Fiscal Commission Public Forum 5 of 7

Chairman Simpson: Go ahead, thank you.
You've got to punch the button.
Veronique de Rugy: Good afternoon, Chairman Simpson, Chairman Bowles,
and distinguished member of the commission.
My name is Veronique de Rugy.
I am a research senior fellow at the Mercatus Center at George
Mason University where I study tax and fiscal policy and the
federal budget process and the implication of government
spending on economic growth.
It is an honor to appear before you today to discuss a matter of
critical importance to this nation.
This commission has a historical opportunity to correct many
years of irresponsible fiscal policy and set us on a path of sustainability.
As you form your recommendation over the next few months,
you will consider many, many proposals.
Several of which you have heard this afternoon.
In order to help you evaluate those ideas I suggest three
criteria that you can apply to those proposals and to your
final recommendation.
Criteria that tell you whether those recommendation will be the
solution to our fiscal troubles.
Remember, recommendation that won't work are not solutions.
These criterias which are explained in detail in my
written testimony are: First, do the recommendations include
real spending cuts?
Second, do the recommendations prohibit exceptions for
political favored programs?
And three, do the recommendation address accounting tricks and
budget gimmicks?
These criteria address the three major issues that put us in our
current state of fiscal irresponsibility --
we have over spent, we have made excuses for our over spending
and we have lied about our over spending.
So first we have over spent.
If the commission wishes to forestall financial catastrophe,
it must recommend that the government of the United States
get to the root of our deficit problem.
Revenue is not the problem.
Spending is the problem.
Increasing revenue alone will not reduce the deficit.
The Congressional Budget Office concluded that the federal
government would need to raise tax rate by substantial amount
to finances projected spending.
From 10% to 25% for the lowest bracket,
25% to 63% for the middle, and 35% to 88% for the highest bracket.
The CBO concluded that these tax rate would significantly reduce
economic activity, create serious problem with tax evasion
and that revenues would fall significantly short of the
amount needed to finance the growth and spending.
These needed tax increase is too great to be achieved through
higher income tax.
Some suggested, then, a value added tax would address the
country's need for revenue.
The data, however, reveal a quite different reality.
A recent study by Florida State University's Randy Holcombe
find that a vat would slow economic growth and that the net
effect on taxes would be almost no additional revenue.
While a vat is a powerful source of government revenue
initially, as it sets in, GDP growth slow and income and sale
tax revenue slow as well.
In other words, the revenue increase of the vat are offset
by revenue decrease in other taxes.
Tax reform is needed, but the fact that we have over spent
remains the main problem.
Second, we have made excuses for our spending.
We have claimed to have cut spending but we have spared
favored program.
For a change to occur, all areas of spending must be on the table
-- Defense, Entitlement, Medicare, Medicaid -- everything.
For the last 15 years, the federal government has sheltered
some 80% of the budget from cuts.
This trend cannot continue.
Finally we have lied about spending.
All governments -- federal, state and local --
have used budget tricks and gimmicks to put off real fiscal
reform and to hide the actual costs of out of control spending.
The use of the emergency supplemental process in the last
ten years, for example, is a good example of these lies.
In the midst of the crisis the American people have changed the
way they address their fiscal situation.
They have reduced their spending.
They've stopped borrowing.
When will their governments catch up?
American people are counting on you to find real solution.
My three criteria should help you choose the best course of action.
Please do not disappoint them, they have been disappointed enough.
Thank you very much.
And I am looking forward to helping this commission as much
as possible.
Chairman Simpson: Thank you.
Mark Rosenbloom: Good afternoon, Chairman Bowles, Chairman Simpson.
Members of the Commission.
Thank you for the opportunity to testify today.
My name is Mark Rosenbloom.
I'm a Senior Policy Analyst at the Migration Policy Institute.
My testimony concerns the effects of immigration on the
U.S. budget and the goals of this commission.
Let me begin by summarizing two facts about immigration,
the economy that have been touched on by some of your
previous witnesses.
