Fiscal Solutions Tour

David M. WalkerPresident and CEO

The Peter G. Peterson Foundationand

Former Comptroller General of the United States

San Jose, CAFriday, September 24, 2010

24%

Total Spending

Projected Size of the Total Economy: $14.4 Trillion

(Constant 2009 Dollars)

2010 2040

39%

Total Federal Spending (As Percentage of U.S. Economy)

Projected Size of the Total Economy: $28.7 Trillion

(Constant 2009 Dollars)

Size of the Total Economy: $8.8 Billion

(Constant 2009 Dollars)

2%1800

1

SOURCES: Data from the Congressional Budget Office; Long-Term Budget Outlook: June 2010, alternative fiscal scenario. Data from Historical Statistics of the United States, Millennial Edition On Line, Cambridge 2006. Compiled by PGPF.NOTE: The alternative fiscal scenario includes several changes to current law that are widely anticipated to occur (i.e. adjustments to Medicare payment rates).

4%15%

12%

7%42%

20%

Medicare and Medicaid Social Security Other Mandatory Net InterestDefense Other Discretionary

SOURCES: Data from the Office of Management and Budget, A New Era of Responsibility: The 2011 Budget, Historical Tables; and the Congressional Budget Office, Preliminary Analysis of the President’s Budget: March 2010. Compiled by PGPF.

Composition of Federal Spending (% of Total Spending)

43%34%

61%

21%

19%

15%6%

19%

19%

Total Spending 1970: $900 Billion (Constant 2009 Dollars)

Total Spending 2010 (estimated): $3.5 Trillion (Constant 2009 Dollars)

2

Since 1800, U.S. Debt Held by the Public has exceeded 60 percent of GDP (the maximum debt ceiling used by the European Monetary Union) only during World War II

18001814182818421856187018841898191219261940195419681982199620100

20

40

60

80

100

120

Per

cen

tag

e o

f G

DP

WWII

Civil War

TARP & Recession

Great Depression

WWI

SOURCES: Data from the Congressional Budget Office, Long-Term Budget Outlook: June 2009; the Government Accountability Office, The Federal Government’s Long-Term Fiscal Outlook: January 2010 Update, alternative simulation using Congressional Budget Office assumptions. Compiled by PGPF.NOTE: Debt held by the public refers to all federal debt held by individuals, corporations, state or local governments, and foreign entities.

3

The following table illustrates the U.S. government’s explicit liabilities, commitments, and unfunded social insurance promises

In Trillions of Dollars

2000 2009 Explicit liabilities $6.9 $14.1

Publicly held debt 3.4 7.6

Military & civilian pensions & retiree health 2.8 5.3

Other Major Fiscal Exposures 0.7 1.3

Commitments & contingencies 0.5 2.0

E.g., Pension Benefit Guaranty Corporation, undelivered orders

Social insurance promises 13.0 45.8

Future Social Security benefits 3.8 7.7

Future Medicare benefits 9.2 38.2

Future Medicare Part A benefits 2.7 13.8

Future Medicare Part B benefits 6.5 17.2

Future Medicare Part D benefits -- 7.2

Total $20.4 $61.9

SOURCE: Data from the Department of Treasury, 2009 Financial Report of the United States Government. Compiled by PGPF. NOTE: Numbers may not add due to rounding. Estimates for Medicare and Social Security benefits are from the Social Security and Medicare Trustees reports, which are as of January 1, 2009 and show social insurance promises for the next 75 years. Future liabilities are discounted to present value based on a real interest rate of 2.9 percent and CPI growth of 2.8 percent. The totals do not include liabilities on the balance sheets of Fannie Mae, Freddie Mac, and the Federal Reserve. Assets of the U.S. government not included. Does not include civil service and military retirement funds, unemployment insurance, and debt held by other government accounts outside of Social Security and Medicare.

4

Without reforms, by 2022, future revenues will only cover Social Security, Medicare, Medicaid, and interest on the debt. By 2046, revenues won’t even cover interest costs.

2010 2022 20460

5

10

15

20

25

30

35

40

45

50

1% 6%

18%

5%

5%

6%

5%

7%

9%

4%

2%

2%

9%

9%

9%

Perc

enta

ge o

f GD

P Revenue

SOURCE: Data from the Government Accountability Office The Federal Government’s Long-Term Fiscal Outlook: January 2010 Update , alternative simulation using Congressional Budget Office assumptions. Compiled by PGPF.NOTE: Baseline interest rate is assumed to be 5.0 percent.

