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...How Might One Think About Turning Around USA Inc.?

One might consider...

• Options for reducing expenses by focusing on entitlement reform and operating efficiency
- Formula changes could help Social Security's underfunding, but look too draconian for Medicare/Medicaid; the underlying healthcare cost dilemma requires business process restructuring and realigned incentives.
- Resuming the 20-year trend line for lower Federal civilian employment, plus more flexible compensation systems and selective local outsourcing, could help streamline USA Inc.'s operations.

• Options for increasing revenue by focusing on driving long-term GDP growth and changing tax policies
- USA Inc. should examine ways to invest in growth that provides a high return (ROI) via new investment in technology, education, and infrastructure and could stimulate productivity gains and employment growth.
- Reducing tax subsidies (like exemptions on mortgage interest payments or healthcare benefits) and changing the tax system in other ways could increase USA Inc.'s revenue without raising income taxes to punitive – and self-defeating – levels. Such tax policy changes could help re-balance USA's economy between consumption and savings and re-orient business lines towards investment-led growth, though there are potential risks and drawbacks.

• History suggests the long-term consequences of inaction could be severe
- USA Inc. has many assets, but it must start addressing its spending/debt challenges now.

KP
CB www.kpcb.com
USA Inc. | Introduction 19

Sizing Costs Related to USA Inc.'s Key Financial Challenges & Potential AND / OR Solutions

• To create frameworks for discussion, the next slide summarizes USA Inc.'s various financial challenges and the projected future cost of each main expense driver.
- The estimated future cost is calculated as the net present value of expected 'dedicated' future income (such as payroll taxes) minus expected future expenses (such as benefits paid) over the next 75 years.

• Then we ask the question: 'What can we do to solve these financial challenges?'
- The potential solutions include a range of simple mathematical illustrations (such as changing program characteristics or increasing tax rates) and/or program-specific policy solutions proposed or considered by lawmakers and agencies like the CBO (such as indexing Social Security initial benefits to growth in cost of living).

• These mathematical illustrations are only a mechanical answer to key financial challenges and not realistic solutions. In reality, a combination of detailed policy changes will likely be required to bridge the future funding gap.

KP
CB www.kpcb.com
USA Inc. | Introduction 20

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