First, immigration increases U.S. productivity and
contributes to overall economic growth.
Immigrants flow into productive sectors,
employers adjust to changes in the labor supply,
and the economy produces more goods and services.
A second effect of immigration is to boost real wages for about
90% of the U.S. workers.
This finding is less intuitive, but wages increase because
immigrants compliment U.S. skill profiles, allowing natives to
specialize in higher-paying work.
And because immigrant spending and investment mean that about
one additional new job is created for each immigrant added
to the economy.
So what do these economic facts mean for the work of this commission?
Narrowly defined, immigration generally reduces the U.S.
deficit because immigrants pay more in taxes than they receive
in services.
Even though many immigrants have low incomes,
all immigrants pay taxes, including, in most cases,
federal payroll taxes.
And adult immigrants are ineligible for most federal
welfare and other spending programs until they have had
their green cards for at least five years.
But the overall fiscal impact of immigration also reflects our
policy choices.
So how can we maximize the economic gains for immigration
to take full advantage of these benefits?
Current U.S. policy is not designed to attract the best and
brightest workers or to ensure that employers have access to
needed workers.
And many of our policies work directly against these goals.
Maximizing the benefits of immigration would require a
policy that facilitates the inflow and the integration of
the most talented and complementary immigrant workers.
We also should increase the proportion of immigrant workers
in legal status.
For decades, U.S. policy has tolerated unauthorized employment.
Yet unauthorized workers are more likely to work off the
books, they are less able to take full advantage of their
skills and they suffer wage penalty compared to legal workers.
Inefficiency and lost tax revenues increase over time,
because unauthorized immigrants avoid making long-term
investments in their own human capital or as entrepreneurs.
The second policy question that this commission should consider
is how to reduce discretionary spending on immigration enforcement.
The politics on immigration make it easier for law makers to
focus on enforcement than to address the root causes of
unauthorized migration.
These political dynamics have produced substantial growth in
U.S. migration control budgets, but historically this spending
has proven ineffective at reducing illegal migration.
So I urge this commission to weigh in on the ongoing U.S.
immigration debate which consists of two well-defined
positions with starkly different fiscal implications.
One view holds that the enforcement strategies of the
last quarter century have been the right approach and principle
and that we should simply do a better job of enforcing laws.
Taken at face value, this enforcement first approach would
require substantial additional spending on border and interior
enforcement to shut down illegal in flows and remove millions of
existing unauthorized immigrants with uncertain and possibly
damaging effects on economic growth.
The alternative approach is comprehensive immigration reform
which combines serious migration enforcement with a legalization
program for most unauthorized immigrants and with visa reform
to rationalize family unemployment based flows.
Comprehensive reform is the more fiscally sound approach for at
least four reasons.
Legalization of existing unauthorized immigrants would
increase their families earning power, their spending,
and their tax payments.
In contrast with enforcement first,
legalization would pay for itself as fines and fees would
cover the cost of the program.
These increased tax revenues and fees are why the CBO found that
the 2006 Senate Immigration Bill would have increased net
federal revenues by about $65 billion over 10 years.
Fixing the visa system would also promote long-term economic
growth with higher earnings and tax revenues throughout the U.S. economy.
And perhaps most importantly from a fiscal perspective,
comprehensive reform would create the conditions for
effective enforcement at a realistic cost.
While the system will always require investment and
enforcement, legalization would take hundreds of thousands of
people out of the cost of detention and removal system and
visa reform would give prospective immigrants real
incentives to wait their turn, easing the burden on border
and interior enforcement in the future.
Thank you very much.
Chairman Simpson: Thank you very much.
William McClellan: Chairman Bowles, Chairman Simpson,
members of the commission, also Director Reed, and your staff,
thank you for extending an invitation to the general public
to provide comments.
We enjoy an unusual privilege of speaking before people who have
actually balanced a federal budget and been architects of
welfare reform.
My name is William McClellan.
I do generation planning for an electric utility,
but I am speaking about my own concerns.
