our situation is today. we have this treaty where, if china were to attack taiwan, we are supposed to support taiwan's. the only problem is, we would have to borrow the money from china in order to do it. this is a real mess we are in today. we can either take the ostrich approach and put our heads in the sand, or we can step up and decide we're going to do something about it. but i can tell you, bankers are

not going to continue to finance something where they're not sure they're going to get paid back. they will cut you off. we are borrowing half of our money from foreign countries. >> how do we translate that? a lot of times we talked about these things in the abstract that. of translate that to the american people, personalizes -- how do we translate that to the american people, personalize it, so that they understand what the impact of our not acting are? a lot of times they react to this program being cut or this program being cut. it is harder, once you focus on the specifics, to get the support you might get when you're talking in general terms about the need to reduce spending and debt. what does this mean to the average american family if we do not take steps to fix this mess? >> senator thune, they have already got it.

we used ask how people were having as a kitchen table. i will tell you how they're handling it. they do not need any charts, nothing. they just say, if you spend more than you earn, you lose your but. if you borrow $0.40 on the dollar, you must be stupid. they understand this. that is all you have to say. you're borrowing $0.40 for every but you spend, and they know that if they did that in their own house, they are out in the powwows. it is over. they get it. >> thank you. back to health care for a minute, health care consumes about 18% of america's gdp right now. the closest country is at 12%,

the workers. so we are half again as bad as the worst country in terms of the efficiency with which we deliver health care. we do not get better outcomes for it. the rate of increase is accelerating. we have a real problem on our hands with health care, and it is not just an entitlement problem. it is a health care system problem, because the cost increases are clobbering the private sector just as strenuously as they are clobbering the public programs. so, i do not think we can entirely fix the health care system just by is trying to cut benefits in the health care programs. there is an underlying cost problem in our health care system that i think has a lot to do with our rube goldberg design of the health care system,

although it is worse. ruth kohlberg was accidental. in this diagram, every party has a motive. i think there is a lot of work being done to try to correct and reform the system as it goes. the areas that are obvious are the quality improvement movement out there. we spent $2.5 pas in billion a year treating what should be completely avoidable hospital infections. a really robust information technology platform could make a huge difference and frankly, generate new private industries. we could start paying doctors better for results instead of just for amassing as many procedures as possible. the overhead could be driven down a lot. there's a great deal of overhead the goes into the totally

unproductive warfare between insurers and doctors over getting paid. they now have armies of consultants and staffers to fight with each other ever getting paid. that is all on the health care system and it does not provide a nickel's worth of health care value. stack of those up and there is quite a lot going on. big out its very pursuing this stuff. reject staff, all of those up and there is quite a lot -- stack all of those up and there is quite a lot going on. there are some very big outfits pursuing this stuff. the president's health care reform is estimated to save $700 billion a year. some have calculated it higher. it looks like a really big number. if you agree with this, i would

urge you, as you are discussing this issue, to really focus on this question of delivery system reform and the win win it so that it is possible to improve care, improved efficiency, and lower costs. the one big flaw is that cbo and omb cannot predict it because it is a process of learning and experimentation. we know there is good stuff to be done out there. we can have confidence in our ability to get there. we cannot predict the dollars. when you get down to a budget discussion, my fear is that this incredibly significant opportunity gets shoved off the table because nobody can put a dollar figure on it and you all are generating a report it that needs to be able to put a dollar figure on it. i guess my appeal is, do not

give up on that just because it is not possible. it is probably -- it is not costable. it is probably the biggest and best thing we can do for our worst fiscal problem, which is the health care system. even if you put it in as a footnote saying, we cannot measure this, but it has a huge potential and we should focus on that potential. it worries me we are not getting that. probably one of the best people in the world on this is under constant attack right now because he did not come here and get confirmed properly. let's not throw that out with the bathwater because we do not have a number. it starts to seem like an ok

idea. i urge you to consider that going foward. it is so important. i hope if you agree you will give it a little more air time. >> i actually do agree. i was vice-chairman of the medical center. after that, i had it the north carolina public health care system. it is un scorable. that is why it is not in our report. >> we have a bipartisan group. we worked for months. the problem was -- you go to the

floor and get an amendment. it was something good. >> tha >> thank you, mr. chairman. we mobilize the american public so we understand how urgent the problem is. we hear this term "debt crisis" all the time. can you explain what that will feel like and how it will affect and enter -- and

individual. what will it do to a family? >> interest-rate costs will rise relatively rapidly. the quality of education that they can provide will erode. the university system's will a evaporate. the likelihood of that creativity is less likely that there will be a new job. there is a likelihood the training funds will be there. their roads and bridges and highways will be less. the guy they get hurt the worst will be the little guy. that is here is going to get hammered.

>> said nothing we can make that. we talked about it solvent. did you fix that on a cash flow basis? >> we did a couple of things. on the revenue side, we raise the minimum that someone would be taxed to fund. it will grow to 168,000 by 2020. the ticket to 190,000. he paid that on the differential. we reduced the rate of growth in

benefits being paid to people at the higher levels. we changed the been raped. the bin rates. we changed the cpi. >> to account for the fact that 2.5 trillion dollars she raised. >> it has to be. >> you are proposing we raise it to 21% of gdp. we never had 21% in gdp. we hit it close three times. i kind of subscribe to the law. did we are going to be about 18.8 durum. how the overcome that? -- 18.8%.

howdy you overcome that? >> i looked at the forecast. revenue was forecast in 2020. spending was about 25% of gdp. i've had to figure out how we would close this gap. i wanted to close the vast majority on the spending side. i wanted to get to a balanced budget. historically, we have always balanced it at a level below 21% of gdp. i thought that was the maximum level we could get to. i thought it was one of the lowest levels we could get spending too. >> no matter what the rates, we never raised 21%. >> that should be the maximum level.

>> one final question, i do not subscribe to the idea that has to be comprehensible reform. the american people want to understand what we are trying to do. did you make any attempt to prioritize the components of this? did you prioritize the other recommendations? >> we did social security separately. we that we rid doing it for 75 years. we did not prioritize the others.

>> thank you for taking on this thankless task. i think all of us agree that we are in a deficit crisis. i would welcome this further. i am convinced that if we do not tackle this, the consequences are drastic. i want to thank you for tackling these areas. tax code reform is the piece i'm going to focus on. it is my hope that if we may be significant changes there would be greater growth in the

possibility for a greater%. please tell me three things. give us a little more detail about how it might unfold. how would it unwind it? how do we stay on top of when it will happen? there is a reemergence of a lot of tax expenditures. some would prevented from then of being undone.

>> these are our colleagues. senator dear banquette asking where the tipping point was. we kept saying, we do not know. some say two years. some say three. it all depends on how far the congress goes in getting to the meat of reducing a $14 trillion in debt. people are not going to be patient. he did not have the guts to do anything.

it did not do what you are supposed to do. we will take care of ourselves. there are not in people. >> we did a couple of things. we put a failsafe on the tax side.

the deficit to gdp was greater than primary balance. the president had to submit a proposal. this was by 2015. this is why we went with that. if it became on stabilized, it began to grow again. on health care cuts, we have -- we did not just willy-nilly say there ought to be cuts in health care. we have every single cut bought and paid for. i had to gore my own to do this. we took away some of the church. .

