[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

                               __________

                              MAY 22, 1997

                               __________

                             Serial 105-34

                               __________

         Printed for the use of the Committee on Ways and Means

                               ----------

                     U.S. GOVERNMENT PRINTING OFFICE
50-563 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            JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona               XAVIER BECERRA, California
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri


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

Advisory of May 22, 1997, announcing the hearing.................     2

                               WITNESSES

Social Security and Medicare Boards of Trustees:
    Stephen G. Kellison..........................................     6
    Marilyn Moon.................................................     5

                                 ______

American Association of Retired Persons, Esther Canja............    57
First Quality Maintenance, Gary Green............................    31
National Taxpayers Union Foundation, Jack Ryan...................    41
Older Women's League, Deborah Briceland-Betts....................    34
Third Millennium, New York, NY, Gary Green.......................    31
United Seniors Association, Inc., Hon. Beau Boulter..............    25


     THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT

                              ----------                              


                         THURSDAY, MAY 22, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:35 a.m., in 
room 1100, Longworth House Office Building, Hon. Jim Bunning 
(Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                                CONTACT: (202) 225-9263
FOR IMMEDIATE RELEASE

May 15, 1997

No. SS-5

               Bunning Announces Third Hearing in 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 third in a series of hearings on ``The 
Future of Social Security for this Generation and the Next.'' At this 
hearing, the Subcommittee will examine the findings of the recently 
released 1997 Annual Report of the Board of Trustees on the financial 
status of the Social Security Trust Funds. In addition, the 
Subcommittee will hear from organizations on generational aspects on 
the future of Social Security. The hearing will take place on Thursday, 
May 22, 1997, in the main Committee hearing room, 1100 Longworth House 
Office Building, beginning at 10:30 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony will be 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's first two hearings in the series have focused on 
the recommendations of the Advisory Council on Social Security and on 
the fundamental issues to consider when evaluating options for Social 
Security reform.
    Since the last hearing, the Social Security Board of Trustees 
released the 1997 report on the operation and financial status of the 
Social Security and Medicare Trust Funds. The projections regarding the 
Old Age, Survivors and Disability Insurance (OASDI) Trust Funds are the 
same as those reported in 1996. Spending out of the Trust Fund is 
projected to exceed tax income in the year 2012, and by the year 2029, 
the Trust Funds are projected to have income sufficient to cover only 
75 percent of annual expenditures. The Trustees believe that the long-
range deficit of the OASDI funds should be addressed in ``a timely 
way'' and also recommend that the Advisory Council recommendations and 
other proposals should be ``carefully evaluated by the Government and 
the public.''
    Currently, a wide range of approaches have been proposed to restore 
Social Security's financial solvency. These range from maintaining the 
program's current structure to revamping the system entirely. 
Organizations with different generational perspectives on Social 
Security reforms have begun sharing their views regarding what needs to 
be done.
    In announcing the hearing, Chairman Bunning stated: ``We're taking 
the issue of Social Security reform seriously. We want to listen to 
what people are saying and we need to know all the facts, including who 
is impacted by each and every proposal. Engaging the public is critical 
as discussions continue regarding the future of Social Security. The 
views of those who represent the interests of America's different 
generations are extremely important to this Subcommittee and must be 
heard.''
      

FOCUS OF THE HEARING:

      
    The Subcommittee will examine the findings of the 1997 Annual 
Report of the Board of Trustees on the financial status of the Social 
Security Trust Funds. The Subcommittee will then hear from 
organizations with different generational perspectives on Social 
Security reform. Specifically, Members would like to hear the views of 
each organization regarding: (1) the degree to which Social Security 
reform is necessary; (2) an assessment of the Advisory Council 
recommendations and other reform proposals; (3) specific 
recommendations for Congress to consider as it moves forward; and (4) 
how soon Congressional action is needed.
      

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, June 5, 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 202-226-3411 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. The Subcommittee will come to order. 
Today we continue our series of hearings on the future of 
Social Security for this generation and the next. During this 
third hearing we will hear from the Social Security Public 
Trustees. Last month the Social Security Board of Trustees 
released its annual report on the status of the OASDI, Old-Age 
Survivors, and Disability Insurance Trust Funds.
    The good news is that the forecasts have not gotten worse. 
The Trustees predicted that the trust fund won't start running 
short of funds until the year 2029. The bad news is that the 
forecasts have not gotten any better.
    It should be patently clear by now that the long-term 
funding problems facing Social Security are not going to go 
away on their own. Congress is eventually going to have to take 
corrective action to put Social Security on a firm financial 
footing.
    I was encouraged by the statement of the Public Trustees 
which accompanied the Trustees' Report. They noted that there 
is an alarming erosion of public confidence in the Social 
Security system and that early attention to Social Security's 
long-range financial problems is vital in restoring public 
confidence in the program.
    I agree with them wholeheartedly. If Social Security loses 
the confidence of the American people, it loses its greatest 
strength.
    Throughout this hearing series, my goal has been to learn 
as much as possible about the reactions and thoughts of all 
segments of the population. Also testifying today are several 
advocacy groups who will present their different generational 
perspectives on Social Security reform. These groups are out 
there gauging the reaction of their members to the problems and 
proposed solutions to the Social Security system. Sometimes it 
is a lot easier to talk about what shouldn't be done, as 
opposed to what should be done. I believe I speak for everyone 
on the Subcommittee when I say that we are looking to you for 
real solutions that will work for your members.
    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. I yield to Congresswoman Kennelly for any statement she 
wishes to make.
    Mrs. Kennelly. Thank you, Mr. Chairman. There has been 
considerable discussion about whether the Social Security 
Program is facing a crisis or not. Some people conjure up 
doomsday scenarios and argue that the Social Security Program 
is unsustainable. Other people believe that we can maintain the 
status quo and ignore all warnings. The truth probably lies 
somewhere in between.
    It really doesn't matter whether we label the situation a 
crisis or not. The fact is that we need to take action to shore 
up the Social Security system. Prudence requires it. Social 
Security warrants serious and timely attention. The longer we 
wait, the more difficult the problems will become. A prudent 
homeowner does not wait until it rains to fix the roof. If we 
are slow in our response, there will be great damage done to 
our most successful government program.
    Our first two witnesses today, the Public Trustees of the 
Social Security system, should be able to tell us, better than 
anyone else, what the implications are if we fail to act. They 
can tell us what the consequences will be if we do not live up 
to our responsibilities to Social Security and the people of 
this Nation. I look forward to hearing their testimony. In 
addition, I'm anxious to hear from the other panel of 
witnesses. I hope they will have some suggestions to us about 
the future of Social Security.
    Thank you, Mr. Chairman.
    Chairman Bunning. If the first panel would take their seats 
at the witness table, we would appreciate that. The Social 
Security Public Trustees will be testifying first. They are Dr. 
Marilyn Moon and Stephen Kellison. Welcome to you both. Dr. 
Moon, if you would begin, we would appreciate it.

   STATEMENT OF MARILYN MOON, PH.D., PUBLIC TRUSTEE, SOCIAL 
            SECURITY AND MEDICARE BOARDS OF TRUSTEES

    Ms. Moon. Thank you. We appreciate the opportunity to be 
here this morning. As public trustees, Mr. Kellison and I 
believe that our role is really twofold: First, to make sure 
that the annual report is done with integrity and as much care 
and professionalism as possible. I am happy to report to you 
that we are very satisfied and, in fact, highly complementary 
of the professionalism of the actuaries who work for both the 
Social Security Administration and the Health Care Financing 
Administration. We have worked hard with them over the last 
year to ensure that great care is put forward in these 
estimates and we are very proud of them.
    Second, we believe another role is to promote public 
education and to help bring to the forefront some of the long-
term issues that this hearing is addressing. We are very 
appreciative, therefore, of being able to be here and 
contribute to that activity. This, we think, is very important. 
The Trustees' Report should serve as an early warning mechanism 
to highlight problems and to enable Congress to move in a 
timely fashion to improve and change the Medicare and Social 
Security Programs as necessary.
    As you mentioned in your opening statement, Mr. Chairman, 
the news, in a sense this year, is that there is no real news. 
Despite a careful look at the assumptions that go into the 
report and some actual changes in those assumptions, the dates 
that people focus on, for example, 2019 as the first year that 
Old-Age, Survivors, and Disability Insurance Program, OASDI, 
outgo exceeds taxes plus interest income, and 2029, the year 
when the combined trust funds' assets are exhausted, are the 
same as they were in 1996.
    That does mean we are 1 year closer, which gives one pause, 
but the news is that the trends look very much like people 
thought they would. That underscores that something needs to be 
done about these programs and it is not too soon to think about 
changes.
    We do know with some considerable certainty what is coming 
in terms of demographic changes, for example. What is less 
certain are some of the economic prospects. That is also where 
there is considerable hope of improvement but also uncertainty 
if things don't go as well as expected. But in general, we 
think that these are good estimates of what the future is 
likely to hold.
    We also believe that there is considerable urgency to take 
a look at the issue for several reasons. First, it is certainly 
better to do something sooner than later in a program this 
important--efforts that would help to reassure people that we 
are seeking balance in the program. Taking up this issue now 
also gives us more flexibility in the kinds of options that are 
possible. A whole range of options that could be addressed now 
could solve the problem--that is, put the program on a better 
financial footing. No one change is inevitable or required at 
this point in time. That is a real advantage of moving sooner 
rather than later.
    Moreover, any reductions in benefits or increases in taxes 
that might be necessary are smaller the sooner that they are 
enacted. For example, in our testimony we indicate that if we 
were to act now to raise payroll taxes--not something we are 
advocating, but rather using to illustrate the impact--the 
payroll tax would have to rise 18 percent more in all future 
years; that is, to about 6.3 percent rather than 5.35 percent 
in Old-Age and Survivors Insurance, OASI. But if we were to 
wait until 2025 to use the same solution of increasing taxes 
only, you would have to raise taxes by one-third to 7.22 
percent.
    These figures help to underscore how important it is to 
take on the issue sooner rather than later. Such an approach 
will also provide some reassurance, I think, to younger 
individuals that Steve will talk about in a moment.
    Let me close on one final note. Although this hearing is 
not about Social Security and Medicare together, when we think 
about a solution for these two very important programs, the 
demographics have the same impact on both of them. And once you 
decide what to do about Social Security, for example, you may 
take off the table elements that are important to the Medicare 
Program.
    I know this is not in your jurisdiction and it is difficult 
to take on two very complicated programs at once, but it is 
just important to note that both programs should be kept in 
mind when we talk about demographic changes.
    I know my colleague would like to say some additional 
things about some of the solutions and some of the reassurances 
for younger people. Thank you.

   STATEMENT OF STEPHEN G. KELLISON, PUBLIC TRUSTEE, SOCIAL 
            SECURITY AND MEDICARE BOARDS OF TRUSTEES

    Mr. Kellison. Thank you, Chairman Bunning and Members of 
the Subcommittee. It is a privilege to be here today to speak 
on behalf of the Public Trustees. As Dr. Moon has indicated, as 
Public Trustees, we do sense a primary responsibility to ensure 
that fair, accurate, and objective information about the 
financial condition of these programs is brought forward to the 
Congress and to the American public. And I totally concur and 
strongly agree with Dr. Moon that we are quite impressed with 
the integrity and the professionalism of the work that goes on 
within the Social Security Administration and the Health Care 
Financing Administration on these programs.
    The long-term financial challenges facing Social Security 
are largely demographic in nature. They really result from the 
existence of the baby boom generation, now beginning to enter 
their fifties, followed by a low birth rate, which has existed 
for the past 25 years. Compounding these demographic profiles 
of the population is the fact that life expectancy of the 
population in retirement has significantly increased over the 
past several decades and is projected to continue to improve.
    As a result of all of these demographic factors, the number 
of workers per beneficiary is expected to decline from its 
current level of 3.3 to only 1.8 at the end of the 75-year 
projection period.
    It is true that there is substantial uncertainty about 
making 75-year projections with any precision and there are 
ranges of plausible outcomes that can occur. However, the 
demographic conditions underlying the current problems are 
pretty well established and locked in and will take several 
decades to unfold.
    One of the key findings in the Trustees' Report is that 
even after the baby boom generation has totally worked its way 
through the system, costs do stabilize but at a significantly 
higher level than today. This, again, is the result of low 
birth rates and continued improvement in life expectancy.
    Throughout most of its history, Social Security has largely 
operated as a pay-as-you-go system. However, under current law, 
Social Security is currently running large annual surpluses and 
a large trust fund is accumulating. This trend reverses, under 
best estimate assumptions, in the year 2012, when the payroll 
tax income first falls short of benefit outgo.
    This large trust fund buildup, followed by a drawdown, has 
a profound effect on the Federal budget, since current annual 
surpluses offset deficits in the rest of the budget, but that 
will all reverse in only another 15 years.
    The trust fund buildup has led some observers to suggest 
that some type of advanced funding of the system be implemented 
so that trust fund buildup would become more permanent and not 
reverse itself. This could either be done through the trust 
fund directly or through the creation of some type of 
individual private accounts.
    These concepts underlie proposals contained in the report 
of the Advisory Council on Social Security, which would either 
invest some of the trust fund in equities or, alternatively, 
create individual private accounts. The rationale of people who 
make these proposals largely is in one or both of two areas. 
First, it would increase overall savings in the economy and 
thus hopefully improve future productivity; and second, it 
might increase public confidence in the future of the system if 
people saw that money was being set aside with their name on 
it, so to speak.
    One challenge that exists for any proposal to move from a 
pay-as-you-go system to one that has some significant degree of 
advanced funding is the need to finance the transition. This is 
a very substantial cost that would need to be financed over 
many years. In essence, one or more generations is put into a 
position of having to provide benefits to a prior generation, 
as well as providing some of their own benefits.
    These are intriguing concepts which deserve more analysis 
and discussion than they have received to date, but there are 
also some tough questions that would have to be answered. In my 
remaining time let me identify a few of these.
    First, investment in equities is motivated by trying to 
achieve higher returns, but in the process, risk is 
significantly increased. This is not only financial risk but 
also political risk. Is the extra return worth the risk?
    Second, would overall savings in the economy increase or 
would people simply move from one type of savings to another? 
If the savings is to be done through the trust fund, it would 
be necessary to balance the Federal budget exclusive of Social 
Security, rather than inclusive of it.
    And finally, another important macroeconomic question: 
Would any increase in national savings actually increase 
productivity and therefore make us a wealthier Nation that 
could afford a wealthier social insurance program?
    Those are some very important, tough questions that need to 
be addressed. At somewhat less level of detail are many 
implementation issues involving possible government ownership 
of equities, what to do about people who invest poorly or are 
unlucky, administrative costs, enforcement and regulation, 
whether people will be forced to annuitize or whether they 
might outlive their assets. Many of these kinds of questions 
that have faced the private pension system would be faced here.
    The point is that these proposals have a lot of advantages 
but they have some disadvantages. They are not magic bullets or 
panaceas, but they do deserve careful analysis and discussion.
    In closing, I would like to underscore our statement and 
Dr. Moon's statement that we are very concerned about public 
confidence in the system. It has eroded, particularly among 
younger generations. We do encourage the Congress to take 
action sooner, rather than later, because the more incremental 
changes can be made, people can have more time to plan their 
retirement and public confidence in the system would be 
improved. Thank you.
    [The prepared statement follows:]

Joint Statement of Marilyn Moon, Ph.D., Public Trustee, and Stephen G. 
Kellison, Public Trustee, Social Security and Medicare Boards of 
Trustees

    It is our privilege to be here today to testify regarding 
the financial status of the Social Security Trust Funds as 
shown in the 1997 Annual Report of the Board of Trustees of 
those funds. As you know, the Public Trustees are part-time 
officials appointed by the President and confirmed by the 
Senate to represent the public interest in this important 
process of public accountability. In our normal activities, Mr. 
Kellison is an actuary and consultant and Ms. Moon is an 
economist and researcher, both with extensive public and 
private experience in Social Security and Medicare.
    As Public Trustees, our primary activities are directed at 
assuring that the Annual Trust Fund Reports fully and fairly 
present the current and projected financial condition of the 
trust funds. To this end, we work closely with the Offices of 
the Actuary in the Social Security and the Health Care 
Financing Administrations to ensure that all relevant 
information is considered in the development of assumptions and 
methods used to project the financing of these vital programs. 
Mr. Chairman, we would note for the record what we are sure you 
and this committee know well: it is an extraordinarily complex 
task to make financing projections for these programs for the 
next 75 years. It is only through the high professionalism and 
decades of experience of the Social Security and Medicare 
actuaries that such projections are possible. But it is 
critical to remember always that these projections ultimately 
are only estimates and must necessarily reflect the 
uncertainties of the future.
    Thus, the projections in the Trustees Reports are most 
useful if understood as a guide to a plausible range of future 
results. And, as this hearing illustrates, the reports serve as 
an early warning system that allows us the opportunity to make 
changes in a timely and responsible manner.

             The Old-Age and Survivors Insurance Trust Fund

    In the 1997 report, the Old-Age and Survivors Insurance 
(OASI) Trust Fund, which pays Social Security retirement and 
survivors benefits, shows a positive balance at the end of 1995 
of $514 billion with a net increase in that year of $55.5 
billion. This fund has been taking in more in tax revenues than 
it has been spending for a number of years and is projected to 
continue in that mode through 2013. As the baby boom generation 
begins to reach age 65 after 2010, OASI benefit costs each year 
will increase rapidly and, beginning in 2014, will exceed 
annual tax income.
    However, the accumulated assets of the OASI fund, interest 
on those assets and tax revenues are projected to cover benefit 
outlays until 2031. Although the assets of the OASI fund would 
be exhausted at that time, tax income at rates provided under 
current law would provide approximately three-fourths of full 
benefit costs in 2031. By the end of the projection period in 
2071, the portion of benefits that tax income would cover is 
projected to decline to about two-thirds. Over the full 75-year 
period, the OASI fund shows a deficit of 1.84 percent of 
payroll, which is approximately 15 percent of the projected 
long-range cost of the OASI program.

                  The Disability Insurance Trust Fund

    Turning to the Disability Insurance (DI) Trust Fund, it 
also showed a net increase of $15.4 billion in 1996 and ended 
that year with a positive balance of $52.9 billion. As this 
committee is well aware, disability costs are more difficult to 
project than are retirement and survivors benefits. 
Historically, the Social Security Disability Insurance program 
has experienced periods of growth and decline for which causes 
cannot be established with certainty. In the early 1990's the 
number of workers applying for disability benefits increased 
rapidly, and there was great uncertainty whether this was a 
temporary or a long-term phenomenon. Actual experience since 
1993 shows that applications for disability insurance benefits 
levelled off in 1994 and have actually declined in both 1995 
and 1996 despite the fact that more people are moving into the 
prime ages for disabilities.
    Notwithstanding this recent experience, the DI program must 
be monitored closely in coming years as policymakers consider 
ways to close the deficit projected for this trust fund. The 
1997 Trustees Report intermediate projections show that the DI 
fund income will exceed expenditures through 2002, after which 
the fund will decline each year until it is exhausted in 2015. 
Over the 75-year projection period, the DI fund shows a deficit 
of 0.39 percent of payroll, or about 17 percent of the 
projected long-range cost.
    If the DI and OASI trust fund projections are combined, the 
exhaustion date for the combined funds is 2029, 14 years later 
for the DI fund and 2 years sooner than for OASI. On a combined 
basis, expenditures first exceed tax revenues in 2012. From 
2012 through 2018 interest income will be needed to supplement 
current tax income to meet costs, and in 2019 through 2029, 
current tax income, interest income plus a portion of the trust 
fund assets will be needed to pay benefits. Considered 
together, the OASI and DI programs have a projected long-term 
deficit of 2.23 percent of payroll, which represents an 
increase in the deficit of .04 compared to the 1996 projection.

                           Urgency for Action

    The purpose of the trustees reports is to provide the 
President, the Congress and the American people each year an 
updated estimate of the current and future financial condition 
of the Social Security and Medicare trust funds. In the early 
1990's, the trustees reports placed highest priority for action 
on legislation to prevent the exhaustion of the DI fund, which 
was then projected to occur in 1995. Such legislation was 
enacted in 1994.
    While the DI fund's financial problems were the most urgent 
in the early 1990's, the dramatic rate of growth of both 
Medicare Hospital Insurance and Supplementary Medical Insurance 
costs indicated even then that further legislation was needed 
to maintain the financial solvency of those programs and begin 
to reduce the rate of growth of heath care costs. We believe, 
as we have stated previously, that the most urgent priority now 
is to enact legislation that extends the date of exhaustion of 
the HI trust fund, which, as you know, is projected to occur 
early in 2001. We note further that, although HI's financing 
problem has received most of the attention recently, SMI's rate 
of growth historically has exceeded that of HI and is 
unsustainable over the longer run. Thus, legislation must be 
enacted quickly to reduce the growth of SMI expenditures in the 
near term and allow time for development of longer term 
solutions to financing the health care of the aged once the 
leading edge of the baby boom begins to reach age 65. The 
recent budget agreement includes a first step to improve the 
financial status of Medicare. However, it is only a modest down 
payment on narrowing the gap between Medicare's projected costs 
and income. Much more will be required to deal with the 
financial imbalance in Medicare as the baby boom generation 
approaches retirement.
    We have in no way intended by giving highest priority to HI 
and SMI financing in our statements to downplay the critical 
importance of beginning the difficult process of developing 
solutions to the projected future deficits of OASI and DI. With 
the progress on Medicare financing in the budget agreement, we 
would hope that the spotlight of legislative attention can be 
shifted to the long-range financing issues facing both Social 
Security and Medicare. In this regard, we commend you, Mr. 
Chairman, and this committee, for undertaking this series of 
hearings, and we are encouraged by the widening public 
discussion taking place regarding Social Security's future.
    The financing deficits facing OASI are smaller and further 
into the future than those facing Medicare, and immediate 
changes in OASI are not as imperative. Action should be taken 
soon, however, for several reasons. First, the earlier that 
changes are implemented the more incremental they can be. 
Second, enacting changes soon would permit time for workers to 
adjust their retirement plans. Third, there has been an 
alarming erosion of public confidence in the Social Security 
program over the past few years, particularly among younger 
generations. Early attention to Social Security's financing 
problems is vital in restoring public confidence in the 
program.
    Another important consideration regarding the timing of 
action on Social Security financing is that the sooner changes 
are enacted the more broadly can the burden of closing the 
financing deficit be distributed across different age groups. 
For example, if it were decided to raise payroll taxes to 
eliminate the OASI projected deficit, employers and employees 
each would have to pay about 18 percent more in all future 
years (i.e., about 6.3 percent rather than the 5.35 percent for 
1998). If the change were not effective until 2010, the rate 
would have to be increased to 6.57 percent, and if delayed 
until 2025, the tax rate would have to be increased by over 
one-third to 7.22 percent. Other types of changes would have 
similar increases in size if their effective dates were 
significantly delayed. Thus, while we have time to consider and 
plan carefully for necessary changes in Social Security, we 
should act as soon as support for a reform plan can be 
developed.

                  Approaches to OASI Financing Reform

    Social Security's financing deficit can be solved with OR 
without major structural change, but a first step may be to 
resolve the philosophical debate about the value of 
privatization. The exact form of any proposal is also crucial 
since it will determine the extent to which we focus in reform 
efforts only on the pension aspects of Social Security, on its 
social insurance characteristics, or on a continued mix of 
both. And while our political process does not always settle 
such debates neatly, we have every confidence a way to fix 
Social Security's financing problem can be enacted in a timely 
manner.
    Recent discussions of Social Security financing reform have 
been held in the context of the three plans put forth by the 
1996 Social Security Advisory Council. All of the plans discuss 
the possibility of investing the trust fund assets in equities 
or requiring individual workers to invest a portion of their 
wages on their own in individual accounts. The new approaches 
that have become part of the discussion regarding Social 
Security financing attempt to get outside the traditional box 
of tax increases and benefit reductions to meet rising 
retirement costs. They appear to be premised on the idea of 
increasing national savings to increase economic growth so that 
the cost of retirement when the baby boom generation retires 
and beyond will require a smaller portion of national income 
than it otherwise would. With a larger economic pie and higher 
wages, a given payroll tax rate would provide more income to 
the trust fund to pay benefits.
    To actually achieve faster economic growth, the income the 
trust fund receives in excess of current needs would have to 
add to national savings, and this can occur only if that excess 
is not used to offset increases in federal budget deficits. The 
prospects of that appear better now than at any time in recent 
years, but there is still a long way to go to reach that 
objective since the recent deficit reduction agreement still 
uses the current excess of Social Security taxes--about $79 
billion in FY 1998--to offset deficits in other parts of the 
budget. But assuming a way can be found to use the excess 
Social Security taxes to spur faster economic growth, the 
attractiveness of investing the trust fund reserves in private 
securities would increase. An alternative would be to allow 
workers to invest a portion of their payroll taxes in private 
savings accounts. Either alternative could channel part of the 
additional growth into retirement income, but both approaches 
raise very tough questions. These questions include, among 
others, whether net national savings actually would increase 
and be invested wisely; whether the burden of regulation and 
enforcement and administrative costs could be minimized; 
whether invested assets could be conserved and turned into 
retirement income; and what government's residual burden for 
retirement income through need-based programs would be. Most 
important, we must not be lulled into thinking that private 
investment in any form can magically solve all of the 
retirement income issues we face as a society in the decades 
ahead.
    Thus, while it would be foolhardy to rush to judgement on 
these new approaches that have been raised for meeting the 
rising costs of retirement, it is vital that as a nation we 
move ahead through informed debate toward resolving the Social 
Security long-range financing deficit. We are at a point in 
time where many options are possible. Further, since we cannot 
predict the future, it will make reaching agreement on changes 
easier if we recognize that searching for a set of changes that 
meet a specific point estimate 75 years into the future is less 
important than moving ahead soon with those changes that seem 
to make the most sense with full realization that Social 
Security cannot be insulated from future social and economic 
change. The strength of the Social Security program is that it 
can adapt as our national circumstances change. It is the 
acceptance of the necessity for change by all of us as 
individuals that is most difficult. This can be eased only by 
having the information we need to feel we understand why change 
is necessary and in which direction it should take us.
    A crucial part of the process to resolve Social Security's 
financing deficit must be the education of the American public 
so that they understand and accept both the need for change and 
the implications of alternative reform plans. We view this 
education responsibility as one in which the Public Trustees 
can play a role by expressing a factual, bipartisan view, and 
we welcome the opportunity to participate in this hearing and 
future efforts to bring the dimensions of Social Security's 
financing problem to the public.
    We have attached the four-page ``Message From the Public 
Trustees'' that is included in the Summary of the 1997 Annual 
Reports, as well as our biographical information. We thank you 
for the opportunity to present our views and will be pleased to 
answer any questions.

                          The Public Trustees

    Six people serve on the Social Security and Medicare Boards 
of Trustees: the Secretary of the Treasury, the Secretary of 
Labor, the Secretary of Health and Human Services, the 
Commissioner of Social Security, and two public members (of 
different political parties) appointed by the President with 
the advice and consent of the Senate. The Boards are 
responsible for reporting annually to the Congress on the 
financial operations of the Old-Age and Survivors Insurance 
(OASI) and Disability Insurance (DI) Trust Funds, the Hospital 
(HI) Insurance Trust Fund, and the Supplementary Medical 
Insurance (SMI) Trust Fund, and on the projected financial 
outlook of these funds for future years. The OASI and DI Trust 
Funds provide financing for the retirement, survivors, and 
disability benefits under Social Security, and the HI and SMI 
Trust Funds finance the Medicare program. In addition to the 
annual report to Congress, the Boards are required to notify 
the Congress immediately when the amount in one of the Trust 
Funds is unduly small and to review the general policies 
followed in managing the Trust Funds. The Public Trustees 
positions were created by the Social Security Amendments of 
1983 for the purpose of increasing public confidence in the 
integrity of the trust funds. Stephen Kellison and Marilyn Moon 
began 4-year terms as Public Trustees on July 20, 1995.

Stephen G. Kellison

    Stephen G. Kellison is Vice President and Chief Actuary of 
the Variable Annuity Life Insurance Company of Houston, Texas. 
Mr. Kellison dealt extensively with a variety of public policy 
issues as Executive Director of the American Academy of 
Actuaries from 1976 to 1988. He has also served on the 
faculties of the University of Nebraska-Lincoln and Georgia 
State University. Mr. Kellison is a Fellow of the Society of 
Actuaries, a Member of the American Academy of Actuaries, and 
an Enrolled Actuary under the Employee Retirement Income 
Security Act of 1974. He served a Chairman of the Technical 
Panel of Actuaries and Economists to the 1991 Advisory Council 
on Social Security and as Chairman of the Committee on Social 
Insurance of the American Academy of Actuaries. He also has 
held leadership positions within the actuarial profession, 
serving on both the Board of Governors of the Society of 
Actuaries and the Board of Directors of the American Academy of 
Actuaries. Mr. Kellison holds A.B. and M.S. degrees from the 
University of Nebraska-Lincoln and is an author, speaker and 
expert witness in the areas of actuarial science, insurance, 
and employee benefits.

Marilyn Moon

    Marilyn Moon is a Senior Fellow with the Health Policy 
Center of the Urban Institute in Washington, D.C. She is 
currently serving as Program Director for the Commonwealth 
Fund's Program on Medicare's Future. From 1986-1989, she served 
as Director of the Public Policy Institute of the American 
Association of Retired Persons. In the fall of 1989, she served 
as a consultant to the U.S. Bipartisan Commission for 
Comprehensive Health Care (the Pepper Commission). Earlier, she 
worked as a Senior Research Analyst at the Congressional Budget 
Office, and as an Associate Professor of economics at the 
University of Wisconsin-Milwaukee. Ms. Moon also is a founding 
member of the National Academy of Social Insurance and serves 
on its Board of Directors. Ms. Moon has written extensively on 
Medicare, poverty, health, income distribution, and long-term 
care issues. Her recent publications include Medicare Now and 
in the Future, ``Facing Up to Medicare's Challenges,'' and 
``Fostering a Rational Debate on Social Insurance.'' She 
received her Ph.D. in economics from the University of 
Wisconsin.

 From A Summary of the 1997 Annual Reports of the Social Security and 
               Medicare Board of Trustees, April 24, 1997

                  A Message from the Public Trustees:

    This is the second set of Trustees Reports in which we have 
participated since we began four-year terms as Public Trustees 
on July 20, 1995. Our goal as Public Trustees is to ensure the 
integrity of the process by which these Reports are prepared 
and the credibility of the information they contain. We are 
honored that the President and the Senate have entrusted us 
with this responsibility. Further, although we are of different 
political parties, we approach our work as Public Trustees on a 
bipartisan basis because we strongly believe that this is the 
only way through which financial problems facing Medicare and 
Social Security can be solved. It is in this vein that we offer 
the following observations regarding the 1997 Annual Reports.

Informed Debate Is Needed

    This year may finally mark the beginning of serious 
consideration of the future of Medicare and Social Security. 
The publication of the Social Security Advisory Council's 
report offering three very different approaches to the long-run 
financing problem facing Social Security has brought increased 
attention to that program, although it also illustrates that we 
have a long way to go before reaching consensus on a solution. 
The debate thus far on Medicare's future has focused on the 
need to achieve short-run savings to extend the life of the HI 
Trust Fund beyond 2001. But even this discussion has directed 
some attention to the longer run problems facing Medicare after 
2010 as a result of the aging of the baby boom generation.
    We welcome these discussions and hope that the trust fund 
reports and this Summary contribute to the factual basis 
necessary for an informed debate. The numbers contained in 
these reports are sobering, but their magnitude should not 
cause us to choose inaction as the appropriate response. 
Indeed, Americans need to become actively engaged in the debate 
about changes in these programs because the choices we make (or 
fail to make) in the next few years will carry important 
consequences for all of us. The aging of the baby boom 
generation will place heavy demands on both Social Security and 
Medicare, requiring substantial changes and sacrifices by some 
or all Americans.
    A key point to remember as the debates go forward is that 
while Social Security and Medicare are large and complicated 
programs which are usually considered separately, they are 
clearly interrelated. Together, these programs form the 
foundation that Americans depend upon in retirement, both are 
vying for the same limited resources, and in the long run the 
shape of both programs will be driven by the same demographic 
forces that are leading us to an aging society.

