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



 
THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT: MEMBERS 
                 OF CONGRESS AND BUSINESS LABOR GROUPS

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 10, 1997

                               __________

                             Serial 105-39

                               __________

         Printed for the use of the Committee on Ways and Means

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
51-071 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 June 27, 1997, announcing the hearing................     2

                               WITNESSES

American Federation of Labor and Congress of Industrial 
  Organizations, David A. Smith..................................   100
Batts, Warren L., National Association of Manufacturers, Premark 
  International, Inc., and Tupperware Corp.......................    95
Burton, Hon. Dan, a Representative in Congress from the State of 
  Indiana........................................................    52
Committee for Economic Development, Bruce K. MacLaury............    82
DeFazio, Hon. Peter A., a Representative in Congress from the 
  State of Oregon................................................    17
Deutsch, Hon. Peter R., a Representative in Congress from the 
  State of Florida...............................................    40
Ehlers, Hon. Vernon J., a Representative in Congress from the 
  State of Michigan..............................................    22
ERISA Industry Committee, Scott J. Macey.........................    88
Filner, Hon. Bob, a Representative in Congress from the State of 
  California.....................................................    42
Graham, Hon. Lindsey O., a Representative in Congress from the 
  State of South Carolina........................................    56
Gregg, Hon. Judd, a U.S. Senator from the State of New Hamsphire.     4
Johnson, Hon. Eddie Bernice, a Representative in Congress from 
  the State of Texas.............................................    30
Kolbe, Hon. Jim, a Representative in Congress from the State of 
  Arizona........................................................    12
Kucinich, Hon. Dennis J., a Representative in Congress from the 
  State of Ohio..................................................    62
Macey, Scott J., ERISA Industry Committee........................    88
MacLaury, Bruce K., Brookings Institution, and Committee for 
  Economic Development...........................................    82
Miller, Hon. Dan, a Representative in Congress from the State of 
  Florida........................................................    47
Nadler, Hon. Jerrold, a Representative in Congress from the State 
  of New York....................................................    25
National Association of Manufacturers, Warren L. Batts...........    95
Neumann, Mark W., a Representative in Congress from the State of 
  Wisconsin......................................................    59
Petri, Hon. Thomas E., a Representative in Congress from the 
  State of Wisconsin.............................................    45
Pomeroy, Hon. Earl, a Representative in Congress from the State 
  of North Dakota................................................    32
Premark International, Inc., Warren L. Batts.....................    95
Sanders, Hon. Bernard, a Representative in Congress from the 
  State of Vermont...............................................    19
Sanford, Hon. Marshall ``Mark,'' a Representative in Congress 
  from the State of South Carolina...............................    65
Smith, David A., American Federation of Labor and Congress of 
  Industrial Organizations.......................................   100
Smith, Hon. Nick, a Representative in Congress from the State of 
  Michigan.......................................................    35
Stenholm, Hon. Charles W., a Representative in Congress from the 
  State of Texas.................................................    10
Tupperware Corp., Warren L. Batts................................    95

                       SUBMISSIONS FOR THE RECORD

Coburn, Hon. Tom A., M.D., a Representative in Congress from the 
  State of Oklahoma, statement and attachment....................    72
Mink, Hon. Patsy T., a Representative in Congress from the State 
  of Hawaii, statement and attachment............................    79
Porter, Hon. John Edward, a Representative in Congress from the 
  State of Illinois, statement...................................   109
Reid, Hon. Harry, a U.S. Senator from the State of Nevada........   111
Walsh, Hon. James T., a Representative in Congress from the State 
  of New York....................................................   112


     THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT

                              ----------                              


                        THURSDAY, JULY 10, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:04 p.m., in 
room B-318, Rayburn 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

June 27, 1997

No. SS-7

               Bunning Announces Fifth 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 fifth 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 views of Members of Congress 
and representatives of business and labor groups on Social Security 
reform. The hearing will take place on Thursday, July 10, 1997, in room 
B-318 Rayburn House Office Building, beginning at 1:00 p.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:

      
    Various approaches have been proposed to restore Social Security's 
financial solvency ranging from maintaining the program's current 
structure to revamping the system entirely. The Subcommittee's first 
four hearings in the series have focused on the recommendations of the 
Advisory Council on Social Security, the fundamental issues to consider 
when evaluating options for Social Security reform, the findings of the 
1997 Social Security Board of Trustees, and the views of policy experts 
and organizations with different generational perspectives on Social 
Security reform.
      
    In announcing the hearing, Chairman Bunning stated: ``Members of 
Congress probably hear more about Social Security from their 
constituents than any other issue around. And for that reason, Members 
of Congress are very much aware of the widespread uncertainty about the 
future of this vital program, very much aware of how important the 
program is to senior citizens, and very much aware that when we get to 
the bottom line it is going to be their responsibility to make the 
changes necessary to restore Social Security's long term solvency.
      
    ``So, it makes sense to me that we bring as many Members of 
Congress into the process as possible and take advantage of any 
suggestions or proposals they might have to offer. Since they are going 
to be on the firing line when we have to make the tough choices, we 
ought to hear their recommendations before we start lining up the 
options.
      
    ``On the other hand, no one has any more at stake in the debate 
over Social Security reform than the employees and their employers who 
are paying the taxes that keep the program going. No matter what we do 
to change Social Security, it is going to have a direct impact on these 
two groups. They should have an opportunity to have their voices heard 
in this process.''
      

FOCUS OF THE HEARING:

      
    The Subcommittee will receive the views of Members of Congress on 
Social Security reform. Representatives of business and labor will also 
present their perspectives. Specifically, Members of the Subcommittee 
would like to hear the views of each individual 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 leastsix (6) 
single-space legal-size copies of their statement, along with an IBM 
compatible 3.5-inch diskette in ASCII DOS Text format only, with their 
name, address, and hearing date noted on a label, by the close of 
business, Thursday, July 24, 1997, to A.L. Singleton, Chief of Staff, 
Committee on Ways and Means, U.S. House of Representatives, 1102 
Longworth House Office Building, Washington, D.C. 20515. If those 
filing written statements wish to have their statements distributed to 
the press and interested public at the hearing, they may deliver 200 
additional copies for this purpose to the Subcommittee on Social 
Security office, room B-316 Rayburn House Office Building, at least one 
hour before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on an IBM compatible 3.5-inch diskette in ASCII DOS 
Text 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.
      

                                

    Mr. Bunning. I am going to bring the Subcommittee to order 
and, unofficially, officially hear Senator Gregg, who has been 
so gracious as to wait for a second member to show up.
    I was going to have opening remarks. I will put them in the 
record by unanimous consent.
    [The opening statement of Mr. Bunning follows:]

Opening Statement of Hon. Jim Bunning

    Today Marks our fifth hearing in the series on ``The Future 
of Social Security For This Generation and The Next.'' We will 
hear testimony from Members of Congress and representatives 
from business and labor groups.
    Social Security is probably the issue that Members of 
Congress hear about more than any other from their 
constituents. Since we are very much aware of the widespread 
uncertainty about the future of Social Security, I think it's 
imperative to bring into the picture the reform measures 
proposed by our own colleagues.
    We--the Members of Congress--are going to be on the firing 
line when it comes time to make the tough decisions on Social 
Security reform, so we ought to hear our colleagues' 
recommendations before lining up the options.
    No one has more at stake in the debate over Social Security 
reform than the employees and their employers who are paying 
the taxes that keep the program going. No matter what we do to 
change Social Security, it is going to have a direct impact on 
these two groups. They, too, will have an opportunity to voice 
their opinions today.
      

                                

    Mr. Bunning. I will welcome Senator Gregg. You may begin.

STATEMENT OF HON. JUDD GREGG, A U.S. SENATOR FROM THE STATE OF 
                         NEW HAMPSHIRE

    Senator Gregg. Thank you, Congressman. It's a pleasure to 
have a chance to testify before your Subcommittee. I 
congratulate you for stepping into this issue aggressively and 
being a leader on the issue of how we make our Social Security 
system solvent for our seniors today and our seniors tomorrow.
    It is also a pleasure to see one of the participants in 
this hearing, Congressman Stenholm, who along with Congressman 
Kolbe and myself and Senator Breaux, are chairing a working 
group of Members and outside experts, under the auspices of the 
Center for Strategic and International Studies, CSIS, to try to 
develop some strategies for how we address the Social Security 
problem.
    I wanted to speak today, however, briefly--and I will make 
it brief, because I know there are a lot of people who want to 
catch your ear on this--on a bill which I have introduced to 
try to address the problem of the Social Security projected 
crisis.
    Now, it's not a projected crisis; it's a real crisis. 
Projected is certainly the wrong word to use. In fact, if we 
were able to predict a date for an earthquake, a date for a 
flood, a date for a hurricane to come ashore that would be 
extraordinarily disastrous, we would obviously anticipate and 
take action to correct that.
    Well, we can predict the date for a massive financial 
catastrophe which is going to confront this Nation, and that 
date begins in about the year 2010 and works well into the next 
century. It's a function of demographics, which we all know--
and I won't quote them again because this Subcommittee is as 
familiar as anybody with them--but the fact is that the postwar 
baby boom generation creates a demographic shift of historic 
proportions which makes it almost impossible for us, under our 
present system, to finance the Social Security as it's 
presently structured.
    Thus, we will have to make changes. We will either have to 
make them at that time, or we will make them now and begin to 
plan for that. It's like the Fram oil filter ad. ``You can pay 
me now, or you can pay me later.'' The sooner we start to act 
on it, the better the chances are that we're going to be able 
to effectively address the problem. The later we wait to take 
action, the worse the problem will be and the harder it will be 
to address.
    The issue here is--and I know this Subcommittee recognizes 
it--is that Social Security is on a pay-as-you-go basis. As 
such, as you reduce the number of payers into the system, as 
the population shifts, it becomes less and less sustainable. 
Thus, we have an unfunded liability under the Social Security 
system of literally trillions of dollars, trillions of dollars.
    The way to address this is to start to prefund the 
liability, to allow people to save for their retirement, rather 
than having them get to retirement and find that the working 
Americans are not enough and are not able to generate enough to 
support the retired Americans.
    So my bill does three things which would correct the 
insolvency of the system. In fact, if my bill was passed, it 
would resolve the long-term actuarial imbalance of the system 
almost completely.
    The three major things that it does is, first--well, there 
are some things it doesn't do. First, it doesn't raise payroll 
taxes, which would be a very serious mistake. But the three 
major things it does is, first, it allows the beneficiaries of 
the system today--the younger beneficiaries, those under the 
age of 50, and especially under the age of 45--to begin to 
invest a percentage of the Social Security taxes that they're 
now paying in private accounts, much like IRA accounts or the 
TSP, Thrift Savings Plan, accounts.
    The amount which we allocate to this type of private, 
prefunded investment is the amount by which the Social Security 
system is today running a surplus, or approximately $29 
billion, or approximately 1 percent of the payroll tax. So we 
reduce the payroll tax to wage earners by 1 percent, and we 
allow them to take that 1-percent reduction, moving it from 7.5 
down to 6.5, and allow them to invest it in a private savings 
vehicle.
    This has absolutely no impact, absolutely no impact on the 
present recipients of Social Security, because this is the 
surplus which is presently being used not to benefit Social 
Security recipients but to operate the Federal Government.
    The question becomes, well, are people who are going to 
invest in the private sector going to be able to do better than 
if they put their money into the Social Security Trust Fund? 
Yes. There is no question. That's the definitive answer to that 
question.
    This chart over here sort of reflects that. If you will 
notice, under the present Social Security Trust Fund, a person 
investing in their own Social Security account has to get about 
a 3-percent return. That's about what they need to get. In 
order to beat a 3-percent return, if somebody simply puts their 
money into a savings account and allows it to compound, they 
beat that. But, for example, if they were to put it into one of 
the Federal savings vehicles, like the C fund under TSP, their 
return is 16 percent, the S&P 500 return is 15 percent, and the 
F fund is 8 percent, and the G fund is 7.6 percent. So you can 
see that it's not very hard for somebody to beat the Social 
Security return.
    If they are able to beat the Social Security return, which 
becomes easier and easier as the number of people retiring 
increase and fewer people pay into it, then they will be in the 
process of prefunding the liability, and that is what is 
absolutely essential, that we allow people to begin the process 
of saving for themselves so that they can offset the fact that 
the Social Security fund is not going to be able to support 
them in the manner in which Social Security recipients today 
are able to be supported.
    In addition, my bill does two other major things. It 
changes the Consumer Price Index, CPI, to make it more accurate 
to reflect inflation, and it also changes the bend points that 
we have more of an affluence tested beneficiary system.
    This is the proposal. It's a hybrid of a lot of other 
proposals that are out there. It's affordable and, most 
importantly, it will work, which is what we should be concerned 
with.
    Thank you very much, Mr. Chairman.
    [The statement and attachment follow:]

