Press Briefing by National Economic Advisor Gene Sperling

The Briefing Room

4:20 P.M. EDT

MR. SPERLING: Back from the depths of financial modernization. I want to discuss the President's radio address tomorrow. In his radio address, the President will announce that he will be sending up to the Hill early next week his legislation for a Social Security lock box that will dedicate -- that will ensure that all of the Social Security surpluses go to debt reduction and that the interest savings that result from that debt reduction will be transferred to Social Security, starting in 2011.

And that this plan -- we've received the preliminary actuarial report, which we will also release early next week, from the Social Security actuaries -- would be a substantial down payment on Social Security reform, extending solvency to the year 2050.

Let me say a couple of things about this plan that we're putting forward. Over the next 15 years, Social Security surpluses are supposed to amount to $3.1 trillion. Under the President's plan we would dedicate that $3.1 trillion to debt reduction, as part of his overall plan to pay off the entire publicly held debt of the United States by the year 2015 -- which, as you've heard the President say many times, would be the first time the country would be free of external debt since 1835.

What the President's -- what the plan does then, however, is important to focus on. When we pay down -- when we decide that, unlike the past, when we essentially spent Social Security surpluses on other government necessities or spending, that money, because it was spent, was obviously increasing the publicly held debt as opposed to reducing it.

What we're doing is saying that when we now change courses and choose to use the Social Security surplus to pay down our nationally, publicly held debt -- we all know that one of the strong benefits of that is that it reduces the amount of interest the federal government has to pay. So, for example, in the year 2011, if we were in our normal pattern that we've been over many years of spending the Social Security surpluses, we would be projected to spend $163 billion in 2011 on interest debt service, $163 billion in 2011.

If, however, up to that point, we have dedicated all the Social Security surpluses to debt reduction and, therefore, slashed debt by $2.1 trillion, the interest payments would only be $56 billion. Therefore, the difference between spending the Social Security surplus and using the Social Security surplus to pay down our national debt is a difference of $107 billion of interest costs in the year 2011 alone.

Now, that savings, that $107 billion in savings, is registered as part of the non-Social Security budget. And those savings can be used for a variety of different purposes. If you extend the Republican tax cut plans out, as they've made very clear, they would spend all of the non-Social Security surplus on a tax cut and that would, if they continued their plan, continue on for many, many years. Therefore, that $107 billion of savings in 2011 that come from Social Security debt reduction would be used to essentially fund a tax cut that is $107 billion larger.

What the President's plan does is say, let's take that $107 billion of interest savings that come from paying down the debt with Social Security surpluses and let's dedicate those benefits not to new spending programs, not to a new tax cut; let's dedicate those funds to extending the life of Social Security.

So what we do, and it's quite simple, is that is $107 billion of savings that we have that we could choose to spend in 2011. We could spend it by giving it back to people in a tax cut, we could spend it on a program; or we could say, let's take that extra $107 billion and pay down the debt further with it. And by saving it by paying down the debt we then are saving, for every additional dollar that we pay down the debt as opposed to spend, we are saving an extra dollar that can then be dedicated to Social Security later, when it is needed, to make sure Social Security does not become insolvent.

So to give an example, between 2011 and 2015 there is a total of $544 billion of interest savings. When we say that we dedicate that to Social Security, what that means is that we're going to, instead of spending that $544 billion or giving that $544 billion a tax cut, we're going to pay down an additional $544 billion of debt with it. So this plan is a stronger debt reduction plan because we're paying down additional debt and because we're saving $544 billion, we are saving money now -- or saving money in 2010, 2011, 2012 -- so that that money is available to help keep Social Security solvent until 2050.

So, quite simply, there are many visions of using the Social Security surplus to pay down the debt. What people have not been so straightforward about is that there have been several so-called lock box proposals out there that say they're a Social Security lock box, but they do not contribute a single penny to the Social Security surplus, or a single day to the life of Social Security. If they worked, they would pay down the debt. But the interest savings, the benefits from paying down the debt, particularly in the Republican plan, are allocated for another purpose, for a tax cut. We're saying, after we've had a decade of paying down our national debt, let's take the interest savings from that and save them further, so that we can keep Social Security strong until 2050.

I want to make clear on a couple of things. One is that this in no way suggests that we are any less committed to long-term Social Security reform that would go to at least 2075 and, as we've suggested, would fix the earnings test and take substantial steps to reduce the amount of poverty among single and elderly women.

