[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
     THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                       MARCH 6 AND APRIL 10, 1997

                               __________

                             Serial 105-25

                               __________

         Printed for the use of the Committee on Ways and Means


                               


                    U.S. GOVERNMENT PRINTING OFFICE
 47633 CC                   WASHINGTON : 1998



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                    Subcommittee on Social Security

                    JIM BUNNING, Kentucky, Chairman

SAM JOHNSON, Texas                   BARBARA B. KENNELLY, Connecticut
MAC COLLINS, Georgia                 RICHARD E. NEAL, Massachusetts
ROB PORTMAN, Ohio                    SANDER M. LEVIN, Michigan
JON CHRISTENSEN, Nebraska            WILLIAM J. JEFFERSON, Louisiana 
J.D. HAYWORTH, Arizona               \1\
JERRY WELLER, Illinois               JOHN S. TANNER, Tennessee
KENNY HULSHOF, Missouri              XAVIER BECERRA, California \2\

                               __________
\1\ January 7, 1997, through April 
9, 1997.
\2\ Appointed April 9, 1997.

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.



                            C O N T E N T S

                               __________

                                                                   Page

Advisories announcing the hearing................................     2

                               WITNESSES

Congressional Research Service, David Koitz, Specialist in Social 
  Legislation, Education and Public Welfare Division.............    51
U.S. General Accounting Office, Jane L. Ross, Director, Income 
  Security Issues, Health, Education, and Human Services 
  Division; accompanied by Frank Mulvey, Assistant Director......    69

                                 ______

Ball, Hon. Robert M., National Academy of Social Insurance.......     8
Butler, Stuart, Heritage Foundation..............................    87
Mashaw, Jerry L., Yale University................................    95
Myers, Robert J., Silver Spring, MD..............................   107
Schieber, Slyvester J., Watson Wyatt Worldwide...................    18
Steuerle, C. Eugene, Urban Institute.............................   100
Gramlich, Edward M., University of Michigan......................    16

                                 ______

                       SUBMISSIONS FOR THE RECORD

Center for the Study of Economics, Columbia, MD, Steven Cord, 
  statement and attachments......................................   122
Employee Benefit Research Institute, Kelly A. Olsen, statement...   124
Kentucky Teachers' Retirement System, Pat N. Miller, letter......   127
Kotlikoff, Laurence J., Boston University, and Jeffrey D. Sachs, 
  Harvard University, joint statement............................   128
National Silver Haired Congress, statement.......................   130
OPPOSE, Denver, CO, Robert J. Scott, statement...................   131
State Teachers Retirement System of Ohio, Herbert L. Dyer, letter   137



     THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT

                              ----------                              


                        THURSDAY, MARCH 6, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 1100, Longworth House Office Building, Hon. Jim Bunning 
(Chairman of the Subcommittee) presiding.
    [The advisories announcing the hearings follow:]


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON SOCIAL SECURITY

FOR IMMEDIATE RELEASE                             CONTACT: (202) 225-9263
February 14, 1997
No. SS-1

                    Bunning Announces Hearing Series
                   on ``The Future of Social Security
                   for this Generation and the Next''

      
    Congressman Jim Bunning (R-KY), Chairman, Subcommittee on Social 
Security of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing series on ``The Future of Social 
Security for this Generation and the Next.'' The first hearing day in 
the series is on the report of the 1994-1996 Advisory Council on Social 
Security. The hearing will take place on Thursday, March 6, 1997, in 
the main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be heard from invited witnesses only. 
Witnesses will include Advisory Council members Robert Ball, Edward 
Gramlich, and Sylvester Schieber. However, any individual or 
organization may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The Social Security program impacts the lives of nearly all 
Americans. This year, the Social Security Administration will pay 
benefits to more than 45 million retired and disabled workers and to 
their dependents and survivors. Nearly every worker and his or her 
employer pays Social Security taxes. The Social Security Board of 
Trustees reports annually to Congress on the financial status of the 
Social Security Trust Funds. In their 1996 report, the Trustees 
reported that Social Security spending is projected to exceed tax 
revenues beginning in the year 2012. By the year 2029, the Trust Funds 
are projected to have income sufficient to cover only 77 percent of 
annual expenditures. The reasons for these projections are partly 
demographic, including: aging ``baby boomers;'' declining birth rates; 
and increased life expectancies.
      
    The final Advisory Council on Social Security was appointed in 1994 
by the Secretary of Health and Human Services. (Under prior law, an 
Advisory Council was required to be appointed every four years.) The 
Council was asked to examine the program's long-range financial status, 
as well as the adequacy and equity of its benefits and the relative 
roles of the public and private sectors in providing retirement income. 
The Advisory Council issued its report January 6, 1997. The Council was 
unable to reach consensus, so the report includes three different 
approaches to restoring financial solvency.
      
    In announcing the hearings, Chairman Bunning stated: ``Social 
Security affects the lives of virtually every person in this country. 
It represents a promise, from one American to another, that we can 
count on each other for a more secure financial future. We must honor 
our promises and in doing so we owe it to every American to explore 
fully every possible option to ensure the future of Social Security, 
for this generation and the next. My aim is for all of us to listen and 
learn so that we can make the right decisions for Social Security's 
future.''
      

FOCUS OF THE HEARING:

      
    The Subcommittee is interested in fully exploring major areas of 
concern identified by the Council, along with the Council's specific 
findings and recommendations.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
copies of their statement and a 3.5-inch diskette in WordPerfect or 
ASCII format, with their address and date of hearing noted, by the 
close of business, Thursday, March 20, 1997, to A.L. Singleton, Chief 
of Staff, Committee on Ways and Means, U.S. House of Representatives, 
1102 Longworth House Office Building, Washington, D.C. 20515. If those 
filing written statements wish to have their statements distributed to 
the press and interested public at the hearing, they may deliver 200 
additional copies for this purpose to the Subcommittee on Social 
Security office, room B-316 Rayburn House Office Building, at least one 
hour before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on a 3.5-inch diskette in WordPerfect or ASCII format.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-225-1904 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON SOCIAL SECURITY

FOR IMMEDIATE RELEASE                            CONTACT: (202) 225-9263
March 21, 1997
No. SS-2

                    Bunning Announces Hearing Series
                   on ``The Future of Social Security
                   for this Generation and the Next''

      
    Congressman Jim Bunning (R-KY), Chairman, Subcommittee on Social 
Security of the Committee on Ways and Means, today announced that the 
Subcommittee will hold the second in a series of hearings on ``The 
Future of Social Security for this Generation and the Next.'' At the 
second hearing, the Subcommittee will hear from expert witnesses who 
will establish a framework for evaluating options for Social Security 
reform. The hearing will take place on Thursday, April 10, 1997, in 
room B-318 of the Rayburn House Office Building, beginning at 10:00 
a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony will be heard from invited witnesses only. However, any 
individual or organization may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    The Subcommittee on Social Security's first hearing in the series 
focused on the recommendations of the Advisory Council on Social 
Security. The Council offered three very different approaches to 
restoring Social Security's financial solvency. These proposals, along 
with many others, offer a wide range of options, from maintaining the 
program's current structure to revamping the system entirely.
      
    As the hearings continue, the Subcommittee will assess the impact 
of alternative solutions to Social Security's financing problems. 
Members of the Subcommittee, as well as the public, want and need to 
gain an appreciation of the effects that changes to Social Security 
will have on the economy, national savings, the Federal budget, and the 
retirement security of every participant.
      
    In announcing the hearing, Chairman Bunning stated: ``The purpose 
of this hearing is to develop a background understanding of Social 
Security's relationship to the economy and the budget so that Members 
will be in a stronger position to evaluate specific proposals to ensure 
Social Security's future.''
      

FOCUS OF THE HEARING:

      
    The Subcommittee will hear the views of a wide range of experts in 
economics and public policy regarding the fundamental issues to 
consider when evaluating options for Social Security reform.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
copies of their statement and a 3.5-inch diskette in WordPerfect or 
ASCII format, with their address and date of hearing noted, by the 
close of business, Thursday, April 24, 1997, to A.L. Singleton, Chief 
of Staff, Committee on Ways and Means, U.S. House of Representatives, 
1102 Longworth House Office Building, Washington, D.C. 20515. If those 
filing written statements wish to have their statements distributed to 
the press and interested public at the hearing, they may deliver 200 
additional copies for this purpose to the Subcommittee on Social 
Security office, room B-316 Rayburn House Office Building, at least one 
hour before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on a 3.5-inch diskette in WordPerfect or ASCII format.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-225-1904 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Bunning. Good morning. First of all, I would like 
to welcome all the Subcommittee Members and witnesses to our 
first hearing of the 1997 or 105th Congress. We are especially 
lucky to have a number of strong newcomers to this 
Subcommittee. Our new Members are J.D. Hayworth from Arizona; 
Jerry Weller from Illinois; Kenny Hulshof of Missouri; Sandy 
Levin from Michigan is not a newcomer to the Full Committee but 
he is to this Subcommittee; Bill Jefferson of Louisiana and 
John Tanner of Tennessee.
    I would also like to recognize a veteran of the Ways and 
Means Committee but a new Ranking Member for this Subcommittee, 
Mrs. Barbara Kennelly of Connecticut. Congratulations, Barbara. 
I am pleased to be working with you in this 105th Congress.
    Mrs. Kennelly. Thank you.
    Chairman Bunning. Today we kick off a series of hearings on 
``The Future of Social Security for this Generation and the 
Next.'' Social Security touches the lives of just about every 
American, and this popular, effective and vital program is 
facing some serious challenges. The challenges are very, very 
serious. In its report to Congress in 1996, the Social Security 
board of trustees said that Social Security spending will 
exceed tax revenues in the year 2012. They also project that 
the trust funds will only be able to pay 77 percent of benefits 
by 2029. In light of this outlook, it is not surprising that a 
much cited recent poll by the Third Millennium showed that 
today's youth have more faith in the existence of HMOs or 
UFOs--than in getting Social Security benefits. I find this 
disturbing and I am deeply concerned. How can we expect young 
people just entering the work force to feel good about 
contributing to a program that they view as going bust? I fear 
that public support for this popular program will erode even 
more quickly if younger workers and future generations cannot 
count on a reasonable return on their contributions. We just 
cannot let that happen.
    That is why we are here to listen to the members of this 
final Advisory Council on Social Security. This Advisory 
Council was appointed by the Secretary of Health and Human 
Services in 1994 and charged with studying the long-range 
financial status of the program and presenting to Congress its 
plan to address the solvency problem.
    I am disappointed that the council could not reach 
consensus and presented three plans rather than one. However, 
their inability to agree on a solution just proves the 
complexity of the issue. Since the Advisory Council released 
its report in January, much public debate has emerged. Engaging 
the public in these discussions is critical to the future of 
Social Security. Finding solutions is not going to be easy.
    Today, we will hear from three members of the Advisory 
Council about their respective plans to fix the system. In the 
next few months, we plan to hear from policy experts, 
advocates, business leaders, Members of Congress, and many 
others. We are taking this issue seriously. We want to listen 
to what the people are saying, and we need to know all the 
facts including who is impacted by each and every proposal. We 
want answers, but we must be careful and thorough.
    Many of you know that I have 9 children and 30 
grandchildren. The future of Social Security is their future. 
We must step up to the challenge and to our responsibility to 
protect their future and the future of all Americans. In the 
interest of time, it is our practice to dispense with opening 
statements except from the Ranking Democrat Member. All Members 
are welcome to submit statements for the record, and I yield to 
Congresswoman Kennelly for any statement she wishes to make.
    Mrs. Kennelly. Thank you, Chairman Bunning, and thank you 
also for announcing to the public that this is only the first 
of a series of hearings because we all know we are going to 
have to study this question, listen to all points of view and 
get as much information as possible. But today's meeting, 
begins the series of hearings on the future of Social Security 
with testimony from members of the Social Security Advisory 
Council.
    Gentlemen, I welcome you.
    The members of the Advisory Council have offered us three 
distinct choices for reforming Social Security. I hope these 
proposals will fuel a vigorous national debate on the nature of 
retirement income. Such a debate is essential. It is an 
ingredient for action in this area. We need to be very sure we 
understand fully the implications of any actions we take in 
attempting to solve the Social Security solvency situation. The 
Social Security system is one of our most successful government 
programs. It has helped to keep older Americans out of poverty, 
and it has provided important protection to families suffering 
the death or disability of a breadwinner.
    At the same time, however, we cannot avoid the demographics 
of the 21st century. The rise in the number of retirees due to 
increased life expectancy and the retirement of the baby boom 
generation will force us to take a hard look at our retirement 
policies.
    I am pleased to have with us today three witnesses who have 
spent an incredible number of hours working on this issue, most 
recently as members of the Advisory Council. I know that they 
have crafted their recommendations, and they have thought 
deeply about the extent to which they think change is needed 
and the nature of those changes. I am particularly interested 
in the overall economic impact of the plans. I would like to 
know what our witnesses think about the need for increased 
national savings and the means of achieving this goal. I am 
also interested in the impact of the plans of these individuals 
and would like to hear from them about the extent to which 
current Social Security protections are reduced under these 
plans before us today.
    What is the impact of an increase in the retirement age? 
What happens to widows, nonworking spouses, children and the 
disabled? What is the impact of changing a defined benefit plan 
into a defined contribution plan? What are the risks? Who bears 
these risks? I hope the presentation today will educate us on 
these questions and further illuminate the choices before us. 
Altering the Social Security system is a very serious 
undertaking, and we should treat it as such. I look forward to 
hearing from our witnesses about their plans and am hoping that 
we can work together to find a stable retirement for this 
generation and the next. Thank you, Mr. Chairman.
    Chairman Bunning. Thank you, Mrs. Kennelly. I want to 
inform our panel that we have a vote on the floor and we are 
going to recess to vote on adjourning the House, and we will be 
back as quickly as we can. I apologize to the panel.
    [Recess.]
    Chairman Bunning. The Subcommittee will come to order. I 
would like now to introduce the witnesses from the Advisory 
Council on Social Security. Robert Ball will present supporters 
of the maintain benefits plan; Dr. Sylvester Schieber 
representing the personal security accounts plan; and Dr. 
Edward Gramlich, chairman of this Advisory Council, 
representing the individual accounts plan. Welcome to all of 
you, and Mr. Ball, if you would begin, I would appreciate it.

  STATEMENT OF HON. ROBERT M. BALL, FOUNDING CHAIR, NATIONAL 
  ACADEMY OF SOCIAL INSURANCE; AND MEMBER, 1994-1996 ADVISORY 
   COUNCIL ON SOCIAL SECURITY (FORMER COMMISSIONER OF SOCIAL 
                           SECURITY)

    Mr. Ball. Thank you, Mr. Chairman. I think the key to the 
position of the six of us who support the maintained benefits 
(MB) plan is that we would like to restore full balance for the 
long-term in Social Security with the least possible change in 
benefit levels and in contribution rates. Our goal is not to 
make major or fundamental changes in the program. We think that 
it is quite possible and desirable--that is why we selected the 
name--to maintain the system much as it is today.
    Now, we agree, Mr. Chairman, with your characterization in 
your opening remarks of there being a major and significant 
long-range problem. But I think there has been, particularly in 
the newspapers, some misunderstanding of the nature of that 
problem. Some of the things I read sound as if the system in a 
relatively short time was going to be without income and go 
belly up. But, as you pointed out in your opening statement, 
the true situation is that the program can pay full benefits on 
time to about 2030 under present law. And then at that point, 
the program does not disappear, but it has a shortfall, a 
significant shortfall, and is able to pay only about 75 percent 
of the cost of the system. But there is an important 
distinction between having to find financing for the whole 
program after 2030 or so, or whether we would be building on 
the continuing support of present financing for at least 75 
percent of the cost of the system. Most of the support of the 
system comes from continuing contributions that individuals and 
their employees make currently, not from a trust fund, and 
current contributions go on after the trust fund is exhausted.
    So, we are not in anything like a desperate or emergency 
situation. We have an important job to do soon because the 
sooner these problems are addressed, the less drastic the 
solutions have to be, but there is time, and it is not an 
emergency situation. Our proposal is to ask the administration 
and the Congress to move as quickly as is reasonable to make 
some common sense changes in the present program that are well 
within the tradition of Social Security. Later on, I will 
enumerate what those are. I cannot wait to take the time in 
this opening 5 minutes to do that.
    As a result of these changes, you move the deficit from the 
present estimated long-term deficit of 2.17 percent of payroll 
down to 0.80 percent of payroll, and you move the time that the 
trust fund is exhausted, from about 2030 to 2050.
    After that we focus on changes that I think really need 
public debate, more study, and evaluation. There is real reason 
for differences of opinion on the additional provisions that 
would eliminate the last 0.80 percent of payroll deficit. For 
example, if it is true that the cost of living has an upward 
bias, and that steps are going to be taken to correct that, the 
change in itself would go a long way to reduce that remaining 
0.80 percent of payroll. I think we would all agree that we 
want the most accurate possible Consumer Price Index, CPI, to 
govern the cost of living for Social Security and there seems 
to be a lot of opinion that supports the idea that there is an 
upward bias. So to some extent, there is reason to delay the 
final part of the solution to the long-range imbalance until 
the controversy over the CPI is settled, as long as the delay 
is for only a year or two.
     We have proposed to the administration and the Congress 
that this last 0.80 percent of payroll deficit be met by a 
mixed public/private investment policy, similar to what just 
about every other pension plan in the country has--that is, 
invest part of the accumulating funds of Social Security in the 
stock market, passively managed and indexed to a large part of 
the market. If invested up to 40 percent of Social Security 
funds in the stock market, you would get rid of that last 0.80 
percent deficit. We think it is a good idea, but deserves more 
study. We are not suggesting immediate action on this. It is 
just enough different from what has been done in Social 
Security in the past that it needs some getting used to. Social 
Security with its huge effect on the whole nation, shouldn't be 
changed significantly from the past without a broad consensus. 
Mr. Chairman, I think probably I am close to my 5 minutes and 
will not start off on another subject.
    [The prepared statement follows:]

Statement of Hon. Robert M. Ball, Founding Chair, National Academy of 
Social Insurance; and Member, 1994-1996 Advisory Council on Social 
Security (Former Commissioner of Social Security)

    My name is Robert Ball. I was Commissioner of Social 
Security from 1962 to 1973. Prior to my appointment by 
President Kennedy, I had been the top civil servant at the 
Social Security Administration for about 10 years; my career at 
Social Security including my years as Commissioner spanned 
approximately 30 years. In 1948, I served as Staff Director of 
the Advisory Council on Social Security to the Senate Finance 
Committee which recommended the major changes that became the 
Amendments of 1950. Since leaving the government in 1973, I 
have continued to write and speak about Social Security and 
related programs. I was a member of the 1965, 1979 and 1991 
statutory Advisory Councils on Social Security, and I served on 
the National Commission on Social Security Reform, the 
Greenspan Commission, upon whose recommendations the 1983 
Amendments were based. I am testifying today as an individual 
member of the 1994-1996 Advisory Council on Social Security, 
but my views are shared in general by five other Council 
members. The views expressed are not necessarily those of any 
organization with which I am associated.

                            I. Introduction

    Perhaps the single most important point to keep in mind 
about Social Security as we consider various options for the 
future is this:
    Social Security is not in the emergency room and does not 
require heroic measures. Rather, it requires thoughtful 
attention to an eventual imbalance of income and expenses that 
begins to take effect in about 30 years. After that, unless the 
program is amended (as I am sure it will be), present financing 
would cover only about three-fourths of the cost.
    The situation with Social Security is like that of 
homeowners living in a sound house that they very much like and 
that needs only to have its mortgage refinanced. There is no 
need to move out of the house or tear it down. The need is only 
to improve its long-term financing.
    Six of us who served on the 1994-1996 Advisory Council on 
Social Security \1\ propose to improve the program's long-term 
financing by initiating, as soon as possible, a series of 
common-sense measures that eliminate much of the anticipated 
long-term deficit. We call this approach the Maintain Benefits 
(MB) plan. It maintains Social Security as a defined-benefit 
plan, with benefits determined by law--a key point to which I 
will return.
    The initial measures that we propose include:
     Adjusting the Cost of Living Allowance to reflect 
these technical corrections to the Consumer Price Index already 
announced by the Bureau of Labor and Statistics;
     Taxing Social Security benefits that exceed what 
the worker paid in, in the same way that other public and 
private defined-benefit pension plans are now taxed;
     Making Social Security truly universal by 
gradually extending coverage to those state and local 
government jobs that are not now covered;
     Either reducing benefits slightly--3 percent on 
average--by increasing, from 35 to 38 years, the wage-averaging 
period used to calculate benefits; or, alternatively,
     Increasing the contribution rate moderately--0.15 
percent each for workers and employers; \2\ and
     When Medicare is refinanced, correcting an anomaly 
in present law \3\ so that income from taxes on Social Security 
benefits goes entirely to Social Security rather than to both 
Social Security and Medicare.
    These changes reduce Social Security's projected long-term 
deficit by nearly two-thirds, from 2.17 percent of payroll to 
0.80 percent, thus extending the life of the trust fund by two 
decades, from 2030 to 2050.
    To close the remaining deficit and maintain Social Security 
in long-term balance, the options available for consideration 
include: gradually increasing payroll taxes; gradually 
increasing the retirement age or otherwise lowering projected 
outlays; or generating a better return on Social Security trust 
fund investments by diversifying them to include investing in 
stocks as well as in government obligations. We recommend that 
this last option be given very careful consideration by the 
Congress.
    This kind of public-private investment strategy--the same 
strategy used by other pension systems--would permit Social 
Security, while continuing to invest primarily in Treasury 
securities, to invest part of the accumulating trust fund 
surplus in a passively managed portfolio of stocks indexed to 
the broad market.
    This investment approach has many advantages over the two 
proposals advanced by other members of the Advisory Council to 
break up Social Security into millions of individual retirement 
savings accounts. Most importantly, it preserves Social 
Security as a defined-benefit plan, in which benefits are 
determined by law rather than by what happens to an 
individual's savings account.
    That is a fundamentally important safeguard for a system 
designed, as Social Security is, to provide a secure base on 
which to plan and build one's retirement. If the base itself is 
made less secure--by replacing it with millions of relatively 
small individual accounts, all subject to the vagaries of 
individual investment decisions and unduly dependent on the 
performance of the stock market--Americans will have lost the 
universal system of basic economic security that we have been 
building so carefully and successfully for 60 years. Instead of 
refinancing the mortgage, we will have undermined the house.
    Whatever the President and the Congress decide to do with 
Social Security in the future, we should not seriously consider 
trading part of it for high-cost social experiments that put 
all Americans at risk. In our view, the Social Security 
Advisory Council did not produce three viable options from 
which to choose. The six of us could not, under any foreseeable 
circumstances, support either of the two private-retirement-
accounts proposals, and we do not believe that most Americans 
will find them even remotely attractive, once the risks, costs, 
and trade-offs are fully understood.

         II. Social Security: America's Family Protection Plan

    For 60 years the United States has pursued a three-tier 
retirement income policy consisting of Social Security and two 
supplementary tiers: employer-sponsored pensions, now covering 
about half the work force, and voluntary individual savings. 
Each tier complements the others and has become a fixed feature 
of national policy. Social Security, covering nearly everyone, 
is a contributory, wage-related, defined-benefit plan 
administered by the Federal government and entirely supported 
by dedicated Federal taxes, and the two supplementary tiers are 
explicitly encouraged by Federal tax policy.
    Social Security, the basis of this three-tier structure, 
has been a uniquely successful program by any measure. For more 
than half a century, it has been America's family protection 
plan, providing millions of the elderly and disabled with 
secure incomes, guarding them against impoverishment, and 
relieving their children and grandchildren of what could easily 
become the unmanageable burden of supporting them year in and 
year out throughout their old age.
    No program has ever done more to alleviate and prevent 
poverty or to protect income against erosion by inflation. None 
has done more to protect children against the risk of 
impoverishment when a wage-earning parent dies or becomes 
disabled. And no program has ever enjoyed greater public 
support.
    Several key points about Social Security need to be kept in 
mind, particularly when considering proposals that would have 
the effect of replacing or substantially altering it:
     Social Security provides a basic income floor for 
virtually all working Americans at the time of retirement, 
allowing millions of the elderly to maintain their 
independence. It provides $12 trillion in life insurance 
protection, more than all private insurance combined. More than 
43 million Americans are currently receiving benefits--
including 27 million retirees, 11 million family members and 
survivors of deceased workers (including 3 million children 
under 18) and 5 million disabled persons.
     Social Security is self-supporting and has not 
added a penny to the deficit. Since 1937 the program has 
collected $5 trillion and paid out $4.5 trillion, leaving $500 
billion in reserve.
     Social Security is highly efficient and has very 
low administrative costs. Administrative expenses consume less 
than one percent of revenues, compared to 11 percent on average 
(not including profit) for private insurance.
     With fewer than half of all U.S. workers currently 
covered by private pension plans, the majority of retired 
Americans find themselves relying on Social Security for most 
of their income. Without Social Security, nearly one of every 
two elderly Americans would fall below the poverty line.
     Social Security benefits and inflation adjustments 
have been of crucial importance in reducing poverty among older 
Americans. Thirty years ago, poverty among the elderly was more 
than twice the national rate. Today the poverty rate among the 
elderly is under 12 percent, comparable to other adults.
     Social Security provides substantial protection 
for survivors and those with disabilities. For a typical 
example--a 27-year-old couple, both working at average wages, 
with two small children--survivors' protection is worth 
$307,000. Disability protection for the same family amounts to 
$207,000.
    Social Security is, in other words, a program of many 
parts: part retirement program, part disability income program, 
part life-insurance program, part anti-poverty program--and all 
of them working together for the benefit of the nation. Even if 
some individuals were able to do better under an individualized 
retirement savings scheme, the nation as a whole would not be 
better off.
    It is also important to understand that although Social 
Security does require financial strengthening to meet its full 
obligations over the 75-year period for which Social Security 
forecasting is done, the program does not face a financial 
crisis--now or tomorrow.
    Even with no changes in present contribution rates and 
benefits, Social Security can continue to pay full benefits on 
time for 30 years, and after that could still pay 75 percent of 
its obligations. Even 75 years from now, without any change in 
law, Social Security could still meet 70 percent of its 
obligations. Our task, in other words, is not to overcome a 
crisis but to make up a shortfall.
    In 1995, the Trustees of Social Security estimated that 
over the long run--that is, over the course of the 75-year 
estimating period--outlays are expected to exceed revenues by 
2.17 percent of total covered payrolls. In other words, if 
Social Security contribution rates had been increased by 2.17 
percentage points in 1995, the long-term deficit would be 
eliminated. This is not to suggest that a contribution-rate 
increase in 1995 would have been a good idea, but simply to 
show that the shortfall on the horizon is not of such magnitude 
as to require radical solutions. Moderate measures, undertaken 
soon, can avert major problems later, in much the same way that 
a minor course correction can steer a ship safely past a hazard 
on the horizon.
    The long-term imbalance of revenues and expenses can be 
substantially reduced by taking several common-sense steps. 
These options are discussed in Social Security for the 21st 
Century: A Strategy to Maintain Benefits and Strengthen 
America's Family Protection Plan, our statement in the report 
of the Advisory Council, and are summarized below:

                                                                        
------------------------------------------------------------------------
                                     Rationale for      Impact on 2.17% 
         Proposed Change                 Change            Deficit 4    
------------------------------------------------------------------------
1. Increase taxation of benefits  Benefits should be               -0.31
                                   taxed to the                         
                                   extent they exceed                   
                                   what the worker                      
                                   paid in, as is                       
                                   done with other                      
                                   defined-benefit                      
                                   pension plans..                      
2. Change Cost of Living          COLA is determined               -0.31
 Adjustment (COLA) to reflect      by CPI, which is                     
 corrections to Consumer Price     widely believed to                   
 Index (CPI) announced in 1996     overstate                            
 by Bureau of Labor Statistics.    inflation; further                   
                                   changes to CPI may                   
                                   be made, perhaps                     
                                   affecting COLA--                     
                                   and thus the long-                   
                                   term deficit--more                   
                                   than shown here..                    
3. Extend Social Security         Most state and                   -0.22
 coverage to all newly hired       local employees                      
 state and local employees.        are already                          
                                   covered; the 3.7                     
                                   million who are                      
                                   not are the last                     
                                   major group in                       
                                   labor force not                      
                                   covered..                            
4. Change wage-averaging period   Helps bring program              -0.28
 for benefits-computation          into long-term                       
 purposes from 35 to 38 years,     balance by                           
 or increase contribution rate     reducing benefits                    
 0.3% (0.15% for workers and       (3% on average)                      
 employers alike).                 for future                           
                                   retirees. Increase                   
                                   would have                           
                                   approximately the                    
                                   same effect on                       
                                   deficit as 3%                        
                                   benefit cut..                        
5. Redirect income from taxes on  Corrects anomaly in              -0.31
 Social Security benefits from     current law. Note:                   
 Medicare to Social Security 5.    This change to go                    
                                   into effect when                     
                                   Medicare is                          
                                   refinanced (2010-                    
                                   2020).                               
------------------------------------------------------------------------
 Long-term deficit remaining after implementation of above changes:     
  0.80% 6                                                               

    The Advisory Council agreed that this package of relatively 
modest changes reduces Social Security's anticipated long-term 
deficit by nearly two-thirds, extending the life of the trust 
funds from 2030 to 2050. That being the case, there simply is 
no compelling argument for abandoning the traditional Social 
Security program, with its unique advantages, for a radical 
experiment with individual retirement savings accounts. Yet 
that is the approach proposed by various Advisory Council 
members.

                     II. `Individual Accounts' (IA)

    The Individual Accounts (IA) plan proposed by two members 
of the Council would:
    (1) Reduce existing Social Security protection so that over 
the long run benefits are brought into balance with the current 
combined contribution rate (12.4 percent of payroll); and
    (2) Establish a new compulsory individual savings plan, 
financed by an additional 1.6 percent deduction from workers' 
earnings, raising the worker's deduction from 6.2 percent of 
earnings to 7.8 percent beginning in 1998.
    Benefits under the Social Security part of the plan would 
be gradually reduced, ultimately cutting benefits about 30 
percent on average. This results in part from accelerating the 
increase in the normal retirement age (NRA) scheduled in 
present law and then continuing to increase it by indexing it 
to longevity, and in part by changing the wage-averaging and 
benefit formulas. The reduction in benefits would be gradual 
but substantial.
    Proponents argue that the IA plan, on average, is designed 
to protect the status quo for Social Security participants by 
bringing the combined benefits of the reduced Social Security 
system and the new savings plan up to the level now provided 
for (but not fully funded) by the present Social Security 
system. However, the IA plan has many flaws:
     It reduces Social Security's defined guaranteed 
benefit plan in the long run by 30 percent for the average 
worker (32 percent for higher-paid and 22 percent for lower-
paid workers), with the hope that the average return on savings 
in individual accounts will make up for the losses in Social 
Security benefits. But even if this turns out to be the case on 
average, many will fall below average, particularly among the 
lower-paid.
     It requires all workers to set aside more of their 
wages than at present--in effect a tax increase--with the 
increase required to be saved for retirement, regardless of 
other more immediate needs that the worker and his or her 
family may have for health care, emergencies, or more basic 
needs such as food, clothing and shelter.
     It makes the challenge of solving Medicare's 
financial problems more difficult by pre-empting compulsory 
deductions from workers' earnings for retirement savings rather 
than for health care. If a payroll-tax increase is to be 
considered, there is a more immediate need to direct such 
income to Medicare than to Social Security.
     It undermines broad public support for the 
residual Social Security system by producing lower and lower 
benefits, which in turn will create pressure from the more 
successful savers and investors to shift more of their payroll 
taxes from Social Security to private accounts.
     Even on average, it is unlikely to achieve the 
goal of adequate retirement income because many savings 
accounts holders will face more immediate needs and will want 
access to their money before retirement, and there will be 
great pressure on the Congress to authorize early withdrawals. 
After all, the selling point for these private accounts is that 
the money belongs to the individual. Individuals facing 
emergencies or other major expenses will not take kindly to 
being told that they must wait for many years to gain access to 
their funds.
    For all of these reasons (discussed at greater length in 
our statement in the report of the Advisory Council), the six 
of us strongly oppose the IA plan. Indeed, we see the IA plan 
as something of a Trojan horse, in effect if not in intent, 
because it could result in undermining support for what would 
remain of the traditional Social Security program, thus leading 
to even greater substitution of a private savings scheme for 
social insurance.

                 III. Personal Security Accounts (PSAs)

     The Personal Security Accounts (PSA) plan proposed by five 
members of the Advisory Council would:
    (1) Replace Social Security's existing benefits structure 
with a flat monthly government-paid retirement benefit varying 
only with length of time worked;
    (2) Create a system of compulsory private individual 
``security accounts'' (i.e., savings accounts) for retirement, 
funded by 5 percentage points of the payroll tax now going to 
Social Security.
    The monthly benefit payable via the government system would 
be $205 after 10 years of coverage (in 1996 dollars, wage-
indexed thereafter), rising by about $8 for each additional 
year of coverage until the maximum benefit--$410 a month--is 
reached for workers having 35 years of coverage. Spouses of 
eligible workers would receive a monthly benefit of $205, and 
older surviving spouses would get 75 percent of the total flat 
benefit payable to the couple. A disability and young 
survivor's program similar to the present system (but 
ultimately reduced by 30 percent in the case of disability) 
would also be part of the central government system.
    The PSA plan requires increasing the payroll tax by 1.52 
percentage points beginning in 1998 and continuing through 
2069. In addition, the plan would borrow from the Federal 
government over 33 years--at the peak owing the Treasury about 
$2 trillion (in 1996 dollars, $15 trillion in then-current 
dollars) and then repaying it over the next 35 years. The tax 
increase and the borrowing are necessary to enable the plan to 
fulfill the benefit promises of the present Social Security 
system for those 55 and older, and to pay for past service 
credits from the present system to those 25 to 54. All those 
now under 25 would, at retirement, receive only the flat 
benefit plus whatever the 5 percent of wages invested in PSAs 
added up to.
    Individuals would be free to invest their PSAs in any 
generally available financial instrument, and the accumulated 
amounts would become available when they reached retirement 
age, with no requirement for annuitization and with no special 
provision for spouses or other dependents.
    The PSA approach has all the disadvantages of the IA plan--
and more:
     It requires a 1.52 percentage point increase in 
the payroll tax for 72 years, and, in addition, massive 
borrowing from the Federal government.
     The residual public Social Security program 
becomes even more unattractive to most contributors than in the 
case of the IA plan, with benefits related only to the length 
of time under the system. Thus, regardless of wage levels or 
what was paid in, the maximum benefit is only $410 a month 
(about two-thirds of the poverty level) for someone who has 
paid into the program for 35 years.
     Investment choices are essentially unrestricted 
(and thus difficult to monitor) and the payout at retirement 
age could be in a lump sum, with no annuity requirement to 
spread payments out over the retirement years--and no inflation 
protection.
     The more successful investors would have little 
reason to want to keep what is left of the public system, and 
without their political support it would probably be phased out 
or converted into a means-tested poverty program.
     The plan increases the Federal budget deficit by 
$200 to $300 billion a year for the next three decades. 
Moreover, with some investors failing to get good returns, the 
burden on the government (read: taxpayers) would in all 
likelihood be greater, because many retirees facing 
impoverishment would be forced to turn to means-tested income-
support programs such as Supplemental Security Income (SSI), 
thus driving up the cost of these taxpayer-supported programs.
     The plan is particularly harsh on those with 
disabilities and on those spouses who do not have sizeable 
accounts of their own (as discussed in our statement in the 
report of the Advisory Council).
     The communication and administrative tasks created 
by the plan, particularly during the ``transition'' period 
(more than 70 years), seem overwhelming. The government would 
have to explain the protection being provided under present 
Social Security law and the new flat benefit program as it will 
be for the young, while explaining the rules governing how much 
one gets from each source during the transition. 
Administratively, the government would have to keep an eye on 
small as well as large employers to make sure not only that 
deductions are made from wages each payday but that they are 
deposited in the employee's choice of a bank, broker, or other 
financial agent. Then the government must make sure that the 
accumulating funds are kept intact--through all subsequent 
movements of the varying totals among changing fiscal agents--
until retirement. This would be a monumental task. As noted 
previously, the administrative costs of the present Social 
Security system are below one percent. In contrast, the 
administrative costs of Chile's privatized retirement system--
which offers fewer options than would be available under the 
PSA plan--are reportedly in the range of 15 percent.
     The plan violates the basic principle of pooling 
resources and spreading the risk that has helped Social 
Security to weather economic downturns and recessions and that 
makes it feasible to distribute retirement income equitably. 
Instead of sharing risks, workers would have to bear risk 
individually--with the certainty that some risks would turn out 
very badly, and that in such cases (typically people outliving 
their savings accounts), retirees would have to turn to their 
adult children or to means-tested income-support programs for 
help.
     The plan fails the test of cost-effectiveness. If 
we want to increase returns on investment of Social Security 
funds--both to completely close the remaining long-term deficit 
discussed above and to make Social Security a more attractive 
`investment' for younger workers--it would make far more sense 
to centrally invest a portion of the trust funds in private 
equities, as is done now by virtually all other federal, state, 
local, and private-sector defined-benefit retirement plans. 
With this approach, administrative costs are much lower and net 
overall returns are thus higher.
    The IA plan and the PSA plan have their differences, but 
what they have in common is that both, in the guise of rescuing 
Social Security, require radical and unnecessary ``reforms'' 
that would mean new risks and higher costs for workers and 
retirees.
     They require workers to pay twice for retirement: 
once to keep the present system solvent enough to pay at least 
reduced benefits to present beneficiaries and those workers who 
will be retiring soon, and once to fund the new system of 
individual retirement accounts.
     They require major new tax increases. The IA plan 
increases workers' deductions (workers only--no matching 
increase for employers) from 6.2 percent to 7.8 percent of 
payroll; the PSA plan increases the combined worker-employer 
rate by 1.52 percentage points while simultaneously borrowing 
more than $2 trillion from the Treasury. These are burdens that 
would begin now and accumulate for decades.
     They undermine public confidence in Social 
Security, even in its ``reformed'' version, by requiring 
substantial cuts in government-paid benefits, thus making some 
private investment accounts appear to be more attractive.
     They assume that workers will, on average, be able 
to offset reduced benefits--and come out ahead--by earning 
higher returns on their private investments. But of course 
there are no guarantees. A skillful or lucky investor may 
indeed do well; an unlucky investor could end up with much less 
than the benefits that would have been guaranteed in law under 
the present system. Averages being averages, it is a certainty 
that many would earn below-average returns.
    None of this is necessary. The six of us who propose the 
Maintain Benefits plan believe that our first task is to take 
the common-sense steps outlined above (and discussed in our 
statement in the Council report) and this greatly reduces 
Social Security's long-term deficit right away. At the same we 
propose exploration of the various options to bring the program 
into full long term balance.
    There are several such options, including: enacting, in the 
near future, moderate tax increases or benefit cuts for future 
retirees; scheduling further increases in the normal retirement 
age (which has the same effect on Social Security's long-term 
deficit as reducing benefits, and which some would argue may be 
justified by increases in longevity); or scheduling a series of 
future increases in contribution rates. All of these options 
have disadvantages, however, including making Social Security 
less attractive to younger workers by lowering the ratio of 
benefits to contributions. This strengthens the case for 
exploring the pros and cons of a public-private investment 
strategy.

                IV. A Public-Private Investment Strategy

    The six of us who advocate the Maintain Benefits plan also 
advocate reviewing Social Security's present investment policy. 
Under present law, funds may be invested only in low-yield 
government bonds. Yet funds are accumulating in anticipation of 
the demands on the system that will be made when the baby-boom 
generation begins retiring in the second decade of the 21st 
century. Investing up to 40 percent of this accumulating 
``surplus'' in stocks indexed to the broad market would yield 
higher returns, closing the remaining long-term deficit while 
also improving the benefit/contribution ratio for younger 
workers.\7\
    The objective of investment neutrality can be established 
in law and pursued as a matter of policy by establishing an 
expert board (as in the case of the Federal Retirement Thrift 
Investment Board, which administers the Thrift Savings Plan for 
Federal employees) to select an appropriate passive market 
index, choose portfolio managers, and monitor portfolio 
management.
    Some critics of this investment strategy argue that 
politicians would be tempted to tamper with the index of 
government investments in order to steer investments toward 
preferred social objectives. In reality this is unlikely to be 
a problem. Once the objective of investment neutrality is set, 
we can be reasonably confident that our competitive political 
system will furnish the necessary checks and balances to 
protect this principle. Efforts by one party to undermine 
neutrality would provide a major point of attack for the other 
party, with the result that future Congresses would be 
reluctant to interfere with an established investment 
arrangement in which nearly every American family would have a 
stake. (This is the same principal of political balance that 
has thus far protected Social Security from radical change.)
    Perhaps foremost among all the advantages of this approach 
over the IA and PSA plans is that it preserves Social Security 
as a defined-benefit plan, with benefits determined by law 
rather than by the uncertainties of individual investment 
decisions. In all respects, it leaves the essential principles 
of the traditional Social Security system undisturbed while 
restoring long-term balance and offering Social Security 
participants the same investment benefits that are enjoyed by 
participants in other large retirement plans--state, local, and 
private. The investment risk is kept manageable and affordable 
by investing as a group rather than as individuals, and the 
administrative costs are, of course, very low in comparison to 
making investments at retail and managing millions of 
relatively small individual accounts.

                             V. Conclusion

     Today Social Security fulfills what Lincoln described as 
``the legitimate object'' of government: ``to do for a 
community of people whatever they need to have done but cannot 
do at all or cannot do so well for themselves in their separate 
and individual capacities.'' It is extremely important that 
Social Security, as the basis for all retirement planning, 
continue in the form of a defined-benefit plan, promising 
specified benefits that are not at risk of being undermined by 
investment decisions.
    With Social Security as a base to build on, those who can 
afford to accumulate other retirement income are free to do so, 
with encouragement from the tax code and without being 
penalized by a means test. And, with basic Social Security 
protection in place, pension plans and private investors can 
more freely take risks in pursuit of higher investment returns.
    This argues for retaining Social Security as the basic 
foundation of our traditional three-tier retirement system--a 
foundation that is not threatened by the failure of a business 
or the decline of an industry, and with benefits continuing to 
be defined by law. Over time, of course, Social Security has 
adapted to change and can continue to do so, even as we are now 
recommending. But the system that has met every challenge for 
60 years has proven sound--and continues to merit powerful 
public support.
    Whenever Social Security's long-term stability has been 
threatened by circumstances warranting a legislative response, 
strong public support for the program has encouraged political 
leaders to seek bipartisan solutions that build on Social 
Security's inherent strengths. That is the approach we 
recommend now--to build on rather than replace the family 
protection plan that works so well for so many.

                                 Notes

    1. Robert M. Ball, Edith U. Fierst, Gloria T. Johnson, Thomas W. 
Jones, George Kourpias, and Gerald M. Shea.
    2. Council Member Edith U. Fierst would prefer not to implement 
either of these changes; see her statement appended to the main report 
of the Advisory Council.
    3. Some of the revenue from taxation of Social Security benefits 
now goes to the Medicare Hospital Insurance (HI) trust fund, not as a 
matter of policy but for reasons related to Senate voting procedures 
(see the report of the Advisory Council, p. 78), and this anomaly 
should be corrected when Medicare is refinanced.
    4. Estimates by the Office of the Actuary, Social Security 
Administration.
    5. This is the only one of these proposals not supported by a 
majority of the Advisory Council.
    6. Adjusted for interaction of proposed changes (see the report of 
the Advisory Council, p. 80).
    7. To help maintain the program in balance even beyond the 
traditional 75-year estimating period, a contribution-rate increase of 
1.6 percent should be scheduled to go into effect in 2045, with the 
understanding that at that time, depending on actual experience, the 
increase may not be needed (see the report of the Advisory Council, p. 
86, for a discussion of this issue).
      

                                

    Chairman Bunning. Your time did expire.
    Dr. Gramlich, would you please make your presentation.

STATEMENT OF EDWARD M. GRAMLICH, PH.D., DEAN, SCHOOL OF PUBLIC 
  POLICY, UNIVERSITY OF MICHIGAN; AND CHAIR, 1996 QUADRENNIAL 
              ADVISORY COUNCIL ON SOCIAL SECURITY

    Mr. Gramlich. Thank you for soliciting my testimony on 
Social Security reform, Mr. Chairman. In trying to reform this 
important program that has worked so well now for 60 years, I 
am guided by three goals. The first is to retain the important 
social protections of this program that has reduced poverty and 
the human costs of work disabilities. The second is to make the 
social protections affordable by bringing Social Security back 
into long-term financial balance. The third is to add new 
national saving for retirement, both to help individuals 
maintain their own standard of living in retirement and to 
build up the Nation's capital stock in advance of the baby boom 
retirement crunch.
    In the recently released report of the Advisory Council, I 
have introduced a compromise plan called the individual 
accounts, IA, plan that tries to achieve all three goals. It 
would preserve the important social protections of Social 
Security and still achieve long-term financial balance in the 
system by what might be called kind and gentle benefit cuts. 
Most of the cuts would be felt by high-wage workers with 
disabled and low-wage workers being largely protected from the 
cuts. Unlike the other two plans proposed by the Advisory 
Council, there would be no reliance at all on the stock market 
for these benefits and no worsening of the finances of the 
Health Insurance Trust Fund.
    The IA plan would include some technical changes such as 
including all state and local new hires in Social Security and 
applying consistent income tax treatment to Social Security 
benefits. These changes are also part of the Council's other 
plans and go some way to eliminating Social Security's 
actuarial deficit.
    Then, beginning in the 21st century, the changes would be 
supplemented with two other measures. There would be a slight 
increase in the normal retirement age for all workers. There 
would be a slight change in the benefit formula to reduce the 
growth of Social Security benefits for high-wage workers. Both 
of these changes would be phased in very gradually to avoid 
actual benefit cuts for present retirees and to avoid notches 
in the benefit schedule, which are instances when younger 
workers with the same earnings records get lower real benefits 
than older workers. The result of all changes would be a modest 
reduction in the overall real growth of Social Security 
benefits. When combined with the rising number of retirees, the 
share of the Nation's output devoted to Social Security 
spending would be approximately the same as at present, 
eliminating this part of the impending explosion in future 
entitlement spending. Of the three plans suggested by our 
Council, my plan is clearly the best for achieving short- and 
long-term balance in the Federal budget.
    These benefit cuts alone would mean that high wage workers 
would not be experiencing rising real benefits as their real 
wages grow, so I would supplement these changes with another 
measure to raise overall retirement and national saving. 
Workers would be required to contribute an extra 1.6 percent of 
their pay to their individual accounts. These accounts would be 
owned by workers but centrally managed. Workers would be able 
to allocate their funds among five to ten broad mutual funds 
covering stocks and bonds. Central management of the funds 
would cut down the risk that the funds would be invested 
unwisely, would cut administrative costs, and would mean that 
Wall Street firms would not find these individual accounts a 
financial bonanza. The funds would be converted to real 
annuities on retirement to protect against inflation and the 
chance that retirees would overspend in their early retirement 
years.
    All changes together would mean that approximately the 
presently scheduled level of benefits would be paid to all wage 
classes of workers of all ages. The difference between this 
outcome and present law is under this plan, these benefits 
would be affordable, as they are not under present law. The 
changes would eliminate Social Security's long-term financial 
deficit while still holding together the important retirement 
safety net provided by Social Security. They would reduce the 
growth of entitlement spending and improve the Federal budget 
outlook. They would significantly raise the return on invested 
contributions for younger workers, and the changes would move 
beyond the present pay-as-you-go financing scheme by building 
up the Nation's capital stock in advance of the baby boom 
retirement crush.
    As the Congress debates Social Security reform, I hope it 
will keep all of these goals in mind, and I hope also that it 
will make these types of changes in this very important 
program.
    Thank you very much for hearing me.
    [The prepared statement follows:]

Statement of Edward M. Gramlich, Ph.D., Dean, School of Public Policy, 
University of Michigan; and Chair, 1996 Advisory Council on Social 
Security

    Thank you for soliciting my testimony on Social Security 
reform, Mr. Chairman. In trying to reform this important 
program that has worked so well now for sixty years, I am 
guided by three goals. The first is to retain the important 
social protections of this program that has greatly reduced 
aged poverty and the human costs of work disabilities. The 
second is to make these social protections affordable by 
bringing Social Security back into long term financial balance. 
The third is to add new national saving for retirement--both to 
help individuals maintain their own standard of living in 
retirement and to build up the nation's capital stock in 
advance of the baby boom retirement crunch.
    In the recently released report of the Advisory Council, I 
have introduced a compromise plan, called the Individual 
Accounts Plan (IAP), that tries to achieve all three goals. It 
would preserve the important social protections of Social 
Security and still achieve long term financial balance in the 
system by what might be called kind and gentle benefit cuts. 
Most of the cuts would be felt by high wage workers, with 
disabled and low wage workers being largely protected from 
cuts. Unlike the other two plans proposed by the Advisory 
Council, there would be no reliance at all on the stock market 
for these benefits, and no worsening of the finances of the 
Health Insurance Trust Fund.
    The IA plan would include some technical changes such as 
including all state and local new hires in Social Security and 
applying consistent income tax treatment to Social Security 
benefits. These changes are also part of the Council's other 
plans, and go some way to eliminating Social Security's 
actuarial deficit.
    Then, beginning in the 21st century, the changes would be 
supplemented with two other measures. There would be a slight 
increase in the normal retirement age for all workers. There 
would also be a slight change in the benefit formula to reduce 
the growth of Social Security benefits for high wage workers. 
Both of these changes would be phased in very gradually to 
avoid actual benefit cuts for present retirees and notches in 
the benefit schedule (instances when younger workers with the 
same earnings records get lower real benefits than older 
workers). The result of all changes would be a modest reduction 
in the overall real growth of Social Security benefits. When 
combined with the rising number of retirees, the share of the 
nation's output devoted to Social Security spending would be 
approximately the same as at present, eliminating this part of 
the impending explosion in future entitlement spending. Of the 
three plans suggested by our Council, my plan is clearly the 
best for achieving short and long term balance in the federal 
budget.
    These benefit cuts alone would mean that high wage workers 
would not be experiencing rising real benefits as their real 
wages grow, so I would supplement these changes with another 
measure to raise overall retirement (and national) saving. 
Workers would be required to contribute an extra 1.6 percent of 
their pay to their individual accounts. These accounts would be 
owned by workers but centrally managed. Workers would be able 
to allocate their funds among five to ten broad mutual funds 
covering stocks and bonds. Central management of the funds 
would cut down the risk that funds would be be invested 
unwisely, would cut administrative costs, and would mean that 
Wall Street firms would not find these individual accounts a 
financial bonanza. The funds would be converted to real 
annuities on retirement, to protect against inflation and the 
chance that retirees would overspend in their early retirement 
years.
    All changes together would mean that approximately the 
presently scheduled level of benefits would be paid to all wage 
classes of workers, of all ages. The difference between this 
outcome and present law is that under this plan these benefits 
would be affordable, as they are not under present law. The 
changes would eliminate Social Security's long term financial 
deficit while still holding together the important retirement 
safety net provided by Social Security. They would reduce the 
growth of entitlement spending and improve the federal budget 
outlook. They would significantly raise the return on invested 
contributions for younger workers. And, the changes would move 
beyond the present pay-as-you-go financing scheme, by building 
up the nation's capital stock in advance of the baby boom 
retirement crunch.
    As the Congress debates Social Security reform, I hope it 
will keep all of these goals in mind. I also hope it will make 
these types of changes in this very important program. Thank 
you for hearing me.
      