>> i want to close by taking -- by thanking you for your hard work. thank you. >> five minutes is a whole lot of time. i would like to maybe ask a few questions. we just focused on deficit reduction.

it is as significant an issue as it is. we lose the context of what it is. the other reality that is happening is that the middle class has been collapsing. poverty has been increasing. we now have the most unequal distribution of wealth and income, of any major country. while poverty increases, the wealthiest people have become wealthier. we have a situation where the top 400 families in america on more wealth than half of the families in america. you have the top 1% earn more income than the bottom 50%. when you talk about moving toward deficit reduction, on whom should that burden floor? she really third 200,000

children off of it? surely cut back on the social security administration? to cut back on programs? how do you deal with that? i'm going to have to get to social security and health care. at a time only have such a grotesquely an equal distribution of wealth, 80% of all income -- why would you suggest that 3/4 of the movement comes from spending cuts and only 25% from revenue? why disney as the wealthiest people to start paying tax -- why didn't you ask the wealthiest people to start paying their fair share of

taxes? >> we have a spending problem. in every single case, we tied to protect the disadvantaged. if you look at the other cuts, about 20% -- we did not touch a single one of those. tax expenditures actually go to those people. why do they do that? they have all these tax expenditures. we got rid of the tax expenditures. that is why it is about 155,000.

>> that is the right thing to do. >> at the end of the day, three- quarters of your plans talks about cutting spending. how you feel about throwing it off? >> when you talk about cuts in spending,. let me go on. >> what about your present offering to cut it? >> i did not do that. it is a terrible idea. >> let me go to social security. social security has been an enormously successful program for the last of me five years. it has taken elderly people out of poverty. it paid out every nickel owed.

you said when we do not put social security, we did not do it from a deficit of you. president obama also had an idea. his idea was to raise the taxable level. >> i have said i do not think people in my in come back the date in my income bracket -- i'd have said that i do not think people in my income bracket need a tax cut. >> i agree with president obama.

to benefit the thousands of dollars -- to render a thousand dollars must be removed. -- $250,000 must be removed. i asked a fairly simple question. do you agree with president obama backed above $250,000 we should remove the cap? a tactical income for social security. -- of taxable income for social security. the president went a lot further than you did. >> we to get to 90%. that is what it originally was. in 2020 into the going to 168,000 -- the president says he will pay taxes on it. >> the president said that we should start very shortly by removing the cap for people over 250?

like i'm happy to give you my opinion. the united states spends almost per capita on health care than any other nation. we are the only nation that allows it to pay a significant role in health care. other countries have national health care programs. would you suggest that one way to lower the cost is to eliminate it? >> you have now gone over. we have to end it there. >> when there is a flow of a conversation, i permit both sides to go over a minute over. now we are two minutes over.

let me go to a point that senator johnson raised. it is critically important. we discuss this in the commission. if we use the revenue, at no time in the last 40 years with we have balanced the budget. i do not think that is going to work. if we look at the five times the budget has been in surplus, what has been the revenue? it is nearly 20% of gdp. 2001, 19.5%. we had a different circumstance we are dealing with.

it is the baby boom generation. it'll double the people eligible. when we looked at that, and we are at 25% of gdp. we have decided that we had to do more on the spending cut side, substantially more -- we also had to do something on the revenue side of we are going to build it in a fair way. we are borrowing of 40 cents of every dollar we spend. if we did that, we would have to cut every single thing. social security, 40%. medicare, 40%. i do not think that is reasonable. there has to be some revenue in

this equation. some will say revenue will return to the normal. right now, revenue is about 15% of gdp. the lows it has been in 60 years. it is the lowest it has been in 80 years -- very close to being the lowest it has been in 80 years. we will get back to close to the average. we know there is a return to the mean. we see it all the time. we have to have some revenue. much more has to be done on the spending side. i want to end my questioning without a question. thank you.

his wife is spectacular. you have proved it. you have worked together. there are all kinds of things in here that i n predict that i disliked intensely paper -- i disliked intensely. the only thing worse than being

for this is being against this. the country is in deep trouble. there is not a single person that can tell you they know with certainty when we will hit it. we are hurtling toward it. whatever year ideology, i put mine on the back burner. as much as i dislike it, what matters to the country is getting a result. failure is not an option.

we will continue to pursue bringing this government's to fiscal sanity. i have no doubt that we need this year. i do not think it dopatta as an economic slowdown. i think they can be done. it will add up to over $800 billion. let's get busy now. i did not shut the door on entitlement reform. they are unsustainable.

i think the financial markets will respond if we put ourselves on the course. you have given us good suggestions. let's see if we cannot make some progress. i look forward to your leadership. thank you for your contribution. you have done something very important. i hope the country is paying close attention. >> thank you for your consistency. you came here when i was here. you step with your guns. 8 if we can just remember one thing, we are americans first

the republicans are -- or democrats. if we cannot remember that, we cannot get out of the rut. >> of men. thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

we have to do this as a comprehensive package. this breaking it up and pieces, this problem is so big we are borrowing 40 cents of every dollar we spend. so you have got to have a comprehensive package. i don't believe senator greg did not believe many of our colleagues don't believe that you can do this breaking up into pieces. you just don't have time. you have got to do a comprehensive approach. >> cutting 1.6%, i can do that tonight. he seems to be dismissing what is going on on the sfloor as kind of a side show. >> i have said on many occasion there is is an incredible disconnect here because they are only dealing with 12% of the budget. you know, at a 3.7 trillion budget they are dealing with 12% of it. so as a result, when you just deal with that 12%, that the

cuts are true draconian, and it doesn't deal with the real problem. the debt is the threat and the debt is going to be $15 trillion at the end of this year. $60 billion doesn't touch it and it doesn't touch it because they are not dealing with the vast majority of the budget. they are just dealing with a portion of it. it makes no sense. it makes no sense. >> you have talked about having some sort of summit at the white have yot gotten anywhere on that? are they leading on this in any way that is not apparent to us? >> i don't see how this ultimately gets done without some kind of negotiation. his rs are at the table. to the members were from the administration.

we did not get 60 votes for that opposition. we got 63. at the end of the day, that is why i went back to the notion. at some point, there has to be a negotiation for everyone that is affected. >> did you take the proposal to the white house? >> i do not know yet. we are working in good faith. we are coming up with a proposal for our colleagues. i do not know. >> the white house is not involved at this point. >> at some point, you will know. they have to demonstrate the senate. they will come together on a proposal that is big. it actually takes care of this problem. >> could they ever?

>> i remain optimistic and hopeful. >> the consequences of failure are so serious. >> potential republican contenders have been making stops in key primary states. this weekend, minnesota congresswoman michele bachmann in new hampshire at a fund raiser for the republican state committee. sunday at 6:30 and 9:30 p.m. eastern and pacific. >> one third of americans have no savings. one quarter of mortgages are under water.

you cannot run an expensive noo conservative foreign policy given that financial reality. >> advising governments and businesses about the political and financial risks of the world today and tomorrow. this sunday ininsights into the intersection of money and foreign policy. >> white house chief economist said the economy is transitioning to a growth phase. the u.s. senate wednesday rejected two competing proposals to fund the government for the remainder of the year. mr. gools by was the key note speaker at the 27 ds policy conference. this event focuses on key economic policies and trends currently impacting the global economy and economic challenges ahead. this is 45 minutes. he spoke for 45 minutes. >> taking a little time this

morning and thanks to everything you do. for six years i was on the census advisory commission and the census advisory commission are basically the only two bodies in the united states strongly and toiletly volting issue is -- totally voting issue is quality of our economic data. [applause] the meeting was in new york. alan greenspan filmed a series of videotapes calling for improvement of the economic data. thank you again for your efforts on that. i thought i would go through a little bit of where i see the state of the economy, where i

see us going, talk a little bit about some of the deficit issues. i was surprised to find that there was that more and your summary discussion about the importance of growth in getting us onto a stronger growth path. the deficit reduction is one of the two most important things we have to confront. a little bit on what the areas of weakness are and see whether you agree with those or not. i start by saying when i look -- and my buzzing? >> it is something up there. >> i'm sorry. let's see if we can fix this. does it was if i do not say anything? i said nothing. she said "better."