What this does represent is a real significant down payment that we could make on Social Security reform this year that would further contribute to making our country debt free by 2015. And I think that if you went to the American people and you said, here's a Social Security lock box, but all of the interest savings from it go to other purposes and it doesn't contribute a day to the life of Social Security; and here is a lock box that does dedicate interest savings from Social Security debt reduction to Social Security and it extends solvency from 2034 to 2050, it would be a fairly simple choice.

Now, we're going to put this legislation up on Monday and we would hope that it would get serious consideration for passage this year. There is a lot of talk about debt reduction. There's a lot of talk about saving Social Security; here is an opportunity to do so. A lot of people have said they think there should be some form of lock box. A lot of people have said we need to protect Social Security. Here is a plan that would commit us to paying down the national publicly held debt by 2015, protecting all the Social Security surpluses and getting a significant down payment on Social Security. If we could get this significant down payment now, we have done something historic and important in the time remaining and we could still come back next year, or in the future, to get the rest of Social Security reform.

Q: Would this begin this fiscal year or in fiscal year 2001?

MR. SPERLING: In fiscal year 2000. Dick?

Q: Does this plan in any way differ from what you laid out, I guess it was early in July when you laid out your new budget proposals? Second, does it maintain a plan to put some money into real assets, into equities as part of the trust fund?

MR. SPERLING: In terms of -- well, I think those two questions are related. What we're essentially doing here is putting the details, the actual legislative language, so that we can get actual scoring from the Social Security Actuary, which is to 2050, and that we can send this up for consideration for passage this year.

We have adjusted this in a few ways, in a couple of ways, for the following purpose. We under-served that this late in the year, we are probably not going to be able to have the full level of discussion and analysis on all the different aspects of Social Security reform. So what we have tried to do is present what we feel is the most solid, bipartisan, hopefully uncontroversial proposal to lock away the Social Security surpluses for debt reduction, and use those interest savings to extend the solvency of Social Security. In doing that, Dick, we therefore are going to put it up without equity investment.

With equity investment, the solvency, instead of being at 2050, would probably be at 2053 or 2054. We still believe that there is a lot of merit to considering how to get higher returns for Social Security. But in the interest of having a bipartisan down payment on Social Security, we would focus just on using these funds for debt reduction, without any equity investment, and transferring the interest savings for further debt reduction and helping Social Security.

The other difference that we have -- again, in the hope of having this passed this year -- is that in the past we had a large component of our Medicare transfers for solvency in our lock box. In this particular lock box, we are simply reserving a third, one-third of whatever the on-budget surpluses are for Medicare. In other words, we are not trying to allocate the exact use of those, because we know we're in the middle of Medicare transfers. But it is important that under plans such as the Republican plans that use all of the on-budget surplus for a tax cut, they would not be able to have any money set aside for Medicare.

I think this year, as we've seen the debate on the BBA measures from '97; as we've seen the fact that people feel that however much good we did in '97, that maybe some of the savings went a little too far -- it should be clear to us we cannot rely on doing Medicare reform simply by further shaving or cuts on providers. And, therefore, it's important that we do allocate some of these funds for solvency.

So I would say two main differences are that we do not put equity investments in this so that it has greater chance of bipartisan support; and, also, we reserve a third of the on-budget surpluses for Medicare. But, again, so that this can have chance of passage these year, we do not seek to allocate what the exact use of those Medicare funds would be.

Q: Gene, why a third? That seems just like an arbitrary marker. Why a third?

MR. SPERLING: Why a third? A couple of reasons. One, that was -- let me give you three reasons. One, it is fairly consistent with the numbers that were in our original plan. Two, the measure of the third was the Conrad -- I believe Conrad-Lautenberg proposal among the Senate Democrats and so it is a proposal that has gotten some strong support in the Senate in the past. And, third, being quite honest, I think we've seen that nobody knows exactly what the on-budget surplus is going to look like in the future years, as we're seeing the difficulty Congress is having meeting the needs of this year and the efforts by some to push funds into another year.

In that light, it is probably more responsible at this time to simply say that a portion of the surplus, whatever it is, should go to Medicare, recognizing that Medicare is supposed to go insolvent in 2015. If you picked out a hard number and budgetary numbers changed, you could be inadvertently squeezing out what's necessary for domestic or defense spending.