                                

    Chairman Bunning. Dr. Schieber.

  STATEMENT OF SYLVESTER J. SCHIEBER, PH.D., VICE PRESIDENT, 
WATSON WYATT WORLDWIDE; AND MEMBER, 1994-1996 ADVISORY COUNCIL 
                       ON SOCIAL SECURITY

    Mr. Schieber. Thank you. Mr. Chairman, thank you for the 
opportunity to testify before you today to relate to you my 
perspective on the deliberations of the Social Security 
Advisory Council, and the proposal calling for the creation of 
personal security accounts, PSA, is the best way to reform the 
program. Social Security's own trustees have been telling us 
for some time that the program is significantly underfunded for 
future generations. If the full imbalance were addressed 
immediately through a tax increase, it would increase cost 
rates by about 20 percent over the next 75 years.
    Given current tax burdens, such an increase is no trivial 
matter. In addition, by the time we get around to dealing with 
Social Security's financing problems, the current funding gap 
will be much larger than it is today. The potential 
rededication of 2 percent of gross domestic product, GDP, to 
provide old-age, survivors, disability insurance, OASDI, 
benefits might be tenable if that were the only imbalance that 
the Government were facing. But as we all know, it is not. For 
reasons outlined in my prepared remarks, Medicare's claim on 
the economy is going to be much harder to reduce or stabilize 
than Social Security's.
    We have to consider rebalancing Social Security in the 
larger context of the total Federal Government claim on the 
economy and within the context of other entitlements that must 
be financed out of government revenues. It does not make any 
difference that there is a separate earmarked tax that finances 
Social Security. There is only so much that the public is 
willing to give to the Government, and there are other things 
that the Government has to do.
    In the Advisory Council's deliberations, there was 
virtually no support for a straightforward increase in the 
payroll tax to rebalance the current system. We spent much time 
looking for ways to live within the current tax rates, but in 
the final analysis, there was little support for that option 
either. The unwillingness to raise taxes or cut benefits in a 
straightforward manner drove us all to consider policy options 
not previously viable, but we split into three camps in terms 
of the particular policy options that we supported.
    The members of the council that I sided with, five of us, 
advocated significant reorganization of the current system. We 
proposed that 2.4 percent of covered payroll that now finances 
disability and young survivor benefits should continue to be 
financed through Social Security. The employer's portion of the 
remaining payroll tax, 5 percent of covered payroll, would 
finance a flat benefit payable to all long career workers. The 
employee's remaining 5 percent would go into personal security 
accounts managed like 401(k) or IRA assets. The combination of 
scaled-down Social Security benefits plus the personal security 
account or PSA benefit would be similar to benefits provided by 
current law.
    Critics of the PSA proposal argue that it would erode 
public support for the redistributive aspects of Social 
Security. Since the PSA system would have the same overall 
benefit structure as current law, this opposition would only 
arise because workers might understand the program's 
redistribution work more clearly than they do under current 
law, but it is likely that most workers already understand the 
current system, either on their own or because many 
commentators have told them how it works. Furthermore, if the 
only way we can get the public to support such a program is to 
confuse them about how it works, the program is not sustainable 
anyway.
    Critics of the PSA plan also argue it would expose workers 
to undue risk in the financial markets. This argument often 
paints a picture of individual account plans creating risks for 
workers where none exists in the current environment. As I 
point out in my prepared remarks, the 1977 Social Security 
amendments reduce many workers' Social Security relatively more 
than the October 1987 stock market crash. Today, Social 
Security is significantly underfunded, and to restore balance, 
benefits must be cut or taxes raised to finance current 
promises. Either of these propose significant risks. Critics of 
the PSA proposal finally argue that it would create tremendous 
new obligations for future taxpayers. The reason that this 
argument is given any credence is because the Government does 
not consistently account for its future obligations.
    Table 1 in my prepared remarks shows that the Advisory 
Council proposal that most significantly reduces the long-term 
Government obligations of Federal taxpayers is the PSA plan. 
Considering the full projected costs of the transition 
including any borrowing, the PSA proposal reduces total future 
taxpayer obligations nearly twice as much as the individual 
accounts proposal. It reduces them by more than 20 times the MB 
proposal's cost reductions. It is the only proposal that would 
reduce the claim that OASDI payments by the Government would 
make on the overall economy.
    While several members of our Advisory Council and others 
have branded the PSA proposal radical, I suggest that we look 
at the world around us to see that such proposals are 
commonplace. Reforms of this sort are sweeping across Latin 
America. Similar reforms have been adopted in a number of 
countries in the Austral-asian sphere of the world. They have 
been implemented in United Kingdom and are being considered 
across other countries of Europe. What is radical about the PSA 
proposal is that it would create an opportunity to turn our 
national retirement program into a system that would begin to 
fund its benefits promises by adding to savings of our economy. 
We believe it would also restore confidence in a system that 
the majority of taxpayers today believe will not deliver the 
benefits that are being politically promised.
    Thank you very much.
    [The prepared statement and attachments follow:]

Statement of Sylvester J. Schieber, Ph.D., Vice President, Watson Wyatt 
Worldwide; and Member, 1994-1996 Advisory Council on Social Security

    The views in this statement are those of the author and do 
not necessarily reflect the views of Watson Wyatt Worldwide or 
any of its other associates.
    Social Security's actuaries and trustees have been telling 
us for some time that the program is significantly underfunded 
for future generations of retirees. Some students of the 
program trivialize its underfunding by saying that it is only 
underfunded by 2.2 percent of covered payroll over the next 75 
years and imply that its imbalance is no big deal. That is very 
misleading. If the actuarial imbalance is to be made up through 
a tax increase, it would be an 18 percent increase in the 
program's cost over the next 75 years. Such an increase in the 
tax that has become the largest federal tax for many workers is 
no trivial matter.
    In addition, the 2.2 percent figure assumes that we could 
have raised the payroll tax rate 2.2 percentage points early 
last year and banked the added accumulation, or cut benefits by 
a comparable amount. There are three problems with such an 
assumption. First, the 2.2 percentage points understates the 
actuarial imbalance because the actuaries do not consider the 
deteriorating funding status of the program at the end of their 
75-year projection period. If we wanted to raise enough 
revenues to make up for this calculation period problem, we 
would have had to raise the payroll tax 2.5 percentage points 
early last year. Second, after the experience of the ballooning 
federal debt in conjunction with the trust fund accumulations 
of the last 14 years there are questions about the government's 
ability to convert added payroll tax collections into national 
savings. Third, policymakers have not been willing to raise 
taxes by the 2.2 percentage points, or the more realistic 2.5 
points, needed last year or to cut benefits immediately by a 
corresponding amount. By the time we get around to dealing with 
Social Security's financing problems, the 2.2 percent or 2.5 
percent funding gap will be much larger than it is currently. 
If we wait until the baby boomers are retired to deal with this 
problem, the actuarial imbalance will have doubled from its 
current level.
    It is important that Congress deal with Social Security's 
financing imbalance soon because it damages the public's 
perception about the long-term viability of the program. Some 
people dismiss reports that the majority of workers under age 
50 believe they will not get full benefits now provided by 
Social Security when they retire as public cynicism. I believe 
that while most people do not understand the arcane nuances of 
Social Security financing, many of them do catch the yearly 
news reports telling of the annual release of the Trustees 
Report. The headlines generated last year by that report 
indicated that Social Security would run out of money in 2029--
that is, within the normal life expectancy of virtually all 
workers under age 50 today. Is it cynicism that people believe 
their government's reports of the program running out of money 
in their lifetime means they will get reduced benefits? I think 
not.
    In considering policies to deal with Social Security's 
actuarial imbalances, Congress cannot ignore the larger context 
of the government's total fiscal operations. It also has to 
keep in mind the provision of retirement security to workers 
while maintaining some modicum of equity across generations. 
Balancing the various goals is no easy task. It was this 
combination of considerations that drove the members of the 
Social Security Advisory Council in very different directions 
in proposing solutions to its current imbalances in the system.

   Balancing Social Security in the Larger Context of Federal Fiscal 
                               Operations

    Figure 1 shows three-year averages of the total receipts of 
the federal government as a percentage of gross domestic 
product (GDP) starting with Fiscal Year 1951 through Fiscal 
Year 1996. I use three-year averages rather than the actual 
annual data to smooth the effects of economic cycles on tax 
revenues. Over this 45 year period, total receipts varied from 
a low of 17.1 percent of GDP to a high of 19.3 percent, only 
about a 2 percentage point variation in the claim that the 
federal government has made on taxpayers. While there is no 
natural limit to government's claim on the economy, there are 
clearly political forces that narrowly limit the amount US 
taxpayers are willing to render to it. Even looking at actual 
year-to-year numbers, the maximum claim in any year was 19.7 
percent of GDP.
    Under current law, OASDI claims are expected to grow from 
4.7 percent of GDP in 1996 to 6.5 percent by 2035. If we begin 
with an assumption that total government claims on the economy 
are narrowly limited and that Social Security is scheduled to 
make a bigger claim than currently, then some other government 
expenditures must shrink. One way to look at the potential for 
Social Security's claim to expand while other programs contract 
is to look at it in the context developed by the Entitlement 
Commission during 1994.
    The Commission looked at the potential total claim that all 
entitlement programs would make on the government as presented 
in Figure 2.\1\ Entitlements include Social Security, Medicare, 
retirement programs for federal civilian and military retirees, 
Medicaid, and various other means tested welfare programs. 
Social Security and Medicare make up about two-thirds of total 
entitlement claims today. By 2030, entitlement claims alone are 
projected to exceed the 17 to 19 percent of GDP that taxpayers 
have been willing to share with government over the latter half 
of the 20th century. Indeed, the programs aimed at the elderly 
alone are expected to exceed that amount by 2030. The 
predicament predicted in Figure 2 suggests that expanding 
Social Security's claim on the US economy might be more 
difficult than simply bringing its own accounts back into 
actuarial balance.
---------------------------------------------------------------------------
    \1\ In these projections, Medicare and Social Security outlays 
follow the Medicare and Social Security Trustees' best estimates. 
Medicaid outlays are assumed to reflect demographic changes and the 
increases in health care costs that underlie the Medicare projections. 
All other spending and revenues are assumed to follow Congressional 
Budget Office projections through 1999 and to grow in proportion to the 
overall economy thereafter.
---------------------------------------------------------------------------
    Figure 3 dissects the projected increases in total 
entitlement claims into three component parts, namely Social 
Security, Medicare, and other entitlement programs. While each 
of the component elements is projected to grow, the graphic 
suggests that the most significant contributor to the expected 
growth in total entitlements is expected to be the Medicare 
program. In the case of the other entitlements, the growth of 
Medicaid is a major contributor in projected growth. This leads 
some policy analysts to argue that our entitlement problem is 
really a Medicare and Medicaid problem rather than one with the 
cash programs that are included under the entitlement umbrella. 
They claim that if we can restrain the rapid growth in the 
health care programs, we can sustain projected growth in the 
cash programs.
    One problem in constraining federal health programs for the 
elderly is that doing so is likely to be more difficult than 
constraining the cash programs for retirees. There are several 
reasons for this. First among them is that old people simply 
use more health care services than younger ones as shown in the 
left-hand panel of Figure 4. The right hand figure shows that 
the percentage of our population over age 65 is expected to 
grow by as much between 2010 and 2030 as it had in the prior 80 
years. In tandem, these two phenomena portend a significant 
increase in the demand for health care in coming decades, and 
much of it is likely to be funded through publicly funded 
insurance programs aimed at the elderly.
    Not only will the increase in the elderly population and 
their natural tendency to use more health care drive up the 
costs of Medicare in the future, but two additional factors are 
likely to further exacerbate these forces. The first is the 
excessive price inflation that seems to persist in the health 
sector of our economy. While medical price increases as 
reflected in the CPI in comparison to overall growth in the CPI 
have moderated recently, the ratio of the Medical CPI to the 
total CPI has been larger from the beginning of this decade 
through the end of 1996 than it has been over the prior three 
decades. It is premature to conclude that recent softening in 
medical price inflation will persist in the long term. The 
record from the last 40 years does not support that conclusion. 
The second factor that will drive up future health costs is the 
continued technological development and more intensive 
treatment of patients. Development of life-extending 
technologies account for the rapid increase in the numbers of 
elderly persons over 85 years of age in recent years. The 
numbers of baby boomers who will live to these ages could have 
a tremendous effect on health care consumption rates by 2030.
    These four factors, the greater consumption of health care 
by older people, the aging of the population, the high 
inflation rates in this segment of the market, and cost 
expanding technologies are all compounding factors that will 
drive up the cost of Medicare claims even in the face of 
program reforms. Current projections suggest that under present 
law Medicare's claim on the economy will grow from 2.5 percent 
of GDP today to 7.5 percent by 2030. The underlying assumptions 
in that projection, however, assume that the added price 
inflationary pressures and the increased costs of treatment due 
to cost expanding technologies will largely be eliminated by 
the end of the first decade of the next century, just as the 
first of the baby boomers begin to turn age 65. In other words, 
our current Medicare projections assume we will have an 
amelioration in inflationary pressures on this program just as 
the baby boomers begin to bring on tremendous levels of new 
demand.
    Yet another problem in dealing with the Medicare dilemma is 
that policymakers will find that they cannot get the same 
leverage from limiting eligibility that they can get with 
Social Security. If normal life expectancy at age 65 is 18 
years, a two-year increase in the normal retirement age will 
reduce Social Security claims by roughly 2/18ths or 11 percent. 
In the case of Medicare, raising the age of eligibility would 
move some recipients to Medicare disability or Medicaid 
coverage, and these tend to be the high-cost cases. For others, 
it would extend VA or CHAMPUS coverage. Figure 5 shows the 
aggregate effects on case loads and potential cost reductions 
from raising eligibility ages under the program and does not 
include the extra potential costs to the government in its own 
retiree health benefits coverage.
    The point of this lengthy discussion is that we cannot 
consider the rebalancing of the OASDI program in a vacuum. The 
potential rededication of 2 percent of GDP to rebalance OASDI 
might be tenable if that were the only imbalance that the 
government were facing. But it is not. There is also a 
tremendous imbalance in Medicare, a program targeted at exactly 
the same population. For the reasons outlined, Medicare's claim 
on the economy is going to be much harder to reduce or 
stabilize than Social Security's. We have to consider 
rebalancing Social Security in the larger context of the total 
federal government's claim on the economy and within the 
context of other entitlements that must be financed out of 
total government revenues. It does not make any difference that 
there is a separate earmarked tax that finances Social 
Security. There only seems to be so much the public is willing 
to give to the government and there are other things that 
government has to do with those limited resources besides 
financing entitlements.

  Forces Driving toward Consideration of Nontraditional Policy Options

    In the Advisory Council's deliberations, there was 
virtually no support for a straightforward increase in the 
payroll taxes when we discussed that approach to rebalancing 
the system. We spent a great deal of time developing an option 
that would have reduced benefits to live within current 
statutory tax rates. When we finished developing that option, 
there was virtually no support for it among the Council 
members. The unwillingness to raise taxes or cut benefits in a 
straightforward manner drove us all to consider policy options 
that have not previously been on the table. But we split into 
three camps in terms of the particular policy options that we 
ended up supporting.
    The first camp, comprised of six Council members, advocated 
several changes, essentially maintaining the current level and 
structure of benefits. Thus, their proposal was called the 
Maintenance of Benefits (MB) proposal. They advocated: (1) 
increasing the number of years of earnings used in determining 
benefits from 35 to 38, moderately reducing benefits for 
workers who do not work more than 35 years; (2) diverting some 
income tax revenues now going to Medicare to the OASDI funds; 
(3) taxing all benefits above workers'; own lifetime nominal 
payroll tax contributions--i.e., their own basis in benefits; 
(4) investing 40 percent of the trust funds in the private 
equity markets to get a higher rate of return than that 
provided by current investments; and raising the payroll tax 
rate by 1.6 percentage points in 2045.
    The MB option was opposed by the majority of the Council. 
Even among its advocates, most came to oppose certain of its 
elements, although they counted the expected revenues from the 
whole proposal. Those of us opposed to the MB plan were 
particularly concerned about the investment of OASDI assets in 
private capital and the increase in the tax rate in 2045. On 
changing investment policy, we are concerned that the equity 
accumulation would be so large that investment decisions would 
become politically motivated. We are concerned about 
irresolvable conflicts of interest as the government would try 
to reconcile its fiduciary obligations to program participants 
while also regulating companies in the investment portfolio in 
the interest of the public's health and welfare. In addition, 
we do not believe that the corporate governance issues can be 
resolved without government taking an active role in ownership 
direction of the assets it owns. On raising the payroll tax, we 
felt strongly that it would be unfair to impose taxes on our 
grandchildren that we are unwilling to pay ourselves.
    The second group on the Council, comprised of two members, 
advocated that future benefits should be reduced to match the 
12.4 percent of covered payroll now dedicated to financing 
OASDI, but that Social Security benefits should be supplemented 
by a defined contribution plan financed by employee 
contributions of 1.6 percent of covered payroll. This saving 
plan, known as the Individual Account (IA) plan, would work 
much like a national 401(k) plan administered by Social 
Security. Social Security would collect and manage 
contributions. Workers could designate the investment of their 
funds across restricted choices--e.g., a government bond fund, 
a corporate bond fund, and limited equity funds--but the 
government would manage the money. At retirement, workers would 
be required to annuitize the assets in their individual 
accounts. The combination of the scaled down Social Security 
benefit plus the IA benefits would roughly replicate current-
law benefits.
    The remaining five members of the Council, including me, 
were uncomfortable with the prospect of Social Security running 
this large investment scheme--indeed, managing more money than 
under the MB proposal. We felt it was important to prefund more 
of accruing benefits financed by the payroll tax than under 
current law, but thought it unwise to have the government so 
involved in the investment of the accumulated assets. We 
advocated significant reorganization of the current system. We 
proposed that the 2.4 percent of covered payroll that now 
finances disability and young survivor benefits should continue 
to be financed through Social Security as now. Under our 
proposal, the employers' portion of the remaining payroll tax, 
5 percent of covered payroll, would finance a flat benefit 
payable to all long-career workers. The employees' remaining 5 
percent would go into Personal Security Accounts (PSAs) that 
they would manage like they manage 401(k) or IRA assets.\2\ The 
combination of the scaled down Social Security benefit plus the 
benefit funded by the PSAs would generate higher benefits, on 
average, than now provided by current law.
---------------------------------------------------------------------------
    \2\ For a complete description of this proposal and its financing 
and benefits implications, see Sylvester J. Schieber and John B. 
Shoven, ``Social Security Reform Options and Their Implications for 
Future Retirees, Federal Fiscal Operations, and National Savings,'' a 
paper prepared for a public policy forum, ``Tax Policy for the 21st 
Century,'' sponsored by the American Council for Capital Formation, 
Washington, DC, December 1996. Copies available from the author on 
request.
---------------------------------------------------------------------------

          Criticisms of the PSA Proposal and Responses to Them

    The PSA proposal has been criticized for several reasons 
but primarily for three important ones. First, critics argue 
that the creation of a two-tier system with a defined 
contribution benefit comprising the second tier would erode the 
public's support for the redistributive aspects of Social 
Security. Second they argue that the PSA proposal would expose 
workers to undue risks in the financial markets. Third, critics 
argue that the PSA proposal would create tremendous new federal 
debt obligations for future taxpayers that do not exist today. 
Each of these will be addressed in turn.
    The combined tiers under the PSA proposal would continue to 
deliver redistributive benefits similar to the current system. 
According to the projections developed by the Social Security 
actuaries for the Advisory Council, the PSA proposal offers the 
potential for both low-wage and high-wage workers to become 
better off under a proposal of this sort than under the 
extremely low rates of return provided by the current system as 
a result of the funding of benefits that is an important 
element of the proposal. The essence of the argument that high-
wage workers would oppose the first-tier of the PSA system is 
that they would get such a relatively low rate of return from 
the first tier compared to the second that they would campaign 
to have all their contributions go to their individual 
accounts. Since the PSA system would essentially have the same 
redistributive characteristics as current law, this opposition 
would only seem to arise because workers might understand the 
redistributive characteristics more clearly under the PSA than 
under current law. But it is likely that most workers already 
understand that the system is redistributive, either on their 
own or because many commentators and financial planners tell 
them about it. Furthermore, if the only way we can get the 
public to support such a program is to confuse them about how 
it works, the program is not established on a sustainable basis 
and will ultimately be challenged anyway. Finally, a number of 
other countries, including Canada and the UK have run their 
social security programs this way for years and those programs 
continue to receive widespread public support.
    The second argument concerns the PSA or the IA plan 
exposing workers to investment risk. This argument often paints 
a picture of individual account plans creating risks for 
workers where none exists in the current environment. To 
illustrate that this is a distorted perspective, consider the 
hypothetical case of two brothers. The first held all of his 
retirement wealth in the form of Social Security promises at 
the beginning of 1977--i.e., he had no personal retirement 
savings or pension rights. He was not going to be eligible to 
retire until five years after the implementation of the 1997 
Social Security Amendments--i.e., he was one of the notorious 
notch babies. The net effect of the 1977 Amendments was to 
significantly reduce his retirement wealth. His brother was 
somewhat younger and managed to hold all of his retirement 
wealth as financial assets invested in the stock market. The 
younger of the brothers happened to be hiking in the Himalayas 
through the month of October 1987 and came home to find that 
his retirement wealth had been significantly reduced by the 
stock market crash that month. In relative terms, the older of 
the two brothers suffered a greater loss in his retirement 
wealth than the younger. Today, Social Security is 
significantly underfunded. Either benefits are going to be cut 
or taxes raised to finance them. Either cutting benefits or 
raising taxes poses significant risk to program participants. 
The PSA proposal would diversify workers' risk between the 
financial markets and the political world in which Social 
Security financing decisions are made. Many policy analysts see 
such diversification as desirable.
    The third argument is that the PSA would create tremendous 
new federal debt obligations for future taxpayers that do not 
exist today because of the transition costs that are part of 
the proposal. The reason that this argument is given any 
credence is because the government does not consistently 
account for its future obligations. The formal debt of the 
federal government is a promise to pay the holders of that debt 
the face value of the bonds they hold at a future point in 
time. Paying off those bonds will be a burden on future 
taxpayers. It is carried on the books of the government. Future 
entitlement obligations are created by statute and are promises 
to pay beneficiaries in accordance with those statutes in the 
future. Meeting future statutory obligations will be a burden 
on future taxpayers just as paying off formal debt will be. But 
statutory obligations are not carried on the books of the 
government. While legislators can reduce statutory benefits and 
the future tax burdens they portend, there is tremendous 
reluctance to do so.
    Table 1 shows projected government obligations under the 
various proposals that were developed by the Social Security 
Advisory Council. The one that most significantly reduces the 
long-term governmental obligations of the taxpayers is the PSA 
plan. Considering the full projected cost of the transition, 
including the cost of transition borrowing, the PSA proposal 
reduces future taxpayer obligations nearly twice as much as the 
IA proposal. It reduces them by more than 20 times the MB 
proposal's reductions. It is the only proposal that would 
reduce the claim that OASDI payments by the government would 
make on the overall economy.
      

                                


                                                     Table 1                                                    
    Present Value of OASDI's 75-Year Obligations under Alternative Policy Options (Dollar amount in billions)   
----------------------------------------------------------------------------------------------------------------
                                                                                     Change from       Percent  
                                                                  Obligations        current law        Change  
----------------------------------------------------------------------------------------------------------------
Present law..................................................            $21,345                                
PSA flat benefit*............................................             14,619            $ 6,726         31.5
PSA flat benefit plus transition tax*........................             16,487              4,858         22.8
OASDI benefit under IA proposal*.............................             18,867              2,478         11.6
MB proposal..................................................             21,177                228          1.1
----------------------------------------------------------------------------------------------------------------
 Source: Social Security Administration, Office of the Actuary.                                                 
* Balances do not include the individual account balances in either the PSA or the IA proposals.                

    While several members of our Social Security Advisory 
Council and others have branded the PSA proposal radical, I 
suggest that we look at the world around us to see that such 
proposals are becoming commonplace. Reforms of this sort are 
sweeping across Latin America. Similar reforms have been 
adopted in a number of countries in the Australasian sphere of 
the world. They have been implemented in the United Kingdom and 
are being considered across other countries of Europe. What is 
radical about the PSA proposal is that it would create an 
opportunity to turn our national retirement program into a 
system that would begin to fund its benefit promises by adding 
to the savings base of our economy. We believe it would also 
restore confidence in a system that the majority of taxpayers 
today believe will not deliver the benefits that are being 
politically promised. 

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[GRAPHIC] [TIFF OMITTED] T7633.005

      

                                