Discretionary Spending

Other Mandatory

Medicare & Medic-aid

Social Security

Net Interest

5

19901995

20002005

20102015

20202025

20302035

20402045

20502055

20602065

20702075

20800

100

200

300

400

500

600

700

800

900

Per

cen

tag

e o

f G

DP

Actual Projected

233%

146%87%

344%

483%

650%

854%

Future U.S. Debt Held by the Public is projected to soar if current policies remain unchanged

SOURCES: Data from the Congressional Budget Office, Long-Term Budget Outlook: June 2009; Long-Term Budget Outlook: June 2010, alternative fiscal scenario. Compiled by PGPF.NOTE: Debt held by the public refers to all federal debt held by individuals, corporations, state or local governments, and foreign entities. The alternative fiscal scenario includes several changes to current law that are widely anticipated to occur (i.e. adjustments to Medicare payment rates).

60 % of GDP

6

Current Treasury interest rates are low by historical standards

19801982

19841986

19881990

19921994

19961998

20002002

20042006

200840405

0

2

4

6

8

10

12

14

16

3- Month

Average Inter-est Rate: 6.5% over past 30

years

SOURCE: Data from the Federal Reserve Statistical Release, Table H.15, Selected Interest Rates, Historical Data, accessed August 16, 2010. Complied by PGPF.NOTE: The U.S. Treasury Department did not offer 30-year bonds between 2003 and 2006.

7

Since its inception, the Social Security program has experienced more surpluses than deficits

19361940

19441948

19521956

19601964

19681972

19761980

19841988

19921996

20002004

2008-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Soci

al S

ecur

ity C

ash

Surp

luse

s (+)

and

De

ficits

(-)

as a

Per

cent

age

of G

DP

SOURCE: Data from the Office of Management and Budget, FY 2011 Budget, Historical Tables, February 2010 and Social Security Administration, 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, August 2010. Compiled by PGPF.NOTE: Excludes interest earnings.

8

1970 1977 1984 1991 1998 2005 2012 2019 2026 2033 2040 2047 2054 2061 2068 2075 20820.0

0.0

0.0

Soci

al S

ecur

ity

Surp

luse

s /D

efici

ts In

Per

cent

of G

DP

2080 Deficit 1.4 % ($722 billion*)

2000 Social Security Surplus0.9 % of GDP ($114 Billion*)

Actual Projected

SOURCE: Data from the Social Security Administration, 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Compiled by PGPF.NOTE: CBO projections show negative cash deficits in 2010 and 2011. Excludes interest earnings.* In 2009 Dollars.

In 2015, OASDI will begin operating with a permanent cash flow deficit.

In the future, persistent cash deficits are projected for Social Security

9

Key Dates and Data regarding the financial condition of the Social Security and Medicare Trust Funds

10

Social Security Medicare 3

Current Beneficiaries 53 million 46.3 million

Year the Trust Fund begins permanently operating with a negative cash flow

20151 2008 (HI Trust Fund)

Trust fund exhaustion year 2037 2029Discounted Present Value (PV) of unfunded promises2

$7.9 trillion $22.8 trillion

Actuarial Balance as a % of GDP 0.71% 1.8%

SOURCE: Data from the Social Security Administration, 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds; and Centers for Medicare & Medicaid Services, 2010 Medicare Trustees Report, August 2010. Compiled by PGPF.1. Estimated to operate with a negative cash flow in 2010 and 2011, and briefly return to positive cash flow in 2012 through 2014.2. Excludes current “assets” in the Social Security and Medicare trust funds.3. The projected financial position of combined Medicare Trust Funds under the 2010 Trustees’ Annual Report showed substantial improvements

from the new health care reform law, which are highly debatable and resulted in an adverse opinion from the Medicare’s Office of the Chief Actuary.

State and local governments face short and long term fiscal challenges as their negative operating balances continue to grow

19901993

19961999

20022005

20082011

20142017

20202023

20262029

20322035

2038-1

-0.5

0

0.5

1

1.5

2

2.5

3

Perc

enta

ge o

f GD

P

11

SOURCE: Data from the General Accountability Office State and Local Government’s Fiscal Outlook March 2010 Update, alternative simulation. Compiled by PGPF.

Federal and State Employee Retirement Liabilities in Fiscal Year 2008

Un-funded

16%

Funded84%

State Pension Liabilities

Unfunded95%

Funded5%

State Health Liabilities

SOURCE: Pew Center on the States, The Trillion Dollar Gap February 2010; U.S. Treasury Department Financial Report of the U.S. Government 2008.NOTE: Data is as of the end of fiscal year 2008. The unfunded liability is the difference between the present discounted value of future liabilities and current assets. For the purposes of converting future liabilities into present value, most states use a discount rate of approximately 8%, based on assumed returns on investing their pension funds.