Statement of Hon. Judd Gregg, a U.S. Senator from the State of New 
Hampshire

    Thank you, Mr. Chairman, for this opportunity to testify 
before the Subcommittee on Social Security. As you know, I have 
been deeply concerned about the future of Social Security, and 
I have been energetically involved in a variety of efforts to 
keep the promise of Social Security for future generations as 
it has been kept for current and past ones.
    Mr. Chairman, if this nation were to receive advance 
warning of a major catastrophe--a hurricane, a tornado, or a 
volcanic eruption--we would strain every effort to prepare for 
its effects. Unfortunately we don't often receive that advance 
warning, and we are left instead with the enormous costs of 
dealing with catastrophes after they occur. But right now we 
are in possession of information about a vital threat to our 
nation's economic future, and we will be sorely remiss if we do 
not act to avert it.
    This crisis, Mr. Chairman, will result largely from an 
enormous demographic shift--the retirement of the baby boom 
generation and the aging of America generally. It will be felt 
not only in Social Security, but in Medicare, in private 
pension systems, and every other method that our society uses 
to care for our citizens as they age.
    I know that this Subcommittee has already looked deeply 
into this problem and that there is little need for me to 
describe the details of the projected crisis here, but I do 
think it is important that certain points be made. First of 
all--and it is unfortunate that I should even have to say 
this--the crisis is real. I hope that this subcommittee will 
not be misled by the various attempts to say that this is not a 
crisis, or that it can simply be met by waiting, and tinkering 
around the edges of current programs, after which everything 
will be fine. Everything will not be fine. Under current law, 
Social Security and Medicare Part A alone--to say nothing of 
Medicare Part B--will absorb more than 25% of the national 
payroll tax base within a generation. We simply cannot pass 
that burden off to future American workers, with no pre-
funding, no attempt to reduce the size of that burden, no 
recognition of their potential need to divert resources toward 
a military or an economic crisis--and still expect them to 
achieve the American dream. To leave such a legacy to posterity 
would be an utter refutation of the founding principles of our 
nation.
    Do not be misled by various attempts to minimize the size 
of this problem. In all likelihood, the problem will be worse 
than a first glance at the statistics might imply. It is said 
that the current deficit in Social Security is ``only'' 2.2% of 
taxable payroll. This underestimates the severity of the 
program's problems. In reality, there are surpluses in the near 
term--which, I would add, are being spent, not saved--and 
enormous deficits in the out years--greater than 5% of the 
payroll tax base--that we have no means of funding. We could 
not, even if we wished, solve the problem by simply hiking 
payroll taxes by 2.2%. That would merely increase the size of 
the current surplus on paper, and do nothing to fund the 
enormous liabilities awaiting us in the future. These 
liabilities project into trillions of dollars on an annual 
basis.
    Mr. Chairman, this is no time to engage in wistful 
nostalgia for a time when these programs may have been better 
suited for our national needs. Social Security was not built 
for an enormous demographic shift of the kind we will see. It 
was built on the assumption that each generation of Americans 
would have enough children to provide for them in their old 
age. Instead, we are living more years in retirement, and too 
many of us are having fewer kids. We have to re-think how these 
programs are structured. We have to retool the Social Security 
program so that it is capable of providing advance funding for 
retirement income needs that are too large to simply pass off 
to future generations.
    Earlier this year, Mr. Chairman, I introduced Senate Bill 
S. 321, the Strengthening Social Security Act of 1997. The bill 
would do three things. First, it would refund one payroll tax 
percentage point into personal investment accounts, which would 
build real retirement savings, and could not be spent or 
invested by the government. At the same time, corresponding 
changes in the bend point formulas would be made to adjust for 
the reduced liability to the federal government that should 
result from refunding this portion of the Social Security 
system into private accounts. Secondly, the bill would reduce 
CPI by 0.5%. Thirdly, the Social Security eligibility age would 
be gradually raised to 70 by the year 2029, and indexed to life 
expectancy thereafter.
    I would like to say a few words not only about the details 
of the bill, but what is more important, the philosophical 
basis behind the decisions that I made. I believe we need to 
come to a consensus soon about the ground rules for reform, as 
a means of facilitating our decision-making. Perhaps Congress 
in its wisdom will decide that my plan is the best one; perhaps 
not. But I do believe that we must agree early in the process 
on certain principles of reform that will enable us to devise a 
fair and far-reaching solution.
    The first principle, Mr. Chairman, is that this problem 
should not be solved, and cannot be solved, by increasing 
payroll taxes. The reasons for this are practical as well as 
philosophical.
     First, because it will have no helpful practical 
effect. If you increase payroll taxes in the short term, and 
this simply increases the size of a surplus that is invested in 
government securities, you have not done anything to ameliorate 
the future problem. Future generations will simply be asked to 
redeem a larger number of Treasury bills with their general 
taxes.
     Second, because it would worsen the deal for those 
Americans who already are treated unfairly by the Social 
Security system. Under current law, an individual's rate of 
return on his Social Security investment worsens with each 
succeeding birth year. Raising payroll taxes would only make 
the system more unfair, and seriously undermine political 
support for the program by making all working Americans losers 
in the game.
     Third, it would undermine the general goal of 
protecting retirement income. This nation has a tremendous need 
to simultaneously increase funding of both the Social Security 
system and private retirement saving. If you increase payroll 
taxes on employees and employers, they will be less able to 
produce retirement savings, and the task of increasing 
retirement security will be made more difficult.
     Fourth, there is simply no way, politically, that 
this will be an acceptable solution. Medicare, also funded 
through payroll taxes, will remain in more severe fiscal 
straits than Social Security. If Congress can't raise payroll 
taxes to fund Medicare, it certainly cannot raise taxes to fund 
Social Security.
     And fifth, of course--it is simply bad economic 
policy.
    I stress these points, Mr. Chairman, because they 
underscore why Congress must act soon to address this problem. 
If Congress waits until the last moment to correct Social 
Security, it will have almost no options left except a tax 
increase, which is unacceptable for all of the reasons I have 
outlined. We must take the opportunity now to restructure the 
program now in a way that leads to fair and responsible reform, 
and which lessens the chance of more costly, unfair changes 
that would be the only result of delay.
    A second principle, Mr. Chairman, is that reform must be 
fair to all generations. There is a burden to be borne here, 
and it need be borne equitably. Many young people today 
believe, and justifiably so, that Social Security is not a 
``fair'' deal for them. The rates of return enjoyed by 
different generations vary wildly according to their birth 
year. It is no wonder that Social Security has been popular 
among current and late retirees, for these Americans enjoyed an 
enormous windfall through the program. A young single male 
today, by contrast, can expect to lose money through the Social 
Security system. We cannot, Mr. Chairman, pursue avenues of 
reform that worsen the deal for young Americans. To do so would 
be to place the program in severe political jeopardy. No such 
program can be sustained if everyone thinks that they lose 
through it.
    This is an important principle, because it will guide our 
range of available responses. Simply hiking the payroll tax, or 
mindlessly cutting future benefits, would be tremendously 
unfair to the young Americans who are being treated the worst 
by the Social Security system. Although I believe that we need 
to increase the Social Security age of eligibility, we must 
also combine this measure with structural reforms of the 
system, else we will do little more than to worsen the deal at 
the expense of those who can afford it least.
    Third, we must reform this program in a way so that it is 
sustainable in the long run. This means that the obligations of 
the program cannot continue to grow, indefinitely, faster than 
the economy can keep pace with them. We must remember that 
Social Security does not exist in isolation. Medicare is 
experiencing even more severe problems. The private pension 
system will also experience strains. None of these three 
components of retirement security must be permitted to weaken 
the others by absorbing national resources in a way that 
reduces the nation's capacity to provide for the others.
    I have come to an additional conclusion, Mr. Chairman, 
regarding the critical elements of Social Security reform. We 
must transform this program into a genuine saving program if it 
is to provide for the retirement income needs commensurate with 
the coming demographic shift. Simply put, we cannot meet such 
needs on a ``pay as you go'' basis. But ``pay as you go'' 
effectively describes any system in which the assets are 
invested solely in government securities. If we take surplus 
Social Security taxes--as we do under current law--and instead 
of saving them for future needs, simply invest them in current 
government consumption, then tomorrow's bills will simply be 
picked up by the taxpayer who has to redeem those government 
securities with his taxes.
    The only way to ``pre-fund'' for the coming Social Security 
liability is to invest the Social Security surplus somewhere 
other than in government securities. This is why I have 
included a personal investment account component in S. 321--a 
refund of one percentage payroll tax point into personal 
accounts. If we do not shelter these contributions in this way 
from government spending, then they will not be set aside to 
generate real assets for retirement. Every year that we wait, 
and continue to spend the surplus in this way, represents an 
enormous additional liability that we must fund in the future 
through general taxation.
    If we were to pass S. 321 today, we would solve 85% of 
Social Security's solvency problem, and we would reduce 
enormously the unfunded liability of the Social Security 
system, converting some of it into a pre-funded liability. We 
would also, in all likelihood, vastly improve the rate of 
return for individuals participating in the system.
    A personal investment account component is important for 
multiple reasons. One is to protect these contributions for 
their intended purpose, by shielding them from being spent by 
government. Another is to provide the potential for an 
individual to improve his rate of return on his Social Security 
investment.
    Many have wondered whether individuals can be trusted to 
make investment decisions with a portion of their Social 
Security payroll tax. I think a better question is whether the 
government can be trusted to make the best use of that money. 
Under current practices, the answer is clearly ``no.''
    I have run the numbers on my program to see how well 
individuals would have to do in their investments, in order to 
do better than under the current Social Security system. The 
Gregg plan would eliminate 85% of the current Social Security 
deficit. If you compare this method with more traditional means 
of ``fixing'' Social Security--for example, benefit restraints 
in the Social Security Advisory Council's Gramlich plan, to an 
extent that also eliminates 85% of the actuarial deficit--it is 
easy to see that an individual need not be a financial genius 
in order to do better investing the money himself. For example, 
the average single male, under the Gregg bill, would simply 
have to earn 3.0% interest on his account in order to do better 
than traditional fixes to the program. 3.0%! A cautious 
individual could simply buy a certificate of deposit and get 
that, and thus do better than in Social Security. A single 
female would have to earn 3.8%. Social Security is simply not a 
good investment. It is not difficult to do better. In fact, it 
will be hard for individuals, investing on their own, to do 
worse.
    My plan also includes provisions to adjust CPI and the 
eligibility age. Let me stress to this subcommittee: if you 
don't like these provisions, then consider what will happen if 
we do not act now to re-direct the Social Security surplus. If 
we fail to take advantage of the existing surplus, we will 
vastly increase the pressure on ``traditional'' fixes, and make 
it much more likely that such adjustments will be necessary--in 
fact, more will be necessary.
    Congress will need to weigh competing concerns in pursuing 
Social Security reform. The larger the personal accounts, the 
greater the potential to increase the rate of return on one's 
Social Security investment. But at the same, time, the larger 
the accounts, then the greater the amount of revenue that you 
are denying to the federal treasury each year. The Gregg bill 
would have refunded roughly $29 billion into personal 
investment accounts. Had we tried, we might have been able to 
direct this year's budget reconciliation tax cuts into tax 
relief of that specific kind. Congress chose not to. It may be 
politically difficult to pursue significantly larger personal 
investment accounts, given the amount of revenue that the 
federal government would have to sacrifice each year. Congress 
must find the proper balance between the federal government's 
short-term revenue needs, and the long-term improvement in the 
Social Security system that would arise in rough proportion to 
the amount of ``pre-funding'' that we create within it.
    I thank you for this chance to describe my plan, Mr. 
Chairman, and I invite any questions that you and the rest of 
the subcommittee may have.
      

                                

[GRAPHIC] [TIFF OMITTED] T1071.001

      

                                

    Mr. Bunning. Thank you, Senator, for your testimony. We 
appreciate your being here. I'm sorry that we started a little 
late.
    Senator Gregg. No problem. I appreciate your time.
    Mr. Bunning. Thank you.
    The next panel is Congressman Stenholm, Congressman Kolbe, 
and Congressman Peter DeFazio.
    I want to let the Subcommittee Members know that, since we 
have over 20 Members that want to testify, we are not going to 
question the Congressmen. We're going to let them put their 
statements on the record, and we appreciate your being here.
    Charlie, if you would start, we would appreciate it.

  STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Stenholm. Thank you, Mr. Chairman, and Members of the 
Subcommittee.
    I often say that if you eat, you're involved in 
agriculture. My life's work as a farmer, an agriculture 
teacher, electric cooperative manager, and as a Member of the 
House Agriculture Committee, has persuaded me that this is 
true.
    Today, as a father, a grandfather, and as the Congressman 
of the 17th district of Texas, west central Texas, I must say 
that if you breathe, you are involved in the future of Social 
Security. And it is our responsibility as the elected 
representatives of all Americans--the old, the young, and those 
in between--to protect the Social Security Program for today's 
beneficiaries and preserve it for future beneficiaries. We must 
do nothing less.
    In August, 1995, we passed an important milestone: The 
Social Security system turned 60. While some may disagree about 
the relative success of this program, I can look from one end 
of my congressional district to the other--and, by the way, 
according to the Social Security Administration, I have a 
greater number of Social Security retirement beneficiaries in 
my district than in any other congressional district in Texas--
and I can see it has kept generations of seniors out of 
poverty.
    In a part of Texas where the family income of almost 50 
percent of my constituents is less than $25,000 a year, keeping 
seniors out of poverty is an important goal. You don't have to 
do much to convince me that Social Security is one of the most 
successful Federal programs ever conceived.
    But something else happened in August 1995. I passed an 
important personal milestone: I became a grandfather for the 
first time. Mr. Chairman, I have spoken for years about the 
need to balance the Federal budget, to cut wasteful spending, 
and to preserve the American dream for future generations. But 
when I look into the eyes of young Cole Stenholm, more than 
ever before I know that I now have an obligation to protect his 
interests and the interests of those who are too young to speak 
for themselves.
    Today, all evidence points to a significant financial 
shortfall for Social Security in the not too distant future. 
The Social Security and Medicare Board of Trustees, which 
included three Clinton cabinet members, has reported that the 
Social Security Trust Fund will be bankrupt in the year 2029. 
And even more alarming, as soon as 2012, the Government will 
begin paying out more in benefits than it is collecting in 
payroll taxes.
    In 2012, the Federal Government will begin redeeming the 
Treasury bounds to the Social Security Administration so it can 
continue to pay benefits. The reality of this circumstance is 
clear. In order to continue current benefits, we will be forced 
to increase workers' payroll taxes, decrease retirees' 
benefits, or the Federal Government will be forced to make 
deeper cuts in spending on other programs. Simply put, in 2012, 
when the Federal Government begins redeeming its bonds, it will 
have to make up the difference elsewhere in the budget, and the 
question will be, at whose expense?
    It is true that the Social Security Trust Fund, which 
currently has accumulated $450-plus billion, will not be 
bankrupt until 2029. But we shirk our responsibility if we 
ignore the dangers we will face as soon as 2012. And every year 
we wait to begin attacking the problem makes it that much 
harder.
    It is also evident that changes in demographics will 
accelerate the problems the Government will have to face to 
ensure a continuation of Social Security. In 1935, no one 
anticipated the baby boom or baby bust. Just over a decade 
later, World War II was over, and the attendant baby boom 
began. Between 1946 and 1964, birth rates soared and 75.9 
million new Americans were born. That's more than the entire 
populations of most nations, including the United Kingdom and 
France.
    Great advances in medical technology also have 
significantly increased the lifespan of all Americans. In 
1935--we all know the facts and figures.
    Unfortunately, these issues are complicated. A discussion 
of demographics, rates of inflation, bend points, life 
expectancy, rates of return, or the consumer price index, 
causes most to reach for the remote control to change their 
television channels. However, the threat is real and, in an age 
of sound bites and 3 minute news stories, we must begin to be 
honest with the American people and provide them with the whole 
story and not just the sexy or scary one-liner.
    These circumstances prompted my colleague, Jim Kolbe, and 
me, in August 1995, to start the House Public Pension Reform 
Caucus as a bipartisan means of educating House Members and 
their staffs about the intricacies of the Social Security 
system. As a caucus, we work to inform and educate. We do not 
yet endorse any specific reform option. But today we have 74 
Members, from both sides of the aisle, of which there is one 
major point and conclusion I make: A solution to our Social 
Security problem, or opportunity, as I like to call it, must be 
bipartisan. That is why I was happy to join with Jim Kolbe, and 
you'll hear from him on some of the additional points that 
we're making.
    Additionally, the Pension Reform Caucus has started a small 
working group, comprised of four Republicans and four 
Democrats. This working group will sift through the various 
reform proposals and work to formulate a legislative 
alternative.
    We look to work with you, Mr. Chairman, and other Members 
of the Subcommittee, to try to be helpful with your 
Subcommittee as you address this very important problem for all 
Americans, but particularly for my grandson.
    Thank you, Mr. Chairman.
    Mr. Bunning. OK, Charlie. I have 31 of them, so you've got 
30 more to go.
    Mr. Stenholm. Mr. Chairman, might I make one comment?
    Mr. Bunning. Certainly.
    Mr. Stenholm. I have noticed every time, the only time I 
get to talk about my one grandchild is when I have the mike. As 
soon as I use it, somebody else talks about more than one. 
[Laughter.]
    You have proven me to be 100-percent correct.
    Mr. Bunning. I'm worried about those 31 just like you are 
for the one.
    The Honorable James Kolbe.

STATEMENT OF HON. JIM KOLBE, A REPRESENTATIVE IN CONGRESS FROM 
                      THE STATE OF ARIZONA

    Mr. Kolbe. Thank you very much, Mr. Chairman. I applaud you 
and your Subcommittee for holding this hearing. I think it's 
very good that you are convening this series on Social Security 
reform.
    I think that reforming the Social Security Program is the 
single most important issue which faces us as Members of 
Congress, this Congress and the next Congress or two. At one 
time it was considered taboo for any of us to talk about Social 
Security. It was the ``third rail'' of politics.
    Well, I really think the tide has turned. In fact, I 
believe very shortly it's going to be the other way around, 
that Congressmen who ignore talking about this issue are going 
to be the ones that will be politically in danger. The American 
people understand that the Social Security Program is in 
trouble and it needs to be fixed. They don't want to hear 
demagoguery about the issue. They want to hear people talking 
about real responses.
    If we make the right kind of changes, if we make the right 
kind of reform, we can not only provide our elderly with 
continued support, but enable young people to feel secure. And 
we can also have an infinitely stronger country as well. We can 
preserve the contract, strengthen the contract, be a model for 
the rest of the world.
    Charlie Stenholm has discussed in detail a lot of the 
problems with the Social Security Program, and you people are 
very well aware of those, so I'm not going to elaborate. But it 
is important to note that the United States is not the only 
country that is facing a bankrupt retirement program, or the 
retirement of a baby boom generation. This is a phenomenon that 
is seen throughout the world as these countries face similar 
aging populations.
    But many of those countries have begun to address the 
problem, the impending retirement of an ever-growing elderly 
population. Some Latin American countries, notably Chile, and 
now Argentina, have introduced fully privatized programs. Great 
Britain has phased in a two-tier public-private pension system 
for its citizens. Even Poland took the first courageous step to 
address demographic and financial problems facing its country.
    Although the entire world is faced with an insecure 
retirement for the elderly population, the main difference 
between the United States and these countries is our 
willingness to take action. I believe, however, the tide is 
turning, evident by today's hearings and the number of Members 
who have stepped forward to express their support for real and 
meaningful reform.
    There are a lot of things that I think we should keep in 
mind as we prepare for this coming debate. Perhaps one of the 
most important ones is this is not the first time we've been 
faced with these dismal numbers. We have an opportunity to 
learn from our mistakes in the past.
    Social Security's 62-year history proves that one more tax 
hike is never enough. Since the first Social Security tax was 
levied in 1937, Congress has raised the tax rates more than 20 
separate times. Taxpayers were assured that the tax hikes 
authorized by Congress in late 1977 would restore the financial 
soundness throughout the next century. And yet, just 6 years 
later, in 1983, they were faced with more dismal projections 
for the Social Security Trust Funds.
    We need to get off the treadmill of increasing taxes and 
reducing benefits. The treadmill we're on today is very simple. 
We go for the quick fixes again, we fall for the rhetoric that 
if we make a few changes, the system will go on forever, and 
we're only going to repeat the dismal pattern that we've seen 
for the last 25 years.
    The system really is broke, financially, and morally. So 
the question is, how do we get off of this treadmill, reform 
the Social Security Program, protect senior citizens, and 
assure a secure and reliable retirement for our children and 
grandchildren.
    So where do we go from here? Charlie said that the Caucus 
has began our educational groundwork. The next step is to begin 
discussing Social Security reform options, and he talked about 
our working group that is doing that.
    Mr. Chairman, it is our desire to work with you, the 
authorizing Committee, the Committee of jurisdiction here, your 
Subcommittee Members and the Full Committee Members, and your 
staff, to work on this important project.
    Even the President has acknowledged that Social Security 
reform is needed. In a Wall Street Journal interview, President 
Clinton said that he envisions reform either this year, 
following passage of the Budget Reconciliation bill, or some 
time next year. I hope we're able to work together to achieve 
that reform.
    Certainly the options are plentiful. Many outside 
organizations have introduced reform proposals, including the 
Center for Economic Development and the National Taxpayers 
Union. We have worked with both of those groups.
    However, some of the most important recommendations were 
developed by the 1995 Social Security Advisory Council, which 
released its report last January. It was given the task of 
studying and making recommendations on the long-range financing 
of Social Security, and the adequacy and equity of the program 
for current and future generations. It offered three separate 
reform options. Some people criticized that because there were 
so many different ones. But I think the fact that they all 
focused on one thing--that is, that we need to use the private 
market to help ensure long-term solvency of the program--is the 
more significant issue. As the country continues to change and 
modernization continues, we have to look for the best structure 
for Social Security for today's society. We don't depend on 
typewriters to communicate with each other in the workplace any 
more; we don't get our news from only radio. The advancement of 
technology has given us computers and television.
    Legislation has been introduced in Congress. I admire and 
must mention the courageous efforts of our Senate colleagues, 
Senators Kerrey and Simpson, who introduced bipartisan 
legislation to reform Social Security during the last Congress. 
That legislation should also be a model for future reform 
alternatives.
    Like many of the Advisory Council proposals, the Kerrey-
Simpson plan would divert a portion of payroll taxes into a 
privately owned account, giving individuals control over their 
retirement. Today you've had Senator Gregg talk about his 
reform options, and I think those are some ideas that we should 
consider.
    Mr. Chairman, we believe that real and meaningful Social 
Security reform can be accomplished. We will continue the 
education process, we will work with all the parties, the 
American people, both young and old, to ensure that Social 
Security is a good deal for all generations. I applaud your 
efforts to do the same.
    Thank you, Mr. Chairman.
    [The joint statement follows:]

Joint Statement of Hon. Charles W. Stenholm, a Representative in 
Congress from the State of Texas; and Hon. Jim Kolbe, a Representative 
in Congress from the State of Arizona