    Chairman Bunning. I thank the panel for their testimony. I 
would imagine, through questioning, more details will be 
revealed. I want to start with Mr. Ball. Mr. Ball, your plan 
restores solvency only if it assumes that 40 percent of the 
trust funds are invested in the stock market. Yet you did not 
include this feature in your final plan, only offering it as a 
recommendation. What do you recommend to close the gap if this 
approach is not pursued?
    Mr. Ball. If it is decided after consideration and study 
that the Administration and the Congress do not want to invest 
central Social Security funds in stocks, then there are several 
alternatives. We would be dealing with a remaining deficit of 
0.80 percent of payroll. The first possibility I mentioned in 
my opening remarks, is that I think it is somewhat likely that 
there is going to be some redefinitions of the CPI which would 
mean a slowdown in the cost-of-living adjustment, COLA, and to 
some extent reduce that 0.80 percent. I am not advocating this. 
I just think it is likely to happen. Beyond that, I would 
propose that there be a modest increase in the maximum tax and 
earnings base of say $10,000. Counting the fact that those who 
pay more will get additional benefits, this change would reduce 
the deficit 0.20 percent of payroll.
    Beyond that, I believe that probably the best thing to do 
would be a modest increase in the contribution rate. The other 
two plans in the council report have major increases in the 
payroll tax. The backers of the IA plan do not want to call it 
a tax, but it is a considerable increase in deductions from 
workers' earnings, which has many of the characteristics of a 
tax.
    In our plan, we do not propose any significant increase for 
the next 50 years in the tax rate, even as an alternative, but 
under the circumstances that you propound, I would think 
perhaps a combined tax rate of about 0.40, that is 0.20 on 
each, starting in 1998, when most other changes would be 
scheduled to go into effect would reduce the balance another 
0.38 percent of payroll and with modest CPI changes bring the 
system fully into balance without investment in the stock 
market. I think investment in the stock market is a very good 
idea, but I recognize that it is controversial enough that it 
might not get adopted. In any event, it is not the only way to 
bring about long-term balance.
    You do not have to go to individual accounts. You do not 
have to change the whole system, as the PSA plan would do, in 
order to bring the system into balance. It can be done by quite 
traditional means if central investment in stocks is not 
accepted.
    Chairman Bunning. I just have one followup question. 
Regarding the recommendation to study the investing of 40 
percent of the trust funds, did you determine how the stock 
market would be affected by such a large influx of dollars?
    Mr. Ball. There was no detailed study of that. However, 
although the proposal would invest a large proportion of Social 
Security funds and even a large proportion of all government 
funds, it is not a large part of our $7.5 trillion economy. The 
amount that would be going into the stock market probably would 
not exceed about 5 percent of the value of the stock market and 
the total would be reached gradually over the next 15 years and 
from then on new investment in stocks would be a declining 
portion of the value of all stocks. It does not appear that it 
would have any very significant effect. I am not personally 
really expert on the performance of the stock market, if 
anybody is, but----
    Chairman Bunning. We found out Dr. Greenspan is. 
[Laughter.]
    Mr. Ball [continuing]. Dr. Greenspan certainly has more 
credentials than I do in that area, but we have a member of our 
group who you may want to consult with at sometime in the 
course of these hearings Thomas Jones, who is the president of 
the Teachers Insurance Annuity Association-College Retirement 
Equity Fund, TIAA-CREF, which is the largest private pension 
and group insurance plan in the country, is very experienced in 
this matter. That is what he does everyday.
    Chairman Bunning. I have a question for Dr. Gramlich. If 
FERS, the Federal Employment Retirement System, is your model 
for an individual account, what would prevent the Government 
from attempting to influence the operation of any company's 
assets that they might own?
    Mr. Gramlich. Well, there would be several checks. First, 
the individuals would be given a choice of five to ten funds, 
and so no one fund would have a monopoly, and no one fund would 
be that large. My funds would be significantly smaller than the 
amount of stock market investment envisioned under the study 
part of the maintain benefits plan. And second, I have not 
heard any reports that the Federal thrift plan is abused in any 
way. In fact, you barely read about it, and so I think that 
setting up accounts--these would be nonbudget accounts, be 
alongside the budget--and I think setting it up in that way it 
would be like standard 401(k) plans, and I do not see any 
likelihood that that would be at all abused.
    Chairman Bunning. Well, under our 401(k) plans, the 
investments are not in individual stocks, they are in averages 
like the Standard & Poor's 500.
    Mr. Gramlich. That is right. Yes.
    Chairman Bunning. And, therefore, we do not own the stocks 
as such, but we own the average, and therefore we would not be 
able to control any of the amounts.
    Mr. Gramlich. That is right. And the individual accounts 
work the same way. These would be average funds, index funds.
    Chairman Bunning. You would buy the average in other words?
    Mr. Gramlich. Buy the average.
    Chairman Bunning. Instead of buying General Motors?
    Mr. Gramlich. That is right.
    Chairman Bunning. Or Ford?
    Mr. Gramlich. That is right.
    Chairman Bunning. Or Chrysler?
    Mr. Gramlich. That is right.
    Chairman Bunning. Or something like that?
    Mr. Gramlich. That is right.
    Chairman Bunning. Question for Dr. Schieber. In your 
testimony you emphasized the importance of balancing Social 
Security in the larger content of Federal fiscal operation, 
making a number of compelling arguments. Would you please 
summarize your views in this area for us?
    Mr. Schieber. Well, first of all, if you go back and look 
at the work that the Entitlement Commission did a couple of 
years ago, it suggested that the amount of revenues that the 
Government has been willing or able to collect from the 
taxpayers over the last 40-45 years has been relatively 
constant between 17.5 and 19 percent of gross domestic product, 
and they said if that is the amount that we can collect, then 
what are the issues that we are going to be facing as the 
population ages and we kind of naturally mature our entitlement 
programs? And they concluded that by 2030 that the entitlement 
programs related to the elderly themselves would claim the full 
allocation that taxpayers have been giving to the Federal 
Government historically.
    And so they said that something has to give. And when you 
look at Social Security in the context of the entitlement 
programs, Social Security and Medicare make up about three-
fourths of them today. The largest growth in these in the 
projected future is going to come in the medical area. One of 
the problems that we have in dealing with the medical area is 
that there are a number of factors that are going to make 
reductions there more intractable than in the cash benefit 
programs. Older people use more health care than younger 
people, and we are an aging society. We are aging at the very 
oldest ages more rapidly than anywhere else.
    We do not have the same kind of leverage that we do with 
Medicare in terms of increasing the entitlement age. If we 
raise the eligibility age in Social Security, say 2 years, and 
life expectancy is 18 years at age 65, you reduce the total 
benefits that you pay to a single person by 2/18ths, about 11 
percent. In Medicare it does not work that way. Older people 
use more health care than younger people, and even the sickest 
of the younger elderly would probably still end up getting 
disability benefits. So it is going to be very hard to 
constrain that. Social Security, as it is currently configured, 
is expected to expand its claim on GDP, our total output, from 
around 4.8 percent today to about 6.8 percent by 2030.
    So if you have got these other entitlements growing, and we 
have got this kind of overall limit, we are going to have to 
constrain something somewhere, and we tried to come up with a 
proposal in this larger context that would do that, that would 
give people financial assets so they would have other claims 
outside the Government to meet their retirement needs, and I 
think that drove our thinking very strongly.
    Chairman Bunning. I want to ask all of you one question. If 
you were a benevolent dictator, as was the case when they 
changed the retirement system in one Latin American country, at 
what point in time do you think that we can act prudently? What 
year? 2000? 2010? Or somewhere between 1997 and 2012 when we 
start dipping into the trust funds. When should we take some 
action to ensure Social Security remains solvent for the next 
75 years? I would ask all three of you.
    Mr. Schieber. I would be happy to start with that. The 
former Chairman of this Subcommittee, Congressman Pickle, put 
in a proposal shortly before he retired that would have reduced 
benefits as the way to fix it. The benefit reductions that we 
would be facing if we were going to make them today would be 
around 20 to 25 percent of current promised benefits. If you 
were to make a benefit reduction say of 25 percent to fix the 
program, and you were to implement it with a 10-year lead time 
so it would affect, say, people that were 55 years of age and 
younger, for a person who was 55 years old, if they wanted to 
save on their own to make up for that benefit reduction, would 
have to save about 10 percent of their earnings each of their 
last 10 years that they worked.
    If you could give that worker a 20-year lead, it would be 
about 4.5 percent. If you could give the worker a 30-year lead, 
it would be a little under 3 percent. The longer lead time you 
can give people in terms of forming their expectations for what 
they are going to get from this program so they can develop the 
rest of their retirement program on a rational basis, the 
fairer you are going to be with the American people. So I think 
the window is fairly short. I think the sooner you can go 
through the deliberative process, and you should definitely go 
through a deliberative process, you should not rush to 
judgment, but I think you should make a judgment and you should 
move with due dispatch because I think otherwise you are 
putting people, your constituents, in tremendous jeopardy.
    Mr. Gramlich. I think we are all going to give the same 
answer to this question.
    Chairman Bunning. OK.
    Mr. Gramlich. One date that could be kept in mind is that 
the baby boomers first become eligible for Social Security 
early benefits, in the year 2008. As Dr. Schieber said, you do 
have to give people advance warning in advance of that. So 
really I think the best time to make changes is in this 
Congress far and away.
    Chairman Bunning. Mr. Ball.
    Mr. Ball. As I suggested earlier, I would move as promptly 
as you possibly could, meaning in this Congress, for solutions 
to about two-thirds of the problem. I am not saying that it is 
easy to do all the traditional things we propose--to extend 
coverage to the remaining State and local employees for 
example. Some States are going to object to that. Some 
employees are going to object. It is not easy to tax more of 
the Social Security benefit, which is part of this traditional 
solution. That was an issue in the 1994 election for example.
    But these proposals are fair. It is actually desirable from 
an equity standpoint because that is the way other pensions 
that are defined benefit plans and contributory are taxed. Why 
should not Social Security benefits be taxed the same way? If 
you are going to change the COLA to a more accurate measure, if 
that is what happens, you would want to do it as soon as 
possible. Now in things like that--and we have a the list of 
five points--there is no reason to delay. They are understood. 
They have been talked about for a long time. Where a delay is 
justified--and I do not mean a long delay but where at least 2 
or 3 years of discussion is justified--are these new ideas. 
Certainly if consideration is going to be given to individual 
accounts, that is a brand new blockbuster of an idea for Social 
Security. I am opposed to it, but it certainly should not move 
from anybody's point of view without a lot of consideration.
    And I think that there is enough difference between the 
tradition in Social Security and investing some of the central 
fund in the stock market--even though it is indexed and even 
though it is passively managed--that I would not urge it right 
away. But I would not think you would need more than say 3 
years to evaluate that kind of an approach. So we are all in 
agreement on very early action. I guess I am the only one that 
divides it into two parts and urges you to act very quickly on 
the traditional changes that have already been studied.
    Chairman Bunning. Thank you. Mrs. Kennelly.
    Mrs. Kennelly. Thank you, Mr. Chairman. In my readings 
about your plans and the various comments that have been in 
many of the periodicals and newspapers, there seems to be a 
suggestion that by taking funds out of the Social Security 
trust funds and putting them into individual accounts or 
personal security accounts, you increase national savings, and, 
Mr. Gramlich, I heard you say that you had to have national 
savings. I am sure Mr. Schieber agrees. Could you further 
elaborate how, in fact, your plans with these new ideas do 
increase national savings because we cannot do it unless we 
increase national savings.
    Mr. Gramlich. Yes. Well, let me start on this. My 
individual accounts would be on top of Social Security, and you 
can probably divide the world out there into those workers who 
have defined contribution pension accounts on top of Social 
Security and those who do not. Roughly half of the work force 
do not have any pension saving on top of Social Security, and 
so if you mandate some saving on top of Social Security, then 
surely saving has to go up for that part of the work force.
    Those who already have pensions on top of Social Security 
may to some degree reduce their pensions or have their 
employers reduce them. That does not bother me so much because 
they already have pension saving on top of Social Security. I 
am interested both in increasing national saving and in having 
it to some degree targeted to the people who are now not saving 
on top of Social Security, and I think my approach does that.
    Mr. Schieber. In the case of the personal security account 
plan, over a fairly lengthy period of time, we would be moving 
from a system that is currently almost totally unfunded. Today 
we have a little over a half trillion dollars in the trust 
funds, and that seems like a lot of money, but if we were to 
shut off the flow of revenues to the system, it would only last 
for about 18 months. So it is not very significantly funded. By 
the end of this fairly lengthy transition, more than half of 
the benefits in our system would be funded. The way we 
accomplish it in the short term is through a transition tax, 
and we are quite explicit about that. We called it a tax. We 
could reconfigure it so it would not be called a tax, but when 
you legislate that somebody should put some extra money in the 
bucket, we said let us be honest, let us not kid around, let us 
call it tax.
    So we called it a tax. It is through that mechanism early 
on that you create additional saving. Over time, though, the 
system would become very significantly funded. By the end of 
the transition, more than 50 percent of all benefits would have 
financial assets laying behind them.
    Mrs. Kennelly. Thank you, doctor.
     Mr. Ball.
    Mr. Ball. Mrs. Kennelly, I am very glad you asked this 
question because I think there has been confusion about our 
plan and the savings issue. The maintain benefit plan over 
time, if you take say the year 2030, has savings that are the 
equivalent of about two-thirds of the savings that are claimed 
without any offsets for the IA plan. It is about half of what 
is claimed for the PSA plan but without any offsets, and, as 
Dr. Gramlich said, there is very good reason to think there 
would be some offsets. So on the savings effects, these plans 
are closer together than that seems.
    But all savings that we need in the economy do not have to 
come from this change in Social Security. It is very important 
to do, and it is good to have Social Security changes make a 
contribution, but it is not the whole story. I am concerned 
about this proposal to deduct another 1.6 percent from workers' 
earnings for the sole purpose of retirement. Professor Gramlich 
is saying that he wants to focus on the people who are not now 
saving. The problem with that is I do not think you are doing 
relatively low-income workers any favors to make them save 
more, particularly for the single purpose of retirement. Many 
of those workers live payday to payday. Many of them need all 
their income for food, clothing, and shelter. Almost all need 
income for partial protection, at least, and maybe total 
protection against the cost of health care.
    You really make it harder to solve the Medicare problem, 
which is a much more difficult problem than the Social Security 
problem, if you preempt deductions from workers' earnings or 
payroll taxes for this one purpose of retirement. So as good as 
savings are, not every way of accomplishing savings is 
desirable. These other two plans get their savings almost 
entirely on the basis of increased taxes. We can do the same. 
You can add an increased tax to the maintain benefit plan and 
it results in savings the same way.
    Mrs. Kennelly. You have got the other gentleman's 
attention, Mr. Ball.
    Mr. Gramlich. Yes, he did indeed get my attention. If I 
could come back on that, I said in my testimony, and I will 
repeat here, that my plan was the only one of the three plans 
that did not worsen the finances of the Health Insurance Trust 
Fund. I mean that seriously. Both of the other plans have an 
implicit tax increase that they are not telling you about, in 
that, the Health Insurance Trust Fund is on pretty shaky 
grounds, as you know, and they are diverting revenue one way or 
another from that Health Insurance Trust Fund so they are going 
to have to make it up in taxes, and so there are a lot of 
things that are going up and down in these plans.
    But I do think that my esteemed colleague, Mr. Ball, has 
misstated the issue on health insurance because it is his plan 
that is actually diverting revenues from the Health Insurance 
Trust Fund, not mine.
    Mrs. Kennelly. And that is where you take the funds that 
are taxed from Social Security and take them out of the 
Medicare Trust Fund and put them back? That is what you are 
talking about?
    Mr. Ball. Yes, Mrs. Kennelly.
    Mrs. Kennelly. And that is a concern of mine.
    Mr. Ball. Let me tell you what the proposal is. The 
proposal is really to correct an anomaly that crept into the 
system, not by the rules of the House but by the rules of the 
Senate. In the 1993 amendments, when taxation of Social 
Security benefits was extended--under they call it the Byrd 
rule in the Senate--you could not put that extra tax money, in 
OASDI. The Senate was barred from adding income to OASDI or 
taking away from OASDI except by a supermajority of 60 votes. 
So they parked the income in the Medicare Program, taxes on 
Social Security benefits in the Medicare Program.
    We are not proposing that it be taken away now. We are 
proposing only that when Medicare is refinanced, as it must be, 
between the years 2010 and 2020, that it would be desirable, 
since the financing is being changed anyway to take into 
account that Medicare is now getting money that really should 
be in the OASDI system. At that time I would transfer future 
payments to OASDI where they belong.
    Mrs. Kennelly. I am going to end this debate because I just 
have time for a few more questions, but I do want to say my 
memory, and I voted on that, was, in fact, that every few years 
because of the trustees' report, we have to do something to 
keep Medicare solvent.
    Chairman Bunning. Yes.
    Mrs. Kennelly. And one of the ways we did it was to take 
those dollars and put them in the Medicare Trust Fund, and 
every time I have a townhall meeting, to this I get brought to 
task for having done it. I can say honestly I did it to keep 
the Medicare Trust Fund solvent, and I think it is 14 percent 
of the change. If we took that money back to the Social 
Security system, it would be 14 percent of the changes needed 
to achieve solvency. So I do not know, Mr. Ball, if you are 
going to get it back, but I think we would have to think about 
it long and hard. But before I finish because all these 
gentlemen are waiting to ask questions, I am concerned about 
the situation of widows and divorcees in these plans.
    Social Security was there for widows and children, and I 
understand the huge amounts of women now working. However, when 
I look at the plans, and particularly when I look at the flat 
benefit that Mr. Schieber gives, I figure that a divorcee might 
end up with $205 a month under your plan, and that certainly 
disturbs me. I am also worried that some years ago we passed 
legislation, and in the legislation we made it mandatory that 
before a man could take it just for himself, he had to have his 
wife's consent. We do not see any of that there. I wish you 
would address that. In fact, women work a shorter amount of 
time, coming in and out of the workforce to have children, and 
end up with lower benefits. How, do you protect women in these 
new plans from, in fact, having a very, very small benefit?
    Mr. Schieber. Well, first of all, if you look at the labor 
force participation rates of women today and compare them to 
the labor force participation rates of retired women today, 
they are very significantly different. For the most part, if 
you look at the retired women today and you consider their 
daughters at similar points in their age spectrum, the women 
today's labor force participation rates tend to be about 35 
percent higher, 30 to 35 percent higher than the mothers' labor 
force participation rates were when they were a similar age.
    So the spousal benefit that was implemented in the 1939 
amendments and has been provided by Social Security throughout 
the years was a very different benefit when it was initially 
implemented than it is today. Now, to the extent that women are 
working, women would accumulate their own entitlement rights, 
and in many regards our plan is more fair than the current 
plan.
    Mrs. Kennelly. Then would they then get their own account?
    Mr. Schieber. They would get their own benefit. Now if 
equal sharing of earnings during a period that people are 
married, if that is a concern of yours, it would actually be 
more easily achievable under our plan than it is under current 
law because if you wanted to actually split in any year a 
couple were married, if you wanted to split their total 
earnings, their total contributions to their combined PSAs, you 
could split it at the end of each year, and you could say that 
this was something that was not subject to negotiation at 
divorce. If earning sharing is a true concern, there would be a 
legislative way to deal with that that I think would be much 
easier than what you've got today. So we are not totally 
oblivious to the needs of women.
    Mrs. Kennelly. And I also want to put on the record that I 
don't know where you got the fact that all of a sudden instead 
of a wife having 50 percent of the benefit, she only needs 35 
percent of the benefit. I am concerned. I am glad I asked some 
of these questions because when we began this hearing, 
everything was sweetness and light, and I think this has 
brought out that there is going to be some serious debate, and 
so we are going to have to sharpen the pencils pretty well 
before we get to the point where we can agree on a lot because 
there is a lot in this. Thank you, Mr. Chairman.
    Chairman Bunning. Mr. Johnson will inquire.
    Mr. Johnson. Thank you, Mr. Chairman. Mr. Ball, you 
mentioned in your testimony that you were trying to protect 
Social Security and use traditional methods, and you used that 
word several times. I wonder if you pursued all the avenues 
that were available and, one, why you did not want to raise the 
retirement age in your idea?
    Mr. Ball. When I replied to the question about what would 
we do if it was not possible to invest in the stock market, if 
people ruled that out, I should have added that one possibility 
would be to reduce benefits by the device of raising the age at 
which people get full benefits beyond the 67 that is in present 
law. I would do that with great--I would agree to that with 
great reluctance. I think the problem is that it is another way 
of cutting benefits, but the incidence of cutting benefits 
falls on the people who have the hardest time staying in the 
work force. That is people who are dependent upon their own 
hand labor. It is people who are handicapped but not to the 
degree where they can get a total disability benefit. The 
proposal runs, too, against what has been happening. I would 
favor raising the retirement age on a demonstration that people 
were actually working longer, and that private industry was 
giving them jobs, and that private pensions were also raising 
the age of normal retirement.
    Going to age 67 has been in the Social Security law now for 
14 years. We are going to gradually start, beginning in 2000, 
raising age 65 to 67. But there has been no response to try to 
deal with this fact. Quite the contrary. The age at which 
people actually are retiring continues to go down, and here we 
already have a policy in Social Security which says, well, we 
are going to go in the opposite direction. I think Social 
Security policy and actual retirement ought to go together. We 
have a natural experiment here. We have 67 in the present law. 
Let us try it. Let us see what happens under present law, and 
if it works well, if there really are jobs there for older 
people, surely, later on we can go to 68. You do not have to do 
it now.
    Mr. Johnson. OK. You know you talk about putting Social 
Security back in the form, I guess, that it originally was in. 
That was one of your reasons for taking Medicare contributions 
back from where they were, but were not disability payments 
also not part of Social Security originally, and did you 
propose to take them back as well?
    Mr. Ball. Mr. Johnson, if I gave the impression that I want 
to take Social Security back to the way it used to be, that was 
a wrong impression. I did not mean to give that impression.
    Mr. Johnson. OK. Well, that is kind of the impression I 
got. I am sorry.
    Mr. Ball. I think Social Security has been greatly improved 
and properly so. It pays higher benefits. It pays total 
disability benefits. It protects against increases in the cost 
of living. It has done much better by women than it used to. I 
think it is a greatly improved system, and we need to maintain 
it with all its improvements.
    Mr. Johnson. Yes. For all of you, do you think you really 
considered all the options? I know you discussed it at length 
among yourselves in your various groups and came up with these 
proposals, but do you feel like you overlooked any solution, or 
do you think there was maybe something that you all failed to 
talk about that has come up since? Whoever wants to go first.
    Mr. Gramlich. We spent 2\1/2\ years on this and there has 
been a huge amount of debate. I personally have not seen any 
idea since we made our report that I was not aware of before we 
made the report.
    Mr. Schieber. Right. Or that we discussed. We kicked most 
of the rocks.
    Mr. Johnson. Did you? And you did not find any snakes?
    Mr. Schieber. We broke our toe a time or two. There were 
snakes.
    Mr. Ball. I think, Mr. Johnson, this does give me an 
opportunity, though, to say that even though we may have 
considered all individual proposals, I do not think we came up 
with the three best plans. I think the two plans that set up 
individual accounts have so many disadvantages to them, I would 
not consider them a second, third, or fourth choice. Our group 
of six people are completely opposed to the idea of reducing 
the basic central Social Security system and then trying to 
make up for the reductions with individual accounts which may 
come out the same on average but only on average. Many will 
lose.
    Mr. Schieber. But the majority did support individual 
accounts, and the fact of the matter was in the final analysis 
the group of six who are dedicated to the current system could 
not even agree on their proposal.
    Mr. Johnson. Thank you, Dr. Schieber. Thank you, all.
    Chairman Bunning. Thank you. Mr. Collins, we will give you 
5 minutes, and then we will recess and go vote.
    Mr. Collins. I will yield my 5 minutes.
    Chairman Bunning. You will yield. Mr. Jefferson.
    Mr. Jefferson. As I think about these three reports, I want 
to ask you this. When you started out this work at some point, 
as you were undertaking it, did you agree on the goals that you 
were seeking to attain as a result of your work? Was there 
agreement on just fundamental goals that you were seeking to 
accomplish?
    Mr. Gramlich. I will speak for myself. I think there is 
broad agreement on the fundamental goals. I think that all of 
the plans attempt to provide a social safety net of some sort. 
It is different in the different plans, but there is broad 
agreement that that is a goal. We certainly agreed that we 
should make the system financially sound over the very long 
run, and by very long run, we mean very long run, and so there 
was certainly agreement on that. There was less agreement on 
the goal of raising overall national saving for retirement. 
There was some disagreement on how important it is to do that 
within the context of Social Security, and so there might be 
some disagreement there, but I think that there was broad 
agreement on goals, speaking for myself.
    Mr. Schieber. And I agree.
    Mr. Ball. I find that generalization hard to agree to. It 
seems to me these individual accounts have in mind other goals 
than the traditional Social Security ones. They are perfectly 
legitimate goals for people to have, but they are different. 
One new goal is individual control over part of the 
individual's own savings. That is a new goal within Social 
Security as against----
    Mr. Jefferson. Everybody agrees, though, on this idea of 
solvency of the system. I mean that is obviously what--but the 
emphasis on security plays in different places. Mr. Ball, in 
your proposal, the security interest looks like security with 
respect to the benefits, and in the other plans, the benefits 
get dealt with tampered with, reduced, and the emphasis is on 
the security of having a safety net, something there to fall 
back on but not necessarily security of the standard benefits. 
And I guess as we go through this, we have got to figure in 
which of these directions really we are going to go. Let me ask 
you about the--Dr. Schieber, I believe--let me see if I can 
understand this. It is correct to say that between 1998 and 
2029 that the Federal spending under the PSA plan would rise by 
over $7 trillion? Is that correct?
    Mr. Schieber. I find it unlikely, but I cannot respond to 
that precisely.
    Mr. Jefferson. What is your figure? Do you have one?
    Mr. Schieber. The present value of the transition cost is 
in the table, Table 1. It is stated in total dollars--I do not 
even have a copy of my own full testimony with me--you show the 
cost of benefits that are provided under OASDI through the PSA 
plan relative to current law, and then there is a second line 
in there that includes the present value of the full 75-year 
transition cost. It reduces the cost to the taxpayers over the 
lifetime of the program.
    Mr. Jefferson. What it seems to show here is that there is 
going to be an increase in the national debt if your program is 
adopted as it is presently presented?
    Mr. Schieber. We were very explicit. We laid that out in 
detail in the report. In present value terms, the amount of the 
added debt, formal debt, would accumulate to I think it is 
around $1.2 trillion. In 1996 dollars, it would accumulate 
around 2030 to about $2.4 trillion.
    Mr. Jefferson. Well, if we do this, are we not going to 
erode any idea of increased national savings when we increase 
the debt that people have to pay to fund it?
    Mr. Schieber. The amount of saving that goes on in the PSAs 
themselves is significantly more than the added temporary 
Federal debt, and that temporary Federal debt is ultimately 
paid off by the explicit transition tax that we included in the 
proposal. In net over time, we reduced the cost to the taxpayer 
of the overall system significantly.
    Chairman Bunning. We are going to have to recess, if you 
will be patient again.
    Mr. Schieber. Absolutely.
    Chairman Bunning. We will come back.
    Mr. Schieber. An important issue.
    [Recess.]
    Chairman Bunning. The Subcommittee will come to order, and 
Mr. Neal will be questioning.
    Mr. Neal. Dr. Schieber, let me pick up on a question that 
Mrs. Kennelly asked before when we were talking about the 
safety net. If the debate is to lose its focus on Social 
Security being a safety net initiative, how can we conceivably 
take the risk of that widow who is living on the $7,000 or 
$8,000 a year by tying some of the moneys into the stock 
market? We do forget there are people out there who live solely 
on Social Security.
    Mr. Schieber. Well, if you look at a pay-as-you-go Social 
Security system of the sort that we have, the rates of return 
that people can get on their contributions over their lifetime 
when you have got a stable population is essentially the rate 
of growth in wages. Rate of growth in wages in our economy over 
the last 15 years has been something less than 1 percent real 
per year, 1 percent over inflation. The projections going 
forward we are expecting that it would only be around 1 
percent. If you begin to fund some benefits, and this is one of 
the reasons why many of us think that we ought to try and 
figure out how to fund some of the benefits, you get a higher 
rate of return on the assets that you put away, and this is 
something that actuaries have learned and economists for years 
and years, that a funded pension plan, a funded retirement 
program, can throw off a higher level of benefits at a given 
cost than a system that is not funded.
    And one of the things that we believe that would happen is 
that if you began to fund some of these benefits is that people 
over time would actually earn higher benefit levels than they 
do under current law, and the flat benefit in combination with 
the individual savings we think would have a more beneficial 
effect on lower wage workers than it would on higher wage 
workers, and this is all spelled out in the report.
    So part of the goal here is trying to figure out how to 
fund these benefits, and as we began to make the commitment to 
fund, a number of us were very concerned about funding them in 
the fashion that the maintenance of benefits proposal suggested 
because the Government would become the largest single 
stockholder in the U.S., become the largest holder of equity 
capital, and we thought that would raise a number of problems. 
It would raise problems of potential political decisionmaking 
in terms of making investments. It would raise conflict of 
interest questions. The Government would have fiduciary 
responsibilities on the one hand. It would have regulatory 
responsibilities on the other, and in some cases those would 
conflict.
    There are governance issues that are raised, and so we came 
to the conclusion that if you were going to try and fund a 
significant portion of benefit to get the economic benefits 
that derive from that, that you would be driven toward 
individual accounts. Now, five out of seven of us oppose the 
approach that Dr. Gramlich has proposed because the Government 
would be a larger manager of investment assets under that 
proposal than under the maintenance of benefits proposal, and 
so we were driven more purely to individual accounts.
    So I think it is the funding that really drove us in the 
direction we went, and the goal was to provide larger benefits, 
not lesser benefits. Now there are risk issues, but there are 
risk issues all around, and I think we have to try and figure 
out how to continue to put the netting in the safety net, but 
we need to do it in a viable way where we can accomplish what 
we are trying to accomplish, and some of us do not believe that 
the current system can do that.
    Mr. Neal. Mr. Ball, you said something I thought was very 
interesting as it relates to low-income people and how to raise 
their rate of savings. You took a contrary position. You did 
not think that that was important to increase or encourage 
perhaps the working poor and others to increase their savings. 
Let me just build upon that for a second. I think that one of 
the things that is lost in this abstract argument over the CPI 
is that when you cut back 1 percent for the working poor or for 
senior widows, it is a pretty significant piece of change for 
them.
    Mr. Ball. Yes.
    Mr. Neal. But I was curious about your position on savings 
for low-income Americans.
    Mr. Ball. Mr. Neal, I certainly agree that it is very 
important to increase the U.S. savings rate, but I do not think 
you are doing low-paid workers any favors by forcing them to 
save more, particularly for the one purpose of retirement. 
Health insurance is one of the biggest needs of middle and 
lower income families, and to take 1.6 percent, as the IA plan 
does, in further deduction from wages entirely for retirement 
benefits seems to me, a mistake. If we are going to increase 
savings, which I think we should, I would not pick out low-
income people to do the saving.
    Now, if I might enlarge on that just a bit, I would like to 
say something about ``averages'' in all this discussion we have 
been having. Professor Gramlich in presenting his plan made the 
point that when you combined the basic Social Security system, 
as he would modify it, plus what workers get from the 
individual accounts, the two together on average would be 
roughly the same as what people get under the present system or 
what they would get under the maintenance of benefit plan.
    That is true, but averages are a real problem if we are 
talking about the basic system. There will be a lot of people, 
by definition, who will be below average. So I have concern 
about the adequacy of the IA plan from the standpoint of their 
stated objective.
    I would also like to criticize my friend's use of 
``adjectives'' a little bit. He speaks of the kinds of cuts he 
would have in his plan as ``mild,'' ``as relatively small, 
particularly for low-income workers.'' But the truth is when 
you put together not just change in the benefit formulas, but 
everything he does to benefits, the average benefit is reduced 
30 percent, and even the benefit for low-wage earners is 
reduced 22 percent. That does not seem small to me.
    Mr. Neal. I think Mr. Gramlich would like to comment that 
alright, Mr. Chairman?
    Chairman Bunning. You will get another turn, Mr. Neal.
    Mr. Neal. OK.
    Chairman Bunning. Mr. Hulshof will inquire.
    Mr. Hulshof. Thank you, Mr. Chairman. Good afternoon, 
gentlemen. Just a couple of quick background comments. I am 
obviously a newly elected member. I also ran in 1994, and 
coming through this past campaign season was just a lot 
different because of the misinformation about certain issues 
and trying to defend and talk about and educate on those 
issues. I appreciate the Chairman convening these hearings. As 
we begin this dialog, I quite frankly think that we should go 
outside these doors and continue to have this public discourse 
because I think we need to bring the American people in and 
allow them to weigh in on the various options that you have 
been talking about.
    Now, I understand that the council actually convened a 
couple of technical panels to support you in your efforts, and 
I think one was on assumptions and methods. Is that right?
    Mr. Schieber. Correct.
    Mr. Hulshof. It is my understanding also that one of the 
conclusions was that the intermediate projections of the Social 
Security trustees provided, a reasonable evaluation of the 
financial status, and Dr. Gramlich, you are nodding in assent, 
and I would assume if there was any objection that you would 
tell me. I think part of the problem is it is very confusing 
when we bring the public in to begin to discuss these issues 
because there are so many things. You can pick up a newspaper 
everyday, and you have different estimates when Social Security 
will go bust. Some say, as early as, shortly after the year 
2000. Some say it is at 2050, and there is this wide disparity 
and misinformation or perhaps correct information, but it is 
just not being communicated effectively. Can you give us any 
guidance as we begin this public discourse across the country 
as to how we can better present these proposals?
    Mr. Schieber. Well, it is difficult because all of the 
estimates for Social Security hinge on 75-year forecasts, and 
these are forecasts of the real wage growth, of fertility 
rates, of mortality rates for 75 years ahead. If you want to 
put it in context, it is as if we were sitting here in the 
Harding administration forecasting now and look at all that has 
happened since then that could not reasonably have been 
forecasted.
    So the fact that in making 75-year forecasts, the numbers 
differ does not mean that anybody is giving misinformation or 
anything like that. It just means that there is real live 
uncertainty in these forecasts. The best guess of when the 
combined retirement and disability trust fund exhausts its 
assets--it does not mean it disappears, but it exhausts its 
assets--is 2030. That is the best guess. Then there is a range 
of uncertainty around that, and so I do not actually know what 
the precise numbers are. The most optimistic for the trust fund 
is that it would never exhaust its asset, and the least 
optimistic is that it would exhaust its assets somewhat before 
2030. That is not misinformation. That is true information 
about the likely uncertainty we are likely to have with Social 
Security.
    Mr. Hulshof. Let me give a quick background for this 
question. Colleagues on the other side of the aisle, the blue 
dogs, have put together a coalition budget, and there has been 
some discussion by the press and even here in the halls of 
Congress, beginning to discuss the merits of various budget 
proposals. It is my understanding, if you know the answer to 
this, regarding COLAs, cost-of-living adjustments, that the 
coalition budget being offered by the blue dog coalition has a 
fixed COLA, and there is also some discussion about changing 
the consumer price index, the CPI. Did that come into your 
deliberations as well? Would any of you like to take that 
question, please?
    Mr. Gramlich. Yes. We talked about that quite extensively. 
One is a political point that I believe we all agree on that if 
you put the inflation adjustment of Social Security in the 
domain of politics there are serious dangers. I think the 
wording in our report was that we would like to follow the 
Bureau of Labor Statistics, BLS, which does the consumer price 
index. We would like to follow that wherever it goes. There are 
grounds for thinking that the consumer price index is biased on 
the upward side, and there are things that BLS can do to change 
their procedures to go to a more current estimate of consumer 
market baskets and things like that would lower the rate of 
inflation, and we would all favor that.
    But I will speak for myself at this point. I have serious 
misgivings about a separate Commission that is independent of 
the BLS and rules on how much the inflation adjustment would 
be. Let me make one other point about this whole thing, and 
that is that a key variable in forecasting the long-run 
finances of Social Security is the rate of real wage growth. 
That is wages deducting inflation. And if there is adjustment 
in the inflation indexation, whatever sort, in effect, what is 
being assumed is that there is going to be higher real wage 
growth for the whole 75 year period. It struck a lot of us on 
the Council that that would be a very risky assumption to make, 
that real wage growth has been down for a long time now, and a 
lot of that does not hinge on the measurement of inflation by 
the BLS, and so I think that there may be some way that there 
could be a downward adjustment in inflation. But I think this 
notion of a separate commission is very dangerous, and I would 
much rather have it come from the BLS.
    Chairman Bunning. The gentleman's time has expired. I have 
a question for Dr. Gramlich and Mr. Ball. Your plans call for 
taxing Social Security benefits the same way private pensions 
are taxed.
    Mr. Gramlich. Defined benefit pensions.
    Chairman Bunning. Example. As they receive over what they 
have paid in.
    Mr. Gramlich. Right.
    Chairman Bunning. Is this feasible in the Social Security 
program where someone can receive benefits on his own record as 
a retired or disabled worker but could also be eligible for 
benefits as a survivor or dependent on another's account? Did 
you ask SSA if they could do this type of bookkeeping?
    Mr. Ball. It used to be thought that Social Security back 
10-15 years ago was not in a position to carry out these 
individual calculations. I do not believe that is any longer 
the case. I think they indicated a year or two ago that they 
now could do it leaving aside the question of whether they 
thought it was desirable.
    Chairman Bunning. Did you ask them if they could do it in 
your deliberations?
    Mr. Ball. Not as a formal request, I do not think; did we?
    Mr. Gramlich. Not that I recall either.
    Chairman Bunning. In other words, you did not ask them if 
they could?
    Mr. Gramlich. What I can say is this, that the Social 
Security Administration has reviewed the draft of the report 
that says they can do it many, many times, and it was sent all 
around the agency, and the only rewording that I remember in 
that process is that there are some people in the agency who 
feel that they could have done it before. We in the end changed 
the wording on that, but nobody questioned that they could do 
it now in the drafts they saw.
    Chairman Bunning. Dr. Schieber, you have something to add?
    Mr. Schieber. Could I make an informational point in regard 
to this observation?
    Chairman Bunning. Certainly.
    Mr. Schieber. The tax treatment of private pensions, I 
think, is different than it is really being characterized here 
in practical terms. To the extent that an employee contributes 
to a defined benefit plan in the private sector, the 
contributions are made with post-tax dollars, dollars that have 
already been taxed. To the extent that there is a benefit that 
accrues based on that, the benefit only becomes taxable in 
excess of the employee's base. The overwhelming majority--I 
mean it is virtually all private sector plans--because of this 
tax treatment of employee contributions, when employer 
contributions are tax deductible, virtually all of the 
contributions--there are some limited contributions that go 
into the plan, but very limited--are made by the employer 
because they are tax deductible.
    The benefits that are distributed in the final analysis are 
then taxable. For defined contribution plans since the creation 
of 401(k)s for the private sector, both employer and employee 
contributions are made after tax. The tax treatment of private 
sector pensions, for all practical purposes, is extremely 
different than what is being characterized here.
    Chairman Bunning. Clearly, there are major disagreements 
among the three of you within the Council and among others in 
the Council. You are able to agree on four major areas of 
concern: Long-term balance, long-term balance beyond the 75-
year horizon, contribution/benefit ratios, and public 
confidence. Can you tell me how you reached this consensus and 
how this consensus framed your deliberations? Any and all.
    Mr. Ball. Mr. Chairman, I think on those things that you 
mentioned, we brought to the council views that were similar or 
the same.
    Chairman Bunning. Starting out?
    Mr. Ball. Yes. It is not that they emerged from a 
negotiation or anything of that kind. And that is true of some 
other points, in the very first chapter. We also came to the 
conclusion that it was undesirable to test people's other 
income and then have a means test deducting such income from 
your Social Security benefit. We came to the Council 
individually agreeing on some of these things before we started 
the discussion, but it seemed good to record it.
    Chairman Bunning. Does anybody want to add anything?
    Mr. Gramlich. The question of when we magically agreed, 
whether we came to it beforehand or agreed in the 
deliberations. I do think that on the question of truly long-
term balance, that was one where the discussion that the 
Council had did influence people, and they agreed to things 
that they might not have beforehand. So I think there was some 
value in our discussions, if you will.
    Chairman Bunning. Mrs. Kennelly.
    Mrs. Kennelly. Thank you, Mr. Chairman. Just a quick 
question to Mr. Gramlich. My understanding is with your 
accounts that you suggest that you have them annuitized, and 
from reading your report I could not decide if it was a private 
annuity or a public annuity. The president's report says 
public. Could you just clear that up for me?
    Mr. Gramlich. Yes. I have mandated that all of those 
accounts are annuitized because there is what is known as a 
self-selection problem in the private annuity market that only 
the people who expect to live a long life will get annuities 
and the insurance companies charge for that. I would like to 
break out of that by saying that everybody must annuitize the 
accounts, and so therefore you would not have that load charge, 
the self-selection load charge, and so you could annuitize the 
accounts at actuarially accurate rates. That is the point 
there. So they would be publicly annuitized in that sense.
    Mrs. Kennelly. Thank you for clearing that up. Dr. 
Schieber, are you concerned about people outliving the benefits 
in the PSA accounts, because you do not require annuities, and 
that concerns me, especially with regard to women. We women 
live forever.
    Mr. Schieber. In the report, we indicated that this was 
what we thought was a political consideration. That it would 
possibly make sense to require that benefits up to one and a 
half times, two times, the poverty line or something of that 
sort be annuitized. We did not know at what level that should 
be set. We thought that was a political decision. Our sense was 
that having studied how some of these processes evolved in the 
past that people would take our framework if they were 
interested in our framework and try and craft legislation 
around it, and this was an issue that we, I think, highlighted 
in the report and said that it was one that deserved political 
consideration. Personally I think it might make sense to 
require some annuity, some annuitization of that PSA, to make 
sure that people do not go off and spend their money too 
aggressively early on and then end up back on the public dole. 
But we did not know where to set that in our deliberations. We 
certainly did not rule it out. We were quite specific in the 
report saying it is a consideration.
    Mrs. Kennelly. I have another concern. We see incredible 
amounts of money now going into mutual funds, into the market. 
And it is thought that it is the baby boomers putting it in 
because they are thinking about their retirement. What concerns 
me is these same baby boomers--we know exactly who they are--46 
to 64--when they retire and they start pulling the money out, 
what happens to the market there when everything is--you know, 
it is like if everyone sells their house at once, the price 
drops. What happens here?
    Mr. Schieber. This is an idea that is meant to haunt me for 
the rest of my life. Professor John Shoven at Stanford 
University and I wrote a paper on this 2 or 3 years ago that 
has come to be known as the ``asset meltdown paper'' that has 
been widely written about. The issue is whether or not during 
the baby boom generation's retirement there is a continued net 
saving going on in the economy. If there is continued net 
saving going on, then there will be people to buy up the assets 
that the baby boomers, in effect, are selling during their 
retirement period.
    Now, we have written a subsequent paper I would be happy to 
share with you. One of the things we believe is that if you 
were to go to a more aggressive funding program of the sort 
that we have, you would really ameliorate that concern. But 
financial markets are far more dynamic than the housing market 
that you suggest. My own guess is that we are going to have 
problems in the housing market when the baby boomers dump all 
their assets. I think it is much less likely that you are going 
to see that in the financial markets.
    Mr. Gramlich. Could I say a word about that?
    Mrs. Kennelly. You have to do it quick. The light is on.
    Mr. Gramlich. OK. But he used all the time. The baby 
boomers are not all the same age. It is not like all baby 
boomers hit retirement in the same year. You will have the 
early boomers selling their stock when the later boomers are 
still accumulating, and so the baby boom does happen over a 30-
year span. The other thing is that unlike housing, financial 
assets are traded in a worldwide market these days, and there 
are other countries coming along who have population bursts 
that are younger than our baby boomers, and so these assets can 
be traded on an international market and not necessarily have 
the people take a loss in the asset when they sell it in 
retirement. So I happen to think that the asset meltdown is 
overblown. Assets are not going to melt down that much.
    Chairman Bunning. Richard.
    Mrs. Kennelly. Thank you, gentlemen.
    Mr. Neal. Thank you, Mr. Chairman. As is not the case here, 
often many of the panels that we have, the people that come 
before the Members of the Congress, are oftentimes chosen 
because they have certain political views, and both sides have 
been part of this strategy for an awful long time, but I think 
that these sessions that Chairman Bunning has provided us with 
are very helpful. It does encourage us to think in larger terms 
than we are used to around here. I do think that your presence 
here today is indeed very helpful.
    Let me raise again, a very important part of this 
discussion. What are we going to do about those 19 million 
Americans who do not have pensions?
     Dr. Gramlich.
    Mr. Gramlich. I think that you ought to mandate that they 
save 1.6 percent on top of Social Security.
    Mr. Schieber. Or that they fund a significant portion of 
their Social Security accumulation.
    Mr. Ball. I think it is terribly important that Social 
Security be maintained at its present level because this is the 
only retirement that these people have and that they can count 
on. It is the base for everybody, but for one-half of the 
American workers, it is the only retirement system. It is not 
adequate in itself, but it certainly does not do any good to 
cut it back.
    Mr. Neal. I think that is interesting because if I might 
just put in a plug, too, that I think we tend to forget how 
successful Social Security has been. I think there are some 
legitimate criticisms about the reach of some of us on our side 
of the aisle, but it is also hard, I think, not to come to 
grips with the reality of how we change the lives of millions 
of senior citizens who until Social Security occurred lived in 
abject poverty. That has been lost in this discussion. We tend 
to treat this as though it is abstract.
    Mr. Schieber. No, I am not sure that is correct.
    Mr. Neal. Feel free to disagree.
    Mr. Schieber. I think if you looked at the deliberations 
within the Council, there was no one suggesting that we cast 
the public back to a pre-1935 environment. I think we were very 
cognizant of considerations about the low-income population. 
That led in the development of the program that Professor 
Gramlich talked about. He protects benefits for low-income 
people to a much greater extent than he does high income 
people. If you look at the characteristics of our plan, that is 
exactly the same case. I think we were very cognizant of the 
safety net, and even those of us that suggested somewhat 
significant changes from the existing system, we did not 
abandon the traditional goals of this program, and I think 
anyone--there are proposals out there that would do that, but 
no one on the Council that I know of seriously suggested that 
we take up those kinds of considerations.
    Mr. Neal. I did not mean to infer that you folks had done 
that. I think that oftentimes here in the abstract when we talk 
about these issues inside of the Congress, we tend to treat 
them with that sort of a proposition.
    Mr. Schieber. Right.
    Mr. Neal. I think that is dangerous. Let me just share one 
anecdote with you, and each Member of this Subcommittee, and I 
have not polled them about it. We frequently spend Fridays or 
Mondays with senior citizens. You attend a luncheon or you go 
to some sort of an event. People talk about the entitlement 
mentality, again in the abstract, but one of the things that 
always strikes me at those luncheons, particularly when you are 
dealing with people that are in their seventies or their 
eighties, if there is an extra piece of bread or whatever on 
the table, they do not leave it there. They wrap it up and take 
it with them. If there is candy, they wrap it up in a little 
napkin or whatever, and they take it with them. That is a 
terrific lesson about how their parents saw their lives 50 
years ago, and it is a pretty important lesson for all of us as 
we begin down the road during this debate. And I do not think 
we should ever lose sight of just how successful Social 
Security has been.
    Mr. Schieber. And I agree, but I think we also cannot lose 
sight of the people who have to support it and the burden that 
it imposes upon the backs of labor. All of the people who come 
to these sessions or the overwhelming majority of them that you 
are talking about have children and grandchildren, and they are 
all part of the equation, and I think, what we toiled with in 
the Advisory Council was trying to figure out how to balance 
this equation fairly, and some of us came out with different 
conclusions than others, but it does not mean that we were not 
cognizant of the concerns about the elderly.
    Mr. Neal. Thank you. Thank you, Mr. Chairman.
    Chairman Bunning. Mr. Christensen.
    Mr. Christensen. Thank you, Mr. Chairman. It is on that 
note, Dr. Schieber, that I want to follow up with a question to 
both you and Dr. Gramlich, and it is really a question of 
advice on how we can marshal the forces of the younger 
generation, the Generation Xers. When Richard said he is at 
senior citizen centers on Fridays and Mondays, when we are not 
there, we are at high schools. When I am at the high schools 
one thing I talk about with these high school seniors, juniors, 
and sophomores is about generational equity and the Social 
Security system, and we have the best discussions with these 
young adults. Mr. Bunning earlier said that in the polls more 
of them believe in UFOs than actually seeing their Social 
Security ever come back to them. What can we do to marshal the 
forces of those 16- through 25-year-old individuals who are not 
in tune politically, who do not go to the polls to vote, but 
are giving 25 to 30 to 40 percent of their little pay stub, 
their paycheck, every other week, to Washington, and they have 
no idea where it is going, and they are never going to see it 
again? They are frustrated. They are mad.
    I have thought about the Internet system, maybe some way we 
can hook them in and marshal them through that way and get them 
to be a force like the senior citizens groups are. I am open 
for ideas and I would like to hear both of your comments.
    Mr. Schieber. The only thing I can suggest having lived 
through two teenagers is maybe MTV.
    Mr. Gramlich. I am going to try a more serious answer. 
Earlier, one of you, I think it may have been Congressman 
Bunning, asked us what is the important date to act, and we all 
said that we ought to act now. That is one of the things that 
we agree on. I happen to think that the people out there are 
probably more interested in action than they are in words, and 
I think that the best thing that could be done by the Congress 
to assure national faith in the retirement system in the years 
ahead is a far-reaching, future-oriented plan that puts 
retirement saving on a more solid basis than it is right now.
    We have proposed three options. There are other options, 
but the present system does have to be shored up, and the way 
it is shored up is by you people, and so I would think that you 
would want to get cracking on it.
    Mr. Schieber. One of the things about this UFO issue that 
keeps getting raised in this discussion, some people attribute 
it to cynicism. My guess is that for the overwhelming majority 
of people, the one thing that they see each year about the 
financing situation of Social Security is the headline that 
gets printed after the Trustees' Report is released, typically 
in April, and that Trustees' Report recently has been telling 
people when the system was going to deplete its trust fund. For 
many people when you tell them that a trust fund is going to be 
depleted and it is backing something that is a benefit that is 
being promised to you, and that falls within your life 
expectancy, I think it is not unnatural that people would 
conclude that, hey, that is probably not going to be there for 
me. They do not understand the point that Bob Ball made a 
little while ago that even when we run out of money in the 
trust fund, there would still be 75 percent of benefits paid by 
current taxation.
    I will come back. I agree with Ned. I think it is time for 
us to try and get this thing solved so we can go to our 
constituencies and we can say we have put this on a sound 
financial basis. There will be money in the bank when you get 
to retirement. There will be something to support your 
benefits. Action is what is important now.
    Mr. Christensen. Well, I appreciate your testimony here, 
and I also appreciate the fact that you have spent so much time 
looking at this issue. Mr. Ball, do you want to say something?
    Mr. Ball. Yes, I would like to comment on this. I agree 
with my two colleagues here that what we need to do is act and 
put the system once again on a completely balanced basis, but 
in the meantime, these young people are being given lots of 
misinformation. It just is not true that they are not going to 
get their money back. One of the common points that the Council 
all agreed on was that this idea that Social Security is not 
going to be there when they retire is wrong. That is one of the 
common points that all 13 members----
    Mr. Christensen. Mr. Ball, if I could have Dr. Schieber's 
response to that.
    Mr. Schieber. The problem is that they are not going to 
become well-developed students of the financing of this 
program, and when we publish reports annually saying we are 
going to deplete the trust fund within their life expectancy, 
then they begin to question seriously whether we are telling 
them the truth about these promises. I think it is relatively 
simple.
    Mr. Christensen. Mr. Chairman, I know I have gone over my 
time, but I think we owe the younger generation of this 
country, the Generation Xers, if you want to call them that, 
information, some kind of information that they know what they 
could be earning, what they could be receiving if they were 
just getting some kind of interest rate that was respectable 
versus the type of 2- and 3-percent returns we see, and what 
kind of money they could expect at age 65 versus what they are 
going to see at age 65 based upon the current system, and 
somehow we have got to engage the Generation Xers into this 
fight because it is their backs, as Dr. Schieber said. They are 
paying and they are carrying this debt and I think that they 
are getting highly unfair treatment in this whole organization.
    Chairman Bunning. Thank you, Mr. Christensen. I would just 
like to sum up and thank the panel for their input and for 
their many years of work in developing three different 
alternatives for consideration. I fully understand having 30 
grandchildren what Mr. Christensen is talking about. Even some 
of my own children wonder about the Social Security system 
being fully funded. They do not realize the amount of dollars 
that would be there even if we depleted all the reserves as we 
go beyond 2029.
    In closing this first hearing, we really want to thank you. 
You have made recommendations. The Advisory Council has spent 
more hours than anyone looking at the many problems and many 
solutions to the problems of Social Security. Your findings 
have been instrumental in bringing Social Security challenges 
to the forefront of public discussion. If we could get 
bipartisan support for any of your plans, and I am talking 
about bipartisan support out of this Subcommittee, out of the 
Full Committee, we could move forward. We did not do that with 
Medicare, and therefore there was unbelievable conflict during 
the election cycle that just passed, one side blaming the other 
side for cuts in Medicare. To get consensus on Social Security, 
it is going to take not only your help, but the help of many 
others who are involved. As our series of hearings on the 
future of Social Security moves forward, we are going to get a 
lot of other opinions besides the ones that you have expressed 
today. We will hear from advocacy groups like the AARP or the 
National Committee to Preserve Social Security and Medicare, 
the Heritage Foundation, the Cato Institute, for example.
    I want to thank you for your appearance today and getting 
us off to a good start. The hearing stands adjourned.
    [Whereupon, at 12:30 p.m., the hearing was adjourned, to 
reconvene on Thursday, April 10, 1997, at 10 a.m.]



     THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT

                              ----------                              


                        THURSDAY, APRIL 10, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10 a.m., in 
room B-318, Rayburn House Office Building, Hon. Jim Bunning 
(Chairman of the Subcommittee) presiding.
    Chairman Bunning. Good morning. Today we continue our 
series on the Future of Social Security for this Generation and 
the Next.
    Before we get underway, I would like to focus on an issue 
which has caught the attention of many deeply concerned 
Americans, including Mrs. Kennelly and myself. That is the 
Social Security Administration's new online access to personal 
earnings and benefit statements via the Internet.
    Thankfully, yesterday afternoon the Social Security 
Administration announced that, in response to public outcry, 
the service was being suspended. While I appreciate SSA's 
desire to provide fast and expedited service, that service 
should never compromise the privacy of Americans. Public 
confidence in the Social Security system is based on trust, and 
Americans trust that their records will be kept safe and 
secure.
    I have asked SSA's Inspector General to thoroughly 
investigate this service and report to the Subcommittee by 
April 22. I then plan to conduct a full oversight hearing on 
this activity.
    Now back to the matters at hand. The focus of this second 
hearing is to establish a framework for evaluating options for 
Social Security reform. Our first hearing focused on the three 
plans proposed by the Advisory Council on Social Security. 
Future hearings in this series will include testimony from a 
wide variety of groups and individuals regarding their views on 
Social Security reform.
    To prepare us for these hearings, I think it is imperative 
that we learn about the impact of the various plans for reform, 
how changes to the current system will affect the economy, 
national savings, the Federal budget, and the retirement 
security of every participant. Some of the proposals may sound 
like simple solutions, but each has underlying complex issues 
that cannot be overlooked.
    As the Subcommittee has agreed, we are going to be thorough 
in our investigation into Social Security reform.
    Today we look forward to hearing the perspectives of the 
Congressional Research Service, the General Accounting Office, 
and four distinguished experts.
    In the interest of time, it is our practice to dispense 
with opening statements, except for the Ranking Democrat 
Member. All Members are welcome to submit statements for the 
record.
    I yield to Congresswoman Kennelly for any statement she 
wishes to make.
    Mrs. Kennelly. Thank you, Mr. Chairman. Thank you for your 
opening statement concerning Social Security and privacy. And I 
would suggest probably that if the Social Security 
Administration had let us know of their intentions, it would 
have been a good idea because we might have been more helpful 
if we had known it earlier.
    I am pleased the Subcommittee is holding the second in a 
series of hearings on the future of Social Security. During 
these hearings we will examine more carefully the options of 
Social Security reform.
    There is no escaping the demographics of the 21st century. 
With the retirement of the baby boom generation, fewer workers 
will be supporting more retirees. Not only will the group 
reaching retirement be larger, but they will be living longer. 
These demographics present us with an enormous challenge. The 
challenge is to provide an adequate retirement income for 
tomorrow's retirees without reducing the standard of living of 
younger generations.
    The Social Security Advisory Council has given three 
options for reform. We are also receiving other options. Our 
witnesses today have analyzed many of these plans and they will 
give us their views on the fundamental issues which need to be 
addressed as part of any Social Security reform and they will 
give us answers to several critical questions. Do we need to 
increase national savings? If so, how can we accomplish this? 
What impact will these proposals have on the Federal deficit? 
What will happen to the current protections which Social 
Security offers to retired and disabled Americans? Will private 
investment in retirement funds increase the risk that 
individuals will have inadequate retirement income?
    I am particularly interested in the impact of these 
proposals on women. I have asked the General Accounting Office 
to look at the labor force participation patterns of women and 
the impact of those patterns on the retirement income of women. 
In addition, I have asked GAO to compare the protections of the 
current Social Security and pension systems to the protections 
offered by the three Advisory Council plans.
    GAO's conclusion must give us pause. The analysis raises 
serious questions about a new system which strips away the 
current protections provided by Social Security and replaces 
them with private investment accounts. Surely we do not want to 
move toward a system which increases the inequities in 
retirement income.
    I appreciate the work the GAO has done and I look forward 
to hearing from each of today's witnesses. Thank you, Mr. 
Chairman.
    Chairman Bunning. Today we will begin with testimony from 
David Koitz from the Congressional Research Service. He is a 
specialist in the Social Legislation, Education and Public 
Welfare Division of CRS. If you'll join us at the witness 
table, you may begin.

  STATEMENT OF DAVID KOITZ, SPECIALIST IN SOCIAL LEGISLATION, 
 EDUCATION AND PUBLIC WELFARE DIVISION, CONGRESSIONAL RESEARCH 
                            SERVICE

    Mr. Koitz. Mr. Chairman and Members of the Subcommittee, I 
was asked to speak to you about some of the issues involved in 
putting together a long-range Social Security reform. Obviously 
for this Subcommittee, the primary question about any proposal, 
is does it make the system solvent? For this, the task is 
figuring out what combination of changes will erase the 
system's 75-year deficit and keep a balance in the trust funds 
throughout the period.
    Two of the three recent Advisory Council plans--the 
Gramlich and the Schieber/Weaver plans--pass this test and the 
third--the Ball plan--could be deemed to do so if its 
proponents' suggestion to invest some of the trust funds in 
equities were considered part of their plan.
    While trust fund solvency is important, how a plan affects 
the Government as a whole also needs to be considered. Social 
Security's financial operations are accounted for separately 
through trust funds, but the money is not kept separate, no 
more so than a bank keeps your money separate when you make a 
deposit. Social Security money goes into and out of the U.S. 
Treasury and, as such, it affects the overall financial flows 
of the Government.
    Two of the three Advisory Council proposals would increase 
budget deficits for as many as 30 years, one by modest 
amounts--that would be the Ball plan; the other by large 
amounts--that would be the Schieber/Weaver plan. If one thinks 
about the struggle that Congress and the President are having 
now over achieving $400 to $500 billion in cumulative deficit 
reductions by 2002, it is hard to comprehend how a gap of two 
or more times that size would be dealt with. The Schieber/
Weaver plan would create such a gap.
    What a plan does to the level of future government 
spending--that is, when the baby boomers are in retirement--is 
another consideration. Medicare and Medicaid spending, in 
conjunction with Social Security, is projected to rise from 
about 8.5 percent of GDP today to 16 percent in 2025. Changes 
in Social Security can affect the potential strain that this 
increase may cause.
    In this regard, the Advisory Council's three plans provide 
a range of impacts. The Ball plan reduces Social Security's 
average costs by 2 percent, the Gramlich plan by 13 percent and 
the Schieber/Weaver plan by 30 percent.
    The impact the plan has on national savings is yet another 
consideration. Some would contend that diverting Social 
Security money into the financial markets will increase 
savings. However, if there are no accompanying revenue 
increases or spending cuts, the Government simply has to borrow 
the money to make up for the foregone revenues. With one hand 
it invests; with the other hand it borrows; on balance, there 
is no change.
    Moreover, if people refrain from saving elsewhere--for 
instance, in their 401(k)s--because part of their Social 
Security taxes are going into market-based accounts, part of 
any positive impact on savings is lost.
    The Gramlich plan raises Social Security receipts and cuts 
spending and also mandates a 1.6-percentage point increase in 
payroll withholding for private accounts. Both parts of this 
plan could raise savings, although a portion of the 1.6-percent 
set-aside might be offset by reductions elsewhere.
    The other two plans also would make large investments in 
the markets, but only part would be financed with revenue 
increases and spending cuts. The other part would be financed 
with government borrowing. When you add this new government 
borrowing together with possible reductions in voluntary 
savings, it is unclear what their net savings impact would be. 
The idea of introducing a market element to Social Security 
also trades off greater risk for greater rewards. Even a 
passive investment fund, using a market-index approach, still 
carries risk.
    The three Advisory Council plans were priced assuming more 
than 11 percent annual rate of return based on the performance 
of the stock market from 1900 to 1995. However, much of this 
success is the result of what the equities market did in the 
last 13 years. The Dow-Jones stood in the 800 to 1,000 range 
from 1964 to 1982. At the end of 1995, it stood at 5,117. Since 
1950, the average return on the S&P 500 index was almost twice 
that of the Social Security trust funds, but in 20 of those 47 
years, it underperformed the trust funds.
    In other words, if one were depending on the market to give 
the trust funds a bigger boost over the next decade or two, 
there is the possibility it would not happen.
    I am not trying to minimize the market's potential to 
enhance investment returns for the system or for individuals. 
Certainly a broad based, buy-and-hold strategy practiced over 
the working lifetimes of most retirees today would have been 
very rewarding. The point here is only that there is more risk.
    On another level, I would point out that there is a 
tendency by many to suggest that economic growth is the panacea 
to Social Security's problems. Its problems, however, are not 
simply a savings or financing issue. They reflect a broader 
change confronting society; namely, that there will be 
considerably fewer workers for each retiree in the future. A 
plan that makes working more attractive than retiring and 
encourages employers to retain older workers may be as 
important as how effectively it restores balance to the Social 
Security trust funds.
    Finally, no plan will effectively address the Social 
Security problem unless it addresses the public's current lack 
of confidence. It may be that the most valuable feature of a 
plan that allows workers to invest part of their Social 
Security taxes in the markets is that it would give them a 
greater sense of ownership of the system. On the other hand, a 
plan that relied on traditional fixes--of raising revenue and 
cutting spending--could achieve a similar result if it stood 
the test of time. Arguably, the 1983 Social Security amendments 
failed the latter.
    [The prepared statement and attachments follow:]

Statement of David Koitz, Specialist in Social Legislation, Education 
and Public Welfare Division, Congressional Research Service

    Mr. Chairman and Members of the Committee, I was asked to 
speak to you about some of the basic issues involved in 
constructing a long-run Social Security fix. I am not here to 
put forward any single proposal or point of view. As requested, 
my purpose is to attempt to provide some sort of framework 
under which you may consider various options. You might think 
of the 8 questions I'm about to pose as a checklist. Congress 
is often asked to focus on proposals, i.e., on the changes 
themselves, and the underlying policy concerns emerge only in a 
piecemeal fashion. The recent Social Security Advisory Council, 
for instance, presented you with three different plans, but as 
many of you already recognized in your previous hearing, they 
spent 2 years contemplating the underlying issues. The 
multitude of things they considered are in their report but are 
presented from the opposing points of view of the various 
factions. I'm going to try here to set out some issues without 
coming to a conclusion about which plan best addresses them.

                 1. Do the trust fund numbers balance?

    Obviously for this Subcommittee, given its stewardship of 
Social Security, the primary question about any proposal is 
does it make the Social Security trust funds solvent over the 
long run. For this, the task is figuring out what combination 
of proposals will eliminate the average 75-year deficit 
reported by the trustees and keep a balance in the trust funds 
throughout the period. In the past, this was the predominant 
criterion used by this Committee. Two of the 3 Advisory Council 
plans--the Gramlich and Schieber/Weaver plans--pass this test, 
and the third--the Ball plan--arguably could be deemed to do so 
if its ``suggestion'' that part of the trust funds be invested 
in equities were considered a recommended change.

   2. Is the Government's overall deficit reduced (or at least left 
                              unaffected)?

    Given the emphasis that Congress and the President are 
placing on eliminating federal budget deficits and halting the 
growth of the federal debt, the financial well-being of the 
government as a whole needs to be considered. Some of the plans 
presented to you would achieve long-range actuarial balance of 
the Social Security system, but they also would increase the 
imbalance between the government's income and outgo. Simply 
put, Social Security receipts and expenditures are accounted 
for separately through federal trust funds, but the money is 
not kept separate--no more so than a bank keeps your money 
separate when you make a deposit to your checking account. 
Social Security money goes into and out of the U.S. Treasury, 
and thereby affects the overall financial flows of the 
government.
    Two of the 3 Advisory Council proposals would increase 
budget deficits for as many as 30 years--one by modest amounts 
(the Ball plan), the other by large amounts (the Schieber/
Weaver plan). They would do so by diverting Social Security 
receipts into investments in the nation's financial markets. If 
one thinks about the struggle Congress and the President are 
having over achieving $400 to $500 billion in cumulative 
deficit reductions by 2002, it is hard to comprehend how a gap 
of two or more times that size would be dealt with. One of the 
plans (the Schieber/Weaver plan) would create such a gap. Over 
its first 10 years, it cumulatively would divert $1.8 trillion 
into the markets by diverting 5 percentage points of the Social 
Security tax rate into personal accounts. Even more modest set-
asides of 1.5 to 2 percentage points of the Social Security tax 
rate would mean large revenue diversions from the Treasury. Two 
percent of payroll is equal to $65 billion a year today, $75 
billion in 2000, and $95 billion in 2005.

       3. Is the overall growth of entitlement programs affected?

    Examining what a plan does to the overall level of 
government spending is another important measure of fiscal 
impact. Ultimately, the overall level of federal taxation is 
driven by the overall level of government spending, even if not 
dollar for dollar. If Social Security were made solvent 
primarily through future revenue increases, or for argument's 
sake, infusions from the general fund to the trust funds, there 
would be no reduction in the burgeoning spending on 
entitlements arising from the retirement of the post World-War 
II baby boomers and a rapidly aging population. Under current 
projections, Medicare and Medicaid in conjunction with Social 
Security would rise from 8.5% of GDP today to 16% in 2025. 
Social Security does not function in a fiscal vacuum; it is 
part of the government; and changes to it can affect the long-
run fiscal strains posed by all major entitlement programs. In 
this regard, the 3 Advisory Council plans provide a range of 
impacts: one reduces Social Security's projected long-range 
cost by 2% (the Ball plan); a second reduces it by 13% (the 
Gramlich plan); and the third by 30% (the Schieber/Weaver 
plan).

    4. Are national savings increased (or at least left unaffected)?

    Some proponents of investing Social Security money in the 
financial markets see it as a means of increasing national 
savings. However, diverting Social Security funds into the 
markets by itself does little or nothing to savings. If there 
are no accompanying federal revenue increases or spending cuts, 
the government simply has to borrow the money to make up for 
the foregone revenues. With one hand it invests (or mandate 
that individuals invest), with the other hand it borrows--on 
balance there is no change.
    Other proposals raise Social Security receipts and/or 
constrain Social Security spending. In so doing, they reduce 
government deficits and thereby reduce what the Treasury has to 
borrow from financial markets (or perhaps some day reduce the 
outstanding federal debt held by the public). More money in the 
financial markets should make more money available for private 
investment. Economists would say that tax increases and 
spending constraints are likely to cut consumption and, thus, 
increase savings.
    Still other plans would raise Social Security receipts and/
or constrain Social Security spending, but then divert funds 
into the markets either by investing a part of the trust funds 
in them or requiring individuals to do so with part of their 
Social Security taxes. Certainly, the first part--raising taxes 
and/or constraining spending--reduces deficits and government 
borrowing, and potentially raises savings. What happens because 
of the diversion of funds into private accounts, on the other 
hand, is less certain.
    If people refrain from retirement saving they would 
otherwise do because they believe a part of their Social 
Security taxes now are going into market based accounts with 
higher returns, especially if these investments belong to them 
personally, part of any positive impact on national savings 
would be lost. For instance, if some people stop making 
payments to their 401(k)s, on balance they may not be saving 
more. One of the Advisory Council's plans, the Gramlich plan, 
raises Social Security receipts and cuts spending--economists 
would say that part potentially increases savings. It also 
would mandate a 1.6% increase in payroll withholding that would 
go into private individual accounts. That too potentially 
raises savings (by cutting consumption), but the amount by 
which it does so is unclear because some of this mandatory 
saving could be offset by reductions in voluntary savings. The 
other two Advisory Council plans would make substantial 
investments in the markets (one much more than the other), part 
of which would be financed with a combination of Social 
Security revenue increases and spending constraints and part 
with government borrowing. As with the Gramlich plan, the part 
that increases receipts and constrains spending could raise 
national savings. However, if some substantial part of the 
money diverted to the markets is offset by decisions to save 
less elsewhere, it is unclear what the net savings impact would 
be, particularly under the Schieber/Weaver plan which mandates 
the creation of large individual retirement accounts.