Budget Director Orszag has said that the overriding economic
policy of the administration became to boost economic growth
to prevent the economy from falling off the proverbial cliff.
Doing so meant temporarily sustaining higher budget deficits.
I agree with this logic.
I also agree with the same logic in reverse that spending cuts
will cool the economy when necessary.
This is the premise of my presentation.
Chairman Bowles mentioned earlier, when do you pull the
trigger on these spending cuts so that you don't hurt the economy?
I am proposing that when the economy heats up in lieu of rate
hikes by the federal reserve that we have equivalent cuts in
federal government spending.
The fed posts its interest rate increase;
Congress would then have 30 days to enact a package of spending cuts.
If Congress chooses not to act, the fed rate hikes --
the fed rate hike kicks in.
To illustrate why this is needed,
imagine landscapers who want to expand their businesses in Rock
Hill, South Carolina -- Congressman Spratt's district.
They show up at an auto dealership in Charlotte,
North Carolina and looking at five pickup trucks.
A federal agency buyer is there and is planning to buy those
same five trucks.
This is a classic inflationary scenario.
Too much money is chasing the same products and/or services.
So the fed has anticipated this scenario and has raised interest rates.
So who doesn't show up to buy those trucks?
It's the private sector.
Have we dealt with inflation?
Yes.
But at what cost?
We now have a smaller private sector that must support a
bigger government.
If instead we tell the federal agency buyer, you stay home,
come back in a year, then we have the same disinflationary
effect, but now the private sector has a chance to grow.
Over the course of the year, those expanded businesses pay
more taxes to their local school districts,
to their state, and to the federal government.
At the end of a year, perhaps one of those trucks can be
purchased outright based entirely on the increased taxes
from these businesses and their employees.
This would renew state and federal deficits four ways.
It would allow business to continue to grow,
increasing the tax base for all taxing entities.
It would keep rates low and reduce foreign costs for government.
It would keep mortgage rates low,
increasing construction spending, also raising the local tax base.
It would reduce the cost of the federal government directly,
reducing deficits.
If enacted by central banks of Germany, France and the U.S.,
interest rates could be kept low.
So companies -- countries teetering on the brink of fiscal
insolvency could continue their recoveries.
It would be a grievous mistake to toss aside this plan because
the federal government is too big to respond in time.
Businesses can change quickly by cutting back on overtime,
and et cetera.
But we have agents of change like yourselves who can make
government as flexible as we ask business to be.
So what I am proposing is that we have a package of federal
spending cuts that can be implemented in lieu and
equivalent to those quarter point incremental rate hike
increases -- not the federal reserve.
Thank you.
Chairman Simpson: Thank you very much.
Charles Lyle: Good afternoon Chairman Bowles and Senator Simpson.
And members of the committee.
I appreciate the opportunity of talking to you briefly.
My name is Charles Lyle.
I am an independent citizen just making some comments.
I'm keenly aware of the precarious position the Social
Security program is currently under,
and the need to reduce, possibly, some coverage.
When Social Security was started in 1935 under the FDR
Administration, it was not meant as a complete retirement program.
It did not encompass the myriad areas that it currently covers.
As result of these programs and as a result of the changing
demographics, the program now faces a $28 trillion unfunded obligation.
Obviously, some changes have to be addressed to protect these --
this program's futures.
This may included additional taxes, higher retirement ages,
reduced benefits, whatever.
And I support many of these changes.
However, there are two current provisions which I would suggest
are both discriminatory and unfair.
These are the Windfall Elimination Provision --
the WEP -- and the GPO -- the Government Pension Offset provision.
Under these provisions, a person retiring may lose significant
income just at a point in life when a stable income is required.
Currently there are seven states in the United States that had
elected for their state employees not to pay into the
Social Security system.
And these are the ones where the most impact occurs.
A person, for example, works a part of their lives in a
position paying into the Social Security system, and part of --
as part as a state employee.
Their spouse works their entire career in a position paying
Social Security.
Then the spouse dies.
The survivor is entitled to spousal benefits even though
they may continue to work full-time as a state employee.