Medicare

    A major focus of issues facing Medicare is the imminent 
exhaustion of the HI Trust Fund. Under the intermediate (best 
estimate) assumptions in the 1997 Annual Reports, the fund will 
be depleted in early 2001--only 4 years from now. Legislative 
changes should be made this year since most proposals for 
slowing the growth in spending have their greatest impact only 
after several years. Even so, changes enacted this year to slow 
Medicare's growth would achieve most of their savings in the 
year 2000 and beyond, dangerously close to when the HI Trust 
Fund will be exhausted. Further, starting in 1995, income to 
the HI Trust Fund has been less than expenditures, and the HI 
fund has been drawing on its assets to meet the shortfall. In 
every year that passes without change, we will have to consume 
more and more of the trust fund's assets to meet current needs.
    But focusing so heavily on HI's immediate problem diverts 
our attention from SMI, which has grown more rapidly than HI 
over Medicare's history. These two parts of Medicare are 
financed very differently and as a consequence, they have 
separate trust funds. But in practice, HI and SMI are just two 
parts of one program, and over time there has been shifting of 
benefits between them. Also, the factors that are driving up 
the costs of each part of Medicare are the same--better but 
more expensive medical technology, more medical care per 
person, and an aging population. Continued SMI growth at 
current rates will ultimately lead to costs which exceed the 
capacity of the funding sources--Federal general revenues and 
beneficiary premiums--to provide benefits.
    Thus, the need to act quickly on the financial problems 
facing HI should not lead us to ignore SMI. Like HI, SMI's 
growth is unsustainable over time. Therefore, Medicare 
legislation this year should include changes in SMI as well as 
in HI.
    Another fact which should be recognized in the debate about 
changes in Medicare is that, as history shows, the program must 
adjust every few years to changes in healthcare technology, 
methods of delivery and utilization. If we can say one thing 
that we think would be helpful in the public debate on Medicare 
financing, it is that there are no magic bullets for solving 
the problem of high rates of healthcare spending. Therefore, 
even major legislation this year cannot fully resolve the 
issues of healthcare cost growth. We should expect that further 
legislative action will be needed even before tackling the 
increase in Medicare costs that will occur when the baby boon 
generation begins to retire.
    Addressing the long-run issues will be difficult and 
challenging under any circumstance. However, finding longer 
term solutions will be facilitated if we can improve the 
current Medicare program, find legitimate short-run savings, 
and improve the balance between the traditional program and 
private plan offerings under Medicare. These short-run 
challenges will likely demand continuing vigilance and 
legislation over the next decade.
    Do the challenges facing Medicare mean that it cannot be 
continued? No! But Medicare cannot stay exactly as it is and it 
is misleading to think that any part of the program--
beneficiary premiums, provider payments, controls on 
utilization, covered services or revenues--can be exempt from 
change.

Social Security

    The cash benefits programs (OASI and DI) face longer term 
challenges. The aging of the baby boom generation will also 
increase OASI expenditures, but OASI annual income, including 
interest, will exceed outgo for almost 25 years. Thus, the 
financing deficits facing OASI are smaller and further into the 
future than those facing either HI or SMI. Immediate changes in 
OASI are not necessary and the magnitude of the program changes 
that will eventually be needed will be less than those required 
for HI and SMI.
    Action should be taken soon, however, for several reasons. 
First, the earlier that changes are implemented the more 
incremental they can be. Second, implementing changes soon 
would permit time for phasing them in and for workers to adjust 
their retirement plans. Third, there has been an alarming 
erosion of public confidence in the Social Security system over 
the past few years, particularly among younger generations. 
Early attention to Social Security's longer range financing 
problems is vital in restoring public confidence in the 
program.
    The Advisory Council on Social Security has put forth three 
different approaches to deal with the long-run financing 
problem in OASI. Those and other plans deserve serious 
discussion now so that reform legislation can be developed in 
the next few years which can gain the support of the American 
public. Some of these proposals would introduce fundamentally 
new concepts into the system, such as investment of the trust 
fund in common stock or the creation of individual accounts. 
Such proposals represent a profound shift in philosophy and 
would have significant ramifications. These ramifications 
deserve careful examination and consideration by policymakers 
and the American public before any changes are made.
    Even in OASI, however, it should be possible to begin 
making adjustments to pave the way for longer run solutions. 
For example, improvements in the CPI to provide a more accurate 
measure of the cost of living should be actively sought and 
adopted for calculating Social Security annual cost-of-living 
adjustments. The future of the program requires not only that 
we make changes as soon as possible but also that we 
demonstrate to younger Americans a commitment to a viable 
retirement system that they can be assured will serve them in 
the future.
    The DI Trust Fund faces other challenges. After significant 
increases in DI costs in the early 1990's, experience from 1994 
through 1996 shows that applications for DI leveled off during 
this period. However, the DI program has, throughout its 
history, experienced periods of growth and decline for which 
causes cannot be established with any precision. Consequently, 
the DI fund should be carefully monitored and its experience 
assessed in developing legislation to close the deficit 
projected in the DI fund in the decades ahead.

Conclusion

    We are privileged to take part in the thorough and careful 
process by which the Annual Reports are prepared to provide 
this vital public accounting. We strongly believe that these 
Reports serve as an early warning of the need for changes to 
ensure continuation of these programs and not as evidence of 
their failure to protect future generations. Working 
cooperatively, with informed public debate, we believe 
solutions can be found to the financing problems facing America 
as our population ages, and it is in this spirit that we will 
pursue further efforts at public education on Social Security 
and Medicare issues during our terms as Public Trustees.
      

                                

    Chairman Bunning. Thank you both for your testimony. I 
would like to start the questioning.
    Given that you are Trustees for both the Social Security 
system and Medicare Programs, do you have an opinion about 
whether the problems of one should be addressed before the 
other, or should we take them on at the same time as part of 
comprehensive reform legislation? Listening to your testimony, 
Dr. Moon, you suggested almost that but I am not sure I 
understand what you were saying.
    Ms. Moon. Medicare has to be addressed first in terms of 
the problems that arise because of higher health care costs. 
The changes that are being proposed this year to reduce the 
rate of spending on the program and bring it down substantially 
are a good first step in that direction.
    My personal view is that we will have to continue to look 
at health care spending problems for some time. We are still 
shaking out the health care marketplace for private plans, and 
Medicare is going to have to change over time as those changes 
occur. It is not going to be easy to tame that health care cost 
tiger.
    On the other hand, Medicare and Social Security, in the 
long run, face very similar problems in terms of the 
demographics. Most Americans believe these two programs are 
integrally related and important.
    My concern is not that they have to be taken at the same 
time or at the same moment in time, but rather, there needs to 
be a recognition, for example, that if we decide to use 
additional revenue sources to help bolster one program and take 
all the relevant taxes off the table before we turn to the 
other, that will place problems on the remaining program.
    The other thing I would note is that people have 
traditionally thought of Medicare as the small piece appended 
to Social Security. But by about the year 2020 or a little bit 
after that, the combined parts of Medicare will be larger than 
Social Security. So from that standpoint, I think we also have 
to be very cognizant of Medicare.
    I am not sure that they have to be taken together. I think 
it is essential to keep in mind what you are doing to the other 
program when you are operating on one of them.
    Chairman Bunning. Well obviously, the fix that we are 
proposing or the agreement that has come between the White 
House and the Congress on Medicare, is a temporary, 10-year, 
possibly more, fix on the funding for the Medicare system. We 
are going to have to reexamine that very shortly to make sure 
that we build in some solvency past the year 2010.
    The recent Social Security Advisory Council has provided us 
with three basic plans or approaches to address the system's 
long-range financing problems. Do either of you have a 
particular favorite among those three choices that they brought 
before us in their testimony?
    Mr. Kellison. The answer to that question is no. Our role 
is----
    Chairman Bunning. That is what we thought.
    Mr. Kellison. Our role as Trustees really does not involve 
trying to develop policy recommendations and policy solutions. 
That is not within the scope of our assignment and I think we 
would diffuse our efforts and our real primary responsibilities 
if we did that.
    These proposals are very detailed. I think the thing we 
tried to extract in talking about them briefly here today at 
this point in time are the concepts that are in there because 
they are new concepts. Social Security basically has not 
changed in 60 years in terms of its financing structure. It is 
basically a 50 : 50 sharing on a payroll tax between employer 
and employee.
    Chairman Bunning. Let me interrupt because I want to ask 
this question while I still have the orange light. Do you 
believe that each or all would solve the solvency problem if 
either of the three were enacted by the Congress? Is is one 
better than the other or are they all equally mediocre?
    Ms. Moon. I like to think of them as three different kinds 
of approaches, rather than focusing on the exact specifics of 
each option. My guess is that is how the Advisory Council would 
like to have them viewed, as well. That is, no one member might 
have locked into exactly all the elements of the proposal he or 
she voted for if they were developing their own specific 
option.
    You could solve the problem with any of those approaches 
and that is the relevant way to look at them, as opposed to 
arguing that only one of them can solve the problem.
    Another important piece of the debate over Social Security 
is to find out what young people who will face this new system, 
if we change it substantially, feel about it. Steve and I will 
probably not be faced with a brand new system, so it is not as 
critical for us as it is for younger people.
    Chairman Bunning. Thank you very much.
    Mrs. Kennelly.
    Mrs. Kennelly. Yes, Dr. Moon, but part of the problem is 
that we in the Congress and the people as a nation do not want 
to face up to something until it is in crisis proportion. I 
know that you are not policymakers but you know more about the 
system probably than anybody else.
    Let me delve a little deeper into the question that the 
Chairman asked you. We now have these three approaches from the 
Council and we all talk about them. Are we getting ourselves 
into a box? Are we just looking at these three proposals and 
not thinking maybe there are other answers?
    I know one of the things you just said was maybe a mix of 
these three proposals, but are there other ideas out there? Are 
we dangerously locking ourselves into just a few situations?
    I don't feel we can accept the status quo. I really feel 
the demographics don't lie. But knowing all your knowledge, is 
there some way we could get outside the box a little more, to 
get some more input into this, rather than locking ourselves 
into these three approaches?
    Mr. Kellison. I think there probably are a number of 
different ways to do it. To cite one illustration, for example, 
there are certain key factors that have been identified as 
having a pretty profound effect. We hear discussions, of 
course, about the importance of the Consumer Price Index, CPI, 
getting a better measure of what the real cost of living is.
    As we have indicated, life expectancy has increased 
substantially, yet the retirement age has stayed the same and 
is scheduled to increase very slightly in the next few years 
but still considerably less than life expectancies have 
improved. That has a profound effect on the system.
    Productivity gains, real wage gains in the economy have 
been very low in the last 25 years. We see some hopeful 
economic signs today but we still are far below the kinds of 
growth rates in the economy that we saw back in the fifties and 
sixties.
    And the question there is a richer society can afford a 
richer social insurance program; a less wealthy society maybe 
cannot afford as much. Should the benefits be adjusted, 
depending on the wealth of the economy?
    So there are other ways of looking at the system and 
finding some possible solutions to it.
    Ms. Moon. Most of the building blocks for change are in 
those proposals. There are a few others that could certainly be 
added to the list.
    I also think that one thing that hasn't been discussed as 
much that might be talked about is the fact that there are some 
changes that one could make sooner rather than later while you 
are continuing to debate broader reforms changes.
    It is not necessary, for example, since there is not 
consensus as yet, to lock into a decision about private 
investment or private accounts. On the other hand, there may be 
some moderate changes to the Social Security Program that you 
might decide to make, some of which have been mentioned in all 
those plans. Full inclusion of State and local workers is just 
one example. Perhaps some change or slight speed up in the age 
of retirement that is now set in law could be made as well.
    Some of those changes might be considered separately as 
ways of making a downpayment on the future and providing some 
reassurance to younger people that you are moving in a 
direction to change the program without making final decisions 
on big structural changes.
    Mrs. Kennelly. Dr. Moon, I thank you for that because we 
keep forgetting the three plans had numerous agreements among 
them and yet the bottom line was very, very different in the 
plans.
    Mr. Kellison, you mentioned the CPI. In this budget 
proposal we have, it looks like there is every intention to 
reduce the CPI downward by 0.3 percent. Will that have an 
effect, or if that number was higher, what is the effect on the 
Social Security deficit down the line?
    Mr. Kellison. Well, it is fairly substantial. If you just 
have a lesser CPI indexing on benefits and no other effects, it 
can be pretty substantial. I do not have the exact numbers in 
front of me on what that would produce, but it is a significant 
issue. We, I think, have looked at some projections of that 
sort that we would be happy to provide the Subcommittee.
    Mrs. Kennelly. My understanding is that if you made that 
kind of change, it would reduce the deficit by something less 
than 4.4 percent. In contrast, if you increased the retirement 
age, you would save 5.5 percent. Is this an area we should be 
looking at in relation to how we make these changes?
    Mr. Kellison. Well, I think it is. In terms of the current 
structure of the system, setting aside the more structural 
types of proposals that we have been talking about, the two 
areas in which most attention has been paid and could be paid 
is the area of the CPI indexing and the area of the retirement 
age, and both of those do have very substantial impacts on the 
cost of the system.
    Mrs. Kennelly. Thank you, and I thank you for your 
testimony. I don't know how we do this but it sometimes seems 
to me when people get into a position and they know so much and 
they have such good judgment, somehow that knowledge has to be 
used by all those who don't have that same kind of 
understanding. I don't know; maybe we can figure out a way that 
you could tell us your most secret thoughts on how we could fix 
this problem. Thank you.
    Chairman Bunning. Your most secret thoughts in public.
    Mr. Christensen.
    Mr. Christensen. Thank you, Mr. Chairman.
    Mr. Kellison, welcome. As a fellow Cornhusker, I see that 
you got most of your education in Lincoln.
    Mr. Kellison. That is correct.
    Mr. Christensen. I am glad that you are here. I want to ask 
you, as I have had an opportunity to go out and visit with the 
schools, there is absolutely no confidence, zero confidence in 
our schools today--the seniors, the juniors that are out there 
in the work force on a part-time basis working after school--in 
terms of ever seeing the money that they are putting into the 
system now coming back to them in 40 years, 45 years.
    What can be done, in your opinion, to educate the public to 
begin a process of educating the young people of the status of 
Social Security--where it is, what can be done, how it can be 
saved, where actually they stand as a high school senior and 
where they stand as a 65-year-old individual? What are your 
thoughts on this, as an actuary?
    Mr. Kellison. Well first of all, I certainly agree with 
your perception. I personally was not aware of the depth of the 
lack of confidence in Social Security among the younger 
generation until I started this assignment and started giving 
some talks to some groups where the average age was quite young 
and it was an eye opener, so I certainly share your perception 
that there is a serious issue there of confidence in the 
system.
    I think it certainly would be helpful if several things 
were done. The Social Security Administration I would like to 
see try to launch more of a public education program about the 
system and what it is and what it isn't. I think, for example, 
some people perceive that in the year 2029, if we didn't do 
anything, the Social Security Trust Funds will be bankrupt.
    I guess the trust fund would be out of money yet the 
payroll tax income would still provide about 75 percent of the 
benefits. So it is not like it is hopeless. Clearly something 
should be done long before that point in time but it is not 
like there are no resources left at all.
    So there are a lot of misconceptions about various things 
of that sort. And as we indicate in our testimony, we would 
certainly encourage the Congress to deal with this sooner 
rather than later. I think some action on the part of Congress, 
even if you didn't necessarily solve the whole problem at once, 
in a sense, incremental action even would be helpful so that 
the American people would have confidence that Congress is 
paying attention to this program and is concerned about putting 
it back on financial standing.
    But there is a definite public education need there, 
particularly in the schools and the younger generation.
    Mr. Christensen. As far as the incremental action that you 
mentioned, how do you feel about the possibility of using the 
markets in terms of a small percentage of the investment?
    Mr. Kellison. Well again, that gets into the specifics of 
these proposals. I think there are some positives and negatives 
to it. Our analysis of it is that a lot more needs to be looked 
at in those proposals. I think there are some attractive 
features to do that and I think it would improve the public 
confidence potentially, but I think there are a lot of 
questions that would need to be answered on the administrative 
side and how it would fit into the rest of the Federal budget, 
for example, that we haven't really dealt with.
    So it is a promising idea in some respects but I think 
there is a lot more analysis that needs to be put into it.
    Mr. Christensen. If you polled the seniors and talked to 
them, as you have had an opportunity to be out there in the 
schools a little bit, and J.D. and Kenny and the rest of us 
here on the panel get an opportunity all the time to talk to 
the kids in schools; there is not one of them that doesn't 
think they can do better at investing their money in the market 
than what the Social Security system has been investing the 
money at, in terms of a return.
    So I guess, as a younger Member in Congress here, I would 
like to implore your leadership in this area in terms of 
getting out there and speaking about the issue that I think is 
going to affect the future generation.
    It is sad to see that when you talk to the seniors, there 
is no confidence in the system and they are very frustrated. 
They feel like they are helpless. They feel like they are 
sending all this money to Washington and they have no idea 
where it is going other than to a deep, dark, black hole and 
they will never see it again. And even though, as you say, 75 
percent of the funding will still occur at 2029 to meet the 
obligations, from an actuarial standpoint it would be out of 
money unless we are able to do something.
    There are a lot of proposals on the table. I think that 
Senator Kerrey has been the leading proponent in this area and 
I would encourage our Subcommittee to tackle this, to look at 
it, to see if we can't figure out some way to save the system, 
to do the right thing and the responsible thing, and I thank 
the Chairman for holding this hearing and I thank you, Mr. 
Kellison and Dr. Moon, for your testimony.
    Chairman Bunning. Mr. Neal.
    Mr. Neal. Thank you, Mr. Chairman. Again, I think that 
these hearings are helpful in the sense that they give us all 
an opportunity for some instructive discussions. And while we 
might have disagreements about where we are headed, I think we 
all acknowledge that we are going to have to do something to 
shore up the Social Security system.
    Mr. Kellison, in your testimony you talked about a 
transition stage and you indicated that it might be expensive 
in that stage of transition. I think we all acknowledge that 
there are going to have to be steps taken to reinforce the 
contract with our retirees over Social Security and future 
retirees. What are some of those transitional steps that you 
would suggest to us this morning?
    Mr. Kellison. The point I was trying to make is that under 
a pay-as-you-go system, basically the benefits that are being 
provided today are essentially coming out of the payroll taxes 
that are being paid today. These proposals, either through the 
trust fund or through private investment accounts, in essence 
would try to advance-fund at least part of the obligation and 
to do that requires, of course, more money because not only are 
you paying the benefits to the current retirees, but you are 
also trying to advance-fund some of the benefits for the 
existing work force.
    Right now we are running some surpluses so a lot of these 
proposals do involve at least trying to somehow take advantage 
of that excess and I think Senator Kerrey's proposal that Mr. 
Christensen recommended is essentially built around that idea.
    But basically we do have to go in that direction. If we are 
going to advance-fund it, it will cost more money on this 
transitional basis. If this works the way some people think 
that it should work, it will increase the overall rate of 
savings in the economy, which would improve productivity.
    So that is really the goal, is to structure it in a way 
that would achieve that objective.
    Mr. Neal. What about expanding IRA accounts? Do you have 
any thoughts on that?
    Mr. Kellison. I think basically it is important to have a 
viable private pension system to support Social Security. We 
have a three-legged stool and now some people are talking about 
a four-legged stool, which involves work in retirement.
    We need to have a strong private pension system through 
employer-sponsored plans, as well as through IRAs. I don't have 
any particular proposals on IRAs directly but I certainly am 
strongly supportive of trying to simplify the administration of 
private pension plans. I try to encourage more employers to 
have them so that more can be delivered through private pension 
plans, as well as to supplement what Social Security is doing.
    Ms. Moon. There are two issues that your question about 
IRAs raises. One is that Social Security is supposed to be the 
base and we want people to have private savings or pensions 
that supplement that base. When we talk about changing the 
Social Security system so that that base itself involves more 
investments with risks attached and since private pensions are 
an element that may have risks attached, we need to think 
comprehensively about how much should be a base that represents 
a very secure investment and how much should be put into 
riskier and potentially higher return investments?
    It is important to think about both Social Security and 
these additional savings and pensions that people have.
    Second, IRAs raise an additional question about how much 
they have helped to contribute to national savings. Do people 
simply shift from one type of savings into another? Certainly 
some of the early analysis done on IRAs hasn't found that they 
have particularly helped to expand national saving. We haven't 
been very good as a country at finding ways to encourage 
Americans to save more overall, as opposed to shifting from one 
form of an account to another. That raises some cautions in 
thinking about whether we are going to be successful in moving 
in that direction in Social Security reforms as well.
    Mr. Neal. If you expand income levels for contributing to 
the IRA, does that not make some sense?
    Ms. Moon. It may make some sense and it may be a good thing 
to do. My only caution is that we sometimes think that by 
providing preferences to people to hold savings in a certain 
way, we will increase the aggregate amount of national savings 
that occurs, and it doesn't always happen that way.
    Mr. Neal. Thank you, Dr. Moon. Thank you, Mr. Kellison.
    Chairman Bunning. Mr. Hulshof.
    Mr. Hulshof. Thank you, Mr. Chairman.
    I respect each of you and your hesitation, if that is the 
correct word, in endorsing or not endorsing any of the 
proposals, because that is certainly not your role.
    So since we are talking in more general terms, why has 
there been an erosion in public confidence in Social Security? 
Hasn't Social Security been a successful program?
    Ms. Moon. I believe Social Security has been a very 
successful program. I think of it in a couple of different 
contexts. One is I think there has been an erosion of 
confidence in government in general and that affects Social 
Security.
    Second, there is a recognition on the part of young people 
about the demographic bulge and it doesn't take a lot of 
thought to imagine that it is going to be more difficult to 
afford the same level of benefits in the future as we have in 
the past.
    Some of the poll results that I have seen that suggest that 
people say Social Security as we know it today will not be 
there when I am 65 are appropriate. I don't think Social 
Security exactly as we know it right now will be there in 20 
years. I think that is a recognition that there needs to be 
some changes.
    The question has been do people think it won't be there at 
all? I hope that they won't. I fear that sometimes in trying to 
beat the drum and say changes need to be made, that we may push 
people into panic and imply that there is no solution. You have 
to find the right balance here of saying that there are 
problems that need to be addressed, but these are not 
insurmountable problems.
    Mr. Hulshof. I think Mrs. Kennelly was right on point. Here 
in this body we focus on things when they become crisis 
situations, even when the crises sometimes are of our own 
doing. But should we be going back to our respective districts 
and talking about the positive things about Social Security and 
looking at--I think, Mr. Kellison, you mentioned the words--the 
demographic realities that are ahead of us. Should we be 
talking in more positive terms about what has happened in 
Social Security?
    Mr. Kellison. I would certainly support that. I think that 
you, as Congressmen, would be in a very strong leadership 
position with constituents to try to carry that message. I 
think the demographic trends are real. They are there. They are 
pretty well established and they are going to be around for 
many decades. I think that people can understand that when you 
talk in terms of 3.3 workers per beneficiary dropping to 1.8.
    Going back to your first question, some of the reasons for 
loss of confidence, in addition to those cited by Mrs. Moon, 
really have to do with people who do perceive that they are not 
getting as good a return on their money and they could do 
better on their own. I think the fact that we have had, in past 
generations, much higher benefits in relation to what people 
paid into it, that was because it was an early system. It 
hadn't fully matured yet. In a sense, those might have even 
been thought of as windfall benefits by some. On a moneys 
worth-type of basis, some of that has gone down.
    On the other hand, to be fair about it, rates of return on 
the stock market have been booming now for over a decade. 
People are used to things that may not happen over long periods 
of time.
    We do have a lot of benefits that some people forget about 
in Social Security that are part of the picture, too. We have a 
lot of survivors benefits, which is somewhat like life 
insurance. We have a lot of disability benefits.
    So I think when people say that they could do better on 
their own, that may or may not be true, but I think to have a 
fair comparison, we do need to recognize that there are a lot 
of benefits in Social Security, such as survivors benefits and 
disability benefits, that typically they wouldn't be thinking 
of doing on their own.
    So I think it is important, if people are going to get into 
that analysis, to do it on a fair comparison basis.
    Mr. Hulshof. Mr. Kellison, you mentioned, along with the 
demographic realities, political realities and you also 
mentioned CPI, so here comes this question. Should we fix CPI--
we, being Congress? Should politicians take on the task of 
adjusting CPI or do you believe it is best left to the 
jurisdiction of the Bureau of Labor and Statistics, BLS?
    Mr. Kellison. Well, what we would like to see, as Public 
Trustees, is to have CPI developed by the BLS to be as fair a 
measure of inflation as possible, and that is what we think is 
intended. And if there is to be indexing to full CPI under 
Social Security, that is the index that, under current law, we 
feel would be appropriate.
    In terms of whether you might artificially consider 
something less than that as a financial savings measure is 
really another issue. I think our primary focus is to get a 
fair measure. That is clearly a BLS issue. The other is a 
political issue that we really would not be involved in.
    Ms. Moon. A lot of measures that we use and rely on are not 
perfect measures. To a certain extent, it has been convenient 
to focus on the CPI because its bias is in a direction that we 
think if corrected would help in reducing Federal Government 
expenditures and hence balancing the budget.
    My view is that it is better to rely upon the BLS and use 
as good a measure as possible. If one decides to change the CPI 
artificially, we should just recognize that that is an 
artificial change and it is not ``fixing'' the CPI.
    Mr. Hulshof. Thank you, Mr. Chairman.
    Chairman Bunning. I would just like to ask both of you if, 
in fact, we used all of the money from the Federal Insurance 
Contributions Act, FICA, tax to go to old age retirement 
benefits, how much more would that save the system? In other 
words, if there were a separate program for survivors and 
disability, how much would that be?
    If I take a portion of FICA tax and invest it in something 
other than government bonds and I get a rate of return on that, 
I don't figure in how much the survivor benefit or the 
disability benefit is going to be. So what portion of that 
program is being charged off for survivors and disability?
    Ms. Moon. Disability is easy to sort out because it is 
separate in the program, so you can estimate that.
    Chairman Bunning. I am trying to combine the two. You look 
at the rate of return we are getting and you look at the rate 
of return you get from private investment, and there is a major 
difference.
    Ms. Moon. So we are talking about 5.35 percent right now 
each, for employers and employees, for OASI. The problem with 
survivors and dependents benefits, though, is that many people 
who receive them usually get a combination of survivors or 
dependents benefit and their own work employment benefit, so I 
don't know that that is a very easy figure to pull out. For 
example, when I retire I may get a dependents benefit from my 
husband but I still will have made a lot of contributions 
myself, and my dependent benefit is just an additional amount 
above my own benefit.
    Chairman Bunning. The difference.
    Ms. Moon. The difference, right. So I think that one would 
be tough to pull out. I don't know if you know.
    Mr. Kellison. The disability insurance, DI, part is quite 
clear. As Dr. Moon has said, it is 0.85 out of the total of 
6.2, leaving the OASI Program at 5.35 employer and employee. 
There are a lot of definitional problems that Dr. Moon is quite 
right about. For ballpark purposes, something perhaps in the 
4.5-percent range probably is----
    Chairman Bunning. Our rate of return?
    Mr. Kellison. For retirement, and the rest of it being 
survivors, is sort of a rough rule of thumb that we use in the 
private sector. Social Security integration in private pension 
plans, I think, uses 4.7 as the strictly retirement piece. That 
may be a tough high, but something around 4.5 to 4.7 are the 
numbers that are typically used for that. But again, there are 
a lot of definitional issues. To try to carve out the survivors 
benefit is not an easy thing to do.
    Chairman Bunning. I don't want to try to answer Mr. 
Christensen's real problem with confidence but when, for the 
last 10 years, you have seen an Standard & Poor's, S&P, rate of 
return over 20 percent or thereabouts, 18 points whatever it 
might be, and then you look at the increase in the ability of 
Social Security to bring in dollars, with the law stating that 
they have to do it in government bonds, that may be a reason of 
no confidence for our young people looking at the rate of 
return on Social Security and the fact that it might not be 
there when they get older or the system won't be the same.
    We know it is not going to be the same in the year 2030 
because we are going to have to change some of the things that 
are in the system to make it more financially solvent. So I 
don't know how we are going to get that message to our young 
people, particularly my children and my children's children. It 
is a very difficult thing to do because we don't have the 
answer right now.
    That is what we are asking you and other people that appear 
before this Subcommittee, to try to get a consensus on answers 
so that we can then look at the options and say ``Here are our 
suggestions for making this solvent down the road.'' We can 
always bring in every expert we can find and they are all going 
to have a different answer. It is going to be up to the 
Congress, as it was in the early eighties, to actually sit down 
and make the decision as to which direction we want to take the 
system, with the confidence and support of the American people, 
not with everybody picking each other apart. This is the 
easiest thing in the world to pick each other apart on, just 
like Medicare was.
    [Questions were submitted by Chairman Bunning to Dr. Moon 
and Mr. Kellison. The questions and responses follow:]

    Question 1. Recognizing that the Trustees' ``intermediate'' 
projections represent a ``best guess'' about the future condition of 
the system, if you were to lean in one direction or the other would it 
be toward the ``high cost'' or ``low cost'' projections?
    Answer: Due to the complexity of the many factors that determine 
Social Security income and expenditures and because the future is 
inherently uncertain, the annual OASDI Trustees Report provides 75-year 
financing projections for Social Security under three alternative sets 
of economic and demographic assumptions to show a range of 
possibilities. These assumptions are reexamined each year in light of 
recent experience and new information about future trends, and are 
revised if warranted. Therefore, the projections under the intermediate 
set of assumptions in the most recent annual Trustees Report represents 
the Trustees ``best estimate'' at any point in time of Social 
Security's future financing. In our view, there is no basis for 
``leaning'' in one direction or the other; if new information indicates 
that future experience is likely to vary from that indicated by the 
most recent sets of assumptions, all three sets of assumptions will be 
reviewed, and one or more sets revised as seems appropriate in the next 
annual report.
    For policymaking, we think the more critical point is that because 
we cannot predict experience over the next 75 years with certainty, we 
should not allow ourselves ever to lapse into thinking that we can 
design a set of financing provisions that will keep Social Security in 
perfect financial balance for 75 years. Rather, what we should do is 
make policy changes whenever the need for such change seems evident, 
just as we revise the assumptions whenever new information indicates 
revision is needed. We believe public confidence in Social Security can 
best be maintained over the long run by openly acknowledging that 
adjustments in Social Security will be needed periodically as economic 
and demographic experience unfolds in future years. If that experience 
is more favorable than the Trustees intermediate assumptions, Social 
Security benefits could be increased or payroll taxes reduced in the 
future; conversely, if experience is less favorable, benefit levels 
would need to be reduced or taxes increased. But what is critical for 
the public to understand is that U.S. economic and demographic 
experience in the years ahead will affect not just Social Security 
financing but every aspect of our society. For example, if the 
productivity of American workers could be increased through better 
education and/or improved technology in the future, not only would the 
standard of living of those workers and their families be increased, 
but Social Security financing also would be improved.
    Question 2. In light of the fact that the Trustees' long-range 
``intermediate'' projections made in 1983 now appear to have been 
optimistic, if one were to ask you to design a package of reforms 
today, would you use the ``high cost'' forecast in your recent report? 
Said another way, should Congress build a financing cushion in the next 
set of changes we make to Social Security in the event your most recent 
intermediate forecast proves to be optimistic?
    Answer: As we indicated in our response to Question 1, we think the 
idea of designing today a set of changes in Social Security that will 
keep the system in perfect balance over the next 75 years is not the 
best approach precisely because we cannot hope to predict with 
certainty economic and demographic experience over so long a period. 
The better approach, we believe, is for all Americans to recognize that 
periodic adjustments will be needed over the next 75 years as economic 
and demographic experience unfolds. The current status of OASDI 
financing is actually quite close to that projected for 1997 under the 
intermediate assumptions in 1983. However, there have been some 
critical changes since 1983 regarding our assumptions for the long-term 
future, particularly as to the productivity of workers in the 21st 
Century. Productivity experience in the last 25 years has been much 
lower than in the previous quarter century, and as that lower 
experience has continued to unfold the Trustees have taken it into 
account in the assumptions.
    Question 3. Given that entitlement spending overall has been 
projected by the Congressional Budget Office (CBO) and others to grow 
dramatically as a percent of GDP in the future (when the baby boomers 
are in retirement), do you think it would be wise to build tax 
increases into any Social Security reform plan?
    Answer: We do not think scheduling an increase in Social Security 
tax rates should be considered without taking into account the future 
financing of Medicare and other critical needs of our society. Also, an 
advantage of periodically reexamining the financing of Social Security 
in future years is that, as has been the case since 1935, each new 
generation will have the opportunity to make revisions consistent with 
its own perceived needs, values, and preferences.
      

                                

    Thank you for your testimony. Does anybody else have any 
questions? Thank you.
    If the second panel would step forward, our second panel 
features organizations representing different generational 
perspectives on Social Security reform. Today we will hear from 
Beau Boulter, who is the legislative counsel for the United 
Seniors Citizens Association; Gary Green, a board member of the 
Third Millennium; Deborah Briceland-Betts, executive director 
of the Older Women's League. I can't believe that is the title 
of that organization. I didn't think women ever got older. Jack 
Ryan, executive director of the National Taxpayers Union 
Foundation; and Tess Canja, vice president of the American 
Association of Retired Persons.
    If you will take your seats we will begin with Congressman 
Boulter.