   5. How much risk/reward should the future Social Security system 
                                assume?

    The idea of introducing a market element to Social Security 
raises the question of trading off greater risk for greater 
rewards in planning for future retirement. Although actuarial 
projections of the effects of the Advisory Council proposals 
assume greater rates of return from market investments than the 
trust funds or individuals would earn from Social Security, 
there is no guarantee. Timing as well as investment choices are 
critical. Even a passive investment fund, using a market-index 
approach so as to minimize the risks of poor investment 
choices, still carries more risk.
    The 3 Advisory Council plans were priced assuming more than 
an 11% annual rate of return based on the performance of the 
stock market over the 95-year period, 1900-1995. However, much 
of this long-range average is based on what the equities market 
did in the last 13 years. The Dow Jones stood in the 800-1000 
range from 1964 to 1982; on December 31, 1995, it stood at 
5,117. Looking back at the performance of the S&P 500 index 
since 1950, its annualized average rate of return was almost 
twice that of the Social Security trust funds (11.36% versus 
5.96%); but in 20 of those 47 years, it underperformed the 
trust funds. There were 7 years in which its 10-year moving 
average underperformed the trust funds. In other words, if one 
were depending on the market to give the trust funds a 
considerably bigger boost over the next decade, or the 
following decade, there is the possibility that the market will 
not meet that expectation and may even underperform the 
traditional means of investing Social Security funds.
    The point here is not to minimize the market's potential to 
enhance the expected returns for the Social Security system or 
for individuals using market-based retirement accounts. The 
longer the period, the greater the likelihood the market will 
do so. Since 1970, the 30-year moving average of the S&P 500 
outperformed the trust funds in every year. Certainly, a broad-
based, buy-and-hold strategy practiced over the working 
lifetimes of most retirees today would have been very 
rewarding. The point is only that there is more risk. U.S. 
equity markets have prospered steadily for the past 15 years, 
and this may or may not continue. Their performance has been so 
robust that some analysts would suggest that we may be 
experiencing the top of an historic bull market. The crucial 
decision for policymakers is how much risk to allow in the 
development of Social Security in the future.

     6. How is the ratio of future workers to non-workers affected?

    There seems to be a preoccupation among many who look at 
Social Security to see economic growth as the panacea to its 
problems. However, Social Security's problems are not simply a 
savings or financing issue. They are a reflection of a broader 
issue confronting society, namely that 25 years from now there 
will be considerably fewer workers for each non-worker. An 
important question with any Social Security fix is how does it 
potentially affect choices about continuing to work late in 
one's career. A plan that makes working more attractive than 
retiring and encourages employers to retain older workers while 
accommodating their increased desire for leisure may be as 
important as how effectively it restores balance in the Social 
Security trust funds. The extent to which the various Advisory 
Council factions considered this perspective in the development 
of their plans is unclear.

       7. What long-run level of retirement income is desirable?

    While the budget and macro-economic effects of any plan are 
important, the impact a plan has on future retirees' income has 
to be part of the equation. Under current projections Social 
Security receipts would cover roughly 75% of the cost of the 
system once its reserves are depleted in 2029. Hence, a plan 
that avoids future tax and revenue increases and relies 
exclusively on constraining Social Security benefits would 
reduce the relative size of future benefits by about 25%, 
assuming the constraints were equally spread throughout the 
Social Security benefit package.
    Keep in mind, however, that current-law projections already 
anticipate constraints on future Social Security benefits 
resulting from a scheduled increase in the so-called normal 
retirement age from 65 to 67. Thus, a cut in future benefit 
levels would have to be on top of this. A Social Security fix 
that relies exclusively on benefit constraints would reduce the 
relative benefit level of a 2030 retiree (i.e., the percent of 
the retiree's final earnings replaced by benefits) by more than 
35% from what it is for someone retiring today. This is not to 
suggest that if today's workers choose later retirement ages 
than today's retirees, today's benefit levels couldn't be 
sustained; but compared to the relative benefit levels at 
retirement ages typically chosen today, i.e., 62-65, they would 
have to be more than 35% lower.
    Although the 3 Advisory Council plans assume different 
mixes of traditional Social Security and private retirement 
savings, they generally aim for a combination of the two that 
approximate the Social Security benefit levels projected under 
current law. In other words, embedded in their plans is the 
premise that the level of future retirement incomes does not 
have to (or perhaps should not) be reduced beyond what is 
scheduled under current law.

            8. Is public confidence in the system bolstered?

    Finally, no plan will effectively address the Social 
Security problem unless it addresses the public's current lack 
of confidence. The 1983 amendments brought major changes to 
Social Security, but did not have a lasting effect in restoring 
public confidence. It may be that the most valuable feature of 
a plan that would allow individuals to invest part of Social 
Security in the markets is that it would give them a greater 
sense of ownership of the system. On the other hand, a plan 
that relied on traditional fixes of raising revenue and cutting 
spending could accomplish a similar result if it stood the test 
of time. Arguably, the problem with the 1983 amendments is that 
they failed the latter. At the time of enactment, the system's 
average 75-year deficit was projected to be eliminated. 
Congress, however, did not examine whether the system's income 
and outgo were matched over the long haul--they weren't, but 
there were no year-by-year projections made at the time of 
deliberation. Consequently, there was little understanding that 
after a period of surpluses, there would be an indefinite 
period of deficits that eventually would throw the system back 
into actuarial imbalance. Another problem is that no cushion 
was built into the 1983 changes in case the projections proved 
overly optimistic, which they did.

  The Advisory Council's 3 proposals do not reflect the full range of 
                                options

    In response to a question asked by Representative Johnson 
in your last hearing, the witnesses from the Advisory Council 
stated that they had explored the full gamut of options. 
Certainly, their 3 plans contain wide ranging differences. 
However, they have a number of fundamental similarities as 
well. None is voluntary--they all require workers to 
participate even in their market-based components. None uses a 
means test--all base benefits on employment and contributions 
records, not on need. None totally eliminates the system's 
social features--all retain a tilt that favors lower income 
workers. None relies on general taxation. Although one borrows 
heavily from the government's general fund, workers' taxes and 
contributions remain the dominant means of financing. Finally, 
all rely on some form of increased taxation (or payroll 
withholding) to reform or restore the system to solvency.
    I think this last similarity is important in illustrating 
that the panel's three proposals do not reflect a full range of 
options. Outside of the Council, there have been a number of 
plans suggested to address the system's problems without tax 
increases. Those that contain a market-based component carve it 
out of the existing tax base. They would earmark a piece of the 
existing Social Security tax rate for individual investment. 
The plans offered by the Advisory Council range from doing as 
little as possible to alter the system's benefits (the Ball 
plan) to adopting a fundamentally new system (the Schieber/
Weaver plan). In between is the Gramlich plan which would 
retain but reduce the cost of the current system and then 
mandate a 1.6-percentage-point increase in payroll withholding 
for private retirement accounts. None of the Council's options 
would reduce the cost of the current system and then carve out 
a piece of the existing tax rate for private accounts. I am not 
suggesting such a change nor that it avoids the issues raised 
by the Advisory Council's plans, but just pointing out that the 
range of options is more complete with it. If Congress does not 
want wholesale reform, does not want to raise payroll 
withholding, and wants at least some market-based component 
added to the system, this fourth approach becomes relevant. It 
certainly becomes relevant if for no other reason than it, 
unlike any of the Advisory Council's three approaches, has been 
introduced by Members of Congress in one form or another.
      

                                


Table 1. Impact of 1994-96 Social Security Advisory Council's Proposals on Federal Deficits and the Federal Debt
                                               Held by the Public                                               
                                  [$s in billions; (+)=increase, (-)=decrease]                                  
----------------------------------------------------------------------------------------------------------------
                        Impact on federal deficits                           Impact on Federal debt held by the 
--------------------------------------------------------------------------                 public               
                                                                          --------------------------------------
                                                                Personal                               Personal 
                                      Maintain    Individual    security                 Individual    security 
           Calendar year              benefits     accounts     accounts     Maintain     accounts     accounts 
                                    (Ball plan)   (Gramlich    (Schieber/    benefits    (Gramlich    (Schieber/
                                                    plan)        Weaver    (Ball plan)     plan)        Weaver  
                                                                 plan)                                  plan)   
----------------------------------------------------------------------------------------------------------------
1998..............................           -5           -4         +101            0            0            0
1999..............................           -8           -5         +121           -5           -4         +101
2000..............................          +13           -8         +137          -13           -9         +223
2001..............................          +13          -11         +155           -1          -17         +360
2002..............................          +13          -16         +175          +12          -28         +515
2003..............................          +13          -23         +192          +25          -44         +690
2004..............................          +13          -31         +211          +37          -67         +882
2005..............................          +13          -39         +231          +50          -98        +1093
2006..............................          +15          -48         +248          +63         -137        +1324
2007..............................          +18          -58         +263          +78         -186        +1571
2008..............................          +22          -67         +277          +96         -244        +1834
2009..............................          +25          -77         +288         +118         -310        +2111
2010..............................          +29          -89         +301         +143         -387        +2400
2011..............................          +32         -103         +311         +172         -477        +2701
2012..............................          +34         -119         +320         +204         -580        +3012
2013..............................          +36         -136         +325         +238         -699        +3332
2014..............................          +35         -157         +330         +274         -835        +3657
2015..............................         -106         -181         +333         +309         -992        +3987
2016..............................         -131         -211         +329         +203        -1173        +4320
2017..............................         -160         -245         +322          +72        -1384        +4648
2018..............................         -193         -284         +311          -88        -1630        +4970
2019..............................         -229         -326         +298         -281        -1914        +5281
2020..............................         -269         -372         +282         -509        -2240        +5580
2021..............................         -314         -416         +264         -779        -2612        +5862
2022..............................         -363         -463         +243        -1093        -3028        +6125
2023..............................         -416         -513         +218        -1455        -3490        +6368
2024..............................         -474         -568         +190        -1871        -4003        +6587
2025..............................         -536         -629         +158        -2345        -4571        +6777
2026..............................         -603         -700         +123        -2881        -5200        +6935
2027..............................         -673         -778          -84        -3484        -5900        +7058
2028..............................         -749         -864          -40        -4157        -6678        +7141
2029..............................         -829         -958           +9        -4906        -7542        +7181
2030..............................         -914        -1062          +63        -5734        -8501        +7172
----------------------------------------------------------------------------------------------------------------

    Source: Analysis by Stephen C. Goss, Deputy Chief Actuary, 
Office of the Actuary, SSA, based on assumptions underlying the 
Intermediate projections of the 1995 OASDI Trustees' Report. 
Report of the 1994-1996 Advisory Council on Social Security. 
Volume 1, Table UB.

   Table 2. Comparisons of Total Returns of S&P 500 Index to Effective Yields Earned by Social Security Trust   
                                   Funds, Year-to-Year Performance, 1950-1996                                   
                                             [Annual rate of return]                                            
----------------------------------------------------------------------------------------------------------------
                                                                                           S&P 500 outperformed 
            Calendar year                      S&P 500           Social Security trust    Social Security trust 
                                                                         funds              funds?  (Yes)/(No)  
----------------------------------------------------------------------------------------------------------------
1950.................................  27.35%.................  2.02%..................  yes                    
1951.................................  21.6%..................  2.89%..................  yes                    
1952.................................  16.58%.................  2.24%..................  yes                    
1953.................................  -1.82%.................  2.31%..................  no                     
1954.................................  48.97%.................  2.30%..................  yes                    
1955.................................  29.48%.................  2.20%..................  yes                    
1956.................................  5.71%..................  2.40%..................  yes                    
1957.................................  -10.96%................  2.49%..................  no                     
1958.................................  41.03%.................  2.52%..................  yes                    
1959.................................  10.71%.................  2.58%..................  yes                    
1960.................................  -0.50%.................  2.60%..................  no                     
1961.................................  25.11%.................  2.76%..................  yes                    
1962.................................  -9.44%.................  2.83%..................  no                     
1963.................................  21.06%.................  2.92%..................  yes                    
1964.................................  14.98%.................  3.08%..................  yes                    
1965.................................  11.06%.................  3.18%..................  yes                    
1966.................................  -10.69%................  3.48%..................  no                     
1967.................................  22.29%.................  3.75%..................  yes                    
1968.................................  9.73%..................  3.95%..................  yes                    
1969.................................  -9.12%.................  4.44%..................  no                     
1970.................................  2.93%..................  5.07%..................  no                     
1971.................................  12.93%.................  5.29%..................  yes                    
1972.................................  17.47%.................  5.41%..................  yes                    
1973.................................  -15.31%................  5.75%..................  no                     
1974.................................  -26.25%................  6.22%..................  no                     
1975.................................  34.86%.................  6.59%..................  yes                    
1976.................................  21.92%.................  6.73%..................  yes                    
1977.................................  -7.88%.................  6.96%..................  no                     
1978.................................  5.34%..................  7.20%..................  no                     
1979.................................  16.78%.................  7.52%..................  yes                    
1980.................................  30.03%.................  8.57%..................  yes                    
1981.................................  -5.53%.................  9.95%..................  no                     
1982.................................  19.57%.................  11.18%.................  yes                    
1983.................................  20.67%.................  10.77%.................  yes                    
1984.................................  5.04%..................  11.60%.................  no                     
1985.................................  29.58%.................  11.21%.................  yes                    
1986.................................  17.11%.................  11.09%.................  yes                    
1987.................................  4.11%..................  10.06%.................  no                     
1988.................................  15.04%.................  9.77%..................  yes                    
1989.................................  29.70%.................  9.55%..................  yes                    
1990.................................  -3.95%.................  9.30%..................  no                     
1991.................................  28.55%.................  9.08%..................  yes                    
1992.................................  6.45%..................  8.74%..................  no                     
1993.................................  8.84%..................  8.32%..................  yes                    
1994.................................  0.28%..................  8.03%..................  no                     
1995.................................  35.67%.................  7.84%..................  yes                    
1996.................................  21.16%.................  7.52%..................  yes                    
----------------------------------------------------------------------------------------------------------------
 Note: Analysis of returns of the S&P 500 includes growth (or decline) in capital value and dividends paid, less
  a hypothetical 1% per annum to reflect administrative costs. Derived from Standard and Poor's Security Price  
  Index Record, 1996 Edition.                                                                                   
 Source: Analysis by Geoffrey Kollmann, Congressional Research Service, March 1997.                             


  Table 3. Comparisons of Total Returns of S&P 500 Index to Effective Yields Earned by Social Security Trust Funds, 10, 20, and 30-Year Moving Averages 
                                                               (annualized rate of return)                                                              
--------------------------------------------------------------------------------------------------------------------------------------------------------
                    10-year moving average, 1950-1996                        20-year moving average, 1960-1996       30-year moving average, 1970-1996  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            S&P 500                                 S&P 500                                 S&P 500     
                                             Social      outperformed                Social      outperformed                Social      outperformed   
          Calendar year            S&P 500  Security    Social Security    S&P 500  Security    Social Security    S&P 500  Security    Social Security 
                                              trust      trust funds?                 trust      trust funds?                 trust      trust funds?   
                                              funds       (Yes)/(No)                  funds       (Yes)/(No)                  funds       (Yes)/(No)    
--------------------------------------------------------------------------------------------------------------------------------------------------------
1950............................    11.52%     2.08%  yes...............  ........  ........  ..................  ........  ........  ..................
1951............................    15.19%     2.13%  yes...............  ........  ........  ..................  ........  ........  ..................
1952............................    14.99%     2.13%  yes...............  ........  ........  ..................  ........  ........  ..................
1953............................    12.39%     2.15%  yes...............  ........  ........  ..................  ........  ........  ..................
1954............................    15.07%     2.18%  yes...............  ........  ........  ..................  ........  ........  ..................
1955............................    14.69%     2.20%  yes...............  ........  ........  ..................  ........  ........  ..................
1956............................    10.85%     2.24%  yes...............  ........  ........  ..................  ........  ........  ..................
1957............................    14.50%     2.30%  yes...............  ........  ........  ..................  ........  ........  ..................
1958............................    18.05%     2.27%  yes...............  ........  ........  ..................  ........  ........  ..................
1959............................    17.52%     2.39%  yes...............  ........  ........  ..................  ........  ........  ..................
1960............................    14.65%     2.45%  yes...............    13.08%     2.26%  yes...............  ........  ........  ..................
1961............................    14.98%     2.44%  yes...............    15.09%     2.28%  yes...............  ........  ........  ..................
1962............................    12.11%     2.50%  yes...............    13.54%     2.31%  yes...............  ........  ........  ..................
1963............................    14.49%     2.56%  yes...............     3.43%     2.35%  yes...............  ........  ........  ..................
1964............................    11.56%     2.64%  yes...............    13.30%     2.41%  yes...............  ........  ........  ..................
1965............................     9.86%     2.74%  yes...............    12.25%     2.47%  yes...............  ........  ........  ..................
1966............................     8.02%     2.84%  yes...............     9.43%     2.54%  yes...............  ........  ........  ..................
1967............................    11.51%     2.97%  yes...............    12.99%     2.63%  yes...............  ........  ........  ..................
1968............................     8.74%     3.11%  yes...............    13.30%     2.69%  yes...............  ........  ........  ..................
1969............................     6.62%     3.30%  yes...............    11.93%     2.84%  yes...............  ........  ........  ..................
1970............................     6.98%     3.54%  yes...............    10.75%     3.00%  yes...............    11.01%     2.69%  yes               
1971............................     5.89%     3.80%  yes...............    10.34%     3.12%  yes...............    11.93%     2.79%  yes               
1972............................     8.68%     4.05%  yes...............    10.38%     3.27%  yes...............    11.90%     2.89%  yes               
1973............................     4.87%     4.34%  yes...............     9.57%     3.44%  yes...............    10.50%     3.01%  yes               
1974............................     0.31%     4.65%  no................     5.79%     3.64%  yes...............     8.80%     3.15%  yes               
1975............................     2.28%     4.99%  no................     6.00%     3.86%  yes...............     8.82%     3.30%  yes               
1976............................     5.51%     5.32%  yes...............     6.76%     4.07%  yes...............     8.11%     3.46%  yes               
1977............................     2.56%     5.64%  no................     6.94%     4.29%  yes...............     9.40%     3.62%  yes               
1978............................     3.10%     5.96%  no................     5.39%     4.53%  yes...............     9.45%     3.77%  yes               
1979............................     4.74%     6.27%  no................     5.68%     4.77%  yes...............     9.48%     3.97%  yes               
1980............................     7.22%     6.62%  yes...............     7.10%     5.07%  yes...............     9.56%     4.19%  yes               
1981............................     5.32%     7.08%  no................     5.61%     5.43%  yes...............     8.64%     4.42%  yes               
1982............................     5.51%     7.65%  no................     7.08%     5.84%  yes...............     8.73%     4.71%  yes               
1983............................     9.31%     8.15%  yes...............     7.07%     6.23%  yes...............     9.48%     4.99%  yes               
1984............................    13.25%     8.69%  yes...............     6.58%     6.65%  no................     8.22%     5.30%  yes               
1985............................    12.79%     9.15%  yes...............     7.41%     7.05%  yes...............     8.22%     5.59%  yes               
1986............................    12.34%      9.59  yes...............     8.87%     7.43%  yes...............     8.59%     5.88%  yes               
1987............................    13.72%     9.90%  yes...............     8.00%     7.75%  yes...............     9.16%     6.13%  yes               
1988............................    14.73%    10.17%  yes...............     8.26%     8.04%  yes...............     8.42%     6.37%  yes               
1989............................    15.94%    10.37%  yes...............    10.20%     8.30%  yes...............     8.99%     6.61%  yes               
1990............................    12.48%    10.45%  yes...............     9.82%     8.52%  yes...............     8.86%     6.83%  yes               
1991............................    16.00%    10.36%  yes...............    10.53%     8.71%  yes...............     8.96%     7.05%  yes               
1992............................    14.66%    10.11%  yes...............     9.99%     8.88%  yes...............     9.55%     7.25%  yes               
1993............................    13.48%     9.87%  yes...............    11.38%     9.01%  yes...............     9.16%     7.43%  yes               
1994............................    12.96%     9.51%  yes...............    13.10%     9.10%  yes...............     8.67%     7.60%  yes               
1995............................    13.48%     9.18%  yes...............    13.13%     9.16%  yes...............     9.39%     7.75%  yes               
1996............................    13.86%     8.82%  yes...............    13.10%     9.20%  yes...............    10.51%     7.89%  yes               
--------------------------------------------------------------------------------------------------------------------------------------------------------
 Note: Analysis of returns of the S&P 500 includes growth (or decline) in capital value and dividends paid, less a hypothetical 1% per annum to reflect 
  administrative costs. Derived from Standard and Poor's Security Price Index Record, 1996 Edition.                                                     
 Source: Analysis by Geoffrey Kollmann, Congressional Research Service, March 1997.                                                                     

      

                                

    Chairman Bunning. Thank you, Mr. Koitz.
    Let me ask you just a couple of questions. You seem to be 
saying that to maintain the benefit plan along with the 
personal savings accounts plan of the Advisory Council, does 
not necessarily increase national savings. How did you reach 
that conclusion?
    Mr. Koitz. OK, I considered three parts of an equation. The 
PSA plan, for instance, would put roughly 5 percent of payroll, 
about $150, $160 billion a year, into the markets. Part of that 
would come from revenue increases or spending cuts that the 
Government would make, but part would come from borrowing.
    So with one hand, we are putting $150, $160 billion into 
the markets; with the other hand, we are borrowing the money to 
do that. With one hand we put it in; with the other hand, we 
take it out.
    The other thing is that most economists would expect some 
reduction in voluntary savings because the PSA plan is a 
mandatory approach. Over time, as amounts in these plans 
accumulate, people are going to say, well, I have a big pot of 
money growing over here in this PSA. I am also putting money 
into my employer's 401(k), or I am putting money into an IRA, 
or into a 403(b) or 457 plan. But I also have a big mortgage to 
pay. Maybe I have special medical expenses, kids' education, 
and so forth. Something may draw me away from that voluntary 
savings route that I was following.
    So if you make an assumption that some of the net money 
going into the markets from the PSA investment is going to be 
offset by voluntary savings, you do not necessarily get an 
overall increase in the amount of money going into the markets.
    Chairman Bunning. That assumes that the person would then, 
who was voluntarily saving, would no longer voluntarily save; 
they would take more out of their 401(k) or other plan they 
might have.
    Mr. Koitz. Right.
    Chairman Bunning. Now, your testimony includes reference to 
the 1983 amendments. You say at the time Congress did not 
examine whether the system's income and outgo were matched over 
the long haul. You mention there was little understanding at 
that time that an indefinite period of deficits, mostly due to 
the aging baby boomers, would eventually throw the system back 
into actuarial imbalance.
    How should we approach the problem differently this time 
around?
    Mr. Koitz. Well, the first part is really easy.
    Chairman Bunning. The first part is really easy, OK.
    Mr. Koitz. There was very little understanding of the year-
to-year flow of funds emanating from the 1983 amendments. There 
was some discussion in the Greenspan Commission about there 
being surpluses, but it was not a long discussion.
    When the plan was being developed here in this Committee 
and in the Finance Committee, there were no year-to-year 
projections. There were two principal goals. One was to get rid 
of the short-run problem, 1983 to 1989-90. Nobody wanted it to 
come back again.
    In the long run, the focus was on the average 75-year 
deficit. For the short run, both Committees looked at 
pessimistic projections because they did not want to see the 
problem arise again in the near term. In the long run, however, 
they focused on what would be reported in the trustees' report 
and that was the average deficit.
    So I think the easy part is that when you are developing a 
plan, you continuously look at what that plan will do year to 
year throughout the projection period. If that had been done in 
1983, you would have seen that there was this huge buildup, a 
huge surplus, a huge trust fund balance building up in the 
early years and, then that income would be less than outgo in 
or around 2020 and 2025, indefinitely. So that is the easy 
part.
    Chairman Bunning. I ask this only because it is a topic of 
discussion on Capitol Hill from Mr. Greenspan to the Boskin 
Commission and others. In 1983 was the adjustment in the CPI a 
consideration at all?
    Mr. Koitz. We delayed the COLA by 6 months permanently.
    Chairman Bunning. No, I mean the change in determining in 
the CPI.
    Mr. Koitz. Not the measurement of the CPI itself.
    Chairman Bunning. So it was not discussed at all?
    Mr. Koitz. No, but I think it was just the year before that 
a major change was made in the treatment of the housing of the 
CPI. We went to a rental equivalency basis rather than a 
purchase price basis.
    Chairman Bunning. Mrs. Kennelly.
    Mrs. Kennelly. Thank you.
    You have joined the club of a few who can talk about this 
important issue.
    I am going to look at this issue from a slightly different 
angle. I know you gave us a great deal of information, but you 
note in your testimony that the diversion of 5 percent of the 
payroll tax from the trust fund into the private personal 
security accounts will increase the Federal deficit. Then you 
calculate that the increase in the deficit will be roughly $1.8 
trillion in the first 10 years.
    So I would like to come at this from a little different 
angle. Why doesn't the large reduction in the benefits in the 
PSA plan and the 1.5 percent increase in the payroll tax cover 
this so that we do not get that huge deficit change?
    Mr. Koitz. The PSA plan would immediately divert the 5 
percent into the markets. The savings that come from its 
benefits changes and a few of the revenue items that it 
proposes are slow growing. So in the early years, you do not 
get much budget savings, so to speak, but you have a big 
revenue loss with the immediate nature of the 5 percent set-
aside.
    Mrs. Kennelly. Let me follow up on that. How does this $1.8 
trillion increase that you have talked about in the deficit 
compare to the increase in the deficit under Mr. Ball's 
maintained benefits plan, which invests a portion of the trust 
fund in the private markets?
    Mr. Koitz. Why don't I lay out the three plans for that 
time period, which is the first 10 years.
    Mrs. Kennelly. You can do that. I do congratulate you 
again.
    Mr. Koitz. The PSA plan cumulatively increases the 
borrowing from the public over 10 years, which is the 
cumulative effect of deficit increases, by $1.8 trillion with 
interest. The Ball plan cumulatively increases deficits by $.1 
trillion; i.e., $100 billion over that period. The Gramlich 
plan improves the budget by about $250 billion over that 
period. So there is a wide dimension with those three plans.
    Mrs. Kennelly. Thank you, sir. I am going to ask you 
another hard one, but you do them very well.
    We know that this is a transition problem, with many of the 
proposals, to move Social Security toward a more market-based 
system.
    Could you distinguish for us between the transition related 
to the trust fund and the transition related to the Federal 
deficit?
    Mr. Koitz. OK. There are two types of transitions. One is 
how do you keep the Social Security system going in the context 
of its trust funds, making sure that there is enough credit in 
those trust funds to cover the benefit expenditures that the 
Treasury is going to have to make. The other transition is what 
happens to the Federal Government?
    Where all three of these plans achieve solvency and, in 
fact, cover the transition from a Social Security standpoint, 
all three of them do not meet the transition from the 
standpoint of the overall government situation.
    Mrs. Kennelly. So we should get that information.
    Mr. Koitz. Right.
    Mrs. Kennelly. Here is my big problem with this. Since 
Social Security is pay-as-you-go, a person is working to pay 
the benefits of the people that are living right now and 
collecting the benefits, and working to make sure the trust 
funds remain solvent so he gets something down the line.
    Is that at all possible when you are dealing with these 
kinds of numbers? It is like a double pay we see when we read 
it.
    Mr. Koitz. Somebody has to pay.
    Mrs. Kennelly. So I am right that there will be a period 
there where someone is working for present day beneficiaries 
and also working for their own benefit?
    Mr. Koitz. Yes, assuming you do not increase borrowing.
    Mrs. Kennelly. I know the gentleman just said we are doing 
it now and I know we are doing it now. But when you are 
starting to really put big dollars into other areas, not just 
the trust fund and not just the bonds, do you think this is 
possible?
    Mr. Koitz. I would have to say, ``Show me.'' We are talking 
about huge amounts of money here. I go back to what I started 
with. If you are struggling, trying to find 400 to 500 billion 
dollars' worth of change to reach balance in the budget by 
2002, how do you achieve something that is twice that amount, 
three times that amount? I do not think reverting to borrowing 
will do it.
    Mrs. Kennelly. Thank you very much.
    Chairman Bunning. The gentleman from Missouri, Mr. Hulshof.
    Mr. Hulshof. Thank you, Mr. Chairman.
    In your testimony, I know that you did not get to the last 
couple of pages, which actually talk about the fact that the 
Advisory Council's three proposals do not recognize or explore 
the full range of options, and I appreciate your responding to 
a question that Ms. Johnson had asked at a previous hearing.
    It seems, and some argue that there are some real 
advantages to the alternative of reducing the cost of the 
current system and then carving out a piece of the existing tax 
rate for private accounts; in fact, some Members have 
introduced just that type of approach.
    What are some of the advantages that you see, should 
Congress ultimately decide to utilize this type of approach?
    Mr. Koitz. Right off, you don't have to increase taxes. The 
other three plans--the three plans before you, in some way, all 
increase taxes, either directly through the payroll tax or 
through the increase in the income taxation of Social Security 
benefits.
    I would worry, however, that the carve-out approach, as I 
have labeled it in my testimony, might have the same kind of 
negative budget effect as the 5-percent set-aside in the PSA 
plan. If the revenue items or spending constraints that are in 
this plan, not counting the set-aside, do not add up to how 
much you are putting into these private accounts, you are going 
to have a negative effect on the budget, and I think most of 
the five or six bills that have been recently introduced do 
have this problem.
    Mr. Hulshof. You also point out that the three plans, while 
mixing traditional Social Security benefits and private 
retirement savings in different ways, aim for the same level of 
benefits, at least as projected under our current law.
    Can you give us some additional detail regarding what we 
need to consider as we determine what long-run level of 
retirement income is desirable?
    Mr. Koitz. First of all, I would say that Social Security 
benefits are projected to grow in real terms. Even with the 
transition from the normal retirement age being age 65 today up 
to age 67 in 2027, there will be real growth in the benefit 
level. There would be huge differences in terms of the 
financial effects, if the system were geared solely to 
maintaining the purchasing power of today's benefit levels.
    So I think you have a range in making your value judgments, 
in your policy choices here about this government-run system, 
that span from maintaining purchasing power versus increasing 
the real value of the benefits.
    Mr. Hulshof. The reason I ask the question is having just 
come from the district when we had a 2-week, district work 
period, a senior came to me and actually showed me the amount 
of moneys that he had contributed to Social Security between 
the years 1937 to 1981 and how much he had put into the system 
and then how much money he had already taken out of the system 
and was angry that we were talking about maintaining the 
current level of benefits, which was somewhat unique to hear 
from someone in his capacity.
    I guess as a last question, let me ask you, and I recognize 
that CRS is very objective, nonpartisan, not advocating a 
particular plan, but what are the advantages to us, Members of 
Congress, of acting sooner rather than later? Can you just 
briefly talk about the timing and the need for the reform?
    Mr. Koitz. I do not think I am out of school saying the 
sooner you act, the better, because the dimensions of the 
change can be piecemeal. They can be scaled. They can be 
gradual. If you wait until 2010 or 2015 and we still have a 
situation like is projected today, the changes, whatever they 
are, be they tax increases or spending constraints, would have 
to be very large and abrupt.
    And I think the best measure of that is that if we were to 
finance the system solely through benefit reductions when the 
trust fund goes belly up in 2029, that would take a 25-percent 
reduction in benefit levels then.
    Mr. Hulshof. Thank you, Mr. Chairman. I yield back.
    Chairman Bunning. Mr. Neal.
    Mr. Neal. Thank you, Mr. Chairman.
    Thank you very much, Mr. Koitz. I think you did a great job 
of framing the issue for all of us. I think that everybody 
understands the dilemma that the Nation confronts.
    Let me bounce an issue off you that you raised when you 
spoke of the national savings rate. I am currently carrying, 
for the sixth time in 9 years, an IRA bill. This time it has 
125 cosponsors in the House and 51 cosponsors in the Senate.
    Do you want to speak to the advantages of incremental 
changes as we proceed to try to do a better job of getting 
people to put aside some money for their own retirement?
    Mr. Koitz. Well, I may sound like an economist, but I am 
not.
    Mr. Neal. Does that mean you are only going to give us one 
answer?
    Chairman Bunning. It is the other way around.
    Mr. Koitz. I guess I have a hard time with this one. I 
think the key question is substitution. If you design an IRA 
plan that is merely substituting for some other form of saving 
and it is not increasing the amount that goes into the markets 
that could potentially go to saving, I am not sure what you are 
doing, other than moving money around.
    So I think the key question with any IRA change is what its 
net impact would be.
    Mr. Neal. But isn't part of it behavioral?
    Mr. Koitz. Yes.
    Mr. Neal. Shouldn't we be getting people to set aside some 
money for their own retirement, getting people to understand 
that there is a link to their own fate by doing a better job of 
determining what their own retirement is going to look like, 
encouraging people in their twenties, for example, in their 
thirties, to start to set aside some money? Do you accept the 
notion that we could incentivize some savings?
    Mr. Koitz. Maybe, because what you are asking them to do--
what you really want them to do--is cut consumption.
    Mr. Neal. That is right.
    Mr. Koitz. And I am not going to be any more forthright 
than most economists. I am not sure I know how to do that.
    Mr. Neal. Thank you. Thank you for clearing that up for us.
    Chairman Bunning. We like those direct answers.
    Mr. Hayworth.
    Mr. Hayworth. I thank the Chairman and my friend from 
Massachusetts, and I am proud to be a cosponsor of his bill to 
deal with the IRA. And let us again return to this notion of 
savings for just a second.
    You mentioned really three elements in the equation when 
you were first addressing the Chairman's question, and perhaps 
I lost you somewhere in there because, in listening to your 
answer, you talked about the PSA really taking 5 percent off 
payroll and looking at $150 to $160 billion.
    Then you offered, I guess, a consensus statement from 
economists, thinking that really you would have the reduction 
in the 401(k) and that type of enforced savings.
    I guess it begs the question of taking into account other 
forms of savings, apart from retirement plans. Right now, just 
generally with the Tax Code, there is a disincentive to save in 
traditional ways. Would it be helpful for us to lift that 
disincentive to save? Would that put more money into savings in 
general?
    Mr. Koitz. Tell me what you are doing to the Federal 
Government's revenue stream and then I could probably answer 
it. If what we are doing is losing revenue to make that 
incentive, I do not know where it comes out, on balance.
    I have another table that I think will clarify a little bit 
of what I was saying earlier, if the staff could hand it out.
    Mr. Hayworth. Great.
    Mr. Koitz. The Advisory Council report provided estimates 
based on the 1995 Trustees' Report of what the budget effects 
would be of the various plans. About 1 week ago I called the 
office of the actuary and asked them for how much money would 
go into the markets as a result of the PSA plan. That is shown 
in the column on the left under ``money flowing into the 
markets, PSA contributions.''
    Let's pick the year 2000. The estimate was $168 billion 
would go into the markets from the 5-percent set-aside. The 
Federal borrowing that would have to take place was equal to 
$137 billion. And if there were no reduction in voluntary 
savings, you would have a net flow into the markets of $31 
billion. That is scenario number one.
    Under scenario number two, again picking the year 2000, I 
made the assumption that 30 percent of the money going into the 
markets, under the PSA plan, would be offset by reductions in 
voluntary savings, and that turned out to be $50 billion. And 
the net result for the year 2000 was that $19 billion would 
flow out of the markets.
    I think that illustrates the point I was trying to make, 
that you have a range, depending upon a variety of assumptions, 
but one of them being what people do with their voluntary 
savings.
    I would also mention that I picked the year 2000 because 
there is no money flowing out of the PSAs at that point to meet 
day-to-day consumption; but as you move out, people are going 
to be relying on their PSAs to live off of, in part because the 
Social Security benefit coming from the Government is that much 
smaller. I did not take that into account. But by 2020, you 
would start seeing some of that effect.
    Mr. Hayworth. Thank you, sir. I have no further questions.
    Chairman Bunning. Mr. Levin.
    Mr. Levin. Thank you, Mr. Chairman.
    I am not quite sure how much of the later testimony will 
focus on this issue and unfortunately, some of us are going to 
have to be away for another meeting, including myself. So let 
me zero in on your charts, the budget flows, the deficit 
impacts.
    I would ask you, you come from an analytical kind of 
neutral entity, so I am going to try to force you to put up the 
best defense against your own arguments.
    Mr. Koitz. OK.
    Mr. Levin. Talking about the PSA plan, now tell me what you 
think the best, strongest argument is against the apparent 
impact. It increases the deficit dramatically. Your latest 
chart even has some analyses of savings that would indicate 
that there isn't going to be necessarily a huge benefit in 
terms of savings.
    So we are trying to look at all these proposals 
objectively, so tell me what you think will be the best 
rejoinder to your analysis of the impact on deficits and the 
rather small potential impact on net savings.
    Mr. Koitz. You do not know that there will be a small 
increase in savings. That is the point.
    Mr. Levin. But you posit a relatively small impact.
    Mr. Koitz. Under one scenario, yes.
    Mr. Levin. So put on another hat or pretend you are writing 
an exam in economics and the professor says to you to put forth 
the best rejoinder to these materials.
    Mr. Koitz. I think there is a long-run potential savings 
from this kind of plan because what you are doing is 
leveraging. You are borrowing at a low rate and hopefully 
making considerably better investments with a bigger rate of 
return in the long run, from going into the market. I think 
that is principally what is going on in this plan.
    The amount of borrowing is very high and it goes on for a 
long time, so you are asked to make a huge leap of faith that 
you will be able to pay this back, and more so, and that there 
will be a cut in consumption and increased savings in the long 
run.
    You are also, from the other side, saying that we are going 
to take a big risk. And it is not, in this instance, the Social 
Security system that is taking the risk. If you are aiming for 
a given level of retirement income, because so much of that 
income would come from individual plans where individuals would 
make the choice as to how to invest, if they invested 
conservatively or they were unlucky, they may not get that 
level of retirement income that we were aiming for here in 
1997.
    So the risk factor on the individual, I think, is a 
critical factor with the PSA plan.
    Mr. Levin. All right. I will not tell you what grade I 
would give that answer. I think you have tried.
    I asked that because your critique, I think, has some 
dramatic implications for the PSA plan and I think that those 
who propose it have to be ready to respond to these kinds of 
tables.
    Thank you.
    Chairman Bunning. Mr. Tanner.
    Mr. Tanner. Thank you very much, Mr. Chairman. I apologize 
for being a few minutes late. Like everything else around here, 
we all have three places to be at 10 a.m., in different areas.
    Thank you for your testimony. I reviewed some of the 
material and I just have a couple of questions.
    Are you familiar or have you been made acquainted with the 
so-called Blue Dog proposal with respect to our budget?
    Mr. Koitz. As of the last Congress, yes.
    Mr. Tanner. And what we did. Would you describe the 
interrelationship between the Boskin Commission's position that 
the CPI is overstated and the reasons contained in that 
document for that position and the solvency of the trust fund 
in the out years?
    Mr. Koitz. How big of a COLA reduction is anticipated under 
the Blue Dog plan right now?
    Mr. Tanner. We took the Boskin Commission, which indicates 
the overstatement is somewhere between 0.8 and 1.6. He thought 
the number was 1.1. We took the low side, of course, being 
politically sensitive, and did a 0.8 adjustment.
    In so doing, we think that that could relieve the budget by 
2005 of relying on the Social Security surplus for balance and 
could reestablish the Social Security trust fund on its own by 
2005. We also think that by doing that, you gain an additional 
13 years of solvency. I would like to know your comment.
    Mr. Koitz. Well, at that order of magnitude, you are 
probably eliminating somewhere in excess of half of the long-
run deficit. And what you would be doing--the long-run 
assumption is that there would be a 4 percent per year COLA 
throughout the 75-year projection period, and you would be 
talking about providing 3.2 percent per year.
    I think 0.8 would give you something in the neighborhood of 
a 1.2 percent of payroll savings on average. The deficit is 
2.19 percent of taxable payroll. So you would get somewhere 
near half. But as you just indicated, it does not buy you a lot 
of time. It buys you some more time. That 2029, if I understood 
you, would go out to 2042.
    But I think the real pressure point comes when revenue 
coming into the Government is less than outgo. That happens in 
2012, and if what we have done is push that out to maybe 2020 
or 2022, I am not sure that that would be the only action I 
would want to see in a long-run Social Security plan.
    Mr. Tanner. I could not agree with you more. I am just 
talking about--there are two problems here.
    Mr. Koitz. Right.
    Mr. Tanner. Short term and long term. Perhaps a fix in the 
short term with, then, a followon, with some of these proposals 
that have been placed, the PSAs and others, would that be a 
reasonably sane way to go about the problem?
    Mr. Koitz. Only if the 0.8 is a good reflection of the CPI 
overstatement, and I am not going to jump into that swamp.
    Mr. Tanner. I understand. We get much praise for our 
courage and little support, it seems. I think, in the interest 
of accuracy, if it were properly posed in that context, it 
seems that we all would prefer for the CPI to be as accurate as 
possible. People disagree with Boskin in his reasoning, I 
suppose, but--well, I will just leave it at that.
    Thank you, Mr. Chairman.
    Chairman Bunning. I have no further questions. We want to 
thank you for your testimony. We appreciate your analyzing the 
many proposals as objectively as you have. Thank you.
    Presenting the views of the GAO are Jane Ross, Director, 
and Frank Mulvey, Assistant Director of the Income Security 
Issues, Health, Education and Human Services Division.
    Miss Ross, welcome back and you may proceed.

 STATEMENT OF JANE L. ROSS, DIRECTOR, INCOME SECURITY ISSUES, 
 HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, U.S. GENERAL 
   ACCOUNTING OFFICE; ACCOMPANIED BY FRANK MULVEY, ASSISTANT 
DIRECTOR, INCOME SECURITY ISSUES, HEALTH, EDUCATION, AND HUMAN 
                       SERVICES DIVISION

    Ms. Ross. Thank you, sir. Mr. Chairman, Mrs. Kennelly, 
Members of the Subcommittee, I am pleased to be here to discuss 
the impacts of proposals to address the long-term financing 
problems of the Social Security system, especially their 
effects on the financial well-being of women. I would like to 
talk about how and why the outcomes for women differ from those 
of men under the current Social Security system and under each 
of the three reform proposals of the Social Security Advisory 
Council.
    One reason to be especially concerned about the financial 
well-being of women is that elderly, unmarried women currently 
have a poverty rate that is about four times that of elderly 
married couples.
    The Social Security Act's provisions, as well as those of 
the three proposals, are called gender-neutral. That is, the 
program rules are the same for men and women. But the benefits 
differ because men and women differ in terms of their labor 
force participation, earnings levels, longevity, and the ways 
they invest in financial assets.
    As you know, Social Security currently provides benefits 
based on an average of a worker's highest 35 years of earnings. 
Women's lower rate of labor force participation and lower 
earnings levels lead, on average, to lower Social Security 
benefits for women than for men.
    For example, men currently have about 4 years of zero 
earnings, on average, out of the 35 years that are used in the 
calculation, while women average about 15 years of zero 
earnings out of their high 35 years. With regard to the level 
of earnings, the median earnings of women working year round 
and full time are about 70 percent that of men.
    Pension benefits are also based, in various ways, on years 
of work and earnings levels. So, as is the case with Social 
Security, women retirees, on average, receive lower monthly 
pension benefits than men.
    Social Security also provides a broad range of dependent 
benefits for spouses, widows, parents and children. Workers' 
benefits are not reduced to pay for these dependent benefits. 
Dependent benefits are especially important to women because 
two-thirds of older women are receiving some or all of their 
Social Security benefits based on their husband's earnings 
records.
    Now, pensions generally don't offer the same protection to 
dependents as Social Security. The primary benefit for 
dependents in a pension system is the provision for a 
survivor's benefit. However, if the worker chooses this 
benefit, the monthly amount of the benefit is reduced in order 
to pay for the additional survivor protection.
    At the current time, differences in longevity do not affect 
the receipt of monthly Social Security benefits. However, they 
can affect the income from pensions, which may be adjusted to 
reflect the number of years over which pensions will be 
received.
    Since women live longer, their monthly pension benefits may 
be lower, even when their earnings were the same as men's. For 
men and women who are currently 65 years old, a woman can 
expect to live 19 years in retirement while a man can expect to 
live 15 years.
    Further, differences in the investment behaviors of men and 
women do not currently affect Social Security benefits, but 
many defined contribution plans provide for workers to invest 
their assets, and differences in how men and women invest can 
lead to differences in their pension benefits.
    When making financial decisions, women tend to be more 
risk-averse or conservative than men. As a result, women tend 
to invest more of their pension funds in safer but lower 
yielding assets, such as government bonds.
    Consequently, a woman who contributes the same amount to 
her pension plan as a man may still have lower pension balances 
at the time of retirement because of her lower investment 
returns.
    The three proposals of the Social Security Advisory Council 
make changes of varying degrees to the structure of Social 
Security. Many of the proposed changes will have different 
effects on the benefits received by men and women.
    For example, extending the computation period for lifetime 
average earnings from 35 to 38 years, as is proposed in two of 
the plans, will have a greater impact on women than on men. For 
most women, the additional 3 years will be years with zero 
earnings, while for most men, the additional years will include 
some positive earnings.
    Consequently, women will see a larger decrease in their 
lifetime average earnings than men, and therefore experience 
relatively greater reduction in their benefits.
    Two of the Advisory Council plans create defined 
contribution accounts for workers. Since women tend to work 
fewer years and earn lower wages, they usually will be 
contributing less to their accounts.
    Furthermore, even if the contributions are equal, women's 
more conservative investment behavior may lead to lower 
investment returns and lower pension benefits.
    In addition, one of these plans leaves the decision about 
purchasing an annuity up to the individual retiree. The monthly 
payments to a woman will be lower than those to a man in order 
to offset the woman's longer life expectancy and longer period 
of benefit receipt. Let me just sum up.
    While the proposals of the Social Security Advisory Council 
are intended to address the long-term financing problems, they 
make changes that might affect the relative level of benefits 
received by men and women. Narrowing the gaps in labor force 
attachment, earnings and investment behavior may reduce the 
differences in outcomes, but they are unlikely to eliminate 
them any time soon.
    In light of this, plans to change the Social Security 
benefit structure should take account of their effect on the 
distribution of benefits between men and women, as well as for 
other groups.
    This concludes my statement and I would be glad to answer 
any questions you may have.
    [The prepared statement and attachments follow:]

Statement of Jane L. Ross, Director, Income Security Issues Health, 
Education, and Human Services Division, U.S. General Accounting Office; 
accompanied by Frank Mulvey, Assistant Director, Income Securities 
Issues Health, Education, and Human Services Divison

    Mr. Chairman and Members of the Subcommittee:
    I am pleased to be here to discuss the impacts of proposals 
to finance and restructure the Social Security system, 
specifically the impacts on the financial well-being of women. 
As you know, the Social Security trust funds are predicted to 
pay out more in annual benefits than they collect in taxes 
beginning in 2012 and are expected to be depleted by 2029. 
Recently, the Social Security Advisory Council offered three 
alternative reform proposals to address this long-term 
financing problem. Each of the alternative proposals also 
affects the financial well-being of beneficiaries, especially 
women. One reason to be especially concerned about the 
financial well-being of women is that elderly unmarried women 
are much more likely to be living below the poverty line. For 
example, 22 percent of unmarried elderly women have income 
below the poverty threshold, compared with 15 percent of 
unmarried elderly men and only 5 percent of elderly married 
couples.
    Today, I would like to discuss how and why the benefits for 
women differ from those for men under the current Social 
Security program and how each of the three reform proposals of 
the Social Security Advisory Council might particularly affect 
women. The information I am providing today is based on 
previous GAO work and contains preliminary findings from a 
report being prepared at the request of the Ranking Minority 
Member of the Subcommittee. \1\
---------------------------------------------------------------------------
    \1\ Pension Plans: Survivor Benefit Coverage for Wives Increased 
After 1984 Pension Law (GAO/HRD-92-49, Feb. 28, 1992); Social Security: 
Issues Involving Benefit Equity for Working Women (GAO/HEHS-96-55, Apr. 
10, 1996); and 401(k) Pension Plans: Many Take Advantage of Opportunity 
to Ensure Adequate Retirement Income (GAO/HEHS-96-176, Aug. 2, 1996).
---------------------------------------------------------------------------
    In summary, our work shows that, despite the provisions of 
the Social Security Act do not differentiate between men and 
women, women tend to receive lower benefits than men. This is 
due primarily to differences in lifetime earnings because women 
tend to have lower wages and fewer years in the workforce. 
Women's experience under pension plans also differs from men's 
not only because of earnings differences but also because of 
differences in investment behavior and longevity. Moreover, 
public and private pension plans do not offer the same social 
insurance protections that Social Security does.
    Furthermore, some of the provisions of the Social Security 
Advisory Council's three proposals may exacerbate the 
differences in men and women's benefits. For example, proposals 
that call for individual retirement accounts will pay benefits 
that are affected by investment behavior and longevity. 
Expected changes in women's labor force participation rates and 
increasing earnings will reduce but probably not eliminate 
these differences.