    Mr. Chairman, Members of the Social Security Subcommittee: 
We appreciate this opportunity to appear together before you 
today as the co-chairs of the bipartisan House Public Pension 
Reform Caucus.
    In August 1995 we passed an important national milestone: 
The Social Security System turned 60. While some may disagree 
about the relative success of this program, we believe it has 
more than fulfilled its original purpose of keeping generations 
of seniors out of poverty. Marking this important milestone 
gave us cause to stop and consider the future of the Social 
Security program. As you know, the years ahead hold many 
challenges for Social Security.
    Today, all evidence points to a significant financial 
shortfall for Social Security in the not-too-distant future. 
The Social Security and Medicare Board of Trustees, which 
included three Clinton cabinet members, reported that the 
Social Security trust fund will be bankrupt in the year 2029. 
And, even more alarming, as soon as 2012 the government will 
begin paying out more in benefits than is collected in payroll 
taxes.
    Many policy analysts minimize the significance of the 2012 
date when retirement benefits begin to exceed payroll taxes. 
They argue that the Social Security Trust Fund portion which 
pays for old-age pension benefits is composed of the cumulative 
surplus in payroll tax revenues plus interest accumulated from 
investing those funds in Treasury bills. Well, we don't deny 
this fact. It is true that the Social Security Trust Fund, 
which currently has accumulated $450 billion, will not be 
bankrupt until 2029. However, we dare not ignore the dangers we 
will face in 2012.
    In 2012, the federal government will begin redeeming the 
Treasury bonds to the Social Security Administration so it can 
continue to pay benefits. The reality of this circumstance is 
clear. In order to continue paying retirees' benefits without 
increasing workers' payroll taxes or decreasing retirees' 
benefits, the federal government will be forced to make deeper 
cuts in spending on other federal programs including, but not 
limited to, defense, medical research, park maintenance, and 
education in order to redeem the Treasury bonds held by the 
Social Security Trust Fund. Simply put, in 2012, when the 
federal government begins redeeming its bonds, it will have to 
make up the difference elsewhere in the budget, and the 
question will be at whose expense?
    Additionally, it is evident that the change in demographics 
will accelerate the problems that the government will have to 
face to ensure a continuation of Social Security. In 1935, no 
one anticipated the Baby Boom or Baby Bust. Just over a decade 
later, World War II was over, and the attendant Baby Boom 
began. Between 1946 and 1964 birth rates soared, and 75.9 
million new Americans were born. That's more than the entire 
populations of most nations, including the United Kingdom and 
France.
    Great advances in medical technology also have 
significantly increased the average life span of all Americans. 
In 1935, the Social Security program began to pay benefits at 
age 65; life expectancy at birth was 64 years. Today, with 
benefits still available at age 65, life expectancy from birth 
is estimated at 75 years, and there are 24 million Americans 
over 70. By 2030, there will be 48 million Americans over 70. 
This is an enormous cost to place on future generations.
    In a little more than decade from now, the first Baby 
Boomers will turn 65 and begin collecting Social Security. At 
the same time the support/benefit ratio will decrease. If 
people are living longer, there are more retirees for each 
worker. If the birth falls there are less workers supporting 
retirees. In 1950, there were sixteen workers paying for one 
social security beneficiary. In 1996, there are three workers 
for one beneficiary, and by 2025 there will be only two for one 
beneficiary. This is a prescription for financial disaster 
unless policies are changed to account for those demographic 
realities.
    Unfortunately, these issues are complicated. A discussion 
of demographics, rates of inflation, bend points, life 
expectancy, rates of return, or the consumer price index causes 
most to reach for the remote control to change channels. 
However, the threat is real and in an age of sound bites and 
three minute news stories we must be honest with the American 
people and provide them with the whole story and not just the 
sexy or scary one-liner.
    Our concerns about the future of the program prompted us to 
start the House Public Pension Reform Caucus as a bipartisan 
means of educating House Members and their staffs about the 
intricacies of Social Security, its long-term financial 
outlook, and options for protecting it in the future.
    As a caucus, we work solely to inform and educate. We have 
not endorsed any specific reform option. As you might imagine, 
a number of our members, many of whom are testifying here 
today, have their own reform proposals.
    Today, the PPRC has 74 members drawn from both sides of the 
aisle. We stress the bipartisan nature of the caucus because we 
believe this debate will go nowhere without bipartisan 
cooperation. There is no broad consensus among our members as 
to the ultimate legislative solution to this problem. However, 
our meetings have been models of decorum and respectful debate. 
As we become better educated to the facts, we at least are able 
to form a better perspective of the range of realistic 
remedies.
    Our members meet to listen, discuss and debate with some of 
the most best public pension experts in the country. To date, 
we have heard from two former Social Security commissioners, 
members of the Social Security Advisory Council, and other 
experts, including Estelle James from the World Bank, Michael 
Boskin from the Boskin Commission, Dean Baker from the Economic 
Policy Institute, John Goodman from the National Center for 
Policy Analysis, and many others. Member and staff briefings 
are scheduled throughout the rest of this year. The caucus 
looks forward to working with the Social Security Subcommittee. 
We would be pleased to provide you with testimony from these 
presenters, as well as additional information regarding times 
and meeting locations.
    Over the next few months, eight caucus members--four 
Republicans and four Democrats--will begin sifting through the 
various reform proposals and work to formulate a legislative 
alternative to address the issues we have raised here today. We 
believe that it is our responsibility as the elected 
representatives of all Americans--the old, the young, and those 
in between--to protect the Social Security program for today's 
beneficiaries and preserve it for future beneficiaries. We can 
do nothing less.
    We are aware that the subcommittee has a number of specific 
concerns it would like addressed. We will address each of these 
concerns in turn.

        The Degree to which Social Security Reform is Necessary

    The Social Security retirement program is vital to the 
nation and must be reformed promptly to place it on sound 
financial footing. Few government programs have enjoyed the 
same levels of success and popularity as Social Security. Since 
the program was enacted in 1935, millions of older Americans 
have enjoyed a much higher standard of living than their 
parents or grandparents ever knew in their old age. It is for 
our children and grandchildren that we need reforms to protect 
this sort of income security, and the caucus has already begun 
to examine all of the options available to us.
    We want to be very clear. The discussion revolving around 
Social Security is not about dismantling the Social Security 
safety net. Instead, we want to ensure that future generations 
can enjoy retirement benefits which are comparable to those of 
today's retirees. It is precisely for this reason that as co-
chairs of the Public Pension Reform Caucus we believe that 
Congress should act responsibly now and take the actions which 
will be necessary for Social Security to survive for 
generations to come.
    Make no mistake. It is not current retirees' Social 
Security benefits that are at risk--the vast majority of 
today's beneficiaries will not be affected by most of the 
changes under consideration. Rather, it's the Baby Boomers, 
Baby Busters, Generation X'ers, and subsequent yet-to-be-named 
generations which stand to lose the most if the discussions are 
not advanced.
    Individuals in these groups already are well on their way 
to a less secure retirement than today's beneficiaries. It is 
important that we preserve the Social Security program for 
current and future beneficiaries equally. Our focus can no 
longer be guided solely by the needs of current beneficiaries, 
but must incorporate the needs of future beneficiaries as well.
    The public often accuses politicians of being short-sighted 
in setting policy. But, in this case, a growing number of our 
colleagues are beginning to take a serious look at the problem 
and consider real long-term solutions. We are learning from 
past reform efforts.
    Today, and in the coming congressional debates, we hope all 
of the various reform options will be examined. Because so many 
of them advocate some level of market-based participation in 
investing the Social Security trust funds, we believe this 
option should be explored thoroughly.

 Assessment of the Advisory Council Recommendations and other proposals

    There are a number of outside organizations which have 
introduced Social Security reform options. The overwhelming 
number of groups proposing reform or supporting a reform idea 
include but are not limited to the Center for Economic 
Development, National Taxpayers Union, The Urban Institute, 
Progressive Policy Institute, Economic Policy Institute, 
National Center for Policy Analysis, and Committee to Preserve 
Social Security and Medicare. This signifies that the issue of 
Social Security reform engages all parties and ideologies. 
Although each chose a different method for ensuring a solvent 
Social Security program, one area of consensus is that reform 
is not only necessary but inevitable.
    It is important also to note that retirement savings reform 
is not limited to the United States. Many countries already 
have begun to address the impending retirement of their ever-
growing elderly population. Some Latin American countries, such 
as Chile and Argentina, have introduced fully-privatized 
programs. Great Britain has phased-in a two-tier public-private 
pension system for its citizens. And Poland recently took the 
first brave step to addressing the demographic and financial 
problems facing its country through a partial-privatized 
program.
    Although, the entire world is faced with an insecure 
retirement for their elderly population, the main difference 
between the United States and these counties is our 
unwillingness to take action. The problems plaguing the United 
States Social Security program are evident. We must be bold and 
begin to look closely at meaningful reform. Everyday that 
action is not taken makes real reform more difficult.
    The most exciting development in the Social Security reform 
discussion came with the release of the 1995 Social Security 
Advisory Council this past January. The 1995 Social Security 
Advisory Council was given the task to study and make 
recommendations on the long-range financing of Social Security 
and the adequacy and equity of the program. What is so unique 
about the 1995 Advisory Council compared to past councils is 
that the 13 member council for the first time developed three 
different reform options rather than just one. The common 
element in all three plans utilized the private market to help 
ensure long-term solvency of the program. The Council broke new 
ground and dealt with not only the long-term financing of the 
program but the equity between generations in its 
recommendations.

 Specific Recommendations for Congress to Consider as it moves forward

    There are a number of things we should keep in mind as we 
prepare for the coming debate. Perhaps most importantly, this 
is not the first time our country has been faced with such 
dismal numbers. We must learn from our mistakes.
    (1) Social Security's sixty-two year history proves that 
one more tax hike is never enough. Since the first Social 
Security tax was levied in 1937, Congress has raised the 
various tax rates more than twenty times.
    (2) Taxpayers were assured that tax hikes authorized by 
Congress in late 1977 would restore the financial soundness of 
the Social Security program throughout the next century. In 
1983, however, Congress was faced with similar dismal 
projections for the Social Security Trust Funds. It is 
interesting to note that after the passage of the 1983 
amendments, the Social Security trust fund was projected to be 
solvent until 2063. However, in almost every year since 1983, 
the estimates of accumulations in the trust fund have been 
revised downward. Today, as we all know, bankruptcy is 
predicted by 2029.
    We must also look at the special needs of minority groups, 
women, and low-income individuals who do not enjoy the same 
level of benefits as the rest of the population because of 
shorter life expectancy, fewer years in the workforce, and 
other special circumstances.
    Finally, depending solely on enactment of a tax increase or 
reducing current benefits to the elderly as a means of bringing 
the program into financial balance must be weighed with extreme 
caution.

                How Soon is Congressional Action Needed?

    As already mentioned, in a recent hearing before the Ways 
and Means Social Security Subcomittee, the authors of the three 
Social Security Advisory Council options concurred on one 
point: reform is needed sooner rather than later. In their 
January report, they urged that ``early action should be taken 
to reform Social Security.'' Likewise, the recommendation of 
the Social Security Trustees in their 1997 annual report, 
issued April 24, states that ``in view of the lack of close 
actuarial balance in the OASDI program over the next 75 years, 
we again urge that the long-range deficits of both the OASI and 
DI Trust Funds be addressed in a timely way.''
    Other federal agencies such as the nonpartisan 
Congressional Research Service point to the year 2012 as the 
date when Social Security outlays will begin to exceed 
receipts. By 2029 or 2030, the Social Security system will be 
in default. The General Accounting Office feels this issue is 
important enough to convene a two day conference on the subject 
next week. It would seem that these agencies also point to 
taking action soon.
    As you know, in a June 19 Wall Street Journal interview, 
President Clinton indicated his desire to take up Social 
Security reform later this year.
    We still have time to debate this issue rationally, to make 
certain that all opinions are heard, and to ensure that all 
reform options are explored. We have time to act responsibly, 
rather than rashly.
    Our personal belief is that we need to continue the 
education process--inside AND outside the beltway--this year 
and begin the reform debate in earnest in 1998.

                               Conclusion

    Thank you for convening this hearing. The House Public 
Pension Reform Caucus looks forward to working with the 
Subcommittee in any way possible to advance this debate.
    To that end, we will continue our educational briefings for 
Members and staff. Our legislative working group will also work 
to make positive contributions to the debate.
    Again, we appreciate the opportunity to share our views 
with you. We look forward to working with you and your staff.
      

                                

    Mr. Bunning. Thanks, Jim.
    Pete, go right ahead.

    STATEMENT OF HON. PETER A. DEFAZIO, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF OREGON

    Mr. DeFazio. Thank you, Mr. Chairman.
    I'm not sure if I'm the only one at this point, but one of 
the very few, who is a trained gerontologist and who has worked 
with seniors and have a long background in this area. I 
appreciate the opportunity to testify.
    A lot of the problem we're focusing on is a 23-percent 
deficit two generations in the future. That is, current 
projections, most probable, show us that we'll be able to pay 
77 percent of obligations of the existing Social Security 
system two generations from now. That's a problem and it needs 
to be dealt with. It is not an immediate crisis, anywhere near 
as much of a crisis, as we have with Medicare.
    But I think there is a more immediate funding problem, 
which is how are we going to pay the benefits even to that 
point in time, which is the fact that Social Security has no 
assets except for Federal debt. That was planned and we 
understand it. It's considered to be a very safe investment.
    But for more than a decade, since I first came to Congress 
and met with the Social Security Commissioner 10 years ago, I 
said how is the Federal Government going to raise the money to 
pay that debt? That is an interesting problem that we need to 
deal with, and one of the things that led me to be a strong 
supporter of the Balanced Budget amendment, along with Charlie 
and others. I think that's something we can't ignore.
    In fact, the so-called balanced budget we reach in 2002, if 
you look at the budget report, it actually shows a $106 billion 
deficit because we are still assuming, for the purposes of the 
congressionally balanced budget, the fact that Social Security 
will run a $106 billion surplus that year, going into a titular 
trust fund to pay for future benefits, to claim our balance. 
That is a problem.
    That has led me to believe that the Ball plan should have 
been implemented some time ago, hopefully could still be 
implemented in time to make a difference, to begin to divert 
part of the trust funds into investments other than Federal 
debt. Real assets, things that have an income stream, things 
that could be cashed in or used to pay benefits, as opposed to 
just the full faith and credit of the Federal Government, and 
the repayment of that debt, depending on where we stand in our 
deficit terms.
    I have problems with other proposals. Schieber-Weaver would 
lead us to a $2 trillion addition to the debt. I think that's 
very problematic. Gramlich scales back benefits and would 
impose a higher payroll tax. I think that's very problematic 
for working people, particularly at the low end of the scale. 
So I think a solution could partially be based in looking at 
proposals of the Ball plan, and I would also suggest that the 
Subcommittee look at the cap on earnings on which you pay 
Social Security.
    If you were to remove that cap, still have everybody 
eligible for benefits, but limit the top benefits similar to 
what they are now, you would find that that would be $67 
billion a year in additional revenues into the program. It's a 
highly progressive tax. Obviously, people at the top would 
scream a little bit, but it's something that, linked with some 
of the Ball proposals, or even looking at changes in the bend 
points out for future generations, could put the plan back in 
balance two generations from now, which is the major focus of 
this hearing today.
    I thank the gentleman for the opportunity to testify and 
look forward to any questions the panel might have.
    Mr. Bunning. Thank you all for your testimony. We 
appreciate your being here.
    The next panel that we are to hear from is Congressman 
Jerrold Nadler, Congressman Bernie Sanders, Congressman Vern 
Ehlers, and Congresswoman Eddie Bernice Johnson. Those are 
scheduled to be here.
    So, Bernie, you are going to----
    Mr. Sanders. So I'll speak for everybody, huh?
    Mr. Bunning [continuing]. You are going to speak, it looks 
like, for the five.
    Mr. Sanders. OK. I'm sure they'll all be delighted by that. 
Just put it in the record they have given me the authority to 
speak for them, and they're fully supportive of everything I'm 
going to say. [Laughter.]
    Mr. Bunning. No, I don't think I can do that. Go right 
ahead, Bernie.