as i look out into the circumstance -- there it was again. we will live with it. it strikes me that we will go from phase 12 phase two. phase one was the rescue phase. if anybody believes we should not done anything, we are very close to being in a depress. being in a depression. it was a deep recession. it would erase all of these self

correcting business cycle. we went down a hole we could not get out up. we had a financial shock bigger than 1929. there was a larger network. the financial system was as close to coming unraveled. it could have been worse than the depression. the financial sector is far more integrated now than it was in 1929. it feels to me like it is over. we are now transitioning to a growth phase. as we shift, the private sector and the financial system both

show clear signs of life standing up the policy shift in what is the appropriate response. and since his replace government involvement. a focus on competitiveness on longer run investment becomes totally appropriate. where we can do things to rely on the private sector to stand up and drive. it to become totally appropriate. i do think there is a bit of -- if you have just gone through a time when you are running into the hotel, and taking children and throwing them down, it is not right to evaluate them and said it was the elem big diving contest. we have a little bit of that.

we are losing a hundred thousand jobs a month. we were trying to save the lives of the economy. we got it from phase one to phase out to. it is a testament to a lot of people's work. i do think we tend to have a bias towards the present. i used to drive the car pool down to chicago. one kid got the guitar hero video game. he had a guitar hero 1986 edition.

i said, let me see that here are remembered all these songs. >> your live in the 1980's? the thing is when i start listening to people, i kind of get the sense they forget the previous business cycle and what it was like. if you had said in march of 2009 when we had just lost 800 jobs a month, that by march of 2011 we were going to have grown for six straight quarters and have added jobs for 12 straight months, spreads are going to be back to lower than they were before the financial crisis, i would have

given you a kiss that is what we need to be doing. i feel like we have turned a very serious corner. parlay i base that on the business cycle data, that you observed every day. the gdp has turned around, the recession was over even before that. the blue chip survey keeps going up. in november 2010, not five months ago, the blue-chip for 2011 was going to be 2.9%, and by this february that is raised to 3.5%. if you look at the purchasing managers, you got strong indicators that manufacturing is coming back on the expectations

of jobs. it is the highest in decades. business confidence appears to be coming back by any of the measures, consumer confidence the highest in at least three or four years. separate from the data coming in on the stronger side, anecdotally, if you talk to business people, but closest they are to the cycle, the stronger their expectations for the coming 2011 and 2012. these durable-goods manufacturers, business equipment, high-tech sectors come historically cyclical, they have a strong this expectations. as you move toward the less cyclical industries, they are positive but milder. that feels like anecdotal evidence backs up -- backing of what is coming in from the business cycle data.

the one exception is small business, which is historically quite a cyclical, one of the first to go down and one of the first to come back. they are lagging, not driving it. that is why that has been a policy area focus for us. the data suggests transition from phase 12 phase two. if you look at the labor market, obviously top of mine for a lot of folks, -- top of mind for a lot of votes, something happens that is under dispute, as bad as the gdp is doing, unemployment rises substantially more than anybody predicts. it was not just my predecessor predicting that the baseline unemployment rate was going to be lower than it ended up being.

all of you made the same predictions and the private smith set -- in the private sector mistook what the baseline was going to be for unemployment. in the relationship of unemployment to gdp broke down from its historical basis. we had 1.5% to 2% more than what anyone would have predicted at the end of 2008. a major question as to why that happened. fundamentally those questions are around, are we going to get it back? will we see on the other sign better unemployment performance than the gdp would to the -- suggest? and with some of the dropping of the unemployment rate, is this sunday okens law residual come back?

one dynamic is heavily to the negative in the recession, which is now turning to be substantially in the positive. in most recessions, productivity growth drops. sometimes it even goes negative. this downturn, the exact opposite occurred. for direct cost cutting or for whatever means, productivity growth was growing at astounding levels through the downturn. if some point, we have allies productivity growth rate to 5% or 6%. that is a recipe for a lot of people losing their jobs, and we were on the downside of that trend for some substantial period. that has almost entirely flipped. you have expectations of output at 3.5%, and you have

productivity back to a board normal 2.5%. if they persist, that is a recipe for a lot of people getting their job back or a lot of people at work working substantially longer hours. that is a trend in the labor market that we continue to monitor, but suggest something positive developing. that is largely why you have seen modest at first but continuing to strengthen labor market performance. when i hear some people say jobless recovery the way the last two recoveries were jobless recoveries, in the early period, i object to that. it is not in fact accurate. the 2001 recession ended and there is job loss for 22 months

after the declared end of the recession. that is a jobless recovery. in this recession, job growth commences nine months after the end of the recession. it is much more like a traditional recovery. the death of this whole -- and have to infer this in my mind -- this goes down, and the job loss from this recession is very much on the order of magnitude of the last three recessions combined. that is how deep it is. but we have now started to come back. that is very different from going down somewhat and then not generate any jobs for a long period. i think our most pressing problem as we transition to face to -- phase two is getting the

growth rate sustained. also quite critical for getting the deficit down and dealing with our long run fiscal challenges, will which we have known about for 30 years, have not gone materially worse in the last two years. what got worse is the business cycle went down the tubes in the iran the deficit up to record amounts. the long run fiscal situation facing the country is oriented around the aging of the population, the acceleration of health care costs, and thinking about things like the share of income pain by high end, americans which is at very low levels, mostly due to major tax cuts over the last decade. if you ask where will the growth relocated, and there is an argument made by some that if we

cannot restore consumer spending and if we cannot get construction back, where will the growth come from? i believe and i should have brought a copy of our economic report to the president. i did not realize that you're sitting near the table. ok. the economic report of the president, the very first graph lays out what is wrong with that reasoning. if you compare the boom of the 2000 cost to previous recoveries, it is highly unusual, in two ways. number one, it is massively way to the to consumers -- weighted to consumer spending. way more than in previous booms in the united states. it is undersized for export

growth in business investment. exports and business investments are traditionally drivers of recoveries, but not in the 2000's. when people say, if we do not have a rapid increase in consumer spending and a big upturn in residential construction, we cannot have a recovery, they are leaving out the phrase, like we had in the 2000's. but it was not sustainable. consumption grew faster than income growth, and they brought the saving rates of the nation down to 0%. that is not sustainable. residential construction fueled by a housing bubble is not sustainable. that is not where we're trying to get back to. in my view, the growth will be located in business investment, exports, traditional business cycle recovery, and we wanted to

be like a traditional recovery, a heavy dose of small business expansion. entrepreneurship, that part has been relatively weak. exports are up 17% over the last year. that is fantastic. that is well on the way to meeting the president's goal, and it could double as -- to double exports over five years. business investment has been up strongly in various quarters and we continue monitoring that. the one industrial production number, durable-goods in january, it was not as strong. but that follows a very strong months. exports, investments, hopefully small business, which is why we passed the credit bill, has put the focus on start of america. it is a focus on public/private