  STATEMENT OF HON. BEAU BOULTER, LEGISLATIVE COUNSEL, UNITED 
  SENIORS ASSOCIATION, INC.; AND FORMER  MEMBER  OF  CONGRESS

    Mr. Boulter. Thank you very much, Mr. Chairman. United 
Seniors Association is a 501(c)(4) nonprofit organization with 
more than 540,000 members across our country. We are entirely 
member supported, with no government grants or contracts, and 
we really appreciate your invitation to be here this morning to 
talk about the report.
    We certainly agree with everybody that Social Security has 
been enormously successful; it provides a basic level of 
retirement security; it raises the poorest elderly people out 
of poverty; and we appreciate Social Security.
    In summarizing my testimony, let me just say that what we 
believe is that we cannot rest on the laurels of Social 
Security because it is fundamentally, we believe, in trouble, 
very seriously so, both in the long term but also even in the 
intermediate term, and we think Congress will soon be faced 
with unpleasant choices if nothing is done almost immediately, 
that very soon you will be faced with the choice of either 
raising payroll taxes or cutting benefits tremendously or 
borrowing money again to meet the liabilities.
    So when we look at the Trustees' Report, here is the way I 
sort of analyze it for our organization, Mr. Chairman. The 
actuarial deficit is 2.23 percent of the taxable payroll. The 
implications of the report are that this deficit could be 
eliminated if you raise the tax from 12.4 to 14.63 percent. 
That would be an 18-percent increase and that assumes that 
there is over $600 billion worth of assets in the Social 
Security Trust Fund.
    Instead, however, the government has IOUs written to itself 
in the trust fund that can be redeemed, but they can be 
redeemed only if we borrow money or if you raise taxes.
    So when you look at it that way, and I think the Trustees 
actually recognize this, that at the end of the 75-year period, 
talking about the long-term problem, at the end of 75 years you 
actually have a deficit which is not equal to 2.23 percent of 
the taxable payroll but the deficit is more like 6 percent of 
the taxable payroll.
    In other words, in the year 2070, revenue from OASDI 
payroll taxes will be insufficient to pay benefits by an amount 
equivalent to almost 6 percent of the taxable payroll, meaning 
that the payroll tax would have to be increased not by 18 
percent but by 47 percent to pay all of the Social Security 
benefits that current law has promised.
    Of course, I think that is the basic problem, at least one 
of the basic problems, that current law promises way too much 
to people way down the road. The benefits are simply too rich.
    At the United Seniors Association, what we would hope for 
in talking about reform, is to make sure that we do guarantee, 
that we keep the social contract with seniors who are retired 
or who are about to retire, perhaps looking at seniors my age 
and older, 55 and older, people in that age category, to make 
sure that they understand that they are going to get everything 
that current law promises them.
    But when we look at younger people, and this is the second 
principle that we have, not that we have worked out all the 
details, but when we look at the younger people, we think we 
have to admit that current law promises way too much, and they 
understand that. We have all talked about the confidence 
problem. The tax rate would be too high. The return is way too 
low.
    At United Seniors Association, we oppose raising the 
payroll tax. I guess that is the one thing we don't like about 
the three plans. We do think they probably would all solve the 
solvency problem, but some approaches we like better. We don't 
like particularly any approach that raises the payroll tax. 
What we would rather see is to take the surplus, which 
apparently is going to be something like $80 billion this 
fiscal year, if I understand it, to start taking the surplus 
now and diverting that into the private sector. That is about 
1.2 percent of the taxable payroll, or maybe more. Maybe take a 
little bit more and divert it into the private sector and keep 
doing that year after year.
    That would get us started so that when it comes time to 
make the structural changes and to cut the benefits for workers 
down the road, they will have built up savings that more than 
compensate for the reduction in the benefits.
    So we think we have to do something like that or that 
Congress does. Otherwise, I think what we will see in the 
coming year is more and more intergenerational conflict that 
could really be a serious problem for our country, and that 
could be one of the most important societal problems for our 
country that we have ever faced, and we want to do everything 
that we can to avoid that.
    [The prepared statement follows:]

Statement of Hon. Beau Boulter, Legislative Counsel, United Seniors 
Association, Inc.; and Former Member of Congress

    Good morning Chairman Bunning and Members of the 
Subcommittee. I am Beau Boulter, Legislative Counsel for United 
Seniors Association, a 501(c)(4) non-profit citizens 
organization with more than 465,000 members across America. We 
are entirely member supported by non-tax-deductible 
contributions and receive no government grants or contracts. A 
copy of my own curriculum vitae is attached. Thank you for 
giving United Seniors Association an opportunity this morning 
to express our views on the findings of the 1997 Annual Report 
of the Board of Trustees and on options to ensure the future of 
Social Security.
    At the outset, let me say that Social Security has been 
enormously successful in achieving its twin goals of providing 
a basic level of retirement security for all Americans while 
raising the poorest of the elderly out of poverty. It is not 
surprising that an overwhelming number of senior citizens give 
the program very high marks. But Mr. Chairman, Social Security 
cannot rest on its laurels. Even its staunchest supporters, 
among whom I count myself and the organization I represent, 
must be unsentimental in evaluating the program's serious 
flaws, for those short comings are so fundamental, so serious, 
that they surely will destroy the system unless they are 
addressed soon. The current Social Security system, unless 
redesigned, will be unable to sustain the level of benefits 
promised to future generations.
    In testimony before this Subcommittee March 6, former 
Social Security Commissioner Robert Ball argued that the 
program ``does not require heroic measures.'' He contended, 
``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.'' I most respectfully 
disagree. A more apt analogy, I fear, is that of a well loved, 
but termite-infested house that has provided comfort and 
shelter for many years but will collapse of its own weight 
unless something fundamental, yes ``heroic,'' is done--first to 
shore it up and then, like an historic landmark, to reconstruct 
it from the bottom up and from the inside out with modern 
systems and amenities. Refinancing the mortgage will only push 
the financial burden off onto the lender when the decrepit 
shell of an asset collapses.
    The White House is a good metaphor for the Social Security 
system. By 1948, the beloved President's house, while it looked 
fine on the outside, had become a health and safety hazard for 
its occupants. Congress didn't allow the White House to 
disintegrate out of false sentimentality. Instead, lawmakers 
made sure it was completely renovated. The entire interior of 
the building was removed. A new basement and foundation were 
built under the original exterior walls, and a new steel 
framework was erected inside them. Modern heating, plumbing and 
electrical systems were installed.
    Today's White House is not your grandfather's White House, 
Mr. Chairman. Similarly, we cannot afford to bequeath an 
unrestored Social Security system to our grandchildren. I say 
that out of concern for our younger generations but I also say 
it with more than a trace of enlightened self interest because 
if steps are not taken soon to restore and renovate Social 
Security, those people depending on it now and those of us soon 
to become dependent on it will find ourselves lying beneath the 
rubble when it collapses.
    Mr. Chairman, before I discuss the 1997 Trustees' Report, I 
want to commend Members of the Budget Committee on their Budget 
Resolution for recognizing the upcoming crisis in Social 
Security and for their finding that Congress and the President 
need to enact a law creating a schedule for paying off the 
national debt, including money borrowed from the Social 
Security Trust Fund. For six years now, United Seniors 
Association has been warning that spending surplus Social 
Security revenues for general government operations jeopardizes 
the future retirement benefits of millions of Americans 
starting around 2012.

      Findings of the 1997 Annual Report of the Board of Trustees

    This year's annual Trustees' Report is very clear. Social 
Security is actuarially unsound over both the intermediate and 
long terms. In 2012, less than 15 years from now, tax revenues 
will be insufficient to pay Social Security cash benefits. At 
that time, Congress will face the unpleasant choice of cutting 
Social Security payments to beneficiaries, raising taxes on 
working people, borrowing more money, or some combination of 
the three. There will be no other options, no side steps, no 
dodges. Unless we get started very soon to renovate Social 
Security, no matter how cleverly a proposal to ``fix'' the 
problem might be packaged to deceive the public and Members of 
Congress, don't be fooled, it will consist one of these three 
options.
    Over the long term (75 years), the system faces an 
``unfunded liability'' of approximately $8.0 trillion. In other 
words, if you add up all the payroll taxes current workers are 
expected to pay plus all the income taxes on benefits current 
beneficiaries are expected to pay and subtract from that amount 
the total benefits the federal government will be obligated to 
pay them, you would get an enormous negative number, i.e., a 
deficit. If that negative number were expressed as a ``present 
value,'' (i.e., the lump sum amount you would need invested 
over the 75 year period at expected interest rates to cover the 
shortfall) you arrive at the $8.0 trillion shortfall, or 
``unfunded liability.''
    The Trustees evaluate the system differently. They evaluate 
the ``actuarial deficit'' by factoring in the total expected 
taxes and benefits of future generations of workers and 
beneficiaries during the 75-year period under evaluation. The 
present value difference between the expected taxes paid and 
benefits received including this group in the calculation 
amounts to about $3.0 trillion. In other words, the federal 
government would need to have on hand, today, $3.0 trillion in 
real income-earning assets to meet all of its future Social 
Security obligations drawing on all its available resources 
between now and 2070.
    Instead, the federal government has on hand a ledger full 
of IOUs written to itself that can be redeemed at the Treasury 
only if taxes are raised or more money is borrowed.
    According to the Trustees, the actuarial deficit of the 
program can be interpreted as the percentage of taxable payroll 
by which the system falls short of meeting its obligations, 
i.e., the number of percentage points by which the payroll tax 
would have to increase in order to pay all benefits promised in 
the future. The Social Security deficit expressed as a percent 
of taxable payroll equals 2.23 percent. The implication of the 
Trustees' Report is that the actuarial deficit could be 
eliminated if the Social Security payroll tax were raised 
immediately by 18 percent, from 12.4 percent to 14.63 percent.
    Now, some people would use this formulation of the problem/
solution to suggest that the expected deficit is really quite 
manageable with a little nip here, a tuck there and a slight 
boost in the payroll tax rate. But Mr. Chairman, don't be 
misled. There is more to the problem than meets the eye; much 
more.
    First, expressing the deficit as 2.23 percentage points of 
taxable payroll disguises the growing extent to which the 
Social Security system relies for revenues on the taxation of 
benefits in addition to payroll taxes. Revenues from income 
taxes on Social Security benefits themselves are slated to grow 
from .23 percentage points of taxable payroll today to .94 
percentage points of taxable payroll in 2075. Without these 
taxes on benefits, the actuarial deficit is actually 25 percent 
larger, amounting to 2.79 percent of taxable payroll.
    Second, and more importantly, this formulation of the 
actuarial deficit depicts an abstraction, using ``summarized,'' 
or average, rates over the entire period, which disguises the 
cash-flow cliff looming a mere 15 years over the horizon when 
Social Security starts taking in less in revenues than it pays 
out in benefits. It is like telling a hiker who doesn't know 
how to swim that he can easily ford a river because its average 
depth is only about 4 feet without pointing out the unpleasant 
fact that in the middle half of the river the bottom falls away 
to 10 feet.
    The entire concept of expressing the actuarial deficit as a 
summarized percentage of taxable income relies upon the fiction 
that during the early part of the actuarial period, large cash-
flow surpluses can be ``saved'' and ``reinvested'' in a 
government trust fund to earn income. Of course, as you are 
well aware, the surpluses to date already have been spent and 
all expected future surpluses are slated to be spent on 
everything from battleships to paper clips.
    In order to eliminate the deficit by raising the payroll 
tax rate 2.23 percentage points, the rate hike would have to 
occur immediately and remain in place throughout the 75-year 
actuarial period. Such a policy would entail huge cash-flow 
surpluses running to about 2021, after which time cash flow 
would turn negative, and Congress once again would be faced 
with the same vexing alternatives: raise taxes again, cut 
benefits or borrow more money. Consequently, any ``Two-Percent 
Solution'' payroll tax hike would simply triple the delusion 
under which the system already operates in order to buy the 
system less than a decade more of solvency.
    Expressing Social Security's future deficit as a percentage 
of taxable payroll is useful to the extent that is provides a 
bench mark to calibrate how serious the problem really is. The 
best way to appreciate the seriousness of the problem is to 
examine how far out of balance the system is at the end of 75 
years, not on average during the 75 years. According to the 
Trustees' Report, in 2070 revenue from OASDI payroll taxes will 
be insufficient to pay benefits by an amount equivalent to 5.86 
percent of taxable payroll. In other words, the payroll tax 
would have to increase 47 percent to 18.26 percent in 2070 to 
pay Social Security benefits promised under current law.
    In the opinion of United Seniors Association, a tax 
increase of any magnitude, much less one sufficient to 
eliminate the actuarial deficit, is out of the question. 
Payroll taxes already are too high. They are politically 
unsustainable and economically nonsensical. The payroll tax 
rate required to pay Social Security cash benefits has risen 
steadily from 2 percent in the 1940s to 12.4 percent today. The 
economy is smaller today and intergenerational tensions are 
greater today as a direct consequence.
    The effect of rising payroll taxes on the economy has been 
pronounced. Social Security payroll taxes raise the cost of 
labor and reduce saving and investment. According to economist 
Martin Feldstein, former Chairman of President Reagan's Council 
of Economic Advisors, the economy today is a full 1 percent 
smaller each year as a direct result of the burden placed on it 
by the presently configured Social Security system.
    United Seniors Association is encouraged that the Trustees' 
Report calls on Congress to address the long-range Social 
Security deficit in a timely manner but I must say, our sense 
of urgency is considerably greater than theirs. United Seniors 
Association believes that the problems with the Social Security 
system are substantially larger than a cursory reading of the 
Trustees' Report might lead one to believe. In particular, we 
believe the nation must come to grips with the fact that the 
trust fund of IOUs, which the federal government has written to 
itself, does not provide a way around cutting benefits, raising 
taxes, or borrowing more money in 2012 to keep the system 
going.
    The Trustees' Report concludes that the Social Security 
system will be able to pay benefits for about the next 34 
years. We disagree. When the Social Security Administration 
begins to present the IOUs to the Treasury 15 years from now, 
there will be no available cash in the vault to redeem them. So 
in answer to the question, ``how soon must Congress act?'' We 
say, now!
    We are also encouraged that the Trustees ``recommend that 
the proposals in the recent Advisory Council Report and others 
being advanced by public officials and private organizations 
should be carefully evaluated.'' Let me turn to those proposals 
now.

       Recommendations of the Advisory Council on Social Security

    The Advisory Council on Social Security, appointed by the 
Clinton administration, recently offered three alternative 
proposals to address the long-run insolvency of Social 
Security. In the opinion of United Seniors Association, the 
three plans encompass most of the range of options available to 
us. However, we were disappointed that all three of the plans 
rely on a substantial tax increase, even though in two of the 
three cases, the tax increase is disguised as a ``mandatory 
contribution.'' One principle on which United Seniors 
Association believes the renovation of the American system of 
retirement security should rest is that current workers will 
not face higher combined rates of taxation and mandatory 
contribution.
    At one end of the spectrum, the Maintenance of Benefit (MB) 
plan would basically retain the current unstable, pay-as-you-go 
structure of the program, and therefore is unacceptable in our 
view. This plan would attempt to patch the system by reducing 
Social Security benefits, raising the payroll tax rate, 
increasing income taxes on Social Security recipients and 
forcing state and local government employees hired after 1997 
to join the Social Security system. The MB plan also recommends 
a study of having the federal government invest large sums of 
payroll-tax revenues directly into private equity markets. This 
idea is a political non-starter. For one thing, it would make 
the federal government the de facto owner of large swaths of 
corporate America. If one believes in investing in the market 
for retirement security, why on earth have the government do 
it? Let people control their own investments.
    The Advisory Council's second plan, the Individual Accounts 
(IA) plan moves in the right direction but still contains 
provisions that concern our members. The plan begins with two 
changes that United Seniors Association supports if they are 
carefully designed and implemented so as not to affect current 
retirees, with whom we have made a morally binding contract 
that must not be breached: an increase in the normal retirement 
age and a change in the benefit formula to reduce the growth of 
Social Security benefits for future retirees.
    Unfortunately, the IA plan has two features that render it 
unacceptable in our opinion. The IA plan would increase the 
payroll tax on current workers by 1.6 percentage points and 
earmark workers' contributions in mislabeled ``individual 
accounts'' that would remain under control of the federal 
government. Workers would not have real property rights to 
these accounts and they would be centrally managed by the 
federal government.
    The fact that the IA plan would allow workers to allocate 
their funds among several broad mutual funds is attractive. 
However, it falls short of a solution that would energize and 
empower workers to harness the private economy, rather than the 
government, to guarantee their retirement security. For 
example, under the IA plan, the rate of return on workers' 
total payroll tax payments would continue to be substantially 
below market returns. It would only be a matter of time, in our 
opinion, before a heightened tax burden yielding benefits at 
below-market rates of return would produce irresistible 
political pressure to ``buy off'' over-taxed workers with the 
promise of higher benefits. Soon, we would be right back in the 
destructive cycle from which we are attempting to break free.
    Finally, the Advisory Council offered a third plan that 
would move America's retirement security system in the right 
direction but still, in our opinion, would be unacceptable 
because it entails raising the payroll tax by 1.52 percentage 
points. The Personal Security Account (PSA) plan would create 
truly private mandatory individual retirement accounts into 
which five percentage points of the worker's payroll tax would 
be reserved for retirement. Workers would have full property 
rights to the accounts, could pass them along to their heirs, 
and would have complete control over their management, subject 
only to the kinds of prudential considerations that presently 
apply to Individual Retirement Accounts (IRAs). The plan also 
would raise the retirement age.

            Redesigning America's Retirement Security System

    In addition to the Advisory Council, numerous individuals 
and private organizations also have proposed plans to overhaul 
America's retirement security system. There also has been 
formed within Congress the bi-partisan Public Pension Reform 
Caucus, led by Congressmen Kolbe and Stenholm.
    In order to help our members evaluate these various plans, 
United Seniors Association is in the process of drawing up a 
set of principles that can serve as criteria for redesigning 
America's retirement security system. Those principles should 
be complete within the next month, and I will be happy to 
provide them to Subcommittee Members at that time.
    The underlying premise of the principles is that Social 
Security comprises a morally binding social contract with 
current retirees and those individuals near retirement. That 
contract must not be breached. The focus of the principles is 
to employ the fiscal strength of the federal government to 
provide a safety net for elderly Americans and to empower 
workers to harness the power and dynamism of the free market to 
retire as wealthy as possible after years of hard work. In 
short, we hope to change the watch words of the system from 
``government taxes and spends'' to ``workers save and invest.'' 
And, as Subcommittee Members already may have gathered from my 
comments on the three Advisory Council plans, chief among the 
specific principles will be maintaining the safety net and 
avoiding any additional tax increases or additional mandatory 
contribution requirements that are not offset by reductions in 
the payroll tax.
    We need a new model for retirement security. Fortunately, 
it appears that there may be an emerging consensus on the 
general nature of such a model. A feature of that consensus is 
a two-part program--part ``safety net'' and part personal 
retirement savings accounts, and there are numerous plans on 
the table for public discussion that all have, to various 
degrees, a private investment component backstopped by a 
government safety-net feature.

                               Conclusion

    The time for action is now, Mr. Chairman, not because we 
face an immediate crisis but rather because Social Security 
suffers from a slow-acting degenerative condition that has gone 
untreated for too long. The problem is not to rescue the system 
from imminent collapse tomorrow but rather to stop the 
deterioration from progressing beyond the point of no return. 
That point is fast approaching and demands that Congress give 
retirement security its immediate attention.
    Chairman Bunning, you and the Subcommittee are to be 
commended for holding these hearings and focusing national 
attention on this vital issue. Please allow me to close with 
one observation. We sometimes get so wrapped up in the numbers 
that we fail to see the most dangerous element of a retirement 
system in the process of failing. This process is socially 
corrosive because it fosters intergenerational resentment and 
antipathy.
    Today's retirees have worked hard all of their lives and 
paid substantial amounts of taxes on the promise that Social 
Security would help provide them with a comfortable and 
dignified retirement. In effect, millions of yesterday's 
workers allowed themselves to become dependent on government 
for retirement security in their old age. Even those who 
resisted dependency frequently found they had no option because 
after paying their share of taxes they were unable to save 
sufficiently to provide for their own retirement. They 
rightfully insist on specific compliance with the social 
contract that has left them vulnerable to the whims of the 
political process.
    At the same time, a growing number of today's workers 
resent having to pay a tax rate to support current retirees 
that is much higher than the tax rate paid by current Social 
Security recipients when they were working. Yet, in spite of 
the growth in promised benefits, which are slated to double in 
inflation-adjusted terms between now and 2070--a promise the 
system as currently configured cannot keep--that promise, even 
if redeemed, is insufficient to provide a rate of return to 
workers comparable to what they could gain in the private 
market.
    Thus we have an apparent paradox: In the eyes of older 
generations, the Social Security system promises future 
retirees generous benefits, which to younger generations 
represent unacceptably low rates of return on the taxes they 
have been forced to pay in the name of ``retirement 
contributions.'' Increasingly, today's workers are catching on 
to the bind in which they have been placed, and they don't like 
it. Young people will resist paying the taxes necessary to 
sustain the current Social Security system. If Congress tries 
to force them to, the result I fear will be intergenerational 
warfare that would tear this country apart.
    This knot cannot be untied. Like the Gordian Knot, it must 
be cut with creative thinking and decisive action. You are 
doing the thinking part now. Please don't wait too long to act.
    Thank you, Mr. Chairman.
      

                                

    Chairman Bunning. Thank you, Beau.
    Mr. Green.

  STATEMENT OF GARY GREEN, MEMBER, BOARD OF DIRECTORS, THIRD 
MILLENNIUM, NEW YORK, NEW YORK; AND  PRESIDENT,  FIRST  QUALITY 
                           MAINTENANCE

    Mr. Green. Thank you, Mr. Chairman, for inviting Third 
Millennium to participate in this dialog on Social Security, 
the largest program in the Federal budget.
    My name is Gary Green. I am a member of the Board of 
Directors of Third Millennium and the president of First 
Quality Maintenance, an office cleaning company employing more 
than 100 blue collar workers in New York City.
    Third Millennium is a national, nonprofit, nonpartisan 
group of Americans born after 1960 and we are based in New York 
City, as well. My colleagues and I have appeared before 
Congress 12 times over the past 3 years, testifying on the need 
to overhaul Social Security and Medicare. We greatly appreciate 
the opportunity to speak on behalf of our members, in all 50 
States, who desperately want Congress to reform these programs.
    In order to ensure that America remains prosperous well 
into the 21st century, it must begin to prepare now for the 
impending retirement of the 70 million plus baby boom 
generation. This requires girding Social Security and other 
entitlements for the long haul.
    Suddenly and remarkably, Social Security is no longer the 
third rail of American politics. Political leaders from both 
parties, such as Congressman Jim Kolbe, Charlie Stenholm, and 
Mark Sanford, are holding huge townhall meetings with their 
constituents specifically to address Social Security. The 
bipartisan Public Pension Reform Caucus, led by Representative 
Kolbe and Representative Stenholm, now boasts more than 75 
members. Similar efforts are starting in the other chamber, led 
by Senators Bob Kerrey and Judd Gregg.
    Think tanks, business associations and advocacy groups such 
as Third Millennium all have played major roles in transforming 
the way Americans use Social Security. And what my generation 
repeatedly discovers is a government program that asks us to 
contribute more than one-seventh of our income with each 
paycheck while, at the same time, warning us that it will be 
bankrupt before we retire.
    No Member of Congress has ever successfully explained to my 
generation how we and our progeny are supposed to meet the 
pension and medical benefits needs of the soon-to-be-retired 
baby boom generation. Worse still, no one has justified the 
fairness of requiring us to bear this remarkable burden while 
making billions of dollars in interest payments on trillions of 
existing public debt.
    Mr. Chairman, the most recent Trustees' Report forecasts a 
dismal future for Social Security. In just 15 years, when I 
turn 47, the OASDI Program will pay out more in benefits than 
it will receive in FICA taxes. Some suggest that this will not 
be a problem because the trust fund is projected to contain 
approximately $2 trillion. But wait. Congress has been 
borrowing against the trust fund every year to mask the true 
size of the deficit. In order to replenish the trust fund 
starting in 2012, Congress will have to raise taxes 
considerably. How well will that go over with tomorrow's 
workers?
    Let's assume for a moment that the trust fund truly merited 
its name and we could readily tap into it when the time came. 
The trust fund would still run dry in 2029, the year I turn 64 
and quickly approach retirement. Wouldn't a tapped out trust 
fund precipitate a crisis for my generation and the ones that 
follow?
    There are those who insist that Social Security technically 
doesn't go bankrupt in 2029, even if the trust fund is 
exhausted. Rather, they cite the Trustees' Report, which states 
that in 2029 Social Security will pay 75 percent of promised 
benefits, and that is not so bad, after all.
    Mr. Chairman, if the 25-percent cut in Social Security 
benefits would be such a good deal for my generation, why 
aren't today's defenders of the status quo advocating it for 
themselves? In truth, such a drastic cut would be as 
unconscionable for tomorrow's poor seniors as it would be for 
today's.
    Rather than whine about the problem, which some are wont to 
do, our organization is working on solutions. Each time we at 
Third Millennium testify, we tell our elected representatives 
to raise the retirement age to 70, means test benefits on a 
scale recommended by the Concord Coalition and transform the 
system, over time, to one that includes private retirement 
accounts.
    As you know, all three factions of the Social Security 
Advisory Council recommended using the capital markets to help 
ensure a higher rate of return on FICA contributions than the 
system is now generating. The 13 members, however, couldn't 
agree on how to do this.
    Third Millennium has not endorsed any one Advisory Council 
plan but there are elements of both the Schieber and Gramlich 
proposals that we find attractive. Specifically, we support the 
Schieber camp's idea to allow workers to invest a portion of 
their FICA taxes in personal accounts. This would add a 
critical component of personal responsibility for one's own 
retirement that is currently absent in Social Security. We also 
support Chairman Gramlich's concept of limiting the number of 
different investment choices to a manageable number, so as not 
to overwhelm novice investors.
    In September 1994 when Third Millennium randomly surveyed 
500 Americans age 18 to 34 by telephone, we found 82 percent 
wanted to be able to redirect a portion of what they currently 
pay in FICA taxes into private retirement accounts. Taking this 
step would not only be politically viable; it would be popular.
    Mr. Chairman, in calling Third Millennium to testify today, 
you asked how soon we thought Congress should act on Social 
Security reform. Our answer: Yesterday. America's leaders are 
wasting precious time. The baby boom generation begins retiring 
in just over a decade and there is no national plan to 
accommodate their massive retirement and health needs. For the 
good of America's future, Congress and the President should act 
expeditiously. If you don't, future generations will rightly 
wonder why you waited so long. Thank you.
    [The prepared statement follows:]

Statement of Gary Green, Member, Board of Directors, Third Millennium, 
New York, New York; and President, First Quality Maintenance

    Thank you, Mr. Chairman, for inviting Third Millennium to 
participate in this dialogue on Social Security, the largest 
program in the Federal budget.
    My name is Gary Green. I am a member of the Board of 
Directors of Third Millennium and the president of First 
Quality Maintenance, an office cleaning company employing more 
than 100 blue collar workers. Third Millennium is a national, 
nonprofit, non-partisan group of Americans born after 1960. We 
are based in New York City.
    My colleagues and I have appeared before Congress 12 times 
over the past three years, testifying on the need to overhaul 
Social Security and Medicare. We greatly appreciate the 
opportunity to speak on behalf of our members, in all 50 
states, who desperately want Congress to reform these programs.
    In order to ensure that America remains prosperous well 
into the 21st century, it must begin to prepare now for the 
impending retirement of the 70 million plus baby boom 
generation. This requires girding Social Security and other 
entitlements for the long haul.
    Suddenly and remarkably, Social Security is no longer the 
third rail of American politics. Political leaders from both 
parties, such as Congressman Jim Kolbe, Charlie Stenholm and 
Mark Sanford, are holding huge town hall meetings with their 
constituents specifically to address Social Security. The 
Bipartisan Public Pension Reform Caucus, led by Representative 
Kolbe and Representative Stenholm, now boasts more than 75 
members. Similar efforts are starting in the other chamber, led 
by Senators Bob Kerrey and Judd Gregg.
    Think tanks, business associations and advocacy groups such 
as Third Millennium all have played major roles in transforming 
the way Americans view Social Security. And what my generation 
repeatedly discovers is a government program that asks us to 
``contribute'' more than one-seventh of our income with each 
paycheck while, at the same time, warning us that it will be 
bankrupt before we retire.
    No member of Congress has ever successfully explained to my 
generation how we and our progeny are supposed to meet the 
pension and medical benefits needs of the soon-to-be-retired 
Baby Boom generation. Worse still, no one has justified the 
fairness of requiring us to bear this remarkable burden while 
making billions of dollars in interest payments on trillions in 
existing public debt.
    Mr. Chairman, the most recent Trustees report forecasts a 
dismal future for Social Security. In just 15 years, when I 
turn 47, the OASDI program will pay out more in benefits than 
it will receive in FICA taxes. Some suggest that this will not 
be a problem because the Trust Fund is projected to contain 
approximately two trillion dollars. But wait. Congress has been 
borrowing against the trust fund every year to mask the true 
size of the deficit. In order to replenish the trust fund 
starting in 2012, Congress will have to raise taxes 
considerably. How well will that go over with tomorrow's 
workers?
    Let's assume for a moment that the ``trust fund'' truly 
merited its name, and we could readily tap into it when the 
time came. The trust fund would still run dry in 2029, the year 
I turn 64 and quickly approach retirement. Wouldn't a tapped 
out trust fund precipitate a crisis for my generation and the 
ones that follow?
    There are those who insist that Social Security technically 
doesn't go bankrupt in 2029, even if the trust fund is 
exhausted. Rather, they cite the Trustees report, which states 
that in 2029 Social Security will pay 75 percent of promised 
benefits, and that is not so bad, after all. Mr. Chairman, if a 
25 percent cut in Social Security benefits would be such a good 
deal for my generation, why aren't today's defenders of the 
status quo advocating it for themselves? In truth, such a 
drastic cut would be as unconscionable for tomorrow's poor 
seniors as it would be for today's.
    Rather than whine about the problem, which some want to do, 
our organization is working on solutions. Each time we at Third 
Millennium testify, we tell our elected representatives to 
raise the retirement age to 70, means-test benefits on a scale 
recommended by the Concord Coalition and transform the system, 
over time, to one that includes private retirement account.
    As you know, all three factions of the Social Security 
Advisory Council recommended using the capital markets to help 
ensure a higher rate of return on FICA contributions than the 
system is now generating. The 13 members, however, couldn't 
agree on how to do this.
    Third Millennium has not endorsed any one Advisory Council 
plan. But there are elements of both the Schieber and Gramlich 
proposals that we find attractive. Specifically, we support the 
Schieber camp's idea to allow workers to invest a portion of 
their FICA taxes in personal accounts. This would add a 
critical component of personal responsibility for one's own 
retirement that is currently absent in Social Security. We also 
support Chairman Gramlich's concept of limiting the number of 
different investment choices to a manageable number, so as not 
to overwhelm novice investors.
    In September 1994 when Third Millennium randomly surveyed 
500 Americans age 18 to 34 by telephone, we found 82 percent 
wanted to be able to redirect a portion of what they currently 
pay in FICA taxes into private retirement accounts. Taking this 
step would not only be politically viable, it would be popular.
    Mr. Chairman, in calling Third Millennium to testify today, 
you asked how soon we thought Congress should act on Social 
Security reform. Our answer: yesterday. America's leaders are 
wasting precious time. The baby boom generation begins retiring 
in just over a decade and there is no national plan to 
accommodate their massive retirement and health needs. For the 
good of America's future, Congress and the President should act 
expeditiously. If you don't, future generations will rightly 
wonder why you waited so long. Thank you.
      

                                

    Chairman Bunning. Ms. Briceland-Betts, please.

STATEMENT OF DEBORAH BRICELAND-BETTS, EXECUTIVE DIRECTOR, OLDER 
                         WOMEN'S LEAGUE

    Ms. Briceland-Betts. Good morning. Thank you, sir. Thank 
you for providing this opportunity for Older Women's League, 
OWL, to testify today. We would like to commend this 
Subcommittee for thoroughly exploring the impact of changes to 
Social Security system's future before moving forward with the 
development of any legislative proposals.
    Several times today we have heard that we are here to 
explore the generational differences in opinion over this 
issue. As a representative of the only national organization 
that represents the special needs of women as we age, I am here 
to say that this is not a generational debate; it is a gender 
debate. There are some very specific issues that are unique for 
women as we age in income and I would like to spend the next 
few minutes highlighting those before I go forward with the 
kinds of changes that we would recommend.
    There are factors in women's lives which work together to 
make our need for Social Security more intense than men's. For 
instance, there is continued pay inequity in this country. 
Thirty years after equal pay laws were passed, women are still 
earning only 71 percent of what men earn for the same kind of 
work.
    Women still predominate the same kinds of jobs that our 
mothers and our grandmothers held. Those are low paying; they 
have few benefits and no pension. They are usually sales, 
service and clerical. And as a result, only 13 percent of women 
today have pensions when they retire.
    And women are still the care givers in our family. The 
average woman spends 11.5 years outside of the work force 
caring for children, for sick spouses, for aging parents. Those 
are 11.5 years when she is not vesting in a pension and she is 
not paying into Social Security. As a result, women of all ages 
hold a special stake in the Social Security debate.
    Additionally, during the last decade the nature of work has 
changed. The number of part time, temporary and contract 
workers has grown at a rate almost double the total labor 
force. Their numbers, most of whom are women, are expected to 
increase 82 percent by the year 2000, though the new 
requirements for welfare beneficiaries mean that this may 
increase very dramatically.
    Increased use of contingent workers means that women will 
stay in low-paying work with few benefits, such as health 
insurance, paid vacation, sick leave or a pension. The 
continued concentration of women in lower paying jobs will 
reduce the financial security of women, resulting in a greater 
than ever reliance on Social Security.
    We must look at what kinds of things cause women to be very 
dependent on Social Security, including the fact that 
increasingly, women live longer than men, an average of 7 
years. Many of us outlive our spouses and, according to the 
General Accounting Office, approximately 80 percent of widows 
become poor only upon the death of their husbands. Their 
husbands intended to retire early because of poor health and 
then, as a result of the loss of earnings, as well as medical 
expenses, the resources were depleted that were available to 
those widows.
    Women also, as we said, care for aged relatives, spending 
11 years out of the work force. Those zero years out of the 
paid work force are then included in the computation for their 
benefits and they disproportionately penalize her for the years 
as an unpaid care giver.
    Looking at exactly what kinds of income women depend on 
when we retire and how unique it is compared to our male 
counterparts, the causes for poverty among older women, 
particularly those living alone, 80 percent of whom are women, 
can better be understood by examining the sources of income 
available to the group.
    Social Security benefits comprise 79 percent of incomes of 
the poor elderly. Supplemental Security Income or SSI is 14 
percent and employment earnings, employer pensions and income 
from assets, taken together, contribute only 7 percent. As a 
result, OWL must oppose any kind or form of privatization. 
While seeking to provide safeguards for the future, it raises a 
whole new set of problems. Chief among them would be to destroy 
the guarantee of a lifetime benefit, critical for women now 
and, because of rising divorce rates, continued low earnings 
and other problems delineated in this testimony, even more 
critical in the future.
    Privatization ignores the social insurance nature of Social 
Security which, as a result of a shared risk pool, assures that 
those who qualify will have a minimum benefit. Were Social 
Security privatized, whether through individual accounts or 
personalized savings, women would have substantially smaller 
accounts than men, made even smaller because they will not 
include the redistributive benefit.
    Privatization would hurt those women who, because of lower 
wages throughout their work life, had been unable to invest and 
therefore have little knowledge of investment markets and risk 
making unfortunate investment choices.
    OWL would suggest two things. Both have been talked about 
here today. First, we believe that public confidence in the 
system must be restored. The problem that Social Security faces 
is a lack of faith in the future. We must engage in a full 
force educational process that would ensure that people 
understand all of the players' stake in the debate and that 
they are ready to understand what the options and implications 
of those are.
    And second, we encourage the increase in support for 
research. The reduction in research at SSA during the past two 
decades coincides with years that awareness of the inequities 
women face in the Social Security system has increased. OWL 
joins the Council and the Advisory Board in urging an immediate 
enhancement of its policy, research and evaluation capability.
    We look forward to working with the Members of this 
Subcommittee during the months ahead to achieve changes in 
Social Security that, while maintaining the basic principles, 
do not unfairly place a burden on older women in this country. 
Thank you.
    [The prepared statement follows:]

Statement of Deborah Briceland-Betts, Executive Director, Older Women's 
League

    Thank you for providing OWL with the opportunity to testify 
today. We commend this Subcommittee for exploring the impact of 
changes to the Social Security system's future so thoroughly 
before moving forward with the development of any legislative 
proposals.
    My name is Deborah Briceland-Betts. I am executive director 
of OWL. Founded in 1980, OWL is the first national grassroots 
membership organization to focus exclusively on issues of 
concern to women over 40 years of age. Through education, 
research, and advocacy, we work to advance public policy 
changes that will reduce the inequities women face as they age.