But the kicker comes when they retire and the need for a steady
income becomes more -- much more evident.
The GE or the GPO or the WEP kicks in and their income is
reduced by a ratio of $2 for every $3 from the state retirement.
I would cite two examples of how this works.
I know these both personally.
One case is with a woman whose husband --
she worked for 30 years as teacher.
And her now deceased husband worked his entire career in the
private sector paying Social Security.
As a result of the GPO, she now draws $12 a month in Social
Security benefits.
The second example is a widow who worked part of her life in
the private sector.
She married.
After marriage, she had a disabled child and she decided
to go back to work as a school secretary to help with the
household expenses.
Her husband worked his entire career in the private sector
paying into Social Security.
When he died, although she was still employed and did not
retire until her -- into her 70s,
she was able to collect all of his survivor benefits.
However, upon her retirement last year,
she came under WEP and her -- his Social Security benefits
were kicked out.
They looked back at her Social Security payments that she made.
As a result, her benefits reduced --
her state benefits were reduced, or the Social Security benefits
were reduced by $800 a month.
I would suggest that this is discriminatory.
It's unfair and needs to be looked at.
Currently there is in the House a House Bill Number 235
sponsored by Congressman LaTourette,
this House bill has been in existence for --
in committee for a long period of time,
and they can't even get it out of the committee.
I would suggest that at the very least,
this should be looked at and at least brought to vote for an up
or down vote.
Thank you very much.
Chairman Simpson: Thank you very much.
Could we have the next group, please?
Chairman Simpson: Let it rip.
Pleased to have you here.
Just introduce yourself and your organization.
Did you hit the button there?
Strong would say, "Hit the machine."
Steve Strobridge: Co-Chairs Simpson and Bowles, and distinguished members of
the Commission.
I am Steve Strobridge with Military Officers Association Of America.
MOAA appreciates your challenge in addressing the
nation's deficit problems.
My focus will be on military and veterans compensation.
MOAA believes strongly that there's a fundamental
difference between social insurance programs open to every
American and military benefits earned by decades of service and sacrifice.
While means testing may be reasonable for the former,
it would be a counter productive performance penalty for programs
like military retired pay which reward length of service and
successful competition for promotion.
Means testing service earned benefits in effect denies that
the service had any inherent value to the nation.
While baby boomer demographics drive Medicare and Social
Security concerns, there is no such problem with the military
population which will remain roughly steady for the next 20
years and then decline.
Those citing military personnel cost growth over the last
decade overlooked that personnel spending was severely depressed
a decade ago.
And the services had serious retention problems following
years of pay raise caps and major retirement and health care cutbacks.
Congress incurred some new costs in addressing those problems,
but that period of rapid growth is behind us and we won't see
major new fixes in the year ahead -- the years ahead.
Many studies have proposed cutting military retirement to
make it look more like civilian retirement.
And a 1986 law change actually reduced retired pay value by 25%
for new entrants.
But as defense leaders predicted at the time,
it had to be repealed 14 years later when it was found to be
causing retention problems.
In short, civilianizing military retirement doesn't work because
military service conditions -- as we see in the newspaper
everyday -- just can't be civilianized.
The unique military retirement benefits are the government's
reciprocal and essential commitment that the relatively
few people willing to accept those arduous service conditions
for a career will be provided a benefits package commensurate
with that extended sacrifice.
Absent the career drawing power of current military retirement
benefits, sustaining the career force through the combat
environment in the last decade would have been impossible.
On military health care, some propose making beneficiaries pay
a fixed percentage of DOD health care costs.
MOAA doesn't support that, mainly because military health
programs are built for readiness, not for efficiency.
The three separate military health systems and three
separate civilian contractors compete independently for
funding and work poorly together.
DOD managers often ignore obvious cost saving options in
deploying doctors in war time necessarily forces patients into
more expensive civilian care.
MOAA isn't saying that health fees should never be increased.
But comparing only military versus civilian cash fees
ignores that military people pay far higher premiums than any
civilian -- but pay them up front and in kind through
decades of service and sacrifice.