    Demographic Characteristics and Labor Market Attachment Affect 
            Retirement Income for Men and Women Differently

    Over their lifetimes, men and women differ in many ways 
that have consequences for how much they will receive from 
Social Security and pensions. Women make up about 60 percent of 
the elderly population and less than half of the Social 
Security beneficiaries who are receiving retired worker 
benefits, but they account for 99 percent of those 
beneficiaries who receive spouse or survivor benefits. A little 
less than half of working women between the ages of 18 and 64 
are covered by a pension plan, while slightly over half of 
working men are covered. The differences between men and women 
in pension coverage are magnified for those workers nearing 
retirement age--over 70 percent of men are covered compared 
with about 60 percent of women.

Labor Force Participation and Earnings Differ for Men and Women

    Labor force participation rates differ for men and women, 
with men being more likely, at any point in time, to be 
employed or actively seeking employment than women.\2\ The gap 
in labor force participation rates, however, has been narrowing 
over time as more women enter the labor force, and the Bureau 
of Labor Statistics predicts it will narrow further. In 1948, 
for example, women's labor force participation rate was about a 
third of that for men, but by 1996, it was almost four-fifths 
of that for men. The labor force participation rate for the 
cohort of women currently nearing retirement age (55 to 64 
years of age) was 41 percent in 1967 when they were 25 to 34 
years of age. The labor force participation rate for women who 
are 25 to 34 years of age today is 75 percent--an increase of 
over 30 percentage points.
---------------------------------------------------------------------------
    \2\ The labor force participation rate is the proportion of the 
population under consideration who are working or actively seeking 
employment.
---------------------------------------------------------------------------
    Earnings histories also affect retirement income, and women 
continue to earn lower wages than men. Some of this difference 
is due to differences in the number of hours worked, since 
women are more likely to work part-time and part-time workers 
earn lower wages. However, median earnings of women working 
year-round and full-time are still only about 70 percent of 
men's.\3\
---------------------------------------------------------------------------
    \3\ Even after accounting for differences in education, work 
effort, age, and other characteristics that affect wages, women earn 
wages that are about 15 to 20 percent lower than men's wages, on 
average.
---------------------------------------------------------------------------
    The lower labor force participation of women leads to fewer 
years with covered earnings \4\ on which Social Security 
benefits are based.\5\ In 1993, the median number of years with 
covered earnings for men reaching 62 was 36 but was only 25 for 
women. Almost 60 percent of men had 35 years with covered 
earnings, compared with less than 20 percent of women. Lower 
annual earnings and fewer years with covered earnings lead to 
women's receiving lower monthly retired worker benefits from 
Social Security, since many years with low or zero earnings are 
used in the calculation of Social Security benefits. On 
average, the retired worker benefits received by women are 
about 75 percent of those received by men. In many cases, a 
woman's retired worker benefits are lower than the benefits she 
is eligible to receive as the spouse or survivor of a retired 
worker.\6\
---------------------------------------------------------------------------
    \4\ Years of covered earnings are the years in which the individual 
received earnings on which Social Security taxes were paid.
    \5\ Social Security benefits are based on the 35 years of highest 
covered earnings.
    \6\ GAO/HEHS-96-55, Apr. 10, 1996.

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Life Expectancies Differ for Men and Women

    Women tend to live longer than men and thus may spend many 
of their later retirement years alone. A woman who is 65 years 
old can expect to live an additional 19 years (to 84 years of 
age), and a man of 65 can expect to live an additional 15 years 
(to 80 years of age). By 2070, the Social Security 
Administration projects that a 65-year-old woman will be able 
to expect to live another 22 years, and a 65-year-old-man, 
another 18 years. Additionally, husbands tend to be older than 
their wives and so are likely to die sooner. Differences in 
longevity do not currently affect the receipt of monthly Social 
Security benefits but can affect income from pensions if 
annuities are purchased individually.

Women Invest More Conservatively Than Men

    Many pension plans give participants responsibility for 
managing the investment of their pension assets, and 
differences in how men and women invest can lead to differences 
in pension benefits they receive. When making financial 
decisions, women tend to be more risk averse than men. One 
consequence of this is that women tend to invest more of their 
pension funds in safer but lower yielding assets, such as 
government bonds. The results of recent study \7\ of the 
federal Thrift Savings Plan indicate that men are much more 
likely to invest in the stock fund than are women. The authors 
estimated that, after 35 years of participation in the plan at 
historical yields and identical contributions, the difference 
in investment behavior between men and women can lead to men 
having a pension portfolio that is 16 percent larger.
---------------------------------------------------------------------------
    \7\ Richard P. Hinz, David D. McCarthy, and John A. Turner, ``Are 
Women Conservative Investors? Gender Differences in Participant 
Directed Pension Investments,'' in Positioning Pensions for the Year 
2000, Olivia Mitchell, ed. (Philadelphia: University of Pennsylvania 
Press, 1996).
---------------------------------------------------------------------------

 Pension Plan Provisions Offer Different Benefits from Social Security

    Social Security provisions and pension plan provisions 
differ in several ways (see app. I for a summary). Under Social 
Security, the basic benefit a worker receives who retires at 
the normal retirement age (NRA) \8\ is based on the 35 years 
with the highest covered earnings.\9\ The formula is 
progressive in that it guarantees that higher-income workers 
receive higher benefits, while the benefits of lower-income 
workers are a higher percentage of their preretirement 
earnings. The benefit is guaranteed for the life of the retired 
worker and increases annually with the cost of living.
---------------------------------------------------------------------------
    \8\ Currently, the normal retirement age is 65 years. It is set to 
gradually increase to 67 for those born in 1960 or after. The early 
retirement age (the earliest age at which a worker qualifies for Social 
Security retirement benefits) will remain at 62.
    \9\ The calculation of a worker's basic benefit amount first 
involves calculating average indexed monthly earnings (AIME) on the 
basis of the 35 years of highest earnings. For workers becoming 
eligible for Social Security benefits in 1997, benefits are equal to 90 
percent of the first $455 of AIME, plus 32 percent of the AIME from 
$455 to $2,741, plus 15 percent of the AIME in excess of $2,741. The 
dollar amounts in the formula are called the bend points, and the 
percentages are called the conversion factors.
---------------------------------------------------------------------------
    Private pensions are different. They can be classified into 
two basic types: defined benefit and defined contribution 
plans. Pension benefits in defined benefit plans are generally 
based on a formula that includes years with the firm, age at 
retirement, and salary averaged over some number of years.\10\ 
Employers offering defined contribution plans generally promise 
to make guaranteed periodic contributions to workers' accounts, 
but the amount of retirement benefits is not specified. The 
benefits from defined contribution plans depend on the 
contributions plus investment returns or losses. Today, defined 
contribution plans are the most prevalent type of pension plan, 
and 401(k) plans are one of the fastest growing defined 
contribution plan types.\11\ Typically, at retirement, workers 
receive a joint and survivor annuity that provides pension 
benefits to the surviving spouse after the worker's death, 
unless both the worker and spouse elect, in writing, not to 
take the joint and survivor annuity. In this instance, the 
retiring worker may elect, along with the spouse, to take a 
single life annuity or a lump-sum distribution if allowed under 
the plan.
---------------------------------------------------------------------------
    \10\ In defined benefit plans that are integrated with Social 
Security, pension benefits also depend on the size of an individual's 
Social Security benefit.
    \11\ 401(k) pension plans are salary reduction plans that allow 
participants to contribute, before taxes, a portion of their salary to 
a retirement account. Many employers match workers' contributions to 
these accounts. Also, many employers allow participants to direct the 
investment of their account balances.
---------------------------------------------------------------------------
    When workers retire, they are uncertain how long they will 
live and how quickly the purchasing power of a fixed payment 
will deteriorate. They run the risk of outliving their assets. 
Annuities provide insurance against outliving assets. Some 
annuities provide, though at a higher cost or reduced initial 
benefit, insurance against inflation risk, although annuity 
benefits often do not keep pace with inflation. Many pension 
plans are managed under a group annuity contract with an 
insurance company that can provide lifetime benefits. 
Individual annuities, however, tend to be costly.

Benefits for Dependents Differ Under Social Security and 
Pensions

    Under Social Security, the dependents of a retired worker 
may be eligible to receive benefits. For example, the spouse of 
a retired worker is eligible to receive up to 50 percent of the 
worker's basic benefit amount, while a dependent surviving 
spouse is eligible to receive up to 100 percent of the deceased 
worker's basic benefit. Furthermore, divorced spouses and 
survivors are eligible to receive benefits under a retired 
worker's Social Security record provided they were married for 
at least 10 years. If the retired worker has a child under 18 
years old, the child is eligible for Social Security benefits, 
as is the dependent nonelderly parent of the child. The retired 
worker's Social Security benefit is not reduced to provide 
benefits to dependents and former spouses.
    Pensions, both public and private, generally do not offer 
the same protections to dependents as Social Security. Private 
and public pension benefits are based on a worker's employment 
experience and not the size of the worker's family. At 
retirement, a worker and spouse normally receive a joint and 
survivor annuity so that the surviving spouse will continue to 
receive a pension benefit after the retired worker's death. A 
worker, with the written consent of the spouse, can elect to 
take retirement benefits in the form of a single life annuity 
so that benefits are guaranteed only for the lifetime of the 
retired worker.
    This wasn't always the case. Under the Employee Retirement 
Income Security Act of 1974, a married worker had the option to 
choose an annuity that provided benefits only as long as the 
retiree lived. Recognizing marriage as an economic partnership, 
the Congress sought through the Retirement Equity Act of 1984 
to bring the retiring worker's spouse directly into the 
decision-making process concerning benefit payment options. 
Under this act, a joint and survivor annuity became the normal 
payout option and written spousal consent is required to choose 
another option. This requirement was prompted partly by 
testimony before the Congress by widows who stated that they 
were financially unprepared at their husbands' death because 
they were unaware of their husbands' choice to not take a joint 
and survivor annuity. Through the spousal consent requirement, 
the Congress envisioned that, among other things, a greater 
percentage of married men would retain the joint and survivor 
annuity and give their spouses the opportunity to receive 
survivor benefits.
    The monthly benefits under a joint and survivor annuity, 
however, are lower than under a single life annuity. Moreover, 
pension plans do not generally contain provisions to increase 
benefits to the retired worker for a dependent spouse or for 
children. As under Social Security, divorced spouses can also 
receive part of the retired worker's pension benefit if a 
qualified domestic relations order is in place. However, the 
retired worker's pension benefit is reduced in order to pay the 
former spouse.

  Some Reform Proposals Would Make Social Security More Like Pension 
                                 Plans

    The three alternative proposals of the Social Security 
Advisory Council would make changes of varying degrees to the 
structure of Social Security. The key features of the proposals 
are summarized in appendix II.

The Maintain Benefits Plan Would Make Fewest Changes to Social 
Security

    The Maintain Benefits (MB) plan would make only minor 
changes to the structure of current Social Security benefits. 
The major change that would affect women's benefits is the 
extension of the computation period for benefits from 35 years 
to 38 years of covered earnings.\12\ Currently, earnings are 
averaged over the 35 years with the highest earnings to compute 
a worker's Social Security benefits. If the worker has worked 
less than 35 years, then some of the years of earnings used in 
the calculation are equal to zero. Extending the computation 
period for the lifetime average earnings to 38 years, would 
have a greater impact on women than on men. Although women's 
labor force participation is increasing, the Social Security 
Administration forecasts that fewer than 30 percent of the 
women retiring in 2020 will have 38 years of covered earnings, 
compared with almost 60 percent of men.
---------------------------------------------------------------------------
    \12\ One supporter of the MB plan does not support this provision.

The Individual Accounts Plan Would Add a Defined Contribution 
---------------------------------------------------------------------------
Component

    The Individual Accounts (IA) plan would keep many features 
of the current Social Security system but add an individual 
account modeled after the 401(k) pension plan. Workers would be 
required to contribute an additional 1.6 percent of taxable 
earnings to their individual account, which would be held by 
the government. Workers would direct the investment of their 
account balances among a limited number of investment options. 
At retirement, the distribution from this individual account 
would be converted by the government into an indexed annuity.
    The IA plan, like the MB plan, would extend the computation 
period to 38 years; it would also change the basic benefit 
formula by lowering the conversion factors at the higher 
earnings level. This plan would also accelerate the legislated 
increase in the normal retirement age and then index it to 
future increases in longevity. As a consequence of these 
changes, basic Social Security benefits would be lower for all 
workers, but workers would also receive a monthly payment from 
the annuitized distribution from their individual account, 
which proponents claim would offset the reduction in the basic 
benefit.
    In addition to extending the computation period, elements 
of the IA plan that would disproportionately affect women are 
the changes in benefits received by spouses and survivors, 
since women are much more likely to receive spouse and survivor 
benefits. The spouse benefit would be reduced from 50 percent 
of the retired worker's basic benefit amount to 33 percent. The 
survivor benefit would increase from 100 percent of the 
deceased worker's basic benefit to 75 percent of the couple's 
combined benefit if the latter was higher. These changes would 
probably result in increased lifetime benefits for many women. 
Additionally, at retirement a worker and spouse would receive a 
joint and survivor annuity for the distribution of their 
individual account unless the couple decided on a single life 
annuity.

The Personal Security Accounts Plan Would Replace Social 
Security With a Flat Benefit and a Defined Contribution 
Component

    The Personal Security Account (PSA) plan would make the 
most dramatic changes to the structure of Social Security. This 
plan would replace the current system with a two-tier system. 
The tier I benefit would be a flat benefit based on years of 
covered earnings. The full tier I benefit, which would be 
equivalent to 65 percent of the poverty threshold, would be 
received after 35 years of covered earnings. The tier II 
benefit would be the distribution from the retired worker's 
personal security account. The personal security account is 
modeled after the 401(k) pension plan and would be funded by 
diverting 5 percentage points of the worker's Social Security 
payroll tax into the account,\13\ which would not be held by 
the government. Proponents of the PSA plan claim that over a 
worker's lifetime the tier I benefits plus the tier II 
distribution would be larger than the lifetime Social Security 
benefits currently received by retired workers. The worker 
would direct the investment of his or her account assets. At 
retirement, workers would not be required to annuitize the 
distribution from their personal security account but could 
elect to receive a lump-sum payment. This could potentially 
affect women disproportionately, since the worker is not 
required to consult with his or her spouse regarding the 
disposition of the personal account distribution.
---------------------------------------------------------------------------
    \13\ The payroll tax for Social Security is 12.4 percent of taxable 
earnings. The tax is split evenly between the employee and employer.
---------------------------------------------------------------------------
    Under the PSA plan, the tier I benefit for spouses would be 
equal to the higher of their own tier I benefit or 50 percent 
of the full tier I benefit. Furthermore, spouses would receive 
their own tier II accumulations, if any. The tier I benefit for 
a survivor would be 75 percent of the benefit payable to the 
couple; in addition, the survivor could inherit the balance of 
the deceased spouse's personal security account assets.

   Effects on Women's Benefits of Changing Basic Social Security Law

    Many of the proposed changes to Social Security would 
affect the benefits received by men and by women 
differently.\14\ The current Social Security system is 
comparable to a defined benefit plan's paying a guaranteed 
lifetime benefit that is increased with the cost of living. 
Each of the Advisory Council proposals would potentially change 
the level of that benefit, and two of the proposals would 
create an additional defined contribution component. Not only 
would retired worker benefits be changed by these proposals, 
but the level of benefits for spouses and survivors would be 
affected.
---------------------------------------------------------------------------
    \14\ The proposed changes could also affect benefits received from 
pension plans that are integrated with Social Security. How the changes 
in these benefits would affect men and women is beyond the scope of our 
testimony.

Conservative Investment Behavior May Have Adverse Consequences 
---------------------------------------------------------------------------
for Retirement Income

    Two Advisory Councils plans--the IA and PSA plans--would 
create defined contribution accounts for workers. Both plans 
would also lower basic Social Security benefits. On the basis 
of calculations by the National Academy of Social Insurance, 
the IA plan would lower basic benefits by 17 percent for the 
average earner, while the PSA plan would lower the basic or 
tier I benefit to about 47 percent of the benefit paid to 
today's average earner. The rest of a retired worker's Social 
Security benefit would come from the distribution from his or 
her private account. Under both plans, the account balances at 
retirement would depend on the contributions made to the 
worker's account and investment returns or losses on the 
account assets. Since women tend to earn lower wages, they 
would be contributing less, on average, than men to their 
accounts. Furthermore, even if contributions were equal, women 
tend to be more conservative investors than men, which could 
lead to lower investment returns. Consequently, women would 
typically have smaller account balances at retirement and would 
receive lower benefits than men. The difference in investment 
strategy could lead to a situation in which men and women with 
exactly the same labor market experiences receive substantially 
different Social Security benefits. The extent to which 
investor education can close the gap in investment behavior 
between men and women is unknown.

How Account Distributions Are Handled Affects Benefit Levels

    The two Advisory Council proposals with individual or 
personal accounts differ in the handling of the distribution of 
the account balances at retirement. The IA plan would require 
annuitization of the distribution at retirement, and choosing a 
single life annuity or a joint and survivor annuity would be 
left to the worker and spouse. If the single life annuity 
option for individual account balances was chosen, then the 
spouse would receive the survivor's basic benefit after the 
death of the retired worker plus the annuitized benefit based 
on the work records of both individuals.
    The PSA plan would not require that the private account 
distribution be annuitized at retirement. A worker and spouse 
could take the distribution as a lump sum and attempt to manage 
their funds so that they did not outlive their assets. If the 
assets were exhausted, the couple would have only their basic 
tier I benefits, plus any other savings and pension benefits. 
Furthermore, even if personal account tier II assets were left 
after the death of the retired worker, the balance of the PSA 
account would not necessarily have to be left to the survivor. 
If a worker and spouse chose to purchase an annuity at 
retirement, then the couple would receive a lower monthly 
benefit than would be available from a group annuity.
    Both the IA and the PSA plans could lead to situations 
where men and women in identical circumstances received 
different Social Security benefits. Suppose a man and woman had 
the same labor market experiences and the same amount in their 
private accounts and then annuitized their distributions. The 
monthly annuity payments would reflect the differences in 
expected longevity (separate life tables could be used for men 
and women in the calculation of annuitized benefits) and, 
although the expected lifetime payments would be the same, the 
monthly payments to the woman would be lower, since women have 
longer life expectancies.

                              Conclusions

    Even though the current provisions of Social Security are 
gender neutral, differences during the working and retirement 
years may lead to different benefits for men and women. For 
example, differences in labor force attachment, earnings, and 
longevity lead to women's being more likely than men to receive 
spouse or survivor benefits. Women who do receive retired 
worker benefits typically receive lower benefits than men. As a 
result of lower Social Security benefits and the lower 
likelihood of receiving pension benefits, among other causes, 
elderly single women experience much higher poverty rates than 
elderly married couples and elderly single men.
    Social Security is a large and complex program that 
protects most workers and their families from income loss 
because of a worker's retirement. Public and private pension 
plans do not offer the social insurance protections that Social 
Security does. Pension benefits are neither increased for 
dependents nor generally indexed to the cost of living as are 
Social Security benefits. Typically, at retirement a couple 
will receive a joint and survivor annuity which initially pays 
monthly benefits that are 15 to 20 percent lower than if they 
chose to forgo the survivor benefits with a single life 
annuity. Furthermore, under a qualified domestic relations 
order, a divorced retired worker's pension benefits may be 
reduced to pay benefits to a former spouse.
    While the three alternative proposals of the Social 
Security Advisory Council are intended to address the long-term 
financing problem, they would make changes that could affect 
the relative level of benefits received by men and women. Each 
of the proposals has the potential to exacerbate the current 
differences in benefits between men and women. Narrowing the 
gap in labor force attachment, earnings, and investment 
behavior may reduce the differences in benefits. But as long as 
these differences remain, men and women will continue to 
experience different outcomes with regard to Social Security 
benefits.
    This concludes my prepared statement. I would be happy to 
answer any questions you or other Members of the Subcommittee 
may have. For more information on this testimony, please call 
Jane Ross on (202) 512-7230; Frank Mulvey, Assistant Director, 
on (202) 512-3592; or Thomas Hungerford, Senior Economist, on 
(202) 512-7028.
      

                                


                           Features of Social Security Under Current Law and Pensions                           
                                                   Appendix I                                                   
----------------------------------------------------------------------------------------------------------------
                   Social Security                                  Current pension plan provisions             
----------------------------------------------------------------------------------------------------------------
                                                      Federal Employees'                                        
                                   Provisions under   Retirement System/    Defined benefit         Defined     
      Type of beneficiary a           current law       Thrift Savings           plans        contribution plans
                                                             Plan                                               
----------------------------------------------------------------------------------------------------------------
Retired worker..................  Benefit             FERS benefit is     Benefit is based    Benefit is based  
                                   computation is      based on            on formula under    on contributions 
                                   based on 35 years   statutory formula.  plan documents.     of employee,     
                                   of highest                                                  employer, or both
                                   covered earnings.                                           plus investment  
                                                                                               returns of       
                                                                                               individual       
                                                                                               account balances 
                                  Progressive         TSP benefit is                          ..................
                                   formula leads to    based on employee                                        
                                   redistribution.     and government                                           
                                                       contributions                                            
                                                       plus investment                                          
                                                       returns of                                               
                                                       individual                                               
                                                       account balances.                                        
                                  Benefits reduced                                            ..................
                                   actuarially if                                                               
                                   taken between 62                                                             
                                   and normal                                                                   
                                   retirement age                                                               
                                   (NRA); increased                                                             
                                   if taken after                                                               
                                   NRA.                                                                         
                                  NRA to increase to                                                            
                                   67 years for                                                                 
                                   those born after                                                             
                                   1959.                                                                        
Spouse..........................  Benefit is 50% of   (b)...............  (b)...............  (b)               
                                   the retired                                                                  
                                   worker's benefit.                                                            
                                  Benefit is                                                                    
                                   actuarially                                                                  
                                   reduced if taken                                                             
                                   between 62 and                                                               
                                   NRA.                                                                         
Survivor........................  Benefit is equal    Joint and survivor  Joint and survivor  Joint and survivor
                                   to amount           annuity is normal   annuity is normal   annuity is normal
                                   deceased spouse     form of annuity,    form of annuity.    form of annuity  
                                   would be            and survivor                                             
                                   receiving but not   receives 50% of                                          
                                   less than 82 \1/    basic annuity.                                           
                                   2\% of deceased                                                              
                                   spouse's benefit.                                                            
                                  Benefit is                                                                    
                                   actuarially                                                                  
                                   reduced if taken                                                             
                                   between 62 and                                                               
                                   NRA.                                                                         
Dually entitled beneficiary c...  Receives own        (b)...............  (b)...............  (b)               
                                   retired worker                                                               
                                   benefit plus                                                                 
                                   difference (if                                                               
                                   positive) between                                                            
                                   spouse or                                                                    
                                   survivor benefit                                                             
                                   and his/her                                                                  
                                   retired worker                                                               
                                   benefit.                                                                     
Divorced and surviving divorced   Must have been      Qualifying court    Qualified domestic  Qualified domestic
 spouse.                           married for at      order.              relations order.    relations order  
                                   least 10 years                                                               
                                   and currently be                                                             
                                   unmarried.                                                                   
                                  Must be at least                                                              
                                   62 years old for                                                             
                                   divorced spouse,                                                             
                                   60 years old for                                                             
                                   divorced survivor.                                                           
                                  Benefit                                                                       
                                   actuarially                                                                  
                                   reduced if                                                                   
                                   younger than NRA.                                                            
                                  Divorced spouse                                                               
                                   benefit is 50% of                                                            
                                   retired worker's                                                             
                                   benefit.                                                                     
                                  Surviving divorced                                                            
                                   spouse benefit is                                                            
                                   100% of retired                                                              
                                   worker's benefit.                                                            
Mother or father and widowed      Have eligible       (b)...............  (b)...............  (b)               
 mother or father plus child.      child in care.                                                               
                                  Under 65 years old                                                            
                                  50% of retired                                                                
                                   worker's benefit                                                             
                                   plus 50% of                                                                  
                                   child's benefit.                                                             
                                  75% of deceased                                                               
                                   worker's benefit                                                             
                                   plus 75% of                                                                  
                                   child's benefit.                                                             
----------------------------------------------------------------------------------------------------------------
a Beneficiary categories are based on Social Security definitions.                                              
b Not applicable.                                                                                               
c Entitled to benefit both as retired worker and as spouse or survivor of retired worker.                       


                    Features of Social Security Under Current Law and Three Reform Proposals                    
                                                   Appendix II                                                  
----------------------------------------------------------------------------------------------------------------
                   Social Security                       Reform proposals of 1994-96 Social Security Advisory   
-----------------------------------------------------                           Council                         
                                                     -----------------------------------------------------------
      Type of beneficiary a        Provisions under                           Individual       Personal security
                                      current law      Maintain benefits       accounts            accounts     
----------------------------------------------------------------------------------------------------------------
Retired worker..................  Benefit             Extends             Extends             Creates two-tier  
                                   computation is      computation         computation         system with tier 
                                   based on 35 years   period from 35      period from 35      I a flat benefit 
                                   of highest          years to 38 years   years to 38 years   based on years of
                                   covered earnings.   of covered          of covered          covered earnings 
                                                       earnings.           earnings.           and tier II a    
                                                                                               personal security
                                                                                               account (PSA)    
                                                                                               based on defined 
                                                                                               contribution     
                                                                                               pension          
                                  Progressive                             Changes benefit     Accelerates       
                                   formula leads to                        formula by          increase of NRA  
                                   redistribution.                         lowering            and indexes to   
                                                                           conversion          longevity        
                                                                           factors.                             
                                  Benefits reduced    Accelerates         Increases early                       
                                   actuarially if      increase of NRA     retirement age to                    
                                   taken between 62    and indexes to      65 years.                            
                                   and normal          longevity.                                               
                                   retirement age                                                               
                                   (NRA); increased                                                             
                                   if taken after                                                               
                                   NRA.                                                                         
                                  NRA to increase to                      Creates individual                    
                                   67 years for                            account (IA)                         
                                   those born after                        based on defined                     
                                   1959.                                   contribution                         
                                                                           pension.                             
Spouse..........................  Benefit is 50% of   Same as current     Benefits are        Benefits are tier 
                                   the retired         law.                lowered from 50%    II accumulations 
                                   worker's benefit.                       to 33% of retired   plus 50% full    
                                                                           worker's benefit.   tier I benefit   
                                  Benefit is                              Joint and survivor                    
                                   actuarially                             annuity with IA                      
                                   reduced if taken                        balance.                             
                                   between 62 and                                                               
                                   NRA.                                                                         
Survivor........................  Benefit is equal    Same as current     75% of couple's     75% of benefit    
                                   to amount           law.                combined benefit.   payable to couple
                                   deceased spouse                                             plus eligible to 
                                   would be                                                    inherit balance  
                                   receiving but not                                           of deceased      
                                   less than 82 1/2%                                           spouse's PSA     
                                   of deceased                                                                  
                                   spouse's benefit.                                                            
                                  Benefit is                              Joint and survivor                    
                                   actuarially                             annuity with IA                      
                                   reduced if taken                        balance.                             
                                   between 62 and                                                               
                                   NRA.                                                                         
Dually entitled beneficiary b...  Receives own        Same as current     Higher of own       Tier II           
                                   retired worker      law.                basic benefit or    accumulations    
                                   benefit plus                            33% of spouse's     plus higher of   
                                   difference (if                          benefit.            own tier I       
                                   positive) between                                           benefit or 50% of
                                   spouse or                                                   full tier I      
                                   survivor benefit                                            benefit          
                                   and his/her                                                                  
                                   retired worker                                                               
                                   benefit.                                                                     
Divorced and surviving divorced   Must have been      Same as current     No mention........  No mention        
 spouse.                           married for at      law.                                                     
                                   least 10 years                                                               
                                   and currently be                                                             
                                   unmarried.                                                                   
                                  Must be at least                                                              
                                   62 years old for                                                             
                                   divorced spouse,                                                             
                                   60 years old for                                                             
                                   divorced survivor.                                                           
                                  Benefit                                                                       
                                   actuarially                                                                  
                                   reduced if                                                                   
                                   younger than NRA.                                                            
                                  Divorced spouse                                                               
                                   benefit is 50% of                                                            
                                   retired worker's                                                             
                                   benefit.                                                                     
                                  Surviving divorced                                                            
                                   spouse benefit is                                                            
                                   100% of retired                                                              
                                   worker's benefit.                                                            
Mother or father and widowed      Have eligible       Same as current     Same as for spouse  Same as for spouse
 mother or father plus child.      child in care.      law.                or survivor plus    or survivor plus 
                                                                           child's benefit,    child's benefit, 
                                                                           which is same as    which is same as 
                                                                           current law.        current law      
                                  Under 65 years old                                                            
                                  50% of retired                                                                
                                   worker's benefit                                                             
                                   plus 50% of                                                                  
                                   child's benefit.                                                             
                                  75% of deceased                                                               
                                   worker's benefit                                                             
                                   plus 75% of                                                                  
                                   child's benefit.                                                             
----------------------------------------------------------------------------------------------------------------
 a Beneficiary categories are based on Social Security definitions.                                             
b Entitled to benefit both as retired worker and as spouse or survivor of retired worker.                       

      

                                

    Chairman Bunning. Thank you very much, Ms. Ross. I would 
like to hear your suggestions on how we can reform Social 
Security and restore long-term financial solvency without 
hurting the relative position of elderly women.
    Ms. Ross. There are four factors I talked about that make 
the most difference between men's and women's retirement 
incomes--the level of earnings, labor force participation, 
longevity and the differences in the ways in which men and 
women invest.
    In two of the proposed plans more of everybody's retirement 
income will come from parts of the system where not only the 
earnings and labor force factors are at play, but the 
investment and longevity factors are important as well. So you 
are putting more retirement income into places where the 
potential for the men/women retirement income differential will 
be greater.
    GAO, does not have a specific proposal. What we seek to do 
today is highlight the fact that when you are restructuring a 
system, you have to keep in mind the distribution of benefits 
in addition to kinds of things that Dave Koitz talked about as 
long as the program has a sound insurance dimension.
    It is especially important to raise this issue because 
there is already a large group of highly vulnerable women out 
there--aged widows--with a very high poverty rate. I don't 
believe that you want to structure a system that looks fair in 
terms of the consistent application of the rules but could 
disproportionately affect a group that is already experiencing 
a high poverty rate.
    Chairman Bunning. So you do not have a suggestion?
    Ms. Ross. Pardon?
    Chairman Bunning. So you do not have a suggestion?
    Ms. Ross. No, I do not have a specific suggestion.
    Chairman Bunning. Let me just go over a little background, 
then. When Social Security began, what percentage of women were 
in the workforce?
    Ms. Ross. In the forties--
    Chairman Bunning. Thirties.
    Ms. Ross. It was about 30 percent.
    Chairman Bunning. Perhaps. Would you say that since we now 
have more women working, that this will eventually work its way 
out, except for the salary structures--and eventually that will 
work its way out, I believe, too--for female employees, rather 
than male employees?
    Ms. Ross. There has certainly been a huge increase in labor 
force participation already among women and the rate is up to 
about 75 percent. The estimates are that it might go as high as 
80 percent. I do not think anybody anticipates that women's 
labor force participation will ever get to be as high as the 
men's rate because of other kinds of--
    Chairman Bunning. Other duties, chosen duties.
    Ms. Ross. Right. The same will likely hold true for 
earnings levels also. The gap seems to be narrowing, but it is 
not clear that the differential will go away entirely.
    An important thing to keep in mind is how long the 
transition period is. Because the averaging period for Social 
Security benefits is 35 years, it will take a very long time 
for these improvements in women's earnings histories to be 
completely incorporated into the benefits contributions. So the 
difference could narrow, but not anytime soon.
    Chairman Bunning. I can speak for my family. I have a 
daughter that is 13 years older than my youngest daughter, and 
her participation in the workforce has been from the very first 
day that she graduated from college. My younger daughter's 
participation has been delayed just a little bit because of 
four children. But she is participating, but not at the same 
high level of salary that my oldest daughter is.
    Over the long haul, that should relieve some of the 
problems that you are speaking about, not all of them but some 
of them.
    Ms. Ross. Right.
    Chairman Bunning. So we are going to have to take that into 
consideration when we are looking for a long-term solution, not 
only in benefits but in how we balance the flow of the money 
that is coming in.
    I did not realize that women were more conservative than 
men in their investments. I am glad the GAO knows that because 
some of the daughters that I have are not more conservative 
than men. [Laughter.]
    So I think we must include what you have suggested in any 
long-term solution, but there are other benefits and problems 
that we have to look at.
    Why do you believe that women investment behavior is 
different than men? Do you have that as a fact?
    Ms. Ross. Part of the reason it is different is because 
investment behavior is affected by income and women, in 
general, have lower incomes. So there is some association 
between incomes and investment behavior. You are picking it up 
by gender, but it relates, at least in part, to income.
    Beyond that, researchers are still trying to understand if 
other factors such as women being less familiar with the 
workings of financial markets are important. If that is the 
case, then, over time, women's investment strategies are likely 
to change as they become more familiar with the stock and bond 
markets. Some people are already studying whether invest or 
education could be helpful. In fact, we are contemplating doing 
a job in that area, to understand a little better whether 
people would have better retirement income if they had a better 
understanding of their investment options.
    Mrs. Kennelly. I am glad you brought that up, Mr. Chairman, 
because I was afraid this would begin to seem that it is a 
personality trait, that women are more conservative than men, 
and that is not the fact. The facts are exactly what Ms. Ross 
has been saying, that women are very, very aware that they 
still only earn 70 percent of income that men earn. They are 
very, very aware that they live longer than men live and they 
have to cover themselves for a certain amount of years. And 
they are very, very aware, if you do a study of wealth in this 
country, it's still, though there are many wealthy widows, 
there are still women, on the whole, that are much poorer than 
men.
    So the whole issue here is not personality traits. It is 
that if you have less to lose, you have to be more careful 
about going in the market. You go into safer securities, which 
are obviously government securities. And we see also that you 
took, I think, Ms. Ross, this information from the Federal 
retirement investment.
    Ms. Ross. Right.
    Mrs. Kennelly. And we wish that we had a lot of wealthy 
government workers but usually they are the average income 
workers in the Government and they would love to go in the 
market. I cannot tell you the number of government workers, 
including myself, that have said, ``Oh, my gosh, I wish I could 
have been investing the last few years,'' but, you never know 
when that bull is going to come around. If you cannot afford to 
lose it, don't put it in the market. This is something that we 
are very aware of, and women have to be cautious to take care 
of themselves. And we live forever.
    But this is something that the Chairman and I have both 
discussed about the whole effort, of making sure we protect the 
right of women to have the choice to stay at home with their 
children. And yet the other side of the coin now is becoming 
very much forward, that so many more women, as the Chairman 
pointed out, work now than when the Social Security system was 
put into place.
    To go back to your Federal thrift savings plan, my concern, 
Ms. Ross, and maybe you have put some time into this, my 
concern is if, in fact, as I said, most people cannot afford to 
lose their life savings and take a bet on the market, wouldn't 
it seem to you that if we go through this great change to 
personal savings accounts and go into the market and change our 
basic traditional Social Security system, we might find that 
people are taking their personal savings accounts and investing 
in government securities. So in other words, we have gone 
through this whole venture and all we have done is increase 
administrative costs, which are now very good, by the way, in 
Social Security. Have you thought about that at all?
    Ms. Ross. Well, we have certainly thought about the fact 
that we don't know how people will invest, but we have not done 
much detailed work on it yet. To the extent that many low-
income people with very little investment experience will be 
managing their own individual retirement accounts, it is not at 
all clear whether they will invest in the same way as people 
already in the market or whether they will feel, as you have 
just suggested, that they have more at risk or more to lose and 
therefore, they will tend to be more conservative.
    Mrs. Kennelly. But I think we do know the administrative 
costs will definitely go up.
    You mentioned the figure two-thirds of women now rely on 
their husband's Social Security or get their husband's Social 
Security.
    Have you done any work to show the difference that the 
Chairman was talking about, that more women are working? Is 
that number changing? Do we have any more up-to-date 
information? Demographics, once again.
    Ms. Ross. What we have seen in terms of receiving Social 
Security benefits is that the proportion of women who get 
benefits on just their own work history has actually decreased 
some. At first this does not seem to make sense, because there 
are more women in the labor market. But what is happening is 
that the number of women who are jointly entitled--earning some 
benefits as a spouse and some as a worker--has grown 
substantially.
    The proportion of women getting benefits just as retired 
workers has actually decreased a little bit since the sixties 
as the proportion receiving dually entitled benefits has grown.
    Mrs. Kennelly. And if you are a couple with no children and 
you have both worked through your entire relationship, often 
from young people to your retirement, and you are a couple, the 
husband working, the wife never working, and she is getting 
more, this is the thing we are going to have to wrestle with. 
Should we address that particular situation?
    Ms. Ross. We did some work last year on this issue of 
equity in Social Security. When the Social Security system was 
designed, in the thirties, the model family was the male worker 
and his wife at home. Because those who designed the system had 
concerns about income adequacy, as well as fairness, there was 
a set of dependents' benefits that were added. These are the 
kind of changes that made Social Security a social insurance 
system.
    Over time, as more women have entered the labor market, so 
they are also eligible for workers' benefits. This has created 
some tension and led some women to question how come they have 
to pay Social Security tax? They go to work, pay Social 
Security taxes and end up with a benefit that is not any larger 
than their neighbor's, who stayed home.
    Mrs. Kennelly. That is what I hear all the time.
    Ms. Ross. So as the demographics are changing, the model on 
which Social Security was based, may need to be reexamined. In 
any case, there is certainly a tension that has developed 
between the fairness and adequacy goals that were built in at 
the beginning.
    Mrs. Kennelly. In your work did you see any concern that as 
you look at some of these proposals, they are more like a 
defined contribution plan than a defined benefit plan? Does 
that concern you, that individuals will have their own personal 
savings account and your widow might end up with a real problem 
here?
    Ms. Ross. Well, having more of your retirement income in 
some sort of a equities-market-related account exacerbates the 
problems we talked about before, such as the greater longevity 
of women. If they decide to buy a life annuity, it has to last 
longer than for a man and therefore, it will cost more.
    Mrs. Kennelly. Some of the reform plans are not even 
requiring annuities.
    Ms. Ross. But then if the annuity is not mandatory and a 
female retiree decides she wants to purchase it privately, 
because she wants to make sure she doesn't outlive her income, 
she will get a lower monthly benefit, because an insurance 
company or an annuity provider will take account of the fact 
that she has a longer life expectancy. In other words, not 
everybody uses unisex tables to decide on the amount of an 
annuity----
    Mrs. Kennelly. The way some of these plans are written, she 
might never have anything, if you really get down to it. You 
are in the market now and you have a plan and your husband is 
putting into it, and we have all the problems we have had with 
pensions, about signing away rights and all the rest.
    I am glad you are here because we are feeling our way and 
there are a lot of unanswered questions that we have to answer. 
It is going to take a lot of work and we will be talking.
    Thank you very much.
    Chairman Bunning. Ken.
    Mr. Hulshof. Thank you, Mr. Chairman.
    Ms. Ross, you mentioned the four disparate factors--level 
of earnings, longevity. Personally, I can tell you that I would 
be interested in legislation that would reduce the disparity in 
longevity, but I am not quite sure----
    Ms. Ross. I hope you would want to increase the life 
expectancy of men and not the other way around.
    Mr. Hulshof. And I am not sure this Subcommittee has 
jurisdiction over that matter.
    My wife, Ms. Ross, is a professional. I am proud of the 
career that she is pursuing. She shares my conservative 
philosophies except when it comes to investments. Boy, what a 
roller-coaster ride. She takes care of those investments.
    You mentioned briefly education--do you think that there is 
a role for investor education that might help narrow these 
future differences in men's and women's investment patterns?
    Ms. Ross. There has been a limited amount of study that 
suggests that education can make some difference, but we plan 
to take a more thorough look at the role of investor education.
    Mr. Hulshof. I appreciate, the study that Messrs. Hinz, 
McCarthy and Turner did regarding this pattern, and let me put 
you on the spot a little bit if you are not intimately familiar 
with that study.
    Did they just look more at an historical perspective? As 
the chairman was asking you questions, going back well into the 
forties, or do they anticipate or, in the study, did they see 
perhaps a more aggressive investment strategy, as women become 
more mobile and pursuing more vigorous careers?
    Ms. Ross. Their study was based on fairly recent data from 
the thrift savings plan. So it does not have that historical 
perspective or a projection.
    Mr. Hulshof. OK. That is all. Thanks.
    Chairman Bunning. Mr. Collins, do you care to question?
    Mr. Collins. Mr. Chairman, I regret that I missed Miss 
Ross's testimony. I am just picking up on bits and pieces in 
reviewing some of the comments.
    But, the pattern that I sense that you are referring to is 
the proposals would create a possible further discrepancy in 
earnings, but will that change? We are talking about the past 
but we are also talking about the future, too. Is that going to 
change in the future with the fact that more women now are 
beginning to enter into professional fields and are earning 
more income and investments change and differ from what they 
have been in the past?
    Will not just the system itself and society make a change 
within itself?
    Ms. Ross. I think you know we have already been seeing that 
kind of change occur as women are becoming more active in the 
workforce, and the change has been to the point now where about 
75 percent of women are active in the labor force. However, 
there are still many more women than men that have many years 
with zero earnings, and the expectation is that will continue.
    So things should get better in the future for women 
relative to men, with regard to their labor force participation 
and their earnings, but it is doubtful that the differences 
will be eliminated. Certainly, they will not be eliminated 
quickly because the averaging period for Social Security 
benefits is 35 years. So it will take a while before changes 
that are going on now for young women in their twenties and 
thirties are actually reflected in greater parity on retirement 
income.
    So it still seems is something to pay particular attention 
to as the Congress assesses the Social Security reform options.
    Mr. Collins. I think that is true. Of course, a lot of this 
just did not happen overnight. For some families, employment is 
a matter of choice as to whether or not they work. But for many 
more really it is not a choice of whether or not to work; it is 
a matter of fact that they need the additional income to help 
with their lifestyle, to maintain a lifestyle and meet the 
needs of their family.
    And a lot of that has been caused by actions of government 
over the years that have now taken about 40 percent of the 
family income, or closer to 50 percent when you get all 
taxation involved, in income. So a family has to work half a 
year just to meet the tax obligations of their earnings. That 
forces a lot of women to work who would have rather had the 
choice of staying home.
    I do not know if there is an answer. I understand that you 
did not have a proposal, per se, to address this problem, 
because I do not know if there is a proposal out there that 
will address that problem, whether it is a matter of choice in 
the marketplace and some decisions in many other areas that the 
Congress will be making over the next years to change the 
policy of taxation and such that will, in itself, drive change.
    Ms. Ross. I think the primary message we were trying to 
convey in our testimony today was that at the current time and 
for quite some time into the future, there will be differences 
between men and women in terms of things that relate to their 
Social Security benefits. And, as you are thinking about 
restructuring the system, along with all of the other things 
you have to keep in mind, it seems appropriate to consider how 
a particular set of rules affects different groups, such as men 
and women differently. As long as Social Security continues to 
have a social insurance dimension, the different impact on low-
and high-income workers also will need to be considered.
    Mr. Collins. And I agree, you do not want to look at and 
adopt proposals that will create an even further discrepancy, 
even unintentionally.
    Thank you, Mr. Chairman.
    Chairman Bunning. I have one last question and I do not 
know if you have the answer. How many people receiving Social 
Security depend on that payment as their main source of income?
    Ms. Ross. Sixty percent of them depend on Social Security 
for more than half of their income.
    Chairman Bunning. Sixty percent rely on the Social Security 
benefit payment for more than half their income. Thank you. 
Thank you for your testimony.
    We will take a break. We will be right back. We have a vote 
on the floor. If the next panel would move up to the table, we 
would appreciate that, and we will be back as soon as we can. 
We are in recess.
    [Recess.]
    Chairman Bunning. If the panel would please be seated, we 
will get back to our testimony.
    We conclude with a panel of individual experts: Dr. Stuart 
Butler, vice president of Domestic Policy Studies at the 
Heritage Foundation; Dr. Jerry Mashaw from Yale University's 
Institute of Social and Policy Studies where he is a Sterling 
Professor of Law and Professor of Management; C. Eugene 
Steuerle, a senior fellow at the Urban Institute; and an old, 
familiar face, Dr. Robert Myers, former Chief Actuary and 
Deputy Commissioner at the Social Security Administration and 
former Executive Director of the National Commission on Social 
Security Reform.
    Dr. Butler, go right ahead.