                              Introduction

    Before proceeding with my testimony, I want to make it 
clear that OWL recognizes the large stake every American has in 
the Social Security system. Social Security remains by far the 
most important retirement program for all our citizens. And 
while we believe the system does not serve women nearly as well 
as it should, we maintain that it is a necessary and vital 
income insurance plan which establishes a foundation for 
economic protection and security for older workers and their 
families.
    OASDI today is supposed to be a gender neutral program. 
But, because lifestyles were very different in 1935 when the 
program was instituted, retirement plans, both Social Security 
and private pensions, were based on male work patterns. They 
still best serve the traditional family: a paid worker (usually 
the husband), an unpaid homemaker (usually the wife), and 
children. Today however, most American families do not fit that 
profile, and even fewer will in the future. And while Social 
Security is a major--often, the only--lifeline for many older 
women, many of us, including widows and divorced women, receive 
neither equitable nor adequate benefits today, nor, under 
current provisions, will they forty or fifty years from now. 
Let there be no mistake: OWL supports the principles underlying 
the current Social Security system, and we will work to 
preserve them. Our goal is to assure that, in the future, the 
current Social Security system more adequately responds to the 
patterns of women's lives.

                          Women in Employment

    During World War II there was a surge of women in the labor 
force which declined after the war. Then, in the 1970's there 
was another increase. In 1950, only 34% of women participated 
in the labor force. In 1972, 44% of women were in paid 
employment, and today, according to the Social Security 
Administration, almost 60% of American women work.
    During the last decade, the nature of work has changed. The 
number of part-time, temporary, and contract workers--
contingent workers--grew at a rate almost double that of the 
total labor force. Their numbers, most of whom are women, are 
expected to increase 82% by the year 2000, particularly with 
the new requirements for women receiving welfare benefits. 
Increased use of contingent workers means that women will stay 
in low-paying work with few benefits such as health insurance, 
paid vacation, sick leave, or pension plans.
    Pension participation is least likely among low wage, part-
time workers and in many industries where women workers 
predominate. Gender-based annuities in many pension programs, 
and the general lack of indexing of pension benefits further 
penalize women. Pension integration, whereby a pension is 
reduced by a portion of one's Social Security, more commonly 
occurs for women workers. Further, the decrease in employer-
funded defined benefit plans leaves low-paid women dependent on 
their own much smaller contributions to such plans that exist.
    The continued concentration of women in lower-paying jobs 
will reduce the financial security of women, resulting in a 
greater than ever reliance on Social Security.

                           Women's Realities

    To arrive at a more adequate level of benefits, several 
realities of women's lives--and their consequences--must be 
confronted:
     Women's wages are considerably less than men's
     Women live longer than men
     Women are the primary caregivers in America

Women's Wages Continue to Lag Significantly Behind Men's

    In 1939, median earnings for full-time women workers in the 
labor force were 58% of the median earnings of men. More than a 
half century later, that figure has risen only to 71%. The wage 
gap is greatest between women and men aged 45 to 64--women earn 
62.7% of men's earnings at the time men are at the height of 
their earning power during the ages 45-54, women 55-64 earn 
63.9% of the earnings of men in the same age range.
    A major reason for this disparity is that women have been, 
and continue to be, segregated in low-paying occupations; six 
of ten working women are in sales, service, and clerical jobs. 
The future does not bode well for younger women in the labor 
force--58% of women between 20-44 are in these occupations, 
just as are 59% of women between 45-64.
    The Department of Labor has identified six occupations 
dominated by women as those most likely to experience large-
scale growth by the year 2000. Wages in five of these 
occupations--sales work, waitressing, cashier, food worker, and 
nursing aide--remain at or below the poverty level. OWL's 
research on chronic care workers--nursing home and home health 
aides--found that there is rapid expansion in these areas, but 
the turnover of workers is high because of low wages, few 
benefits, lack of a guaranteed income, and no upward mobility. 
This has implications not only for the financial future of 
these workers, but also for the quality of care provided to 
their clients.
    Already, many older women, especially those over age 65, 
are clustered in most of these jobs, working part-time for low 
pay and no benefits. The projected increase in the number of 
these jobs suggest that women's real earnings profile will 
deteriorate, rather than improve.
    Although job expectations of the current generation of 
young women have changed and more women have entered 
professional jobs, they remain exceptions. Most of today's 
young women can expect to do the same low-paying work as their 
mothers and to suffer the same poverty in retirement.

Women Live Longer Than Men

    In 1993, men at birth had a life expectancy of 72.1 years, 
women 78.9. At age 65, the life expectancy for women is an 
additional 19.2 years, while for men it is only 15.4 years. By 
2070, according to SSA projections, a 65-year-old woman can 
expect to live to 87, another 22 years, while a man will live 
to 83, only 18 years.
    Because of their greater longevity, most American women 
will live out their lives as widows. Currently, half of all 
women age 65 and over are widows, and about 100,000 women 
become widowed annually.
    Millions of widowed older women depend exclusively on 
Social Security for adequate income during retirement. This is 
particularly true of black and other minority women. However, 
the Social Security benefits they receive are not adequate for 
their needs. Black women are more likely than white women to 
take the reduced benefits associated with early retirement: 
almost 66% begin drawing Social Security before age 65, in part 
because of the stress of a lifetime of low wages and physical 
work, and because women experience job discrimination earlier 
than men. The incidence of poverty is dramatically higher among 
minority elderly who live alone--43% for blacks and other 
nonwhites and 35% for Hispanics--compared with a poverty rate 
of 16% for white elderly persons living alone.
    According to the General Accounting Office, approximately 
80% of widows become poor only upon the death of their 
husbands. Their husbands tended to retire early because of poor 
health. The resulting loss of earnings, as well as medical 
expenses, deplete the resources available to the widows. The 
husband's death may, as well, ultimately mean the loss of his 
pension income.
    The increase in the divorce rate also has contributed to 
the growing diversity of family roles and work patterns, since 
many divorced women must work to support themselves or their 
families.
    Today, the number of women between the ages of 45 and 64, 
who are separated, divorced, or widowed is twice that of men. 
Most of these women are the sole support for their families.
    The causes of poverty among older persons living alone, 80% 
of whom are women, can be better understood by examining the 
sources of income available to this group. Social Security 
benefits comprise 79% of the incomes of the poor elderly; 
Supplemental Security Income (SSI) contributes about 14%; while 
employment earnings, employer pensions, and income from assets 
taken together contribute only 7%. On the other hand, moderate 
to high income older persons living alone depend on Social 
Security for only 22% of their total incomes, while income from 
assets contributes 52%, employer pensions 13%, and employment 
earnings 12%. But because they live longer, even women with 
assets or savings become dependent on COLA protections as their 
own money begins to run out.

Women Are the Primary Caregivers for Children and Older Persons

    OWL estimates that 89% of all women over age 18 will be 
caregivers to either children, parents, or both. Up to twelve 
million Americans are unpaid caregivers to older persons, 
almost three out of four of whom are women. Their average age 
is 57.
    Today, women who are in midlife will spend more time caring 
for their parents than they have for their children. This 
phenomenon has been labeled the ``sandwich generation'' because 
women are sandwiched between caring simultaneously for small 
children and aging parents. The phenomenon will not go away. In 
fact, the fastest growing segment of the population is the 85 
and older group. The ``sandwich'' is often now a triple decker: 
many women care for elderly grandmothers, mothers, and small 
children simultaneously.
    Caring for aged relatives forces many women in the 
workforce to cut their hours, take time off without pay, and 
rearrange their job schedules. In a national survey, 11% of 
caregivers to the elderly stated they quit their jobs in order 
to provide care. Findings from a study done by OWL, in 
collaboration with the Families and Work Institute, on the 
balancing act for employees with elder care responsibilities, 
reveals that almost a quarter of the respondents drastically 
changed their employment situation as a result of their elder 
care responsibilities. This included changing jobs, becoming 
unemployed, becoming self-employed, or taking on several part-
time jobs. Women spend a median of 11 years out of the 
workforce, years that she is not vesting in a pension or paying 
into Social Security. These ``zero years'' out of the paid 
workforce are then included in the computations for her 
benefits, disproportionately penalizing her for her years as an 
unpaid caregiver.
    These factors leave women at retirement age at a severe 
economic disadvantage and result in significant inequities and 
disparities in their Social Security benefits. Despite major 
reforms through the years, fundamental biases against women 
persist.
    The Older Women's League believes that there are two issues 
that must be addressed in any reform of the Social Security 
system: while these hearings are primarily focused on the 
future solvency of the Trust Fund, consideration of the 
adequacy of the system in addressing women's needs must also be 
of paramount importance.
    Traditionally, Social Security is considered to be one leg 
of a three-legged stool of retirement income--Social Security, 
pensions and savings. Unfortunately, for many older women, 
Social Security is the only leg, and for many American women, 
it does not work as well as it should:
     In the 1990s, we have the dilemma of dual 
entitlement and single benefit. A woman in a two-earner couple 
who is dually entitled to both a worker benefit on her earnings 
and a spousal benefit on her husband's earnings can receive 
only the greater of the two, usually the spouse benefit.
    Since 1960, the percentage of women drawing a benefit based 
on their own work records has remained virtually constant--
36%--even though the percentage of women dually entitled to 
benefits on both their own work records and those of their 
husbands has jumped from 5% in 1960 to 25% in 1993. Those years 
during which a working woman paid into the system through 
payroll taxes do not yield higher benefits but do decrease the 
liability to the Social Security system. Despite the increased 
participation of women in the workforce, they will remain just 
as dependent on their spouses--receiving exactly the same 
spouse benefit that they would have received had they never 
worked outside the home.
     In addition, too many women must rely on the 
spouse's benefit rather than their own work record either 
because of wage inequities or because they have left the work 
force to care first for children and later for ailing parents 
or spouses.
     So-called ``zero years'' are taken into account 
when calculating the benefits of women who have taken extended 
periods of time away from work to fulfill caregiving 
responsibilities. Inevitably, adding zero years to the 
calculation results in lowered benefits.
     A divorced person age 62 and over can receive 
Social Security upon divorce if the former spouse is drawing 
Social Security, but must wait two years if the former spouse 
is still in the workforce. This provision was enacted as part 
of the Social Security Amendments of 1983. (The stated purpose 
of the two-year requirement was to prevent couples from 
obtaining a divorce in order to avoid loss of spousal benefits 
under the earnings test). This two-year waiting period can be a 
time of great deprivation with no alternative options 
available. It can also be regarded as imposing a penalty on 
divorce. Moreover, the gender inequity is clear: 60 times more 
women than men are dependent on their divorced spouse's 
earnings for Social Security benefits.
     If a widow(er) becomes disabled more than seven 
years after the spouse's death, she/he is not eligible for 
disability benefits.
    The reason for the seven-year limit was the view that if a 
previously uninsured widow or widower in good health entered 
the labor market after the spouse's death, the widow(er) would 
be able to develop his or her own worker eligibility for 
disability benefits and not need to rely on the deceased 
spouse's coverage. However, when the seven-year restriction was 
enacted in 1967, less than seven years of Social Security 
earning was enough to qualify an individual for disability 
benefits.
    Today, this is no longer true. Even if a widow(er) entered 
the labor force in covered work within a few months after the 
spouse's death, it would take, under subsequent adjustments in 
the law, close to 10 years to develop eligibility for 
disability benefits for those who experienced qualifying 
impairments. Thus, a spouse who diligently went to work and 
became disabled during the seventh to 10th years following her 
deceased spouse's death could be left without benefit 
eligibility that would have been assured to widows and widowers 
who developed their disabilities just a few years after the 
deceased worker's death. This is an inequity that weighs most 
heavily upon older women who simply were not in the Social 
Security-covered workforce during their family rearing and 
caregiving years.
    In addition, there is 50-year age requirement for 
eligibility for widow(er)s. Developing a 10-year earnings 
record is a considerable burden on midlife and older women who 
essentially have been out of the workforce until their husbands 
died, and then, along with their lack of experience, face age 
and sex discrimination when they seek to return to the 
workforce.
     Technically, a widow who enters in or continues in 
the work force past age 65 receives her own delayed retirement 
credits for any month after age 65 that she does not receive 
Social Security benefits. If her own benefits are greater than 
her widow's benefits, she will receive delayed retirement 
credits. But if her widow's benefits are the greater amount, 
when she retires, she will actually receive no delayed 
retirement credits whatsoever. The benefits paid will be 
identical to those she would have received if she had never 
entered the work force or had retired at an earlier age.
     Women who have devoted most of their adult lives 
to caregiving are not treated differently than long-term wage-
earners when applying the earnings test. For example, a women 
in her early sixties who, because she devoted herself to 
caregiving in earlier years, has no earnings record, may try to 
work in order to achieve some small savings to be used for her 
support in later years. In these cases, if the earnings test is 
applied, she is danger of losing a portion of her savings.
     Social Security does not provide spouse benefits 
to spouses under the age of 62 who are caring for an annuitant 
so disabled as to be in need of aid and attendance. In 
contrast. if an adult disabled child who is receiving benefits 
is in need of attendant care, benefits are paid to a mother 
providing that care regardless of her age.

The Advisory Council Recommendations

    Assuring the future solvency of the Social Security Trust 
Fund raises another, equally important, set of issues for 
women. The Report of the 1994-1996 Advisory Council on Social 
Security highlights the difficulty of ending these inequities--
for women, none of the three options proposed by the Council 
provides a fully acceptable solution.
    OWL must oppose any form of privatization. While seeking to 
provide safeguards for the future, it raises a whole new set of 
problems, chief among them that it would destroy the guarantee 
of a lifetime benefit, critical for women now, and, because of 
rising divorce rates, continued low earnings and other problems 
delineated in this testimony, even more critical in the future.
    First, privatization ignores the social insurance nature of 
Social Security, which, as the result of a shared risk pool, 
assures that those who qualify will have a minimum benefit, 
gives people with higher wages a higher benefit, and assures 
that benefits will continue for as long as people live. 
Privatization would undermine the redistributive impact of the 
program, and benefit only those individuals with high wages. It 
is clear that women cannot afford to lose a known basic 
benefit, with its guarantee of a progressive formula for even 
small increases.
    Were Social Security privatized, whether through the 
Individual Account (IA) option or the Personal Savings Account 
(PSA) option, women would have substantially smaller accounts 
than men, made even smaller because they will not include the 
redistributive benefit. Further, according to a GAO report 
recently presented to this subcommittee, women tend to be more 
conservative investors than men, so that, over time, their 
smaller investments would lead to yet smaller returns.
    Privatization would hurt those women who, because of lower 
wages throughout their work life, have been unable to invest 
and therefore have little knowledge of investment markets and 
risk making unfortunate investment choices; those who spend 
some of their money before retirement, often for long term care 
for a spouse or education for a child; and, those who, simply, 
live too long.
    Importantly, particularly in light of current prospects for 
a balanced budget, privatization would cost America trillions 
of dollars. A new administrative structure have to be 
established and costs increased; and, as funds are paid out to 
individuals instead of into the Trust Fund, benefits for 
current retirees would still have to be paid. The only way 
those transitional costs could be compensated would be through 
increased taxes, lower benefits--and/or a huge increase in the 
deficit, which could result in the demise of other components 
of our nation's social insurance program, such as Medicare.
    The Maintain Benefit (MB) option contains proposals that 
OWL can support; we know that some adjustment in payroll taxes 
and the COLA may be necessary to maintain the Trust Fund's 
long-term solvency. However--and we are aware that this is a 
complex issue--we have concerns about any proposal that extends 
the benefit computation period without considering the special 
needs of women as unpaid caregivers.
    Another potential problem in the MB option is the 
investment of Trust Fund income in private investments. This 
raises complex issues, including the potential risk to 
beneficiaries inherent in a non-government-bond based 
portfolio, and questions surrounding who will make decisions on 
investments, and what they will be. Additionally, there will be 
costs associated with administering such investments; and the 
withdrawal of funds from the Trust Fund will have a serious 
impact on the deficit if the Treasury must go elsewhere to 
borrow.

                            Recommendations

Making the System Work for Women

    OWL believes that existing data shows that the solvency of 
the Social Security Trust Fund can be assured with minor 
changes to the current system. But we believe that any proposal 
to address the future solvency of the Trust Fund must be 
analyzed for its impact on women. Such assessments must take 
into account the proposal's impact on both today's 
beneficiaries and tomorrow's.
    More importantly, as Congress comes to grips with the more 
universal problems of solvency, it is time, we believe, to 
eliminate the inequities women face. The laws and regulations 
governing eligibility and benefits system must be rewritten to 
make this guaranteed benefit, so vital to American women, truly 
gender neutral, for both current and future recipients.

Restoring Public Confidence

    One problem Social Security faces currently is a lack of 
public confidence in its future. Despite solid reports that the 
Trust Fund is fully solvent until 2037, the public, 
particularly younger people, believes the Trust Fund will be 
bankrupt before long, and they will not have benefits when they 
reach retirement age. This view is being actively promoted by 
those favoring privatization, and it appears to resonate with 
the public.
    It is OWL's view that without the backing of an informed 
public, no meaningful proposals for change can succeed. 
Historically, people do not focus on their retirement during 
their younger working years, and many do not understand what 
Social Security is, how it works, and what effect the options 
presented by the Advisory Commission would have on the future 
of their benefits. With the special impact that the baby boom 
will have on the solvency of the system, the involvement of 
younger people in decision-making process is critical.
    OWL urges the implementation, before any further 
Congressional action on the Trust Fund's future, of a 
comprehensive, nationwide education campaign that will 
illuminate the scope of the challenge that exists in reforming 
the system, and describe various reforms that have been 
proposed, with an accurate assessment of their impact. We 
believe that this is an issue that transcends partisan 
politics, and such efforts should be non-partisan and non-
political.

Improved Research is Necessary

    The report of the Advisory Council, and the more recently 
released report by the Social Security Advisory Board, 
Developing Social Security Policy: How the Social Security 
Administration Can Provide Greater Policy Leadership emphasize 
that the Social Security Administration, since the 1970's, 
given insufficient attention to policy, research and program 
evaluation activity. The Council report, in fact, states that 
the research and analysis resources within the agency are ``not 
sufficient to address adequately the problems facing the 
program over both the short-and long-term.''
    The reduction in research at SSA during the past two 
decades coincides with years that awareness of the inequities 
women face in the Social Security system have increased. OWL 
joins the Council and the Advisory Board in urging an immediate 
enhancement of its policy, research and evaluation capability. 
The increased availability of data on the distributional 
impacts of Social Security policy options and changes is vital. 
It is only through such an increase that the true effectiveness 
of existing programs for women, and the prospects for future 
proposals can be properly assessed before they are implemented.
    OWL looks forward to working with the members of this 
Subcommittee during the months ahead to achieve changes in 
Social Security that, while maintaining the basic principles of 
social insurance that lie at the root of our country's compact 
with its citizens, will ensure that women will have, long into 
the future, access to pensions and Social Security benefits, 
without being penalized for their caregiving years, and for 
living longer than men.
      

                                

    Chairman Bunning. Mr. Ryan, please.

  STATEMENT OF JACK RYAN, SENIOR RESEARCH ASSOCIATE, NATIONAL 
                   TAXPAYERS UNION FOUNDATION

    Mr. Ryan. Thank you. Mr. Chairman, on behalf of the 
National Taxpayers Union Foundation and all other organizations 
who have struggled over the years to put Social Security reform 
on the national agenda, thank you for holding these hearings 
and inviting recommendations for review.
    The financial status of the Social Security Program reveals 
that absent any major reform, the aging of our society is 
likely to have catastrophic consequences on the aftertax living 
standard for future generations. When one considers the looming 
debt of $5.3 trillion and the surge in mandatory spending from 
33 percent of all Federal spending in 1963 to 66 percent in 
1993, it is evident that major reform is necessary sooner, 
rather than later.
    Despite the overwhelming evidence that the cost of Social 
Security will expand to unsustainable levels with the 
retirement of the baby boom generation, the notion still 
persists that Social Security is sustainable with only minor 
reforms. In 1996, the Trustees reported that there is ample 
time to address projected funding shortfalls in the Social 
Security Program. I disagree with this notion and testify to 
the fact that the longer reform is put off, the larger the 
sacrifices will be for our children.
    From the competing alternatives suggested by the Advisory 
Council on Social Security Reform, the personal security 
accounts plan is the most intriguing. Mr. Chairman, aging 
societies should save more, not less. This is the best way to 
increase the size of the economy and hence, to ensure that 
future retirement claims do not come at the expense of the 
living standards of future workers.
    With this in mind, the National Taxpayers Union Foundation 
developed the National Thrift Plan with the goal of 
demonstrating the feasibility of gradually shifting Social 
Security to a funded system of privately owned and managed 
savings accounts. This will increase retirement security and 
reduce pressures on spending and taxes. It will also stimulate 
the economy by raising the savings rate, while retaining and 
building upon the popular features of the existing Social 
Security system.
    The National Thrift Plan contains a requirement that every 
worker set aside 5 percent of his or her earnings into a 
personal savings account. Unlike Social Security, workers would 
own this money. Since the money remains in control of the 
worker, it can be placed in a wide variety of investments and 
even passed on to their heirs at death.
    Initially, workers would continue to pay Social Security 
taxes to maintain the commitment to current retirees. Over 
time, however, tax-funded Social Security benefits would phase 
out and taxes would be cut accordingly. To minimize hardship on 
the working poor, the Government would help with dollar-for-
dollar matching contributions.
    Thus, the National Thrift Plan, once implemented, offers a 
5-percent contribution instead of a projected Social Security 
tax rate of 20 percent or more if the system is allowed to 
continue unreformed. Equally important, workers would own and 
control personal savings accounts contributions, whereas under 
an unreformed Social Security system, proceeds would be left to 
the uncontrollable whims of politicians.
    One key point to remember is that every worker at every 
income level would retire with substantially more income than 
would be the case under Social Security--two to three times 
greater over a lifetime. The entire transition would be 
achieved without adding to the Federal debt in any year, a key 
test that many other reform plans fail to meet.
    This plan would also restore the actuarial balance of the 
trust funds over the 75-year period ending in 2070. In 
contrast, the Advisory Commission's maintain benefits plan 
recommendation, which continues the same Social Security 
system, does not restore the trust fund balances.
    In my opinion, the current Social Security system is not 
capable of equitably meeting the future demands of 
beneficiaries and providing relief from pending tax hikes. The 
maintain benefits plan would continue this inequitable method 
of financing, whereas the personal security accounts plan would 
attempt to reduce these inequities by taking advantage of a 
better rate of return in the private market.
    The compelling reasons why Social Security should be 
reformed are as follows. First, the current Social Security 
system will impose an extremely heavy tax burden on future 
generations. According to the most plausible Trustees 
estimates, the cost to future workers to fund social programs 
as a percent of taxable payroll will rise by 6 to 9 percentage 
points over the next 35 years, or by 50 to 80 percent. When the 
employer match is taken into account, the Trustees project that 
the current 15.3-percent payroll tax will probably require 
doubling or tripling to 30 or 40 percent. This undoubtedly 
would crush our economy.
    Second, there's a growing imbalance in the return from the 
Social Security system. Social Security's popularity 
traditionally stemmed from its generous rate of return but now, 
for the first time, large numbers of future beneficiaries will 
have to pay more into the system than they will get back. 
Unfortunately, the Federal Government has promised today's 
adults $8.3 trillion in Social Security benefits beyond the 
value of taxes they have paid into the system. This translates 
into the largest intergenerational transfer of wealth in 
American history.
    Third, Social Security's rate of return is only 2.9 
percent, compared to 9.3 percent in the private market. 
Economists realize that this lack of investment earnings is 
substantially contributing to the demise of the Social Security 
system. In essence, the lack of investment earnings that could 
be experienced in the private market is fueling the need for 
more taxes and the reduction in future benefits.
    This leads to a final concern about Social Security. There 
is now an emerging consensus that in order to remain 
competitive in the future, America needs to raise its savings 
rate. It is widely believed by economists that the payroll 
taxes, along with the pay-as-you-go benefit structure, 
discourages thrift.
    In conclusion, when determining the need for Social 
Security reform, I would recommend that the Subcommittee fully 
consider the issues of taxation, transfers of wealth, thrift, 
and the contribution rate of return. Future generations cannot 
afford the status quo. Reforms must be implemented today to 
ensure an adequate retirement policy for tomorrow's 
beneficiaries.
    In my opinion, the Social Security reform debate should 
focus on the principles behind the personal security accounts 
plan, which, if implemented, would establish a system that 
instills the value of thrift, limits taxation, and provides a 
better rate of return for future generations. Thank you, Mr. 
Chairman.
    [The prepared statement and report follow. Appendixes and 
charts are being held in the Committee's files.]

Statement of Jack Ryan, Senior Research Associate, National Taxpayers 
Union Foundation

    Mr. Chairman, on behalf of the National Taxpayers Union 
Foundation and all other organizations who have struggled over 
the years to put Social Security reform on the national agenda, 
thank you for holding these hearings and inviting 
recommendations for review.
    The financial status of the Social Security program reveals 
that absent any major reform, the aging of our society is 
likely to have catastrophic consequences on the after-tax 
living standard for future generations. When one considers the 
looming debt of $5.3 trillion and the surge in mandatory 
spending, from 33% of all federal spending in 1963 to 66% in 
1993, it is evident that major reform is necessary, sooner 
rather than later.
    Despite the overwhelming evidence that the costs of Social 
Security will expand to unsustainable levels with the 
retirement of the baby-boom generation, the notion still 
persists that Social Security is sustainable with only minor 
reforms. In 1996, the Trustees reported that there is ample 
time to address projected funding shortfalls in the Social 
Security system. I disagree with this notion and testify to the 
fact that the longer reform is put off the larger the 
sacrifices will be for our children.
    From the competing alternatives suggested by the Advisory 
Council on Social Security reform the Personal Security 
Accounts Plan is the most intriguing. According to the Council, 
this plan ``...envisions a smaller public system in which 
workers would rely more on private pensions, individual 
retirement accounts, and other savings.''
    Mr. Chairman, aging societies should save more, not less. 
For this is the best way to increase the size of the economy 
and hence to ensure that future retirement claims do not come 
at the expense of the living standards of future workers.
    With this in mind, the National Taxpayers Union Foundation 
developed the National Thrift Plan with the goal of 
demonstrating the feasibility of gradually shifting Social 
Security to a funded system of privately owned and managed 
savings accounts. This will increase retirement security and 
reduce pressure on spending and taxes. It will also stimulate 
the economy by raising the savings rate, while retaining and 
building upon the popular features of the existing Social 
Security system.
    The National Thrift Plan contains a requirement that every 
worker set aside five percent of his or her earnings into a 
personal savings account. Unlike Social Security, workers would 
own this money. Since the money remains in control of the 
worker, it can be placed in a wide variety of investments and 
even passed on to heirs at death.
    Initially, workers would continue to pay Social Security 
taxes to maintain the commitment to current retirees. Over 
time, however, tax-funded Social Security benefits would phase 
out, and taxes would be cut accordingly. To minimize hardship 
on the working poor, the government would help with dollar-for-
dollar matching contributions.
    Thus, the National Thrift Plan would, once implemented, 
offer a five percent contribution instead of a projected Social 
Security tax rate of 20 percent or more if the system is 
allowed to continue unreformed. Equally important, workers 
would own and control personal savings account contributions, 
whereas under an unreformed Social Security system, proceeds 
would be left to the uncontrollable whims of politicians.
    We conservatively project that this plan will boost savings 
by 1.2 percent of GDP by the year 2001; by 2.6 percent of GDP 
by 2010; and by 5.9 percent of GDP by 2065. Within 25 years 
there will be a pool of savings growing tax-free in 
individually directed Personal Savings Account equivalent to 
50% of GDP. We estimate by 2050 productivity will be 26 percent 
higher than it would be otherwise. No less important, every 
worker at every income level will retire with substantially 
more income than would be the case under the current Social 
Security system. And by the 2030s, when you would be sharply 
raising payroll taxes under Social Security today, we would be 
cutting them under the National Thrift Plan.
    One key point to remember is that every worker at every 
income level would retire with substantially more income than 
would be the case under Social Security--two to three times 
greater over a lifetime. the entire transition would be 
achieved without adding to total federal debt obligations in 
any year, a key test that many other reform plans fail to meet. 
This plan would also restore the actuarial balance of the trust 
funds over the 75 year period ending in 2070. In contrast, the 
Advisory Commissions Maintain Benefits Plan recommendation, 
which continues the same Social Security system, does not 
restore the trust fund balance.
    The subcommittee should consider the following facts and 
fundamental flaws associated with the current Social Security 
system. The World Bank concludes that the current pay-as-you-go 
system ``... inevitably produces low costs and large positive 
transfers to the first covered generations and produces 
negative transfers for later cohorts because of system 
maturation, population aging, increased labor market 
distortions and incentives to evade.'' In my opinion, the 
current Social Security system is not capable of equitably 
meeting the future demands of beneficiaries and providing 
relief from pending tax hikes. The Maintain Benefits Plan would 
continue this inequitable method of financing, whereas, the 
Personal Security Accounts plan would attempt to reduce these 
inequities by taking advantage of a better rate of return in 
the private market.
    The compelling reasons why Social Security should be 
reformed are as follows: First, the current Social Security 
system will impose an extremely heavy tax burden on future 
generations. According to the most plausible Trustees 
estimates, the cost to future workers to fund social programs 
as a percent of taxable payroll will rise by 6 to 9 percentage 
points over the next thirty-five years, or by 50 to 80 percent. 
When the employer match is taken into account, the Trustees 
project that ``the current 15.3% payroll tax will probably 
require doubling or tripling to 30-40% by the time todays young 
workers retire.'' This undoubtedly would crush our economy. Of 
special note is that 16 out of the past 20 Congresses have 
implemented a payroll tax increase for social programs and have 
raised the payroll tax 261% over this time period.
    Second, there is a growing imbalance in the returns from 
the Social Security system. Social Securitys popularity 
traditionally stemmed from its generous rate of return. But 
now, for the first time, large numbers of future beneficiaries 
will have to pay more into the system than they will get back. 
Unfortunately, the federal government has promised to todays 
adults $8.3 trillion in Social Security benefits beyond the 
value of taxes they are expected to pay into the system. This 
translates into the largest inter-generational transfer of 
wealth in American history.
    Currently, Social Securitys rate of return is only 2.9 
percent, compared to 9.3 percent in the private market. 
Simplified, this means a 50-year-old person must pay $1,000 to 
get $1,900 worth of benefits at age 75. In a private market, 
that person would only have had to pay $206 to get the same 
benefits. Similarly, consider the following rate of return 
facts from Eugene Steuerle of the Urban Institute: ``Even 
[when] assuming a moderate 6 percent real rate of return (and 
there has not been a single 30-year period since 1926 in which 
the stock market rose less than 6 percent after inflation), a 
married earner born in 1955 making $60,000 in 1993 dollars 
would get $750,000 less from Social Security than he or she 
paid in. Under the current system, a $25,000-a-year worker 
loses more than $260,000.''
    Economists realize that this lack of investment earnings is 
substantially contributing to the demise of the Social Security 
system. In essence, the lack of investment earnings that could 
be experienced in the private market is fueling the need for 
more taxes and the reduction in future benefits.
    This leads to a final concern about Social Security. There 
is now an emerging consensus that in order to remain 
competitive in the future, America needs to raise its savings 
rate. It is widely believed by economists that the payroll 
taxes along with the ``pay-as-you-go'' benefit structure, 
discourages thrift.
    In conclusion, when determining the need for Social 
Security reform, I recommend that the subcommittee fully 
consider the issues of taxation, transfer of wealth, thrift and 
the contribution rate of return. Future generations can not 
afford the status quo. Reforms must be implemented today to 
ensure an adequate retirement policy for tomorrows 
beneficiaries. In my opinion, the Social Security reform debate 
should focus on the principles behind the Personal Security 
Accounts plan, which if implemented, would establish a system 
that instills the value of thrift, limits taxation and provides 
a better rate of return for future generations. Any reform plan 
must honor current Social Security obligations while providing 
a sound retirement policy for younger Americans.
    Mr. Chairman, thank you for holding this hearing and for 
the opportunity to testify on the National Thrift Plan and 
Social Security reform.
      