MOAA believes that should be acknowledged by limiting the
percentage fee increase in any year to the percentage growth in pay.
No less than important than fees is benefits delivery.
Many military beneficiaries have trouble finding doctors to take
them because the military TRICARE system is one of the
lowest paying health care programs in the country.
One of the most frequently proposed cost cutting
initiatives involves reducing or means testing annual COLAs.
MOAA believes strongly that regular COLA's are fundamental
to sustaining real purchasing power.
Curtailing them dooms beneficiaries --
and especially long living beneficiaries --
to long-term geometrically progressive devaluation of their
earned compensation.
Whatever else may be done in the name of savings,
periodic restoration of full value purchasing power as
measured by the CPI must remain a fundamental commitment of the nation.
Thank you for this opportunity to present MOAA's views on these
important issues.
Chairman Simpson: Thank you, sir, and thank you for your service.
Steve Moorehead: Good afternoon, Chairman Bowles, Chairman Simpson,
members of the Commission.
My name is Steve Moorehead and I'm from Dedham, Massachusetts.
There are three critical issues facing our country: a growing
deficit, reduced personal savings,
and an enormous national debt.
My three part proposal enables Congress to address each of
these issues.
First, it increases taxes to reduce the deficit.
Second, it increases personal retirement assets.
And third, it reduces interest payments on our federal debt and
on our dependence on non-U.S. holders of federal debt.
So, how does my proposal work?
Well, personal income -- tax rates -- would go up.
Taxpayers can choose to buy a U.S. savings bond instead of
paying the tax increase.
The price of the bonds would be tied to a taxpayers bracket,
so wealthier taxpayers pay more for their savings bonds.
For example, if a taxpayer in the highest tax bracket has an
increase in taxes of $50,000, that taxpayer would have an
option to purchase the $50,000 U.S. savings bond for $100,000,
thereby eliminating the increased tax.
Now, by requiring taxpayers to hold these bonds until age 65 at
a minimum or suffer a penalty for early sale,
overall retirement assets will increase.
And these bonds, the revenues from these bonds will go
exclusively to reducing the federal debt.
And the interest payments on these bonds will be lower which
will mean a reduced cost of debt service and less reliance on
federal holders of debt.
And the U.S. Treasury will retain fiscal flexibility under
this proposal because they will have the right to call these
savings bonds at any time and they will have the right to pay
out over up to a four-year period.
So, who are the winners under this proposal?
The deficits improves as tax revenues are increased,
the federal debt is reduced, and the federal debt service costs
are decreased.
The current generations, retirement assets are increased,
and our children inherit a healthier U.S. balance sheet.
Who are the losers?
In the short-term, Santa Claus.
And that would be for the -- for the consumer society.
There'd be fewer presents under the tree as retail America
would suffer under this.
And there would be less private capital available to invest in
our economy.
So, in closing, Congress must once again appeal to Americans
to sacrifice for their country the way we did in our successful
Liberty Bond campaigns of World War I and World War II.
These save for ourselves, save for America bonds could, one,
improve financial literacy across the income spectrum by
increasing the number of Americans who privately own
their retirement savings.
Two, repair America's balance sheet allowing us to better
compete globally.
And, three, build a stronger economic foundation,
because more Americans will have a direct stake in the fiscal
future of our government.
So, I believe the save for ourselves,
save for America bonds have the potential to engage us as taxpayers.
To understand that we are all in this together.
And we all have to save -- sacrifice and save in order to
ensure that the world's last best hope is protected and
preserved for generations to come.
The details of my proposal are in an earlier submission,
and I very much also want to thank you for providing a public
forum for Americans to offer their thoughts.
Chairman Simpson: Thank you.
I had actually read your proposal earlier,
so thank you very much.
Steve Moorehead: Thank you.
I appreciate it.
Janice Gregory: Good afternoon.
And thank you for being here.
Especially on such a long day.
I am Janice Gregory, the current President of the National
Academy of Social Insurance and it's over 800 experts on social insurance.
