JEFFREY BROWN: Now, we do gauge some of the fallout that is already happening from the financial turmoil. We look at the impact on retirement savings and the federal budget with Peter Orszag, director of the Congressional Budget Office.
Welcome to you.
PETER ORSZAG, Director, Congressional Budget Office: Thank you. Nice to be here.
JEFFREY BROWN: Now, we just heard some potential good, and I think we’re all hoping for that. But you’ve been looking at the impact already on retirement savings, something that everybody is concerned about.
Can you make a general statement about what the impact has been so far?
PETER ORSZAG: Sure. And retirement assets are one of the myriad ways in which financial market turmoil is going to affect households, looking specifically at that since the beginning of — sorry, since the middle of last year, retirement assets, public sector, private sector, defined benefit, defined contribution, all together, have declined by about $2 trillion, or about 20 percent.
JEFFREY BROWN: Two trillion dollars?
PETER ORSZAG: Yes.
JEFFREY BROWN: Now, you just — there’s different kinds of pensions.
PETER ORSZAG: Yes, there are.
JEFFREY BROWN: And so break it down a little bit. Define “contribution.” That would be the 401(k)s that people are familiar with.
PETER ORSZAG: Right.
JEFFREY BROWN: Now, do we know — are most of those in stocks or the majority? How does that work?
PETER ORSZAG: Something like two-thirds of the assets that are in 401(k) plans are in stocks. And, actually, one problem is that too many workers are over-invested in a single stock like their own employer’s stock, which is not a wise investment strategy.
JEFFREY BROWN: Not sufficiently diversified.
PETER ORSZAG: Not sufficiently diversified, yes. But even for those who are diversified, they suffer when, if you’re in a diversified stock fund, when the stock market goes down, your retirement assets decline.
Ability to pay pensions diminished
JEFFREY BROWN: The other -- another kind is the defined benefit plan, right? This is company...
PETER ORSZAG: Correct.
JEFFREY BROWN: Explain the difference and what's happening to those plans.
PETER ORSZAG: Sure. In a defined benefit plan, the company owes you something in retirement, $10,000 a year. And if there's not enough money there, they need to make up for it.
So what will happen now, given that the assets in those plans have declined, is the companies need to put in more money, and that will come out of either their shareholders, their workers, or they'll try to pass it along to their consumers.
JEFFREY BROWN: So companies are hurting because of the economy, because everything we've just been talking about, but they still have to put money into these pension plans?
PETER ORSZAG: That's correct. They're given some time. They can spread it out over time, but they will have to make up the difference.
JEFFREY BROWN: And what about public plans?
PETER ORSZAG: Public plans have also suffered something like more than a $300 billion decline, and there state and local governments will have to make up the difference, again, based on -- it will be borne by either state and local government workers or taxpayers.
JEFFREY BROWN: Now, the practical impact of this is the potential that people will have to look at working longer. Where -- well, go ahead.
PETER ORSZAG: I was just going to -- basically, if you have, say, a 401(k) plan and it goes down, you only have three choices. You can save more now to try to make up for it; you can spend less once you're retired; or you can work longer. Those are the three choices.
JEFFREY BROWN: What has been the trend?
PETER ORSZAG: The trend in retirement age has been a decline through the 1970s and '80s, and then it's reversed a little bit, so that we are now a little bit working longer, and that may well be reinforced by the decline in the stock market.
Deficit going up
JEFFREY BROWN: I want you to put on your other hat now, which is the budget watcher.
PETER ORSZAG: OK.
JEFFREY BROWN: Is there any question at this point that the budget deficit will be much larger than one we had thought?
PETER ORSZAG: There's no question the budget deficit is going up. It was increasing even before the most recent turmoil.
If you add the potential for a significant recession and the operations of the federal government in trying to stave off the financial turmoil, we could be seeing a deficit this year of $750 billion or more.
JEFFREY BROWN: Compared to what? What was your most recent?
PETER ORSZAG: Last year, it was a little under $450 billion.
JEFFREY BROWN: And give us some perspective.
PETER ORSZAG: Sure.
JEFFREY BROWN: I mean, I know in the past we always talk about this vis-a-vis GNP...
PETER ORSZAG: The economy, yes.
JEFFREY BROWN: ... right? So when is it scary and when is it not scary?
PETER ORSZAG: Seven hundred and fifty billion dollars would be about 5.5 percent of the economy. That's a big number. It's not the largest ever, but it's a big number.
JEFFREY BROWN: What are the variables? I mean, we're talking every night about the potential plans in which the government gets itself involved, right?
So I know there's a lot of variables out there about what could happen or what the government could be -- we, the taxpayers, could be on the hook for. When you think about the budget implications, what are the main variables that you're thinking about?
PETER ORSZAG: Well, for example, the announcement that the Treasury Department is now focusing on injecting equity into banks, rather than just buying...
JEFFREY BROWN: The thing we just talked about...
PETER ORSZAG: ... exactly -- rather than just buying assets could change the numbers a lot. If we buy an asset at a fair price, if we buy something for a dollar and it's worth a dollar, there's no net impact on the budget. If we instead inject capital into a bank, there may well be a more substantial effect.
So it will depend on what we wind up doing, and we still don't know exactly what we're going to do.
Impact on government spending
JEFFREY BROWN: Now, then, the next, of course, major question is, what kind of impact would these kind of deficits have on government spending?
PETER ORSZAG: Well, we were -- even before this, we were on an unsustainable fiscal course. And, you know, one thing we need to remember is we're lucky that we have the maneuvering room now to issue lots of additional Treasury securities and intervene aggressively to address this crisis.
JEFFREY BROWN: Wait a minute. Explain that. Lucky in what sense? That we just have the money available?
PETER ORSZAG: That people are still willing to lend to us. If in 20 or 30 years we continue on the same path, with rising health care costs and rising budget deficits, we would reach a point where we wouldn't even have that ability.
And so if another crisis like this one hits, we would then not have the maneuvering room that we currently have to address it in a prompt way.
JEFFREY BROWN: But even in the next year, say, when you look at various things that are talked about -- well, the health care system, for one. That's one you've studied a lot. There are implications for any possible reforms or programs that anybody might want to implement.
PETER ORSZAG: I think it's going to be very likely that, early next year and into much of next year, most of the economic policy discussion will be surrounding the financial markets, and so it's going to be hard to get other topics on the agenda, not just for fiscal reasons, but also just because we're all human beings and there's a limited amount of time and attention that can be given to different topics.
JEFFREY BROWN: We've heard the candidates asked about this, and my colleagues Jim and Gwen have both asked them in the debates they moderated about the implications. You're saying there's no doubt that, whoever takes office, will have to deal with this?
PETER ORSZAG: We had to deal with it. We have to deal with our long-term fiscal problems. We had to deal with them before this financial crisis occurred. All the more so, as we emerge from the crisis, we better get our hands around the fiscal course that we're on.
Again, primarily because, if we don't, we're going to wind up with a crisis that's even worse than today's and we won't have the ability to address it in any sensible way.
JEFFREY BROWN: And as we were just talking about, there could be more to come in terms of government rescue-type plans, right?
PETER ORSZAG: There could well be more to come.
JEFFREY BROWN: All right, Peter Orszag, thank you very much.
PETER ORSZAG: Thanks for having me.