                                

National Thrift Plan Project Revised Final Report by Neil Howe and 
Richard Jackson

    In the fall of 1995, the Center for Public Policy and 
Contemporary Issues at the University of Denver and the 
National Taxpayers Union Foundation initiated a major Social 
Security reform project. Its purpose is to develop a viable 
plan to transition from the current pay-as-you-go Social 
Security system to a fully-funded system of individually owned 
and privately invested Personal Thrift Accounts (PTAs). This 
final report explains the rationale for this reform, describes 
the main features of our proposed ``National Thrift Plan,'' and 
summarizes the plan's quantitative effects on public-sector 
budgets, on the national economy, and on individual workers in 
different cohorts and income groups.
    The final report is organized as follows: I. The Problem; 
II. The Solution; III. The Plan; IV. Model and Assumptions; and 
V. The Results.

                             I. The Problem

    Just a few years ago, major restructuring of Social 
Security was practically unmentionable. Today, a rapidly 
growing number of voices--from federal commissions, public-
interest lobbies, private research institutes, universities, 
and even the mainstream media--are openly weighing radical 
reform proposals. Meanwhile, opinion surveys show low and 
falling levels of public trust in Social Security as it now 
stands. Three-quarters of all Americans doubt that Social 
Security will be able to fulfill its promises to new retirees 
within twenty years--and about two-thirds agree that Social 
Security ``is in need of major reform now.''
    Why is this happening? And why now? There are four 
important reasons:
     First, there is the mounting concern that the 
current Social Security system will impose a very heavy burden 
on tomorrow's workforce. According to the most plausible 1995 
Trustees' estimates (the ``intermediate'' and ``high-cost'' 
projections), the cost of Social Security as a percent of 
taxable payroll will rise by 6 to 9 percentage points over the 
next thirty-five years--or by 50 to 80 percent.
     Second, there is growing worry that the current 
system--if it doesn't crush future workers--will betray 
tomorrow's retirees. To keep Social Security outlays from 
exceeding earmarked tax revenues in 2030, we would, in that 
year, have to enact a roughly one-quarter to one-third across-
the-board benefit cut. Most Americans are not prepared for 
large cuts in Social Security. Under half of the private-sector 
labor force participates in an employer pension plan. In 1993, 
according to a Merrill Lynch analysis of Census data, half of 
all U.S. families had less than $1,000 in net financial assets; 
even among adults in their late fifties, the age workers are 
staring directly at retirement, median savings are still shy of 
$10,000.
     This leads to a third concern about Social 
Security. There is now a growing consensus that America needs 
to raise its savings rate. More than two-thirds of Americans 
agree strongly that ``government should provide more incentives 
to save for retirement''; among adults in their forties, the 
share is four-fifths. Yet economists widely believe that Social 
Security's pay-as-you-go benefit structure (entirely aside from 
its impact on the federal budget) discourages thrift. Nor is 
this just a U.S. worry. Reformers worldwide are turning away 
from unfunded retirement systems precisely because of their 
tendency to undermine private savings rates.
     Finally, there is the widespread disappointment 
about Social Security's declining rate of return on 
contributions. Today, for the first time in the history of 
Social Security, large categories of newly retiring workers are 
due to get back less than the market value of prior 
contributions, even when that value is computed at the lowest 
plausible interest rate. Everybody is beginning to understand 
that in future years these ``market losers'' will comprise a 
steadily growing share of all beneficiaries.
    Reforms that merely make adjustments to the current Social 
Security system cannot address these concerns. Yes, future 
hikes in payroll taxes or future cuts in promised benefits 
might narrow or even close Social Security's funding gap. But 
the public rightly perceives the prospect of large tax hikes or 
benefit cuts as part of the problem, not the solution. 
Conventional reforms, moreover, cannot alter Social Security's 
built-in bias against thrift--and they would actually worsen 
the cascading pattern of generational inequity that destines 
each new cohort of participants to receive lower returns than 
the last.
    This is bad news for a program predicated on the chain-
letter notion that everyone can be a winner. Many critics used 
to think that Social Security's windfall paybacks were a good 
argument for reform: Why not cut benefits and still leave 
everyone a winner? That argument fell on deaf ears. Ironically, 
the opposite argument may now turn out to be more persuasive: 
Why not rethink a system that cannot possibly offer the same 
personal retirement security and the same long-term rate of 
return as genuine economic savings?
    It is this logic that is leading many to advocate a radical 
solution: transforming Social Security into a funded system of 
personally owned defined contribution accounts. Such a system 
would differ from today's in two fundamental respects. Social 
Security is now a pay-as-you-go program, meaning that current 
payroll contributions, after a brief stop at the U.S. Treasury, 
go directly to pay current benefits. In a funded system, 
payroll contributions would be invested, create net new wealth, 
and thus generate an economic return over time. Popular 
mythology to the contrary, Social Security is a tax and 
transfer program in which participants earn no contractual 
claim to future benefits. In a system of personally owned 
accounts, all contributions would remain the property of 
participants.
    One obvious advantage of such a system is that it would 
allow higher benefit levels and rates of return. While the 
long-term rate of return in a pay-as-you-go Social Security 
system is limited to population growth plus productivity 
growth, the rate of return in a funded system is equal to the 
marginal product of capital, which (even when adjusted for 
risk) is typically much higher. Another obvious advantage is 
the higher rate of national savings--and thus ultimately higher 
rates of productivity and living standard growth. A funded 
system benefits workers not only as future retirees, but also 
as wage earners. Any economic income generated by savings that 
is not captured by the return to capital must show up (to the 
extent the savings are invested domestically) as higher labor 
earnings
    There are other benefits as well. By requiring that 
individuals save for their own retirement, a system of 
personally owned accounts would institutionalize the habit of 
thrift, and this might create an accelerator effect that 
further boosts national savings. Most economists agree that the 
FICA is a tax--and that taxes distort labor markets. By 
reducing (or eliminating) this tax, this reform would increase 
labor supply and hence economic growth. Finally, there is the 
issue of retirement security. Ironically, Social Security was 
originally set up because people trusted the government more 
than financial markets. Today, most Americans under fifty feel 
just the opposite. They know that Congress will necessarily 
renege on unsustainable pay-as-you-go benefit promises--but 
that no politician can take away personally owned assets 
invested in the real economy.
    The two principles underlying this reform--funding and 
personal ownership--are equally important. There are some who 
suggest that we move toward a more funded system without giving 
participants personal ownership of their savings. This 
approach, which calls for investing part or all of the current 
Social Security surplus outside of government, does nothing to 
guarantee personal retirement security: What Congress promises 
it can still take away. It is also questionable whether it 
would amount to genuine funding--that is, the creation of net 
new economic wealth. Since reformers don't specify how 
government would make up for lost FICA revenue, privately 
invested Social Security surpluses may simply be canceled out 
dollar for dollar by a larger federal deficit. More generally, 
there is no institutional means to prevent Congress from 
diverting FICA taxes to current consumption at some future 
date. Only personal ownership of contributions can do that.
    Another school of thought advocates personal ownership, but 
not necessarily funding. These reformers would allow workers to 
invest some or all of current FICA contributions in personal 
retirement accounts; meanwhile, implicit Social Security 
benefit liabilities for past FICA contributions would be 
translated into individual property rights by issuing 
beneficiaries ``recognition'' bonds--that is, formal Treasury 
debt. While this approach protects beneficiaries from the risk 
that government will default on its benefit promises, it only 
does so by shifting the current system's cost to the general 
taxpayer.
    It is sometimes said that a system of personally owned 
Social Security accounts would shift unacceptable risks to 
individuals--in other words, that it amounts to totally 
``privatized'' retirement. But personal ownership is consistent 
with any degree of government paternalism. It need not allow 
people to recklessly overconsume during their working years. 
Contributions can be made mandatory and restrictions can be 
placed on the use of retirement savings. It need not strip 
people of the disability and survivors insurance protection 
that Social Security now provides. These elements of the 
current system can be preserved or duplicated. Nor need it put 
the low-income (or simply unlucky) worker at greater risk of 
poverty and hardship in old age. Government can subsidize the 
savings contributions of low-earning workers and provide a 
guaranteed floor of old-age income protection.
    Other critics question whether funding Social Security is 
really worth the effort. Since all income which is consumed 
tomorrow must be produced tomorrow, some say that it doesn't 
matter if retirees exercise claims on tomorrow's production by 
selling a stock or cashing a government check: The working 
population will have to support the retired population in both 
cases. This argument misunderstands the purpose of funding. By 
raising national savings, a funded Social Security system will 
increase the nation's capital stock and raise the productivity 
of tomorrow's workforce, thus making future retirement claims 
more affordable regardless of how they are paid. A pay-as-you-
go system will not. It has also been argued that the long-term 
rate of return to capital cannot exceed the long-term growth 
rate of the economy, and that workers can therefore do no 
better under a funded system than under a pay-as-you-go system. 
While this claim may have had some passing plausibility when 
both the population and productivity were growing rapidly (Paul 
A. Samuelson offered his classic formulation of this hypothesis 
in 1958), today almost all economists agree that in fact the 
rate of return to capital far exceeds the rate of economic 
growth.
    There is, however, one drawback that no honest plan to fund 
Social Security can avoid: the large transition cost. Since 
moving to a funded system means that society must begin to save 
at a higher rate, society will necessarily have to consume at a 
lower rate--at least until the productivity advantages of 
higher savings kick in. Or, to put the transition problem in 
layman's terms, current workers must pay for two retirements: 
their own (which now must be prefunded) and that of current 
beneficiaries (who will continue to rely on pay-as-you-go 
benefits). To finance the transition, current workers will thus 
have to save more, current beneficiaries will have to receive 
less, or some combination of the two. This challenge is 
compounded by the massive future deficits currently projected 
by the OASI trustees. As it now stands, benefits must be deeply 
cut (or taxes steeply raised) simply to keep the current system 
in balance--even apart from paying the extra cost of 
transitioning toward a funded system.
    Most reform proposals downplay or deny the need for 
sacrifice--and so veer off course. One common strategy is to 
argue that merely by investing some or all of workers' current 
FICA contributions in private capital markets (either through 
personal accounts or in one big government pool), everybody 
ipso facto will better off in the long run. Yes, reformers know 
that Treasury will have to borrow to make up for the missing 
revenue. But apparently they believe that Treasury (or each 
worker's account) can indefinitely earn greater returns (with 
no greater risks) on the new equity assets than would be lost 
on the new debt liabilities. Ironically, the premise behind 
this ``free lunch'' assumption, made by many libertarians, is 
that current financial markets are massively inefficient 
allocators of capital.
    The truth is that any plan which relies on the spread 
between stocks and bonds is a dicey and perhaps even dangerous 
proposition. If the federal government starts buying stocks and 
selling fixed-interest debt on a large scale, the yield on 
bonds will rise and the yield on stocks will fall--narrowing 
the favorable spread the plan depends on. Moreover, the very 
fact that government is betting on the stock market to defray 
the cost of future benefit payments will raise the risk (and 
hence the interest cost) of government debt. This narrows the 
spread even more, perhaps to the vanishing point. No major 
country engages in this sort of arbitrage--not just because of 
the negative (fiscal) effect on interest rates, but because of 
the corrosive (political) effect on the ``full faith and 
credit'' of government itself. On the other hand, if FICA 
contributions are put into individual accounts, the extra 
interest payable to new government debt holders will largely 
cancel out the (risk-adjusted) return to account holders. In 
the long run, this revolving door is just as unlikely to leave 
society better off.
    Another way to make the transition cost appear small is to 
concede that there must be some new net national savings, but 
to minimize what is needed by assuming that each new savings 
dollar will earn a huge return. Indeed, if the total real rate 
of return on business equity is assumed to be high enough (say 
15 percent before corporate taxes, a common if outlandish 
assumption), and if it is further supposed that workers' 
portfolios will be invested entirely in equities (another 
common if outlandish assumption), the transition problem all 
but vanishes. On the one hand, workers could finance generous 
retirement annuities by saving a mere one percent of payroll. 
On the other hand, the huge increase in private savings in the 
form of corporate equity would generate huge additions to 
federal, state, and local revenues via corporate income and 
property taxes. Some of this revenue could then be cycled back 
into Social Security, thus obviating the need for most (or all) 
sacrifice on the part of current or soon-to-retire 
beneficiaries.
    A few plans acknowledge the cost of transitioning to a 
funded system, but try to design the reform so that the 
sacrifice is hidden from the public. To this end, they too 
mostly or completely exempt current and soon-to-retire 
beneficiaries from programmatic sacrifice--thus shifting the 
transition cost entirely to younger workers. But since they 
don't want to advertise this sacrifice either, they are 
reluctant to require that workers make new payroll 
contributions. Instead, they resort to some combination of two 
strategies: issuing government debt and raising net taxes 
outside the Social Security system.
    The problem with financing the transition by running-up the 
national debt is not just that it undermines the purpose of 
reform by neutralizing much of the private savings boost. It 
would wreak havoc with the nation's popular, procedural, and 
constitutional firewall against excessive indebtedness. If we 
can borrow trillions to finance the Social Security transition, 
why can't we borrow trillions for any purpose at all? Those 
plans which issue ``recognition'' bonds directly to 
beneficiaries also raise an additional concern. By translating 
existing implicit Social Security liabilities (which have no 
constitutional protection) into formal debt, they would in 
effect render these benefits unreformable. The economy might 
collapse or the nation go to war. But short of default on the 
national debt, Congress would still have to pay every penny of 
today's Social Security liabilities.
    The problem with the general tax hike strategy is that it 
hopelessly obscures the rationale for sacrifice. If we pay for 
the transition by imposing (say) a new national sales tax, the 
public is likely to view this new tax as a substitute for 
existing taxes and demand an offsetting tax cut. If it does, 
the result will be a larger federal deficit--which, once again, 
would undo some (or all) of the effect of higher private 
savings. On the other hand, if we pay for the transition by 
raising savings contributions within the Social Security system 
itself, the rationale for the sacrifice is clear. Moreover, if 
we make these contributions the personal property of workers, 
the benefits will accrue directly to those making the 
sacrifice. No one is going to say: Congress is requiring me to 
save more, so it had better cut my income taxes. Many, if not 
most, Americans will welcome the opportunity to do something--
save for their future--that the vast majority confess they 
should be doing anyway.

                            II. The Solution

    Whatever happened to the idea that entitlement reform 
requires sacrifice? What happened is that reformers were so 
dazzled by the long-term benefits of a funded Social Security 
system that they succumbed to the temptation of a free lunch. 
Our plan--a National Thrift Plan--is different. It fully pays 
for the transition to a funded system--without shell games, 
without adding to total federal debt, and without new general 
purpose taxes.
    To begin with, it takes the essential step of reducing 
benefits under the current Social Security system. Today's 
retirees would face reduced COLAs and full taxation of 
benefits. Future retirees would in addition face a gradual 
phase-out of new benefit awards. At the same time, it would 
require all workers to make a mandatory 5 percent of payroll 
savings contribution, which, initially, would come on top of 
current FICA taxes.
    This is the transition cost of escaping from the chain 
letter on which we have thus far been depending. Plans that 
pretend to manage the transition with less sacrifice are 
engaging in false advertising. To the extent that they actually 
fund Social Security, the sacrifice will be just as real. More 
likely, future generations will be saddled with a permanent 
debt service charge that requires them to pay back (under the 
table) much of what we claim to be giving them.
    The National Thrift Plan will deliver what it advertises. 
At the national level, it will substantially boost net savings 
in each and every year. At the individual level, it will 
greatly increase retirement incomes and retirement security. 
Within a few years of the plan's implementation, all cohorts of 
new retirees (at all income levels) will be receiving total 
benefits that exceed (and eventually far exceed) current-law 
Social Security benefits. As the new system matures, the rate 
of return that beneficiaries can expect on total lifetime 
contributions will also rise steadily relative to current law. 
This improvement, moreover, will be proportional for all income 
groups--meaning that the new system would continue to offer 
low-earning workers the same relative deal that the current 
Social Security system does.
    The National Thrift Plan also provides for a transition 
that is inherently stable. The best that most plans can promise 
is that at some distant date future generations will come out 
better off--if everything works out as planned. Our plan 
recognizes that the future is by definition uncertain. It thus 
insists that net savings must be positive throughout the 
transition--and it builds in the flexibility to ensure that we 
remain on this sustainable economic path. Where many other 
plans would tie Congress's hands by converting current Social 
Security liabilities into formal debt, we ensure that Congress 
can respond to tomorrow's unknowable challenges by making 
additional adjustments in benefits.
    What the National Thrift Plan would not do is ``privatize'' 
Social Security. Rather, it would allow us to transition to a 
new Social Security system--one that continues to provide 
universal old-age and survivors insurance, but that does so in 
a way that is both beneficial for own personal futures and 
constructive for the nation's collective future.

                             III. The Plan

    The National Thrift Plan would gradually phase out Social 
Security Old-Age and Survivors Insurance (OASI) ``elder 
benefits'' and replace them with a system of mandatory Personal 
Thrift Accounts (PTAs). These elder benefits--that is, retired-
worker benefits, benefits for spouses aged 62 or older, and 
benefits for widows and widowers aged 60 and over--comprise 95 
percent of current OASI benefit dollars. The other 5 percent--
primarily benefits to children, widowed mothers and fathers, 
and nonaged disabled widows and widowers--would remain in 
place, as would all Social Security Disability Insurance (DI) 
benefits.\1\
---------------------------------------------------------------------------
    \1\ Nonaged OASI benefits could perhaps be phased out as part of a 
thrift plan that offered convenient and efficient life insurance 
requirements, but in view of their relatively small cost we decided to 
retain them; reform of DI benefits is a complex issue in its own right 
and lies beyond the scope of this project.
---------------------------------------------------------------------------
    The PTA accounts are thus designed to serve a single 
function: providing for the retirement income of workers and 
their aged survivors. In addition to the PTAs and small nonaged 
benefit components, the new system will include a means-tested 
benefit that guarantees all elders an income equal to 100 
percent of the poverty line. As now designed, the National 
Thrift Plan will cover workers currently covered by OASDI 
(about 95 percent of all U.S. workers), but it could be 
expanded to cover the entire labor force.\2\ The plan would be 
implemented starting in 1998, when PTA payroll deductions would 
begin.
---------------------------------------------------------------------------
    \2\ Expanding coverage would ease the transition cost (or increase 
the transition savings), since it would increase FICA tax revenue far 
more and much earlier than it would raise eventual benefit outlays.
---------------------------------------------------------------------------
    The following outline describes the major components of the 
National Thrift Plan:

1. Trust-Fund Reform

    (A) Abolish the OASI Trust Fund. The plan would formally 
abolish the OASI trust fund, thus acknowledging what's always 
been true in fact: that today's Social Security system is a 
pay-as-you-go program, and that its surpluses are not 
translated into genuine economic savings. The current OASI 
trust fund balance, consisting of some $500 billion in Treasury 
IOUs that can only be redeemed by raising taxes or borrowing 
from the public, will thus be erased. Any perceived loss on the 
part of workers who have contributed toward this paper surplus 
will be more than compensated by the certainty that future 
Social Security surpluses really will benefit their economic 
future. Initially, any cash surplus of OASI tax revenues over 
outlays will be used to offset the cost to the rest of the 
federal budget of implementing the National Thrift Plan. As 
described below, once the OASI system is determined to be in 
permanent cash balance the surpluses will be refunded to 
workers' PTAs.\3\
---------------------------------------------------------------------------
    \3\ Our results show that the National Thrift Plan will probably 
not produce a permanent OASI operating surplus until the early 2030s. 
Until then, though benefit outlays will be greatly reduced from current 
projections, the reductions will simply serve to prevent future 
benefits from exceeding future tax revenue. Once this initial 
``Boomer'' cost wave is past, however, the size of the surplus (and 
thus the refund to worker PTAs) will grow very rapidly.

---------------------------------------------------------------------------
2. Benefit Reform

    (A) Expand Taxation of Social Security Benefits.\4\ 
Starting in 1998, taxation of Social Security benefits will be 
expanded so that 85 percent of all OASDI benefits are subject 
to personal income taxes.\5\ In effect, this reform takes the 
new 85 percent taxability rule that now applies to 
beneficiaries with incomes over high thresholds and applies it 
to all beneficiaries. Since the change will affect only those 
households with enough earnings to pay income taxes, it will 
affect no beneficiaries beneath or near the poverty line. At 
higher income levels, beneficiaries would pay some tax. Small 
or large, the tax on their OASDI benefits would be at the same 
rate that all Americans in the same tax bracket pay taxes on 
their incomes--and at the same rate that future retirees will 
be paying taxes on their PTA withdrawals. It's worth noting 
that because current-law does not index the income thresholds 
at which benefit taxation applies, a rising share of total 
OASDI benefits are now becoming taxable--and eventually 85 
percent of all OASDI benefits will be taxable. The principle of 
full benefit taxation is therefore already accepted by the 
current Social Security system. What our reform does is to 
apply that principle immediately in order to gain the crucial 
near-term savings that any transition plan needs.
---------------------------------------------------------------------------
    \4\ Means-testing was considered as an alternative to full benefit 
taxation. However, we concluded that a stand-alone means-test for 
Social Security (as opposed to a comprehensive means-test for all 
federal entitlements) would be both needlessly arbitrary and expensive 
to administer. In any case, the progressive income tax code constitutes 
an implicit means-test--and is, moreover, the same ``means-test'' that 
will be applied to all PTA withdrawals under the National Thrift Plan.
    \5\ The 15 percent exemption reflects a generous estimate of the 
dollar value of most beneficiaries' prior FICA contributions that have 
already been subject to personal taxation, and hence brings the tax 
treatment of Social Security in line with the tax treatment of private 
pension benefits. All new revenue from the taxation of OASDI benefits 
will be credited, pro rata, to the OASI and DI systems. The Medicare 
Hospital Insurance program, however, will continue to be credited with 
its current-law revenue from OASDI benefit taxation, and will thus be 
held harmless under our plan.
---------------------------------------------------------------------------
    (B) Reduce Social Security COLAs. Current law provides that 
all OASDI benefits are upwardly adjusted in December of each 
year by the annual growth in the Consumer Price Index (CPI). 
The plan provides for a one-year COLA freeze to be enacted in 
1998 (thus going into effect with the benefit checks received 
on January 3 and 4, 1999). Thereafter, the annual COLA will be 
pegged to the CPI minus \1/2\ percentage point. This permanent 
adjustment recognizes the growing consensus among economists 
that the CPI may overstate inflation (\1/2\ of a percentage 
point is a typical estimate)--as well as the increasing 
likelihood that Congress, entirely apart from broader issues of 
Social Security reform, will enact a COLA cut. Like expanded 
taxation of Social Security benefits, these provisions produce 
critical near-term savings.
    (C) Phase-Out New OASI Elder Benefits. Social Security 
benefits are computed on the basis of annual ``wage credits'' 
earned during years of covered employment. Starting in 1999, 
the National Thrift Plan would gradually reduce the credits 
used in computing all new OASI elder benefits. Specifically, 
newly earned wage credits will be reduced by a factor of 5 
percent per year until they reach zero after 20 years. Thus, 
workers retiring in the year 2000 will receive 95 percent of 
their current-law wage credit for the year 1999 and 100 percent 
for all earlier years. The benefit formula for each successive 
cohort will include an additional year of reduced credits. For 
example, workers retiring in 2001 will receive 90 percent of 
their current-law wage credit for the year 2000, 95 percent of 
their wage credit for 1999, and 100 percent for all earlier 
years. This phase-out of OASI elder benefits will already be 
generating large savings by the time Baby Boomers start 
retiring en masse in the 2010s. However, it will take years 
longer before the phase out is entirely complete. The last 
partial wage credit for OASI elder benefits would be earned in 
2017; the first cohort to receive no OASI elder benefits would 
begin retiring in the 2050s; and the last OASI elder benefit 
check would be mailed out sometime around the year 2100. While 
this reform operates through a complex change in Social 
Security's benefit formula, it in effect amounts to a pro rata 
cohort reduction in benefits where the amount of the reduction 
depends on the year beneficiaries were born (or turn age 
62).\6\ Initial retirement awards would be unaffected for 
workers born before 1938; as a percent of current-law awards, 
they would be reduced about 25 percent for workers born in 
1954, about 50 percent for workers born in 1964, and about 75 
percent for workers born in 1973.
---------------------------------------------------------------------------
    \6\ So-called ``drop out'' years will not affect this benefit 
reduction. If a wage year excluded from the Social Security benefit 
calculation is a year affected by the wage-credit phase-out, the 
appropriate reduction factor will be applied to the earlier replacement 
year. The benefit reduction will also be invariant with respect to 
retirement age--and thus will not penalize continued employment. The 
reduction factor applied to wage years after age 61 will be fixed at 
the average reduction factor for all prior wage years.
---------------------------------------------------------------------------
    (D) Phase-Out New OASI Spousal Benefits. Current law 
guarantees that the aged spouse of a retired worker receive a 
benefit equal to at least one-half of the retired worker's 
benefit. If a spouse does not qualify for a benefit of this 
size on the basis of his or her own earnings history, a special 
``spousal benefit'' fills in the difference. This 50 percent 
benefit supplement for retired workers with nonworking spouses, 
designed for another era, is a capricious windfall that has 
long outlived its social usefulness. Moreover, it benefits a 
declining number of new retiring couples--and those whom it 
does benefit are typically the ones least likely to need the 
extra income. The National Thrift Plan includes a special 
provision for the phase-out of all new spousal benefit awards. 
Effective for workers reaching age 62 in the year 2000, new 
awards would be reduced by 10 percent; awards for each 
successive cohort would be reduced by an additional 10 percent 
until spousal benefits are entirely phased out for workers 
reaching age 62 in 2009 and later. Because these reduction 
percentages are applied directly to new benefit awards (rather 
than to annual wage credits), the spousal benefit is phased out 
more rapidly than other OASI elder benefits. Spouses of workers 
born before 1938 would be unaffected; spouses of workers born 
in or after 1947 would receive no spousal benefit.
    (E) Guarantee a Floor of Old-Age Income Protection. The 
plan will provide for a means-tested floor of protection, to be 
phased in from 1998 to 2002, that guarantees all Americans aged 
62 and over a total household income equal to 100 percent of 
the poverty line. This benefit will replace the current means-
tested Supplemental Security Income (SSI) benefit for the 
elderly. (Nonaged disabled beneficiaries will remain under the 
SSI program.) SSI now guarantees a floor of elder income 
protection that averages just 70 percent of the poverty line 
for single beneficiaries and 90 percent for couples. 
Eligibility, moreover, starts at age 65. The National Thrift 
Plan will thus provide more generous poverty protection than 
current law.

3. Mandatory PTAs

    (A) Require Mandatory PTA Contributions. Every covered 
worker will be required to contribute 5 percent of earnings (up 
to the current year Social Security taxable maximum) to a PTA 
established in that worker's name. Contributions will start in 
1998 at 1 percent of payroll and be phased in over 5 years. All 
contributions will be personal; there will be no employer 
contribution. The government, however, will make payments to 
the PTAs of all disabled workers and all young and disabled 
widow(er) beneficiaries.\7\ Workers could satisfy part (or all) 
of the 5 percent payroll deduction requirement by reallocating 
current deductions under defined contribution pension plans. 
Above and beyond the mandatory 5 percent payroll deduction, all 
workers would have the option of making additional voluntary 
contributions up to a dollar cap set at 5 percent of maximum 
taxable earnings.\8\ All PTA contributions and capital 
appreciation will be exempt from personal income taxation; PTA 
funds will only be taxed on withdrawal.
---------------------------------------------------------------------------
    \7\ Specifically, the PTAs of nonelderly adults who qualify for 
OASDI benefits because they are not expected to work--that is, disabled 
workers, widowed mothers and fathers, and disabled widow(er)s--would 
receive monthly government contributions on the basis of the disabled 
or deceased worker's former wages. This ensures that the PTAs of these 
individuals continue to be funded--an important provision in view of 
the fact that our plan would phase-out all OASI elder benefits, 
including benefits to elderly widows and former disabled worker 
beneficiaries.
    \8\ A higher dollar cap (perhaps 10 percent of maximum taxable 
earnings) could be a logical component of an overall national thrift 
plan. However, since a higher cap would increase the cost of the tax 
expenditure--and might not produce a commensurate increase in net 
savings--we felt it required further study.
---------------------------------------------------------------------------
    (B) Provide for PTA Matches for Low-Earners. The government 
will match, dollar for dollar, the mandatory PTA contributions 
of all single workers aged 20 to 62 who earn up to 45 percent 
of the average wage. Above this level, the subsidy will be 
reduced by half the mandatory contribution rate times each 
additional dollar of earnings so that it falls to zero at three 
times the low wage threshold. The wage thresholds for married 
workers will be 50 percent higher.
    (C) Establish PTA Investment Rules. Mandatory deductions 
will be made automatically by employers; voluntary deductions 
at a higher rate will be made at the request of employees. The 
self-employed will be responsible for making at least the 
minimum contribution to their own PTAs. Workers may choose 
their own certified financial manager and invest funds as they 
wish within certain regulatory guidelines.\9\ The federal 
government will establish an oversight board, with public and 
private trustees, whose functions will include establishing 
these guidelines and maintaining a ``switchboard'' to ensure 
that PTA deductions are made and that all contributions (even 
for part-time and migrant workers) are routed to the right PTA. 
This oversight board will also serve as the default financial 
manager of PTA funds: Anyone who is unable or unwilling to deal 
with a private manager will have his or her PTA managed by this 
federal agency.\10\
---------------------------------------------------------------------------
    \9\ Clearly, investment choices must be limited and regulated. Yet 
to the extent possible, we just as clearly want to maximize individual 
choice. At a minimum, there will need to be a requirement that some 
percentage of assets (adjusted for age) be invested in risk-free or 
near risk-free debt. (As explained in the next section, our model 
implicitly assumes such a requirement.) Other issues to be studied 
include the types of investments that will be allowable and, among 
allowable investments, the extent to which workers will be required to 
diversify by investing in indexes.
    \10\ The government would invest all default funds according to 
some relatively low-risk formula (there would be two or three standard 
options) that includes indexed Treasury bonds and stock market indexes. 
The level of risk in default portfolios would also automatically be 
adjusted to the worker's age. Although some critics raise concerns 
about how financially unsophisticated workers would fare under a PTA 
system, most economists believe that this approach would ensure those 
workers a rate of return comparable to (or even better than) that of 
workers who enjoy sophisticated financial advice.
---------------------------------------------------------------------------
    (D) Establish Rules on Use of PTA Funds. Unlike current 
Social Security benefits, to which workers only have a 
statutory right that is subject to revision or revocation by 
Congress, PTA funds will be common law personal property. 
However (just as can legally occur in certain trusts), PTA 
funds will be subject to use restrictions. In the event a 
couple divorces, PTA assets attributable to wages earned during 
the marriage will be evenly divided. If the PTA owner dies, the 
assets will be routed tax-free into the PTA of the spouse; if 
the owner is unmarried, the assets become part of the owner's 
estate. Until age 62, no worker will be allowed to withdraw PTA 
funds unless he or she purchases an indexed annuity (a 
requirement now made feasible by the Treasury's recent decision 
to issue indexed bonds). This annuity, together with the 
spouse's own PTA annuity and any future OASI benefits, must 
ensure that the worker and spouse possess an income for life 
equal to the higher of (a) a fixed-dollar low-income threshold 
set at 120 percent of the poverty line or (b) 30 percent of the 
worker's preretirement wage. (This second test is only slightly 
below the current Social Security replacement rate for average-
earning workers retiring at age 62.) Couples would not only 
have to provide for joint income, but for the survivorship of 
the spouse.\11\ Workers aged 62 and over will be allowed to 
withdraw PTA funds at any time, but all funds must be invested 
in an indexed annuity until the above conditions are met.\12\ 
Fund balances in excess of those required to purchase the 
minimum annuity will be subject to no use restrictions and may 
be consumed, reinvested, or passed on to heirs.
---------------------------------------------------------------------------
    \11\  The relatively rare event of the survivorship of the 
dependent child of a retired worker is not an issue here, since the 
National Thrift Plan would retain all current-law OASI child benefits.
    \12\  Alternatively, workers could be allowed to make annual 
withdrawals from their PTAs, with the amount not to exceed the account 
balance divided by the average remaining years of life expectancy.