  STATEMENT OF STUART BUTLER, PH.D., VICE PRESIDENT, DOMESTIC 
              POLICY STUDIES, HERITAGE FOUNDATION

    Mr. Butler. Mr. Chairman, most of the focus up till now in 
the hearings has been on the larger macroeconomic issues, such 
as savings rates. I want to focus a little bit more on the 
aspects of any framework of evaluation with regard to workers 
and future beneficiaries as individuals, or how they would see 
these different reform. In other words, I will preserve a kind 
of consumer's checklist that you might want to apply to rival 
proposals. I touch on a number of them in my testimony and I 
just want to focus on three in the short time I have.
    The first is: ``Does the proposal significantly improve the 
rate of return on the contributions made by today's workers?'' 
If you net out from the contributions that workers make the 
spousal benefits, the disability benefits and so on, and just 
focus on the contributions towards retirement income, a male 
worker of average wages born after 1951 will actually lose 
money in real terms with regard to their payments. And when you 
look at certain categories of individuals, like minority 
workers, it is even worse than that.
    So when one is looking at different proposals, one of the 
criterion has got to be how does it affect the rate of return. 
When you look at things like raising the retirement age, for 
example, or increasing payroll taxes, clearly that is going to 
reduce the rate of return.
    The second criterion I think it is important to apply from 
the consumer's point of view is: ``Would the proposal actually 
provide workers with a clear statement of what the actual 
returns are in the alternative proposals and the existing 
system?'' This is a very real concern to people. When you are 
looking at, say, a wife who is considering going back into the 
workforce and has an option to do that in order to partly help 
fund their retirement through Social Security. Maybe the other 
option is to stay at home and have the husband work more 
overtime and put some money into a savings plan for the wife. 
The comparisons are very real that have to be taken into 
account.
    But today the SSA benefit statements, as you well know from 
the GAO reports, are very ineffective in providing that kind of 
information and also are very unclear.
    So it seems to me that one of the important steps that 
should be in any reform is a much clearer statement so that 
people can make real decisions about their retirement, by 
actually knowing the effective rate of return that they would 
get on their current Social Security benefits and 
contributions.
    The third criterion I think that should be in play is: 
``Does the reform provide alternatives to an annuity-type 
retirement income system?'' An annuity is not always the best 
retirement vehicle for individuals. It is different for 
different individuals, as you well know. People who have a low 
life expectancy in general are not going to find an annuity the 
most attractive way of savings. If people want to have a nest 
egg for their spouse, to supplement spousal benefits, or for 
their children, some kind of savings plan, as opposed to an 
annuity. For somebody with a low life expectancy it makes a lot 
of sense. There are various other reasons why an annuity would 
not be attractive.
    So when one is looking at alternative reforms, the extent 
to which they allow alternatives to an annuity-based system is 
very important and should be clear and should be one criterion.
    The last criterion I will just mention, which is 
particularly applicable to any kind of opt-out approach or 
personal savings account approach, is the extent to which the 
reform provides a down side risk protection, an issue which has 
been raised, by previous witnesses. You can have people losing 
their shirt in a bull market and it is very important to look 
carefully at what kinds of risk protections are placed in any 
proposal that allows people to opt out of the current system.
    There are many ways in which one might do this: Certain 
requirements on the portfolio itself to spread risk. Possibly a 
requirement that a private plan actually guarantees the same 
rates of return, or at least includes an annuity equivalent to 
Social Security today, would be one way to go, or is structured 
similarly to Social Security today. In the United Kingdom, 
which is a partly privatized system, that is one of the 
requirements on their plans.
    So I think it is very important, when you look at these 
issues, to consider the consumer, the worker himself, and the 
way he or she would see the alternatives. This must be taken 
into account, besides the bigger issues associated with the 
trust fund and the savings rate.
    [The prepared statement and attachments follow:]

Statement of Stuart Butler, Ph.D., Vice President, Domestic Policy 
Studies, Heritage Foundation

    My name is Stuart Butler. I am Vice President of Domestic 
and Economic Policy Studies at The Heritage Foundation. The 
views I express in this testimony are my own, and should not be 
construed as representing any official position of The Heritage 
Foundation.
    I appreciate the opportunity to testify on a framework for 
evaluating Social Security reform proposals. While others no 
doubt will address this by focusing on the larger macroeconomic 
or public finance issues associated with reform, I will focus 
my testimony on the issues that would directly effect workers 
and future beneficiaries. The main reason we are able to 
discuss reform of the Social Security system today--even 
radical reform--is because an increasing proportion of younger 
workers has come to believe that Social Security is no longer a 
retirement income security system for them. These Americans are 
concerned that any reform of the Social Security system should 
result in a better and more secure retirement income system. 
Thus quite apart from the macroeconomic issues involved in the 
Social Security debate, any reform must address directly the 
individual retirement needs of working Americans.
    With this in mind, I would urge the subcommittee and 
Congress to include the following criteria in a framework for 
evaluating reforms.

  (1) Does the proposal significantly improve the rate of return on a 
            worker's contributions to the retirement system?

    Today's Social Security system provides very poor returns 
to most workers for the investment they make in payroll taxes. 
The younger a worker is, generally the lower will be the rate 
of return. The attached charts have been assembled using the 
Social Security Administration's benefits software. The 
calculations compare the typical inflation-adjusted retirement 
income for these workers with the estimated share of the 
employer and employee payroll taxes dedicated to pension 
benefits. As the chart for male workers of average earnings (as 
defined by the Social Security Administration) indicates, the 
rate of return is low for workers of any age, but for workers 
born after 1951 it is actually negative. The current SSA 
average wage is $24,799. Thus in real terms the Social Security 
system for these latter workers actually reduces the real value 
of the money put aside for retirement. For low income male 
workers the picture is only slightly better, as it is for 
female workers in general, but all young workers face very low 
or negative returns on their mandatory savings.
    For a reform to win support among younger workers it must 
improve the rate of return. That criterion necessarily raises a 
problem for at least three categories of reform: raising the 
retirement age; reducing or taxing more heavily expected 
benefits, and raising payroll taxes. Each of these would have 
the effect of reducing the rate of return.
    As an example, consider what the rate of return would be 
for a typical worker if the retirement age today were raised 
immediately to 70 rather than 65. This would increase the 
period during which payroll taxes were paid, for current 
workers, and reduce the period during which benefits were 
received, thereby reducing the rate of return. As the 
accompanying chart shows, for the average worker (i.e. 
``combined'' male and female) earning the SSA average wage, 
this step would mean that workers born between 1937 and 1975 
(the current ``break even'' point for all average workers) 
would face negative returns rather than positive returns. For a 
worker born in 1956, for instance, the rate of return would 
fall from about 0.5 percent to about minus 1.5 percent.

  (2) Would Social Security under the proposal provide workers with a 
            clear statement of the return on contributions?

    When President Roosevelt launched the Social Security 
system, he emphasized that it should be seen as but one leg of 
a three-legged stool, the other two legs being individual 
savings for retirement and employment-based pension plans. With 
these three legs to the retirement pension stool, couples could 
plan how best to allocate their savings to strike the proper 
balance between using their earnings to fund expenses during 
their working life and setting aside money to help fund their 
retirement years.
    Today there is a rich variety of savings tools for 
retirement, complementing Social Security. Not only are there 
many savings vehicles, such as Individual Retirement Accounts, 
401 (k) plans, and many employer-sponsored pension plans, but 
the methods of providing income vary, including annuities, 
whole life insurance programs, and lump-sum savings plans.
    To determine the array of retirement plans that make most 
sense to a couple or individual, one of the crucial pieces of 
information needed is an estimate of the rate of return from 
contributions to a retirement plan. Thus for Americans to judge 
if and how they should supplement their expected Social 
Security benefits, they need a clear indication of the return 
they can expect from their contributions to Social Security. 
Even more important, in the context of evaluating proposed 
Social Security reforms, they must have a clear idea how a 
reform might affect the rate of return on the various 
contributions they make, in payroll taxes, IRA contributions, 
etc. Without this, Americans will be unable to determine 
whether a reform will or will not enhance their retirement 
security.
    At the end of last year, the Chairman of this subcommittee 
received a report from the General Accounting Office indicating 
that the estimated benefit statements currently provided by the 
Social Security Administration, though well-received, were 
difficult for Americans to understand.\1\ The GAO recommended a 
number of changes to make the Personal Earnings and Benefit 
Estimate Statement (PEBES)--soon to be distributed to all 
workers--easier to navigate and understand. One crucial element 
in any statement, however, must be an estimate of the rate of 
return on Social Security contributions. This is particularly 
important in any reform that includes an ``opt-out'' provision. 
Reforms that would allow workers to divert some of their Social 
Security taxes into a private retirement plan must permit 
workers to make some comparison between Social Security and 
private alternatives--otherwise decisions will tend to be made 
on the basis of guesses and prevailing wisdom rather than real, 
individualized information.
---------------------------------------------------------------------------
    \1\ SSA Benefit Statements GAO/HEHS-97-19, December 1996.
---------------------------------------------------------------------------
    Even before any general reform of Social Security, Congress 
should take action to improve the PEBES statements that will 
over the next few years be mailed to over 100 million Americans 
annually. In addition to the improvements in presentation 
recommended by the GAO, Congress should require the SSA to 
include a real rate of return estimate. Legislation to require 
this is currently being prepared by Senator Rod Grams (R-MN). I 
would urge the subcommittee to examine that legislation.

 (3) Does the proposal allow workers, especially those with lower life 
      expectancies, to choose an alternative to an annuity system?

    Payroll tax contributions to Social Security are based on 
wage and salary earnings, but the total retirement payout from 
Social Security depends on life expectancy. This is the 
characteristic feature of an annuity, which is the central 
retirement income product contained in Social Security (Social 
Security does, of course, also transfer wealth through social 
insurance, and provides benefits other than retirement income).
    Any financial planner would point out to a prospective 
client, however, that an annuity (or at least complete 
dependence on an annuity) is not necessarily the most prudent 
way to assure retirement security. This is particularly the 
case for an individual with a low expectancy compared with 
others of the same age and income. In those cases it might make 
far more sense to set aside most contributions into a 
traditional savings plan, perhaps supplemented with life 
insurance and a modest annuity. In this way the individual 
would have a potentially large sum with which to enjoy what 
would likely be a relatively short retirement, or a larger 
estate to pass onto his or her heirs.
    The ``annuity-only'' nature of Social Security denies 
workers the flexibility to improve the security of their 
retirement years by choosing to place some of their payroll tax 
contributions into some vehicle other than an annuity. This is 
a serious shortcoming of Social Security today for some whole 
classes of Americans with shorter life expectancies, such as 
African-American males (who encounter among the lowest rates of 
return from the current system).
    Moreover, for many low-income workers, Social Security 
constitutes virtually he only method of ``saving'' for 
retirement available to them, since after Social Security taxes 
they have insufficient discretionary income to permit 
significant savings. Thus a system which essentially diverts 
earnings into an annuity system also depletes the potential for 
private savings.
    One criterion that should be applied to the evaluation of 
any reform plan is whether it corrects this inherent problem. 
This might be accomplished within he current structure by 
introducing a range of products and permitting individuals to 
make choices at various points during their working life. Opt-
out proposals would accomplish the objective by allowing 
workers to dedicate part of their payroll taxes to a non-
annuity retirement plan if they wished. Proposals that only 
change the tax and benefit amounts would not deal with this 
concern.

(4) Does an ``opt out'' or ``privatization'' proposal include downside 
                            risk protection?

    A number of reform proposals would allow workers to devote 
some portion of their current payroll taxes, or require them to 
devote a supplementary payroll tax, into a private retirement 
plan.
    Given the estimated rate of returns for today's younger 
workers under Social Security, the typical likely returns from 
even the most conservative private savings or investment 
vehicles would be far higher. However, these private returns 
are subject to two significant forms of risk. The first is the 
inherent risk associated with any specific investment in the 
private economy -even when stocks are rising rapidly, 
individual investors in particular stocks may be losing their 
shirts. The second is the risk associated with the financial 
stability of any intermediary institution controlling an 
investor's funds.
    These are not risks associated with the current Social 
Security system. However, if the government were to invest a 
portion of Social Security payroll tax receipts in the stock 
market, workers would face the risk that these funds might be 
badly invested--perhaps forcing future benefits reductions. 
Moreover, since benefits are effectively set by Congress, not 
by returns from the market, there is a ``political'' risk 
inherent in Social Security.
    One criterion for evaluating reform proposals should be the 
degree to which the proposal includes downside risk protection, 
if at all. This is particularly an issue with opt-out 
proposals. One way a degree of protection could be included 
would be a requirement that at least some portion of 
contributions to be retained in a government-sponsored 
``safety-net'' pension. An alternative, or supplement, to this 
would be some requirements on the investments that could be 
made under the private option, such as a rule that some portion 
be invested in Treasury bills or other relatively safe 
vehicles. There could even be a rule that a private plan must 
provide a structure and level of benefits at least comparable 
to the existing Social Security program. The British partly-
privatized system, for instance, requires private plans to 
assure at least comparable benefits. A rule might even require 
a private plan to include an annuity identical to the estimated 
benefits from Social Security if the worker had chosen to 
remain entirely in that system.
    The solvency risk associated with private plans could still 
remain even with these requirements. Thus Congress also should 
evaluate the steps contained in a proposal to protect workers 
and beneficiaries from the insolvency of financial 
intermediaries handling their funds. These steps might include 
solvency requirements for each intermediary, a requirement that 
an intermediary acquire secondary insurance to spread the risk, 
or a government insurance backstop.

 (5) Does an ``opt out'' or ``privatization'' proposal protect workers 
             from fraudulent, misleading or unsound plans?

    Another concern about privatization proposals is that 
workers might make unwise decisions because of misleading 
(intentional or unintentional) or fraudulent marketing. This is 
a common concern raised whenever Americans are allowed to make 
important choices, and often is exaggerated. Nevertheless, 
experience suggests that there are significant dangers to avoid 
and proposals should indicate how they address them. For 
example, the aggressive marketing of supplementary health 
insurance (``Medigap'') policies to seniors some years ago 
resulted in many elderly Americans buying several plans with 
overlapping coverage. And in the early years of Britain's 
Social Security opt-out program, there were sufficiently 
widespread cases of misrepresentation that Parliament took 
action.
    Proposals might include a variety of ways to reduce the 
concern to acceptable levels. Standardized marketing 
requirements is one common approach. These rules would require 
plans to present certain information in a standardized way, so 
that comparisons can easily be made.

         (6) Does the proposal protect existing beneficiaries?

    While the focus of most reform proposals is on future 
beneficiaries, just as important--especially from a political 
point of view--is how a reform would affect Americans who are 
already retired or may be so close to retirement that they 
could do little to accommodate to the change before retiring. 
These Americans are concerned in two general ways.
    First, would the proposed reform protect and improve the 
condition of the trust fund from which their benefits are paid? 
The pay-as-you-go nature of the current system makes this issue 
particularly acute. Increases in the payroll tax would add 
revenues and thus raise the level of protection, although this 
would also reduce the rate of return and have other disturbing 
side-effects. Opt-out proposals would reduce the revenue 
available to pay current beneficiaries, even though these 
proposals would reduce the long-term liabilities of the Social 
Security system. This latter group of proposals needs to be 
examined to see if the revenues are sufficient during the 
transitional period, before liabilities fall.
    Second, what assurance does the proposal give retirees that 
future benefits are secure? Current beneficiaries 
understandably are concerned about the level and certainly of 
their future benefits. A criterion for evaluation should be the 
degree to which the proposal guarantees a specific real level 
of benefits, either as the total benefit or as a minimum. For 
example, some reformers propose converting the existing stream 
of Social Security benefits into a form of Treasury bond with 
an indexed interest payout, so that Congress could not change 
future benefits.

                             Technical Note

    The annual rate of return to Social Security is computed by 
estimating the lifetime OASI taxes which the average individual 
can expect to pay and the lifetime OAS benefits which they can 
expect to collect. Each individual is assumed to earn the 
average annual age in each year between age 20 and retirement. 
They are then assumed to collect the corresponding OAS benefit 
in each year between their retirement and the year in which 
their life expectancy ends.
    The annual rate of return is calculated as for a private 
investment plan. OAS taxes are treated as negative cash flows 
(i.e. as initial investments) and OAS benefits are treated as 
positive cash flows (i.e. the return these investments). The 
rate of return is the value of the annual compound interest 
rate on the individual's ``initial investments'' through their 
working lifetime which will enable them to receive a sum 
equivalent to that which they can expect to receive in social 
security benefits. For example a 1 percent rate of return means 
that an individual will receive back from Social Security an 
amount equivalent to that which they would have received had 
they invested their OAS taxes and earned a compound annual rate 
of 1 percent. A rate of return of minus 1 percent means that 
the individual will receive back from the OAS program an amount 
equivalent to that which they would have received had they 
invested their taxes and say the value of their investment 
shrink at a compound rate of 1% per annum. The rates of return 
calculated refer to the ``real'' (or post-inflation) rate of 
return and are estimated on the basis of inflation-adjusted 
1994 dollars.
    For the years 1931-94, historical data on wages and OAS tax 
schedules from the Social Security Administration's 1996 
``Annual Statistical Supplement to the Social Security 
Bulletin'' are used to calculate OAS tax payments for the 
typical individual. For the post-1994 period, the mid-range 
estimates from the 1996 Annual Report of the Board of Trustees 
of the OASI, DI and SMI Trust Funds (which represent the Social 
Security Administration's ``best guess'' about future economic 
and demographic conditions) are used to project future wages, 
inflation rates, taxes and life expectancy. The Social Security 
Administration's own PEBES computer program, which is identical 
to that in use in SSA field offices, is used to calculate the 
annual value of OAS retirement benefits. The future OAS tax 
schedule is assumed to be equal to that mandated by current 
law.
      

                                

[GRAPHIC] [TIFF OMITTED] T7633.006

[GRAPHIC] [TIFF OMITTED] T7633.007

      

                                

    Chairman Bunning. Dr. Mashaw.

STATEMENT OF JERRY L. MASHAW, PH.D., STERLING PROFESSOR OF LAW, 
 PROFESSOR OF PUBLIC MANAGEMENT; AND PROFESSOR AT INSTITUTE OF 
           SOCIAL AND POLICY STUDIES, YALE UNIVERSITY

    Mr. Mashaw. Thank you, Mr. Chairman. Let me very briefly 
talk about a couple of major points that I think ought to be 
considered as we think about the future of Social Security.
    I think what we ought to think about primarily is the 
important values that Social Security currently serves. The 
first is income security for workers against loss of wage 
support by death, disability or insufficient wealth to finance 
a decent retirement. The second is fairness in the distribution 
of benefits and burdens in the overall retirement system, by 
which I mean not only Social Security but also the tax 
expenditures that go into 401(k) plans, IRAs, mortgage 
deductions and the like.
    I think the current Social Security system gets fairly high 
scores in relation to both of these values. It pools risks of 
having relatively low lifetime earnings. We know that it 
reduces poverty enormously among the elderly. The average wage 
earner actually has a relatively low wage by the standards of 
most people sitting in this room. And one third of those paying 
FICA taxes have earnings that are $9,000 in 1993 dollars.
    So we are talking about protecting a lot of people who 
cannot easily bear market risk on their own. Those market risks 
include not just being a low-wage earner over your lifetime but 
also the market risk of what happens to your savings in an up-
and-down stock market.
    Finally, the Social Security system has substantially 
higher ratios of payments for lower contributors, offsetting 
major benefits to higher wage earners elsewhere.
    The proposals to shift the program into a more private-like 
market format, do not score very well in relation to these 
basic values. They reduce the redistribution that goes on in 
the system and, to that extent, they have very serious effects 
on low-wage workers or those who might become disabled before 
retirement. And second, market risk bearing by low-wage workers 
is not a very good idea. They are not able to bear those risks.
    The basic idea in privatizing accounts is to attempt to get 
the security of mandated savings and, at the same time, the 
gains from prudent investment in market accounts. The problem 
is that we may not get those values. What we may get is the 
insecurity of market risk bearing, combined with resentment of 
government regulation of what people can do with something 
which is supposed to be their own account.
     I am reminded of the story of George Bernard Shaw, who was 
approached by an actress who suggested that they get married 
because with her good looks and his brains, they would have 
wonderful children. He suggested to her, ``Madam, it is just 
possible that they would get your brains and my looks.'' That 
is the sort of possibility we should be concerned about with 
mandated private accounts.
    Maintaining a publicly owned and administered system does 
not affect ``the moneys worth'' of pensions to individuals. 
This is not rocket science. It depends on the amount invested, 
the interest rate, and the time at which something is invested, 
and the expenses of administering the program. A publicly 
financed and publicly managed can be designed to program have 
exactly the same returns to retirees as a private one.
    We have already talked this morning about the uncertainties 
inherent in the net national savings issue. There are certain 
things, I think, that are relatively predictable. Some 
investment in the equities market, in a public account or in a 
private account--it does not matter--will have some positive 
impact on net national savings. If everything else stays the 
same, smaller amounts of taxes will have to be levied to pay 
benefits. Some portion of those taxes not collected will be 
consumed; some will be saved. There this will be some small 
increase in net national savings.
    Beyond that, I think we cannot say anything because the 
behavioral effects are too unpredictable.
    Let's illustrate this point by recounting a story. Martin 
Feldstein, a very distinguished economist, is also well known 
for predicting very large dissavings effects from the Social 
Security system. Mr. Feldstein premises that funding on the 
belief that workers looking at the possibility of getting this 
income stream limit the amount of savings they engage in.
    I am told that Professor Marty Feldstein, when he was being 
confirmed to be chairman of the Council of Economic Advisors, 
had to fill out the usual forms. When filling out his financial 
forms, he failed to include a large financial asset, his TIAA-
CREF retirement fund.
    If Martin Feldstein can forget about his TIAA-CREF 
retirement fund when listing his net assets, one wonders how 
much workers think about either their Social Security benefits 
or the value of their IRAs. I would not predict anything on the 
basis of what we know about what workers think. Thank you.
    [The prepared statement follows:]

Statement of Jerry L. Mashaw, Ph.D., Sterling Professor of Law, 
Professor of Public Management; and Professor at Institute of Social 
and Policy Studies, Yale University

    Projections of the Social Security system's capacity to 
meet future pension obligations suggest two things: First, 
there is no crisis. The system is fully financed for the next 
three decades. Second, changes are necessary to assure 
financial soundness of the system into the indefinite future. 
But, if actions are taken relatively quickly, modest 
adjustments in tax rates and benefit levels are all that are 
necessary. The Trustees' ``best estimate'' of the long-term 
``deficit'' pegs it at 2.19% of payroll.
    A collection of modest changes, agreed to by most members 
of the 1994-96 Advisory Council on Social Security (ACSS), 
reduce this projected long-term deficit by half. Expressed as a 
% of payroll, these changes produce the following effects:
     extend coverage to newly hired State and local 
employees (.22%);
     CPI corrections already made by the BLS (.31%);
     increase the benefit computation period from 35 to 
38 years (.28%); and
     tax benefits like other defined-benefit pensions 
(.31%).
    The remaining gap could be closed by a small FICA tax 
increase (.55% each on employers and employees).
    While these adjustments are not noncontroversial, they are 
clearly doable. This leads to an obvious question about the 
current debate concerning Social Security pensions. Why are 
many people, including some of the ACSS members, suggesting 
significant changes in the form of Social Security pensions? 
And, what do they and others mean when they suggest that Social 
Security should somehow be ``privatized''?
    As Congress considers how to adjust the Social Security 
program, it is critical to understand what visions of Social 
Security's future underlie various proposals and why those 
proposals are being offered. To simplify matters I will confine 
my remarks to the three proposals recently advanced by the 
ACSS.

                       Varieties of Privatization

    The current Social Security system is a ``public system'' 
in virtually every relevant sense. Public decisions determine 
the level of taxation and the benefit structure as well as how 
reserve funds are invested. Reserves are invested only in 
public bonds (designated Treasury securities). Risks are 
publicly borne through universal pooling arrangements. 
Ownership of funds prior to payment of retirement benefits is 
in public hands, and the relationship of contributors and 
beneficiaries to the pension system is governed largely by 
public law.
    Privatizing Social Security pensions could, therefore, mean 
a number of very different things. We might be asking whether 
the funding of the Social Security system should include the 
investment of Social Security reserves in private markets. We 
might be asking, in addition, whether some portion of mandatory 
retirement accounts should be individually owned and held at 
individual market risk. We might be asking further whether 
mandated individual accounts should devolve investment decision 
making onto individuals both during the accumulation period and 
at the time of distribution.
    These are in effect the three very different questions 
asked and answered by the proposals of the 1996-97 Advisory 
Council on Social Security. It is crucial to recognize that the 
ACSS proposals differ because they address different issues, 
not because the members disagreed about what method would solve 
the long-term finance question. All the proposals solve the 
projected, long-term fiscal issues facing the Social Security 
system. They are in that sense, fiscally equivalent. The 
interesting distinctions among the proposals lie along three 
very different dimensions--their political premises, their 
effects on workers' retirement security and their effects on 
the distributional fairness of our overall retirement security 
policies.

                 Policy Bases for Partial Privatization

    The proposal to invest a portion of Social Security 
reserves in private equity markets (the so-called ``Maintain 
Benefits'' or ``MB'' plan) begins with a political judgment 
that something very like the current system is desirable. 
Social Security now contains a complex compromise between 
pension adequacy (the provision of a base line pension that 
provides a reasonable base of income security for the average 
worker) and equity (the provision of income security that is 
tied to prior contributions). The MB proposal makes virtually 
no change in this balance and retains a public promise of a 
specified level of support in retirement. The tentative 
proposal in the MB plan to invest Social Security reserves 
partially in the equities market is addressed to the limited 
and straightforward question of how best to finance the current 
system over time. It seeks to establish fiscal balance, without 
any tax increases for nearly four decades, by harnessing the 
returns on a portion of the Social Security Trust Fund's 
reserves to the overall productivity of the American economy.
    The proposal to create individual retirement accounts asks 
and answers two rather different questions. On one view it asks 
only a strategic question of how contributions to Social 
Security retirement income can be increased in a fashion that 
is politically acceptable. From this standpoint the 
``Individual Account'' (IA) proposal is committed to the 
current system, but believes that its preservation is best 
accomplished by an immediate tax increase disguised as an 
individually owned retirement account. Because the amount of 
the increased contributions are small, and only that increase 
is included in the individual account, the alteration of the 
current system could be viewed as modest.
    On another, and I believe more persuasive, view, the 
individual account model makes important political breaks with 
past arrangements. We have, after all, never before included 
mandated savings in our retirement security system. The 
individual account proposal, therefore, seems to imply a belief 
(1) that the government should promote retirement security by 
regulating the level of private savings for retirement, (2) 
that a greater portion of retirement income should be directly 
tied to individuals' levels of prior contributions, and (3) 
that a substantial portion of workers' Social Security pensions 
(ultimately about 30% for an ``average'' worker) should be at 
market risk in an ``individually owned'' account.
    The Private Security Account (PSA) proposal put forward by 
another sub group of the 1994-96 Advisory Council carries some 
purposes of the IA proposal much further. By placing roughly 
one-half of current Social Security pension contributions (5% 
of payroll) in private accounts, the PSA plan would make a 
major shift from pooled to individually borne market risk and 
simultaneously eliminate much of the redistribution that is 
currently built into the Social Security benefit formula. Given 
its extremely low guaranteed public pension (410 1996 dollars 
per month) the PSA proposal shifts dramatically away from a 
public-insurance model guaranteeing adequacy in favor of a 
private-investment model emphasizing returns proportional to 
contributions.
    In addition, the PSA plan has a semi-strong commitment to 
individual choice. While the level of personal savings for 
retirement is mandated, its investment form and the form of 
ultimate distributions are left to PSA owners.
    Given this analysis it probably makes sense to think of 
only the IA and PSA proposals as ``privatization'' 
alternatives. The MB proposal maintains the current public 
commitment to defined benefit levels and to public management 
of all critical aspects of the system. Its only innovation is 
in investment policy for public funds, and that innovation is 
only tentatively supported.

                  Evaluating Alternatives: Non-Issues

    The critical question for the Congress is how best to think 
about these alternatives as it looks at possible changes in the 
Social Security system. While it is surely true that the devil 
is in the details when considering long-lived and complex 
systems, I would urge that Congress not be distracted by 
technical projections of the ultimate value of these proposals 
to individual beneficiaries (the ``money's worth'' debate) or 
by general claims about savings rates or economic growth. 
Neither of these matters turn on whether the system remains 
public or shifts to partial private ownership.

``Moneysworth''

    The value of the system to the average beneficiary (or some 
subclasses of beneficiaries) is a function of a small number of 
variables: the amount saved, the rate of return on savings net 
of administrative cost, and the length of the accumulation 
period. Under similar assumptions concerning these variables 
returns are completely independent of whether the system is 
structured as a system of public accounts or a system of 
private accounts. The only possible qualification is that it is 
quite difficult to make the administrative costs of private 
accounts as low as the administrative costs of the current 
Social Security system, even with some investment of public 
funds in private markets. Hence, if similar amounts are put 
aside at similar gross rates of return for equivalent periods, 
a system of public rather than private investment is likely to 
have a slight edge in total returns.
    Very different moneysworth projections for different groups 
can be produced by engaging in within-system transfers. And the 
returns to all workers can be changed by using other tax 
sources instead of, or in addition to, the payroll tax. But 
again these changes are quite independent of the legal form in 
which accounts are held, public or private.

National Savings

     Shifting from public accounts to private accounts also has 
no effect on net national saving. A stylized example will 
illustrate this point. Assume that annual government spending 
is currently 100 and that the government's revenue sources are 
simple: it obtains 90 from general taxation and 10 borrowing 
from the Social Security trust funds (which are all held in the 
form of Treasury securities). Net private saving elsewhere in 
the economy is five. Because the surplus in the Social Security 
trust funds are exactly offset by the borrowing of those funds 
by the national government, there is zero net public saving. 
The net national savings rate--public and private savings 
combined--is therefore five.
    Assume now that, in accordance with the proposal to invest 
Social Security surpluses partially in private equities, next 
year the Social Security system invests five in the private 
equities market. The national savings accounts will now look 
like this: Private savings are 5; Social Security savings 
initially are still 10 (although five will now be held in 
equities rather than Treasury bonds); and government savings 
still equal -10, unless taxing and spending rates elsewhere 
have changed. The only difference is that now 5 of the 10 
previously borrowed from Social Security reserves must be 
borrowed elsewhere. Net national savings remain five.
    The theory is that over time Social Security surpluses will 
increase by the amount of increased earnings on equity 
investments. This will allow taxes to go down, or not to go up, 
and some of those taxes not paid by workers will be saved. Net 
national savings thus go up by some amount assuming that 
government does not have to pay higher interest rates to borrow 
non-Social Security funds and increase taxation to pay the 
higher interest.
    Transferring these same investments into private accounts 
has exactly the same effects. Because legal title has shifted 
we would now say that ``private saving'' is 10 and Social 
Security saving (reserves) is 5. But if general governmental 
saving remains -10, net national saving is still 5. The 
difference between public investment in private markets and 
private investment in private markets is in the accounting, not 
the economics. One could get new net national savings from 
mandating private savings only if the mandated savings (1) were 
not a substitute for saving that was already occurring 
elsewhere, and (2) not offset by reductions in prior levels of 
individual savings.
    Put slightly differently, any changes in net national 
savings created by any of the Advisory Council's three plans 
would result from increased advance funding of Social Security 
obligations, changes in investment vehicles or higher 
contribution rates (taxes). None can be attributed to a 
difference between holding reserves in public or private 
accounts.
    Moreover, the increase in national savings predicted for 
any of these approaches is premised on controversial economic 
assumptions. The public-accounts approach assumes that higher 
interest rates for constant levels of government borrowing, or 
increased government spending equal to the higher returns on 
Social Security reserves, will not eat up the gains from 
partial investment of reserves in equities. The private-
accounts approach assumes, in addition, that new IAs or PSAs 
funded by contributions equal to 1.6% or 5% of payroll will not 
be offset by reductions in savings elsewhere (IRAs, 401k plans, 
etc.). The PSA proposal also assumes that massive government 
borrowing to fund the transition to the PSA system (equal to 
40% of the existing national debt) will not increase the cost 
of government borrowing. All approaches assume that substantial 
additions of capital to equities markets will not affect 
historic average returns in these markets. These assumptions 
could hold true. But, then again, they may not. It would 
certainly be surprising if all of them were accurate 
predictions, rather than merely convenient assumptions.

                           The Real Questions

    Given these uncertainties, the real questions for the 
Congress when comparing the proposals now on the table concern 
which system best protects the American worker and responds 
best to our overall notions of fairness in distribution. 
Neither consideration favors ``privatization'' that goes beyond 
investment of a portion of Social Security reserves in private 
markets.
    The basic purpose of the Social Security pension system is 
to insulate Americans' retirement income from some aspects of 
market risk. These risks are of two quite different sorts. The 
first type is the risk of turning out to be a low wage earner 
over the course of one's working life, or of having that 
working life cut short by disability or death. Should any of 
these possibilities materialize, the worker will have much less 
capacity to save for retirement or provide for dependents. The 
Social Security system's redistributional formula for benefits 
ensures that in these eventualities dependents are protected 
and retirement income will not turn out to be too awful. The 
effects of the current Social Security system in drastically 
reducing poverty for beneficiaries attest to the system's 
success in accomplishing these goals.
    The other type of market risk is the variability of returns 
to investments in private markets. This includes differences in 
returns given investment choices and the temporal risks that 
are inherent in the choice of a retirement age when that choice 
is not entirely voluntary. A cursory look at the short and 
long-term variation in mutual fund returns and at the erratic 
short-term behavior of the stock markets makes plain that 
neither of these risks is trivial.
    Why would workers want to bear any of these risks 
individually if that could be avoided? In a rapidly changing 
economy most people feel an increasing loss of control over 
their long-term economic circumstances as wage earners. In the 
face of these large and perhaps increasing risks, pooling the 
risk of turning out to have had a relatively poor, lifetime 
earnings history seems prudent.
    In addition, workers' other savings are virtually all at 
market risk. Why would workers want to trade a guaranteed 
public pension return for variable returns in the private 
market which, on average, will not dominate public pension 
returns (assuming, of course, investment of resources in 
instruments having similar yields). Because of overoptimism 
some workers might want to make this choice. But because on 
average workers simply cannot do better than average--this is 
not Lake Wobegon--there seems no reason for public policy to 
provide this option.
    Substantial privatization of retirement account ownership 
would also drastically reduce the adequacy of disability 
insurance and survivors insurance benefits. For example, under 
the PSA proposal, average-wage workers disabled at age 50 would 
lose 25% of the replacement value of their current disability 
insurance. Low wage workers would lose proportionately more. 
Most workers would find it impossible to replace this insurance 
in private markets.
    Privatization also carries with it substantial political 
risks to retirement security. IA and PSA accounts have been 
analogized to IRAs or 401k plans. But, as proposed by the ACSS 
Report, they are quite different. Unlike IRAs or 401k plans, 
IAs and PSAs are mandatory and yet unavailable for any purpose 
other than retirement. This is necessary if these arrangements 
are to hope to fulfill--even on average--the retirement income 
security purposes of Social Security pensions. But are these 
constraints sustainable over time? Can Congress year after year 
deny constituents access to their own private accounts for all 
manner of worthy purposes--obtaining life-saving medical care, 
preventing loss of the family home, avoiding the termination of 
childrens' college education, and so on? I, for one, am 
doubtful.
    Finally, in terms of overall fairness, taking substantial 
portions of redistribution out of the Social Security system 
through the establishment of individually owned accounts moves 
in precisely the wrong direction. Because current income tax 
subsidies to retirement savings and the mortgage interest 
deduction enormously favor higher wage and higher wealth 
individuals, I can see no argument for restructuring the Social 
Security system to favor those individuals as well. A greater 
move toward tying returns to contributions within the Social 
Security system would be justified only if it were coupled with 
proposals to reduce or eliminate the tax expenditures that 
support the retirement savings of higher wage individuals under 
present law. These latter sorts of changes are highly unlikely.
    In short, from the perspective of the income security of 
individual workers or from the perspective of the overall 
fairness of the retirement security system, individual 
ownership or individual ownership and management of Social 
Security accounts is unattractive.
    Should We ``Privatize'' At All? I should add a final word 
on the desirability of investing Social Security funds in 
private equities markets. This proposal is preferable to 
maintaining a straightforward pay-as-you-go system in which tax 
rates are raised only as they become necessary to finance 
current payments. A pure pay-as-you-go system will put large 
burdens on future workers and/or reduce the value of Social 
Security pensions for all workers.
    However, a complete pay-as-you-go approach is not the only 
one available to us. As we have seen, a combination of modest 
changes and an immediate small tax increase (1.1%) would do the 
job as well. Indeed, the tax increase would be smaller than 
those proposed by either the IA (1.6%) or the PSA (1.5%), and 
dramatically lower than that included in a privatization 
proposal recently put forward by the Committee on Economic 
Development (3.0%).
    For this and other reasons I believe it was wise for the 
plurality of the Advisory Council to suggest merely that 
investment in private securities be studied. Not only are there 
important institutional questions to be considered, the 
secondary and tertiary effects of this approach on other 
investments, the total cost of Treasury borrowing, and the 
like, are not now well understood.
      

                                

    Chairman Bunning. Eugene Steuerle.

STATEMENT OF C. EUGENE STEUERLE, SENIOR FELLOW, URBAN INSTITUTE

    Mr. Steuerle. Thank you, Mr. Chairman.
    In the near future, this Subcommittee will inevitably be 
required to vote on major legislation to reform Social 
Security, and I would like to join others in applauding your 
current effort to prepare for this task by developing a 
framework to guide your deliberations. Only with a framework 
can one assess how to balance many competing objectives and 
goals, many of which are valid but compete with each other.
    I suggest that your framework include the following: An 
historical perspective on the problems that force Social 
Security on the table; a set of principles, some process 
guidelines, and a more comprehensive measurement system that 
emphasizes the lifetime value of benefits and taxes or the 
insurance policy, essentially, that you are providing to 
individuals. Let me deal very, very briefly with each of these 
in order.
    From an historical standpoint, in the early fifties 
expenditures on retirement, disability and health occupied less 
than 10 percent of Federal expenditures. Today they comprise 
almost 50 percent, and the number is continually rising. When 
the baby boomers begin to retire in the first third of the next 
century, the Federal Government could devote almost all its 
revenues to retirement and health, to the exclusion of 
everything else.
    Now, this Nation, I believe, is committed to taking care of 
its most disadvantaged citizens, as well as trying to ensure a 
basic retirement living for our elderly. The current, 
unsustainable growth rate in retirement and health 
expenditures, however, in my view is helping to support 
disinvestment in our Nation and in our children's future.
    Social Security and other government programs for the 
elderly and near elderly have several related problems. The one 
I would emphasize most is the huge decline in the use of our 
human capability and capital, but there is also some reason to 
believe that Social Security may reduce societal savings. These 
programs also are very inflexible, do a poor job of taking care 
of the very old elderly, as opposed to the young elderly, and 
they treat second earners in families unfairly.
    All these reasons, I believe, give great weight to the 
notion that we should begin reform now, rather than later.
    Now, it is the automatic growth in cost of the program, not 
so much the cost today, that leads to many of these problems. I 
would like to emphasize the three primary sources of growth in 
Social Security.
    First, annual benefits are scheduled to grow forever, in 
real terms, for each succeeding generation of cohorts. Second, 
we live longer and retire earlier. Most of us now can expect to 
live approximately one-third of our adult lives in retirement, 
on Social Security.
    And, by the way, Mr. Chairman, you asked earlier about the 
percentage of people who were primarily relying upon Social 
Security. Those numbers you were given did not take into 
account Medicare. The percentage would be probably in excess of 
80 percent if we asked how many people were primarily reliant 
upon Social Security and Medicare for their well being in old 
age.
    Now, there is a third source of pressure which is not under 
our control, and that is changes in birth rates and demographic 
patterns. This is a nontrivial change. The reduction in work 
force that is scheduled is equivalent, in order of magnitude, 
to an increase in the unemployment rate of about 10 percentage 
points. That is the type of demographic shift that we are going 
to incur soon, and very quickly, when the baby boomers retire.
    Dealing with these problems, I believe, can best be done by 
reference to some basic principles and to some very important 
process guidelines. And again, let me mention a few very 
briefly.
    I believe, like many, that the basic purpose of a 
governmental system of elderly support is to help those in 
their last years of life maintain an income level above poverty 
and to ensure that they receive some basic level of health 
services. But as much as possible, any government system should 
distort work, saving and other individual behavior as little as 
possible.
    Therefore, the first principle in some ways is always going 
to conflict with the second one, and there is going to be 
certainly conflicts and disagreements among Members as to how 
to deal with them. Nonetheless, once the redistributive 
function has been accomplished, then government should be 
guided as much as possible by the principle of efficiency in 
allocating its resources.
    There are a couple of budget principles, and I will not go 
through all of them again, as they are in my testimony. Among 
them I argue that future generations of voters should have the 
right to vote over how to spend money and that too much 
automatic growth in any problem--Social Security, Medicare, 
any--basically takes this right of voting away and violates 
budgetary principles.
    I have also mentioned a couple of process guidelines, 
including the issue of dealing with Social Security and 
Medicare reform all in the same boat. To give you only one 
example why this is important, if you try to increase, the 
premium that individuals have to pay for Medicare, one way to 
compensate is to increase moderately the cash benefit given to 
low-income Social Security beneficiaries. If you separate the 
two programs, you cannot make these types of adjustments.
    And finally, as my last point, I would like to recommend 
very strongly to this Subcommittee, when it thinks about 
measuring what is going on in Social Security, that it look at 
the lifetime value of the policy and not simply at the annual 
benefit. Remember that Social Security benefits are now 
scheduled for an individual to last about 18 years and, for a 
couple, to last about 25 years. That is a long time.
    Even a low annual benefit, for many, many years of 
retirement support, can lead to the type of situation that we 
have today, where the lifetime value of a policy in Social 
Security for a couple is worth about $\1/4\ million, and 
Medicare is worth almost $\1/4\ million more, so that we are 
promising about a $\1/2\ million of benefits to couples 
retiring today, and that number is going up towards $\3/4\ 
million in the future.
    I would very much encourage you to look at lifetime values 
when you are thinking about how to do your reform.
    Thank you.
    [The prepared statement and attachment follow:]

Statement of C. Eugene Steuerle, Senior Fellow, Urban Institute

    Any opinions expresed herein are solely the author's and 
should not be attributed to The Urban Institute, its officers 
or funders.
    Mr. Chairman and members of the Subcommittee:
    In the near future this subcommittee inevitably will be 
required to vote on major legislation to reform Social 
Security. I applaud your current effort to prepare for this 
task by developing a framework to guide your deliberations. Too 
many policy debates begin with proposed solutions even before 
the problems have been fully defined. Only with a framework can 
one assess how to balance competing objectives and goals and 
gain some sense of how different pieces fit together.
    I suggest that your framework include the following 
elements: a nonpartisan, historical perspective of the problems 
that force Social Security on the table today; a set of 
principles that should undergird both current and future Social 
Security policy; some process guidelines; and a comprehensive 
measurement system that emphasizes the lifetime value of 
benefits and taxes under Social Security and other programs for 
the elderly and near-elderly. I don't mean to imply that this 
framework will lead to unanimous consensus over what should be 
done. It can, however, lay out in clearer fashion the benefits 
and costs of various actions and remove from consideration 
options that fail to address basic problems or that 
unnecessarily violate fundamental principles.

         The Social Security ``Problem'' in Historical Context

    Defining Social Security as a problem in some ways is like 
defining a cancer cure as a problem. Unlike crime rates, 
educational test scores, or children begetting children, most 
of our budgetary problems in the fields of health and 
retirement come from gains to society--not from a deterioration 
of conditions which may require new resources to redress. This 
should warn us that Social Security's budgetary ``problem'' 
derives more from an excessive set of promises than from new 
and unexpected needs.
    As has been made quite clear by the trustees of the various 
Social Security trust funds, the promises of benefits within 
the Old Age, Survivors, and Disability Insurance (OASDI) are 
significantly in excess of the payroll taxes and other income 
sources available to the trust funds. You have received 
testimony on these issues and I will not dwell on them here. 
The problems posed by Social Security, however, extend far 
beyond mere adequacy of trust fund balances. In the early 
1950s, expenditures on retirement, disability, and health 
occupied less than 10 percent of federal expenditures. Today 
they comprise almost 50 percent, and the number is continually 
rising. Social Security by itself is now over one-quarter of 
all federal expenditures other than interest on the debt. When 
the baby boomers begin to retire in the first third of the next 
century, the federal government could devote almost all its 
revenues to retirement and health to the exclusion of almost 
everything else.
    This Nation, I believe, is committed to taking care of its 
most disadvantaged citizens, as well as trying to ensure a 
basic retirement living for our elderly. Nonetheless, needs 
compete for limited resources. We must choose wisely which 
additional dollars of resources can best be used to meet which 
additional needs. The current unsustainable growth rate in 
retirement and health expenditures, in my view, is helping to 
support a disinvestment in our nation's and our children's 
future. Our current budget, through rules that often operate 
automatically, effectively allocates larger shares toward 
retirement and health and smaller shares toward educating our 
youth, helping children who now have the highest poverty rates 
in the population, preventing crime, restoring promise and 
order in some of our central cities, or simply allowing 
individuals to keep more of their tax dollars. I don't mean to 
imply that making other budget choices is easy. We are on a 
path, however, that almost no one would choose, not even as a 
compromise.
    Social Security and other government programs for the 
elderly and near-elderly have several related problems that go 
beyond their impact on the federal budget:
    (1) First, they schedule and set in place a huge decline in 
the use of our human capability and capital. By encouraging 
longer and longer retirement periods relative to life spans--
the very early withdrawal from the workforce of a large number 
of extraordinarily talented people--they reduce enormously the 
productive capacity of the nation.
    (2) Second, our federal government increasingly favors 
consumption. Each year, it devotes larger budget shares toward 
higher levels of consumption and more years out of the 
workforce, rather than other longer-term objectives.
    (3) Third, Social Security and other programs for the near-
elderly and elderly, despite substantial resources, are very 
inflexible: they do a poor job taking care of the elderly poor, 
typically those who are very old, and they create a large 
number of inequities for second earners in families.
    (4) Finally, there is good reason to believe that Social 
Security may reduce societal saving by (a) reducing the 
workforce and, thereby, leaving less societal income from which 
to save; (b) making large transfers from younger savers to 
older consumers; and (c) displacing some personal saving that 
would be made for retirement, although the claims in this last 
case are often exaggerated.
    Although resolving these problems requires some difficult 
and fundamental decisions to be made in the near future, it 
does not mean that these decisions need to have a large impact 
on the elderly. With adequate forethought and preparation, 
reform can still mean that almost all future retirees receive 
greater or equal lifetime benefits than those who retired 
before them. Benefits generally can be maintained; it is the 
growth in benefits foreordained in current law that must be 
slowed.

                The Basic Sources of Budgetary Pressures

    There are a variety of reasons for the past and future 
growth in the cost of Social Security. Three dominate. First, 
annual benefits are scheduled to grow forever in real terms for 
each succeeding cohort of retirees. Second, we live longer and 
retire earlier, and most of us can now expect to spend 
approximately one-third of our adult lives in retirement, 
during which period we will be primarily dependent upon younger 
taxpayers for our income and health care support. Without 
increasing early and normal retirement ages in Social Security, 
the fraction of our lives during which we would receive 
government support would rise even more. Third, changes in 
birth rates and related demographic patterns now mean that just 
around the corner there will be a reduction in the workforce 
that is equivalent in its economic impact to an increase in the 
unemployment rate of over 10 percentage points.
    This last source of pressure is unavoidable. No matter how 
we define ``old age''--for example, by a given life 
expectancy--the proportion of the population that is closer to 
death will soon rise dramatically, with most of the change 
occurring during about a twenty year period when the baby 
boomers become ``old.'' Needs of the ``old'' will increase 
during this period and require adjustments in federal outlays.
    The two other sources of pressure, however, could be placed 
more under control. Growth in real benefits per person can be 
pared, as can the number of years of promised support. After 
taking into account earlier retirement, remember that the 
typical annuity for an individual now lasts about 18 years and 
for a couple about 25 years. Some combination of these changes 
alone could bring the Social Security system into budgetary 
balance.
    The simple fact is that future cohorts of individuals in 
their 60s and even early 70s will not be ``old'' by traditional 
standards of having short expected life spans. As a whole, 
moreover, this age group is already among the richest and most 
capable of all age groups, while our societal standard--both 
public and private--is to treat them as unproductive and create 
incentives to move them out of the workforce.
    The pressure put on younger workers is already significant, 
with about $1 in $5 of their cash earnings already being 
transferred to support federal programs for the elderly and 
near elderly, some additional amount going to state and local 
programs for the elderly and near-elderly, and the effective 
federal tax rate projected almost to double in coming decades 
due to a scheduled drop in number of workers to retirees and 
the lack of control over health costs.

                            First Principles

    Dealing with these various issues and problems can be done 
best, I believe, by reference to basic principles and then 
making appropriate trade-offs among them.
    Principles of Social Security
    The first set of principles relates to the fairness and 
efficiency of Social Security itself:
    (1) Addressing Fundamental Needs. The basis purpose of a 
governmental system of elderly support is to help those in 
their last years of life to maintain more than poverty level 
income and insure that they receive a basic level of health 
services. Social Security's success here has been remarkable 
and should not be abandoned wantonly.
    (2) Equal Treatment of Equals. All law should promote equal 
justice--in the case of Social Security, avoid any arbitrary or 
capricious difference in taxes or benefits among those who are 
more or less equally situated.
    (3) Efficiency. As much as is reasonable, the system should 
not distort work, saving, or other individual behavior.
    (4) Individual Equity. Individuals have the right to 
receive a fair return on their transactions.
    The first principle almost inevitably requires some 
redistribution in society--from young to old and from rich to 
poor--and hence conflicts with the third and fourth principles. 
Alternative reform proposals place different emphasis on 
different principles. Nonetheless, once the redistributive 
function has been accomplished, the government should be guided 
as much as possible by the latter principles in allocating its 
resources.
    In a society providing minimum levels of benefits to 
individuals, moreover, each individual carries some 
responsibility to avoid relying upon others. If you and I have 
equal lifetime incomes, but you save and I spend during our 
earning years, then in a simple welfare system you would end up 
paying for my retirement, as well as your own. Social 
insurance, therefore, carries along with it obligations to pay 
as well as rights to receive.

