THE WHITE HOUSE
Office of the Press Secretary
AS PREPARED FOR DELIVERY
REMARKS BY GENE B. SPERLING ASSISTANT TO THE PRESIDENT FOR ECONOMIC POLICY THE NATIONAL PRESS CLUB JANUARY 29, 1999
In his State of the Union address, President Clinton launched a national debate on how our country should best allocate resources during a remarkable period of prosperity and surpluses. The President's fundamental message is a clear one: with the budget deficit cured, but a long-term retirement deficit looming, the fiscally and financially responsible way for this nation to deal with this period of surpluses is not to consume them today and turn a blind eye to the retirement challenges of tomorrow, but rather to save and invest them. By doing this, we will pay down the debt and lift the burden of much of the long-term retirement deficit off the next generation.
While politicians are often criticized for supporting live-for-the day fiscal policies, the President's plan essentially reserves 90 percent of our surplus for the next 15 years for savings to address the long-term retirement challenge. The framework that the President put forward allocates 62 percent -- or $2.8 trillion -- of the projected surpluses to Social Security and 15 percent -- or $686 billion -- to secure the Medicare trust fund until 2020. Even the President's $536 billion tax relief proposal -- his Universal Savings Accounts or USAs -- is specifically designed to promote long-term savings among those moderate and low-income families who are least able to save and currently receive the smallest incentives to save from our tax system. In sum, of the $4.4 trillion in surpluses allocated in the President's framework, $3.4 trillion or 77 percent is allocated to be put towards shoring up the Social Security and Medicare Trust Funds with another $536 billion allocated for incentives to increase private savings through the USA accounts. The remaining 11 percent would be dedicated to military readiness and such further investment in education and research that are critical for future growth and productivity.
While I would like to make sure that I address some of the parts of the President's proposal that have raised the most commentary, I want to start by making clear why the core of the President's proposal is as unambiguously pro-savings, pro-debt reduction, pro-long-term growth as any plan ever put forward by a President.
At its core, the President's proposal sets aside nearly $3 trillion dollars over the next 15 years in projected surpluses for debt reduction and then allocates a portion of the benefits to shore up the solvency of the Social Security and Medicare Trust Funds.
Before any one gets lost in arcane budget accounting debates, it is important to understand the sound and substantial economic logic of the President's proposal: rather than consuming the surplus through new spending or new tax cuts, the plan will pay down nearly $3 trillion of our national debt, resulting in higher national savings, lower interest rates, higher investment, higher growth, and higher revenues and will, therefore, improve the fiscal and financial capacity for our nation to meet its unkept promises to future Social Security beneficiaries.
The impact of the President's plan in reducing the national debt is dramatic. Consider the following: in 1981, when Ronald Reagan took office, the debt held by the public was 26 percent of our national income. By the end of 1992, that number had nearly doubled to 50 percent -- so that the government's debt amounted to half of our annual income as a nation. Through fiscal discipline -- the 1993 economic plan and the bipartisan 1997 Balanced Budget Agreement -- we have turned our debt situation around. Right now, our national debt is 44 percent as a share of the economy, and under the President's plan will fall below 26 percent by year 2006. In short, within seven years, we will have wiped out the debt -- measured as a percent of the economy -- that was run up during the Reagan-Bush years. And by the end of the President's 15-year framework, the national debt held by the public will have fallen to 7.1% of GDP -- its lowest level since America entered World War I in 1917.
For all the debates about budget accounting terms today, if a Republican President had come forward with a plan to nearly eliminate the publicly held debt in 15 years, the only debate would be whether to build a statue or a pyramid on the mall to honor him or her.
It is no wonder that whatever their disputes on certain aspects of Social Security reform are, some of the most prominent budget experts in town, Alan Greenspan, Bob Greenstein, Robert Reischauer and Henry Aaron, agree on the fiscal wisdom of the President's effort to reduce our national debt and a lock-box through essentially a debt reduction allocating much of the benefits to Social Security and Medicare.