---------------------------------------------------------------------------
4. FICA Reform

    (A) Credit OASI Cash Surpluses to Worker PTAs. As soon as 
the OASI system (including the cost of the new means-tested 
safety net and the PTA subsidies) is determined to be in 
permanent cash balance, any annual surplus of tax revenues over 
current year outlays will be automatically credited (pro-rated 
to covered wages) to worker PTAs. Thus, to the extent that 
benefits decline as a share of taxable payroll, the PTA 
contribution rate will rise above 5 percent. This provision 
gives younger workers a direct stake in any reforms that 
restrain the future cost of OASI benefits.
    (B) Provide for an Eventual Phase-Out of Payroll taxes. 
Once the PTA contribution rate reaches 8 percent of payroll, 
OASI FICA (and SECA) taxes will be progressively reduced. This 
reduction will continue until OASI revenues (excluding the 3 
percent PTA refund) fall to the ultimate level (about 2 percent 
of payroll) that is needed to pay for: (1) all OASI child and 
nonaged survivor benefits; (2) the means-tested floor of 
protection for the low-income elderly; and (3) the PTA savings 
subsidies. Thus, when the transition is complete, the total 
contribution rate under the new Social Security system (about 
10 percent) will be somewhat less than the current-law OASI 
payroll tax rate--and no more than two-thirds of the tax rate 
that would eventually be required to pay for OASI's ever-
deteriorating current-law deal.

                       IV. Model and Assumptions

    The National Thrift Plan Project required the development 
of interlinked macro and micro models that quantify the affects 
of the plan on the federal budget, the national balance sheet, 
and individual cohorts of beneficiaries. Except for unavoidable 
exceptions, our macro model precisely follows the official 1995 
``intermediate'' scenario prepared by the Social Security 
Administration's (SSA) Office of the Actuary for all future 
years through 2070. Wherever we needed to add assumptions, we 
have, in the interest of prudence, tried to lean in the 
direction of prudence.
    The following outline describes our model and our principal 
assumptions:

Model
    (1) Macro Module. The macro module calculates OASI 
benefits, the OASI balance, PTA refunds, changes in other 
government outlays and revenues, and changes in net national 
savings. It also includes a productivity feedback equation. In 
calculating yearly outlay changes due to our OASI reforms, we 
tried to ensure the highest possible degree of accuracy for 
retired worker benefits by using actual SSA projection matrices 
that specify benefits and beneficiaries by year, by age, and by 
age of entitlement. (At 75 percent of total benefits, these 
constitute far and away the largest category.) Savings in other 
OASI benefit categories were estimated using the results for 
retired worker benefits and adjusting them as necessary. 
Revenues from benefit taxation were calculated using data from 
the SSA and the Office of Tax Analysis. Our calculations of the 
cost of the PTA savings match used SSA data on covered 
earnings; our calculations of the poverty benefit's cost are 
based on data published by the Urban Institute.
    (2) PTA Module. The PTA module tracks PTA assets owned by 
workers at every age in every year. Specifically, it takes 
total yearly PTA contributions from the macro model, calculates 
the build up of worker assets by age and by year, and then 
subtracts assets that leave the system due to death or 
retirement. The module also adjusts portfolio composition by 
age. In order to accurately distribute assets, we assumed that 
workers' earnings vary by their age. The relationship between 
age and earnings was estimated using Census and SSA data and 
then normalized so that total yearly average earnings conform 
to yearly average earnings in the SSA scenario.
    (3) Micro Module. The micro module takes the results from 
the macro and PTA modules and uses them to calculate total 
contributions and total benefits for every cohort, over its 
entire working life and retirement, for the following three 
ideal worker types: average-earners (that is, workers whose 
wages in every year are equal to the average U.S. wage); low-
earners (whose wages are equal to 45 percent of the average 
wage); and maximum-earners (whose wages are equal to the 
taxable maximum). For each of these types, the model then 
generates replacement rates, present values of lifetime 
benefits and taxes, payback ratios, net present values of 
lifetime benefits, and wage-adjusted net present values of 
lifetime benefits.\13\ All life expectancies are weighted male-
female averages.
---------------------------------------------------------------------------
    \13\ The replacement rate is the first year of retirement benefits 
divided by the last year of earnings. All present values (PVs) are 
discounted at the OASI trust fund interest rate to the year of 
retirement. The payback ratio is the PV of benefits divided by the PV 
of taxes (plus PTA contributions). The net PV of lifetime benefits is 
the PV of benefits minus the PV of taxes. Wage adjusting the latter 
means using baseline taxes in all PV calculations--so that tax payments 
reflect only the ``hourly'' cost of benefits and do not reflect the 
productivity gains implicit in the reform scenario.

---------------------------------------------------------------------------
Assumptions

    OASI Baseline. To calculate a baseline scenario, we needed 
to make some assumption about what will happen to OASI after 
its trust fund's (1995) projected bankruptcy in 2031. Our 
assumption is that, upon bankruptcy, an immediate across-the-
board benefit cut will be enacted that returns the system to 
cash balance. Thereafter, benefits will be adjusted annually to 
maintain cash balance. If Congress literally takes no action, 
OASI's legal appropriations would run dry and SSA would have no 
other choice but to enact some such measure. One could of 
course argue that Congress will someday correct the imbalance 
partially or entirely through payroll tax hikes. But while this 
action would have the effect of improving the baseline deal for 
today's cohorts of workers, it would result in an even worse 
deal for future cohorts of workers. The reader should keep this 
trade-off in mind while assessing our results.
    Financial Rates of Return. We assumed two basic types of 
financial instruments: (a) relatively risk-free public debt, 
whose real rate of return to investors is assumed to be 
identical to the projected average rate for OASI trust fund 
assets (2.3% after 2010); and (b) corporate equity, whose real 
rate of return to investors is assumed to be 6.7% in every 
future year. The latter figure is the average compound rate for 
total real returns in U.S. stock markets over 190 years, from 
1802 to 1992, as computed by Jeremy J. Siegel at the Wharton 
School. This is slightly lower than most estimates of the rate 
since 1946 and substantially lower than most estimates of the 
rate since 1982. According to Ibbotson Associates, the total 
real return on large company equity from 1925 to 1995 was 7.2%. 
As elsewhere, we wish to resolve any uncertainty on the side of 
prudence.
    Portfolio Composition. Our calculation of the internal 
return to PTAs assumes a conservative mix of equity and debt. 
This mix varies by age (whether because of regulation or 
individual preference), with the share of assets in equity 
trending linearly downward from two-thirds at age 30 to one-
third at age 60, then dropping to 10 percent at age 61. All 
assumptions about portfolio composition were suggested by 
survey data on how households of different ages voluntarily 
allocate assets.
    Management Fees. Annual management fees for equity are 
assumed to average 0.5 percent of assets. We consider this to 
be a generous assumption, first, because management fees for 
many popular no-load index funds are today less than 0.2 
percent of assets, and second, because the universal 
availability of a low-cost default investment option will tend 
to keep fees down. On the other hand, PTA managers will have to 
acquire certification and assume special fiduciary 
responsibilities. This will add to cost. Management fees for 
debt are assumed to be negligible.
    Voluntary PTA Contributions. We assume that voluntary PTA 
contributions will be equal to 10 percent of mandatory 
contributions (including both personal and government 
contributions). Since the vast majority of workers will be able 
to contribute at least 10 percent more with full tax 
deductibility, this assumption may be conservative.
    Savings Offset. We assume that 30 percent of all new 
personal contributions to PTAs will be offset by reductions in 
non-PTA savings. This assumption seems generous for three 
reasons: (1) PTAs will be subject to strict rules limiting 
preretirement withdrawals; to the extent that households prefer 
the greater flexibility of 401ks and other savings vehicles, 
this will limit the offset. (2) Since there will be a 
relatively low dollar cap on contributions, the average PTA 
savings dollar will reflect a much lower household income and 
asset profile than the average U.S. savings dollar. In other 
words, the majority of PTA contributors now save little (or 
nothing), and so will not be able to offset PTA contributions 
at the 30 percent rate we assume. (3) The National Thrift Plan 
will simultaneously reduce unfunded Social Security benefit 
liabilities. To the extent that households view these 
liabilities as assets, a large share of PTA contributions will 
be regarded as substitutions for (not additions to) existing 
household wealth.
    PTA Withdrawals. Our model assumes that every worker 
retires and translates his or her entire PTA into an inflation-
adjusted annuity at age 62. All PTA accumulations at age 62 or 
older are ignored. These are of course simplifying assumptions. 
On the one hand, some PTA assets will be immediately consumed 
upon retirement. On the other, some people will continue to 
work and build up PTAs well after age 62--and others will want 
to preserve assets and bequest some of them to heirs. Our model 
also assumes that withdrawals are annuitized to a unisex life 
expectancy at age 62. This assumption too understates savings 
since joint annuities (which would be mandatory under our plan) 
would in reality be annuitized to joint life expectancy, which 
is longer. Upon the death of never married or widowed workers 
(at any age), assets are assumed to be withdrawn from the PTA 
system.
    Taxes. In calculating changes in personal income taxes, we 
assume, for workers, that the mean marginal personal income tax 
rate on PTA covered earnings is 16 percent for the federal 
government and 3 percent for state and local governments; for 
retirees, we assume that marginal personal income tax rates are 
two-thirds of the above. Half of the savings offset to PTA 
contributions is deemed to occur in savings vehicles where both 
the contributions and the internal return are already tax 
exempt--an assumption that reflects the large share of current 
savings that takes place in tax-exempt vehicles like 401ks, 
Keoghs, and IRAs. In calculating changes in corporate taxes, we 
assume (conservatively) that corporations pay total taxes equal 
to 45 percent of corporate earnings after taxes and after 
adjustment for inflation. These taxes are assumed to flow two-
thirds to the federal government and one-third to state and 
local governments. We further assume that the corporate equity 
share of the savings offset will be equal to the corporate 
equity share of all PTA assets.
    Administrative Cost. We assume that the additional cost of 
administering the PTA oversight board, the PTA matches and 
refunds, and the expanded means-tested safety net will entail a 
doubling of projected current-law OASI administrative costs.
    Productivity. In order to account for the impact of higher 
savings and investment rates on GDP and wages, we developed two 
productivity scenarios: a main scenario and a low-response 
scenario. Both scenarios assume that the productivity growth 
rate will begin rising in the year 2000 by 0.05 percentage 
points per year over baseline. Under the low-response scenario, 
its rise stops at 0.25 percentage points over baseline in the 
year 2004. Under the main scenario, it stops at 0.5 percentage 
points over baseline in the year 2009. Even a conservative 
neoclassical production function suggests that in today's 
economy each 1 percentage point increase in investment rates 
will lead to a one-eighth of a percentage point increase in the 
productivity growth rate. By and large, our main scenario 
follows this 8-to-1 response rule. Combining this productivity 
response with our other assumptions about rates of return, it 
was reassuring to find that our results for net savings were 
consistent with a steady and plausible share (20-30%) of 
additional capital income to additional GDP. However, in the 
interest of extreme prudence, we also developed our low-
response scenario in which the productivity improvement is just 
half as large. In all cases, our model assumes that increases 
in wages will be proportional to increases in GDP.
    Fiscal Dividend. Because most tax revenues (but not most 
public outlays) increase automatically in line with real 
economic growth, economists generally assume that higher 
productivity, in and of itself, will improve public-sector 
balances. The National Thrift Plan is thus almost certain to 
have a positive fiscal impact above and beyond that due to 
specific reform measures. Our model makes the extremely 
conservative assumption that there will be no such fiscal 
dividend: The dollar balance of outlays and revenues not 
directly affected by reforms is assumed to remain unchanged in 
all years.
    Labor Market Response. Most economists also believe that 
payroll taxes reduce the supply of labor, and hence shrink tax 
revenues. Since our mandatory contributions would not be 
regarded as a ``tax'' by most households (after all, households 
will continue to own each of these PTA dollars as they are 
earned and invested), we do not make any downward adjustment in 
the labor supply. Since the plan will eventually reduce the 
OASI payroll tax rate far beneath current projections, a more 
plausible case can be made for a later upward labor supply 
adjustment. In the interest of prudence (and to avoid 
problematic deviations from the official OASDI projection 
scenario), we chose to make no adjustment in any year.
    Poverty Guarantee. The higher retirement benefits which 
low-income workers would earn under the National Thrift Plan 
would almost certainly do something to reduce poverty rates 
among future elderly cohorts. In projecting the cost of the 
plan's means-tested safety net, however, we did not account for 
this feedback. Benefit costs assume both a constant poverty 
rate and a high participation rate (75 percent of eligible 
beneficiaries versus about 60 percent under the current SSI 
system).

                             V. The Results

    We summarize the quantitative results of the National 
Thrift Plan in the two appendices following this section. The 
first, the ``Economy Appendix,'' shows the impact of the plan 
on national savings, public-sector revenues and outlays, OASI 
revenues and outlays, and OASI benefits. The second, the 
``Payback Appendix,'' shows how the plan will affect workers in 
different cohorts and income groups. Under each heading, we 
tabulate the results for two productivity scenarios: our 
``main'' scenario, in which the annual productivity growth rate 
improves by 0.5 percentage points, and our ``low-response'' 
scenario, in which it improves by 0.25 percentage points. All 
results highlighted below refer to our main scenario. The 
findings are slightly less favorable for the low-response 
scenario, but the same basic conclusions hold. In any case, the 
most significant differences are in the distant future when the 
superior outcomes of the National Thrift Plan would be manifest 
under any plausible productivity scenario.
    As can be seen, the National Thrift Plan accomplishes its 
objectives:

Economy

     In each and every future year, the impact on net 
national savings is positive. Already by the year 2000, net 
savings is up by 1.2 percent of GDP; by 2010, when the Baby 
Boom begins retiring, it is up by 2.6 percent of GDP; by 2065, 
it is up by 5.9 percent of GDP.
     Initially, the increase in net national savings is 
due entirely to new private savings in PTAs; relative to 
baseline, the public sector runs a small deficit. This deficit, 
however, is never more than 0.4 percent of GDP and disappears 
entirely by 2014. Thereafter, the impact of the National Thrift 
Plan on the public-sector balance is hugely positive. By 2020, 
relative to baseline, the federal budget alone is running a 
surplus of 0.5 percent of GDP; by 2025, the surplus doubles to 
1.2 percent of GDP; by 2030, it nearly doubles again to 2.1 
percent of GDP.
     Although the small near-term deficits imply that 
net borrowing from the public will temporarily increase, this 
borrowing will be dwarfed by the contemporaneous increase in 
private savings. Even at its dollar peak in 2006, the negative 
federal deficit impact (at $45 billion) will amount to just 11 
percent of net PTA savings (at $416 billion). Given any 
plausible assumption about portfolio composition, bond 
purchases by PTA accounts will be more than sufficient to 
absorb this new debt. Or, to look at it another way, the PTA 
system and the rest of government combined will be buying back 
debt from other bond holders.
     Total Treasury debt--that is, publicly held debt 
plus Treasury borrowing from the OASI trust fund--decreases in 
each and every year relative to the current-law baseline. 
Trust-fund IOUs represent obligations that (absent a change in 
current law) future taxpayers will be required to pay, and 
which our baseline assumes that future taxpayers will indeed 
pay. From year one, the National Thrift Plan thus reduces the 
total formal obligations of government.
     By 2015, total OASI outlays (which now include an 
OASI-funded poverty floor and PTA savings subsidies) are cut 
beneath baseline. By the 2030s, the OASI system begins to 
register large cash surpluses and PTA refunds begin. By the 
2040s, PTA refunds climb to 3 percent of taxable payroll and 
FICA taxes are cut. By 2065, the total cost of the OASI 
system--including the expanded poverty floor and the PTA 
subsidies--falls to 2.4 percent of taxable payroll, less than 
one-quarter today's rate. The transition to a fully funded 
Social Security system is thus successfully completed.

Payback

    By the year 2005, newly retiring workers will be receiving 
greater benefits under the National Thrift Plan than under 
current law. Within a few decades, they will be receiving much 
greater benefits. This is true for workers at all income 
levels, no matter what the measure of benefit adequacy. It 
would also be true if full current law benefits were paid after 
Social Security's bankruptcy and not cut as our baseline 
assumes.
    By 2015, the average-earning worker retiring at age 65 will 
be receiving $20,400 more in present value (PV) lifetime 
benefits under the National Thrift Plan than under baseline; by 
2045, that worker will be receiving $156,000 more; by 2065, he 
or she will be receiving $278,000 more. The share of 
preretirement earnings that benefits replace will also be 
higher--in fact, nearly twice as high by the 2060s. Although 
current retirees are asked to sacrifice, viewed in perspective 
that sacrifice is tiny: just $733 for an average earning worker 
who retired in 1986, or less than 1 percent of lifetime 
benefits.
    The relative improvement in benefits over baseline will be 
roughly the same at all income levels. By 2065, low-and 
average-earning workers will be receiving lifetime benefits 
that are 2.5 times higher than baseline, and high-earning 
workers benefits that are 2.9 times higher. The National Thrift 
Plan thus retains the relatively favorable deal Social Security 
now offers low-earners.
    Along with benefit adequacy, payback ratios also improve. 
In fact, the payback ratio on contributions rises steadily for 
all cohorts retiring from 2005 on, with low-earning workers 
doing best of all. By 2065, the PV ratio of lifetime benefits 
to lifetime contributions for average-earning and high-earning 
workers will be roughly 30 percent higher than under baseline; 
for low-earning workers, the ratio will be roughly 45 percent 
higher.
    It is true that net benefits (that is, the PV of lifetime 
benefits minus the PV of lifetime contributions) will remain 
negative under both systems--and indeed, that despite the 
better rate of return, average-earners under the National 
Thrift Plan will initially have a larger net loss. This is the 
unavoidable cost of transitioning to a funded system. Net 
benefits earned by PTA contributions alone are positive in all 
years (because our discount rate, the interest rate on Treasury 
debt, is lower than the return to PTAs). But this effect is 
long overwhelmed by the cost of paying off unfunded benefit 
promises to older retirees: for average-earning workers, the 
net benefit does not exceed the baseline until 2044 and for 
maximum-earning workers not until 2059. Low-earning workers are 
an exception. Since their PV ratios are positive both under 
baseline and under reform, the larger dollar contributions give 
low-earners an immediate net gain. Their net benefit improves 
with reform in every year from 2004 on.
    These net benefit measures, however, do not take into 
account the fact that improvements in productivity will make 
each dollar of contributions easier to earn. We have therefore 
also calculated net benefits adjusting contributions for the 
hours of work they reflect. According to this ``wage-adjusted'' 
net benefit measure, average-earning workers will be doing 
better than baseline by 2037 and high-earning workers will be 
doing better by 2043. Moreover, for average earners, the net 
benefit loss relative to baseline is never greater than 
$11,000. By 2050, average earners will be coming out $48,000 
ahead of baseline; by 2060, they will be coming out $116,000 
ahead.
    Workers born in 1972 (and reaching age 65 in 2037) are thus 
the first cohort of Americans who will emerge unambiguously 
better off because of the National Thrift Plan, not just in 
terms of the lifetime benefits they will receive or the rates 
of return they will earn, but according to the harshest measure 
of all: their absolute dollar gain. Thereafter, with the 
transition now fully paid for, all younger Americans are free 
and clear.
    All of this, moreover, overlooks another vast benefit of 
the National Thrift Plan: the impact that higher productivity 
growth will have on the living standards of future American 
workers before their retirement. By the year today's newborns 
are due to retire at age 65, the average U.S. wage will, under 
our ``main'' productivity scenario, be nearly a third higher 
(in inflation-adjusted dollars) than it would be under 
baseline.
    [Additional attachments are being retained in the 
Committee's files.]
      

                                

    Chairman Bunning. Ms. Canja.

STATEMENT OF ESTHER CANJA, VICE PRESIDENT, AMERICAN ASSOCIATION 
                       OF RETIRED PERSONS

    Ms. Canja. Thank you, Mr. Chairman. I am Tess Canja, vice 
president of AARP. We appreciate your invitation to present our 
views regarding options to restore Social Security's long-term 
financial health.
    AARP and its members have a considerable stake in the 
Social Security solvency debate. I want to emphasize this 
personal perspective this morning. AARP membership begins at 
the age of 50. The majority of our members receive Social 
Security and they are the parents and the grandparents of 
tomorrow's beneficiaries, some of whom already belong to AARP.
    Currently, one-third of our members work, and although they 
probably don't want to admit it, the first wave of boomers are 
now eligible for AARP membership. This means that an increasing 
percentage of our members will still be working.
    AARP recognizes that we must consider the needs of all 
generations as we evaluate solvency options and solvency 
packages. We have adopted principles that will guide us, which 
are attached to our testimony.
    In order to develop a solvency package that can be 
supported by the American people, we must first understand the 
public's views about the program. The message from public 
opinion surveys is loud and clear. Americans of all ages 
continue to support Social Security in very large and 
consistent percentages, and people of all ages agree that 
society has an obligation to honor the commitment it made to 
provide Social Security when people retire.
    Despite the overwhelming support for Social Security, many 
people question the program's ability to pay benefits in the 
future. Their lack of confidence reflects many things, 
including misinformation about the program, the widely held 
belief that Congress has raided the trust funds, and an overall 
lack of confidence in all institutions, particularly 
government. In addition, many Americans believe that current 
Social Security benefits are too low. These factors add to the 
most commonly mentioned belief that Social Security will be 
unable to deal with the retirement of the boomers.
    Even though confidence in the program is fragile, people of 
all ages would like Social Security to be there just in case 
they need it. For better or worse, the public is not prepared 
at this time to decide how we should strengthen Social 
Security. The public needs more information and time to work 
through the options and necessary policy tradeoffs.
    Polls suggest that the public rejects most solvency options 
in isolation and they are especially resistant to choices that 
involve pain and sacrifice. However, it is important to keep in 
mind that options with little support in isolation, when 
incorporated in a broader package, will gain support.
    It is important to keep in mind that under current law, 
Social Security can continue to pay full benefits until the 
year 2029. Beyond that, Social Security can continue to pay 
about three-fourths of promised benefits.
    We do not need to alter fundamentally the current system 
and we should not undermine the principles that have led to 
Social Security's success and enormous popularity. For the sake 
of our children and grandchildren, we should continue to 
provide a guaranteed Social Security benefit that is protected 
against inflation and we should continue to provide an array of 
protections for workers and their families, including 
disability, survivor and dependent benefits.
    Mr. Chairman, AARP agrees with the Advisory Council that 
any solvency package should spread the responsibility for 
bringing Social Security into long-term balance among all who 
are part of the system. Ultimately, AARP and most Americans 
will judge Social Security changes based on the fairness of the 
entire package.
    We look forward to working on a bipartisan basis with our 
elected officials to achieve a solution that maintains the 
program's guiding social insurance principles, achieves 
solvency in a fair manner, and ensures an adequate benefit for 
all. Thank you.
    [The prepared statement and attachments follow:]

Statement of Esther Canja, Vice President, American Association of 
Retired Persons

    AARP appreciates the opportunity to present its views 
regarding options to restore the long-term solvency of the 
Social Security system. Americans of all ages have a stake in 
the future financial strength of this critical family program. 
We hope today's hearing will facilitate a national dialogue on 
options for assuring Social Security's long-term financial 
health and help allay fears that the program is in imminent 
fiscal danger.
    Last month the Social Security trustees reaffirmed that the 
program is not in, or near, crisis but does have a long-term 
problem. In order to help find solutions, it is important for 
the American people and their elected officials to engage in an 
inclusive national dialogue about how Social Security works and 
the many options to restore the program's long-term financial 
stability. An early discussion of the options will allow 
workers and beneficiaries adequate time to voice their 
preferences and concerns. And, if changes are enacted in the 
near future, they will be less painful than those made later. 
Early action also would provide workers with adequate notice 
and the opportunity to plan accordingly.

                           I. Public Opinion

    Public opinion polls consistently demonstrate that 
Americans of all ages strongly support the Social Security 
program and believe society should honor the long-term 
commitment that Social Security be there for people when they 
retire. Nevertheless, many people, particularly younger 
workers, lack confidence in the program's long-term viability. 
This lack of confidence has many sources, some having little to 
do with Social Security per se: a lack of confidence in all 
institutions, particularly government; a widespread perception 
that the Social Security trust funds have been ``raided''; and 
a pervasive belief that benefit levels are too low--a view held 
particularly by the ``Boomers.\1\ Finally, the lack of 
confidence reflects the widely held idea that the program will 
not have the resources to finance the Boomers' retirement.
---------------------------------------------------------------------------
    \1\ These findings are based on over ten years of analyses of 
public attitudes done for the Association by DYG, Inc.
---------------------------------------------------------------------------
    Despite a lack of confidence in Social Security, most 
Americans (88 percent of all individuals according to DYG, 
Inc.) still want to know that Social Security will be there for 
them ``just in case'' they need it. In order to ensure that 
benefits will be there, the public will need to become more 
engaged in the solvency debate. A discussion of solvency 
options will not be fruitful, however, unless the public's 
understanding of Social Security improves. Millions of 
Americans, convinced that the trust funds have been stolen, are 
unaware that even after 2029 the system can honor all but about 
25 percent of the benefits currently promised, i.e., if 
Congress does nothing to change Social Security.
    The American people not only need better information about 
Social Security, but they also require time to work through 
some of the policy tradeoffs that are a necessary part of the 
national debate. Right now, the public opposes most solvency 
options in isolation and is particularly resistant to options 
that require much ``pain.'' Fortunately, there is sufficient 
time to engage in a meaningful dialogue that can lead to 
greater public support for enactment of an acceptable solvency 
package.

               II. Status of Social Security Trust Funds

    Social Security is the nation's most closely monitored 
federal program and the only one that projects future income 
and costs over 75 years. In April 1997, the trustees reported 
that Social Security will be able to pay full benefits on time 
until 2029--the same as in last year's forecast. The combined 
Old Age and Survivors Insurance (OASI) and the Disability 
Insurance (DI) trust funds (OASDI) will take in more tax 
revenue annually than is needed to pay benefits until 2011. 
From 2012 through 2018, revenue to the trust funds plus 
interest earnings will exceed expected benefit payments. 
Starting in 2019, annual outgo will exceed annual income, and 
the trust funds' reserves will be gradually drawn down until 
they are exhausted in 2029. Even in 2029, without any change in 
current law, incoming revenue will cover about 75 percent of 
the benefits currently promised. (See Chart 1)
    The annual trustees' report serves as an early warning 
system of impending problems. Throughout the program's history, 
changes have been enacted to improve solvency; many were 
adopted with considerably less lead time than we have now. The 
major factors contributing to the projected shortfall have been 
apparent for some time. One of the largest is demographics. We 
know that the retirement of the roughly 77 million people born 
between 1946 and 1964, the Boomer generation, will be costly. 
However, our nation has adapted to the Boomers as they moved 
through life's other life landmarks--when they entered school, 
college, the work place, and the home-buying market. Reasonable 
accommodations were made then, and adjustments can be made to 
Social Security and other retirement systems to deal with the 
Boomers' retirement and that of the generations to follow.

     III. Report of the 1994-1996 Social Security Advisory Council

    A 13 member advisory council was appointed in 1994 to 
recommend a solution to Social Security's long-term problem. 
The Council, which delivered its report this January, did not 
reach consensus on a single approach for restoring long-term 
solvency. However, it did agree on key principles and features 
of the current system that should be retained, such as 
maintaining full cost-of-living adjustments (COLAs) and 
rejecting means-testing. It did recommend some modest changes 
to the program that considerably reduce the projected 
shortfall.
    The Council also emphasized the importance of early action 
to restore long-term solvency. Generally, long-term solvency 
can be restored by increasing revenue, reducing benefits, or 
some combination of the two. The last reform package, the 
Social Security Amendments of 1983, included revenue and 
benefit changes and sacrifices were asked of all who 
participate in the program: workers, employers, and 
beneficiaries. AARP believes the 1983 approach of shared 
sacrifice and balanced changes within the program should serve 
as a model for the future.

A. Principles That Should Be Maintained

    The Council highlighted numerous principles of the Social 
Security program that should be retained. In 1995, AARP adopted 
a set of principles which we believe should be reflected in any 
solvency plan (see appendix for the complete list). AARP and 
the Council agree on the following principles:
     Social Security should be self-financed;
     Social Security should be compulsory;
     Social Security benefits should bear a reasonable 
relationship to contributions, plus interest;
     ``Conventional'' means testing should be rejected; 
and
     Social Security should continue to protect low 
income retirees by paying benefits that keep them from relying 
on means tested benefits.
    The above principles have been largely responsible for the 
enormous support Social Security enjoys among Americans of all 
ages. The Social Security benefit blends the concepts of 
``individual equity'' (a reasonable relationship between 
contributions and benefits) and ``social adequacy'' (providing 
an income floor). To preserve the concept of equity, benefits 
are computed using an individual's work history and payroll tax 
contributions. To provide adequacy, however, the formula is 
weighted so lower-wage workers receive a benefit that replaces 
a higher percentage of their pre-retirement wages than for 
average or higher earners. This weighting provides lower income 
workers and their families with a benefit that helps protect 
them from destitution when a wage earner leaves the workforce 
and provides a measure of dignity and independence. The 
progressive benefit formula is critical to lower-wage workers 
since they generally do not accumulate sufficient financial 
resources, such as a private pension or savings, to help 
replace wages lost when they retire or become disabled.
    If Social Security benefits were conditioned solely upon 
need, i.e., means tested, public support would drop 
precipitously. And, if benefits were denied to high-income 
workers, they would be far less willing to support and 
participate in the program. Since the Social Security formula 
represents an implicit income transfer from higher earners to 
lower earners, Social Security's progressive benefit structure 
would not be possible in its current form if high earners opted 
out of the system.
    The Council also endorsed, and AARP supports, the following 
principle:
     The goal of universal coverage should be achieved.
    In order to attain universal coverage, the Council 
recommends extending mandatory coverage to newly hired state 
and local workers. Although Social Security covers about 96 
percent of the workforce, some state and local employees remain 
outside the program. Mandatory coverage for all newly hired 
state and local workers would better serve both the excluded 
employees and the financial health of the Social Security trust 
funds.
    Universal coverage is desirable in a social insurance 
program to ensure public cohesiveness. It also makes sense 
because Social Security provides excellent protections. For 
many Americans, Social Security is the only source of survivor, 
dependent and disability benefits, and it is their only income 
source that is adjusted annually for inflation. Additionally, 
Social Security's progressive benefit formula means lower-
income workers often receive higher benefits under Social 
Security than under public plans.
    Equity considerations also suggest that universal coverage 
is preferable. Some state and local employees who have also 
worked in Social Security-covered employment or who marry a 
covered employee gain a Social Security benefit with fewer 
contributions than other beneficiaries. Although their benefits 
are smaller, their overall return on the payroll taxes paid is 
greater. AARP believes all workers should be covered; states 
and localities wishing to supplement Social Security coverage 
should be encouraged to do so, similar to private employer 
pension plans.

B. Important Benefit Features to Retain or Improve

    The Council concurred on numerous features of the current 
benefit structure that should be maintained or improved. AARP 
believes that one of the most important is:
     Social Security should continue to provide full 
cost-of-living adjustments (COLAs).
    The Council affirmed that full cost-of-living adjustments 
are one of Social Security's most important contributions to 
the income security of retirees. Today, Social Security remains 
the dominant income source for 3 of 5 beneficiaries and 
virtually the only source of income for 1 in 4 beneficiaries. 
Given this widespread reliance on Social Security, any 
reduction in COLAs would mean that millions of beneficiaries 
would face economic hardship. Annual COLAs are the only means 
that most older Americans have to keep up with the rising costs 
of goods and services. In fact, most of the reduction in the 
poverty rate for those age 65 and over in the early 1970s was 
due to the large ad hoc increases in Social Security that 
occurred prior to automatic cost-of-living adjustments. And, 
since then, the poverty rate for the elderly has stabilized 
because annual COLAs have prevented the more than one in five 
older Americans--mostly older single women--who hover within 
125 percent of the poverty line from falling further behind 
economically.
    COLAs are not intended, nor do they function, as a benefit 
increase. COLAs help ensure that beneficiaries, particularly 
the oldest ones, will not outlive their resources. In an ironic 
twist, proposals to permanently reduce COLAs mean that as 
beneficiaries age, the real value of their benefits would 
decline. In effect, beneficiaries would be paid higher real 
benefits at age 65 than at age 80 although their other income 
has likely declined and their health care costs will have risen 
sharply.
    Some advocate reducing COLAs by legislatively changing the 
Consumer Price Index (CPI), which is used to adjust benefits, 
or by providing partial COLAs. Those who want to reduce COLAs 
by changing the CPI contend the index overstates inflation. It 
is not clear to what extent this may be true. The Bureau of 
Labor Statistics (BLS) determines the CPI, revises the CPI 
market basket every ten years, and makes technical adjustments 
to the index on an on-going, as-needed basis. AARP believes 
that the experts at BLS, not Congress, should continue to make 
adjustments to the current index. We are pleased that the House 
overwhelmingly adopted House Resolution 93, which supports 
leaving the determination of the CPI to the BLS.
    Others suggest limiting COLAs for beneficiaries whose 
Social Security benefit or Primary Insurance Amount exceeds a 
specified threshold. Affected beneficiaries (all those above 
the cut-off point) would receive a flat dollar amount of no 
more than the COLA provided to a beneficiary at the threshold. 
A ``capped'' COLA is a form of means testing the basic benefit 
package. But, Social Security is a social insurance program 
that provides lifetime protection for workers and their 
families as an earned benefit, rather than a benefit contingent 
upon income. Those who advocate means testing, in any form, 
ignore the insidious message it sends to workers: if you do 
well, if you work hard, if you save, you are penalized.
    A ``capped'' COLA also incorrectly assumes Social Security 
benefits are an indicator of comparative wealth. Some 
individuals have low benefits because they spent only a brief 
period working in Social Security-covered employment and the 
rest of their career in non-covered employment. Many of them 
may be eligible for other types of pensions (typically public 
employee pensions and/or military benefits) or may have 
accumulated additional financial resources for their 
retirement. Yet, other beneficiaries with larger Social 
Security benefits may have no other income sources. To more 
accurately assess wealth would require beneficiaries to give a 
full accounting of their income and assets, which if feasible, 
is administratively complex and inconsistent with the concept 
of an earned benefit. In addition, a portion of the COLA is 
recaptured through the tax system for beneficiaries who pay 
taxes on their Social Security benefits. Finally, AARP rejects 
a capped COLA because it could lead to further reductions in 
this critical part of the Social Security benefit if the 
initial threshold is unindexed or actually lowered.
    The Advisory Council also stated that we should:
     Increase benefits for widow/ers.
    Council members recognized that widow/ers benefits are 
critical to the income security of millions of single 
beneficiaries. They proposed to finance the improved widow/ers 
benefits by a reduction in spousal benefits. Clearly, the loss 
of a spouse increases the probability of poverty in old age, 
particularly for women. This proposal would reallocate benefits 
throughout the expected lifetimes of both spouses by lowering 
joint benefits and raising survivor benefits an equivalent 
amount. This change may be worthwhile, but it deserves to 
viewed in the larger context of the relative needs of married 
couples and survivors for retirement income. Any changes should 
be based on findings that better adjust Social Security 
benefits to the actual needs of its beneficiaries.