                      Principles of Budget Policy

    A second set of principles applies more broadly to budget 
policy, which seeks over time to allocate scarce resources to 
the greatest needs and demands of society:
    (5) Ownership of Government. Future voters and generations 
have a right to some ownership of government and to a say in 
how to allocate the additional tax resources that accompany 
economic growth.
    (6) A Level Budget Playing Field. Different items in a 
budget should not arbitrarily be divided into those that grow 
rapidly with only minority support and those that decline 
unless they can obtain the backing of a supermajority. (By 
minority support, I refer to the ability of a majority of one 
in either house or a President by himself to block changes 
favored by a majority; by supermajority, I refer to the need to 
obtain a majority in both houses of Congress and Presidential 
approval.)
    (7) A Comprehensive Budgetary Perspective. To promote both 
equity and efficiency, when different programs have related 
goals, they need to be considered as a whole.
    These latter issues are often ignored when budgetary 
decisions are taken one at a time or put into strict 
compartments. In the United States today, as well as much of 
the industrial world, programs for health and retirement have 
begun to dominate other budget items and are scheduled 
automatically to absorb more than all of the revenue growth 
that accompanies an expanding economy. The uneven playing field 
of the budget--the so-called entitlement problem--means that 
over the long-run items such as education and the environment 
receive smaller shares of funding so as to support significant 
growth in expenditures for retirement and health. Put another 
way, our government resources are increasingly and 
automatically devoted to consumption in old age relative to 
education of our youth, greater crime prevention, a fixing up 
of our central cities, and simply getting our youth off the 
streets after school and during summers.
    Good budget policy, therefore, tries to avoid excessive 
promises even if rising incomes in theory make such promises 
affordable. Ownership of government is reserved for each future 
generation not simply as a matter of right or of justice, but 
because we are humble enough to admit that we do not know today 
all the circumstances that will arise tomorrow. Perhaps 
programs for the elderly should be even larger than anyone 
contemplates, maybe taxes will have to be devoted instead to 
problems not even anticipated. To lock into law benefit and tax 
increases for the future that can only be overturned by a 
future supermajority, however, borders on being an act of 
distrust in democracy itself.
    Any set of proposals for Social Security reform should be 
assessed by reference to this type of set of fundamental 
principles.

                           Process Guidelines

    In addition to basic principles, it is important that any 
reform effort begin with some process guidelines. Let me 
suggest three that are important for Social Security.
    First, Social Security reform must bring long-run revenues 
and expenditures into line and not depend upon perpetual, long-
term, deficit financing within Social Security itself. We 
cannot consider our problems solved if we merely reach 75-year 
balance of receipts and expenditures, a traditional Social 
Security goal. Such a balance implies that after a few years of 
surplus in the current period, due largely to the relatively 
small birth cohort now retiring, Social Security can run 
perpetual deficits that will be financed by the general 
taxpayer, who pays for the interest or redemption of principal 
of moneys attributed to the trust funds. This is foolhardy. 
Long-run expenditures and sources of funds must also be brought 
into line.
    Second, reform of programs for the elderly, as much as 
possible, ought to be considered as an integral whole. There 
are very important interactions among Social Security, 
Supplemental Security Income (SSI), and Medicare, among others. 
For example, if Social Security and Medicare were considered 
together, I believe that we would be less likely to continue 
the trend toward increasing Medicare benefits relative to cash 
benefits. Some worthwhile trade-offs would become more 
apparent, such as increasing cash benefits for some poor 
elderly in exchange for more tightly controlled Medicare 
expenditures. As another example, transfers to the poor through 
SSI or Social Security should be integrated.
    Third, reform ought to center on long-run structural, not 
short-term cash flow, problems. To achieve this goal, reform 
should begin as soon as possible. When the baby boomers begin 
retiring, the fiscal impact of paying off the many new unfunded 
promises made to them hits with a bang. The longer we continue 
to delay dealing with Social Security's problems, the more 
likely legislation will be centered on cash flow fixes, rather 
than long-term reforms. For instance, increasing tax rates or 
cutting back on cost-of-living adjustments can add quickly to 
trust fund balances. Raising the retirement age, reducing the 
rate of growth of unfunded benefits for each new cohort of 
retirees, or gradually building up private funds and saving, on 
the other hand, occur only gradually over time. One reason for 
gradual implementation of the latter reforms is to avoid large 
differences in benefits between new retirees from one year to 
the next. While the cash flow revisions add quickly to trust 
fund balances, they often fail to deal with the issue of how 
Social Security should be structurally designed for the long-
term.
    Finally, any accounting system should be complete. It 
should account not only for what is happening to Social 
Security, but to the government budget as a whole, and to 
private individuals as taxpayers, recipients, and savers. As 
one example, it is important to beware of magic money that 
derives from incomplete accounting. Attempts to let government 
borrow at a 2 percent real interest rate and then encourage 
government accounts or private accounts that supposedly grow at 
a stock market rate of, say, 6 percent are misleading, if not 
dangerous. Orange County writ large. If government can win by 
arbitrage, then someone else is losing. If one really believes 
that all government has to do is to arbitrage some money to 
solve its long-term problems, then let's simply increase 
government borrowing even more and then invest that money, or 
force private savers to put money aside, in the stock market! 
Magic money is being used by some to argue that hard choices 
don't have to be made. That is, it is tempting to promise 
continued huge increases in the elderly and near elderly's 
share of the national pie simply by having their money grow 
faster than the economy--that is, faster than income and 
consumption of everyone else. Not only is magic money often 
involved, but even if available it doesn't solve many of the 
longer term problems associated with the waste of our human 
capital or capabilities.

                 Measuring Lifetime Benefits and Taxes

    Social Security reform discussions often start with too 
narrow a focus--the value of annual benefits for particular 
sets of beneficiaries. While this measure is adequate for some 
purposes, a more comprehensive way of viewing Social Security 
requires looking beyond annual costs toward the value of 
expected lifetime benefits--the amount of money it would take 
for households to buy a private insurance policy that provided 
equivalent benefits.
    With a lifetime perspective, it is easier to view many of 
the trade-offs comprehensively. For example, recent debates 
over cost of living adjustments have focused on their impact on 
annual benefits. If one wants to reduce lifetime benefits by 10 
percent, however, it may be better to cut back on benefits of 
the young elderly than on the old elderly, who are most 
affected by cost of living adjustments.
    Lifetime benefits allow one to consider more directly the 
choice made between higher annual benefits and more years of 
support. For a couple retiring at age 62 today, annuity 
payments can be expected to last for one-quarter of a century 
on average. That is, because Social Security operates like an 
insurance policy with a right of survivorship, the longer 
living of the two partners will on average receive 25 years 
worth of Social Security benefits. For any lifetime benefit 
package, reducing years of expected support allows one to 
maintain higher annual benefits.
    The combination of real growth in annual benefits, combined 
with more years of retirement support, has led over time to a 
significant increase in lifetime benefits. For an average-
income one-earner couple retiring at age 65 in 1960, for 
instance, total Social Security cash benefits were worth about 
$99,000 (in 1993 dollars). Today those benefits cost about 
$223,000. In another 25 years, the Social Security pensions of 
new retired couples with average incomes will have a value of 
about $313,000 (see Table 1). Remember again that one reason 
these lifetime costs are this high is that benefits are 
scheduled to last for more than two decades.
    Until recently, almost all recipients--whether rich or 
poor--received more in benefits than they paid in taxes and the 
interest they could have earned on those taxes. Those who were 
richer, moreover, consistently received transfers (benefits in 
excess of taxes) as large, if not larger, than those who were 
poorer. To take an example, low-income couples retiring in 1980 
paid into the system about $27,000 in taxes and got back 
$150,000--a net transfer of $123,000. High-income couples 
retiring in that year paid in about $83,000 in taxes, but got 
back $316,000--a net transfer of $233,000. Only now and in the 
future will that situation gradually begin to reverse itself--
and even then low-income households will sometimes receive 
fewer net OASI transfers than those with higher incomes.
    When Social Security and Medicare benefits are added 
together, an average-income couple retiring today is promised 
benefits not far from 1/2 million dollars--growing toward 
$800,000 by the year 2030. For some high-income couples 
retiring in the future, the value of benefits will approach 1 
million dollars.

                               Conclusion

    I have suggested that a framework for reform should give 
considerable attention to historical context, principles, 
process, and use of comprehensive measures. While a good 
framework will not provide any final answers, it will help 
focus attention on the main issues at hand and help keep poorly 
designed options off the table. If the subcommittee can achieve 
those objectives, it will have advanced the Social Security 
debate by several stages and have made it much easier to 
develop a system that serves the needs of citizens in the next 
century.
      

                                


                                                     Table 1                                                    
            Annual and Lifetime Social Security and Medicare Benefits Average Wage One Earner Couple            
                                                  1993 dollars                                                  
----------------------------------------------------------------------------------------------------------------
                              Annual Benefits                                Lifetime Benefits Assuming Survival
---------------------------------------------------------------------------               To Age 65             
                                                                           -------------------------------------
        Year Cohort Turns 65           Social Security        Medicare       Social Security        Medicare    
----------------------------------------------------------------------------------------------------------------
1995................................            $14,600             $9,600           $237,000           $232,000
2030................................            $20,800            $26,400           $324,000           $497,000
----------------------------------------------------------------------------------------------------------------
 Notes: Data are discounted to present value at age 65 using a 2 percent real interest rate. Table assumes      
  arrival to age 65 and retirement at the OASI Normal Retirement Age.                                           
 Source: C. Eugene Steuerle and John Bakija, Retooling Social Security for the 21st Century: Right and Wrong    
  Approaches to Reform, 1994. Projections based on intermediate assumptions of the 1993 Social Security Board of
  Trustees reports, adjusted by the authors for the estimated impact of 1993 enactments.                        

      

                                

    Chairman Bunning. Thank you. Dr. Myers.

 STATEMENT OF ROBERT J. MYERS, LL.D., SILVER SPRING, MARYLAND; 
 (FORMER CHIEF ACTUARY AND FORMER DEPUTY COMMISSIONER, SOCIAL 
    SECURITY ADMINISTRATION; AND FORMER EXECUTIVE DIRECTOR, 
       NATIONAL COMMISSION  ON  SOCIAL  SECURITY  REFORM)

    Mr. Myers. Thank you, Mr. Chairman. I shall first discuss 
the current financial status of the Social Security program as 
it is shown in the 1996 trustees report. The 1997 trustees 
report was due April 1, but it has not been filed yet. Next, I 
will talk about what I consider to be the underlying principles 
of the Social Security program. Then, I will describe certain 
widespread misconceptions about it. Finally, I will give my 
solution to the financing problem that is very likely. My 
solution has some of the points of the Advisory Council 
proposals but also differs and, in combination, it is quite 
different.
    As to the long-range financial status, at the end of last 
year, the trust funds had a balance of $567 billion. The excess 
of annual income over outgo in the next few years will be as 
high as $60 billion up to over $100 billion, and eventually the 
trust funds will peak at about $3 trillion in 2019 and then 
will decrease until being exhausted in the year 2029, according 
to the intermediate estimate. I emphasize, according to the 
intermediate estimate, because that is not a certainty.
    The long-range situation is that there is an actuarial 
imbalance of about 2.2 percent of payroll for the 75-year 
period. That is a significant figure, but it is not an 
overwhelming one.
    The situation under the low-cost estimate, which is a valid 
estimate, is much more favorable. In fact, there is no 
financing problem at all under the low-cost estimate, not only 
in the 75-year period, but for all time to come.
    One reason the low-cost estimate has a certain validity 
these days is because of the possible changes in the CPI that 
have been mentioned. If we have a 1.1 percentage less increase 
in the CPI each year, two-thirds of the long-range problem 
would be solved, and the other one-third could be solved very 
easily by relatively minor changes.
    As to the underlying principles of the program, it is 
compulsory and has almost universal coverage. It provides a 
basic economic floor of protection with benefits heavily 
weighted for the lower paid people, to take care of the social 
adequacy aspects. It should be emphasized that the program is 
an economic maintenance program, and not an investment program.
    Therefore, in my view, moneys' worth analyses or rate-of-
return analyses on the taxes paid are interesting, but not 
really relevant or applicable. This is somewhat similar, 
although not as extreme, as school taxes, where the person who 
has a big mansion pays many times the school taxes that 
somebody who has a modest home does, and even though they have 
the same number of children, and thus they each have the same 
benefits, one pays much more than the other. Or, in fact, going 
even further, people who never have children pay school taxes, 
and they get no benefits from them, other than the very broad 
national benefit that it is desirable to have an educated 
population.
    There are certain widespread misconceptions about the 
Social Security program. The first is that the system is 
certain to be bankrupt soon. As I indicated, this is not at all 
certain. Making actuarial estimates for long-range periods of 
time is not a precise science, and it is quite possible, 
particularly if the CPI is reformed, that this problem will be 
greatly deferred.
    The second misconception is that there are unbearable costs 
over the long run. I don't think that this is true, because any 
problem can be solved relatively easily by either small 
decreases in benefits and/or increases in contribution rates.
    Another misconception is that the trust fund investments 
are worthless IOUs. People state this and say that the money 
has been spent. Well, in the same way, the money has been spent 
for any government bonds or any bonds that are sold by 
corporations. Some persons say that the interest is not usable. 
Actually, it can be demonstrated that the interest is used 
every month.
    It is said by some that Social Security is a poor 
investment for any purpose. As I have said, that is not the 
purpose of Social Security, to be an investment program.
    The final misinterpretation is that Chile has the perfect 
Social Security system because it is privatized, and we should 
do the same. People do not realize the differences between here 
and Chile. Chile is financing the huge transition costs through 
the fact that they have budget surpluses. We have budget 
deficits, and you cannot finance anything with a budget 
deficit.
    My solution is the time-tested procedure of reducing 
benefit costs--by raising the retirement age. I would go up, 
not to 67 as under present law, but rather as far as age 70, 
very slowly and gradually, by the year 2037. I would increase 
tax rates by 0.3 percent each on the employer and the employee 
in 2015, 2020, 2025, and 2030. And if this were done, there 
would also not be the problem at the end of the valuation 
period of benefit costs thereafter greatly exceeding tax 
income.
    I would also reduce the tax rate that goes to Social 
Security in the next 10 or 15 years and transfer that money to 
Medicare's Hospital Insurance Trust Fund, because I think the 
Social Security trust funds are building up too rapidly.
    Finally, I would establish a new, separate, compulsory 
individual account program on top of the reformed Social 
Security program, to be invested at the choice of the person in 
the private sector, but I would exclude very low-paid persons, 
for administrative cost reasons, because the administrative 
expenses would eat up so much of the contribution.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Robert J. Myers, LL.D., Silver Spring, Maryland; (Former 
Chief Actuary and Former Deputy Commissioner, Social Security 
Administration; and Former Executive Director, National Commission on 
Social Security Reform)

    Mr. Chairman and Members of the Subcommittee: My name is 
Robert J. Myers.
    I served in various actuarial capacities with the Social 
Security Administration and its predecessor agencies during 
1934-70, being Chief Actuary for the last 23 of those years. In 
1981-82, I was Deputy Commissioner of Social Security, and in 
1982-83, I was Executive Director of the National Commission on 
Social Security Reform (Greenspan Commission). In 1994, I was a 
member of the Commission on the Social Security ``Notch'' 
issue.
    In this testimony, I will first analyze the current 
financial status of the Social Security program (Old-Age, 
Survivors, and Disability Insurance, or OASDI), and I will then 
describe its basic underlying principles. Next, I will discuss 
some of the misconceptions of these principles, which 
misconceptions lead some persons to recommending that the 
program should be radically changed by either wholly or 
partially privatizing it. I shall not analyze or criticize 
these various proposals, but I will briefly give my views as to 
what changes should desirably be made.

             Current Financial Status of the OASDI Program

    At the beginning of this year, the assets of the OASDI 
Trust Funds amounted to $567 billion. Virtually all was 
invested in federal obligations that are part of the National 
Debt, redeemable at par on demand (plus accrued interest). The 
interest rate on these securities when they are issued, as set 
by law, is the average market interest rate on all federal 
bonds having a maturity date of at least 4 years in the future. 
The rate on such securities issued in 1996 varied from 5.875% 
to 7.0%.
    Under the intermediate-cost estimate in the 1996 Trustees 
Report, the trust-fund balance will grow steadily--by as much 
as $125 billion per year in the early 2000s--reaching a peak of 
$2.9 trillion in 2018 and 2019. Thereafter, if present law is 
not changed (which, I believe that it most certainly will), the 
balance will decrease and become exhausted in 2029.
    Another way to look at the financial status of OASDI is to 
consider the estimated actuarial imbalance over the next 75 
years. According to the intermediate-cost estimate, this is 
2.2% of payroll, meaning that the employer and employee tax 
rate would each have to be immediately increased by 1.1 
percentage points in order that outgo would be fully financed 
by income over the next 75 years. An increase of such small 
magnitude would hardly be ``unbearable'' to preserve what is 
generally considered such a valuable program. The drawback 
would be that extremely large fund balances would be built up 
in the next four decades and then torn down, which would create 
almost untenable problems during both periods.
    Such a financing problem would not occur under the low-cost 
estimate, but would, of course, be worse under the high-cost 
estimate. The assumptions used in the low-cost estimate are 
reasonable, although it is not likely that the actual 
experience will follow all of them. Fiscal prudence dictates 
that remedial action should be taken soon, although any changes 
should be made first effective many years hence, when it is 
clear that there really is a long-range problem; if it turns 
out that there really is no problem, then the changes can be 
repealed or lessened.
    The future outlook as to one assumption is currently very 
favorable--namely, the annual increase in the Consumer Price 
Index. Many persons believe that this is overstated and that, 
accordingly, the CPI should be drastically revised. One 
widespread view is that such overstatement is about 1.1 
percentage points per year. If such is the case for this one 
factor, the long-range deficit under the intermediate-cost 
estimate would be reduced by two-thirds, and the point of 
exhaustion of the fund balance would be deferred until the 
2050s. Any program changes needed to close the gap would be 
relatively small.

               Underlying Principles of the OASDI Program

    Over the years, the OASDI program has generally been 
considered to have the basic purpose of being an income 
maintenance program that provides a basic economic floor of 
protection in the event of disability and old-age retirement or 
in the event of death of the breadwinner. It is intended to be 
almost completely financed by contributions (taxes) from 
workers and employers and from a portion of the income taxes 
that are levied on Social Security benefits. It is not intended 
that the benefits of each worker are to be completely financed 
by her or his own contributions and those on her or his behalf 
by the employer. Rather, it may properly be said that the 
worker contributes toward her or his own benefits, but does not 
actuarially ``purchase'' them.
    Although the employer contributions are, in the aggregate, 
part of employee remuneration, they are not individually 
assignable as a property right to each employee. Rather, they 
should be viewed as pooled for the program's general purposes--
to meet the cost of the benefits for high-cost groups, such as 
those who were near retirement age when the program began, low-
earning workers, and workers with qualifying family members. 
This practice is generally followed in benefit plans of private 
employers. One such example is when an employer adopts a 
maternity-benefits plan for the female workers, instead of 
giving all workers a wage increase; the male workers have not 
been inequitably treated, even though they will receive no 
benefits.
    On the other hand, OASDI is not intended to be an 
investment program, under which all covered individuals get 
their money's worth in protection, no more and no less. To put 
it another way, each person does not get the same--presumably, 
high--internal rate of return on her or his taxes.
    Similarly, school taxes should not be considered as an 
investment program (except, broadly, from the standpoint of the 
nation as a whole). The owner of an expensive house pays many 
times the school taxes as the owner of a modest one with the 
same family composition, but yet receives only the same 
education-benefit protection. Also, the person who never has 
children obviously does not get her or his money's worth. Nor 
can people cease paying school taxes when all their children 
become adults.
    Those who retired in the early years of operation of OASDI 
received large ``actuarial bargains'' because their total taxes 
were relatively small, but they frequently supported their aged 
parents, because they did not qualify for Social Security 
benefits. On the other hand, current workers, who pay 
relatively high OASDI contributions, rarely do so.

          Misconceptions of the Underlying Principles of OASDI

    In recent years, several misconceptions about the 
underlying principles of the OASDI program have emerged. These 
have resulted in greatly reduced confidence as to its long-term 
viability, as well as growing demands for its dilution (or even 
elimination) through so-called privatization.

(1) ``Certain to become bankrupt soon.''

    As discussed previously, the intermediate-cost estimate 
shows that the trust-fund balance will peak in 2019 and become 
exhausted in 2029. Some individuals note that payroll-tax 
income will fall short of meeting outgo in 2012 and 
subsequently; this is not of significance, because interest 
income is also available, both before and after 2012. All these 
points in time are cited as evidence of certain near-future 
bankruptcy.

(2) ``Unbearable cost over the long range.''

    Some persons assert that the cost of OASDI will ultimately 
(in 50-75 years) be as much as 40-55 percent of payroll--and 
thus obviously unbearable. Such a cost includes the employer 
payroll tax and the cost of the Hospital Insurance program 
(and, sometimes, the cost of the Supplementary Medical 
Insurance program expressed as a percentage of taxable payroll, 
even though it is not financed in that way), and is based on 
the high-cost estimate. Under this basis, there quite naturally 
would be a huge long-range actuarial imbalance; this would 
undoubtedly be rectified well in advance by changes in benefits 
and financing.
    Further, some critics assert that very large budget 
deficits and increases in the National Debt will result. They 
do not note that, in the past, the OASDI program, due to its 
self-supporting nature, has not contributed at all to the 
general budget deficits (and, if anything, has hidden them) or 
the increase in the National Debt. As long as this principle is 
maintained by appropriate changes in the benefit structure and 
the financing, the OASDIprogram never will have such an effect.

(3) ``The trust-fund investments are worthless IOUs.''

    Some persons assert that the government securities in the 
trust funds are valueless, because they are nonmarketable 
``IOUs,'' and that, moreover, the government ``has already 
spent the money on many different things.'' Just as bonds 
issued by a private company or a deposit in a savings bank, the 
money involved--although having been spent, for the purpose 
that the bond was issued or in the way that the bank lends its 
deposits--represents a valid interest-bearing debt. The 
characteristic of being redeemable at any time--the same as the 
Series E government bonds widely sold to the general public--
is, at times, more advantageous than being marketable (and, at 
other times, the reverse).

(4) ``The interest on the trust-fund investments is not 
usable.''

    Critics often say that the interest on the trust-fund 
securities is never usable. They assert that, during the next 
decade or so, when the income from payroll taxes exceeds outgo, 
the interest is not used, but rather is merely put into more 
``worthless IOUs.'' Further, after that time, they argue that 
new taxes or borrowing will be needed to pay such interest. 
However, they do not consider that, if the trust funds had not 
had the money available to purchase these securities, then the 
general public would have done so--and the same interest 
payments would have been made.
    Because the Treasury checks for the periodic interest 
payments are mingled with the payroll taxes paid by employers, 
it is usually impossible to determine which of these two 
sources of income are used to meet outgo and which are left 
over to purchase government securities. One instance, however, 
is quite clear. Like any good money manager, the trust funds 
invest daily any excess of income over outgo. Then, at the 
beginning of each month when about $30 billion of cash is 
needed to pay benefits, existing investments are redeemed. 
However, somewhat less than $30 billion of securities is 
redeemed, because the accrued interest on the redemptions makes 
up the difference.

(5) ``Chile has the perfect social security program.''

    Many critics of the OASDI program who propose cutting it 
back by partially privatizing it (or even eliminating it by 
full privatization) assert that Chile has been a great success 
in its replacement of a floundering traditional social 
insurance system in the early 1980s by a fully privatized 
program. The new Chilean program has been reasonably 
successful, but it was not the only solution that could have 
been adopted, and it is by no means ``perfect.''
    Furthermore, conditions in Chile were relatively quite 
different than in other countries, so that what worked out well 
there would not necessarily do so elsewhere. Chile had large 
budget surpluses that were used to finance the emerging 
transition costs (prior-service credits) and the generous 
minimum-benefit provisions; such financing may be a serious 
problem over the long range. On the other hand, other countries 
generally have budget deficits and so cannot follow this course 
of action. Chilean government bonds are price-indexed and, in 
the past, bore double-digit coupon rates. So, it is not 
surprising that the pension companies, with about 40 percent of 
their assets so invested (and with their holdings in private 
bonds and bank deposits necessarily having to be competitive as 
to investment returns), have shown very successful investment 
experience.
    Still further, coverage compliance is poor (although 
greatly improved over the old system). The administrative 
expenses of the retirement-benefits portion of the system are 
relatively high--about 13 percent of contribution income (as 
compared with less than 1 percent for OASDI).

(6) ``OASDI is a Ponzi, chain-letter, or pyramid scheme.''

    Some critics of the OASDI program assert that it is a hoax 
and lie, because it is a Ponzi, chain-letter, or pyramid 
scheme, which of its very nature will inevitably ultimately 
collapse. Under those three types of plans, operations can 
continue over long periods only if there is a continuing 
geometrically-increasing number of contributors each year--an 
impossibility, of course.
    The OASDI program is quite different. All that it requires 
for long-range financial stability is that the ratio of 
contributors (active workers) to beneficiaries will ultimately 
stabilize at a reasonable level. That result will be achieved, 
almost certainly, under normal demographic conditions. At 
worst, it can be accomplished through appropriate deferred, 
gradual increases in the ``full benefits'' retirement age (now 
65 and scheduled to rise to 67 in 2027), so as to recognize 
increasing longevity over time.

(7) ``OASDI is a poor investment for many persons.''

    Many individuals--particularly young, high-paid ones--
complain that OASDI is a poor investment and that, even if the 
program is viable over the long range, they do not get their 
``money's-worth'' in benefits from the payroll taxes paid by 
them and their employers. This represents a gross 
misunderstanding of the basic purpose of the program, as 
discussed earlier.
    If people are allowed to opt out of OASDI and make their 
own investments to take care of their retirement, it is true 
that many would be successful--although others would not. Due 
to the ``actuarial law'' of anti-selection, the relative cost 
of the program for those remaining in it would rise, and there 
would be increased public-assistance costs with respect to 
those who opted out and failed to make good investments. Such 
costs would have to be met by society as a whole and would 
largely fall on those who believed that they had 
``successfully'' opted out to their own financial advantage.

               My Solution to Financing Problem of OASDI

    I would solve the problem by the traditional, time-tested 
way of combining, more or less equally, benefit-cost reductions 
and tax-revenue increases--all done in a deferred, gradual 
manner, although enacted into law now.
    The ``full-benefits retirement age'' should be increased to 
70 in 2037, and the employer and employee tax rates should be 
raised by 0.3 percent each in 2015 and then again in 2020, 
2025, and 2030, making a total increase of 1.2 percent each. 
Although in some quarters, a proposal to increase taxes is 
virtually equivalent to blasphemy and advocating economic 
collapse, I do not believe that such small intermittent 
increases (even if the employer passes them on to workers 
through lower periodic wage increases) would be harmful under 
the likely future circumstances of slow, continuous growth in 
real wages that will almost certainly occur over the long run. 
This package of changes would definitely restore the long-range 
actuarial balance of the OASDI program, under the intermediate-
cost estimate.
    If the correction in the method of computing the CPI were 
as large as some experts recommend, the changes could be much 
less, possibly confined only to raising the full-benefits 
retirement age (and then not to as great an extent).
    Also, I believe that the OASDI-Hospital Insurance taxes for 
1997-2009 should be reallocated so that the total OASDI taxes 
are reduced by reducing employer and employee rates by 0.6 
percent each, and those amounts are then transferred to the HI 
Trust Fund. This has a double advantage--(1) the excessive 
growth of the OASDI Trust Funds is reduced, and yet the fund 
balances are ample and (2) the HI Trust Fund will be in a 
satisfactory cash-flow position for at least a decade, and 
there will be sufficient time to work out a long-range 
solution. At the same time, the total taxes paid by employers 
and workers will remain unchanged, and there will be no effect 
on the general budget deficit or the National Debt.
    Finally, I favor the adoption of a compulsory individual-
savings-account plan to supplement a reformed, fiscally sound 
OASDI program. This would involve an additional employee 
contribution rate of, say, 2 percent. Such amount would be 
directed, at each individual's choice, to an appropriate, 
government-regulated private organization, such as a mutual 
fund, insurance company, or bank. The only exception would be 
that persons with low total earnings (say, under $5,000 per 
quarter) would be exempt, by having the contributions refunded, 
because the small amounts involved could not be handled in a 
cost-effective manner.
      

                                

    Chairman Bunning. Thank you all for your testimony. I want 
to ask one basic question of all of you and then I will ask 
some individual questions.
    Of the four of you here, how many think that we should 
address sooner, rather than later, what is considered a problem 
with Social Security's long-term solvency? Dr. Myers actually 
does not believe that we have a problem.
    Mr. Myers. No, I say we may not have a problem.
    Chairman Bunning. I know. Let the other three handle this 
one and we will get back to you.
    Mr. Myers. Excuse me, Mr. Chairman. I would be in favor of 
addressing it now, with the action to be deferred until later.
    Chairman Bunning. OK. Go ahead, Dr. Butler.
    Mr. Butler. I think it is clear that we should be 
addressing it now. Much of my work, besides this area, is on 
Medicare, where I think we are seeing the results of not 
addressing a problem very early. We now have very limited 
solutions, which are very unattractive for Congress.
    I think clearly the more rapidly we deal with this, the 
better. We also have a baby boom generation that is of an age 
now where it might contemplate some structural reforms. I 
suspect, when that baby boom generation starts getting 60 to 
65, your options for making reforms will become dramatically 
lower. So the sooner, the better.
    Chairman Bunning. Dr. Mashaw.
    Mr. Mashaw. I agree with Stuart. I think we should act 
soon. I think that the political difficulty is there is no 
current crisis.
    Chairman Bunning. We understand that. That is always the 
way we act in the Congress.
    Mr. Mashaw. And in the absence of a crisis it is difficult. 
Stimulating a crisis in order to get action may produce action 
which one does not want to take.
    Chairman Bunning. No, we do not want to stimulate the 
problem. It is enough of a problem as it is.
    Mr. Steuerle. Mr. Bunning, I think sooner is clearly the 
right answer, but let me indicate that one of the reasons is a 
technical one having to do with drafting.
    Let's suppose you really want to achieve a long-term 
solution, such as increasing the retirement age. The only way 
really to do that is to do it gradually over time, increase the 
retirement age 1 or 2 months per year every year, so that 
gradually we implement a higher retirement age.
    If you wait until something like 2010, we cannot go to 
people and says, ``Whoops, we are out of balance by 25 percent; 
we are going to increase the retirement age. For people who 
retire today, the retirement age it is going to be 65; for 
people who retire tomorrow, it is going to be 70.'' It just 
does not make sense.
    Chairman Bunning. We have a window of opportunity within 
the next, I would say, 7 or 8 years to do this properly.
    One of the things that I question you all about is that 
people under 40 have more confidence that there are UFOs than 
they do that Social Security will be available for them when 
they come to retirement age.
    How do you overcome that without a fix that assures them 
their benefits will be there? They don't feel they own any part 
of their contributions to Social Security right now. Any of you 
may answer.
    Mr. Butler. I have no position on UFOs or the feasibility 
of them exactly but--
    Chairman Bunning. I don't, either.
    Mr. Butler. I think there is both a concern and an 
opportunity in what you say. The current concern is, of course, 
a lack of knowledge about what the situation really is. I think 
that is one important reason for getting better information, 
including rate of return information, for those individuals so 
that they can actually see the picture.
    I think there is an opportunity in the sense that we could 
consider some changes now in the system that would not have an 
effect on beneficiaries for many years. This would be quite 
acceptable to young people who do not think they are going to 
get much anyway out of the system. So they are very inclined to 
look at changes in the system that might, in fact, reduce what 
they do not think they are going to get anyway, and therefore 
you have a political opportunity there.
    Chairman Bunning. But still and all, they are paying their 
FICA tax, so they would like to see some of their contributions 
where they can put their hands on it, rather than the 
Government doing it.
    Mr. Butler. Oh, I agree.
    Chairman Bunning. You have to overcome that.
    Mr. Butler. Yes, indeed, and I agree we should try to 
accomplish their objective. But I think that in the time being, 
they think largely of FICA tax as another tax that just goes to 
the Government.
    Chairman Bunning. That's 15 percent off the top.
    Mr. Butler. Yes, I know. It is a heavy tax.
    Chairman Bunning. Roughly 7.5 from employer and 7.5 from 
employee.
    Mr. Butler. But to the extent that people feel that way----
    Chairman Bunning. Their employer could give them another 
7.5 percent.
    Mr. Butler. But to the extent they feel that way, I think 
it means that it opens up options for making changes that would 
be acceptable to them, even under----
    Chairman Bunning. If we do it sooner, rather than later.
    Mr. Butler. Exactly.
    Mr. Mashaw. Just two points. I think first of all, one 
should look not only at public opinion polls here but also at 
behavior. When younger workers are told that their retirement 
benefits are being figured by taking into account the 
expectation that they will be paid Social Security benefits, 
they are not telling their employers that they have to put more 
into their retirement savings plan, because the Social Security 
is not going to be there. So there is some divergence between 
behavior and reported opinion.
    And second, it seems to me that one has to also consider, 
when one is thinking about public opinion about the security of 
the funds, what is going to happen to the funds if they are in 
private accounts, as against public accounts? We may have one 
problem now. Retirement funds are in public accounts and the 
Government can do what it wants with them. That may make people 
insecure.
    The alternative problem is to say to people that the funds 
are theirs, they own it. But they cannot do anything with it 
except hold it till retirement. What if they need life-saving 
medical treatment; they need money to keep their kids in 
school; they need money in order not to default on their home 
mortgage, and so on. The Congress has responded to those sorts 
of claims with respect to IRAs recently. It is very hard to see 
that similar diversions could be resisted over time in private 
retirement accounts. So we have a retirement security problem 
there, as well.
    Chairman Bunning. OK.
    Mr. Steuerle. Mr. Chairman, I talk to a lot of groups 
around the country and actually, I find that not only are most 
young people willing to reform Social Security but I think most 
old people are also. I think they recognize it is a problem. 
They do not trust necessarily the people who are going to make 
the decisions all the time, but they recognize there is a 
problem and if they thought that reform was really being done 
in an impartial way, they would accept it.
    I think one of the biggest problems for young people, as I 
tried to mention, is that as long as you have this automatic 
growth in the budget that is so great--this is more of a budget 
issue than just purely a Social Security issue or a Medicare 
issue--as long as so much growth is automatic and all the 
revenues that government gets every year are spent because they 
are due to legislation we enacted in the past, I think younger 
voters and generations feel like they do not own government, 
that they have no real say over it.
    I know a number of Members of Congress who resigned on that 
basis, that ``we'' are not deciding anything, because 
everything is decided already by this automatic growth, and we 
are just basically in there trying to constantly cut the 
deficit and cut back on the promises.
    The system as a whole has to be brought to the point where 
it is clear that the promises can be met. We might debate about 
what those promises should be and how we might change them over 
time, but if we get to a system where it is clear that the 
promises that are made can be met, I think young people would 
be much more likely to trust in government than they do today.
    Chairman Bunning. Dr. Myers.
    Mr. Myers. Mr. Chairman, as to restoring confidence of 
young people that there will be some system, I think the answer 
to that is the question you raised previously. Reform the 
system now, even though the changes might be deferred off into 
the future, and if people are told that according to the best 
professional judgment, the system is viable and will be there, 
I think that confidence will be restored.
    I believe that young people do feel that way, that only 25 
percent or so believe that the system will be there. I can 
understand why they think that. I think they are wrong. But as 
to the UFO question, I think really it is the old story: Ask a 
silly question and you get a silly answer.
    Chairman Bunning. OK. Go ahead.
    Mr. Christensen. On that, I will tell you, Mr. Myers, you 
have not been in high schools recently, then, because the best 
thing that I have had the opportunity to do is travel to high 
schools. We talk about it with the seniors, juniors and 
sophomores, and I ask how many of them work and nearly every 
hand goes up. The number one issue that we talk about is Social 
Security.
    If you haven't done this, I would encourage you to spend 
less time in Washington and spend more time going to the high 
schools and talking to the kids that are out there, that are 
frustrated and fed up with what is going on and totally lacking 
in any kind of feeling of ability to change the system.
    Most of them are seeing 35 to 40 percent of their biweekly 
money just going in taxes and they know they are not going to 
see any money returned. It is very frustrating.
    And then to hear you talk about, well, we ought to frankly 
raise the tax another 0.3 percent on both the employer and the 
employee, that is no solution at all. I see that as a total 
absence of any kind of positive answer to the solution.
    I would like to hear the other three gentlemen's position 
on Dr. Myers' statement that says that we should not look at 
this as an investment and that this is purely a social issue.
    Mr. Butler. I think it is a mix of both and should be seen 
as such. And just to take the analogy of Dr. Myers' about 
school taxes, people are concerned about school taxes and 
education in two ways. If they have children, they are 
concerned about the education of those children who belong to 
them. But also, if they do not have children, they are looking 
at education in general in the United States and what that 
means in terms of our productivity and our situation. They are 
concerned about whether their taxes are, in fact, paying for 
good education.
    We need to be looking at Social Security in roughly the 
same way. It is a mixture of a system which is intended to 
transfer income and wealth--that is fine--and it is one to 
allow people to get income retirement security. And both of 
those have to be looked at.
    The concern for so many people today, such as younger 
workers, and particularly male minority workers, is that while 
there may be redistribution, sometimes it is not even in their 
interest and second, that when they are looking at getting 
retirement income, the taxes are such that they do not have 
other discretionary income to put aside to supplement Social 
Security, and that is a real concern for those individuals.
    So we have to do both with Social Security. Social Security 
is both an income redistribution guaranteed income system but 
also a means of people to save and to put money aside for their 
retirement. And the problem today is that that second element 
is failing a lot of people.
    Mr. Christensen. Dr. Butler, you and I have talked about 
this before, about trying to get information to these young 
people. One way is looking at through the Internet so that they 
can pull up information to find out exactly where they stand, 
as an 18-year-old or a 17-year-old, in terms of when they are 
65, how much is built up in their account, just seeing the kind 
of return. Dr. Myers does not believe that the rate of return 
matters. How do you feel about this issue?
    Mr. Butler. Well, I think that, as I said in my statement, 
that there ought to be a rate of return estimate for people to 
take into account. I am not saying it is the only factor that 
should be taken into account, but people ought to know that so 
that when they make decisions about their workforce 
participation, or the degree to which they are working, or 
whether their spouse enters the workforce, they at least have 
the information about what rate of return is available to them, 
to compare with alternatives.
    And that, I believe, should be the case with any opt-out 
personal savings approach in this country. The same requirement 
should be placed on those plans, too, so that people can make 
comparisons. I think it is almost self evident that we should 
be doing this.
    Mr. Christensen. Dr. Mashaw.
    Mr. Mashaw. Stuart and I do not disagree about this. It is 
a very complicated system. To look at either its tax and 
redistribution aspects or its pure investment aspects 
separately, it seems to me, makes no sense. How you communicate 
to people what the mix is and how they ought to think about 
this is a much more difficult problem.
    I think looking at it in either way individually simply 
misleads people about what this system is about. It is ensuring 
against many things, including not having your parents live 
with you in old age and not having to live with your children 
in old age and not having to pay increased taxes for those 
people who have been improvident and do not save for their old 
age.
    So it is a very complicated thing to get across.
    Mr. Christensen. And not to be totally negative toward you, 
Mr. Myers, but I do agree with you on some of the points about 
the retirement age. We are living longer. We need to look at 
that. I would applaud your efforts in that area.
    Mr. Myers. Thank you. Mr. Christensen, I might say that I 
have not talked to high school students. I do get outside the 
beltway, and I frequently talk to college students. Immodestly, 
I might say that I can generally convince them that the system 
is going to be there if it is modified in reasonable ways.
    When I talk about raising the retirement age and they say, 
``Oh, but look, we are going to have to work until 70 and you 
guys could quit at 65,'' I point out, ``Look at the lifetime 
aspect of it, that you will probably live longer at 70 than 
people do today at 65.'' Then they see that point.
    So if you educate the younger people, have discussions with 
them, place all the facts before them, I think that they may 
come to a different conclusion.
    Mr. Christensen. And I know that you have spent a lot of 
time in this area, Dr. Myers, and I do appreciate your work.
    I guess I am out of time.
    Chairman Bunning. Mac.
    Mr. Collins. Thank you, Mr. Chairman.
    Mr. Christensen makes a very good point about talking to 
young people. That is one of the main things that comes up when 
I speak to a young group, whether it be high school or college, 
whether it be in Georgia or they are visiting here in 
Washington. And it is hard to convince them that Social 
Security is an investment. It is a mandatory deduction from 
their paychecks. They have no choice as to whether it comes 
out. They have no choice as to where it goes and they have no 
choice as to whether someone else uses or borrows those funds 
to keep a government running that is running at a deficit.
    So it is not a bright future as far as trying to convince 
people that this is an investment process, because they do not 
see it that way.
    And another interesting thing is when you ask the same 
question that Mr. Christensen talked about--``How many of you 
young people work?''--a lot of those high school students will 
raise their hand. You ask them what was their reaction to the 
first paycheck they drew, they just kind of draw up and frown 
and they say, ``Well, the first thing I did was go ask Momma, 
is this right? This is not fair. Look what they took out of my 
check. I earned this much and I only get this much. Something's 
not right about this system.''
    So it is a very difficult challenge, and I do my best to 
convince them that it is going to be there because, as I tell 
them, as I told the President when he was in Georgia 2 years 
ago about this same time, that Social Security is my old age 
pension. I am going to say it again, Mr. President. Social 
Security is my old age pension because I turned down the 
congressional pension. My small business does not have a 
pension. I have an IRA and Social Security is my old age 
pension. His response was, ``I find your background very 
interesting.'' Well, I wanted to say, ``I find yours very 
interesting, too,'' but I did not go that far.
    But there is a statement to be made there. Social Security 
is all of our old age pension because it is mandatory. It is 
not an investment. It is a mandatory deduction from our 
paychecks. It is very hard to convince these young people that 
it is going to be there. It is very hard to convince seniors 
today that it is not going to be reduced and not going to be 
cut.
    My question to you: What is your opinion on CPI? Mr. Myers.
    Mr. Myers. I usually have a very strong opinion on almost 
any subject dealing with Social Security, but as to the CPI, I 
am rather ambivalent because the CPI, unfortunately, is not a 
very precise thing. What is the proper CPI for one group of 
people may not be for another group. For people over 65, a 
certain market basket might be right. For young survivors, 
another might be. It is just not a very precise matter.
    I think that the CPI as it is now probably overstates 
inflation, but I would not want to venture a guess whether it 
ought to be 1.1 or not. But I do look at the other side of the 
coin--that if the overstatement were 1.1 percent, it would 
certainly help the long-range financing of the program when it 
was corrected.
    Mr. Collins. That is good, in a much less lengthy answer.
    Mr. Steuerle. CPI is an interesting issue, among other 
reasons, because its principal long-run effect, if you cut back 
on the CPI, is to increase income tax rates. That is because 
the income tax is CPI adjusted, whereas Social Security 
actually has a wage index that is not affected by changes in 
the CPI.
    The initial level of benefits in Social Security is not 
changed at all by changing the CPI. When you cut back on the 
CPI, you mainly affect the oldest of the elderly, cut back on 
their benefits.
    Mr. Collins. Mr. Mashaw.
    Mr. Steuerle. Bottom line, as a technical matter, however, 
what Congress could do is cut back on the CPI by a modest 
amount, fully fund the BLS and count on them to do----
    Mr. Collins. Quickly, Mr. Mashaw, and then I want to get to 
Mr. Butler and then I have an opinion.
    Mr. Mashaw. I have exactly the same belief, that there is a 
correct CPI, as that I will be abducted by a UFO. [Laughter.]
    Mr. Collins. Mr. Butler.
    Mr. Butler. I believe that if we say to retirees, we will 
adjust your benefits according to your actual cost of living, 
that should be as accurate as we can possibly do. Therefore, I 
think we should be looking at ways to make that more accurate.
    I do not think anybody would dispute the fact that if we 
people were saying the CPI is too low and that benefits should 
be adjusted upwards to take that into account, there is no 
question in my mind that Congress would be acting right now to 
adjust benefits.
    Mr. Collins. The point is that people do not know what CPI 
means. This goes back to Mr. Myers. When you try to discuss CPI 
with seniors, the only thing they know is that every year their 
checks are adjusted to the cost of living, the increase in what 
it costs to buy products at the grocery store. They do know, 
too, that those products increase because they got an increase.
    But it confuses people when you talk about CPI and that is 
the reason that I think we ought to stay with the terminology 
``the cost of living increase.'' And if there is going to be an 
adjustment, put everybody in the starting gate at the same time 
and address it according to the cost of living. Forget this 
language of CPI. It confuses people. They do not know what you 
are talking about, and they are afraid you are trying to 
hoodwink them.
    Thank you, Mr. Chairman.
    Chairman Bunning. Thanks, Mac.
    Congress has never adjusted the CPI, ever. The Bureau of 
Labor Statistics in the administration has always adjusted the 
CPI. So you are telling us, in your opinion, that Congress 
should address the CPI? Is that your personal opinion? Or do 
you think that it should be handled by the administration?
    Mr. Steuerle. I think, in terms of the CPI index, it has to 
be done by a technical staff. Part of the problem with the CPI 
is it is not a cost of living index, which everyone throughout 
the spectrum admits, from people who don't want to adjust to 
people who do want to adjust.
    What Congress can do, as I think Mr. Collins suggested, if 
they want to--I don't think you can go very far because nobody 
knows what the right number--is to set a reasonable cost of 
living adjustment as the CPI minus 0.02 or 0.03. I do not think 
you can cut to the full extent which some people are asking 
because some of the adjustments they are asking BLS to do, and 
you----
    Chairman Bunning. No one in the Congress knows what is 
included in the CPI, and everything that determines the CPI, so 
we would be acting in complete ignorance if we tried to adjust 
it.
    We had a group of supposed experts on the Boskin Commission 
telling us that 1.1 percent would be their suggestion. We had 
the Chairman of the Federal Reserve telling us it is anywhere 
between 0.5 percent and 1.5 percent, and he has a lot more 
statistical data than anybody in the Congress.
    But the fact of the matter is that CPI issues should not be 
a consideration in what we are doing here, in trying to look at 
the long-range solvency of Social Security. The Bureau of Labor 
Statistics takes into consideration those things that effect 
the CPI.
    Let me just get back to Dr. Butler for a second. I was 
pleased to see your comments regarding the personal income and 
benefit statements. I think that is a very big educational 
tool, as you do. I am going to give you an example, because my 
father used to track this when he was alive.
    When he retired in 1970, he came to me and said, ``Jim, I 
have put $3,200 into the Social Security system.'' Each year he 
tracked what he got back. When he died in 1992, he had received 
over $210,000 in return. Now, that is someone who started 
contributing at the beginning of the Social Security system, 
not after 1951.
    So it is more of an educational tool. The sooner SSA can 
distribute--not on the Internet--but written statements to 
those who are about to receive or who already receive their 
benefits, the sooner they realize how much they've paid into 
the Social Security system and how much they are or will 
receive back.
    People need to realize that Social Security was not 
designed as an investment insurance program, but it is a pay-
as-you-go system. It is unlikely that an investment of $3,200 
could have grown to $210,000 in a lifetime, because of the 
small increments that my father paid in.
    So I happen to agree that if we could get that statement 
into every Social Security recipient's hands, it would be an 
important educational tool.
    It would be beneficial if we could update the statement 
annually for those people that are currently paying into the 
system. People do not know that 15 percent goes in off the top 
from the employer and the employee. That is a substantial 
amount, even if you are in a very low income bracket. And the 
sooner we can get that information out to the general public, 
especially those young people who John Christensen talked 
about, the better off we are going to be.
    Is there anything else that any of you would like to bring 
forth? We have your written testimony.
    Mr. Mashaw. Could I comment on your last statement, Mr. 
Chairman?
    Chairman Bunning. Surely.
    Mr. Mashaw. I think it is very important to get the 
information out. I think it is very important to get full 
disclosure out. That is, I think those statements ought also to 
reveal that Social Security is providing more survivors 
insurance, life insurance, than is written by private companies 
in the United States. I think, if we can estimate it, that the 
current value of the disability insurance that is being 
provided, also, ought to be there, so that people can really 
get a good idea of what is in this package and----
    Chairman Bunning. Well, the total, overall package.
    Mr. Mashaw. Yes, and its elements.
    Chairman Bunning. Anyone else?
    Mr. Myers. Mr. Chairman, I would like to mention one thing 
of possible historical interest in connection with Dave Koitz' 
excellent testimony, to amplify on it a little--namely the 
situation in 1983 when the Greenspan Commission made its 
recommendations.
    At least the technical people knew at that time that there 
was going to be this big buildup in the trust funds temporarily 
and then a reduction and eventual exhaustion. It was hoped that 
it would not occur nearly as early as 2029. We also knew that, 
at the end of the valuation period, there was this gap.
    But, with the crisis that there really was at that time it 
was essential to get the various people with different 
political views to agree on a compromise package that would 
assure the safety of the system for at least the next 10 years 
and would do something about the long-range problem. So, there 
just wasn't time to bring up these relatively minor points, 
which could readily be dealt with later when there was more 
time, when there was this great difficulty of getting a 
consensus, which was done, and which the Congress then enacted.
    Chairman Bunning. Thank you all for being here. Thank you 
for your testimony.
    The hearing is adjourned.
    [Whereupon, at 12:13 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of Steven Cord, Center for the Study of Economics

[GRAPHIC] [TIFF OMITTED] T7633.001

[GRAPHIC] [TIFF OMITTED] T7633.002

[GRAPHIC] [TIFF OMITTED] T7633.003

      

                                

Statement of Kelly A. Olsen, Employee Benefit Research Institute

    It is a pleasure to submit material for the printed record 
of the hearing held by the Committee on Ways and Means, 
Subcommittee on Social Security, on March 6, 1997 entitled, 
``The Future of Social Security for this Generation and the 
Next.'' My name is Kelly Olsen, and I am a research analyst at 
the Employee Benefit Research Institute (EBRI). On behalf of 
Dallas Salisbury, President and CEO of EBRI, I would like to 
inform you of the pioneering effort that EBRI is making through 
its Social Security Reform Evaluation Project to ensure that 
the future of Social Security is based on the type of accurate, 
complete information required for sound policy decision-making.