STATEMENT OF HON. BERNARD SANDERS, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF VERMONT

    Mr. Sanders. Thank you for inviting me to say a few words 
on what is obviously an issue of enormous impact.
    First of all, as a prelude to what I want to say, I happen 
to believe, perhaps unlike some people in the Congress, that 
Americans are entitled to certain rights, including economic 
rights. I think it will be a national disgrace when the day 
comes where some elderly people may not get all of the health 
care that they need or all of the retirement benefits that they 
need.
    If this country can afford to create an economic system in 
which the richest 1 percent of the population owns more wealth 
than the bottom 90 percent, then we damned well can make sure 
that every senior citizen in this country lives out their last 
years with dignity and that we retain a strong Social Security 
system.
    So that's my prelude. We are not a poor Nation. We are a 
wealthy Nation. The bottom line is that every senior citizen 
has the right to live our their last years with dignity and 
security.
    Number two, some of us, when we pick up the newspaper or 
watch television, we hear about the crisis facing Social 
Security. Every day we hear about the crisis. Well, as you 
know, Mr. Chairman, there are already a lot of crises facing 
this country and this Congress. It just so happens, in my view 
at least, that there is no crisis in Social Security, and that 
it is a myth being created by certain corporate ``think tanks'' 
and certain political people, and maybe the media as well.
    This year, as you know, the Social Security Trust Fund is 
running a surplus of $73 billion. My hope would be that we 
should have similar type crises in other agencies of 
government. We would all be in pretty good shape. The trust 
fund currently contains over $500 billion and, if we do 
nothing--and many people think the best thing that Congress can 
do is nothing--but if we do nothing, we will be able to pay out 
all of our benefits to every eligible American for the next 32 
years, until the year 2029, and that's using very conservative 
economic projections. Obviously, no one can predict what 
happens in the next 30 years, but there are economists who tell 
us that, in fact, we will be able to continue to pay out 
benefits even longer than that.
    Now, I don't understand how you can have a crisis when you 
have a program that's working well for the next 32 years. No 
business that I know can do that and then say they have a 
crisis.
    As you know, in 1983 we, in fact, did have a crisis. In 
that year, the Social Security Trust Fund would have been empty 
in 2 months, 2 months, had the government not acted. But today 
we have ample time. There is no crisis and we have ample time 
to adjust the system, and that's something we should be doing 
in a thoughtful, nonpanicky way.
    I would suggest to you, Mr. Chairman, that one of the 
reasons that we hear about the ``crisis'' has to do with the 
fact that there are some people on Wall Street who would like 
to ultimately privatize the Social Security system. The Wall 
Street Journal reported that Social Security privatization--
``could be the biggest bonanza in the history of the mutual 
fund industry * * * hundreds of billions of dollars could 
shower into fund companies and brokerage firms.'' So the more 
we hear about the crisis and the more that young people 
especially believe that Social Security might not be there for 
them, I suspect the more people might think that we should do 
away with the system and privatize it.
    In Washington, financial industry lobbyists are pressing 
hard for such a bonanza. The Wall Street Journal also said that 
corporate interests are bankrolling a public relations 
campaign--``to put an intellectual face on the issue, stoke a 
national debate and, they hope, eventually make the sale.'' In 
other words, millions of dollars are going into corporate think 
tanks and big money interests are wanting to convince the 
American people that the system in crisis is not in crisis, so 
that eventually it will be privatized. Needless to say, I do 
not look favorably on that whole approach.
    At the same time, there are some people in Congress who are 
trying to cut back the CPI, which you know determines the 
Social Security cost-of-living adjustments. To my mind, that is 
an outrageous attempt to balance the budget on the backs of the 
elderly, rather than dealing with issues like corporate 
welfare. We've got $125 billion a year in corporate welfare. We 
have a tax system which, in the last 20 years, has given huge 
tax breaks to the wealthy and the large corporations. We are 
spending, in my view, far too much on the military. Some of us 
tried to lower the intelligence budget yesterday, without 
success. I think we should look in that direction, rather than 
telling elderly people in Vermont, or anyplace else in this 
country, that we have to cut their Social Security benefits 
when they're trying to survive on $8,000-$9,000 a year.
    While there is no crisis today, we should, in fact, begin 
working now to make certain that we avoid a problem in 32 
years. Let me suggest a few reasonable steps that Congress can 
take.
    Currently, Social Security is funded in an extremely unfair 
manner. Pete DeFazio mentioned that. While most Vermonters and 
Americans contribute to Social Security based on their entire 
income, the wealthy pay Social Security taxes on only a 
fraction of their income, because any individual's salary above 
$65,400 a year is exempt from Social Security. In other words, 
a billionaire pays the same in Social Security taxes as an 
individual making $64,500. Frankly, I think that's wrong. If 
you want to save Social Security, do away with that ceiling.
    Let me say that we do face basically two crises, and I will 
conclude by saying this, making the same point that Peter made 
a moment ago, that if you do away with the ceiling, we could 
raise another $70 billion next year and keep the trust fund 
solvent, conservatively speaking, for another 56 years, until 
the year 2053.
    Bottom line, there is no crisis; bottom line, Wall Street 
is pouring millions of dollars to try to convince the American 
people that there is a crisis; bottom line, with simple, decent 
changes, Social Security can and should remain strong in 
perpetuity.
    Thank you very much, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Bernard Sanders, a Representative in Congress from 
the State of Vermont

    Mr. Chairman, thank you for holding these hearings and for 
inviting me to testify here today. I believe our Social 
Security system is one of the most important, most successful 
pension programs in history. For the past sixty years, Social 
Security has always paid its benefits in full, on time. This 
program currently serves 43 million people, including 98,000 
Vermonters, and we must very carefully examine any proposed 
changes for the future.
    Some politicians and Wall Street speculators want us to 
believe that there is a ``crisis'' facing Social Security so 
that they will have an excuse to lower benefits. The truth is 
that the Social Security system today is extremely strong, and 
will remain financially solvent long into the future with only 
minor changes.
    There is absolutely no question that today's retirees will 
receive their benefits in full, on time, as long as politicians 
do not cut benefits.
    This year, the program is running a surplus of $73 billion. 
The Trust Fund currently contains over $500 billion and, if we 
do nothing, will be able to pay out all benefits for the next 
32 years--until 2029, using very conservative economic 
projections. That is no ``crisis.''
    In 1983, we had a real crisis. In that year, the Social 
Security Trust Fund would have been empty in two months had the 
government not acted. Today, we have ample time to adjust the 
system. The whole notion of a ``crisis'' is part of a 
coordinated campaign by Wall Street speculators and their 
friends in Washington to destroy faith in Social Security for 
the sake of personal profit.
    Last year, the Wall Street Journal reported that Social 
Security privatization ``could be the biggest bonanza in the 
history of the mutual fund industry .... hundreds of billions 
of dollars could shower into fund companies and brokerage 
firms.''
    In Washington, financial industry lobbyists are pressing 
hard for such a ``bonanza.'' The Wall Street Journal also said 
that corporate interests are bankrolling a public relations 
campaign to, quote, ``put an intellectual face on the issue, 
stoke a national debate and, they hope, eventually make the 
sale.'' Companies with a great deal to gain are donating 
millions of dollars to federal candidates and right-wing think 
tanks who will work to destroy confidence in the system, 
especially among the young.
    At the same time, some politicians are trying to cut the 
Consumer Price Index, or CPI, which determines Social Security 
Cost of Living Adjustments. This is an outrageous attempt to 
balance the budget on the backs of the elderly, rather than 
cutting corporate welfare and reducing unnecessary military 
spending.
    Cutting the CPI would be a disaster for thousands of senior 
citizens in Vermont and around this country. Half of senior 
citizens have incomes of less than $15,000 a year, and last 
year 12% of Vermont seniors lived below the poverty level of 
$7,740. And with the 1.1 percentage point cut in the CPI 
advocated by some politicians, the average Vermont widow--who 
today receives about $8,000 in Social Security--would take a 
$600 a year cut by 2003.
    For the many Vermont seniors who must struggle to pay for 
the heat, food, prescription medicine and housing they need, 
that would truly be a ``crisis.'' That is why the CPI should be 
determined as it is today: by the expert economists at the 
Bureau of Labor Statistics, not through the back door by 
politicians.
    While there is no crisis today, we should begin working now 
to make certain we avoid a problem in 32 years. Let me suggest 
some fair, reasonable steps that Congress can take.
    Currently, Social Security is funded in an extremely unfair 
manner. While most Vermonters must contribute to Social 
Security based on their entire income, the wealthy pay Social 
Security taxes on only a fraction of their yearly income, 
because any individual's salary above $65,400 a year is exempt 
from Social Security. In other words, a billionaire pays the 
same in Social Security taxes as an individual making $64,500 a 
year.
    If we are serious about protecting Social Security, not 
raising taxes on the middle class, and not cutting the benefits 
desperately needed by many senior citizens in Vermont and 
throughout this country, we must adjust this artificial ceiling 
on Social Security taxes and make the Social Security tax more 
progressive.
    According to the actuaries at the Social Security 
Administration, changing this unfair and regressive policy, 
depending on exactly how it is done, would raise up to $70 
billion next year and keep the Trust Fund solvent, 
conservatively speaking, for another 56 years--until 2053.
    Let me say that we do face two crises, although neither is 
in the Social Security Trust Fund. The first crisis is in the 
moral fiber of those who would destroy the most successful 
universal pension program in history; the second would be a 
financial crisis for the millions of elderly Americans who will 
suffer if Wall Street gets its way.
    Congress must ensure Social Security remains solvent and 
safe for generations to come. We must not let anyone dismantle, 
cut or gamble with our seniors' Social Security under the guise 
of ``protecting'' it.
      

                                

    Mr. Bunning. Thank you.
    I want to remind our good friends from the Congress that we 
are looking for suggestions. We are looking for ideas on 
changing the current system, making it more viable, and making 
sure that the 75-year window that we are looking at is funded. 
That is the purpose for these hearings. I need to remind you of 
that.
    Sometimes we get off the track. But that is the purpose of 
the hearings, to make sure for the next 75 years, the program 
is in 1983, we were going to make sure that that funded 
properly. I would hope that you would address your remarks to 
that.
    Vern, you're up.

    STATEMENT OF HON. VERNON J. EHLERS, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Ehlers. Thank you, Mr. Chairman and Members. I will 
give you a few impressions first and then come up with a few 
concrete suggestions.
    I first of all commend you for having this hearing. I think 
it's an extremely important issue. I do disagree with my 
colleague who just testified. I don't know if I would use the 
word ``crisis,'' but I would say it's at least an impending 
crisis. It's something that we have to address.
    Just imagine if we, as elected officials, would decide to 
tell the American public that we have just introduced 
legislation to preserve Social Security. Everyone would be 
happy. But when we reveal the details, that we're doing this by 
raising payroll taxes by 17 percent, or that we're advocating 
cutting Social Security benefits by 14 percent--which is what 
it would take to achieve a balance--clearly, the public would 
be less than excited about our statements.
    Yet, those are the facts. Those are the statistics, and 
that's what is contained in the Social Security Report which is 
released annually. It is simply absorbed and people toss it in 
the corner without recognizing the implications of it.
    It is very important for us as Americans to recognize that 
we have an actuarial deficit in the Social Security Program of 
2.23 percent of payroll. That's a very serious problem. And 
yet, the public, I'm afraid, is not aware of that. I think that 
can be one important benefit of these hearings, to educate the 
public about the dangers that they're facing in the future.
    The true significance of this deficit is it's use as a 
measure of time and urgency. In 1983, I was not in the 
Congress, but both the Congress and President Reagan formed a 
bipartisan commission, the Greenspan Commission, that agreed on 
historic legislation to save Social Security. They seriously 
thought they had, because the actuarial unfunded liability was 
zero. And yet we find that, today, we're at 2.23 percent 
actuarial deficit, 22 percent worse than we had in 1983. 
Obviously, we did not fix the problem.
    I think this is a call to action, and particularly if we 
look at the cash flow deficits. If we don't do anything, in the 
year 2012 we will have a $7 billion deficit in that particular 
year, and 5 years later, in 2017, we will have a $50 billion 
deficit. As you can imagine, the reserves will soon run out and 
we would have to pay for it by borrowing more money. If we 
don't do anything, don't change anything, by 2030 our national 
debt will grow from $5 trillion to $35 trillion. That's simply 
inconceivable to me. We cannot do that.
    Behind these dry statistics are very real people, people 
who are going to depend on Social Security to pay the rent, to 
buy their food, and others who benefit from Social Security, 
such as the disabled.
    I think it's very clear that we have to reform Social 
Security, and that's why I commend you and the Members of this 
Subcommittee.
    A first step toward reform is education. The public has to 
understand the nature of the Social Security system. Sometimes 
I tell my constituents, when I'm giving speeches and they ask 
questions this, that it's important to recognize that Social 
Security payments they're getting consists of two parts: A part 
which you might consider a pension, a return of the money they 
have invested, and the second part is welfare. It is the 
Nation's largest welfare system. That is very disturbing for 
them to hear, but it is not too hard to prove. We have to be 
aware of that and distinguish between those two aspects of it.
    Last, while I'm commending people, in addition to you, I 
want to commend Senators Simpson and Kerrey, who introduced 
some well thought out legislation last Congress in the Senate 
to deal with this, and also my friend from Michigan, Nick 
Smith, who has worked on this extensively and has introduced a 
proposal which I think deserves consideration as well.
    Now, to get to the specific suggestions that I have--and 
some of these, since I'm relatively new here, as you know, 
these may sound a little off the wall.
    Frankly, I think it was a mistake to include Social 
Security in the budget. I think Social Security should be off 
budget so that it's precisely clear to the public and to us 
what we have in reserves and what we have borrowed, what the 
cash reserves are, and what the long-term future is. Having it 
buried in the rest of the budget, I think, is misleading. It 
makes our deficit look smaller than it really is. I think we 
should clarify that.
    I think we are going to have to look at some type of means 
testing to deal with the problem. Some of the suggestions of 
the Concord Coalition I believe deserve consideration. One 
proposal, for example, is that those who have over $100,000 a 
year of retirement income do not get the welfare portion, as I 
called it, of the Social Security payment, but that they do get 
back what they put in, plus interest. In other words, the 
pension part of the Social Security. That will, of course, be 
controversial.
    My colleague who spoke before me indicated that we should 
remove the lid on the contribution, the payroll taxation. If we 
do that, then, of course, we should means test benefits, 
because then we're hitting people doubly hard. We're making 
them pay more to start with and get less at the end. So you 
can't do both of those. You have to do one or the other.
    These are some thoughts, Mr. Chairman. I notice the red 
light is on. I could give you more, but I have submitted 
written testimony for the record and I hope you find these 
comments useful.
    [The prepared statement follows:]

Statement of Hon. Vernon J. Ehlers, a Representative in Congress from 
the State of Michigan

    Thank you Mr. Chairman and Members of the Subcommittee for 
holding such an important and timely hearing on Social 
Security's future. I appreciate you extending your invitation 
to all Members of the House so you can hear a wide diversity of 
views. I am also pleased your Committee is continuing to shed 
light on a subject that, to many, should be kept in the dark.
    I mentioned that this is an important and timely hearing 
because of two reasons. First, it is important because no other 
government program has touched more Americans' lives than 
Social Security. Since its inception in 1935, Social Security 
has grown and has been drastically changed by Congress. Growth 
in payroll taxes to finance the program and growth in the 
amount and type of benefits has marked its adolescence and 
maturity. Currently, 145 million workers pay into the system, 
and 44 million retirees are drawing benefits out of the system. 
Workers now pay 12.4 percent of their income for retirement and 
disability benefits. This is a far cry from the 1 percent 
payroll tax in 1940. Second, it is timely because recent Social 
Security Administration projections show that the program may 
face forced retirement from its impending bankruptcy. With so 
many Americans depending on Social Security, I welcome your 
leadership and these hearings.

                                My View

    Imagine if we, as elected officials, had to go out that 
door and tell the American public we have just introduced 
legislation to preserve Social Security for future generations 
by raising payroll taxes by 17 percent. Or, even more 
unbelievable, imagine if we introduced a bill to cut Social 
Security benefits for current and future retirees by 14 
percent. I do not think any of my colleagues would be running 
for the door to tell the press corps that news. However, the 
Social Security Administration releases the Social Security 
Trustee's Report every year telling Congress those very 
statistics.
    The report tells us that the ``actuarial deficit'' of the 
Social Security program is 2.23 percent of payroll under 
intermediate assumptions. To the American public this might as 
well be written in ancient Greek because not many people 
understand its implications. Nevertheless, I can tell you it 
says we are in trouble and that America's favorite government 
program is in jeopardy.
    The true significance of this deficit is its use as a 
measure of time and urgency. In 1983, Congress and President 
Reagan formed the bipartisan Greenspan Commission that agreed 
on historic legislation to ``save Social Security.'' Then, the 
Social Security Administration actuaries warned that the system 
had an unfunded liability equal to 1.82% of taxable payroll. 
The 1983 law was supposed to solve this problem through the 
middle of the next century. However, the actuaries now find 
that the unfunded liability is 2.23% of taxable payroll--22% 
worse than in 1983!
    If that is not a call to action, then maybe we ought to 
look at the actual cash deficits Social Security will begin 
accruing in 2012. Consider the following figures that are in 
today's dollars: In the first year, $7 billion; by the fifth 
year, $50 billion. When we combine these deficits with spending 
on other entitlement programs, namely Medicare, the national 
debt is projected to grow from $5 trillion today to $35 
trillion in 2030. Incidently, the Social Security trust fund is 
projected to run out in 2030. Behind these dry statistics are 
very real people--retirees that live on Social Security from 
check to check to buy their food and make their rent payments, 
disabled children and adults who cannot reenter the workforce, 
workers who live paycheck to paycheck, with little savings, 
that cannot afford another payroll tax increase. We have to ask 
ourselves as leaders of America: Can we leave future 
generations this legacy?

                     The Social Security Trust Fund

    Of course, we hear from constituents that there is a vast 
trust fund waiting to pay off our obligations to future 
retirees. However, the hard truth about the Social Security 
trust fund is that the government has lent itself all of the 
money. I am not a banker, but I know that being both the 
underwriter and payee of a loan is not a wise financial 
situation. The trust fund does hold government bonds, they do 
earn interest, and they are backed by the full faith and credit 
of the government. Nevertheless, when Social Security surpluses 
turn to deficits, Congress will be in a budget crunch. So we 
cannot turn a blind eye to this problem now. Even today some 
Members of this body are skeptical about our ability to repay 
all of Social Security's nonnegotiable bonds.

                     Demographics drive the problem

    What is driving Social Security to bankruptcy? First, the 
system is not designed like a normal fully-funded pension 
system. It is and always has been a pay-as-you-go system, where 
current workers support current retirees. If the pool of 
workers expands and the pool of retirees being supported by the 
workers stays static, this financing works. Unfortunately, this 
design is Social Security's fatal flaw. People are living much 
longer today than when the system was first created. Secondly, 
there will be more retirees in the future from the baby boomer 
generation.
    At the peak of the baby boomers' retirement there will be 
approximately 64 million Social Security beneficiaries, today 
there are only 37 million. Because Social Security is a pay-as-
you-go system our workforce must expand, or Congress will have 
to increase workers' taxes to support these 64 million 
beneficiaries. Unfortunately, the Social Security 
Administration's projections show that our workforce will only 
increase by 14 percent from 143 million workers today, to 163 
million workers in 2025. This is not enough growth to keep up 
with the 71 percent increase in beneficiaries.

                               Conclusion

    Clearly, reforming Social Security is incumbent upon us. 
However, the first step toward reform is education. This is the 
most important role we, as elected officials, can provide to 
the public. Mr. Chairman, your efforts serve this goal well. I 
would also like to commend my colleagues Mr. Kolbe and Mr. 
Stenholm for their work with the Public Pension Reform Caucus. 
Their goal of educating members and staff on this issue is a 
critical piece of reform. Besides these efforts, many private 
organizations are managing large education campaigns. While I 
do not have time to name all of them, I would like to thank 
those dedicated to making America aware of this problem.
    Lastly, I also commend my colleagues who have introduced 
comprehensive legislation addressing Social Security's long-
term problems. Last year, Senators Simpson and Kerrey 
introduced well-thought-out legislation in the Senate, and my 
friend from Michigan, Mr. Smith, introduced a comprehensive 
proposal in the House. While I may not agree with all of the 
policy implications in these proposals, their efforts can serve 
as an important tool for reform.
    Thank you again, Mr. Chairman and Members of the Committee, 
for letting me express my views on Social Security. I look 
forward to working with you and Members of the Committee on 
efforts to reform the system.
      