Q: Gene, just last week the Administration was saying the CTBT didn't get a fair hearing because there wasn't enough time. Republicans are more than likely to say this is another situation where there is not a lot of time left to have extensive hearings and, likely, will also accuse you of trying to mount some sort of a political effort here to hem them in further on budget talks. How would you respond to something --

MR. SPERLING: A couple of things. One is, we've put forward this basic proposal in the midsession review so the basic concept and idea of this proposal and a substantial amount of the details have been out since the summer. Secondly, we spent the last couple of years asking for a dialogue and debate on Social Security. We did quite a lot that we could do as an administration, including in '98 holding bipartisan forums across the country. Third, the Republicans have professed to be for a Social Security lock box. They have professed to be for saving this for debt reduction. Therefore, it is not a new idea.

What they are not being very clear about with the American public is that I imagine most people who hear the phrase "Social Security lock box" think that Social Security might be made a single day or more better if they were to lock away those funds. I think most people would be surprised to find out that the Republican proposals don't add a single day to the life of Social Security; and that all of the interest savings that come from the debt reduction, from the Social Security surpluses, that happen after 2010, would likely be allocated to a larger and exploding tax cut instead of to actually helping the solvency of Social Security.

And let's remember -- what's the basic concept? The basic concept is that our essentially pay-as-you-go system in Social Security will have a hard time being viable in the future, because now it is viable because we have three workers for every one retiree. If you get to the future, and we see there's going to be two workers for every one retiree, we see that our pay-as-you-go system would not work and would become insolvent.

And so in some way or another, our goal is to in some way additionally save and pre-fund Social Security -- save now, so that there are more resources available to take care of the Social Security needs in the future without having to raise taxes or cut spending on the next generations. If you're saving money, if you're saving the Social Security surplus for debt reduction, but then the benefits of that you're allocating somewhere else, and not for Social Security, you're not really coming through on your commitment.

I think if you have a public discussion on this, I don't think there is any question that the American people would want something called a Social Security lock box, something called a debt reduction lock box for Social Security to actually benefit Social Security. That seems fairly reasonable.

Q: What happens, Gene, as we look at the shifting demographics, if there's a couple of bad years with the economy between now and 2011? How does that change the whole scenario? You've either got to break into the Social Security surplus or add debt.

MR. SPERLING: First of all, the -- in many ways, at least macro economically, the fact that there could -- you know, despite the nice and long expansion we've had -- be downturns in the future, a significant commitment on debt reduction should help the country deal with such times in the future for at least a couple of reasons. One, by having greater savings, higher -- lower interest rates, higher investment, greater capacity, you're more likely to keep an expansion going.

Secondly, to the degree that you did have a downturn, very low debt reduction, very low levels of debt put the country in a far better situation to have either looser monetary policy or more expansive fiscal policy when the country needs it. And I think if you remember Chairman Greenspan's testimony on why a large tax cut may not have made as much sense now, he said if we save it now, we will pay down the debt now -- that doesn't mean one can't use those funds eventually but this may not be the right time. You might want to save them for different times.

So I think that debt reduction and having this type of plan increases the chances that the economy will stay strong and put you in the strongest situation possible to deal with a downturn, and gives both the federal government and the Fed the largest number of tools possible.

Q: How much longer do you need to get a really good head start on that? Do you need a couple, three more good years?

MR. SPERLING: On -- I'm sorry, which?

Q: To get a really good start on that scenario.

MR. SPERLING: Well, I think we already have. I mean, this is -- I mean, we've had a dramatic turnaround.

Q: I mean, look at the budget debate going on right now, though. We're not there yet. Do we need a couple, three more good years to really get rolling on this? What do we need?

MR. SPERLING: I'm not sure I know what you mean by "getting rolling on this." I mean, when we came --

Q: Your scenario about debt reduction leads to all of the other great financial --

MR. SPERLING: Well, hold it, hold it. But I do think this is a continuation of a process. When we came into office, the deficit was supposed to be over $400 billion this year. And interest rates were probably projected to be 7.5, 8 percent this year. What we've had instead is a situation where you're having a unified surplus of over $100 billion. That means there's $500 billion more available for private capital markets than were expected when we took office. There is no question that that is a main reason that we've been able to have such high growth, high demand for physical capital, high demand for housing and, yet, see interest rates grow.