to start and grow businesses. things that in the old equation, we want the focus on. physical capital, human capital, and others. nobody in the white house wants to hear about human capital accumulation, physical capital accumulation, and productivity enhancement. but when the press this is out educate, out innovate, and out build the rest of the world. it has a economic foundation. it comes out of that model. i think a growth agenda is what is warranted. when we are talking about when the future, we're talking about rooted in a business cycle driven by exports, by raising the skill level of our

workforce, and to me, that is the private sector sustainable kind of growth. let us talk about the deficit in the issues of debt facing the economy. as all of you know, what matters is our debt to gdp level. and what matters is, as the bulls-sensing commission observed, not 2011 -- bowles simpson commission observed, the deficit is very dangerous because it leads you to do things that are not correct. we signed a tax deal in december in a bipartisan manner which was important. it gives incentives for investment, which gives a payroll tax cut to encourage workers and to encourage hiring, he gives incentives for education -- all of those all-

important and everyone knew when they sign did with 80 + senators signed that bill, it would increase the deficit in 2011, but we needed to get on the pro-growth path to confront long run fiscal issues. to come back and say, but look, the 2011 deficit is high, therefore we need to cut, is in some sense running -- completing what the problems are. -- conflating what the business problems are. the president outlined that he would release a budget that cuts discretionary spending down to a share of the economy that it has not been since dwight eisenhower was the president. and then he said, look, once we do that, that's all at one

another and agree that is only 12% of the budget. that is not what the problem is. if we want to hold hands and together in a bipartisan way think about the aging of the population in the acceleration of healthcare costs, think about the tax rates on high- income people over the long run, let's do that and a bipartisan way. but let us not continue saying that the problem is runaway discretionary spending, because that is 12% of the budget, and we are running a deficit in 2010 and 2011 because of the business cycle. growth is going to be a key component in getting the deficit down. before the financial crisis, that deficits may be free% of gdp. it goes up to something like 11% of gdp.

most of that 11% is from the business cycle. getting the business cycle reversed is critical to getting it down 4% or 5% and getting from that to primary surplus, it has to get -- come from cuts. but growth is fundamentally important. up until 1979, the united states cut the debt to gdp ratio by 85 percentage points. and it runs a surplus of only three or four times in that entire period. gdp grew at a sustained rate and made a big difference. we have got to live within our means. we have got to think about the entitlements, but that is an issue that we have known about for 30 years, and they cannot be done in a partisan way.

if the argument was, why doesn't president obama come forward and say here is my partisan plan to go ahead and change entitlements, and we went through a period in the health care bill, in which it was not -- it was a cut to private subsidies, the medicare advantage program, it was not even medicare. that was transformed into the president wants to kill your grandma. [laughter] in an environment like that, we're not having an adult conversation about the aging population and the acceleration of healthcare costs. we cannot be in that environment. there are hardening things. in the fiscal commission, you had sitting senators from both parties say, look, let's hold hands and confront issues, as confront them in the future. it is not about right now.

but you also had sitting members of the house saying absolutely not. we will not have anything to do with it. in some sense, we have to see how this one plays out, but the president is committed to a strong budget on the discretionary side, which if enacted would get discretionary spending levels down to somewhere they have not been for many decades. the art two ways to mortgage the future. one is by running up deficits spending and leading the bills to your kids the other is by not investing in the things that our kids will needs to get good paying salaries in the future, such as education, investing in r&d, investing in business, and physical capital. both of those are important and we have to preserve and live within our means and make the

investments that we have to make. there are such things as bad cuts to make. cutting the things that are critical for our growth, that is not a good idea. if you will pull away the financial aid of nine millage -- 9 million college students in the middle of the school year so that thousands of them drop out, that is not a good idea. that does not pay for itself. that is a cut which cost you money. if you're talking about cutting things like that $30 billion of terminations and reductions, things that the president already said we can afford to do without, when you are cutting things that are duplicative, wasteful spending -- when you are not in phase one rescue mode, you can afford to get rid of a lot of things. what matters is not just some aggregate number. what should the aggregate spending of the government

be? lastly, there are clearly concerns. we are in a recovery, shifting to phase two, but we have not yet recovered. we still have of fear on the horizon that we continue to monitor. most obvious, the price of oil. a lot of people have in their mind the 1970's were when the price of buyout -- oil goes up, it sends the economy into recession. there is good news on that front. number one, if you look at energy intensity per dollar of gdp, it is 40% lower than it was in the 1970's. most economists believe that the sensitivity of our growth rate to oil prices up or down is lower than it was at that time.

number two, and you saw announced overnight and today that they are willing to use -- i was going to say, there is capacity among other oil producers in a way that at previous times when the price went up, they were not. nigeria and saudi arabia and some others are going to increase their production to replace the supply disruption coming from libya. the fact that there is capacity to address that is also the relative positive. but there is clearly a risk premium on top of stronger world fundamentals. as world demand for oil goes up, and world production rises, that drives the price and then there is a risk premium on top of that. the question is, how much comes from the fundamentals? there is one upside to the

fundamentals, which is if massive oil demand is driving the price of oil up, those countries tend to buy a lot of stuff from the united states. if prices are going up because of supply disruption, that is not good for anybody. if it is because in china they are expanding output -- china has become a large export market for u.s. markets so that is not all in the negative. i would emphasize a long run energy policy so that we're not having this conversation every summer. we know that in the summer the demand -- that in the summer, demand goes up. we are having the same conversation again and again, year after year. whether energy efficiency, domestic production, or other energy policies to alternative fuels, it is important that we think those three. price of fuel is one risk. financial problems in europe

remain a concern. a year ago, it felt we were getting momentum. the events in greece and some of these spooked financial markets, much like it does, so we continue to monitor the events in europe. third, the housing market remains in the dumps. there are maybe 5 million vacant homes, so i think it seems unlikely that with the reserve army of unemployed homes that it will become rebounding rapidly in the near future. that said, the impact of the housing sector on gdp growth, a major negative drag in 2008 and 2009, its impact on gdp growth in a negative way has lessened if only because construction is at such a low level that even if there remains depressed, that is

not adding negative numbers -- it is just adding zero, not driving recovery as opposed to pulling it down. those three from our perspective are the areas that we continue to look at. on the job market, is clear that state and clear governmentslag the economy six to 12 months. there will continue to be a drag on the employment prospects. not enough to outweigh the private sector, but over the last year, the private sector has added 1.5 million jobs. the government side driven by state and local subtracted 300,000. d of numbers are negative, but approximately of that magnitude. i would close by saying, i think there is a source -- we have

made a transition, a scary one. i think there is an obvious transition we want to make to growth based on more traditional investment, exports, consumption proportional to in time, keeping the saving rates at 5%. that is sustainable and broad base, unlike the ones that we have just gone through. the we put a focus on deficit reduction where it ought to be, in the medium to long term, and that we not mortgage the future while doing that by cutting exactly the wrong things, that we focus the cuts where they need to be. and that we obviously be mindful of those concerns coming. but the optimistic note of this -- warren buffett i got to know in the campaign was a supporter of the president. warren buffett says, in 1900

that dow was at 50. if you ask in 1900, what you think will happen if over the next 110 years we have two world wars, a great depression, a flu pandemic, a series of things -- list all the things that went wrong, all the challenges. they would say, the dow might be down to 20. [laughter] meanwhile, in 2011, we are hovering around 11,000. mine accounted friends, that is not accounting for inflation. it would be somewhere around 1000. our standard of living is up by a factor of eight or 10 since that time. productive innovative capacity of the american economy is virtually unbounded.

also in the economic report to the president, there is a plot of per capita income in the united states from 1820. basically, it is a straight line upward. and there is a downturn, and even the depression, you can see. but it comes back to that line. the thing keeps going. you can see the downturn of 2008-2009 on that chart. but we are getting back on that line and we are growing. for all the hype about china, they could double their in come and we will still be five times more rigid in them. our workers of the most productive in the war. on a ppp adjusted basis, luxembourg is higher than the united states. [laughter] except for luxembourg, we have the most productive workers in the world.

and anybody would trade places with us. everyone would like it. if you compute the ratio -- this is the best kind of statistic. on tractable, checkable. [laughter] if you compute the ratio of the number of people who want to come to your country/the number of people that want to move somewhere else, the u.s. has got the highest ratio by far. you can look that up in the almanac. [laughter] so i think overall, very positive prospects for the economy. we have to grow our way out of this spot that we are in now. do we have -- what is our time frame? we have time for a couple of questions. i would be happy to take them. >> could you use the microphone?