                                

    Mr. Bunning. Thank you very much, Vern.

STATEMENT OF HON. JERROLD NADLER, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF NEW YORK

    Mr. Nadler. Thank you, Mr. Chairman. Thank you for the 
opportunity to testify before the Subcommittee.
    I would like to stress one major point at the outset. I do 
not believe there is a crisis in Social Security. A crisis 
suggests imminent demise that requires drastic action. That's 
not the case. There is a long-term financing problem of 
moderate dimension at most. Yes, we must make some changes, but 
we do not by any stretch need to dismantle the system to ensure 
its long-term solvency.
    Two arguments are used to assert that there is a major 
financing crisis facing Social Security and that, consequently, 
we must reduce benefits and, according to some, privatize the 
system.
    First, we are told the problem is demographics because 
people are living longer and the baby boomers will retire in a 
couple of decades. We are told that whereas now there are 3.3 
workers for every person on Social Security, in 30 years there 
will be only 2 workers for every person on Social Security and 
this will present a much higher and insupportable burden for 
each worker.
    But this is a very flawed argument. The ratio of workers to 
seniors is not the ratio that determines the relative burden on 
each worker. The relevant ratio is that of working age people 
to all dependents, people who cannot work and must be supported 
by the current generation of workers, namely, seniors and 
children.
    Today's workers must pay not only for Social Security, but 
also for schools, day care, baby food, tricycles and ``boom 
boxes.'' When we look at this ratio, we see a very different 
picture.
    In 1965, there were 95 children and seniors for every 100 
working age Americans, so every 100 workers had to support 195 
people, themselves and 95 children and seniors. In 2030, every 
100 working age Americans will have to support 179 people, 
themselves and 79 children and seniors. The relative burden 
will have been reduced substantially, not increased. And the 
per capita income with which to support that burden is much 
higher today than it was in 1965, and it will be much higher in 
2030 than it is today.
    Today, the worker to dependent ratio is 1 to 0.71. In 2030, 
it's expected to be 1 to 0.79, a 4\1/2\-percent increase in the 
per capita burden. But even a conservative 1 percent annual 
productivity increase, compounded over the next 33 years, will 
produce a roughly 40-percent increase in per capita income with 
which to support the 4\1/2\ percent increased burden. In short, 
the burden of Social Security will be much lighter than it is 
now, or has been in decades.
    The second argument, we are told that the Social Security 
Trust Fund will be bankrupt by 2029. This projection of the 
Social Security Trustees is based on an average economic growth 
rate assumption, from now until 2029, of 1.75 percent. The 75-
year projection is based on an average economic growth of 1.4 
percent. In the last 25 years, economic growth has averaged not 
1.75 or 1.4, but 2.5 percent, and somewhat higher in the last 
several years.
    Even if we project a very conservative growth rate of 2.2 
percent annually, the trust fund shortfall will amount to 1.5 
percent of taxable payroll, not the 2.2-percent gap projected 
by the Trustees. Even assuming the extremely low growth rate 
projected by the Trustees, the shortfall is only a little more 
than 2 percent of taxable payroll, not an enormous amount. We 
can deal with it without destroying the system.
    I propose that we look to some intermediate steps now, to 
narrow the gap in taxable payroll and wait to take further 
action until we have a better idea of what the future of our 
economy holds. Obviously, the best thing we could do is follow 
economic policies to have a reasonably high economic growth 
rate. But let's mention a few possible measures that we can 
take in the immediate future.
    First are two measures proposed by the Ball Commission. 
One, invest a portion of the trust fund in the private 
markets--not as much as they propose, but a portion--and two, 
bring State and local workers into the system. A third 
possibility is to raise or lift entirely the cap on taxable 
earnings, as Congressman Sanders mentioned. Fourth, the former 
president of the American Association of Economics, 
Northwestern University Professor Robert Eisner, has proposed 
that the portion of income taxes paid on income paid into the 
Federal Insurance Contributions Act, FICA, be shifted from the 
general fund to the trust fund. This, by itself, would solve 
much of the problem and would not increase the deficit by a 
nickel.
    Privatization is certainly not the solution to the problem 
we are facing. Privatizers are faced with a major problem: How 
do you shift a huge income stream away from the trust fund and 
still pay current benefits? Social Security actuaries peg 
transition costs to an individual accounts system at $7 
trillion. So what do they propose to do? Raise Social Security 
taxes by 1.6 percent and then privatize. With any kind of 
reasonable economic growth rate, a 1.6-percent tax increase 
would solve the problem by itself, without privatization or any 
other measure.
    And the privatizers' statistics make no sense at all. They 
predict the economy will grow at 1.75 percent annually, but 
that stock prices will increase by 7 percent a year 
indefinitely. Such a discrepancy cannot be sustained. The 
price-to-earnings ratio for stocks would have to climb to 
astronomical levels and eventually the bubble must burst.
    Aside from the shaky economics, privatization would remove 
the security from Social Security. It would shift the risk from 
the government to the individual. If your investments don't do 
well, you starve in your old age. Social Security was designed 
as it is for a reason: To share the risk as a nation, so that 
everyone will have at least a minimally adequate income for 
their retirement. Privatization is a tax increase in extremist 
clothing and sounds a death knell for the security that Social 
Security provides to our seniors.
    We must handle the issue prudently. Acknowledge we have a 
problem, not a crisis, take some steps now, and then wait--have 
policies for reasonable economic growth rates--and see what, if 
anything, down the road we must do.
    We must do all we can to boost economic growth so that we 
don't ever have to cut benefits or raise taxes to keep the 
trust fund solvent. A reasoned, rational response is required, 
nothing rash like privatization. We must protect and preserve 
Social Security for our parents, for ourselves, and for our 
children, reasonably and rationally.
    Thank you.
    [The prepared statement follows:]

Statement of Hon. Jerrold Nadler, a Representative in Congress from the 
State of New York

    Mr. Chairman, thank you very much for the opportunity to 
testify before the subcommittee. I think it is a great service 
to the country that the subcommittee is actively exploring the 
future of Social Security.
    Let me begin by saying I do not believe there is a crisis 
in Social Security. A crisis requires drastic action. That is 
fortunately not the case for Social Security. Yes, we must make 
some changes, but we do not, by any stretch, need to dismantle 
the system to ensure its long-term solvency.
    Social Security was founded on a basic premise: the 
guarantee of a basic, minimally adequate retirement pension for 
everyone, regardless of whether or not they have private 
pensions or savings. And it has worked. Before Social Security, 
old age often was a guarantee of poverty and hunger. By and 
large, thanks in great part to Social Security, that is no 
longer true.
    Today, that warranty is under assault. And the strategy for 
destroying this successful program has been to discredit it and 
to sow fear through misinformation.
    We are told that the Social Security trust fund will be 
bankrupt by 2029. Now, these projections are based on average 
economic growth rates of 1.75% from now until 2029. Economists 
have relatively sound arguments as to why this may be the case, 
but what if the economy grows at 2.2% instead of 1.75%? This, 
by the way, would be considerably less than the 2.5% average 
rate of growth we've had for the last 20 years. If we get 2.2% 
economic growth, we will have a deficit in Social Security's 
trust fund of just over 1.5% of taxable payroll, not the 2.2% 
gap projected by the Social Security Trustees. No one can say 
for sure this will happen, but it is quite possible. We just 
can't tell.
    To predict the economic health of the nation decades in the 
future is virtually an impossible undertaking. We have enough 
trouble predicting economic growth rates even one year in the 
future. Just to give you an example, take fiscal year 1996, 
which ended September 30, 1996. At the beginning of the 
fiscalyear, the Congressional Budget Office predicted we would 
have a deficit of almost $160 billion for the year. The real 
number was $107 billion. They were off by over one-third! And 
the Social Security Trustees are trying to predict how things 
will be 75 years from now.
    Despite these facts, some still argue we must reduce 
benefits, and privatize Social Security to prevent the presumed 
bankruptcy of the system. They point to the declining ratio of 
workers--who pay for benefits--to seniors--who receive them. 
They argue that today, there are approximately 3.3 workers for 
every senior citizen, whereas by 2030, there will only be 2 
workers for every senior citizen. In other words, they predict 
there will be relatively fewer people to share the burden of 
providing for the elderly.
    But, this is a flawed argument. The ratio of workers to 
seniors is not the ratio that determines the relative burden on 
each worker. The ratio to look at is that of working-age people 
to all people who cannot work or are retired and must be 
supported by the current generation of workers--i.e. seniors, 
the severely disabled and children. Today's workers must pay 
not only for Social Security, but also for schools, day care, 
baby food, even tricycles.
    But, in 1965, there were 95 children and seniors for every 
100 working-age Americans. So every 100 workers had to support 
195 people--themselves, and 95 children and seniors. In 2030, 
thanks mostly to declining birthrates, there will be only 79 
children and seniors for every 100 working-age Americans. 
Therefore, every 100 workers will have to support 179 people--
themselves and 79 children and seniors. The relative burden 
will have been reduced substantially, not increased. And the 
per capita income with which to support that burden is much 
higher today than it was in 1965.
    In addition, assuming a modest 1% annual productivity 
growth, per capita economic output will be 35-40% higher in 
2030 than it is now, giving us even more income to pay for 
retirement and other concerns. In short, the ``burden'' of 
Social Security will be much lighter than it is now or has been 
in decades. We can provide for the elderly.
    Even considering the low economic growth figures assumed by 
the Trustees, the problem we are talking about is a little more 
than 2% of taxable payroll. That is not an enormous amount. We 
can deal with that gap without destroying the system. I propose 
that we look to take intermediate steps to narrow the gap in 
taxable payroll and wait to take further action until we have a 
better idea of what the future of our economy holds. I know 
that, politically, few members want to go to bat on solutions 
without appearing to deal with the entire problem posed by the 
Trustees. But the reality is it is prudent not to overreach. No 
one wants to be known as a person who cut Social Security. 
Maybe someday we will have to do it, but why do it now, and 
take all the political heat, when it may not be necessary? And 
policy-wise, it makes sense to take logical steps now and wait 
to see what, if anything, further we need to do.
    Let me just mention a few possibilities being discussed. 
One is having the government invest a portion of the trust fund 
in alternate investments. This would allow us to increase 
returns while keeping the risk with taxpayers as a whole, not 
hoisting it on the individual. Another possibility is raising, 
or lifting entirely, the cap on taxable earnings. A third 
option might be to bring state and local workers into the 
system. Or, we perhaps could look at a proposal put forth by 
Professor Bob Eisner of Northwestern. He proposes shifting the 
taxes people pay on the portion of their income which goes to 
Social Security from the general fund to the Trust Fund. After 
all, the revenues are Social Security related. I must study the 
ramifications of these and other possible changes before I 
could support them, but these are the types of things we should 
be looking at now, not talking about slashing benefits or 
privatizing Social Security and dismantling the entire system.
    Privatization is certainly not the solution to the problem 
we are facing. I could not be more strongly opposed to this 
ideologically-driven quest. First, privatization of Social 
Security would do nothing to extend the life of the Social 
Security Trust Fund. Nothing. Privatizers are faced with a 
problem: how do you shift mass levels of assets out of the 
trust fund and still pay current benefits? The costs would be 
enormous. In fact, the Social Security actuaries peg transition 
costs to an individual accounts system at upwards of $7 
trillion. Let me say that again: the cost to shift from the 
current system to a private accounts system would be $7 
trillion. And you thought we had a revenue problem now? So 
what's the solution of the privatizers? Raise taxes! We are 
faced with a gap of slightly more than 2% of taxable payroll. 
The privatizers want to raise taxes 1.6%--and then privatize. 
Why not then just raise taxes all the way and solve the problem 
entirely?
    Second, privatization would force individuals, on their 
own, to invest funds for their retirement with no certainty as 
to the outcome. Many Americans already invest for their 
retirement independently of Social Security, but Social 
Security remains an often necessary guarantee against poverty. 
The vagaries of the stock market, not to mention the fact that 
many Americans lack working knowledge of how the market 
functions, would prevent any guarantee of a reasonable return.
    Privatization shifts the responsibility of risk from the 
nation as a whole to each individual worker. It becomes every 
person for his or herself. Should you make poor choices, too 
bad. Poverty awaits. This is especially possible for those 
already on the edge of poverty. Since contributions to 
individual retirement accounts would be made based on a percent 
of earnings, those with lower incomes would contribute less 
each month, leaving them less to invest. This would severely 
restrict their ability to diversify their account, putting them 
even more at risk for a catastrophic loss.
    This is not acceptable. We must ensure that Social Security 
continues to guarantee adequate payments in our later years. 
Investment in the stock market is not a magic panacea. The 
alarmists argue the average rate of return for stocks will be 
7% for the next 75 years. That simply does not follow from 
their projections for how well our economy will do as a whole. 
They predict the economy will grow at only half the rate it has 
in the last 100 years, but the stock market will grow at the 
same pace it has been. This makes no sense.
    There are only two ways this could happen. One, the price 
to earnings ratio for stocks must climb to astronomical levels: 
34 to 1 in 2015, and 485 to 1 by 2070. Today, the price to 
earnings ratio is just over 20 to 1, near record highs. Perhaps 
price to earnings ratios can rise continually and rapidly--but 
only for a period of time. It has happened before: in the 
1920's and the 1980's. And then the bubble will burst. Does the 
name Black Tuesday ring a bell?
    The only other way stocks can continue to produce such high 
returns given the projected decline in the rate of economic 
growth is if corporate profits rise enough to support returns 
of 7%. But following the Trustees model, the increases in 
profits have to come at the expense of wages. In order to 
generate 7% returns, wages would have to fall to 63% of their 
current level by 2035. By 2055, real wages would have to fall 
to just 18% of the levels projected in the Trustees' Report, 
and by 2070, they would actually turn negative. Imagine the 
impact this would have on Social Security revenues, not to 
mention the disaster this would be for our nation as a whole.
    But, even assuming stocks by some miracle were to produce a 
7% return after inflation, an average implies results both 
above and below the mean. That means millions of people will do 
much worse than 7%. In fact, they may even lose money. What 
then? Are we going to tell those people tough luck? Do we try 
and differentiate between those who were unwise and those who 
were merely unlucky? Under the Personal Savings Account plan, 
those people would be left with a flat, SSI-level benefit of 
$410 a month. This is well below the current average monthly 
benefit of $738 for single retirees. Do we really want to tell 
our nation that this is what they will have to live on?
    Social Security was devised as it is for a reason: to share 
the risk as a nation so that everyone would have at least a 
minimally adequate income for their retirement. Privatization 
is a tax increase in extremist clothing and sounds a death 
knell for the security that Social Security provides to our 
seniors.
    As you know, this is a situation ripe for intergenerational 
conflict and for undermining support among the young for Social 
Security and other entitlement programs. We must handle the 
issue carefully, but we should not be scared to take prudent 
policy actions: acknowledge we have problems, but not a crisis, 
take some steps now and then wait and see what, if anything, 
further we must do. Otherwise, we may be unnecessarily 
depriving countless people of their hard-earned retirement 
income.
    Meanwhile, we should do all we can to boost economic growth 
so that we don't ever have to cut benefits or raise taxes to 
keep the Trust Funds solvent. There are a number of factors, 
from interest rates to investment in research and development 
to labor force participation rates, which contribute to 
economic growth rates--and which will help the revenues for 
Social Security--which can be affected by public policy. We 
must look at how we in government can assist these factors and 
help the economy grow faster.
    We simply do not need massive changes to a successful 
program. We must question prevailing wisdom and not allow those 
who would dismantle Social Security to control the debate. A 
reasoned, rational response is required--nothing rash like 
privatization. We must protect and preserve Social Security for 
our parents, for ourselves, and for our children. Thank you.
      

                                

    Mr. Bunning. Thank you.
    Mrs. Johnson.