           The EBRI Social Security Reform Evaluation Project

    Both because of the complexity of Social Security and the 
emotion evoked by widespread consensus that the program is in 
need of reform, the availability of clear, objective, 
nonpartisan analysis of policy alternatives is essential. The 
desire to provide this type of analysis as well as the tools 
for further analysis is the impetus behind the Employee Benefit 
Research Institute's Social Security Reform Evaluation Project. 
At the heart of this effort lies the development of the EBRI-
SSASIM2 Policy Simulation Model, the type of model 
(``stochastic'') recommended for development by a majority of 
Council members in the 1994 1996 Social Security Advisory 
Council report.\1\
---------------------------------------------------------------------------
    \1\ Advisory Council on Social Security, Report of the 1994-96 
Advisory Council on Social Security, Vol. 1 (Washington, DC, 1997), p. 
22.
---------------------------------------------------------------------------
    Although the EBRI-SSASIM2 Policy Simulation Model is 
central to the overall project, EBRI's educational efforts go 
beyond the sole provision of quantitative tools and analysis. 
As evidenced in the January 1997 EBRI Special Report, ``Keeping 
Track of Social Security Reforms,'' which profiles seven 
popular reform plans, EBRI is committed to helping policymakers 
and the public compare and understand the current reform 
proposals. In addition, the March 1997 EBRI Issue Brief, ``A 
Framework for Analyzing and Comparing Social Security 
Policies,'' explores eleven areas of consideration under which 
current law and proposed reforms must be examined to ensure 
fair, objective, and comprehensive analysis and comparison 
among policy alternatives. These recent publications build on 
over a decade of previous EBRI research on Social Security 
issues.

         The Need for the EBRI-SSASIM2 Policy Simulation Model

    There are several reasons why the availability of a model 
like EBRI-SSASIM2 the only one of its kind is especially 
critical to the quality of this round of Social Security 
debate. First, while policy simulation modeling has a long 
tradition in the Social Security policy analysis community, 
most current models are designed to analyze the nonstructural 
reforms that have dominated past debate (e.g., raising taxes, 
cutting benefits). As a result, most current models are not 
well suited to analyzing more fundamental Social Security 
reforms, such as the implementation of individual accounts or 
the shift of trust fund assets into equities. In addition, the 
EBRI-SSASIM2 model will allow for more realistic modeling than 
was previously available of the range of outcomes that could 
result under the current system, if it remains unchanged. This 
will provide a better understanding of the current system as a 
baseline by which to compare reforms.

                       Capabilities of the Model

    EBRI-SSASIM2 began as the SSASIM model, which was created 
under contract with the 1994 96 Social Security Advisory 
Council to analyze the effect of a partial switch of trust fund 
investments into equities. Since then, EBRI has contracted to 
expand the model's capabilities. One of the added analytic 
capabilities is the ability to analyze the effects of 
implementing individual savings accounts either to augment or 
replace the current Social Security system. For this purpose, 
assumptions about rates of return on equities and individual 
investment behaviors are necessary. Unlike other models, which 
often ``hard wire'' their assumptions, EBRI-SSASIM2 allows the 
user to select his or her own assumptions about equity returns 
and investment behaviors, as well as assumptions about several 
other variables such as tax rates, the cost-of-living formula, 
and mortality and birth rates. In addition, the user can model 
varying mixes of individual accounts and the traditional 
defined benefit Social Security system in order to assess 
outcomes under a partially ``privatized'' system.
    A second added capacity is EBRI-SSASIM2's ability to 
``permit policy analysis to be conducted in a way that more 
realistically incorporates uncertainty into its measures of 
long-term financial viability.'' \2\ Because Social Security 
models project policy outcomes based on uncertain events and 
circumstances such as stock market performance in 20 years, or 
birth rates in 40 years it is important that such uncertainty 
be reflected in modeling results. This uncertainty is not 
expressed in the traditional high, low, and intermediate point 
estimates used by the Social Security Administration (SSA) and 
can only be expressed with the use of ``stochastic'' modeling 
techniques. While the SSA's traditional techniques can report 
outcome estimates under pessimistic, optimistic, and 
intermediate scenarios, such results do not give an indication 
of which scenario is actually most likely to occur. In 
addition, unlike stochastic methods, traditional point 
estimates cannot express the range of likely outcomes. For 
example, a point estimate under intermediate assumptions might, 
report a 6 percent real rate of return on equities over the 
next 75 years. In contrast, stochastic modeling might show that 
under the same assumptions, there is an 80 percent chance that 
equities will range from 5-7 percent real return in the next 75 
years.
---------------------------------------------------------------------------
    \2\ Ibid.
---------------------------------------------------------------------------
    A third added capability of the EBRI-SSASIM2 model over the 
original SSASIM model is the ability to analyze Social 
Security's macroeconomic effects. As a program that covers 141 
million workers and holds over half a trillion dollars in 
reserves, Social Security is a significant force in the U.S. 
economy. For example, a change in normal retirement age could 
impact the labor market; a change in trust fund investment 
could affect financial markets; and the addition of individual 
savings accounts could increase personal savings rates and 
thereby spur economic growth by providing more investment 
capital. The interaction of multiple outcome variables can 
produce primary and secondary economic feedback effects effects 
of which the policy community might not be aware or be able 
only to speculate about without a macroeconomic feedback model 
pertaining specifically to Social Security policy. For this 
reason, EBRI-SSASIM2 includes savings, investment, and 
productivity growth linkages that permit analysis of the extent 
to which Social Security policy affects national saving, 
capital accumulation, and hence, productivity growth.
    With model completion scheduled for the summer of 1997, 
EBRI-SSASIM2 will be able to generate several outcome 
variables. Model results of reform options \3\ and the current 
system will include the following benefit and cost measures:
---------------------------------------------------------------------------
    \3\ The first actual reform plans to be modeled will be the three 
Advisory Council plans.
---------------------------------------------------------------------------
     Lifetime Program Benefits: Actuarial present value 
of lifetime program benefits (adjusted for inflation and 
mortality).
     Benefit-Contribution Ratio: Actuarial present 
value of lifetime program benefits divided by the actuarial 
present value of lifetime payroll contributions.
     Net Benefits: Difference between actuarial present 
value of lifetime program benefits and the actuarial present 
value of lifetime payroll contributions.
     Net Benefits as a Percentage of Earnings: Net 
benefits minus contributions, divided by the actuarial present 
value of lifetime earnings.
     Internal Rate of Return: Internal rate of return 
on benefits given contributions.
     Average Benefit: Average annual real benefit over 
retirement years.
     Replacement Rate: Percentage of final year of 
preretirement earnings that is replaced by the average benefit 
for a continuously employed person earning average wages.
     Low Benefit Avoidance: Percentage of beneficiaries 
expected to have retirement benefits above a low-benefit 
threshold.
     Real Per Capita Gross Domestic Product (GDP): 
Inflation-adjusted value of the GDP.
     Average Cost Expressed as a Percentage of Taxable 
Payroll
     Actuarial Balance Expressed as a Percentage of 
Taxable Payroll
    EBRI-SSASIM2 will allow these benefits and cost measures to 
be reported in aggregate for entire age cohorts and for 
individuals with different demographic characteristics within 
these cohorts by using realistic age-earnings profiles. In 
addition, users of the EBRI-SSASIM2 Policy Simulation Model 
will be able to create their own ``stylized'' individuals by 
defining age, earnings, asset allocation, and annuitization 
behavior in order to generate programmatic outcome data for 
specific groups.

     EBRI's Role in the Social Security Reform Debate: Provider of 
                   Nonpartisan Education and Research

    In short, EBRI-SSASIM2 will generate aggregate and 
individualized quantitative analysis about the current system 
and proposed reforms, using the most up-to-date technology in 
policy simulation, as recommended by the 1994 96 Social 
Security Advisory Council. Designed to allow the user to employ 
his or her own assumptions and beliefs in the model, and to 
model various structural policy alternatives, EBRI-SSASIM2 is 
nonpartisan in design and is the centerpiece of EBRI's overall 
effort to provide nonpartisan guidance and information. Social 
Security is an issue whose complexity and importance exposes it 
to the risk of misunderstanding and demagoguery. As a neutral 
voice in the whirlwind of advocates for one side of reform or 
another, EBRI is providing tools and analysis for informed 
policy decision-making.
      

                                

                                     Kentucky Teachers'    
                                          Retirement System
                                                     March 18, 1997

The Honorable Jim Bunning, Chairman
Subcommittee on Social Security
Committee on Way and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

Re: March 6, 1997

    Dear Mr. Bunning:

    I am writing to express the strong opposition of the Teachers' 
Retirement System to any attempts to mandate Social Security coverage 
for Kentucky's public school teachers. My statements speak solely on 
behalf of the 58,000 members of the retirement system. I represent no 
individuals or groups beyond the members of the Teachers' Retirement 
System.
    The issue of mandatory Social Security coverage for teachers and 
other state and local public employees, as you are well aware, has been 
proposed on several occasions during the past 20 years.
    The Kentucky General Assembly enacted legislation in 1938 
establishing the Teachers' Retirement System (TRS). This legislation 
was a direct result of the federal government prohibiting public 
employees from participating in the Social Security System. After 
almost 60 years of operation, the TRS is proud to have a defined 
benefit plan operating on an actuarially sound basis as attested to by 
the annual valuation conducted by the System's actuary.
    The TRS is an ``actuarial reserve, joint contributory'' plan. The 
member and state contributions plus earned interest are placed in 
reserve to meet the annuity obligations of the members. If member 
benefits are improved, the contribution rate is increased to finance 
the improvement. This is an important difference from Social Security 
that has operated on a ``pay as you go'' basis.
    Unlike Social Security, many state retirement programs have 
constitutional or statutory provisions that guarantee promised benefit 
coverage. Kentucky has a statutory provision that constitutes an 
inviolable contract which prevents the reduction or impairment of 
member benefits. Eligibility requirements or benefits for members are 
not altered and the members are well aware that they and their 
survivors will not have promised benefits withdrawn by future 
legislation.
    The 1977 federal legislation which became effective in the early 
1980s, known as the Social Security Offset Provision, is a good example 
of promised benefits being withdrawn. A reduction in benefits for 
eligible spouses may well have been justified, but the offset provision 
should not have been applied to Social Security participants who had 
earned the spouse protection prior to the enactment of the law. 
Certainly, there is no inviolable contract for Social Security 
participants.
    Kentucky teachers contribute 9.855% of their salary toward 
retirement and the state provides 13.105% of each employee's salary. To 
add Social Security on top of these amounts would not be fiscally 
possible. The net result would be to reduce benefits under a very sound 
plan in order to accommodate Social Security. Kentucky very clearly 
does not want to water down its benefits for its career teachers. It is 
the one benefit that teachers are very proud of and grateful for when 
their careers are completed. Even if the proposal would only include 
new hires, it would only be a very few years before the costs would 
escalate drastically related to mandatory coverage.
    State and local governments would have to assume the additional 
financial burden for mandatory coverage along with the employees. 
Mandatory coverage amounts to nothing more than a new tax being imposed 
on state and local governments and the employees of those subdivisions 
who have provided fiscally sound retirement plans over the years. 
Public retirement systems, including the Teachers' Retirement System, 
have built their reputations on providing promised benefits at 
reasonable costs to the membership. The package of benefits provided by 
these systems, including the Teachers' Retirement System, surpass the 
benefits provided under Social Security in almost all cases.
    Funds now provided by the retirement system for investment capital 
could well be impaired. Enactment of mandatory Social Security coverage 
would certainly reduce the available funds for capital improvement. The 
Kentucky Teachers' Retirement System has assets of over $8 billion and 
if members are required to pay for Social Security, a reduction will 
have to be made in the retirement contributions of the members. The 
funds diverted to Social Security will not likely be used for capital 
investment in the private sector.
    On behalf of the Board of Trustees of the Kentucky Teachers' 
Retirement System, I ask you and each member of your subcommittee to 
reject the idea of mandatory Social Security coverage.

            Sincerely,
                                              Pat N. Miller
                                                Executive Secretary
      

                                

Statement of Laurence J. Kotlikoff, Professor of Economics, Boston 
University; and Jeffrey D. Sachs, Professor of Economics, Harvard 
University

                              Introduction

    Chairman Bunning and other distinguished members of the 
Subcommittee on Social Security of the Committee on Ways and 
Means,
    The U.S. Social Security System is in urgent need of 
reform. It has a massive long-term deficit that cannot be 
covered without major payroll tax hikes or significant benefit 
cuts. The system is also inefficient, inequitable, 
uninformative, and outmoded.
    The Personal Security System would redress these problems 
by replacing the OAI portion of Social Security with a system 
of individual accounts and by establishing a dedicated stream 
of revenues to pay off the current system's unfunded liability.
    Unlike most other plans being put forward, this plan has a 
real means of financing the transition, protects non working 
spouses, protects survivors, delivers true progressivity, and 
ensures the annuitization of personal security account balances 
in old age.
    The Personal Security System, is being endorsed by a 
growing number of academic economists including three Nobel 
Laureates in Economics: Robert Lucas of the University of 
Chicago, Merton Miller of the University of Chicago, and 
Douglas North of Stanford University.
    The Personal Security System has seven elements:
     Social Security's Old Age Insurance (OAI) payroll 
tax is eliminated and replaced with equivalent contributions to 
PSS accounts.
     Workers' PSS contributions are shared 50-50 with 
their spouses.
     The government matches PSS contributions on a 
progressive basis.
     PSS balances are invested in a regulated, 
supervised, and diversified manner.
     Current retirees and current workers receive their 
full accrued Social Security Retirement benefits.
     A Federal retail sales tax finances Social 
Security retirement benefits during the transition and the PSS 
contribution match.
     At age 65, PSS balances are annuitized on a 
cohort-specific and inflation-protected basis.
    Simulations of this approach to social security reform show 
substantial long-run improvements in U.S. living standards. 
These gains reflect the partial alleviation of the enormous 
fiscal burden facing future generations arising from current 
entitlement programs. Precise analysis of any social security 
reform requires the use of the Social Security Administration's 
extensive data bases. For this reason, we strongly urge 
Congress to instruct the Social Security Administration to 
provide a detailed analysis of this proposal.

                         Scope of the Proposal

    Only the OAI payroll tax (about 70 percent of total OASDI 
contributions) is eliminated. Contributions made to and 
benefits received from the DI (Disability Insurance) and SI 
(Survivors Insurance) portions of the Social Security System 
are completely unchanged.

                            Earnings Sharing

    To protect non-working spouses as well as spouses who are 
secondary earners, total PSS contributions made by married 
couples are split 50-50 between the husband and wife before 
being deposited in their own PSS accounts.

                Government Matching of PSS Contributions

    The federal government would match PSS contributions of 
low-income contributors on a progressive basis. It would also 
make PSS contributions through age 65 on behalf of disabled 
workers.

                     Tax Treatment of PSS Accounts

    PSS contributions are subject to the same tax treatment as 
current 401k accounts. Contributions are deductible and 
withdraws are taxable.

                  Survivor Provisions of PSS Accounts

    Through age 65, survivor provisions governing PSS balances 
are identical to those governing 401k accounts.

                   Investment of PSS Account Balances

    Workers and their spouses invest their PSS contributions in 
regulated, supervised, and diversified investments. For 
example, these investments might be restricted to inflation-
indexed, exchange-rate hedged, high-grade domestic and 
international government and corporate zero-coupon bonds which 
come due when the worker reaches age 65. Alternatively, the 
portfolio rules could specify particular equity and debt shares 
that might vary by age, but which preclude trying to ``time the 
market.''

                 Annuitization of PSS Account Balances

    PSS balances can not be withdrawn prior to age 65. At age 
65, PSS balances are pooled with those of other cohort members. 
The federal government purchases, on a competitive fee-bidding 
process, single-life, real annuities for each cohort member in 
proportion to his or her age 65 PSS account balance.

   Payment of Social Security Retirement Benefits to Current Retirees

    Current recipients of Social Security retirement benefits 
continue to receive their full inflation-indexed benefits.

   Payment of Accrued Social Security Retirement Benefits to Current 
                                Workers

    When they reach retirement, workers receive the full amount 
of Social Security retirement benefits that they had accrued as 
of the time of the reform. These benefits are calculated by 
filling in zeros in the OAI earnings records of all Social 
Security participants for years after the transition begins. 
Since new workers joining the workforce will have only zeros 
entered in their OAI earnings histories, new workers will 
receive no OAI benefits in retirement. This ensures that over a 
transition period aggregate Social Security retirement benefits 
will decline to zero.

                        Financing the Transition

    During the transition, Social Security retirement benefits 
will be financed by a federal retail sales tax. The tax would 
be collected by the states. The PSS sales tax would also 
finance the government's PSS contribution match. Over time, the 
PSS tax rate would decline as the amount of Social Security 
retirement benefits decline. Provisional calculations suggest 
that the sales tax would begin below 10 percent and would 
decline to a permanent level of roughly 2 percent within 40 
years.

                        Advantages of the Reform

    The Personal Security System would improve benefit-tax 
linkage, enhance survivor protection, equalize treatment of 
one-and two-earner couples, offset the ongoing transfer of 
resources from the young to the old, provide better divorce 
protection to non working spouses, make the system's 
progressivity apparent, resolve Social Security's long-term 
funding problem, and ensure Americans an adequate level of 
retirement income.

                         Macroeconomic Effects

    Simulation studies suggest that this reform will, over 
time, increase the economy's capital stock by roughly one third 
and its output by roughly 10 percent.

                           Impact on the Poor

    Social Security's cost of living adjustment insulates its 
beneficiaries from the potential increase in consumer prices 
associated with the introduction of the PSS retail sales tax. 
Hence, the current poor elderly will experience no higher 
fiscal burden. Moreover, simulation analyses show that poor 
members of current middle aged generations, poor members of 
current young generations, and poor members of future 
generations have the most to gain from privatizing social 
security.

                        Intergenerational Equity

    The PSS proposal asks current Americans, old and young 
alike, to contribute to paying off Social Security's unfunded 
retirement benefit liability. Since it insulates the current 
poor elderly, only rich and middle class elderly face a higher 
fiscal burden. Asking them to pay their share of Social 
Security's unfunded liability is intergenerationally equitable 
particularly given the massive and growing Medicare-financing 
burden facing future generations.

                Comparision with Other Reform Proposals

    Unlike many other social security reform proposals, the 
Personal Security System would substantially alleviate the 
long-run fiscal crisis facing future generations. It would also 
improve economic efficiency by linking retirement income to 
retirement saving without sacrificing secondary earners and the 
poor.

                   The Challenge Facing the Congress

    All major social security reform proposals as well as the 
current system need to be compared on a systematic basis with 
respect to intergenerational burdens, fiscal sustainability, 
economic efficiency, and intragenerational equity. Congress 
should instruct the Social Security Administration to perform 
this analysis in consultation with the Congressional Budget 
Office and other agencies of the U.S. government.
      

                                

Statement of National Silver Haired Congress

    Mr. Chairman: The National Silver Haired Congress (NSHC) 
commends you and the Members of this Subcommittee for 
conducting this important hearing on the future of Social 
Security. We are pleased to share with you information on a 
resolution which was adopted at our Inaugural Session, February 
8-14, 1997 in Washington, D.C., dealing with Social Security, 
its present and its future. This was, in fact, the top 
resolution of our Conference, modeling the outcome of the 1995 
White House Conference on Aging which adopted a comprehensive 
Social Security resolution and it was the top vote getter of 
the 45 resolutions.
    This resolution was adopted overwhelmingly by nearly 300 
Silver Senators and Silver Representatives from 43 states, 
including Nelda Barnett from Owensboro, KY and Edna Hawkins 
from Bowling Green, KY.
    Its main points include:
     Exclude Social Security from any Federal balanced 
budget amendment or law.
     Ensure Social Security trust funds and 
contributions shall not be diverted into individual private 
accounts.
     See that Social Security shall not be means 
tested.
     Maintain a COLA computed by the Bureau of Labor 
Statistics to be distributed in January of each year, to 
include military, railroad and civil service.
     Mandate income from married couples shall be 
divided in order to establish equal and separate accounts.
     Eliminate restrictions on earnings after 
retirement for Social Security purposes.
     Create and support a strong program to inform the 
public about Social Security.
     Assure that all new state and local government 
employees hired after 1997 must be brought under the Social 
Security system resulting in increased payroll taxes for the 
system.
    The NSHC hopes that our resolution contributes to the 
discussion and subsequent actions taken to address Social 
Security. We also especially commend you on approaching this 
issue from an intergenerational approach.
    By means of background, the NSHC is a non-partisan, non-
profit organization comprised of registered voters over 60 
years of age from across the nation. For further information 
about the history of the NSHC, please see the attached 
information sheet.
      

                                

Statement of OPPOSE

    My name is Robert J. Scott. I am Secretary/Treasurer of 
OPPOSE. OPPOSE is a Colorado Corporation formed by teachers, 
fire fighters, police officers, and other state and local 
government employees who have elected not to join the Social 
Security-Medicare system. The purpose of our organization is to 
assure the continued financial integrity of our members' 
retirement and health insurance plans by resisting efforts to 
mandate Social Security or Medicare coverage of public 
employees. Our members are found in Alaska, California, 
Colorado, Connecticut, Illinois, Kentucky, Louisiana, 
Massachusetts, Minnesota, Nevada, Ohio, and Texas. With respect 
to the issue of mandatory Social Security and Medicare 
coverage, the interests of OPPOSE are identical to those of the 
approximately five million public employees throughout the 
nation who remain outside the Social Security system.

                               Background

    For many years after the Social Security system was 
created, state and local government employees were not allowed 
to participate in the system; Beginning in the 1950s, state and 
local government employers could elect to have their employees 
covered. Governments which elected in were also permitted to 
opt out again, after notification of the intent to do so, and 
the expiration of a two year waiting period.
    This was the law for about three decades, until, in 1983, 
there was a major revision of the Social Security and Medicare 
laws, triggered primarily by a concern about the long term 
solvency of these two trust funds. Congress decided not to 
require state and local employees who were outside the system 
to be covered, but did end the opt out for public employees who 
had chosen to be covered. An ``anti-windfall'' rule was 
adopted, to ensure that public employees who were covered by 
Social Security and by a public plan did not receive excess 
credit for Social Security purposes.
    In 1986, as part of the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (``COBRA''), Congress determined to 
require participation in the Medicare system on a ``new Hires'' 
basis, but chose to leave public employee retirement plans in 
place, and did not change the law with respect to Social 
Security.
    In 1990, Congress enacted a law requiring that all public 
employees not covered by a state or local retirement plan 
meeting specified standards must be covered by Social Security. 
That law, adopted as part of the Omnibus Budget Reconciliation 
Act of 1990 (the ``1990 Act''), ensures that all public 
employees will be covered either under Social Security or under 
a public retirement plan which provides comparable benefits. 
Today, about one-third of all state and local government 
employees, about five million people, are outside the Social 
Security system because they are covered by public retirement 
plans.

                       Background of this Hearing

    There is no serious question about the soundness of the 
Social Security system over the next twenty to twenty-five 
years. The most current estimates are that income from Old-Age, 
Survivors and Disability Insurance (``OASDI'') taxes will 
exceed OASDI expenditures until the year 2012. After that year, 
OASDI taxes, plus reasonable interest earnings on those taxes 
will exceed OASDI payments through the year 2019. OASDI Trust 
Fund reserves will continue to fund benefits through the year 
2029. After that time, Social Security, viewed in isolation 
from all other federal programs, is projected to be in deficit.
    Reasonable people differ about the date after which serious 
trouble really begins for the Social Security system. Although 
nominally established like a funded pension system, in 
practice, Socail Security Trust Fund surpluses are used to 
reduce operating deficits in other parts of the federal budget. 
There is an obligation for the Treasury to repay these 
``borrowings'' from Social Security, but the federal government 
will not be able to repay these borrowings when the time comes, 
except by creating surpluses in other parts of its budget, or 
by printing money.
    In this sense, at least, it does not matter very much if 
the Social Security Trust Fund is in a state of surplus. When 
Social Security outlays begin to exceed Social Security 
revenues, an additional burden will be placed on an already 
strained federal budget, as Social Security becomes a net 
importer of general federal revenues. On the other hand, if 
general federal revenues are in a healthy posture (admittedly 
an unlikely prospect), a Social Security deficit could, in 
theory, be little more than an accounting inconvenience.
    This is not to suggest that the worrisome mid-term Social 
Security projections do not matter. These projections are 
important because they indicate that we are currently promising 
to future Social Security recipients substantially more than we 
will comfortably be able to pay.
    As a result of these concerns, Social Security reform has 
been the subject of numerous bills and hearings, as well as 
several major study commissions, over the last several years.
    In 1994, the Bipartisan Commission on Entitlement and Tax 
Reform (also known as ``the Kerrey-Danforth Commission'') 
studied the problem of projected short falls in the Social 
Security and Medicare Trust Funds, as well as other mid-term 
and long-term deficit problems. The Commission was unable to 
agree on a set of recommendations, but did valuable work in 
assessing the dimensions of the problem. In an interim report 
published in August, 1994, the Commission projected that with 
no changes in law, by 2010 entitlement spending and interest on 
the national debt would consume almost the entire federal 
revenues; by 2020, entitlement spending alone would almost 
equal the federal revenue stream; by 2030, there would not be 
enough revenue to service the federal entitlement obligations, 
even if no money were used for other purposes, including 
payment of interest on the national debt.
    In 1995 and 1996, the Advisory Council on Social Security 
examined the mid-term and long-term solvency of Social Security 
and the Social Security Trust Fund. Once again, there was no 
majority on the Council for any set of recommendations. Three 
different alternative proposals were put forth by different 
groups of members. These hearings were held, in part, to review 
the Report of the Advisory Council on Social Security, and to 
consider those sets of recommendations, as well as other 
possible alternatives to reform the Social Security System.

 Mandatory Social Security Coverage Is Wrong And Should Not Be Adopted

 I. Public employees are able to decide for themselves what is 
in their own best interest.

    Of the arguments advanced for mandatory coverage, by far 
the most arrogant is that Social Security coverage would 
benefit the people affected. For example, a majority of the 
Advisory Council on Social Security (``the Council'') suggest 
that ``workers would generally gain'' from Social Security 
coverage (Council report, p. 20, three members dissenting).
    It is insulting to suggest that Advisory Council members, 
or other Washington officials, care more about, or better 
understand what is best for, public employees, than do the 
employees themselves, or their (largely elected) plan trustees.
    Analyses done by public plan fiduciaries indicate that 
public employees of almost any description (in terms of salary, 
length or service, etc.) do better under their public plan than 
they would do under Social Security. For example, the Public 
Employee Retirement Association (``PERA'') of Colorado produced 
a study (assuming retirement in 1994 at age 62) showing that an 
employee working ten years with a highest average salary of 
$15,000 per year, would receive a Social Security benefit equal 
to 21.6 percent of pay; the PERA employee would receive a 
benefit of 22 percent. For short term employees with higher 
average rates of pay, Social Security benefits are 
proportionally much lower. For example, a ten year employee 
with an average rate of pay of $60,000 per year would get a 
benefit of 10.9 percent under Social Security; his PERA benefit 
would be 22 percent.
    Longer term employees at all rates of pay do 
proportionately much better under PERA. A fifteen year employee 
earning a high average salary of $15,000 would receive 26.1 
percent of pay under Social Security--33 percent under PERA. A 
twenty year $15,000 per year employee would receive 29.5 
percent of pay under Social Security--fifty percent of pay 
under PERA. At 30 years of service, this hypothetical, 
relatively low pay ($15,000 per year) employee would receive 
36.3 percent of pay under Social Security, but 65 percent of 
pay under PERA. At forty years of service, the respective 
numbers are 39.1 percent of pay for Social Security, 80 percent 
for PERA.
    Employees at higher rates of pay do even better. For 
instance, a thirty year employee with high average pay of 
$45,000 per year, receives a benefit of 22.5 percent from 
Social Security, but 65 percent from PERA.
    To restate what is demonstrated by this analysis, those 
employees who are relatively disadvantaged, i.e., relatively 
low pay and relatively short term service, DO BETTER UNDER PERA 
THAN THEY DO UNDER SOCIAL SECURITY. Those employees with higher 
rates of pay do much better.
    PERA of Colorado is a good plan. But analyses of other 
public plans suggest that these plans also provide benefits for 
their employees that are generally better than Social Security 
benefits.
    The point, however, is not to prove that public plans are 
better than Social Security. The point is that government 
employees and their fiduciaries are quite capable of comparing 
their plans with Social Security and deciding for themselves 
what is better for them.
    The Council argues at pages 19-20 of its report that ``over 
the course of a lifetime, it is impossible to tell who will and 
who will not need [Social Security] coverage.'' The Council 
suggests that Social Security may be superior to state or local 
plans because of the inflation proof aspect of Social Security, 
or because of the spousal benefit.
    Although Social Security does have some desirable features, 
State and local plans are often superior in terms of their 
ancillary provisions. For instance, state and local plans 
provide 100 percent immediate vesting in employee 
contributions. PERA of Colorado members are fully vested for a 
future retirement benefit percent after five years of service. 
By contrast, Social Security provides no retirement benefits 
until the employee has ten years of service.
    Public plan benefits are generally guaranteed by state law, 
often by state Constitution. Social Security benefits and taxes 
may be changed by Act of Congress, and probably will be changed 
in ways making the system less desirable for participants in 
order to solve the funding problems of the system.
    Public plans are funded, often fully funded. Social 
Security is not.
    Social Security is highly portable, but so are public plan 
benefits. Not only are benefits generally fully transferable 
within the same state system, but many public plans have a buy 
in feature. For instance, credits earned in a Colorado plan may 
be used to buy in Illinois plan benefits if a teacher moves to 
Illinois.
    Public plans may have lower retirement ages than Social 
Security, and generally do not penalize a retired employee who 
continues to work. Social Security reduces retirement benefits 
based upon an ``earnings'' test.
    Although state and local plans are not required to provide 
survivor and disability benefits, most major plans do. These 
benefits are sometimes superior to the benefits provided under 
Social Security.
    Social Security benefits are protected against inflation, 
although the correct amount of the inflation adjustment (CPI) 
is now the subject of serious debate. State and local plans 
often, though not always, have an inflation protection feature, 
either directly, or through increases in benefits provided by 
the legislature, and made possible by good plan management. In 
any event, the basic benefit provided by state and local plans 
is often so superior to the Social Security benefit, that 
Social Security's inflation protection merely serves to reduce 
this difference.
    It may well be the case that some workers or their families 
will turn out to better off under Social Security than under a 
weak state or local public plan. But what about the 
overwhelming majority of workers who will be far better off 
under their public plan? Does the interest of this vast 
majority count for nothing?
    Even if it were once the case that some government workers 
might have been better off under Social Security than under 
their government plan, Congress has addressed this issue. In 
1990 (as discussed above), Congress enacted a law requiring 
that all public employees not covered by a state or local 
retirement plan meeting specified standards must be covered by 
Social Security. That provision of the 1990 Act ensures that 
all public employees will be covered either under Social 
Security or under a public retirement plan which provides 
comparable benefits.
    Regulations issued under that law require that the state or 
local plan must provide a minimum benefit, generally equivalent 
to the benefit provided by Social Security. Special 
protections, having the general effect of increasing 
portability, are provided for certain categories of workers, 
such as temporary, seasonal, and part-time workers. Still other 
regulations protect workers from losing benefits.
    If government workers want to participate in the Social 
Security system they can, by arranging for their government 
employer to contract into the system. But the decision should 
be made by the people affected--state and local government 
employees.

 II. Mandatory Social Security coverage of middle class public 
employees now outside of the Social Security system will not 
improve the fiscal soundness of the system.

    For the next fifteen years, the retirement portion of the 
OASDI Trust Fund is in good shape. As discussed above, 
responsible analysts believe there is reason for concern about 
the out years, although there is some disagreement as to 
exactly when the really serious problems will begin.
    Most people agree that it would be wise to take action in 
the near future to bring the OASDI Trust Fund into long term 
balance. The sooner we take action, the less painful the 
corrective measures will have to be. Politically, however, this 
means a trade off of short term pain for long term gain--always 
a difficult proposition.
    In order to understand what we need to do to correct our 
long term problem, it is necessary to understand why we are in 
our present fix. The primary reason is that we are trying to do 
two contradictory things with OASDI taxes.
    Current OASDI taxes are higher than they need to be to fund 
current OASDI benefits. The theory is that we are building up a 
trust fund to pay future benefits.
    But the theory does not correspond with what we are 
actually doing with the OASDI revenues. These revenues are 
being used to pay the current operating expenses of the United 
States government.
    Of course, the OASDI Trust Fund receives promises to pay 
from the federal government, but these promises are are secured 
only by the future taxing power of the government. This means 
that at some point in the future, when the ratio of taxes to 
benefits is less favorable than it is today, there will be no 
assets to draw down in order to make up the difference.
    Mandatory Social Security coverage for government employees 
will not solve these problems. In the short run, taxes from the 
newly covered government workers would exceed benefits paid to 
those workers. But OASDI does not have a short term problem. 
Short term excess revenues cannot help solve a mid-term or long 
term problem unless those revenues are saved and invested. But 
OASDI has a mid-term and long-term problem precisely because 
excess revenues taken in today are not being saved and invested 
to pay the accruing liabilities attributable to those revenues.
    Fifteen, twenty, and twenty-five years out, the newly 
covered government employees would be entitled to the same 
benefits as all other covered workers. If the cost of providing 
benefits exceeds the funding necessary to provide those 
benefits (as appears to be the case today), adding more people 
to the system will make matters worse, not better. If the tax 
revenues from the newly covered government workers are not 
saved, mandatory coverage of public employees will result in a 
situation where the eventual gap between current OASDI taxes 
and current OASDI obligations will be far worse than it 
otherwise would have been.
    There are other reasons why mandatory Social Security 
coverage will not help to solve the financing problems of the 
Social Security system. The Bipartisan Commission on 
Entitlement and Tax Reform worked long and hard analyzing 
various options to ease the entitlement and deficit problems 
which our nation will confront in the next century. The 
Commission was not able to reach a consensus on recommended 
action. Co-Chairmen Danforth and Kerrey did present a package 
of options, one of which was mandatory Social Security. It was 
estimated that mandatory Social Security would only achieve 
about 1.8 percent of the Commission's entitlements objective 
(about ten percent of its Social Security objective). (The 
Advisory Council on Social Security had a similar estimate with 
regard to Social Security needs.)
    This 1.8 percent estimate, however, is almost surely 
inflated. Under present law, annuities from public pension 
plans are fully taxable to the extent that those benefits 
exceed the beneficiary's own after tax contributions to his or 
her retirement plan. Social Security benefits are not taxable 
to most recipients, and most retired public employees would 
fall below the income threshold for taxation of Social Security 
benefits. The resulting loss to the general revenue fund may 
easily offset any very modest gain made by the Social Security 
Trust Fund.
    Moreover, to the extent that mandatory coverage imposed new 
burdens on the states, states would be forced to raise taxes or 
reduce services to offset their increased obligations. New 
state taxes would be deductible, thereby further reducing 
general fund revenues.
    Finally, estimates of gains to the Social Security Trust 
Fund from mandatory coverage must be predicated on the 
assumption that other changes in law are made which have the 
general effect of reducing the current highly favorable pay 
back ratio which most Social Security beneficiaries receive. It 
is obvious that if Social Security loses money on a per 
participant basis, adding more participants will not help.

 III. Mandatory Social Security coverage would not be fair.

    The Advisory Council on Social Security argues, at page 19 
of its report (three members dissenting), that ``all Americans 
have an obligation to participate [in Social Security], since 
an effective Social Security program helps to reduce public 
costs for relief and assistance, which, in turn, means lower 
general taxes.''
    One of several confusions in this argument is the failure 
of the Council to notice that public retirement plans also 
reduce public costs for relief and assistance in precisely the 
same way that Social Security achieves this effect. Employees 
covered by public plans are not candidates for welfare, SSI, or 
other forms of public assistance.
    For most public employees, their rights in their retirement 
plan represent a substantial part of their life time savings. 
In 1989, the median American household had a net worth of 
approximately $42,000, much of this tied up in their equity in 
their home. Forty-two thousand dollars is not a large cushion. 
For middle income public employees, the security provided by 
their public retirement plan makes possible a comfortable, 
reasonably secure life.
    There is also no exposure to the federal government, or the 
taxpayers who support that government, in connection with 
public plans, because public plans are not insured by the 
Pension Benefit Guaranty Corporation.
    There is every reason to believe that mandatory Social 
Security coverage would impair retirement security for millions 
of public employees. State and local government plans work well 
for employees because public fund assets are invested in the 
economy, and returns on those investments allow the employees 
to receive substantially greater benefits than would be 
possible under a pay-as-go-approach. Although some people would 
argue that the Social Security Trust Fund is also invested, 
these monies are invested solely in government accounts, and 
the benefits are secured only by the future taxing power of the 
United States government.
    Mandatory Social Security, even on a new hires basis, would 
undercut the ability of state and local governments to maintain 
their plans. Some government employers might attempt to 
maintain a two tier system divided along the lines of existing 
employees (remaining in their public plan) and new hires 
(covered by Social Security and a supplemental public plan, or, 
possibly, no plan), but cost and administrative considerations 
would almost certainly defeat this effort within a short time. 
In any event, a supplemental state plan, on top of Social 
Security, would almost certainly be far less generous than 
existing plans, because the out flow of cash to Social Security 
would not be invested.
    This undercutting of existing plans would be nothing less 
than a breach of faith, because many public employees accept 
less than competitive wages in part because they know that the 
public retirement plan will take care of them later.
    CBO has recognized this point in its report entitled 
``Reducing Entitlement Spending'' (page 18) where, in the 
context of discussing the inappropriateness of lumping federal 
pensions in with other entitlement programs, the report states:
    ``Supporters of federal workers and retirees point out that 
these programs were integral parts of the employment contract 
between the federal government and its employees and therefore 
constitute earned benefits. Cutting them would probably hurt 
the government's reputation as an employer. Annual surveys 
comparing government and private-sector wages indicate that 
federal workers may be accepting lower cash wages in exchange 
for better retirement benefits in deciding to work for the 
government. In essence, these workers pay for their more 
generous retirement benefits by accepting lower wages during 
their working years. Moreover, as some observers maintain, 
cutting benefits promised to current workers may prompt 
forward-looking workers to demand higher compensation now to 
offset the increased uncertainty of their deferred benefits.'' 
(Footnote omitted.)
    For whatever reasons, state and local government employees 
were kept out of the Social Security System for many years. 
These once excluded employees have built up their own systems, 
which work well for the overwhelming majority.
    By contrast, for many years the Social Security System has 
been managed improvidently. The federal government has allowed 
retirees to reap where they have not sown, by drawing out of 
Social Security far more in benefits than their contributions 
and ``earnings'' on those contributions could support. Worse, 
the federal government has used the contributions of Social 
Security participants to pay current operating expenses rather 
than truly investing the money.
    Now the Social Security System is in a hole. This is 
certainly sad news. But it is hardly ``fair'' to ask public 
employees to pay. Public employees did not create this problem.
    If we were writing on a clean slate, with full knowledge of 
the consequences of operating Social Security like a lottery 
where everybody wins, until this is no longer possible, the 
nation would almost chose to adopt an approach much closer to 
the public pension plan system than to Social Security. Having 
gone down the wrong path for many years, it will be very 
difficult to now create a system of invested individual 
accounts, which is fair to young workers, without undermining 
the expectations of retired and soon to be retired Social 
Security participants, who would not have time to adjust to a 
new system.
    There is, however, no reason to make things even worse than 
already are, by taking many millions of public employees out of 
their existing plans, which work, and adding them to the stock 
pile of unfunded federal liabilities.
    At page 20 of its report, the Advisory Council puts forth, 
as one argument for mandatory coverage, that a high proportion 
of state and local government workers will receive Social 
Security benefits because of non-government work which they 
perform, or through their spouses. The Council report fails to 
acknowledge that State and local government employees do not 
receive any unfair advantage by remaining outside of the Social 
Security system for most, or part, of their career. In 1983, as 
part of the overall Social Security reforms enacted in that 
year, Congress adopted an anti-windfall rule, which has the 
general effect of reducing any Social Security benefit that the 
employee might otherwise be entitled to in accordance with a 
formula based on the period of time during which the employee 
was not covered by Social Security. This adjustment is made 
because Social Security is bottom weighted---that is, Social 
Security tends to provide relatively high benefits for workers 
who have relatively low average career earnings. Another rule 
which is applicable to non-covered government workers, known as 
the spousal offset rule, reduces the spousal benefit which 
would otherwise be payable to these workers.

IV. Mandatory Social Security coverage has the effect of an 
unfunded mandate.

    The effects of mandatory coverage on state and local 
governments would be serious. Those governmental entities which 
are now the most hard-pressed, such as large cities which have 
significant low income populations, would be the most severely 
affected.
    The eventual cost to governments, when mandatory coverage 
is fully phased in, would be staggering. California, for 
example, would have annual costs of almost $2.3 billion. Ohio 
would be burdened with over 1 billion in additional cost, and 
Texas, Illinois, Colorado, Massachusetts, and Louisiana would 
have annual costs in the hundreds of millions. Even states like 
Washington, Florida, Georgia, and Connecticut, Michigan, 
Minnesota, and Missouri, which are not always thought as states 
having a high rate of non-covered employees, would face costs 
near, or exceeding, $100 million per year. On a new hires 
basis, the initial cost of mandatory coverage would be less, 
but even under this approach more than a dozen states would 
face first year costs in excess of $10 million.
    As recently as March 12, 1997, bi-partisan representatives 
of the National Governors' Association testified before a joint 
session of the House and Senate Budget Committees, urging 
Congress not to enact federal tax cuts which would force state 
or local tax hikes. Mandatory coverage would be one degree 
worse, a federal tax hike which would also force state and 
local tax hikes.

V. Mandatory Social Security coverage is a new, regressive tax.

    Mandatory Social Security coverage would be a new highly 
regressive tax, and would certainly be viewed that way by the 
middle class people who would pay it. Nationwide, the average 
earnings of a full time state or local public employee are 
approximately $31,850. The Social Security tax on this amount 
(6.2 percent) would be almost $2,000. An Illinois teacher would 
pay more for Social Security than for clothing or health care, 
and the Social Security tax, over $2,500 for an average teacher 
in this state, would equal almost half of his or her food 
budget. Currently the average Illinois teacher just about 
breaks even between salary and expenses.
    Most public employees fall in the second and third 
quintiles of income. These are families whose average income 
ranges from about $20,000 per year to about $32,000 per year. 
Studies based upon CBO data and prepared by the U.S. House of 
Representatives Ways and Means Committee staff indicate that 
many of these families actually lost ground during the period 
1977 through 1989, or, at best, have progressed only minimally. 
For example, the second quintile, those between the 20th and 
40th percentiles in terms of average family income, actually 
lost about 1.7 percent in after-tax income, measured in 
constant dollars, during this thirteen year period. Those in 
the third quintile, between the 40th and 60th percentiles, 
fared somewhat better, but still realized income growth of less 
than a half a percent per year, uncomponded, throughout this 
period. Federal income tax rates, as a percentage of pretax 
income, actually increased slightly for the fourth income 
quintile group. (For the third quintile income group federal 
tax rates were essentially unchanged.). People at this level of 
income should not be called upon to pay additional taxes.
      

                                

                              State Teachers Retirement    
                                             System of Ohio
                                                     March 13, 1997

Mr. A. L. Singleton, Chief of Staff
U. S. House of Representatives
Committee on Ways and Means
1102 Longworth House Office Bldg.
Washington, D.C. 20515

    Dear Mr. Singleton:

    These comments are being submitted for the printed record of the 
Social Security Subcommittee of Ways andMeans hearing on ``The Future 
of Social Security for this Generation and the Next'' on behalf of the 
Ohio StateTeachers Retirement Board and the 300,000 active and retired 
members of our system.
    Having carefully studied the January 6, 1997 report of the Advisory 
Council on Social Security, we strongly believethat mandatory coverage 
for all public employees will be a mistake and should not be a part of 
a reform packagethat claims to restore the financial solvency of the 
Social Security Trust Fund.
    We urge your determined opposition to any proposal that would 
mandate Social Security coverage for new hiresor for any other 
configuration that could evolve requiring mandatory participation.
    Ohio has a long history, predating Social Security, of providing 
retirement and disability security and familyincome protection to state 
and local public employees. When Social Security was initiated in the 
mid-1930s, Ohiopublic employees were not permitted to participate. 
Later, when states were given the option of joining SocialSecurity, 
Ohio voted to remain independent. Ohio public servants were already 
well-served. The Ohio publicretirement systems were and are stable and 
working well.
    Mandatory Social Security coverage would hurt, not help, Ohio 
public employees. All Ohio public employees arecovered by a public 
retirement system. Unlike Social Security in which current workers are 
supporting retirees, theOhio STRS is reserve-funded. Ohio teachers fund 
their own future benefits. Today STRS is 81 percent funded. On a 
comparable basis, federal Social Security is funded at 5 percent or 
less. STRS is not dependent on governmentappropriations but is funded 
entirely by member and employer contributions and earnings from 
investments. Interest earnings provide 62 percent of the annual income 
today. Additionally, investments made by STRS andsystems like STRS 
throughout the nation make a powerful contribution to this country's 
economic strength andcontinued growth.
    It would be a mistake to believe that those public employees who 
remained in public pension funds would not beadversely affected by 
mandatory coverage for new hires. Faced with the added cost of Social 
Security, it is almostcertain that Ohio would be forced to change 
existing public pension plans by adjusting benefits downward andperhaps 
even dropping retiree health care. The pool of money available to 
invest in our country's industrial baseand technological research would 
shrink over time as it was siphoned off to pay member benefits. From a 
publicpolicy perspective, it makes no sense to harm a system that is 
working well in an effort to temporarily fix SocialSecurity's problems. 
Furthermore, the enactment of mandatory coverage would produce an 
apparent unfundedmandate of immense proportions for Ohio taxpayers.
    We appreciate the opportunity to comment on this important issue 
and would be pleased to provide furtherinformation if that would be 
helpful to you. Thank you for your consideration.

            Sincerely,
                                            Herbert L. Dyer
                                                 Executive Director