C. Increasing Social Security's Rate Of Return 

    The Council members agreed that the rate of return on 
Social Security investments should be increased, but they 
differed on how to achieve an increased rate of return and who 
should benefit from any improvement. These differences produced 
the three plans that divided the Council.
    The Maintenance of Benefits plan (MB), or the Ball Plan, 
includes five modifications to the program that restore about 
two thirds of the shortfall. Ball proponents believe that in 
order to eliminate the remainder, serious consideration should 
be given to investing up to 40 percent of the trust funds' 
assets directly in common stocks indexed to the broad market. 
Since the investments are being made on behalf of the trust 
funds, any increased returns would be credited to the trust 
funds collectively. Individual benefits would not be directly 
affected by changes in the market.
    The Individual Accounts (IA) plan, or Gramlich plan, 
creates individual accounts alongside a pared back Social 
Security system. Workers would invest an additional 1.6 percent 
of wages--that is, in addition to their current payroll tax 
contributions--in individual accounts held by the government. 
Investment choices would be made by individuals but options 
limited to a ``menu'' of those selected by the trustees. The 
return on these individual accounts is intended to augment the 
reduced basic Social Security benefit.
    The Personal Security Accounts (PSA), or Schieber/Weaver 
plan, creates larger individual accounts designed to replace a 
significant portion of the Social Security benefit. Workers age 
54 and under would direct 5 percentage points of the current 
payroll taxes into these accounts, which would be individually 
managed and invested in financial instruments of the 
individual's choice. The investment yield would be added to a 
basic flat Social Security benefit, which is roughly equivalent 
to two-thirds of the poverty line in 1996, or $410 per month. 
In order to finance the transition to this new system, payroll 
taxes would be increased by 1.52 percent and over $1.9 trillion 
in new borrowing would be needed.
    The IA and PSA plans require individuals to make investment 
decisions and bear the risks associated with their investment 
choices. The larger the portion of Social Security's defined 
benefit that these accounts replace, the greater the risk to 
individuals, and the greater the change to our nation's current 
retirement income structure.

1. Three Legged Stool

    Retirement income has been compared to a three legged 
stool, with Social Security, pensions and private savings 
representing the three legs. (The Advisory Council describes 
retirement income as a tiered structure and adds a fourth 
level: means tested programs). This diversity is a source of 
strength that provides beneficiaries with an array of 
protections through the balanced distribution of risk among 
Social Security, employer based pensions and individual 
savings.
    Social Security serves as the base of retirement income to 
be supplemented by the other two legs. In practice, for many 
retirees, the other two legs are weak or nonexistent. Currently 
over 3 in 5 older Americans count on Social Security for at 
least 50 percent of their total income, and 16 percent have no 
other income. This trend is not likely to change significantly 
for the next generation of retirees.
    Social Security is a social insurance program with 
compulsory and near-universal participation. It was never 
intended to be a personal investment plan. In a social 
insurance program, workers pool their resources in a 
government-sponsored program to ``buy'' protection that they 
might not otherwise have purchased (or afforded) on their own 
or received from their employer. As social insurance, the 
program is shaped by societal decisions about who should 
receive benefits and the amount of those benefits relative to a 
worker's contributions. Since Social Security's progressive 
benefit formula deliberately blends the concepts of equity and 
adequacy, the program should not be evaluated solely with 
regard to one purpose--the level of return on one's investment.
    Pensions are the second leg of the income stool. Pensions 
are retirement benefits earned in voluntary, employer-sponsored 
plans. Only half of all workers today are covered by a pension 
plan. Highly compensated individuals are more likely to be 
covered by such plans and accrue higher benefits. However, 
private sector pension plans are undergoing a shift in design 
that places greater responsibility and risk on the employee. At 
a time when pension plans are becoming more individual-account 
oriented, it is even more important to maintain Social 
Security's social insurance design and defined benefit promise.
    Savings, the third leg, are individually held assets and 
investments. Like pensions, higher earners are most likely to 
accumulate savings and in far greater amounts. Many households 
have no retirement savings or use those that they do accumulate 
for non-retirement purposes. It seems therefore probable that 
many future retirees will have inadequate savings to meet their 
income needs.

2. The Risks of Individual Accounts

    Individual investment accounts are touted not only as a 
mechanism to improve Social Security's solvency but also as a 
way to improve individuals' rates of return and to increase 
national savings. AARP agrees with the need for increased 
national savings, but we believe that this outcome should be 
achieved in a way that does not interfere with the goal of a 
secure retirement income, particularly for low wage workers and 
their families. Moreover, as the Congressional Budget Office 
(CBO) concluded in 1994, individual accounts funded through 
existing payroll taxes are unlikely to increase national 
savings.
    Worker controlled accounts should not be substituted for 
Social Security benefits because they would shift to the 
individual a larger portion of the nation's commitment to 
assure a foundation of retirement, disability, and survivor 
income for workers and their families. Individual accounts 
would gradually transform Social Security from a universal 
defined benefit plan to a non-guaranteed, defined contribution 
or individual savings plan. Social Security's design as a 
secure base of retirement income--to be supplemented by 
pensions and private savings--would become less predictable and 
not be guaranteed. Indeed, the distinction between Social 
Security and the other legs of the retirement stool would be 
blurred, and the differing purposes each leg serves could be 
jeopardized.
    The shift to individual accounts poses special risks for 
low wage earners. First, if individuals receive back a portion 
or all of their current contributions, less revenue would be 
available to the system to finance the progressive benefit 
formula that helps low wage workers. Furthermore, since low 
earners would be investing relatively small amounts, they would 
be less able to adequately diversify their holdings to shield 
against risk and would face proportionately larger 
administrative costs and higher fees that would, in turn, lower 
the return on their investments.
    Some of the touted financial advantages of individual 
accounts are dubious. The rates of return are often overstated 
by many proponents of privatization. Stated annual rates of 
return represent an average, and few, if any, actually receive 
the ``average.'' In fact, many receive less. Also, proponents 
overlook the possibility of poor investments, failed financial 
institutions and failed businesses. Ultimately, investment 
success requires considerable knowledge of investment options 
and strategies, a properly diversified portfolio and a 
willingness and the resources to bear some risk.
    On the other hand, people who invest conservatively--many 
are lower wage earners--will see more modest returns that are 
unlikely to outpace the current rate of return to the trust 
funds. Yet, encouraging workers to invest in riskier ventures 
only invites hardship for those whose investments do not do 
well--hardships that might have to be offset through other 
government programs. And, unless early withdrawals and 
borrowing from these accounts are prohibited, workers may not 
wait until they retire before tapping into these accounts, thus 
diminishing the base of their retirement income security. The 
current move in Congress to allow easier access to Individual 
Retirement Accounts (IRA) suggests that early withdrawals from 
individual accounts would eventually be permitted.
    Moreover, there is no guarantee that historical patterns of 
return on assets will continue in the future. (In fact, 
historical patterns represent average annual returns, which do 
not apply to everyone.) And, many of those with dramatic paper 
gains today may not realize them tomorrow when large public and 
private retirement programs will be selling off assets in order 
to finance their commitments to the retirement of the Boomers. 
This simultaneous unloading could drive down the price of a 
worker's holdings. Also, the significant administrative costs 
of millions of individual accounts will reduce returns.
    In addition, moving from the current system to a partially 
privatized one poses large transitional problems. If benefit 
levels for those now in and those near beneficiary status are 
protected, then workers will have to pay to finance two 
benefits: those of current recipients and their own. Current 
beneficiaries and those nearing retirement face added risks. 
The deterioration in the trust funds resulting from the draw-
down to finance individual accounts is likely to generate 
pressure to cut benefits for current retirees and those nearing 
retirement. Yet, for those nearing retirement the opportunity 
to offset any lost income with individual investments is 
limited. Similarly, younger workers who become disabled or die 
shortly after individual accounts are inaugurated may face 
lower benefits for themselves and their families. They may not 
have accumulated enough in their individual accounts to provide 
benefits that are the same as they would receive under current 
law.
    For all of these reasons, AARP believes Social Security 
should not be replaced with individually controlled accounts. 
While individual accounts have a legitimate role to play in 
overall retirement income security, these accounts are best 
left--and should be encouraged--for the two private legs of the 
3-legged stool. Given the shift to individual accounts in the 
private pension system, the secure defined benefit promise in 
Social Security takes on greater importance. Indeed, if pension 
coverage continues to stagnate at under 50 percent of the 
workforce and savings rates continue at current low levels, 
Social Security could, in the future, be responsible for an 
even greater portion of retirement income security. If greater 
individual control over investment decision-making is the 
desired goal, then public policy could encourage greater 
savings in existing vehicles (e.g. IRAs, 401(k) plans, etc.) 
that already provide for individual control. We do not have to 
undermine Social Security to achieve that goal.

3. Rates of Return

    The Advisory Council's solvency proposals are also designed 
to improve the ``money's worth return'' for future generations. 
Money's worth is one way of assessing the program's fairness 
across generations. ``Fairness,'' however, does not necessarily 
mean every generation or every individual within a generation 
will have exactly the same rate of return. Given the 
variability in birth cohort size, life expectancy, changes in 
the economy, and Social Security's evolving nature, fairness 
will always be a relative measure.
    Money's worth analyses often underestimate the value of 
Social Security by excluding disability and, in some cases, 
survivor and dependent benefits. Yet, Social Security is the 
only long-term disability insurance for 3 out of 4 workers, and 
its life insurance features provide income protection for 98 
percent of the children in this country. According to the 
Social Security Administration, the Social Security survivor 
benefit is equivalent to a $295,000 life insurance policy for 
the spouse and two children of a deceased worker with an 
average earning history, and the disability protection is 
equivalent to $203,000 for that worker and his/her family. 
Moreover, Social Security provides disability and survivor 
benefit coverage for workers with pre-existing conditions, 
whereas in the private market they are often excluded. When 
these critical factors are taken into account, the full 
lifetime value of Social Security becomes even more apparent.
    Another caveat regarding money's worth analyses is that 
most workers' situations change over the course of a lifetime. 
Few workers have close to average earnings throughout their 
lives, and some workers may be single for only part of their 
lives. Moreover, many workers have periods of unemployment or 
reduced earnings. Social Security protects these workers by 
providing ``dropout years.'' (The Social Security benefit 
formula assumes a forty-year work history, but calculates the 
worker's benefit on the thirty-five highest earning years, thus 
allowing five ``drop-out'' years.) Many of the money's worth 
studies do not allow for these variations.

                      IV. Other Options for Change

1. Raising the Normal Retirement Age

    The 1983 Social Security Amendments included a phased-in increase 
in the age of eligibility for collecting full benefits (the Normal 
Retirement Age) from age 65 to age 67, beginning with those born after 
1937 and becoming fully effective for people born after 1959. In order 
to improve Social Security's long-term solvency, some propose further 
changing the age for collecting full benefits. These proposals range 
from accelerating the twelve-year hiatus in the current timetable, as 
recommended by many on the Advisory Council, to raising the full 
retirement age to 70 years old.
    Proponents of increasing the retirement age point out that 
increased longevity means future beneficiaries will live longer and 
collect Social Security for a longer period of time. If people live 
longer, proponents argue, they could reasonably be asked to work longer 
and postpone receiving benefits in order to improve Social Security's 
long-term solvency. While many policy experts support raising the 
retirement age, the public soundly rejects the idea. Many polls show 
that Boomers and the following generation, the Baby Busters, intend to 
stop working before age 62. Their anticipated retirement ages reflect 
the reality of the current labor market in which the retirement age has 
now dropped to about age 62. The polls also strongly suggest that most 
workers are unaware of the existing increase in the age of eligibility 
for unreduced benefits.
    Current trends affecting older workers suggest that raising the 
retirement age could exacerbate existing problems in the labor market. 
Many willing older workers are unable to find employment, and some 
older workers have physically demanding jobs or health conditions that 
make continued work difficult. Despite the elimination of mandatory 
retirement in 1986, age discrimination remains a significant factor in 
today's work place. Studies show that older workers continue to have 
the longest spells of involuntary unemployment, and many employers 
remain reluctant to hire older workers. Also, many employers have 
policies in place to move out their older workers, such as early 
retirement incentives, that younger workers tend to support. In short, 
age bias, health problems and limited job opportunities for older 
workers could mean that an increase in the Normal Retirement Age will 
result in lower benefits, not additional work.
    AARP believes that any increase in the Normal Retirement Age should 
be accompanied by policies promoting expanded job opportunities for 
older workers and incentives that encourage older workers to extend 
their working careers. We are pleased that the Advisory Council agreed 
on the need for improved work incentives for older workers. These 
incentives would encourage older workers to remain in the workforce and 
also provide overall benefits to our economy.

2. Changing Number Of Years In Benefit Calculation

    The majority of Council members support increasing the indexing 
period for computing benefits from the current 35 years to 38 years. 
This change would result in an average benefit reduction of 3 percent. 
While this may be a preferable alternative to any increase in the 
retirement age, it particularly disadvantages women who spend more 
years out of the labor force caring for family members. In evaluating 
this and other options, it will be critical to assess the compounding 
effects of multiple options on particular groups, such as older women.

3. Raise Early Eligibility Age (EEA)

    Some not only want to increase the age for collecting full 
benefits, but also to raise the age--currently 62--for first collecting 
benefits. AARP believes we should maintain an early eligibility age 
because of the conditions in the labor market discussed above, and 
because many individuals are unable to work past age 62 due to ill 
health or physically demanding jobs. Without these protections, many 
older Americans would face serious economic hardship while they wait to 
collect benefits as well as throughout retirement. If we did raise the 
early retirement age, disability benefits should be expanded to protect 
those physically unable to work longer.

4. Increase the Taxation of Benefits

    The taxation of Social Security benefits was introduced in the 
Social Security Amendments of 1983. Single taxpayers with modified 
adjusted gross incomes (MAGI) over $25,000 (adding in tax exempt 
interest and half of their Social Security benefits to their adjusted 
gross income) and joint filers with MAGIs in excess of $32,000 were to 
be taxed on the lesser of half of their benefits or half the amount by 
which their MAGI exceeds these thresholds. The maximum percentage of 
benefits subject to federal income taxation was set at 50 percent of 
benefits because employees contribute half of the Social Security 
payroll taxes and employers contribute the other half. Since the 
provision was enacted to help restore Social Security's long-term 
solvency, the revenue has been credited to the Social Security trust 
funds.
    The 1983 thresholds deliberately were not indexed in order to 
provide Social Security with increasing revenue in the future when the 
number of beneficiaries will rise dramatically and the ratio of workers 
to retirees will decline. Initially, about eight percent of 
beneficiaries were taxed on up to 50 percent of their Social Security; 
today, almost one in four beneficiaries are affected. Without any 
change in current law, by the turn of the century almost one in three 
beneficiaries will be taxed on their Social Security.
    Effective taxable year 1994, single beneficiaries with MAGIs over 
$34,000 and couples with MAGIs above $44,000 are taxed on up to 85 
percent of their benefits. The revenue from taxing the additional 35 
percent, unlike the revenue from taxing 50 percent of benefits, is 
credited to the Medicare Hospital Insurance (HI) Trust Fund.
    The rationale for taxing up to 85 percent of benefits was to more 
closely conform the tax treatment of Social Security benefits to the 
taxation principles that apply to private pensions. However, Social 
Security is fundamentally different from a private pension. Social 
Security is a mandatory, almost universal social insurance program 
established by the government to provide income protection to workers 
and their families if the wage earner retires, becomes disabled, or 
dies. Given Social Security's unique features, it is not necessary to 
have parallel treatment to private pensions.
    Members of the Advisory Council and others support increasing the 
amount of Social Security that is taxed in order to help restore long-
term solvency. Options range from lowering the 1993 thresholds for 
taxing 85 percent of benefits (e.g. to levels that apply for the 50 
percent rate) to fully taxing Social Security for all beneficiaries 
with taxable income. AARP recognizes that the additional taxation of 
benefits (assuming the receipts are deposited in the OASDI trust funds) 
could improve Social Security's long-term health, but we remain 
concerned that any further increases will result in an unanticipated 
heavy tax burden for many already retired middle and moderate income 
beneficiaries. Also, fully taxing benefits could bring millions of 
older Americans who currently do not pay any income taxes back onto the 
tax rolls. Since moderate income beneficiaries rely heavily on Social 
Security, the increased tax burden would be significant, and many of 
those affected would be unable to recoup lost income. Also, since the 
current thresholds are not indexed, additional taxation of Social 
Security will already gradually occur over time.

5. Payroll Taxes

    Historically, payroll taxes have been increased as part of 
legislation to improve long-term solvency. Although the payroll tax is 
considered regressive by some, they neglect the fact many low-income 
workers are eligible for the Earned Income Tax Credit (EITC), which 
offsets some of the initial payroll tax contributions. In addition, 
Social Security's progressive benefit formula provides low earners with 
a larger portion of their pre-retirement earnings than average and high 
earners. Despite criticisms of the payroll tax, most workers consider 
it fairer than the income tax because they believe few can avoid paying 
the tax and because they know it is used to pay Social Security 
benefits. (Seventy-one percent consider it a fairer tax than the income 
according to DYG, Inc.) Any payroll tax increase, however, should not 
be a first choice and should be limited in order to protect the 
standard of living of younger working families.

6. Benefit Changes

    Some policymakers suggest modifying the ``bend points'' in the 
Social Security benefit formula, particularly for average and higher 
earners. Significant reductions in benefits for average and high 
earners could undermine support for the program, particularly among 
highly compensated workers, but proposals to modify the Social Security 
benefit formula for high earners should be distinguished from means 
testing benefits--which the Association opposes--since workers would 
continue to receive benefits under a modified formula.
    Significant changes in any aspect of the benefit formula would 
affect today's workers once they retire, while increasing payroll taxes 
affects them while they are in the workforce. AARP believes today's 
workers should be given the opportunity to voice their views about the 
timing and desirability of any additional financial sacrifices they 
will bear.

                             V. Conclusion

    Americans of all ages need to be better informed about the 
Social Security system so they can participate in the debate 
about its impact on their future. The program has been, and 
should continue to be, an important part of our nation's 
commitment to ensuring that workers who retire, die, or become 
disabled, and the families and the survivors of those workers 
will be protected from ``the hazards and vicissitudes of 
life.'' Fortunately, Social Security has over $550 billion in 
its trust funds, so we have time to conduct a national dialogue 
that will lead toward consensus.
    AARP is encouraging this dialogue in our publications and 
in conversations with our members and other interested people 
of all ages. The Advisory Council proposed three solvency 
packages, and there are many other options that have been 
suggested. AARP believes these proposals and others that will 
emerge should be part of the public debate. It is important to 
recognize that while some options may have little support in 
isolation, modest changes that are incorporated into a broad 
solvency package may be acceptable to most Americans.
    We agree with the Advisory Council that solvency packages 
should spread the responsibility for bringing the system into 
balance among all who are part of the system. As we continue 
our dialogue with our members, one-third of whom are still in 
the work force, and most of whom have children and 
grandchildren about whom they are concerned, we will be mindful 
of our principles and the need to preserve Social Security for 
future generations. Maintaining Social Security's long-term 
solvency and improving the overall retirement income of future 
generations is vital to our nation's economic well-being. The 
Association looks forward to working on a bipartisan basis with 
our nation's elected officials to achieve a solution to Social 
Security's long-term problems that maintains the program's 
guiding social insurance principles, achieves solvency in a 
fair manner and ensures an adequate benefit for all.
      

                                

[GRAPHIC] [TIFF OMITTED] T0563.001

[GRAPHIC] [TIFF OMITTED] T0563.002

[GRAPHIC] [TIFF OMITTED] T0563.003

[GRAPHIC] [TIFF OMITTED] T0563.004

      

                                