 STATEMENT OF HON. EDDIE BERNICE JOHNSON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mrs. Johnson. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify before you, and appreciate that you are 
calling these hearings.
    Social Security is arguably the most successful antipoverty 
program of the U.S. Federal Government. In fact, 26 percent of 
elderly recipients rely on Social Security for 90 percent of 
their total income. Without Social Security, the poverty rate 
for those 65 or older would increase from 13 percent to nearly 
50 percent, which translates to about 12 million people.
    Today, Social Security actually is in fairly good financial 
shape. The trust fund has over half a trillion dollars reserved 
to pay future benefits. This year alone, Social Security will 
take in over $70 billion more than it spends.
    What I do appreciate is the fact that we're planning ahead. 
The problem posed by the retirement of the baby boom generation 
has been clear for decades. However, the trust funds have been 
building a reserve that will help finance this generation's 
benefits.
    As the Trustees' reported in April, Social Security can pay 
full benefits in a timely manner until 2029, without a single 
change in current law. In 2029, annual tax revenues will cover 
about 77 percent of the benefits promised under current law. 
The remaining projected shortfall in the trust fund can be 
fixed, I believe, with manageable changes to the system.
    In 1983, the Social Security Trust Fund faced insolvency in 
2 months' time. This crisis was averted without radical change. 
Today, I think we can do it again without radical change. 
Nonetheless, legislators must discuss real solutions to the 
problems facing Social Security that do not radically transform 
the program.
    I note that privatization has been determined to be a real 
option, but for long-term security problems, I do have strong 
reservations. That is a rather radical change because it puts 
at risk the livelihood of Americans who have worked hard and 
paid into the system and have nothing else to rely on, for the 
most part.
    Eight-six percent of the persons retired rely on Social 
Security as their retirement. Health care and nothing else 
improved until after Social Security because of having that 
reliable source to depend on at the time that people retired. I 
am old enough to remember that in Waco, Texas, as a kid, I 
remember older people having to give up whatever they had and 
move to Austin, Texas, to what they called the ``old folks 
home'' upon retirement. This did not change until after 
Medicare and Medicaid under the Social Security Act.
    I hope, and I believe, that because we are starting in 
time, that we can find some workable solutions that do not put 
at risk these people who will best be in or out, depending on 
the whims of the market, because the market does change. I hope 
that we can find some in between that would keep us healthy in 
this fund and at the same time do not put at risk the persons 
that are most at risk when changes come.
    I know this is not for my district, but that's the number 
one concern throughout the district that I represent. 
Ironically, before last August, crime was the number one 
concern, but I have taken in now another large metropolitan 
area, of middle and upper income people, and it became number 
one because they are concerned. I've had about 400 letters 
asking that it not be privatized, and about 4 letters that have 
indicated they would like to try it.
    There has to be some way, to perhaps do a little bit of 
both, but I hope we don't radically go into this change so that 
we can move the people with us as we make a change. In my 
judgment, at this point, we need to take some corrective action 
for the future, but I will not go far enough to say that it 
ought to be privatization.
    I thank you very much for the time, and I will submit my 
statement.
    [The prepared statement follows:]

Statement of Hon. Eddie Bernice Johnson, a Representative in Congress 
from the State of Texas

    Mr. Chairman, thank you for providing me the opportunity to 
express my views on the future of Social Security.
    Social Security is arguably the most successful anti-
poverty program of the U.S. federal government.
    In fact, 26 percent of elderly recipients rely on Social 
Security for 90 percent of their total income. Without Social 
Security, the poverty rate for those 65 or older would increase 
from 13% to nearly 50%, which translates to about 12 million 
people.
    Today, Social Security is in good financial shape. The 
trust fund has over one half trillion dollars reserved to pay 
future benefits. This year alone, Social Security will take in 
over $70 billion more than it spends.
    The problem posed by the retirement of the Baby Boom 
generation has been clear for decades. However, the trust funds 
have been building a reserve that will help finance this 
generations benefits.
    As the trustees reported in April, Social Security can pay 
full benefits in a timely manner until 2029 without a single 
change in current law.
    In 2029, annual tax revenues will cover about 77 percent of 
the benefits promised under current law. The remaining 
projected shortfall in the trust fund, can be fixed with 
manageable changes to the system.
    In 1983, the Social Security trust fund faced insolvency in 
two months time. This crisis was averted without radical 
change. Today, radical change is clearly unwarranted.
    Nonetheless, legislators must discuss real solutions to the 
problems facing Social Security that do not radically transform 
the program.
    Privatization has been proposed to solve social security's 
long term problems. However, the privatization of Social 
Security is a radical solution because it puts at risk the 
livelihood of Americans who have worked hard and paid into the 
system.
    Under privatization, the Social Security taxes that we pay 
would be placed into the stock market. Consequently, if the 
stock market crashes, many of our elderly citizens will become 
destitute.
    For individuals with additional income such as IRAs and 
other pensions, privatization is not as life threatening an 
issue in comparison to someone who depends solely on Social 
Security benefits to survive.
    As a strong supporter of Social Security and the benefits 
that it provides to many citizens, I will work to ensure that 
radical solutions, such as privatization, which may cause long-
term problems are not enacted.
    Various organizations that have a vested interest in 
dismantling the system are financing efforts to perpetuate 
misinformation. A lot of money is being spent to convince 
people that the potentially disastrous privatization of social 
security is a necessary and preferred change.
    For example, the enormous cost of the transition to 
privatization is rarely discussed. It must be noted that one to 
two generations of people would have to bear the burden of the 
cost of this transition.
    Mr. Chairman, let's keep Wall Street out of our social 
security system. If we don't we may have to change the name 
from social security to social gambling--the gambling with the 
security of our citizens.
    Again, thank you for allowing me to testify on this 
important issue.
      

                                

    Mr. Bunning. I thank the panel for their testimony.
    The next panel is Peter Deutsch from Florida, Earl Pomeroy 
from North Dakota, and Nick Smith from Michigan.
    Earl, if you would like to begin, you may start this panel.

 STATEMENT OF HON. EARL POMEROY, A REPRESENTATIVE IN CONGRESS 
                 FROM THE STATE OF NORTH DAKOTA

    Mr. Pomeroy. I am happy to, Mr. Chairman. I'm a little 
apprehensive, sitting next to my colleague, Congressman Smith. 
I read this morning he's got a black belt, and if we have any 
policy differences, I hope we resolve them. [Laughter.]
    I want to thank you for your leadership on this critical 
issue, and for having this hearing and giving me a chance to 
testify.
    There are three points I would like to emphasize in my 
remarks. First is to underscore that Social Security has been, 
and continues to be, a remarkably successful program. We must 
not reform away its basic features, which have provided so much 
to millions and millions over the last 60 years. Second, we 
must approach Social Security in the context of its role in 
helping Americans achieve economic retirement security. Social 
Security, along with pensions and personal savings, form the 
three-legged stool of retirement security, and we must ensure 
that as we reform Social Security, we take account of the 
dramatic changes currently taking place in our Nation's private 
pension system. And third, we must resist the temptation to 
fund a redesign of Social Security by additional increases in 
FICA taxes, which millions of working Americans simply can't 
afford.
    Mr. Chairman, the anecdotal evidence one hears in the press 
these days, and even from some Members of Congress, is that 
citizens have lost faith in Social Security, that they believe 
the system is broken. What I'm hearing is quite different back 
in North Dakota. The constituents point to Social Security as 
perhaps the one government program they've got some confidence 
in, and one that has made a profound difference in their lives. 
They recognize as I do that Social Security offers all 
Americans a basic retirement safety net and that it has proven 
remarkably effective in reducing poverty among older Americans.
    What I take from their comments is that we must proceed 
with caution in making changes to a program most Americans 
believe has been enormously successful. We should not kid 
ourselves into thinking that the public has given us license to 
freely redesign this program from the ground up. Rather than 
creating a new alternative retirement system, I think our 
central goal must be, as we focus on the difficult issue of 
Social Security solvency, to make the modest reforms needed to 
place Social Security on sound financial footing into the 
future.
    Developments in the private pension system, Mr. Chairman, 
provide us with guidance as to what direction these reforms 
should take. I think the changes occurring on the private side 
should be complemented by the changes that we might consider 
for Social Security. On the private side, large numbers of 
employers are shifting from defined benefit pension plans, 
which guarantee a fixed monthly benefit upon retirement, to 
defined contribution plans, like 401(k)s, where the benefits 
are undetermined but the contribution levels fixed. While 
defined contribution plans represented only 29 percent of 
workplace pension plans in 1982, they were 56 percent in 1990, 
and I dare say they are probably a lot higher percent right 
now.
    This shift has profound consequences for American workers, 
one that Congress really hasn't fully analyzed. With 
traditional benefit plans, the employee bears very little risk. 
Employers make the contributions, manage the investments, and 
pay out a fixed monthly benefit which lasts throughout the 
worker's retirement. In addition, the benefits are insured by 
the government through the Pension Benefit Guaranty 
Corporation.
    Defined contribution plans, as you well know, involve 
substantial risk for individual employees. Workers are 
responsible for making contributions, they typically direct the 
investment, and they often receive a lump sum benefit rather 
than the fixed monthly payment upon retirement. This means that 
employees run the risk of contributing too little, not managing 
their investments wisely, or draining their accounts too 
quickly once they retire. Preliminary reports indicate that 
those of modest income and education levels have the most 
difficulty relative to the risks they have been asked to assume 
under the defined contribution plan.
    Now, since Social Security should complement private-sector 
efforts, increased risks for employees in the private pension 
system means that more than ever they need Social Security to 
provide a safety net. Plain common sense tells us that with 
workers being asked to assume more risks in the private pension 
system, now is not the time to dump substantial additional risk 
on them in the Social Security system. Yet, that is precisely 
what some of the reforms would accomplish. With American 
workers being asked to walk a higher and thinner pension tight 
rope, it is not responsible to reduce at the same time the 
Social Security safety net underneath them.
    In trying to rush to closure, I think there are some 
fruitful areas to pursue, including--I'm very intrigued with 
the notion of enhanced return through partial investment of the 
trust funds in the private sector. I think there is a host of 
complicating factors along with that, but I do think that is 
one of the things to pursue. I don't intend to indicate that we 
can invest our way out of the long-term solvency crisis; we 
can't. Tougher measures will also have to be taken. But that is 
the way we ought to look.
    Now, in addition to Social Security--I want to emphasize 
this point perhaps above all others in my testimony today. 
Reforming Social Security to ensure its long-term solvency will 
be a difficult task which will likely take us several years to 
achieve. What we must not do is allow this difficult challenge 
to deter us from taking steps we can take today to improve the 
retirement security of working families. We must act now to 
boost savings incentives and make reforms necessary to expand 
pension coverage. In other words, regardless of what we do with 
Social Security, private savings and expanded pensions are 
going to be a critical part of people having economic security 
in retirement, that we should move full throttle on that one, 
regardless of what we do with Social Security.
    Thank you, Mr. Chairman, and Subcommittee Members.
    [The prepared statement follows:]

Statement of Hon. Earl Pomeroy, a Representative in Congress from the 
State of North Dakota

    Mr. Chairman, thank you for the opportunity to appear 
before the Subcommittee this afternoon. Reforming the Social 
Security system to ensure its long-term solvency is one of the 
most critical public policy issues we confront. I salute you 
for your leadership on this issue, and I welcome the 
opportunity to make my views known.
    There are three points I would like to emphasize in my 
remarks this afternoon. First, is to underscore that Social 
Security has been--and continues to be--a remarkably successful 
program. We must ensure that we do not reform away its basic 
safety net features. Second, we must not reform Social Security 
in isolation. Social Security, along with pensions and personal 
savings, form the three-legged stool of retirement security. We 
must ensure that reform of Social Security takes account of the 
dramatic changes currently taking place in our nation's private 
pension system. And third, we must resist the temptation to 
fund a redesign of the Social Security system by raising taxes 
on America's working families.
    Mr. Chairman, the anecdotal evidence one hears in the press 
these days and even from some Members of Congress is that 
citizens have lost faith in the Social Security program and 
believe it is broken. I must tell you that my experience could 
not be more different. My constituents point to Social Security 
as the most successful government program around and one that 
has made a profound difference in their lives. They recognize, 
as I do, that Social Security offers all Americans a basic 
retirement safety net and that it has proven remarkably 
effective in reducing poverty among older Americans. And they 
recognize the important social insurance function Social 
Security plays in providing a measure of financial security to 
survivors and the disabled.
    What I take from the comments of my constituents is that we 
must proceed with caution in making changes to a program most 
Americans believe has been enormously successful. We should not 
kid ourselves into thinking that the public has given us 
license to redesign the program from the ground up. Rather than 
creating a new alternative retirement system, our central goal 
must be to make the modest reforms that are needed to place 
Social Security on a sound financial footing for the long-term.
    Developments in the private pension system, Mr. Chairman, 
provide us with guidance as to what direction these reforms 
should take. Indeed, our nation's work-based retirement system 
is undergoing a rapid and profound change. In large numbers, 
employers are shifting from defined benefit pension plans which 
guarantee a fixed monthly benefit upon retirement to defined 
contribution plans such as 401(k)s where the benefits are 
undetermined but the contribution levels fixed. While defined 
contribution plans represented only 29% of workplace pension 
plans in 1982, their share grew to 56% in 1990, and has 
undoubtedly risen higher since. And while in 1975 87% of 
participants in workplace retirement plans were enrolled in a 
defined benefit plan, by 1993 this percentage had dropped to 
56%.
    This shift has profound consequences for American workers. 
With traditional defined benefit pension plans, the employee 
bears very little risk. Employers make the necessary 
contributions to the plan, manage the investment of these 
contributions and pay out a fixed monthly benefit which lasts 
throughout the worker's retirement. In addition, benefits are 
insured by the government through the Pension Benefit Guaranty 
Corporation. Defined contribution plans, however, involve 
substantial risk for individual employees. Workers are 
responsible for making contributions to the plan, they 
typically direct the investment of their own accounts, and they 
receive a lump sum benefit rather than a fixed monthly payment 
upon retirement. This means employees run the risk of 
contributing too little to the plan, of not managing their 
investments wisely and of draining their accounts too quickly 
once they retire. Preliminary reports indicate that those of 
modest income and education have the most difficulty navigating 
these new retirement risks.
    Since Social Security should complement private-sector 
efforts when it comes to providing retirement security, 
increased risks for employees in the private pension system 
make it more important than ever that workers have Social 
Security as their retirement safety net. Plain common sense 
tells us that with workers being asked to assume more risks in 
the private pension system now is not the time to duplicate 
these very same risks in the public pension system. Yet this is 
precisely what many of the more sweeping Social Security reform 
proposals would do. With American workers being asked to walk a 
higher and thinner pension tight rope, it would simply be 
irresponsible to weaken the Social Security safety net beneath 
them. If anything, we should be particularly careful in light 
of the riskiness of today's private-sector plans to preserve 
and even strengthen the retirement safety net which our Social 
Security system provides.
    Proposals from the Advisory Council and others for 
fundamental redesign of the Social Security system would also 
require the imposition of substantial new payroll taxes on 
American workers. I believe that hiking payroll taxes in this 
way would be patently unwise. The burden of such a tax increase 
would be particularly onerous for the many self-employed 
farmers and small businesspeople who pay both the employer and 
employee share of payroll taxes--already a whopping 12.4% of 
earnings, 15.3% when Medicare is factored in. Moreover, because 
the Social Security payroll tax is regressive in its effect, 
any increase would disproportionately hit the low and moderate 
income families who are struggling so hard each month just to 
make ends meet. Surely we can all agree that the tax burden on 
these families is already too high. Financing a fundamental 
redesign of Social Security is simply an insufficient 
justification for pushing their taxes higher still.
    Mr. Chairman, as your subcommittee moves forward to 
consider reforms to Social Security, I hope that you will keep 
in mind the views of North Dakotans and other around this 
nation who want to see this successful program reformed but not 
remade. I also hope that you will not compound the new and 
profound retirement risks that workers are facing in the 
private pension system, nor add to the already heavy tax burden 
on working families. Thank you for the opportunity to share my 
views.
      

                                

    Mr. Bunning. Thank you.
    Nick Smith.

STATEMENT OF HON. NICK SMITH, A REPRESENTATIVE IN CONGRESS FROM 
                     THE STATE OF MICHIGAN

    Mr. Nick Smith. Mr. Chairman, Subcommittee Members, it's 
going to be hard for me to do it in 5 minutes and keep your 
attention, but bring those charts on down closer.
    [Charts are being retained in the Committee's files.]
    Mr. Bunning. Everybody else has, Nick, so you're burdened 
with that problem.
    Mr. Nick Smith. I have introduced the only bill in the 
House of Representatives that is scored by the Social Security 
Administration to keep Social Security solvent for the next 75 
years. So the bill has been introduced.
    One thing that I was very concerned about--and there's only 
two ways to solve the Social Security problem. I'm not going to 
go into the background. You folks are aware of the fact that 
Dorkas Hardy says Social Security could have less money coming 
in than is required for the payout as early as 2005. I'm not 
going to go into all the background and the demographics. The 
fact is that when we start bringing less money in, government 
is either going to have to increase taxes on somebody to come 
up with the additional money, or borrow it from someplace else. 
The longer we put off coming up with solutions, the more 
drastic those solutions are going to have to be.
    I heard an earlier comment of let's just increase taxes. 
Since 1971--well, on this chart, 78 percent of families now pay 
more in the payroll taxes than they do in the income taxes. 
Let's do it some way besides increasing taxes on workers.
    This chart shows how taxes have increased over the years. 
It gives you the perception of the problem of increased taxes. 
Down in the bottom right-hand corner is the point that I would 
like to drive home. We have increased Social Security taxes 36 
times since 1971. So it seems to me that we should be creative 
enough to do it in some other way.
    Mr. Portman. Does that include the employer's contribution?
    Mr. Nick Smith. That includes the employer contribution.
    Here is what we're facing, the fact that Social Security is 
not a good investment. This is how long it's going to take you 
to get back what you and your employer put in, plus what 
Treasury was paying in interest in those particular years since 
you first paid in the tax. If you retired in 1960, it takes 2 
years; if you retire this year, it's going to take about 17 
years. If you retire after 2015, you're going to have to live 
26 years after retirement to get back what you and your 
employer put in, plus the interest Treasury is paying.
    Treasury doesn't pay much interest. They're paying 2.3-
percent real return on interest. That's why every one of the 
three advisory groups, that turned into three because they 
couldn't come up with one agreed upon solution, each suggested 
some privatization.
    Let me briefly go through my proposal. The only way to 
solve the Social Security problem, as far as I'm concerned, is 
very undesirable. You either increase revenues or you decrease 
benefits. If anybody has got any suggestions for any other 
ways, then let's hear them.
    One way to increase revenues is some privatization. I don't 
know if you can see the charts, but I'll read them. There is no 
tax increases----
    Mr. Bunning. Mr. Smith, those are for very good eyes. 
[Laughter.]
    Mr. Nick Smith. You have very good eyes.
    Mr. Bunning. Some of us with trifocals cannot read this.
    Mr. Nick Smith. I'm worried about Mr. Hulshof.
    There is no tax increase in my proposal, no transition 
cost. The reason there is no transition cost is because I 
simply use the surpluses coming into the Social Security Trust 
Fund as that amount that's going to be allowed to be privately 
invested. And you know what the magic of compound interest is.
    Number three, it balances the Social Security system for 
the next 75 years. Newly hired State and local government 
employees would be required under my bill to join Social 
Security. Right now there's a half-a-dozen States that are not 
having their employees do Social Security.
    The retirement age. It allows the private investment 
account withdrawal at age 60. So what you're allowed to 
privately invest, which starts at 2.3 percent of payroll, ends 
up to be over 10 percent, out of the 12.4 percent, is what 
you're allowed to privately invest. You can take that out as 
early as age 60. That's sort of a trade off for increasing the 
retirement age by 2 years over the next 24 years. The 
retirement age is ultimately indexed to life expectancy, so 
this, at least in theory, would keep it solvent forever.
    Briefly, the other changes are that you have a private 
investment account. You gradually reduce the increase in 
benefits. Couples will receive 133 percent. As a minimum for 
widows and widowers, we would actually increase benefits. After 
the first spouse dies, she/he would have 110 percent of 
benefits rather than 100 percent.
    Let's put up the supporters to just give a brief view of 
those who have supported it. Well, they can't read that, 
either. Three senior groups have supported this concept along 
with many of the youth groups. The Jaycees are taking it around 
the country as a proposal. I'm running it up the flag pole as 
one possible solution. I think we have simply got to deal with 
it.
    Thanks for having the hearing.
    [The prepared statement follows:]

Statement of Hon. Nick Smith, a Representative in Congress from the 
State of Michigan

    Today, I will present my views on Social Security reform.
    Social Security is in financial trouble. Almost everyone 
agrees dramatic steps must be taken to clean up the way Social 
Security is financed. Social Security surpluses of revenues 
over payments to beneficiaries are projected to end as early as 
2005.
    Social Security is not a good deal for anybody that has not 
retired. For instance, men retiring in 1997 will receive about 
1 percent rate of return on their and their employer's Social 
Security contributions. This means that men and women retiring 
in the 21st century will receive thousands of dollars less than 
they might have received for investments in stocks, bonds, CDs, 
or mutual funds. If a person's Social Security funds had been 
invested in the average stocks and bonds, over the last 40 
years, the return would have averaged 9 percent. We must reform 
Social Security--making it a good deal for all Americans.
    How soon should we deal with Social Security's impending 
bankruptcy? The sooner the better. The longer we wait the more 
drastic the steps we will have to take.
    The Social Security ``fix'' can only be accomplished in two 
ways:
     reduce benefits
     increase revenues
    None of these are fun or exciting. You have hard work ahead 
as you craft legislation to repair Social Security.
    My Social Security Solvency Act uses a combination of many 
small changes to achieve fiscal solvency for Social Security 
over at least the next 75 years. In fact my bill is the only 
legislation that has been introduced in the House that is 
certified by the Social Security Administration's actuaries as 
keeping Social Security solvent.
    My Social Security Solvency Act allows each worker to 
establish a personal retirement security savings account 
(PRSA). Workers would be able to save, in their personal 
account, 4 percent initially, rising to 10 percent, from their 
12.4 percent FICA tax. An additional 10 percent of gross wages 
could be added to their personal retirement savings account.
    My testimony is drafted to answer the three questions posed 
by the subcommittee:
    1. To what degree is Social Security Reform necessary?
    2. Are the recommendations of the Advisory Council on 
Social Security and other reform proposals constructive? and
    3. Are there specific recommendations that Congress should 
consider as it moves forward?
    Now let me answer the questions. 