** The data have a few limitations. States have different methods in computing their obligations, and different assumptions of retirement ages and life spans. They also conduct actuarial valuations at different times of the year, which can cause their funding levels to appear better or worse off depending on economic conditions .

12

New Jersey Alabama Hawaii Iowa Minnesota Wisconsin California0

5

10

15

20

25

30

12.1 % 11.8 % 9.5 %6.6 % 5.7 % 4.3 % 4.4 %

16.4 % 14.5 %16 %

0.6 %0.6 % 1.4 %

10.5 %

Retiree Pension BenefitsRetiree Health Benefits

Shar

e of

Sta

te R

even

ue in

Per

cent

NOTE: The actuarially required contribution is the annual contribution to the retiree pension and health funds required for future assets to be in line with future liabilities within 30 years. It has two components: a normal contribution to keep up with new benefit obligations accrued, and a catch-up payment to make up for the current gap between pension assets and liabilities. The data for both revenues and unfunded obligations are for fiscal year 2008. Most states end their fiscal year in June of 2008, and therefore these numbers do not include losses in the stock market that led to losses in most pension funds. ** The data have a few limitations. States have different methods in computing their obligations, and different assumptions of retirement ages and life spans. They also conduct actuarial valuations at different times of the year, which can cause their funding levels to appear better or worse off depending on economic conditions .

Actuarially Required Contribution to Retiree Health and Pension Funds (as a Share of State Revenue) in Fiscal Year 2008 **

13

Moody’s Rating Structure

Obligation RatingAaa

Aa1 Aa2 Aa3A1 A2 A3

Baa1 Baa2 Baa3Ba1 Ba2 Ba3

B1 B2 B3Caa1 Caa2 Caa3

CA

C

Top Rating/Minimal Risk

Bottom Rating/Typically in Default

SOURCE: Data from Moody’s Investors Service, Government-Related Issuers: Methodology Update, July 22, 2010. Compiled by PGPF.

14

State and City Moody’s Ratings

State City

Georgia –Aaa Alexandria, VA - Aaa

Texas - Aaa Jacksonville, FL – Aa1

Alabama – Aa1 San Jose – Aa1

Florida –Aa1/Aa2 Atlanta – Aa2/A1

Connecticut - Aa2 Washington – Aa2/Aa1

New York – Aa2 Chicago – Aa2

New Jersey –Aa2/Aa3 Houston – Aa2

California – A1 New York – Aa2

Illinois - A1 Bridgeport, CT - A1

SOURCE: Data from Moody’s website, Look-up a Ratings. Compiled by PGPF.

15

A Way Forward

Federal:• Implement statutory budget controls that address discretionary and

mandatory spending as well as tax preferences in order to stabilize our debt/ GDP at a reasonable level

• Achieve Social Security reform that makes the program solvent, sustainable, secure and more savings oriented

• Reduce the rate of increase in health care costs and more effectively target related taxpayer subsidies and tax preferences

• Ensure that all future health care reforms adequately consider coverage, cost quality and personal responsibility

• Pursue comprehensive tax reform that makes the system more streamlined, understandable, equitable and competitive while also generating adequate revenues

16

A Way Forward- Continued

• Review, re-prioritize and re-engineer the base of the federal government, including national security strategies, to focus on the future, eliminate waste, generate real results and ensure sustainability

• Ensure that we have process that will enable us to achieve the above objectives within a reasonable period of time

State and Local:• Reform pension and health systems to make them reasonable, affordable and

sustainable

• Review, re-prioritize and re-engineer the base of government.

• Pursue comprehensive tax reform in coordination with the federal government.

• Consider an exchange of primary roles, functions and revenue sources as part of a new federalism or devolution effort (e.g., health care, education, infrastructure)

17

Illustrative Social Security Policy Options

• Make little or no changes to those who are near retirement or are already retired, and make a number of adjustments that would affect younger workers:

• Phase in increases in the normal and early retirement ages, and index to life expectancy (with a modified disability access provision

• Modify the current benefit formula to reduce the replacement rate for middle and upper income workers, and possibly increase it for lower income workers

• Consider a modest adjustment to the COLA formula (e.g., a 0.5 reduction) so that everyone contributes something to the overall reform

18

Illustrative Social Security Policy Options (cont.)

• Make little or no changes to those who are near retirement or are

already retired, and make a number of adjustments that would affect younger workers:

• Increase taxable wage base, if necessary

• Address equity and other considerations

• Consider mandatory supplemental individual savings accounts on a payroll deduction basis (e.g., a minimum 2 percent payroll contribution and a program designed much like the Federal thrift Savings Plan with a real trust fund and real investments)

19