>> this guy is a ringer. i know him. >> you signed off on my dissertation. if you need any help with that -- [laughter] i had a serious question. getting back to what you said about the breakdown between the link between gdp and the unemployment, it is supposed to be a measure of the output of the economy. but sometimes we proxy it by the input, which is not a perfect measure. and that is the issue with health care and education and a lot of our government spending. as a result of the stimulus and the subsidies to state and local government, that accounts for a larger share of gdp than it did a few years ago. is it possible that because of that, gdp is a less meaningful

measure of our economic health than even two years ago? and that could explain the disconnect between gdp in unemployment? >> that is interesting. i have not looked at the data so i do not know the answer. i would try to figure out the magnitude of what the shift to explain it. i would not think the magnitudes of what share of the economy is education would change that dramatically over the two-year period, though it would break down okens loss significantly. i'll take a look to that. >> outside of this room, are we going to have an endorsement by the president of the president's own commission on productivity and growth, chaired by simpson

and bowles? the state of the union in particular, absolutely quiet. >> i do not agree with that. absolutely not quiet. absolutely. [laughter] >> are we going to have a more vigorous enforcement of a really broad program of both revenue increase and cutting of entitlements? >> this is what i try to affect -- address in section c of my remarks. and what i said is that the president stated in the state of the union, he said, ok, on the budget i am going to put forward a budget that brings us down -- he did not say it in these words -- but something like primary surplus, which lowers

discretionary spending since dwight eisenhower. that is a small share of the budget. he applauds the commission. and he says we're not going to do this and a partisan way. the only way will work is if we all hold hands and do it together. we will have to see if people want to do this together or go back to the pulling apart and granma mode. >> in the economic assumptions 2012, you are forecasting real growth -- >> ok. >> forecasting real growth around 4%. you have stated that growth is very important to dealing with

the deficit. as i imagine you are aware, the consensus forecast is somewhat lower for those years. in particular, the imf is more pessimistic than most seeing lasting effects on supply and demand and credit, as has been the case in several countries that have been through a financial crisis. can you explain why you expect u.s. to be different? >> the forecast embodies three parts. the short term, to thousand 11, a 2012. in the medium term, and one is the long term. the long-term growth rate, our forecast is almost exactly what theirs is. it has to be locked in in november so we are actually lower than the private forecasts for the next two years, and then we are higher for the three

years following that. for anyone who says, rosy scenario, we are low and then high, they are high and then low. after the whole period, we're all on the trend rate. our fundamental disagreement is, the potential output being lower in the u.s. because we have gone through a deep recession or do you think potential output remains the same? our reading of the evidence, a lot of people will agree, that potential output is not destroyed. if you look at the graph of income from 1820 to the present, it is a straight line, the depression, he goes down and then they get back on the same line again. that is why we have a medium- term rebound. i have got to go. >> we have two questions.

people like doug holtz-eakin had said some of the reforms are unworkable. a lot like for you to come in on that. the subsidies under health reform are unworkable. a like to comment more generally on implementation of reform. >> implementation of the health care act is not the main focus there, but i do not think the notion of pulling whisked into exchanges, subsidizing people -- pooling risk into exchanges, things like that have been worked internationally quite frequently. i think the fundamental problem of a purely private system where you allow premiums can mean is what we have gone to -- premium

skimming is what we have gone too. a lot people get dropped as soon as they get sick. we do not combine risk, so we have major costs problems. in conception, it is not unworkable at all. we have to make sure the details are right. but i think it is a good idea overall. >> thank you for coming. i will end with the real easy one for you. a few days ago the president talked about the strategic petroleum reserve, considered some release. you mentioned that there will be supply coming from opec. will some of the criteria be about reaching the reserve, and the think about this? >> the strategic petroleum reserve exists to deal with large international supply disruptions. that is why we created it. that is mainly the criteria that

we use for thinking about whether we should use it. the ca chair is not the person that decides to to use that. that is one of our tool kit of things. and we are monitoring the situation. it is nice -- it is completely full. it is in salt mines or something or in different places. but it is not depleted. that is an option that we have. and it is usually tied to the issue of the supply disruption. thanks, everybody. [applause] >> here is a look at our prime- time schedule. started at 7:00 p.m. eastern, the ninth circuit court of appeals hears an oral argument in an oregon-based organizations

challenge to its designation as a terrorist group. then, microsoft chairman bill gates talks about his work as a philanthropist. after that, first lady michelle obama and secretary of state hillary clinton host the annual international one of courage award ceremony. finally, congress holds a joint meeting to hear remarks from the prime minister of australia. >> despite what passes for conventional wisdom in certain circles, there is nothing radical or not american above holding these hearings. >> ascribing evil acts of a few individuals to entire community is wrong, and effective, and risks making our country less safe part >> watch the entire hearing about possible radicalization in u.s. muslim communities, including reaction from viewers, all on line at the

c-span video library. his washington, your wife. -- it is washington, your weight at >> if you missed the hearing on radicalization wheaton muslim communities, which will show the hearing chaired by new york republican peter king sunday morning, here on c-span. tomorrow, booktv continues its live coverage from the tucson value -- to sun festival box. we will have panels on the stories of the american west. also, on "afterwards" the congeniality of barack obama -- the ethnic congeniality of barack obama.

the congressional budget office estimates that the social security reserve will completely run out of funds by 2037 if nothing is done to address the problem. earlier this week, chief actuary stephen goss explained the shortfall and what could be done. held by the national economists club, this is an hour. >> we will share little but of what we know, what we think we know, and have the opportunity to share more of what we should know. that is my objective today. what we think we know is that a shortfall as coming -- is coming. one topic test and of some

interest for awhile is the concept of due trust funds matter? social security is a trust fund- based program and. there are others. the hospital insurance program of medicare is a trust fund- based program. another thing i want to talk a little bit about today and we're looking for your feedback on, is what are their shortfalls in the future for social security? that is something we are not sure everyone fully understands as desirable. the second topic we want to get through it is the budget issue. he have all heard the discussion about social security and the budget, medicare and the budget -- what is the interplay? what is the implications? many people have said many things. there have been people from the administration -- paul ryan, was

on the fiscal commission and now chair of the budget committee for the house of representatives, i have stated surface security is not part of the budget issue. -- have stated social security is not part of the budget issue. we look forward to your thoughts on this. first of all, let's go to the thing that i know best, which is the solvency of social security. looking at social security, it does have trust funds. it is charged by lost. we have board of trustees. we have the commissioner of social security. we had two public trustees. one is formally of the economic commission of the white house in the bush administration. we now have six trusties on staff. their charge, as a board of trustees is to look over these trust funds and their operations

and to monitor them. it is not to come up with ideas for how the law should be changed in the future part of the charge is to then develop with the assistance of the factories -- actuaries to come up with a projection for their annual reports to the converse on the actual status of these programs. -- congress on the actual status of these programs. that is the real work that we do. then, we have a little bit of work on the side when members of congress and others come up with ideas on how to change the program and what the implications of those changes would be. this picture we see it tells the picture of what solvency is for social security. at any moment in time, it is the trust fund in the position to have enough money to pay all the benefits that are scheduled to be paid.