There is significantly more capital available and so the cost of money and interest rates is lower because the government, rather than crowding out the capital markets, taking money out, is actually paying down the debt and putting more money back in. And that's what we mean when we say that we feel there has been a virtuous cycle of deficit reduction leading to lower interest rates and, therefore, leading to investment and greater capacity in the economy that has allowed us to grow without hitting the walls or inflation that's often ended expansions in the past.

I think by continuing it, the deficit reduction, and continuing fiscal discipline, what I would say is that it increases the chance that we can control our own destiny and that we can keep the expansion going. And I think the longer we keep the expansion going that has substantial benefits for our work force, for people, but also for getting the debt down. In terms of how many years, you know, people can have different judgments about what is the right level of debt. The President has set an ambitious target, which is to make us debt free by 2015. Even people who think that that might be quite an ambitious goal might still feel that it's a positive goal to aim for, because perhaps if we aim for it, we may achieve it. But we'll certainly be in a better situation than if we just give up our fiscal discipline now.

I think that we wanted very much this year, and want this year to be a year that we live by the rule of not going into Social Security surpluses. The problem is, is that even though we have unified surpluses, to meet that test this year people have got to make some tough choices. They've got to do some hard things. And so far, the ones that we have presented have been rejected, and the Congress has chosen to simply go into Social Security surplus and find different ways to mask that.

Q: Gene, could you talk about the $163 billion debt service figure? How do you calculate that, and would that be adjusted as you pay down the debt further?

MR. SPERLING: The $163 billion is the number of what debt service would be in a scenario in which we spent the Social Security surpluses. What you're trying to do is ask, what contribution to interest savings is paying down the debt with Social Security surpluses making?

So what you would do is say, what if we took the amount from Social Security surplus every year and we spent it, as the country often had, what would our interest be? So that is kind of one side.

The other side, which is what we are proposing, is that all of that, those funds, go to paying down the debt. So the difference, if you are trying to describe to somebody what difference does it make for the country in terms of interest costs from spending Social Security surplus versus using it to pay down the debt -- the answer is in 2011, $107 billion in savings, because it would be $163 billion in interest costs if we spent the Social Security surpluses and it would be only $56 billion if we used it to pay down the debt.

Q: It's not really spent. You're borrowing -- spending the Social Security surpluses. That's not really accurate, is it? That's not what you're doing right now, spending them. You're borrowing against it.

MR. SPERLING: No, you are -- you are taking funds that come from the surpluses, from the payroll taxes, and you are choosing to use it for consumption at this time, as opposed to paying down the debt. So whatever phrase you want to use, you are taking the -- think of it this way. More money comes in from the Social Security payroll taxes. That extra money comes in, ideally, to help us pre-fund future Social Security costs.

If we are consuming that extra money, then one would say that defeats the purpose. If we are using the money to pay down the debt then, rather than consuming it for today, we are saving the money so that that money is available in the future.

Q: One technical question and one political question. The technical one is, I'm having trouble understanding how, if you're not using equity investment, what mechanism you use to claim an extension of solvency of Social Security, since all you're doing is eliminating public debt that --

MR. SPERLING: I'm sorry. I'm sorry. Let me make that clearer then. So in the year 2011, where we're saying that there is $107 billion of interest savings because of paying down the debt with Social Security surpluses. You would say -- so, let's just say hypothetically that that meant that there was $ 1 trillion, let's say in the year 2011 -- I don't know the exact number but, for simplicity purposes, there's $1 trillion of on-budget surpluses in that year. Okay? You could spend all $1 trillion of those dollars on spending, or giving it to people in a tax cut.

We would say that you would take $107 billion out of that amount, and you would pay down the debt with it. For every dollar that you pay down the debt, you would transfer a bond to Social Security. But the important point is, you're only giving Social Security another dollar claim in the future to the extent that you're saving it. So in other words, it would be as if you had $10,000 in your -- you owe $10,000 to your credit card, and you wanted to make a $5,000 purchase five years down the road. You had $5,000 now, and you could spend it. Or you could pay down your credit card so that you could afford that $5,000 down the road.

So what you're doing is, you're taking that $107 billion and you're saying, that money, that $107 billion that we think is savings coming from Social Security, is not available for consumption of any kind in the year 2011. It's not available for spending consumption. It's not available for tax cut consumption.