        1. To what degree is Social Security Reform necessary? 

    I believe that it is necessary to begin reforming Social 
Security this year. First, we must demonstrate the retirement 
security alternatives. My retirement security demonstration 
bill would allow for pilot testing of major proposals.
    It is almost universally recognized that Social Security, 
with no changes, is headed towards bankruptcy. The only 
question is when will it happen? The obvious response is to 
make Social Security work better. This means guaranteeing a 
fair return for workers as well as continuing equitable retiree 
benefits.
    Most Americans who are retired depend on Social Security 
for a major part of their retirement income. Today, fully 80 
percent of Americans depend on Social Security for at least 50 
percent of their retirement income. Without Social Security 
reform, the financial future of America's seniors is in 
jeopardy.
    In 1935, the Social Security Act was enacted to provide a 
government guarantee against poverty. Although most people were 
unaware at the time, Social Security was designed as a pay-as-
you-go system where current workers taxes go to pay current 
retirees' benefits.
    Changing demographics, however, have threatened the 
solvency of the pay-as-you-go system. In 1950, there were 17 
workers paying taxes to support the system for each retiree. 
Today there are only 3, and by 2029 there will only be 2. This 
change was been caused by a combination of longer life spans 
and lower retirement ages. In 1935 the retirement age for 
Social Security was 65 and life expectancy was 63. Today, the 
early retirement age is 62 and life expectancy is 76.
    To make up for this falling ratio of tax paying workers to 
retirees, Congress has continually raised taxes. In 1950 only 3 
percent of a worker's first $3,000 in earnings was taxed. Today 
we tax 12.4 percent of a worker's first $62,700 in earnings. 
Social Security taxes have been raised 37 times since 1970.
    By 2010, members of the huge baby-boom generation will 
start to retire and draw benefits from the government's three 
biggest entitlement programs--Social Security, Medicare, and 
Medicaid. In the 104th Congress, I introduced the Social 
Security Solvency Act (H.R. 3758) on July 9 in order to save 
and preserve Social Security. In my proposal, we have ruled out 
tax increases, additional debt, and changes in benefits for 
essentially all current retirees or those over 57.
    My proposal slows down the increase in benefits for higher 
income seniors and allows individual workers to invest some of 
their tax dollars in their own personal retirement savings 
accounts. Private investment choices will be limited along the 
lines of restrictions for IRAs, but will be the property of 
workers. If a worker earns an average return on his 
investments, he will get back more from Social Security under 
my legislation than under the existing program.
    The worst myth about Social Security is that there exists a 
trust fund filled with the surpluses of years of Social 
Security tax payments. In truth, the trust fund, like an empty 
vault, is filled with government IOUs. My Social Security bill 
stops the federal government from future raids on surplus money 
coming into the trust fund. When Congress reconvenes in 
January, I plan on reintroducing the legislation as the 
beginning of an effort to save Social Security--make it solvent 
and ensure benefits for future retirees.
    My proposal for Social Reform is:

The Social Security Solvency Act

     No Tax Increase
     No Transition Costs
     Private Investment Accounts using trust fund 
surplus
     Gradually reduces the increase in benefits for 
high income retirees
     Allows private investment account withdrawals at 
age 60
     Increases retirement age two additional years
     Assumes a 0.15 percent lower measured CPI growth
     Allows voluntary annual additional $2,000 PRSA 
contribution
     Balances the Social Security System for the next 
75 years
     Retirees may choose payment options--lump sum (up 
to \1/3\ of discounted present value) with annuity or annuity 
only.
     After full payback plus interest, gradually 
reduces benefits for those making over $50,000
     COLA increase limited to dollar amount at 30th 
percentile for high income
     Newly hired State and local government employees 
join Social Security
     Couples receive a minimum of 133 percent of higher 
benefit
     Widows or widowers receive minimum 110% of married 
benefit payment
     Retirement age is ultimately indexed to life 
expectancy
    Individual savings accounts (PRSA) will accumulate 
considerable sums resulting in higher retirement benefits. The 
surpluses coming into the trust fund allow private investments 
(PRSAs) to start at 4 percent of payroll and increase to 10 
percent of payroll in the year 2070.
    My Social Security Solvency Act is the only House bill that 
has been ``scored'' by the Social Security Administration to 
keep Social Security solvent for at least the next 75 years.

 2. Are the recommendations of the Advisory Council on Social Security 
               and other reform proposals constructive? 

    There are a lot of good ideas out there. For instance, the 
Advisory Council has unanimously agreed that Social Security's 
financial problems are manageable and part of the solution is 
investing in the private sector. These are compelling reasons 
to pilot tested private investment options.
    We need to get going with retirement security 
demonstrations. This will allow us to determine what--works, is 
attractive to the customer, and can be administered easily and 
fairly. Pilot testing of the reform proposals should start no 
later than October 1998 (Fiscal year 1999). My draft bill (see 
attached) gives the Secretary of Treasury in consultation with 
the Social Security commissioner and congressional committees 
the authority to construct and implement retirement security 
demonstrations.
    Reform proposals that need to be considered include:
     various IRA options proposed by members of 
Congress,
     options that would level the playing field for 
parents, especially women, saving for retirement,
     proposals that would improve pension portability,
     the Gramlich proposal,
     the Schieber-Weaver proposal,
     Senator Gregg's proposal,
     Senator Kerrey's proposal,
     My proposal,
     Representative Sanford's proposal,
     a back-loaded Individual Retirement Account,
     a union-sponsored savings plan, and
     other options to be developed by the Treasury 
Department, in consultation with the Ways and Means and Finance 
Committees, and private sector organizations.
    Beyond these good ideas, there are retirement security 
alternatives that are actually working. I asked the 
Congressional Research Service (CRS) to develop a comparison 
chart describing retirement security/Social Security options 
currently underway in various countries, states, and local 
governments. (See Attached)
    Australia, Chile, Columbia, Singapore, and United Kingdom 
have operating retirement security systems that merit review. 
Also, various state and local systems offer ongoing 
demonstrations of what can work. These systems often return 
much more than Social Security. A study by economists at the 
Florida State University and Miami University found that the 
state and local government employee systems--covering 1.9 
million workers--often pay retirement benefits of 2.5 to 7 
times more than Social Security.
    Time is important. Workers should get the best deal 
possible. Studies of Social Security/retirement security 
systems indicate that a much better deal can be had. It is time 
to demonstrate retirement security options--letting workers 
have greater control of their future. 

3. Are there specific recommendations that Congress should consider as 
                           it moves forward? 

    I propose two specific legislative recommendation for 
consideration by this Subcommittee as it moves forward:
     The Social Security Solvency Act of 1997 
(Discussed above)
     Retirement Security Demonstration Act of 1997

Retirement Security Demonstration Act of 1997

    Demonstrations, pilot tested under the Retirement Security 
Demonstration Act, will include options suggested by the three 
legs of the retirement security ``stool'':
     private plans,
     workplace pensions, and
     Social Security.
    The demonstrations will:
     provide test marketing of the various options of 
funded retirement programs;
     confirm administrative feasibility of specific 
proposals;
     indicate the relative popularity of various 
proposals;
     establish costs of various proposals;
     provide benchmarks against which to measure 
savings patterns; and
     reduce accrued liabilities of the Social Security 
trust fund.
    Significant issues under the demonstration program include:
     A means of testing the feasibility and popularity 
of private savings proposals;
     No reduction in payroll tax receipts by Social 
Security Administration;
     No new compliance requirements for employers;
     The demonstration is based on equitable solutions 
to a growing problem; and
     The demonstration will likely prove to be 
extremely popular.

                               Conclusion

    Thank you for your willingness to tackle Social Security 
reform. You are to be complemented for taking on a most 
important issue facing America's future.
    [Attachments are being retained in the Committee's files.]
      

                                

    Mr. Bunning. Thank you, Mr. Smith.
    Mr. Nick Smith. I assume my testimony will be submitted for 
the record.
    Mr. Bunning. All of your testimony will be put into the 
record--all of it.
    We have a vote on. If you can take 5 minutes, we will get 
to the vote afterwards. Go right ahead.

    STATEMENT OF HON. PETER R. DEUTSCH, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF FLORIDA

    Mr. Deutsch. Thank you, Mr. Chairman. I appreciate it. My 
comments are not quite as extensive, but if they can be in the 
record as well, I would appreciate it. I will just summarize 
them.
    I guess I would focus really on three points. The first is 
a little bit of a historical perspective of bringing us back to 
before Social Security existed in America. For a hearing on 
Social Security, I think a little bit of history, and not 
ancient history, is really appropriate.
    When we look at what America was like prior to Social 
Security and today, it's a much different country. I would 
offer that the Social Security system, as a system, with the 
faults we can talk about, is still the best government program 
created by man, period. I say that very seriously and very 
specifically, that it has fundamentally changed at least one 
generation, if not two generations, of Americans in terms of 
the quality of life that they have at the present time. It has 
fundamentally changed America, I believe, in an incredibly 
positive way.
    That sort of backdrop I think sort of drives a number of 
concerns and conclusions that I have. The first is that today, 
as we are today and looking into the 10-, 15-, or 20- year 
horizon, in a sense the system is not broken. For that period 
of time, to take any kind of dramatic action today, to me 
doesn't make sense.
    We can talk about issues beyond that, but the system is an 
insurance system and, as an insurance system, it is actuarially 
based. It has met actuarial challenges before. One of the 
actuarial challenges is that Americans live far longer today 
than they did previously.
    I guess I'm very fortunate, since both my parents are still 
alive. They're 73 years old. I have actually been looking at 
things with them in terms of how to draw on their IRAs and 
their pension. An incredible number is that, at their age, 
their joint life expectancy is over 18 years. They're 73 years 
old, and for the average 73-year-old couple today, the joint 
life expectancy in America is 18 years. That's an incredible 
statistic.
    When Medicare was set up 31 years ago, the average life 
expectancy for Americans was 65 years old. I think those 
numbers are sort of mind blowing, in terms of the implications 
they have.
    I guess really, in conclusion, in terms of my statement and 
my comments, it is that yes, we have plenty of concerns in 
terms of the baby boom generation, which, in fact, I'm a part 
of as well. My year of birth is 1957, which was actually the 
year that more Americans were born than any other year in our 
Nation's history. We're the peak of the baby boom, those of us 
who are 40 years old today. For that, though, we don't expect 
to retire for over 20 years. So that Congress, over this period 
of time, will have plenty of time to address the needs of the 
Social Security Program. I think it's important to emphasize 
again that the system is not in crisis, that we need to treat 
it as an insurance plan, which I'm sure Congress ultimately 
will.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Peter R. Deutsch, a Representative in Congress from 
the State of Florida

    As a representative of south Florida, I represent a 
district that by far has one of the largest senior populations 
in the country. I work with my constituents every day, and I 
know that the Social Security program is critical to my 
constituents' ability to live with dignity and security. Many 
of my constituents would be living below the poverty line 
without the Social Security benefits that they rely on to meet 
the ever-increasing cost-of-living for seniors. At the same 
time, as the father of two young children, I want to be sure 
that we do our job to ensure that future generations will 
continue to be able to rely on Social Security in their later 
years.
    We have all read the most recent report by the Social 
Security Trust Fund Trustees, and the Trustees are clear that 
the program will remain fully solvent, paying full benefits on 
time until 2029, and continue to provide three-quarters of 
benefits for the next 70 years thereafter. The Trustees are 
also clear that we have the time to fully discuss and develop a 
strong plan to protect the long-term solvency of the program. 
Clearly, we must not delay action on this critical issue 
because the sooner we implement changes, the more time future 
beneficiaries will have to adapt to any changes in the program, 
and to plan their futures. At the same time, we must not rush 
to make unnecessary and dramatic changes to the program which 
is fundamentally working or that would undermine the basic 
principles of the program. We cannot accept any proposals that 
would renege on the contract the government has with current 
beneficiaries and those who have planned their retirements 
around the current program.
    The fact is that the Social Security program has been an 
unprecedented success. For nearly 60 years, Social Security has 
been and remains our nation's most effective anti-poverty 
program. According to the Census Bureau, without Social 
Security, poverty among the U.S. elderly population would be 
over 50 percent. The program continues to run at a surplus and 
has not contributed one cent to the federal deficit. Now the 
challenge is to ensure that it will continue to be a success in 
the future as the baby boomer generation begins to retire.
    We must remember that throughout its 60 year history, the 
Social Security program has undergone many periodic adjustments 
to respond to changing demographics. As economic and 
demographic realities fluctuate, reasonable adjustments are 
required from time to time. However, unlike other government 
programs, the solvency of the Social Security program must be 
estimated over a 75 year period, despite the fact that it is 
difficult to predict these future fluctuations. A few solid 
years of strong economic growth, for example, could 
dramatically improve the long-term picture for Social Security. 
If the economy grows at even 1 percent more than the 
conservative estimate assumed by the Trustees, the Trust Funds 
would remain solvent over the 75 year period.
    Now, there are ways to make the necessary incremental 
adjustments that will strengthen the program and extend the 
solvency of the Trust Funds. And, again, there is time to look 
at a myriad of proposals to do exactly that. But I am 
particularly leery of the suggestion that we move to 
privatizing the Social Security program when to do so could 
jeopardize both the purpose and the success of the program.
    We cannot forget this purpose or the unique nature of the 
Social Security program. Social Security is unlike any private 
pension plan. It is much more than that. Not only does Social 
Security provide guaranteed benefits to senior retirees, 
adjusted to keep pace with inflation, but it is also insurance 
against disability for workers and survivor protection for 
families in event of the death of the breadwinner.
    Privatizing the program into separate individual accounts 
for retirement would fundamentally change the very nature of 
the program by eliminating the program's guaranteed benefits 
and replacing it with benefits that would be uncertain. 
Benefits would be based solely on the return of individual 
investment choices and would shift investment risks to 
individual workers, instead of spreading risk out over the 
entire workforce as Social Security does. And, as we all know, 
there are no guarantees on Wall Street. And what about the 
worker who dies or becomes disabled before the investment had a 
chance to accrue? What we will be looking at could be increased 
enrollment in needs-based programs such as welfare.
    We also cannot deny the cost of moving to a system of 
individual accounts. Current administrative costs of the Social 
Security program are equal to only about 1 percent of the total 
program budget. The transition to individual accounts is 
estimated by the Social Security Administration at more than $7 
trillion. That's going to be paid for with higher individual 
taxes, a much larger federal deficit or both.
    What we need to do is to take the steps that are necessary 
to strengthen the Social Security program, not gut it. That's 
what my constituents want, that's what the majority of 
Americans want, and that is the right thing to do. We should 
not try unnecessary, risky and dramatic changes that for 
millions of Americans could once again equate aging with a life 
of poverty.
      

                                

    Mr. Bunning. Thank you all for your testimony.
    We will recess for the vote, and we'll be back as soon as 
we can. Thank you.
    [Recess.]
    Mr. Bunning. The Subcommittee will come to order.
    I want to assure all Members who are testifying that their 
full statements will be put into the record. Since you're the 
only one here right now, Bob, you may go ahead and begin.