As Chairman Greenspan said yesterday and I quote, "[I]ncreasing our national saving is critical. The President's approach to Social Security reform supports a large unified budget surplus. This is a major step in the right direction in that it would ensure that the current rise in government's positive contribution to national saving is sustained."
Despite this support, some members of Congress have rushed out to criticize this part of the President's plan on the fundamental misunderstanding that the President was somehow increasing our existing Social Security obligations or making a "double obligation" to Social Security.
Let me explain why that notion is misguided. We as a nation right now have in place a promise to pay Social Security benefits to America's workers under an existing benefit structure. That promise exists today, but, as we all know, it is an unfunded promise as we get past the first few decades of the next century.
When people suggest that the government is double obligating, it gives the impression that we are increasing our obligations to retirees in the future. For example, they seem to think that we owe a retiree Social Security benefits in 2035, but are now increasing that obligation to include a new toaster, a calender and a rental car for a week. This is simply not the case. The president's plan is not creating any new promises or new obligations. He is simply seeking to pay down the debt and increase our national savings rate -- so that we are strengthening our fiscal and financial capacity to meet our existing Social Security promise for a longer period of time from 2032 to 2055.
Let me provide an example: A worker today with a high school degree makes $20,000 per year, but has $50,000 in credit card debts. This worker has additional debts of $10,000 per year that come due after 2032. The worker's wealthy aunt or uncle leaves him $100,000. The worker now faces two choices: he or she could simply consume the $100,000 now and remain in a terrible position to pay his debts 30 years from now. Or, that worker could save and invest the money, paying off his existing $50,000 credit card bill and investing $50,000 in an education that allows him to make $90,000 a year. That would put the worker in a dramatically better financial and fiscal condition to pay-off existing obligations while still maintaining a high standard of living.
The worker here has not increased his or her obligations or debts; he has simply saved and invested wisely so that he has a greater capacity to pay back his existing obligations. That is similar to the President's proposal for Social Security.
By saving and investing the surplus, the President's plan dramatically reduces our debt, increases our savings, lowers interest rates, and spurs investment to increase our nation's wealth, and thus, puts our government in a position to better meet our existing promises -- not new ones.
The fact that one aspect of the President's plan allocates new bonds to the Social Security Trust Fund when it pays down the debt does not increase our obligation -- it simply gives Social Security after 2032 a first call on some of the dividend created by debt reduction so that we can keep our existing promises to Social Security beneficiaries past 2050. Now some may say: "I support the President's plan to reserve a large amount of the surplus for debt reduction, but why allocate additional bonds to Social Security, when you can just pay down the debt without taking any additional steps?"
Let's call their case the "debt-reduction only" plan and let's call the President's plan the "debt-reduction lock-box for Social Security." Both plans would have precisely the same effect on the economy until 2032 because both plans would have the precisely same positive impacts on national savings, on capital stock accumulation, on lower private interest rates, and on lower debt service costs. Advocates of both plans agree that this degree of debt reduction will create debt reduction dividends. Paying down our debts today creates a small pot of gold for tomorrow. So what's the difference? The only difference is this: In the President's "debt-reduction lock-box for Social Security" plan, when we lock-in debt reduction today, we also allocate bonds to the Social Security Trust Fund that ensure that Social Security will get a portion of that debt-reduction dividend so that we can meet existing Social Security promises after 2032. In the "debt-reduction only" plan, the allocation of the dividend is left completely open for future Congresses, and there is no commitment to extend Social Security even a day longer.
Now some may disagree with our option of locking in the benefits of debt reduction for Social Security, but let's at least agree that it is not about double counting or double obligations. That's a specious argument. It is simply a decision about whether or not we decide today to lock in some of the dividends from the extraordinary debt reduction to fulfill promises we have already made about the future.