if there is enough money at that moment to pay the benefits in full, the trust fund is solvent at that moment. what we tend to look at is into the future, are we solving it now? the answer is yes. for how long will we be solvent under current law? that is the critical defect. all of our ports are under current law, what will happen in the future. you see the picture. the black lines show you disability insurance. we tend to look them together because when one runs into trouble, oftentimes there are changes in the law to have the other one reallocate the tax rate to make them more similar. the funds are dominated by the survivors insurance trust fund -- that is something like 85% of .ll costs you ca you can see the results and it

is 2037. -- non--solvent date is 2037. that is the duration we haven't of the trust funds will use up the reserves. at that point, we would not have enough money coming into fully paid benefits in real time. we break it down into these separate trust funds. one is better financially, and we project it will last until 2014, but the di trust fund, with current financing and current estimates, is estimated to become exhausted in 2018. will that happen? we will get more into that. you'll notice on the bottom part of the graph, there is a point in 1994 where we were reaching the point where di trust fund was approaching exhaustion, and

the congress relatively easily reallocated some of that fall 0.4% tax rate -- 12.4% tax rate. if they simply change the allocation to put a little bit more of them into the di fund, and it brought them back up. because it is so easy to do something like that, and history tells us it has been in the past, it is why we tend to look them on a combined basis. this is a picture of what solvency for social attorney looks like as defined based on trust funds having enough money to pay benefits and through what period of time, under current law. i should mention, the reason we always do this under current law, and some people say are the laws not going to change? we expect they will, but our job and our trusties jobs are to lay

out the the consequences if it does not change. that lays out when we will be needing changes, and what changes are necessary. the second picture speaks more to the cash flow concept. solvency is all about the trust funds having enough money one way or the other, but it is also useful to look to the cash flow, which is usually defined by looking at the non-interest income, or whatever is coming into the trust fund other than interest you compare that to the cost of the program -- and comparing that to the cost of the program. so, when we compare the income level -- on this graph we have everything expressed in terms of the percentage of our taxable payroll -- our tax base. it is not a surprise that the income level is pretty much a

flat line. the taxes on earnings is a flat 12.4% of all taxable play a role. -- payroll. it grows a little bit over time because we have another component, which is revenue from the taxation of social security benefits, which we actually split. part of that goes to the medicare hospital insurance fund, but that tends to be growing over time as a percentage of payroll, and is causing this red line is to grow ever so slightly. the real story is the blue line. the blue line on this, you can see that we are projecting for about the next three, four, or five years, to be very close to have non-interest income be at the same level as the cost of the system. they will be very similar. that is not a problem. plus or minus a few billion

dollars is not a big deal. remember, the trust fund fees are not in dollar terms right now, the cost is about $2.60 trillion. that is why when the blue curve starts to go up, well above the red curve, we show that the cost of the system is going up, and, in fact, the system will be able to pay those benefits because the reserves will be available to augment the taxes that will be coming in for a period of time. but, there will be a time after which those reserves will be used up, and the remaining taxes will still be coming in, of course, but we will no longer have reserves to dip into to augment the taxes, and we project that would begin 2037. if this plays out, and we use up our reserves, and there is no change in law, and presumptions come true, then we will,

suddenly, during the year 2037, reached a point where we no longer have any trust fund reserves to augment the taxes, and i trust funds have special rules -- they are only allowable to pay out what they have. there is no borrowing authority. it is not like the rest of the government. if they are very segmented. they are separate in operations from the rest of the government. if we continue to reach this scenario, we project that in the year 2037 we would have about 78 cents of tax revenue still coming in for every dollar of scheduled benefits, which means we would simply not be able to pay out full benefits in real time. from most of the rest of the 75- year period, the relationship is quite stable, with about 75 cents coming in for every dollar of benefits. you can see the little lion is the cost of paying scheduled benefits, which, of course,

after tax fund -- trust fund exhaustion is higher, reflects the amount of money. the reality is if they were to exhaust, and we have tax revenue coming in that is less than the benefits, then we would not be able to pay them all. exactly how that would play out has not been determined, and the good news is because we have never gotten there. we will get to that in an upcoming slide. so, we talked about the solvency of the program. we talk about the cash flow that is contributing toward possibly using up the reserves that we have, and having the trust funds become exhausted. another thing that has become a big topic that is much- discussed is sustainability of social security, and a lot of programs. social security, medicare, other programs -- we are concerned, and want to pay attention to sustainability. the question is what we mean by

sustainability? there are two definitions. the first one is just related to the fact of under current law, it is the scheduled amount of revenue based on the schedules taxes coming in going to be sufficient for the schedule of benefits? in reference to the slides, the answer is no. in that sense, sustainability is not achieved if you mean by sustainability that under the current law there will be on of revenue coming in with no change to be able to cover the currently scheduled benefits. in that sense, the currently scheduled benefits are not sustainable with currently scheduled income. there is another concept of sustainability which is more fundamental, which is the system, as we know it in its basic structure, is it sustainable for the future? and, our sons on that, is, of course, there are 535 people up the road will decide which direction the program will go, but if we look at a chart

similar to the one we had before, it shows that as a percentage of gross domestic product, what the cost of soldiers to carry is, and what the income is, you can see that the income is a flat line. the cost, based on schedule of benefits is a different story. it has been operating for many years in the past where it was less than the amount of revenue coming in, and that is why the trust fund has built up, and we have reached a point where they are at about parity between 2008 and 2030, we are seeing this level shift. it is making a big move up -- a substantial move up toward a higher level of cost, up above the level of tax revenue. now, beauty is always in the eyes of the beholder, and the question is does this look as if the system is sustainable or not? some have suggested that it looks as though because these curves are not diverging from

each other, that, perhaps, what can be done is to just make some adjustment in the level of cost to bring it down, or some change in tax revenue to bring it up, get that two closer together, and they could be deemed to be sustainable. others say that a more fundamental change to the nature of the program really would be desirable, or might be in order, and that is why we are so glad we are only actuaries, and we just run the numbers and the the policy decisions to others. this does give you a picture for you to have your views about what you think about the sustainability in the future. paris -- there is clearly a level shift from the cost of social security having been around 4.3% of gdp, shifting over the next 20-30 years to about 6%, although it will be relatively stable from all level

thereafter according to our projections. another question that has often arisen is due the trust funds matter? what is the significance? 50 exhaustion happens by 2037, the commissioner of social security will be constrained to have only about three-fourths as much money available as would be necessary. things would have to be done, and a lot is not specific about what would happen. -- a lot is not specific about what happened. then, u.s. the logical question of has this ever happened? the good news is no, and the reason is obviously because congress and the executive branch has always understood that this would not be a good thing to have social is a dirty becoming exhausted. there be a sudden drop in benefit levels for all beneficiaries. as a result, when we have approached such times in the