This commission faces a difficult task and we want to
commend you for your dedication and your commitment.
Governments establish universal compulsory social insurance
programs when insuring against certain risk serves societal purposes.
As Agrarian economies shifted to wage economies,
such programs were established around the world to address the
serious economic insecurity that arises whenever most individuals
work for wages.
Programs such as Social Security introduced the idea of
preventing economic insecurity through participation in advance of need.
This innovation protected families,
avoided disincentives to personal savings,
prevented the thrifty from having to pay for the
improvident, allowed workers to risk new or different
employment, protected mass purchasing power,
and worked in a counter cyclical manner to lessen swings in the economy.
The Social Security law was enacted as a necessary
underpinning in the modern world for individual liberty,
for free enterprise, and for democracy.
Regarding the commission's task, however,
Social Security has run surpluses since 1984 and is not
a cause of the current problems.
While the general fund has shifted from an annual surplus
of 86 billion in 2000 to a deficit of 1.5 trillion last
year, the Social Security program has amassed a reserve
now at 2.5 trillion expected to climb to about 4 trillion over
the next decade.
It is important to recognize that this reserve was built
through dedicated taxes paid by lower and middle income workers
and their employers and invested in special Treasury securities.
These securities are very real obligations of the federal
government owed to America's workers.
Thus for the Social Security program there really is no
short or medium-term challenge.
The challenge for the commission is to put the general fund in
better shape.
Regarding the long-term, Social Security has a modest impact.
It will increase by about 1% of GDP over the long-term.
Compared to some estimates of say 16% for Medicare and
Medicaid, which is themselves driven by increases in national health costs.
Social Security's long-term short fall is .65% of GDP,
which is virtually the same as the costs of extending the 2001
and [200]3 tax cuts for the top 1% of the taxpayers.
If the commission chooses to address Social Security's modest
long-term short fall, I commend the academy's publication,
which will be -- is available to all of the commission's members,
fixing Social Security, adequate benefits,
adequate financing, which includes ideas for revenue,
ideas for benefit improvements and ideas for benefit reductions.
In looking at it, I hope you also keep in mind that under
current law, future benefits already are going to be reduced
because of the increase in age that's pending that comes in
fully by -- in 2022, and because of the increasing bite of
Medicare premiums, today's workers face increasing
individual risk.
With a $14,000 average annual benefit,
Social Security is a modest program, but the most important
source of income for most of our elderly.
And a third of benefits go to survivors and disability.
It is -- it provides a annuity based on overall wage growth in
the economy with 100% survivor and disability protection and
an inflation rider; a modest benefit,
but one far out of the reach of almost all in the open market.
I thank you for your time.
And I'd be pleased to answer questions now or later.
Thank you.
Chairman Simpson: Thank you.
The commission staff did make your document available to us.
So thank you very much for that.
Janice Gregory: Thank you.
Chairman Simpson: Thank you.
We could have the next group, please.
Chairman Simpson: Thank you, go ahead.
Speaker: Chairman Bowles and Simpson, thank you for allowing me to
speak to you on behalf of the 4.6 million federal workers and
annuitants represented by the National Active and Retired
Federal Employees Association.
Regarding your role in trying to achieve fiscal balance,
there are over 2.3 million retirees and survivors who
depend on either the civil service retirement system or the
newer federal employees retirement system.
These two systems differ from state and local public plans and
the largest Social Security program.
Many consider federal civilian retirement similar to other
entitlement programs.
However, there is one significant difference.
Civil service retirement and health benefits are earned by
employees and designed to attract and retain a skilled work force.
They are not modeled on social insurance,
health based or means tested.
Workers make contributions to both their retirement benefits
and their health coverage.
Once they become annuitants they continue to pay the same portion
of their health insurance premiums.
The federal service has always been a program of shared costs
between the agency and the worker.
Regrettably, the public is often misinformed,
believing federal employees get free or overly generous benefits.
In fact, federal workers participate in the Social
Security system under FERS, redesigned in 1986 to provide