We are ready and willing to work with both parties in Congress on the effort to craft true bipartisan Social Security legislation. We simply must work in a bipartisan way to make the tough-minded but sensible choices that will extend the solvency of Social Security for 75 years. However, I do want to make the following challenge to some of the Republican critics who asked the President to come forward with a specific outline, but who then have only offered criticism, without putting forth better ideas. The independent Social Security actuaries who have analyzed plans during Democratic and Republican Administrations for the past three decades have determined that the President's plan extends the solvency of Social Security until 2055. Let those who only criticize come forward with how their opening bids lengthen the life of Social Security until at least 2055 while meeting all of the principles and tests that they have applied to the President's proposal. A few can meet the test. But only a few.
Second, I would challenge anyone to show how they would extend the Medicare trust fund before they come forward with either a popular consumption oriented tax cut or new spending measures.
The President set forth a comprehensive economic agenda and explained to the country exactly how he would allocate the surplus. But many people today put out proposals to cut taxes or spend new money without explaining how they would use the surplus to extend the life of Social Security and Medicare or to ensure that our nation was not draining away resources that are needed help with military readiness and critical education needs.
The President's plan also proposes that we invest a portion of the surplus in the market to strengthen Social Security. We took very seriously the concerns that this investment option not allow any undue political interference. The President's plan would mean that on average, the Social Security investment would total less than 4 percent in the market -- 60 percent less than what state and local pensions control today and roughly as much as Fidelity controls. Second, the President's proposal insists that all investments be made only by private sector managers after a competitive bidding process. If for example, there were four or more private sector teams overseeing this investment, none would control more than a single percent of the market. Each private sector manager would be required to engage in the most broad-based passive indexes without any option to pick and choose stocks day-to-day so as to ensure there is insulation from political interference. Indeed, this investment option allows us to extend the life of the Social Security trust fund another 6 years. It also accounts for one-third of the improvement in the actuarial balance achieved under the President's proposal.
Finally, I'd like to say a few words about the President's $536 billion tax relief plan to create USA accounts.
During the President's year-long debate, he heard the case for two very powerful principles. One was the need to provide additional savings for the tens of millions Americans who do not have adequate savings or employer provided pensions and therefore are not enjoying the full benefits of higher returns and wealth creation that more and more middle and upper middle class Americans are reaping today.
But the other principle the President heard over and over again was that Social Security should remain the one critical leg of the retirement system that is a rock-solid defined benefit plan that people can count on no matter what. We felt that by having tax relief to create USA accounts outside of the Social Security system, we could keep these two powerful concepts in harmony rather than in tension.
The structure of the President's USA Accounts are designed specifically to improve our tax system's inadequate incentives for savings for low and moderate income families. Currently, we have a tax incentive structure for savings that provides generous incentives for Americans in higher income brackets. Americans in the 31 percent bracket essentially receive a 50-70 percent subsidy for every dollar they put in. Yet that subsidy is not even 20 percent for the 70 percent of Americans in the lowest income bracket. And for the many American families with virtually no income tax liability, there is almost no tax incentive to save at all.
It is hard to justify this as a complete and rational savings policy. Americans in upper income brackets clearly have a higher propensity to save than moderate or lower income Americans. Furthermore, tax incentives for more well-off Americans are more likely to simply lead to a shifting of existing savings from non-tax-subsidized to tax-subsidized accounts. It is families with low or moderate income, families that are under most pressure to spend all of their income on daily necessities, who need stronger incentives to save.
USA accounts seek to remedy this imbalance in our incentive system for savings by offering a flat tax credit for all working Americans up to some income level. This plan would ensure that most working families get a contribution for savings no matter what their tax liability. Then, we would add a progressive match so that there is a higher tax subsidy (or 'match') for families at lower income brackets who need stronger incentives to save.
In setting forth this proposal, the President seeks to empower the tens of millions of Americans who have inadequate individual savings or no employer-provided pension. We believe that is the right way to provide incentives for individuals to become part of the culture of savings and wealth-creation and to ensure that more Americans enjoy the higher returns that can come through equity investments and accumulated returns.
USA Accounts together with the President's commitment to Social Security, Medicare, as well as his continued commitment to increase the skills of our people -- reflects a commitment to launch the era of surpluses with the same commitment that helped create them: fiscal responsibility, savings for the future, and investing in the productivity of our people.