    Chairman Bunning. Thank you. If the panel would be so kind 
as to hold, we have a vote, so we will recess and we will come 
back as soon as we vote. We will stand in recess.
    [Recess.]
    Chairman Bunning. The Subcommittee will come back to order. 
We will start questioning the second panel.
    I am going to start out with a question for Beau Boulter. 
You say that Social Security comprises a morally binding social 
contract with current retirees and those individuals near 
retirement and this contract should not be breached. While the 
Advisory Council was not able to agree on everything, they did 
agree that any sacrifices in bringing the system into balance 
should be widely shared and not borne entirely by the current 
and future workers and their employers. The Council's 
suggestion was to apply appropriate income taxation to Social 
Security benefits.
    Are you really saying that current beneficiaries should not 
be at all impacted by any reform proposals? Do you believe that 
most Americans feel the same way?
    Mr. Boulter. Well, what we are really saying, Mr. Chairman, 
is that current beneficiaries or those who are about to become 
current beneficiaries, yes, that we basically should leave them 
alone; Congress should basically leave them alone. This debate 
over Social Security reform really, in our view, should not be 
so much about them, what they get or what they don't get, but 
more about what their children and their grandchildren and what 
they are allowed to do during their working lives.
    And we do think it is a social contract with the older 
Americans and that we should leave it alone as far as they are 
concerned.
    Chairman Bunning. Let me ask you, Beau, because this is 
very important. In other words, any means testing of benefits, 
any adjustment as far as retirees are concerned, you are saying 
that that shouldn't be adjusted to the current retirees or the 
immediate future retirees?
    Mr. Boulter. Yes. We really don't like the idea, at our 
organization, of means testing. In fact, we think you already 
have a back-door means test through taxing the benefits.
    Chairman Bunning. The reason I ask the question, and I 
think it is very important that all of you understand this, is 
that by the time I retire, I will have put in approximately 
$100,000 to $120,000 into the system. I don't know if I will 
ever get that back.
    And I'll guarantee you that if the system continues as it 
presently is, and the retirement age is raised to 70, the 
chances of my son who has my same name and is 40 years old, 
getting his contribution back in retirement are slim, barring 
some miraculous health discovery that I don't know about. He 
will have put more dollars into the system than he could ever 
recover.
    What is the solution to that?
    Mr. Boulter. Well, I think the main part of the solution is 
to recognize that in the case of your son, that it is unfair to 
ask him to continue to pay more in payroll taxes with such a 
low rate of return, to make sure that you get what you are 
entitled to, knowing that he probably isn't going to get the 
same thing.
    Chairman Bunning. We don't have an argument there.
    Mr. Boulter. So what we do, I think, is allow him, 
according to our testimony and our belief, allow him to take 
the equivalent and a little bit more than the equivalent of the 
Social Security surplus, which is 1.2 percent of the payroll 
tax plus some, and start putting it into the private sector.
    Chairman Bunning. But there is a real transition problem 
here that we are looking at. You mentioned the age of 55. We 
have looked at age 55 to 65 and if we start at age 55, there is 
not a long enough transition. We are going to have to look at 
some age group that is much younger than that and provide a 25-
year transition. It seems to me at age 40 if we are going to 
keep the retirement age at 65, or at age 45 if we are going to 
increase the retirement age to 70, that transition period is 
going to have to be a 25-year transition because we can 
guarantee that an individual at age 45 who has 25 years to age 
70, that benefit. Those are possibilities.
    Mr. Boulter. I think that is a possibility.
    Chairman Bunning. Yes, ma'am.
    Ms. Briceland-Betts. I think that the question goes to the 
social insurance nature of Social Security. When you talk about 
that contract and why it was originally put together, it was to 
ensure not that Social Security would be the sole source of 
income for folks, but that it would be--an unpopular phrase 
today--a safety net, if you will, to be there for folks who 
have lifetime low-income earnings, for folks who have 
disability, for women who take time out of the work force.
    I think that that lifetime higher-wage earner that you are 
talking about has every opportunity, through 401(k)s and IRAs, 
to enhance that. It is not necessarily true that other factions 
of our work force, mostly women, who do very good, long-term 
low-wage work, have that same opportunity. And I think that 
that redistributive benefit that you are referring to--Social 
Security is not a bank account; it really is a social program--
is a very important concept for us to have a further discussion 
about and, in our sense, to protect.
    Chairman Bunning. But when Social Security was started it 
obviously was not going to be the retirement for as many 
people. We didn't adjust the age groups and the dollar inflow 
to the reality of the age expectancy.
    We do have a problem with that adjustment. It was never 
meant to be the retirement for everyone that it is now. It was 
never set up that way. In the early eighties when we readjusted 
Social Security, you know that it was supposed to be solvent 
for 75 years and we have never reached that point yet.
    Ms. Briceland-Betts. But my point it was never set up to be 
a dollar-for-dollar return, either. That was not the intention. 
It is a social insurance program.
    Chairman Bunning. No one ever said it was. The insurance 
part of it--I am going to have to yield to Ken because my time 
has expired. Go ahead.
    Mr. Hulshof. First of all, thank you, Mr. Chairman, for 
providing us with this excellent panel of five individuals, all 
of like mind. At least I think all of the testimony we have had 
in this series of hearings, the consensus is we should act 
sooner rather than later. I think I could probably get five 
nods of heads.
    Just a quick followup. Just anecdotically, back in the 
district, Mr. Boulter, I have a senior who comes up to me and 
he says, ``I worked from 1937 to 1981.'' He showed me his pay 
stubs. ``Here is what I paid into the system,'' he says, and 
then he says, ``Here is what I have taken out of the system,'' 
and he was angry at me because he had taken out sevenfold more 
than what he had put in, even taking into account compounding 
interest.
    Mr. Green, I think the Chairman brings up a good point. 
What do we tell those constituents of mine who came through the 
Great Depression, survived it, built a business, have become 
successful and now we are suggesting, through means testing, 
that we penalize them or ask them to subsidize our generation, 
and I think you and I are probably fairly close in age, to 
subsidize our generation through means testing? What comments 
do you have as to what Mr. Bunning asked Mr. Boulter, Mr. 
Green?
    Mr. Green. Well, as we just discussed, it originally 
started out not as a pension plan. Like we discussed, the 
401(k)s are what should cover that.
    Forty percent of the people that receive Social Security 
right now are above the median income level. We had the 
ability, earlier in the 1900s and moving forward, to allow our 
grandparents, our parents to have the ability to take care of 
their elderly impoverished.
    I employ over 100 people and I have asked my employees the 
question. ``Do you know you are putting your money into FICA 
system and do you know it is not going to be there? Are you 
angry about that?'' I have personally put in about a quarter of 
a million dollars over the past 16 months into the system, and 
I am angry as well.
    Not only do my employees not understand this constituent's 
logic, but when they do find out the facts, they are just as 
angry and they will need the money. Social Security should be 
based on need. It should be based on need because we must take 
care of our elderly impoverished, just as we have done 
throughout the entire century. For today's elderly to suddenly 
say, ``This is mine,'' goes against everything that has 
happened in this country's history. In the Great Depression we 
bonded together. In World War II, we bonded together to pull 
through. All of a sudden, the elderly are out for themselves 
and not joining together to take care of tomorrow's elderly 
impoverished in this country? It is not right.
    Mr. Hulshof. I am going to bounce around. Ms. Canja, if I 
have some time I would like to ask you a question, as well.
    But Mr. Ryan, you mentioned that with workers maintaining 
control of personal savings accounts, and we have tried to 
weigh the pros and cons of each of the Advisory Council's 
provisions, one of the things you mention in your testimony is, 
of course, placing this money in a wide variety of investments.
    How do we ensure that individuals make wise investment 
choices? How do we make sure that, for instance, somebody 
doesn't take their money and go down to the riverboat or go to 
Vegas and suddenly their money is no longer available?
    Mr. Ryan. It would be through an education process, similar 
to 401(k) plans right now, where ERISA, Employee Retirement 
Income Security Act, governs which funds and plans can be 
implemented in this type of retirement package. The same rules 
would have to apply, as well, to these funds. That is how you 
could do that. They are doing it right now in the private 
sector. You should be able to transition these regulations into 
the public sector, as well.
    And if I could just point out a few statistics on the rate 
of return, currently, under our current system, a $25,000 a 
year worker loses more than $260,000 under the current system. 
And when you have someone coming up to you and saying, ``You've 
given me more back than I put in,'' shortly, in a few more 
years, you will have people saying, ``Hey, I put more in than I 
am getting back out.''
    Mr. Hulshof. Right. Let me interrupt you because my time is 
about up.
    Ms. Canja, I have to tell you that I have had some 
delightful conversations with the Ninth District of Missouri 
AARP, Representative Mack Brushwood. He was here this week. He 
continues to update me and it is great.
    Here is--I don't know if dilemma is the right word. As I 
understand AARP's position, they do want cost of living 
adjustments, COLAS. They want their COLAs. They are not big 
fans of individual accounts. AARP is open to raising the normal 
retirement age but doesn't want to change early retirement age. 
It doesn't want to increase tax on benefits. It doesn't want 
payroll tax increases to be our first choice and does believe 
that reductions in benefits can undermine support of the 
program.
    With those general thoughts of AARP's position, what are we 
going to do? What options do we have left?
    Ms. Canja. Oh, there are many options. I tried to point out 
today that really what we are going to need is a broad program 
with shared sacrifice, and everybody is going to have to give a 
little something and get something else in return.
    There is such a degree within all of those things. For 
example, if you are talking about taxation of benefits, you can 
have a different threshold that would be a very moderate 
change; or, you can have an enormous change. If you are doing a 
broad package, you can have a variety of changes that--if you 
do it early enough--you are not going to hurt too many people.
    As long as it is fair, as long as it is shared, you are 
pretty accurate in where we stand now on our feelings on some 
of these options.
    Mr. Hulshof. Mr. Brushwood has done a good job advising me.
    Thank you, Mr. Chairman.
    Chairman Bunning. Mrs. Kennelly.
    Mrs. Kennelly. Yes, I would like to talk to Ms. Briceland-
Betts. I have worked with the OWLs over the years on pensions. 
I have watched the good work that they have done. You have 
every reason to feel kind of frightened about this whole thing. 
We have, in this country, older women, divorced older women. If 
someone is older and in poverty, it is more likely to be a 
woman.
    I look forward to looking at your testimony more closely 
because you point out some things I hadn't thought about, about 
what happens when the welfare mother goes into the work force 
and things like that.
    So what I would appeal to you, and I would give the same 
appeal to the AARP representative, is that if, in fact, and the 
gentleman with you, Mrs. Canja, was at the same place that I 
was this morning. We had, as usual in this town, discussions. 
We are the only ones discussing this, by the way. They don't 
discuss it that much beyond these doors.
    It was suggested that there is a good chance, if we are 
going to be able to do anything, we will have a grandfather 
situation where, as you know, in 1983 when we raised the age, 
no one born before 1960 had their retirement age raised. So 
there is no way you are going to do anything if you don't have 
a grandfather situation where those, in fact, collecting 
benefits now and for the near future will not be impacted.
    Are you getting that information out? My first question is 
are you getting that out to your membership, so you can be part 
of the solution? What I am afraid of is that particularly 
groups like the OWLs, that really have seen inequities, and are 
so frightened about this whole thing that they won't get into 
the mix to see what we can do right.
    And I don't mean you, of course. You are here representing 
the group. But I mean your members, who are very bright people 
around the country.
    And I am afraid of the same thing with AARP. If you are so 
against certain things, what are your plans to fix the system?
    And what I am afraid of, and the discussion I was in this 
morning, there are some very powerful people in this country 
who think they know how to fix it and I am not so sure they do 
know how to fix it. We, as women, still earn 70 percent of what 
men earn. We live longer. We are afraid sometimes to make 
investment choices. And we are going to have low-paying jobs in 
sales and services for a long time.
    So all I am asking is do you have any thoughts on how, in 
fact, we can bring your membership into a discussion that looks 
for solutions to the problems of Mr. Green's, and of my three 
daughters? What I am afraid is that our energy, your and my 
energy, as one of four women on this Subcommittee, will get 
lost in protecting the stay-at-home moms and not have enough 
time for the dual earner who gets less than the stay-at-home 
mom. We have some huge questions here.
    Have you addressed that in your groups?
    Ms. Briceland-Betts. Certainly. It is a very important 
issue. I think that, however, what we emphasize in our 
testimony is because of the complicated nature of this 
discussion, we cannot rush into a quick fix. There is not a 
quick fix here. And if you look at the quick fix that is being 
considered, it has such a disparate impact on women from now 
into the future. This is not the overwhelming media myth that 
women in the future all carry briefcases and are bumping our 
heads on the glass ceiling. Studies that have been done by 
groups like Madeline Hockstein and Daniel Yankelvoich Group, 
Inc., DYG, show that the children of boomers are saying you 
sacrificed quality for quantity. We can't live on one income in 
our house but we can live on one and a half. Guess who's 
returning back to part time, working out of the home, not 
vesting in a pension.
    Yes, we are scared because we are the ones who stand to be 
seriously injured here, and we know that. And yes, we are 
working very hard to make sure that those, as you indicated 
earlier, who have the wherewithal and the knowledge for system 
and who understand it in its intricacies, when they get ready 
to make that move, to fix that system, take into consideration 
the very special dependence that women have.
    So we say two things. We must have that education that you 
are talking about. We have to talk about this for a longer 
time, so we know what all our options are and the implications 
of all of these. And second, we need a lot more research before 
we can move. We are not saying don't move. We are saying don't 
move so quickly that we do damage that is going to be hard to 
repair.
    Mrs. Kennelly. I hear you but I also hear Ms. Canja, who 
says we have to do it earlier rather than later. And if you 
look at the elections in France that are going to take place on 
Sunday, what is going to happen if we wait too long is that the 
baby boomers are going to be that huge piece of voters, as we 
know older people vote more than younger people, so they are 
going to be that huge piece of voters. So we have to be very 
careful.
    Look, I agree with you. The education hasn't been done. I 
can tell you that. There is a certain level of understanding 
when you have a townhall meeting and then it drops. But we have 
to start pretty soon, and that is one of the things Mr. Bunning 
and I are trying to do. The education, yes, but if we wait too 
long, it won't happen.
    Ms. Briceland-Betts. And that is why the kinds of things 
that we have done traditionally, when we get to this place of 
Social Security, this isn't the first time we have been here. 
This isn't we woke up and oh, my goodness, we are in a bad 
situation. We have done some things over the years to ``buy us 
time'' to look at the longer range.
    So in terms of raising payroll tax to buy us a longer time 
of reviewing what we need to do, ultimately with the program it 
is very important because of the serious implications that any 
drastic change has for sections of the population.
    Mrs. Kennelly. Ms. Canja.
    Ms. Canja. We have been engaged for a long time now in 
Social Security education and we are into a major campaign on 
it right now. We do such things as have forums where we give 
our members, or whoever is there, a list of options. If you 
were Congress and you had to come to these kinds of decisions, 
how would you split the money? How would you make up the 
deficit for Social Security? How would you make it solvent? And 
we are engaged in that discussion, so that we are getting 
feedback, very valuable feedback from our members of what is 
acceptable, what portion of something is acceptable.
    Mrs. Kennelly. Let me just interrupt. We don't have any 
cameras here today or any press, so we can talk. You say what 
do our members need and want. I come from Hartford, 
Connecticut. My constituents can read annuity tables. They were 
in insurance. They understand this.
    But what I am saying to you is if we just have this group 
saying ``Don't change this; don't change that,'' where is the 
flexibility of trying to make Social Security work for my kids, 
who are Mr. Green's age?
    So I am just saying let them have the view not just what I 
want. I have what I want. The system right now will give you 
what you want. If you're 50 or older, you are going to get what 
you have been promised. It is younger Americans that these 
smart people have to figure it out for.
    Ms. Canja. When we have these forums, we are not just 
talking about ourselves. These are people with children. They 
have children and grandchildren and we are saying this is a fix 
for the future and what can work? What can you see working for 
the future? We bring our own children into the discussion, so 
it isn't as though we are just talking to ourselves, to a 
generation that--let's face it--is not going to be affected as 
other generations are, as much affected.
    So that is our emphasis right now. I think the public has 
to be better educated or they are not going to accept choices. 
They see one solution. You were talking about payroll taxes. 
That probably is not going to be the only thing that would 
happen in a package. There would be a lot of things. People 
don't understand that, so they are going to say, ``No, no, no, 
no'' to one thing, but they might say yes if they saw it was a 
piece of a broader package that everybody was participating in.
    Mrs. Kennelly. I have to tell you something. I read your 
magazine every month and I follow everything you have to say 
and if I don't follow it, I'm told what you have to say. I 
still think you have to have a little more open window, to know 
that something is going to happen here, because demographics 
don't lie.
    You have this huge force of people who are very influential 
on this Congress and we need you to open up and help us.
    Let me get Mr. Green in on this.
    Mr. Green. I want to thank the panel for giving a glorified 
statement of the problem for the past 10 minutes. However, we 
need solutions. To sit around idle and state that we need to 
get more educated, it sounds great and it is great rhetoric, 
but the education is there, the facts are right in front of our 
faces.
    The Gramlich plan sticks a toe in the water. It doesn't 
dive in. It merely sticks a toe in the water for the direction 
in which Social Security should go. It provides a payroll tax 
that people could get some significant interest on.
    We hear all of the arguments about what is going to happen 
when the stock market crashes? Is the Government going to bail 
us out? That is great rhetoric and we could focus on the crash 
of 1987 but the bottom line is that in the 23-year period 
between 1967 and 1990 when the stock market was clearly 
flatlining a majority of the time, 5-percent returns were 
incurred, without dividends being invested. From 1990 to 1997, 
13.7-percent returns and 17-percent returns with dividends 
being invested. All of these figures are indexes of the Dow.
    The stock market is not a 10-year hold. When you enter the 
FICA system at age 21 and retire at 65, it is a 44-year hold. 
An index of the Dow is clearly a solid long-term investment. It 
is not a 2.3-percent investment like government bonds. It is 
not as risk-free as that. But let's use common sense. Let's not 
use rhetoric. The answers are in front of us. Let's educate the 
public based on what we have in front of us. Let's not dive in, 
but let's stick our toe in the water, as Third Millennium is 
suggesting.
    Mrs. Kennelly. Thank you.
    Chairman Bunning. Thank you. I would like to go back to 
Mrs. Briceland-Betts. You talked about a quick fix. One thing 
the Congress does not do is quick fixes, especially with this 
system.
    Mrs. Kennelly. She said no quick fix.
    Chairman Bunning. I know. She said she is against a quick 
fix. She can be assured that we will not have a quick fix for 
Social Security.
    We are trying to search out solutions and we are trying to 
put them all on the table. My good friend and young colleague, 
Mr. Green, would like action. He thinks all things are on the 
table. I don't think they are. I think that we know the 
demographics. We know the possibilities, of what we could do, 
but we haven't, I don't think, thought out all the consequences 
of what happens when we do them.
    In the early eighties, we did something. We thought the 
changes would last for 75 years and there was some thought that 
they might not. Well, the fact of the matter is they haven't 
and now we are to the point where we are reexamining the system 
and saying, ``My goodness; they didn't last for 75 years.''
    Now we are going to have to go back and try to project a 
longer lifespan for the system, without damaging the system. 
Everybody here agrees that the system has very strong redeeming 
qualities. It does need some adjustments. That is why I wanted 
to go to Mrs. Briceland-Betts. The fact of the matter is that 
we are going to have to adjust those things specifically for 
women.
    Do you have a list of suggestions that you would like to 
send to the Subcommittee so that we can put them in with the 
other suggestions that we are getting? You said in your 
testimony that there are other things that you would like to 
see done, but we would like the suggestions.
    Ms. Briceland-Betts. Yes, sir. We would certainly follow up 
with that.
    I would like to take the opportunity to reply to my 
colleague here at the table with me that if we move too 
quickly, the women that we are talking about will not 
disappear. They depend on Social Security for 79 percent of 
their income in retirement. Those women are our mothers and our 
grandmothers. And while we are struggling, and I tell the very 
personal story of already supporting three generations because 
I have a mother and mother-in-law who both retired from retail 
and I have a small daughter, because of delayed childbearing. 
We support three generations in our household, and that is with 
Social Security in place.
    If we move too quickly and have too much of a serious 
impact on those women, those women will come back home and that 
sandwich will become a club sandwich because we live longer and 
we will be carrying two generations up and one back. And then 
if you want to talk about the impact on the ability of these 
young men and women to be able to save for their retirement, we 
will have very, very serious and quick discussions, sir, as 
Congress.
    This issue is very serious. We may not have the answers 
today but we certainly have a responsibility to raise the very 
special dependency of women on this income.
    Chairman Bunning. Well, I am not going to dispute that with 
you but that is why we are doing the hearings. We are the only 
ones doing the hearings. Everybody else brought their 
suggestions and said, ``Here is the way to fix it,'' or ``Here 
are suggestions on the way to fix it.''
    If we are going to fix it, we want to make sure that we 
have your suggestions on the table. So you have to bring it to 
the table so we can have it.
    Ms. Briceland-Betts. Yes, sir, we have. Our fixes that we 
brought to the table here, I haven't heard people address. What 
we have been saying is the fixes they brought to the table are 
not fixes. And we also brought some things to the table here 
today and I refuse to sit here and have it implied that we 
didn't come here ready to discuss this.
    And what we are trying to do is to discuss all of the 
issues that are on the table and make sure that we understand 
the implications of all of them that are here.
    Chairman Bunning. You are missing my point. We had someone 
testify that they would like not to see too much change and we 
need to know all the facts and figures about how women 
specifically are impacted under the present system, which you 
have brought out very clearly. And if we are going to make sure 
that they are not impacted adversely in a change or a reform of 
the system, we need your assistance in doing that.
    Ms. Briceland-Betts. That is right.
    Chairman Bunning. That is what I'm making sure that we 
understand.
    Ms. Briceland-Betts. Thank you.
    Chairman Bunning. Mr. Portman, would you like to question 
any of the witnesses?
    Mr. Portman. Thank you, Mr. Chairman. I apologize that I 
couldn't have been here earlier. I had a bill on the floor and 
I would like to have been here because I wanted to hear all the 
witnesses. I do have a couple of questions.
    First, Mr. Green, you testified today about your group's 
interest in having some sort of private account established and 
what I would like to know from you, and again I apologize that 
I wasn't here to hear it and you may have already answered it: 
Have you talked about how this Congress and how your group and 
others might better educate people in your generation and my 
generation, being a baby boomer, as to the issues and to begin 
to develop a consensus on this, which I frankly don't see out 
there yet?
    Mr. Green. As we discussed before, our generation, what is 
called Generation X, is clearly turned off and has a lack of 
trust of the leaders in this country, for different reasons 
which we could probably discuss all day.
    Generation X has a choice. Our choice was to do something 
about this distrust and get educated to make a difference, or 
choose the ignorance-is-bliss attitude. Our generation has 
chosen the latter and we are not happy about it.
    Part of the goal of Third Millenium is to stand in front of 
legislators like yourselves and make a difference and be heard. 
But a big, big part of what we do is to educate our generation, 
because if young people don't have the education, we can't 
become a force.
    Right now we are in a membership drive to increase upon our 
2,000 members. Quite frankly, we need a cash infusion for that 
and that is what we are working on, raising private donations. 
Otherwise, it is not going to happen. I am sure that this 
importance of dollars is understood here in Washington, too.
    What we do is, we get people together and educate them. 
About a month ago we had a group of 600 people in a room who 
really didn't understand Social Security. We had a benefit in 
New York City, and the equivalent of what I am doing here 
today, we got up on a platform--I call it a soapbox--and 
explained what is going on with Social Security. I have to tell 
you, the people in that room were very educated; they did not 
have an education as to what is going on. And when these young 
people do have the education, they will go out and do something 
about it.
    I would invite young people like myself on the Hill. I 
would have a media event day with all the young media types, 
MTV and such. You should go to college campuses, have townhall 
meetings on college campuses, just like Third Millennium does.
    Mr. Portman. Let me follow up with Mr. Ryan and others who 
may have some interest in the educational aspect. All of you 
have interest in it, I know.
    The PEBES statement has been controversial to the extent to 
which it is online and there might be access, to people's 
private information. This is something that, thanks to Chairman 
Bunning, we had a hearing on right away and talked about the 
pros and cons. It is a difficult issue for a lot of us.
    How do you all, to the extent we have time here, if you all 
could just go down the line, maybe Congressman Boulter first, 
how do you all feel about the online issue with PEBES? Do you 
think it is a valuable information tool? I think it is. Should 
it be online, and the extent to which that should be a factor 
in the consideration of where we go next.
    Mr. Boulter. Well, I personally have a lot of concerns 
about the privacy issue and we really haven't addressed it 
specifically, Congressman, but I do want to let you know, 
because we all are interested in the educational process, that 
Mr. Green's organization, in fact, is represented on the 
National Advisory board of our foundation. We have started the 
foundation to look into some of these issues, headed up by 
Dorcas Hardy, Social Security Commissioner, under Presidents 
Reagan and Bush, and we have participated in a number of 
forums.
    On the privacy issue, except for a general feeling of 
concern, we haven't really addressed it.
    Mr. Portman. Mr. Green.
    Mr. Green. We haven't addressed it.
    Mr. Portman. Ms. Briceland-Betts.
    Ms. Briceland-Betts. I think the privacy issues are very 
serious but I think that the education value--there should be 
something there that highlights Social Security, the issues in 
Social Security and perhaps a form that people could print out 
and fill in and send off, something to give them urgency to get 
more information. Perhaps online is too----
    Mr. Portman. Something that they can print out and send 
back and get in the mail something that is more private?
    Ms. Briceland-Betts. Exactly.
    Mr. Portman. Interesting idea.
    Mr. Ryan.
    Mr. Ryan. For purposes of education, what we are doing on 
our website currently is to have users type in what they make, 
date of birth, and other relevant information to calculate a 
benefit. So we don't have to have personal information on the 
Internet. That would produce benefit estimates of what they 
will get back from the Social Security system, and under a 
privatized system. Those software packages are already modeled 
and can be in use. We are just uploading them right now.
    I think that would be an excellent solution for people to 
find out the benefit differences between privatization and 
keeping the current pay-as-you-go system.
    Chairman Bunning. Mr. Ryan, thank you. I am going to have 
to cut my good friend from Ohio a little short because his bill 
is being voted on on the floor right now and I want to make 
sure that he gets a chance to vote on it.
    Mr. Portman. Thank you, Mr. Chairman.
    Chairman Bunning. Go ahead, Mrs. Kennelly.
    Mrs. Kennelly. And he has allowed me to say a few more 
words. I just want to say to Ms. Briceland-Betts that being on 
this Subcommittee and being the Ranking Member of the Social 
Security Subcommittee, I have done a bit of reading about 
Social Security and over the years, there were inequities for 
women.
    So what I am saying to you today is that I am glad to see 
you there and I am glad to see me here and I am glad to see 
Mrs. Canja there because what I found out was there weren't any 
women on those particular Subcommittees when the changes took 
place, and there weren't any head staff on those Subcommittees.
    So this is going to be a rough and tough and interesting 
debate, but we have to make sure we are in the room.
    Chairman Bunning. And I want to assure the panel that I 
have Generation X children and grandchildren very interested in 
Social Security. That is why I am having these hearings.
    I want to, first of all, thank you all for your testimony. 
If you have specific recommendations, please send them in to 
us. If we have some questions that we would like to explore 
with you, we reserve the right to send the questions to you and 
it would be very helpful if you would answer those questions.
    [Questions were submitted to the panel from Chairman 
Bunning. The responses follow:]

                      The responses of Mr. Boulter

    Question 1. One concern that has been repeatedly expressed 
is the rate of return that Social Security provides, especially 
for younger workers. United Seniors Association supports 
raising the normal retirement age and changing the benefit 
formula to reduce the growth of Social Security benefits for 
future retirees. Is this fair to younger workers? What do you 
think employer reactions might be, should they be expected to 
retain older workers?
    Response to Question 1:
    You observe that many people voice concern about the 
relatively low rates of return that Social Security will 
provide future retirees. You then ask whether it is fair to 
younger workers to raise the retirement age and change the 
benefit formula to reduce the growth of Social Security 
benefits for future retirees.
    If you ask the question without considering the private 
investment reforms United Seniors Association favors that would 
more than compensate for any loss in benefits caused by raising 
the retirement age or changing the benefit formula, there may 
be a strong presumption that it is not fair to younger workers.
    Younger workers know they are not going to get a very good 
rate of return on Social Security. Therefore, if we devise a 
package in which we can substantially improve the rate of 
return, I believe younger workers would accept some change to 
the retirement age and future benefits promised by the 
program--especially in light of the fact that so many of them 
don't even believe they will see those promised benefits 
anyway. In other words, it isn't very meaningful to promise 
younger workers a large safety net if they can look down from 
the heights and see how tattered and frayed it is. They aren't 
going to want to have to rely on it anyway.
    Your question concerning what employer reactions might be 
to retaining older workers is an interesting one in light of 
current employer behavior that is, in many cases, unfavorable 
to older workers. In the future, however, when employers will 
need workers due to several reasons, including the so-called 
baby bust, employer reactions should be quite favorable.
    In summary, whenever we talk about the future of Social 
Security and what reforms might be instituted, it is important 
that we always keep them in context so the American public can 
see the whole picture.
    Also, I believe a few things must happen if we are to have 
real Social Security reform. Younger workers must assure 
retirees that reform will not entail cutting current benefits. 
And retirees must assure younger workers that they will help 
them put in place reforms that will guarantee their retirement 
security for the future. In other words, we need an 
intergenerational understanding that will protect the interests 
of both young and old alike.
    Question 2. You support individuals having full control 
over the management of their own personal accounts. What about 
the concerns raised by many that low income workers may not do 
as well, or that individuals may not make wise investment 
choices?
    Response to Question 2:
    Clearly, we do not have in mind allowing individuals to 
take all of their retirement funds and put them into high-risk 
investments. Not so much because we believe government should 
be paternalistic toward individuals--it should not--but rather 
because the only way to maintain the integrity of the system is 
to have rules that require prudent management of retirement 
funds--no different than we already have under ERISA for 
private retirement funds.
    Such a system would take care of most everyone. For low 
income individuals and those who may not make wise investment 
choices even within the ERISA-like constraints, of course we 
must have a safety net provided by the government. However, our 
point is that these individuals will be the rare exception to 
the rule and that the system should be designed to deal with 
them as exceptions. A retirement security system for the 21st 
Century should not be premised on the few exceptions but rather 
on the vast majority of individuals who can and will provide 
for their retirement if only government provides them a 
conducive economic and programmatic environment in which to do 
so.
    As I mentioned in my testimony, I think there may be an 
emerging consensus as to what a newly-restructured Social 
Security model will look like. Perhaps the best senior 
citizens' economic security program would be one that combines 
two elements: an Old Age Insurance plan (which would serve as 
the safety net) and a Personal Savings Account plan (which 
would give people the opportunity reap the rewards of long-term 
investment).
    Under such a model, we would have the best of all possible 
worlds. Individuals, having saved and invested over a working 
lifetime, would retire with real wealth and security and have 
far better benefits than would otherwise been provided by 
Social Security. On the other hand, all individuals would have 
the basic social protections provided by the current system.
      

                                

                       The responses of Mr. Green

    1. Q: You indicate that each time Third Millennium has 
testified, you tell your elected representatives to raise the 
retirement age to 70, means-test benefits on a scale 
recommended by the Concord Coalition and transform the system 
over time to one that includes private retirement accounts.
    In a previous hearing in the series, we heard testimony 
indicating that two of the three Advisory Council proposals 
would increase budget deficits for as many as 30 years. Over 
the first 10 years, the Personal Savings Account Plan, which I 
assume is similar to what Third Millennium would support, would 
cumulatively divert $1.8 trillion into the markets by diverting 
5 percentage points of the Social Security tax rates into 
personal accounts.
    This loss to the Treasury would have to be made up somehow, 
through increased federal borrowing, increased taxes, or cuts 
in spending. Wouldn't this cause a double burden on younger 
workers? Has Third Millennium discussed ways to ease the cost 
of transition to a personal account system?
    A: You bring up several very good points, Congressman--I'll 
take them in order. First, as to the issue of increased 
deficits--the public should not mistakenly believe that the 
choice is between large transition costs or no costs (and thus 
no reform). It must understand that the choice is between 
paying to build a better program today or paying to bail out a 
failed one tomorrow.
    Moreover, we should understand exactly which methods of 
financing involve which burdens. Should we choose to finance 
entitlement reform through increased borrowing, there is no 
``double burden'' on younger workers, because the bill, like so 
many of our other bills that together make up the national 
debt, will simply be handed down to later generations and the 
increased borrowing will offset the savings realized in Social 
Security dollar-for-dollar. However, this is a poor method of 
financing, not least because it constitutes asking our children 
to pay our bills. It would also increase the portion of the 
U.S. budget that goes toward paying interest on the national 
debt, which would stall America's progress toward a balanced 
budget. If we fund the transition through taxes, then there is 
indeed a double burden on the generation or generations paying 
those taxes, but those same workers will also realize a gain in 
Social Security savings.
    I believe we all understand that the trust fund is borrowed 
in its entirety every year to offset the yearly deficit, with 
cash from Social Security being exchanged for special Treasury 
bonds. From Franklin Roosevelt's onward, every Administration 
has termed the trust fund a debt of the U.S. government, not an 
asset. Any move to change this--such as the Advisory Council 
proposals you mentioned--immediately results in a loss to 
Treasury. However, the sanctity of the Social Security system 
itself depends on reforming the trust fund. The question before 
you and your colleagues, Mr. Chairman, is whether the loss to 
Treasury will occur and be dealt with now, with time for 
deliberation and in a sound economy, or whether the loss to 
Treasury will occur 15 years from now, in economic conditions 
we cannot predict, when Social Security begins redeeming the 
bonds it now holds in the Trust Fund to pay benefits to the 
Baby Boom generation.
    Please keep in mind that while Third Millennium does back 
some of the concepts embodied in the Personal Savings Account 
plan, we have endorsed no specific reform plan. We believe 
there is much more public education to be done. In order to 
minimize the impact of transition costs, though, we do lean 
toward diverting a smaller percentage of income than the PSA 
recommends, at least in the beginning. Perhaps something on the 
order of two percentage points should be explored and pilot-
tested before we commit ourselves to diverting five. We have 
read and considered other ways of financing the transition, and 
our position is that the cost of the transition cannot 
accurately be determined until we see precisely what measures 
entitlement reform will involve. Once that is established, we 
will have solid numbers and we can then begin the discussion of 
how to ensure that the transition does not impose a painful 
burden on any segment of society--economic or generational.
    You ask if reform now does not constitute a double burden 
on young adults, and I must honestly tell you it does. Indeed, 
it does not seem quite fair to place the burden of reform so 
squarely on the shoulders of the very workers who faced up to 
Social Security's deep problems and vowed to fix them. There 
will be transition costs, and Third Millennium believes that 
our generation is prepared to take the lead now in order to 
avoid disaster later. But all generations alive today should 
shoulder some of the burden. A reformed Social Security system 
has the potential to give retirees larger benefits, taken not 
from the wages of their children and grandchildren but from 
their own equity stake in America's economic growth. It also 
has the potential to give low-wage retirees benefits larger 
than they could have received under the current system, lifting 
them financially and improving their standard of living. It can 
address 21st-Century demographic projections rather than 
inaccurate 1930s ones regarding the length of retirement and 
lifespan. And finally, it can lift the burden of supporting 
elders from the backs of our children and grandchildren and 
give them the freedom to keep moving America forward in long-
term prosperity. We believe these goals are worth achieving. 
Third Millennium is not the ``gimme'' group for our generation. 
Our philosophy is in our name--Third Millennium: Advocates for 
the Future.
    2. Q: We have heard repeatedly, in testimony before the 
Subcommittee, that today's Social Security system provides very 
poor returns to most workers for the investment they make in 
payroll taxes. While there are certainly arguments regarding 
the importance of rate of return to the overall debate about 
Social Security, your testimony stated that Third Millennium 
supports raising the normal retirement age, which would 
ultimately reduce the rate of return for younger workers. Why 
does your organization support raising the retirement age?
    Are your members at all concerned that it may be more 
difficult for employers in some industries to retain younger 
workers if advancement and salary increases are slowed because 
of the retention of senior workers?
    A: Third Millennium's reason for supporting an increase in 
the retirement age can be summed up in one word--demographics. 
The normal retirement age has not changed since Social 
Security's inception in 1935. Since that time, according to the 
Bipartisan Commission on Entitlements and Tax Reform, life 
expectancy has increased by 17 years--most of them far 
healthier and more active years than in the past. Social 
Security was meant to support the aged in their final years. 
Now it supports a vibrant group for decades--and supports them 
with more money in benefits than they paid in taxes.
    The rate of return is an important consideration for Social 
Security, but it is insanity to allow Social Security policy to 
be governed by 1930s assumptions regarding lifespan--especially 
when we know, and have known for decades, that those 
assumptions were wrong. Considering the relative wealth, 
health, and sheer size of the generation about to enter Social 
Security, stepping up the retirement age to fit current 
lifespan projections ile and Jon Bakija of the Urban Institute, 
writing in Retooling Social Security for the 21st Century, 
suggest that the government set a number of years during which 
seniors should draw Social Security and let the retirement age 
float with increasing lifespans, so that when the lifespan 
increases so does the retirement age. Again, this will lower 
the rate of return for younger workers, but it will also save 
the program from its projected insolvency. Current return rates 
are unrealistic. Let's face facts, Mr. Chairman--Social 
Security is today a great deal for exactly one generation, the 
one alive when it was enacted. For Baby Boomers and for 
everyone after them, it is a lousy deal, one that grows worse 
every year that passes without reform. No generation that finds 
UFOs more credible than Social Security believes it is going to 
receive the same return rates as today's seniors.
    Regarding the second part of your question, I do not 
believe that young workers today will face employment crises 
due to the retention of older workers. The Baby Boom, the 
largest generation in American history is leaving the 
workforce, and following it is so-called ``Generation X,'' a 
demographic only about half as large as the Baby Boom. Even 
with the retention of Baby-Boom workers for an additional few 
years--and keep in mind that any increase in the retirement age 
would be phased in over a number of years, not enacted 
immediately--I believe there will still exist a great deal of 
opportunity for today's young adults.
      

                                

                       The responses of Ms. Canja

    Question 1: In your testimony, you discussed reasons why 
AARP believes Social Security should not be replaced with 
individually controlled accounts, and that public policy could 
encourage greater savings outside Social Security through 
existing vehicles (IRAs, 401(k), etc.). You also agree with the 
Advisory Council finding that Social Security benefits should 
bear a reasonable relationship to contributions plus interest, 
which they clearly won't in the future, especially for younger 
workers. How do you suggest we go about increasing public 
confidence in the program?
    We recognize that many young workers, despite strongly 
supporting Social Security, lack confidence in the system's 
ability to continue to pay the same level of retirement 
benefits in the future. The lack of confidence, while 
disturbing, is not surprising, and it reflects an array of 
factors, some attitudinal and some programmatic. Many of 
today's workers are skeptical about the ability of any program 
or institution, not just Social Security, to sustain itself 
over the long-term. From a programmatic perspective, the lack 
of confidence in Social Security reflects the widely held view 
that the government has mismanaged the trust funds, including 
the notion that the funds have been stolen. The public also 
believes Social Security benefits are too low and will be worth 
even less in the future. Finally, as you know, the public 
confuses Social Security and the Supplemental Security Income 
program, a needs-based program financed out of general revenue 
and run by the Social Security Administration (SSA). This 
confusion contributes to the widely held view that the Social 
Security program is mismanaged and paying out benefits to those 
who did not earn them.
    Restoring the public's confidence in Social Security will 
require a significant public education effort on the part of 
many, particularly SSA, Members of Congress, and groups with a 
stake in the future of Social Security. The message must be 
clear: while Social Security has a long-term financing problem, 
it is not in or near crisis. The public must understand that 
Social Security is not on the verge of bankruptcy, and that 
even beyond 2029 (the current projected date for exhaustion of 
the trust funds), the system has sufficient incoming revenue to 
cover about 75 percent of the benefits currently promised. For 
too many years, and from too many sources, Americans have heard 
gloom and doom scenarios for Social Security that greatly 
exaggerate the program's financial problems. American workers 
need to know that Social Security's long-term financial 
condition can be improved with modest incremental reform. 
Education efforts must also place greater emphasis on the value 
of the social insurance aspect of the program--particularly the 
survivor and disability components of the system--since the 
value to current workers would demonstrate to younger workers 
that the program is protecting them now.
    Question 2 (part 1): AARP believes that any increase in the 
normal retirement age should be accompanied by policies 
promoting expanded job opportunities for older workers. Do you 
have any specific policies to suggest?
    For many older workers, expanding employment opportunities 
will require little more than fair and equitable treatment. 
Better enforcement of the Age Discrimination in Employment Act, 
particularly with respect to on-the-job training, is critical. 
Below are a number of specific policy suggestions for promoting 
job opportunities for older workers.
     Training: Despite improvements since the early 
1980s, older workers remain underrepresented (and receive fewer 
hours) in employer-provided training programs. Yet, employers 
complain that a lack of technological competence is one of the 
major weaknesses of older workers. Continuous training and 
retraining will increasingly be required of all workers who 
want to remain employable. Efforts must be made to ensure that 
a revamped job training system does not shortchange older 
workers.
     Recruitment and Retention of Experienced Workers: 
Employers must rethink their perception of older workers as an 
expense and begin to view them as a reservoir of talent and 
experience. Many businesses have already implemented programs 
and policies that attract and/or retain older workers. Some 
options, like phased or gradual retirement,\1\ are specifically 
geared toward older workers, but other options, such as 
enhanced part-time employment, job sharing, job redesign, and 
flexible and alternative work schedules, can help employers 
attract the best workers of all ages. Adjustments to employee 
benefit rules may be needed to accommodate and encourage these 
employment practices.
---------------------------------------------------------------------------
    \1\ Phased retirement programs allow older workers to reduce their 
work hours for a period of time in their regular job before retiring. 
With phased retirement, wages are generally reduced, benefits may be 
prorated, and a partial pension plan may be available. However, workers 
may be constrained from accepting phased retirement if they participate 
in defined benefit pension plans that base pensions on average salary 
in the final years of work. A reduced salary from reduced work could 
result in lower pension benefits. This issue must be addressed if 
phased retirement is to be promoted.
---------------------------------------------------------------------------
    Question 2 (part 2): I'm sure many of your members are 
employers. Have you thought about whether raising the 
retirement age will make it more difficult for employers in 
some industries to retain younger workers if advancement and 
salary increases are slowed because of the retention of senior 
workers?
    There is relatively little evidence either from the United 
States or abroad that older and younger workers compete for the 
same jobs. The changing nature of work and employment in the 
United States, e.g., the leveling of the corporate pyramid, 
frequent corporate restructuring to meet changing demands, the 
growth of the contingent workforce, the expansion of part-time 
work, and a decline in job tenure also suggests that the 
stereotypical career pattern of upward mobility in a single 
firm will become less and less common. Lateral mobility, along 
with numerous career and job changes throughout the worklife, 
are more likely to be the norm.
    Furthermore, contrary to conventional wisdom, 
``established'' retirement ages bear very little relationship 
to the opportunities for advancement and salary increases 
available to younger workers. This is true even in the few 
industries still permitted to set a mandatory retirement age 
(sometimes as young as 55 in some jobs, e.g., police officers 
and firefighters in some cities).
    There are a number of reasons for this. First, despite the 
general elimination of mandatory retirement in the U.S., the 
average voluntary retirement age--the age at which people 
choose to retire, without any coercion from the employer--has 
steadily declined over the past 15 years. It is now 
approximately age 62. The voluntarily departure of older 
employees opens up jobs for younger workers to advance.
    Second, employers have at their disposal a wide range of 
legal (and often desirable) methods of encouraging workers to 
leave the work force voluntarily. These exit and early 
retirement incentives can take many forms: supplements to a 
pension benefit, lump sum cash payments, retiree health 
benefits, etc. Indeed, the federal government frequently uses 
such ``buy-out'' plans to accomplish workforce downsizings and 
adjustments. So long as the benefit plans are not denied to 
workers above a certain age, and are not used to coerce older 
workers out of their jobs, they are legitimate tools for 
workforce management.
    Despite these existing means to manage a workforce, 
employers remain hesitant to hire and keep older workers. While 
a strong argument can be made for the retention of highly 
skilled, experienced, and loyal older workers, these workers 
are all too often forced, either subtly or not too subtly, to 
retire. Unless and until attitudes towards older workers can be 
improved, raising the retirement age remains problematic.
    Thank you for the opportunity to provide the Committee with 
our views on Social Security solvency and the opportunity to 
comment on issues of importance to you. If you need additional 
information, please contact Evelyn Morton of the Federal 
Affairs Department at (202) 434-3760.
      

                                

    We like the way the testimony is coming in for these 
hearings and we really appreciate your participation. The 
Subcommittee stands adjourned.
    [Whereupon, at 12:40 p.m., the hearing was adjourned.]

                                   -