Peter G. Peterson, Senior Chairman and Co-Founder, The Blackstone Group

1. Economic Speech Washington Speeches Background image located in:R:\Adm\f000024\2005 Social Security Speech\_cover\_cover\Cover-blue.jpg February 6&8, 2007 Peter G. Peterson, Senior Chairman and Co-Founder, The Blackstone Group

2. The QUAD-DEFICITS • Long Term Budget Deficits • 10 years and beyond • Current Account Deficits • Savings Deficits • Political or Leadership Deficit • These four deficits are inter-related and should be resolved together

4. The Concord Coalition: Using reasonable projections, entitlement and interest alone are expected to consume all federal revenues in under 20 years

6. Indeed, if the federal government had to observe Sarbanes-Oxley and ERISA and amortize its unfunded pension benefit liabilities over a maximum of 30 years the same way public corporations are required to do, it would add a minimum of $1.5 trillion annually to the federal budget deficit!

7. % of GDP

8. Alternative 1: Social Security Reform: Borrow the Money How much would we have to borrow? Between 2018 and 2042, how big are cumulative cash flow deficits? • $5.4 trillion in inflation adjusted dollars!

9. [Section Title]

10. What about increased payroll taxes? The cost of Social Security alone is due to rise from 11.2% of workers’ pay in 2006 to 17.5% in 2040. Hiking payroll taxes to cover the growing cost would put a heavy burden on the middle class – and that doesn’t include a much larger tax increase to cover projected costs of Medicare Alternative 2: Social Security Reform: Increase Taxes

11. The Concord Coalition: Using reasonable projections, entitlements and interest are expected to consume all federal revenues in under 20 years

12. Beyond benefit reductions, we should also seize this opportunity to increase personal savings, which are at historic low levels I have come to conclude that America is so consumption and borrowing obsessed that one must seriously consider a program of mandatory savings much as Singapore, Chile, and recently Australia has instituted

14. Health Care Costs as a % of GDP Healthcare Costs: Pre- and Post-Medicare(U.S. vs. Other G-7 Countries)

15. In per capita dollars, the U.S. spends more than twice the developed country average – $5,711 vs. $2,681 in 2003 And there is very little evidence that our health outcomes are anywhere close to being twice as good as other developed countries Healthcare Costs: Pre- and Post-Medicare(U.S. vs. Other G-7 Countries)

16. We Also Spend Much More on Last Months of Life

17. We Also Spend Much More on High-tech, High-cost Medicine • High cost surgical procedures • High cost equipment

18. Deficit #2: Current Account Deficits: • Previous Record in the 1980’s: 3.45% of GDP • Today: Nearly 7% of GDP (and widening by every account) • Import over $6 billion of foreign capital every work day • $2.9 billion to finance current account deficits • $3.2 billion to finance investments. These foreign borrowings finance about ¾ of our critically needed investments

20. The “hard landing”, “soft landing” debate, given that virtually no one believes that the present level of current account deficits is sustainable

22. Net National Saving: The Ultimate Bottom Line % of GNP

23. Personal Savings as a % of Disposable Income

24. Household Debt Service is 14.5% of Disposable Income as of Q3:06, a higher level than at any time in the last twenty-five years.

25. By some accounts, more than 60% of the country is considered in a housing “bubble” versus 40% a year ago(1) 1. Home price/income ratio more than 3 standard deviations above average. Source: Merrill Lynch

26. Ask All of Us A Rude Question: • Given that households are highly leveraged, that energy costs remain at high levels, that there are long term inflation fears and the potential for a decline in the dollar and a related increase in interest rates, what might be the effect of a significant rise in interest rates and a significant decline in housing values on consumer spending and the US economy?