past, and happened in 1977 and 1983, wheaton and of having amendments to source 30 that make a big difference. in this you can't -- having amendments to social security that make a big difference. once again, trust funds are the funds there for social security. you can see the trust fund reserves had been about 4.5% of gdp in the 1950's, and they gradually came down until the 1972 amendments to about 4%, but there were some amendments that modified the benefit formula and made it grow faster than it had been growing before, and that sent it up without commensurate increases in the tax rates, and that cost the trust fund to start diminishing. by 1977, it was realized fully and sufficiently that this trend

was not going to be sustainable, and there had to be changes. in 1977 amendments made huge changes in the nature of the benefit formula for social security. actually, the problem that was being faced at that time was on the order of 3 or four times as large as the problem we have law digit now. the 1977 amendments fixed about three-fourths of it at that time. that left more work to do, and a mere six years later in 1983, which came along and further amendments that included increasing the retirement age and many other provisions that took care of the remaining gap that had been left for the 75- year period. we increased taxes somewhat, lower benefits somewhat, the usual compromise. at that point, the level of the trust funds turned around quite dramatically. the trust funds have since that time been growing substantially as a percentage of gdp. that is why we now have the two

trillion dollars -- dollars. this is the key to of the story? well, now we have our projection. the trust fund will not start diminishing. they have peaked. in a minute, we will get to why, which is the most fun part. the projections are the trust fund assets will start going down in the not-too-distant future, and start dropping quite rapidly for the exhaustion in 2037. the periods in which those are being spent down our periods in which the debt of the the dredge -- owed to the trust funds will be diminished, and during that time, the debt will be to the public.

[unintelligible] >> what was the variable in the buildup of that reserve? was it in favor of the demographics? one explained the 4.5% of gdp to almost 18%? >> it was favorable demographics during the time, and that tax rates have been will raise the tariffs basically, what happened was that changes were made. if you look to the 75-year. as a whole, to make sure things would be ok, and the time we did not have the computers we have now, and not able to turn out as a means of the year-by-year basis, and short order, which we now do overnight. at the time, they came up with a solution that would get us fully-financed over a 75-year period, but the timing of the costs against the revenue were

not as well matched as we would ke.e to re i would like to mention something about the sustainability aspect. since the 1990's, we have been incorporated a new concept, and it is not just to look over 75 years to see if there will be an off total income to pay the total benefits, because this is not a pretty picture. we do not want to see trust fund assets dropping like this toward the end. the new regimen, and i'm happy to be able to report to you that all the legislative reports we have dealt with over the last 15 or 16 years now have all taken this seriously into art reject not only keeping this trust fund ratio above zero, but to aim to have that level or slightly rising at the end of the 75- year. . if that is achieved, we declare it has achieved sustainable solvency.

the 1983 amendments did not. they had the extra revenue front-loaded in large part for demographics. this is what we are facing. the money were -- will drop. again, if this were to happen, the benefits would not be payable, and we would only be able to pay 75% if nothing else is done. something will be done. we know there will be more adjustments. >> when the graph is downward sloping, can i interpret that to mean that the social security system essentially drawing money from the trust fund? >> any money that is ever paid out by a social as attorney is drawing on the trust fund because the revenue comes in on a daily basis. >> so if it is positive sloping, there is money going in? >> there is not build up in the fund. exactly.

because this is relative to gdp, if we have no cash flow in or out of the trust fund, and it was just growing within trust, it would be relatively -- with interest, it would be relatively flat. let me get to what i think it is significant and important to focus on. you have seen the shows will carry has in the past, it was corrected, and we're seeing in the future, shortfalls. you are seeing is having a seven basis. you might as quiet is -- you might ask why is happening? we are an aging population. does that mean people are living a lot longer?

here it is a projected. you can see focusing on the yellow band, 65-year-olds, which has been growing all of the, but there is a sudden shift of that growing substantially between 2010 and 2030 or 2035. there is a big change. the share that is 20-64 is about the same, but the key thing is the ratio between the number that are over 65 and working age is changing a lot. we might ask, why is that? well, it is true that the baby boomers born in 1946-1965 are just now crossing the threshold into retirement age, and it will be shifting over that. they are contributing to having the shift to more 65 and older,

and less workers, but that would not be a permanent shift. so, there is something much, much more going on than the fact that the baby boomers were here a relatively large bulge in the population. another thing that is often looked at his life expectancy is. they have been rising. we are showing for males and females the top line is at birth, and we project it will continue to rise. more importantly for the cost of social security benefits, life expectancy has been rising of light. a disaster for men than women. we're having a period of ketchup, which is nice. guys appreciate that. we are expecting that it will continue to rise in the future. this puts pressure on the costs of social security, but the big factor over the next 20 years

far and away without any question is the change in birth rates. change in birthrates -- remember, we used to have on the level of three kids born per woman, is now to the wall, and that is our assumption that we will continue. immigration has made a significant impact on softening the impact on this big drop in birthrates. if we look of the total fertility rate, which is defined as some total of the birth rates for women ages 14-49, so it is kind of age-adjusted, but for the birth rates of all of those ages, add them up, that is a rough estimation for a woman on average to have the average number of births, that tells you how many children you would expect to be born.

the little lion is the recorded fertility rate that as happened historically. you can see that it has been dropping generally. we had the dip in the 1920's and the depression, and i will push back up post-world war two, and there was a shift after that, but we also create another line here, which is a little bit of a modification in adjustment to the fertility rate, which looks at just not the number of children born, but the number that would be expected to survive to age 10. this is from the theory that when people have children it is not just about having babies, but a desire to produce adult offspring down the line. when you make that adjustment, you can see the curve looks different. the number had been stable but for the dip in the boring 20's and the depression -- in all or

rain 20's and the depression, and has been a summer in the upper two's two three for along time, until we get to the end of 1965, and then suddenly the number dropped down. people were taken back to the likelihood that it would drop below two. we would recognize this as being a transitional shift, because woman, at that time, were having less children in their 20's, and more in their 30's. >> ban birth control? >> well, we have the first policy option put on the board here. [laughter] you can see that this happened quite precipitously. so, what are the implications?

here is another view because i promised to say a little something about immigration. remember, there are two ways we bring people into the population. one is that they are born. then, we could inters it to come across our borders. if we have upwards of 1 million people entering our country than leave our country every year, and we have 4 million births in our country every year, clearly, the immigration is the key factor toward augmenting our birth. not all countries have that net emigration. we continue to have positive net emigration in the future is our projection. it is not been a long phenomenon. it is only since 1980 that we have a substantial levels. we expect those levels to continue in the future, and basically, if we add them into the births, and say what would an adjusted total fertility rate be treating the people in the country as lot -- as though they

were birds -ths -- [unintelligible] >> both, legal and illegal. a key thing is whether they come in on a legal or undocumented basis, what gives the most impact to our trust fund solvency and our program financing down the road is not just that they come in. we have people coming in and 2011, getting benefits, that turns out to be roughly a wash. what counts is that they have children. we have more births as a result of the net emigration. those children have children themselves. it is the addition to the population and the multiplication of having more people come in as workers during the period. >> could you evaluate policy

options like title -- tighter border controls? if there was a reduction in illegal? >> there is a valid question. >> my sense is you would not get as much of a bang -- as you what if the borders are still pretty loose. >> we have done aston's for -- estimates for ted kennedy, chuck grassley, and others on specific immigration reform plans several years ago, and we do to estimates while looking at implications for shorter security financing on the basis of various legislation that would impact immigration. it defect our projection in the future. >> if you look good european and japanese statistics, those are much lower. if anything, these are optimistic figures. >> that is exactly right.