So you would take that $107 billion, and you would then use $107 billion of on-budget money to pay down the debt even further. And you would then transfer $107 billion to the Social Security trust fund.

Q: Would that be in the form of yet another form of IOU against a future claim on government revenues? There's no real asset. How do you claim an extension in solvency?

MR. SPERLING: Because, Dick -- one could just -- take the year 2011. One could just say, I'm going to put $100 billion into the Social Security trust fund. That's it. I mean, bonds. Then you'd have $100 billion of claims in the future. But you would just be shifting those claims to the future; you would not have done anything additional to save to meet those. That would be illegitimate.

But if you take $100 billion and you say, I'm going to -- rather than consuming this money this year, I'm going to pay down $100 billion of debt so that I can use $100 billion in the future for Social Security, you are eating what you sow. You are only transferring a dollar, there, to the degree you have saved an extra dollar by paying down our national debt.

I mean, one could imagine that you took that $107 billion, and you put it in a bank somewhere and you just held it until 2034, and then used that money for Social Security at that time. The only difference is that, as long as you have a debt, the way you would do that is you would first pay down your debt and that way you're also saving money so that it's available later.

Q: All right. How much is all of this just a reaction to the fact that the Republicans are running ads whacking people like Earl Pomeroy and --

MR. SPERLING: You know what, Dick? I'll tell you exactly what it's a reaction to. We put out a plan in January that was essentially a debt reduction plan that said, let's pay down the debt and use the benefits from debt reduction to extend Social Security solvency.

When we went out and spoke to people, what we heard was the following. We heard, we very much like the concept but it's been -- it's hard to explain to people. They said, can't you do something like you're doing now, where you can show people more clearly that you're paying down the debt and using the interest savings from debt reduction to help Social Security.

So we went back and, for the midsession review, we constructed the lock box, our Social Security plan, just that way. We still had the same concept of paying down the debt, only this time we only put a dollar into Social Security obligation to the degree that there is an extra dollar that we are paying down the debt with from the on-budget surplus. And that has been our plan.

I think that, as this discussion has gone on, I think it has made this ripe and I think that this is a chance, this is a chance for both parties to actually show the American people that they're willing to do a down payment on Social Security reform, that they're willing to take some tough steps to lower our consumption on spending and tax cuts right now, so that we are saving more to meet the Social Security crisis in the future. If we don't do this, then we are just putting those burdens on a future generation.

And if somebody -- and I will answer a question that hasn't been asked. If someone says, but aren't you transferring general revenues there? Only to the extent that the Social Security surplus, by reducing the debt, has made the general revenues larger. Only to that extent. It's not an unlimited amount.

And in that sense, it puts more pressure for the Congress and future administrations to stick to their debt reduction. Because to the degree in the future that people took money from the surplus, they would be reducing the interest savings that would go into Social Security, and that would probably be a significant political constraint. Right now, people go into the Social Security surpluses, and it's not having an impact on the solvency of Social Security. If you had this plan in the future, you would be reducing the amount of debt reduction, and thereby reducing the amount of future interest savings that would go to Social Security.

Q: So it's not like extra Social Security tax?

MR. SPERLING: No. What it is, it is generating more revenues for the future by saving now, having lower interest rates, higher savings.

And let me just make one last point. I have done the most -- we have shown what the most tangible benefit of this form of debt reduction is, which is the interest savings it produces for the government. What almost all economists would believe is that this degree of debt reduction will have a larger macroeconomic effect, in that, by keeping interest rates low and capital formation and investment very high, that it would make the country more productive and, with higher productivity, those two workers in the future will be more productive and more able to meet the demands of the future. We're not even taking that into account. All we're saying is the tangible interest savings that come from paying down the debt should go to Social Security.

I just want to make one last point. When Social Security -- when you have a Social Security lock box or you make a commitment that Social Security is going to pay down the debt, you are going to free money up in interest savings. And, one way or another, Dick and everybody, you are going to do something with it. You may choose to spend it, you may choose to give it in a tax cut or you could choose to use the money for Social Security or Medicare. What we are saying is, you are going to do something with the savings from debt reduction, why not use those to save further and strengthen Social Security.

So, thank you.

END 4:55 P.M. EDT