japan, as we probably all know, has a birth rate of not two 0.0, but more like 1.5. their population has actually been declining, even the people are living much longer. their total population has been declining because their birthrate is so low, and they have known that immigration. we are having essentially replacement birthrates, and net immigration. so, good point. our problem is significant, but it is worse elsewhere. if that is any solace, that is really good news. if you look at the birth rate, and you add in the net immigration, it makes it more equivalent to 2.3, which means that the birth rate has dropped from three down to two. it is very significant. the implications of all this in terms of the effect on social

security and beyond social sit -- security, we could look at what has happened to the relationship between a number of workers, and the number of beneficiaries. this is similar to a demographic ratio that is often looked at, which is the age of dependency ratio -- the number of folks over 65/the number of working age people. this has the same shape since 1975. i put a vertical line because these statistics before 1975 are not very meaningful because when the program for started back around 1940, essentially all workers were paying in taxes, but in 1940, you have to let working to the will of the last three years, and there were not that many people over 80 that were working into the will of the last three years at that point. it took all while, until about

1975, for the system as a whole to really mature, and the stability. this is what maturity looks like from 1975 to about 2008 or 2009. this ratio of the number of workers divided by the number of beneficiaries was right around 3.3, plus or minus a little bit thraw that three-year. we had a combination of all of those. it made that constant during the period. over the next 20 years, this changed. the level shift, which may not be familiar, the timing of it, we have a big shift of workers to beneficiaries that drops from loss of 3.3 workers per beneficiary, which had been stable from 1975-2008, and it will drop down to about two

workers per beneficiary as we move down to 2037, and remains stable thereafter. it is not a stretch, obviously, to understand this is because of the shift in the birth rates. so, here is an example, and we will go through this in detail because over the years we have talked about the shift from 3 to two children and the impact of the cost of the system, and the numbers do add up, which is comforting to us and all economists, too. our average beneficiary is receiving a benefit something on the order of $1,000 a month. let's take that as a starting point. if we were operating in a world where there was 3.3 workers for every beneficiary, that would be $300 on average each.

that would pave the $1,000 monthly benefit. over the period of 1990-2008, workers were paid more than $300 each. if taxes were coming in more than needed to pay the current benefits. ashley, this stylized example is more like we are having -- actually, the stylized example is more like having $341 coming in for each of these 3.3 workers. we have the trust fund buildup. now, let's test ford to a world where we will only have two workers for each beneficiary. if they continue to pay the same $341 that they paid in the past, which is equivalent to keeping the 12.4% tax rate where it is, the average retiree will not get $1,000 any more. they will get about 680 two dollars, which is a drop in the level of benefits.

this does not add up with our projection that under current law will have a 25% reduction in the level of benefits that could be afforded with current taxes. what is the difference? we have isolated the items that explain the difference. one is between now and 2022, we will have a change that lowers benefits by about 7%. that explains a portion of this difference. another factor is that the revenue from taxation and benefits under social security is actually rising relative to payroll and gdp. the reason for that is because that $25.30 $2 threshold is not indexed. -- $32 threshold is not indexed. a third point, which is a little more subtle, is that if you look at the average benefit for people receiving social is 30

benefits, to the average wage, even though we have an index system up until the point where you become eligible, which is for retirement at 62, they keep in sync with what is happening. however, after you are eligible, the benefits go up with the cost of living. that is what we estimate to be about 1.2% slower per year than the average wage growth. if our distribution stayed the same over time, say 10 years, that would mean they would have the same amount of cost of living adjustments, and will have fallen behind the standard of living because every year that you get a cost of living adjustment, it is 1.2% less, you are falling behind a workers' standard of living. over time, as people are living

longer, our average beneficiary's will have had more cost of living adjustments, and therefore will fall a little further behind the general standard of living of workers, which is the place where we derive our tax revenue from. over time, the increasing longevity lowers the benefit level a little bit relative to the average wage level, and those three factors explain the fact that we have only a 25% shortfall instead of a 32% shortfall. now, with this, let me jump to the second part. i did not how we're doing on time, but i have a few slides on another topic that, of course, is of a lot of interest lately, and that is social security and the budget. how do these interface? you have all, i'm sure, heard a number of people from the

administration, capitol hill, and others, for talk about the extent to which a security is part of the budget and negotiations. wheaton of this from -- look at this from a technical point of view and make observations. first of all, social security is not just mandatory spending. in addition, it is the fact a trust fund program they are all trust fund programs that operate on the basis of dedicated revenues coming in. as a result, the trust fund estimates that our -- assets that are developed, are, in fact, assets that have been loaned to a general fund of the treasury, and they represent that. there are a liability. just like any kind of treasury notes. those are publicly-held debt.

they are marketable. social security securities are not marketable, but they're also money that they have borrowed from another entity. if you look to the two of those together, the trust fund benefits add to that to create the total debt. the question is, what is the significance if it is accounted for in the budget? so security is the principal component of the off budget. there is the opportunity to the '50s as separate entities. the budget focus, one might say, should be on this basis that the on-budget should be the focus of what people are really worried about because socials courteous a separate, the fineable entity operating on its own trust fund basis, and one could say that a total of that, which is what the general fund holds to the public and the trust funds is something that might be of issue. publicly-held debt is most

general, but private debt should be considered. just to give you a picture of the effect of social security hysterically and in the future on budget balances -- historic win the future -- and in the future, and then, social security's impact on the on budget is the red line. it is nothing. he does not really matter. if social security spends or costs, or build up trust funds, that does not affect the on- budget, except possibly one thing -- interest that is owed by the general fund of the treasury to the trust funds is the cost to the on-budget accounts. however, consider all the assets that social security has amassed

over the years, which is the basis, if they have not amassed those assets, and all other spending were as it has been, that darling would have not been to the trust funds, but from the public, and treasury would have to pay interest to the public. because the trust funds have amassed these assets, of -- assets, the treasury has to pay this interest. they do not create a net effect on the on-budget flows. if you look at it from a unified budget point of view, and this is the world of suggesting that we should not worry about the trust funds, but rather the flows from year-to-year. if you look at the flows then, the effect is really just its own cash flows over time.

you can see where it went up and down, and it was very positive during the period that the socks -- trust fund was building, and now it will be dropping down because of the shifting demographics, and we will be spending down the trust funds will -- which will be a draw on the unified budget. when of the key things is that bedrock of the unified budget stops once the trust funds exhaust, because once the trust funds exhaust, there is no longer anything to be tapped into, other than current taxes. if there would be no impact of the unified budget, -- even the unified budget flows would not be impacted under law. a little example of how the on- budget would actually work -- imagined you have access on budget spending, and that would require that whenever we have access to on-budget spending,

more than is brought in in revenue, says there has to be borrowing. both and that a liability to the treasury, and one could be substituted to the other. they're both liabilities. if it is owed to the trust funds, it is old indirectly to the public. -- owed indirectly to the public. now, imagines a world in which we have positive social security cash flow, which we have had for a number of years. in that case, we are building up the amount in the trust funds, which means we are loaning money to the treasury, so there is morris trust fund? been built up, but that means there would be -- more trust fund debt been built up. now, and mentioned a world were now, and mentioned a world were it