STATEMENT OF HON. BOB FILNER, A REPRESENTATIVE IN CONGRESS FROM 
                    THE STATE OF CALIFORNIA

    Mr. Filner. Thank you, Mr. Chairman. And since you're the 
only one here----
    Mr. Bunning. Well, there will be others joining us.
    Mr. Filner. I appreciate your holding this hearing, giving 
us the opportunity to let you know where we are from various 
parts of the country. Clearly, in this Nation, and certainly in 
my district in southern California--the farthest southwest part 
of the Nation as you can go--we support the Social Security 
Program and believe it can and should leave us and future 
generations financially secure.
    More than 63,000 residents of my district receive Social 
Security every month, and it provides a benefit to 99 percent 
of retirees, as you know, in the United States. It provides a 
secure base for our senior citizens and allows their children--
a very important point, I think--to concentrate financial 
resources on their own families.
    My parents are 83 years old. Their sole source of support 
right now is Social Security. It gives me the ability to worry 
about my kids in college and their future without having to 
have great financial concerns for my parents.
    But you are holding this hearing because Social Security 
has a financing problem that we all have to understand and 
address. Clearly, the sooner we resolve it, the less drastic 
the solutions will need to be.
    I would like to add my voice to those who think, however, 
that we have time to discuss wise and prudent adjustments. 
While in 1983, the Social Security Trust Fund was going to be 
insolvent in 2 months if Congress didn't act, today we have 30 
years to prevent a similar situation.
    So I think radically altering the system is not warranted. 
We can fix the projected shortfall with relatively minor 
changes to the system. Certainly privatization and gambling 
with retirement income is not the answer.
    As we search for solutions to our problems, we should also 
keep in mind the features of the program that work. Foremost 
among them is the availability of benefits to all workers who 
earned them, regardless of income. So I agree with the Social 
Security Advisory Council that we should reject means testing. 
Tying benefits to need sends the wrong message to workers and 
to beneficiaries, a signal that if they save for retirement, 
their Social Security could be reduced or lost.
    In addition, the program's progressive benefit formula 
already differentiates between those who are more highly 
compensated and those who are not. Low-wage workers receive a 
greater return on their payroll taxes than average and high 
earners. This practice works, but additional tilting away from 
those who earn more could punish productivity and create the 
impression that Social Security is, in fact, a welfare program. 
I think we know that nothing could be further from the truth.
    I believe that privatization would tilt the Social Security 
Program far away from low-wage workers by introducing a huge 
element of uncertainty into the economy and into a retiree's 
monthly income. I think we must reject this change. Currently, 
Social Security is the secure portion of a family's retirement 
portfolio. An individual's savings and investments now are the 
risk-taking element. Privatizing makes Social Security and an 
individual's retirement income subject to the whims of the 
stock market and the skills, or lack thereof, of a person's 
financial advisor. In short, gambling with our seniors' future 
livelihoods is unacceptable.
    With privatization, I believe we would be placing all of 
our retirement ``eggs'' in one unstable basket, risking 
scrambling all of our retirement plans.
    Proponents of privatization suggest that it will promote 
national savings, but shifting payroll taxes from the Social 
Security Trust Funds into individual accounts does not increase 
the national savings by one penny.
    It is my opinion that misinformation regarding Social 
Security has been spread by powerful groups determined to turn 
the entire fate of America's retirees over to Wall Street. In 
contrast, making reasonable modifications to restore Social 
Security's long-term imbalance is a far more sound and prudent 
course.
    Let me repeat. We have time to fix the problems. Social 
Security has stood the test of time and has proven to be a fair 
and successful program. We do not need to rush into unknown 
waters with privatization and other radical proposals. Our 
seniors and future seniors deserve to have this body take a 
moderate and deliberative approach to altering a program that 
has served so many so well for so long.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Bob Filner, a Representative in Congress from the 
State of California

    Along with the vast majority of Americans, I strongly 
support the Social Security program and believe that we have a 
responsibility to make it financially secure for generations to 
come!
    When I am in my Congressional District, I see this highly 
successful program at work. More than 63,000 residents of my 
district receive a Social Security benefit every month. Social 
Security provides a guaranteed benefit to 99% of retirees in 
the United States! Social Security provides a secure base for 
senior citizens and allows their children to concentrate more 
financial resources on their own families.
    However, we all realize that Social Security has a 
financing problem that we must address. The sooner we resolve 
it, the less drastic the solutions and the greater the lead 
time for people to adjust for their own retirement. I do want 
to point out, however, that we have time to discuss and decide 
on wise and prudent adjustments. In 1983, the Social Security 
Trust Fund would have been insolvent in two months if Congress 
had not acted. Today, we have 30 years to avoid a similar 
situation.
    Radically altering the system is not warranted--the 
projected shortfall in the Trust Fund can be fixed with 
relatively minor changes to the system. Privatization and 
gambling with retirement income is not the answer! The Social 
Security Administration has been aware of the problem posed by 
the retirement of the Baby Boom Generation for decades. Social 
Security has faced challenges in the past and can face this 
challenge of the future without dismantling the entire system.
    As we search for solutions to Social Security's long-term 
problems, we should think about the features of the program 
that work. Foremost among them is the availability of benefits 
to all workers who earned them, regardless of income. 
Therefore, I agree with the Social Security Advisory Council 
that we should reject means testing. Tying benefits to need 
sends the wrong message to workers and beneficiaries--a signal 
that if they save for retirement, their Social Security (to 
which they are currently contributing) could be reduced or 
lost.
    In addition, the program's progressive benefit formula 
already differentiates between those who are more highly 
compensated and those who are not. Lower-wage workers currently 
receive a greater return on their payroll taxes than average 
and high-earners. This practice works, but additional tilting 
away from those who earn more could punish productivity and 
create the impression that Social Security is somehow a welfare 
program. Nothing could be further from the truth.
    On the other hand, privatization would tilt the Social 
Security program far away from lower-wage workers, by 
introducing a huge element of uncertainty into the economy and 
into a retirees' monthly income. Therefore, we must reject this 
change. Social Security currently is the secure portion of a 
retirement portfolio. An individuals' savings and investments 
now are the risk-taking segment. Privatizing makes Social 
Security and an individuals' retirement income subject to the 
whims of the stock market and the skills, or lack thereof, of a 
person's financial advisor. In short, gambling with our 
seniors' future livelihoods is unacceptable.
    With privatization, we would be placing all of our 
retirement ``eggs'' in one unstable basket--risking scrambling 
all of our retirement plans!
    Proponents of privatization suggest that it will promote 
national savings, but shifting payroll taxes from the Social 
Security Trust Funds into individual accounts does not increase 
the national savings by one penny.
    Misinformation regarding Social Security has been spread by 
powerful groups determined to turn the entire fate of America's 
retirees over to Wall Street. In contrast, making reasonable 
modifications to restore Social Security's long-term imbalance 
is a more sound and prudent course.
    Let me repeat--we have time to fix the problems! Social 
Security has stood the test of time and has proven to be a fair 
and successful program. We do not need to rush into unknown 
waters with privatization and other radical proposals. Our 
seniors and future seniors deserve to have this body take a 
moderate and deliberative approach to altering a program that 
has served so many so well.
      

                                

    Mr. Bunning. Thank you for your testimony.
    Tom Petri.

STATEMENT OF HON. THOMAS E. PETRI, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF WISCONSIN

    Mr. Petri. Thank you very much, Mr. Chairman, for 
scheduling this very important Subcommittee hearing this 
afternoon.
    I appreciate the opportunity to testify on behalf of the 
Social Security reform plan outlined in my bill, H.R. 1611, the 
Retirement Security Act. You will no doubt hear from a number 
of Members who will point to the low interest earned by the 
trust fund, as it is currently required to be invested in 
Treasury securities. I'm sure this Subcommittee has seen all 
the data reflecting how well the typical retiree could have 
done if his or her contributions to the Social Security system 
had been invested in the stock market, for example, and 
received a return equal to that of an appropriate index fund.
    My bill seeks to use the benefits of the private market to 
place Social Security on a sound financial footing, as do a 
number of other reform plans. But more than that, I seek to 
maximize the magic of compound interest by beginning the saving 
for future retirees as soon as they are born.
    My plan would create a personal retirement account for each 
child born after the date of enactment, when his or her parents 
apply for a Social Security number at the hospital. The 
government would place $1,000 in the account when it was 
created. The parents or guardians would then choose among the 
same investment funds available to Federal employees today 
through the Federal Thrift Savings Plan. As you know, that 
plan's C fund and F fund have historically achieved much better 
returns than the Social Security Trust Fund. After reaching the 
age of majority, the accountholder would make the investment 
decisions among these funds.
    The accountholder would have the option of adding his or 
her own money, up to $2,000 a year tax free, in the account. 
However, even if nothing were added beyond the initial $1,000, 
if invested in the common stock fund, that amount could be 
expected to grow to around $700,000 in absolute terms by the 
time of retirement. In real dollars, at the historic average 7-
percent real rate of return for common stocks, that amount 
would be about $83,000.
    The crucial point is that that $83,000 would be just enough 
to pay completely for today's average Social Security benefit. 
It sounds amazing, but it's true. The keys are the 7-percent 
real rate of return and the long period of compounding. Since a 
7-percent rate of return doubles an investment every 10 years, 
roughly, the extra 20 years gained by starting these accounts 
at birth rather than at about age 20 makes the eventual account 
balance four times as large as it would otherwise be.
    All funds in these accounts, including private 
contributions, would be used first to pay whatever Social 
Security benefits were owed to the holder at retirement. So 
that would strengthen the fund for people that didn't 
participate. If the account holder died before becoming 
eligible, the funds could be used to pay the survivor benefits.
    Only after the account's funds were depleted would money be 
drawn from the Social Security Trust Fund. Should an 
individual, as a result of making additional contributions, 
have more available in the account than would be necessary to 
pay Social Security benefits for the rest of his or her life, 
there would be several annuity options available. The tax 
advantages of these accounts would make it worthwhile for many 
people to make private contributions even though a portion of 
those contributions might pay for Social Security benefits. In 
this way, future obligations of the Social Security Trust Fund 
would be further reduced.
    At recent birth rates, the cost of my bill would be about 
$4 billion per year. In order to pay for it, my bill calls on 
the President to issue a list of Federal assets to be sold each 
year, and Congress is to vote up or down on the entire list. Of 
course, the Federal Government sells assets every year anyway. 
However, this money is used for current spending. This is not a 
sound financial practice. If we are going to be selling off 
assets, we should use the money to invest in something which 
will gain in value over time, such as retirement accounts with 
real assets.
    Clearly, this bill is a long-term solution. The current 
system is expected to go bankrupt long before those who have 
not yet been born become eligible for retirement. Therefore, 
even if my bill is adopted, something will have to be done to 
keep the system solvent in the meantime. However, eliminating 
most of Social Security's obligations to all those retiring 
after a date 67 years in the future, at the small cost of $4 
billion per year in the interim, will make it far easier to 
deal with the problem of all those retiring before that date.
    How that is done I leave to you and others. But I do think 
that allowing a decent rate of return through investment in the 
private market is the key. However, I also think that it's 
essential that individuals rather than the government make the 
investment decisions in any such plan. Otherwise, placing such 
a massive amount of money into the stock market or other 
private investments, all controlled by the government, would 
essentially socialize the U.S. economy.
    You have a monumental task in front of you: To save the 
Social Security system for future generations, fulfill the 
promises made to current and soon to be retirees, correct the 
flaws in the current system, and do it all in a way which is 
politically possible. This will not be an easy task, but I'm 
gratified that you have begun the process and I hope I have 
made a small contribution toward that end.
    [The prepared statement follows:]

Statement of Hon. Thomas E. Petri, a Representative in Congress from 
the State of Wisconsin

    I appreciate this opportunity to testify on behalf of the 
Social Security reform plan outlined in my bill H.R. 1611, the 
Retirement Security Act. You will no doubt hear from a number 
of members today who will point to the low interest earned by 
the Trust Fund as it is currently required to be invested in 
Treasury securities. I'm sure this committee has seen all of 
the data reflecting how well the typical retiree could have 
done if his or her contributions to the Social Security system 
had been invested in the stock market, for example, and 
received a return equal to that of an appropriate index fund.
    My bill seeks to use the benefits of the private market to 
place Social Security on a sound financial footing, as do a 
number of other reform plans. But more than that I seek to 
maximize the magic of compound interest by beginning the saving 
for future retirees as soon as they are born. My plan would 
create a personal retirement account for each child born after 
the date of enactment. The government would place $1000 in the 
account when it was created. The parents or guardians would 
then choose among the same investment funds available to 
federal employees through the federal thrift savings plan. As 
you know, that plan's C fund and F fund have historically 
achieved much better returns than the Social Security Trust 
Fund. After reaching the age of majority, the account holder 
would make the investment decisions among these funds.
    The account holder would have the option of adding his or 
her own money, up to $2000 a year tax free, in the account. 
However, even if nothing were added beyond the initial $1000, 
if invested in the common stock fund, that amount could be 
expected to grow to around $700,000 in absolute terms by the 
time of retirement. In real dollars, at the historic average 7% 
real rate of return for common stocks, that amount would be 
about $83,000.
    The crucial point is that that $83,000 would be just enough 
to pay completely for today's average Social Security benefit! 
It sounds amazing, but its true. The keys are the 7% real rate 
of return and the long period of compounding. Since a 7% rate 
of return doubles an investment every 10 years, the extra 20 
years gained by starting these accounts at birth rather than 
about age twenty makes the eventual account balance 4 times as 
large as it would otherwise be. All funds in these accounts, 
including private contributions would be used first to pay 
whatever Social Security benefits were owed to the holder at 
retirement. If he or she died before becoming eligible, the 
funds could be used to pay the survivor benefits. Only after 
such funds were depleted would money be drawn from the Social 
Security Trust Fund. Should an individual, as a result of 
making additional contributions, have more available in the 
account than would be necessary to pay Social Security benefits 
for the rest of his life, there would be several annuity 
options available. The tax advantages of these accounts would 
make it worthwhile for many people to make private 
contributions even though a portion of those contributions 
might pay for Social Security benefits. In this way, future 
obligations of the Social Security Trust Fund would be further 
reduced.
    At recent birthrates, the cost of my bill would be about $4 
billion per year. In order to pay for it, my bill calls on the 
President to issue a list of federal assets to be sold each 
year and Congress is to vote up or down on the entire list. Of 
course, the federal government sells assets every year anyway. 
However, this money is used for current spending. This is not a 
sound financial practice. If we are going to be selling off 
assets we should use the money to invest in something which 
will gain in value over time--such as retirement accounts with 
real assets.
    Clearly, my bill is a long term solution. The current 
system is expected to go bankrupt long before those who have 
not yet been born become eligible for retirement. Therefore, 
even if my bill is adopted, something will have to be done to 
keep the system solvent in the meantime. However, eliminating 
most of Social Securities' obligations to all those retiring 
after a date 67 years in the future, at the small cost of $4 
billion per year in the interim, will make it far easier to 
deal with the problem of all those retiring before that date. 
How that is done I leave to others. I do think that allowing a 
decent rate of return through investment in the private market 
is the key. However, I also think that it is essential that 
individuals rather than the government make the investment 
decisions in any such plan. Otherwise, placing such a massive 
amount of money into the stock market, or other private 
investments, all controlled by the government, would 
essentially socialize the U.S. economy.
    This committee has a monumental task in front of it: To 
save the Social Security system for future generations, fulfill 
the promises made to current and soon to be retirees, correct 
the flaws in the current system, and do it all in a way which 
is politically possible. This will be no easy task but I am 
gratified that the committee is holding these hearings and has 
begun to try to tackle this issue.
      

                                

    Mr. Bunning. Tom, thank you very much.
    Dan Miller, if you would like to begin.

STATEMENT OF HON. DAN MILLER, A REPRESENTATIVE IN CONGRESS FROM 
                      THE STATE OF FLORIDA

    Mr. Miller. Thank you very much, Mr. Chairman. I have a 
written statement that I will submit for the record.
    Mr. Bunning. Without objection, it will be put into the 
record.
    Mr. Miller. Thank you.
    Thank you for having this hearing. This is part of the 
process of moving toward saving the Social Security system. It 
is one of the programs that we all agree, Democrats and 
Republicans, that we need to save and strengthen and preserve 
for future generations.
    The time is right that we can now address this issue, 
because, first of all, we're moving toward a balanced budget 
and it gives us that opportunity. And we have about 15 years 
before the cash flow turns negative in the Social Security 
Program. The sooner we address the problem, the easier and less 
painful it's going to be as we work toward a solution.
    My congressional district, as you may know, since in your 
former career you visited there, and Mr. Petri's in-laws are 
retired residents in my district--has more seniors than 
anywhere else in terms of the country, in terms of 
congressional districts, so issues of seniors are of great 
concern to me. During the Medicare debate during the past 2 
years, I spent a large amount of time visiting mobile home 
parks, condominiums, retirement areas, talking with seniors and 
listening and learning their concerns. So, it is an issue of 
great concern to me. It's not just for the seniors but the 
biggest part of my economy is related to the senior citizens. 
It affects everybody in my particular district.
    We all understand the problem. I call it the 2010 problem, 
where 2010 is 65 years after the end of World War II. That 65 
years is when the baby boom started, and that's when they start 
retiring, 65 years after 1945. So it's a demographic problem. 
We talk about Florida having senior citizens. But the entire 
United States is going to look like Florida within not too many 
years as the baby boomers start retiring and as the population 
starts to age. We don't have a trust fund like people think we 
have. We have to have a trust fund to really pay for this 
problem.
    The solutions: A couple of my colleagues talked about 
solutions. There are different options. We've had some 
commissions that have addressed the issue. There's a lot of 
experts on the issue. The most recent commission came up with 
several options but couldn't agree. What we need to do is move 
toward a commission to address that problem. I personally think 
we should move toward the direction of at least part of the 
Social Security money being used in private investment, to have 
some control over it. I don't think we will be able to move 
totally to that type of system. But whatever we do has to be 
done in a bipartisan fashion.
    Just like Medicare. There was a great model used this year 
in Ways and Means, passed by your Committee by a 36 to 3 vote, 
and passed similarly in the Senate. But the fact is it's 
bipartisan. If we don't address this in a bipartisan manner, 
it's not going to happen.
    Let me make two recommendations right now. One is, on this 
commission that's a part of our budget, we have got to make 
sure the composition of the commission is one that will come up 
with recommendations that this Congress and the President will 
accept. When Mrs. Clinton developed the health care plan, she 
developed it in secret. It never even passed through a 
Democratic Ways and Means Committee. The Kerrey Commission came 
up with ideas but it didn't get the full support of Congress. 
So whatever the membership of that commission, it's got to have 
membership that will work closely with this Congress and with 
the next Congress, Democrats and Republicans, and with the 
administration. So the composition of this commission, in my 
opinion, is very important, based on the experience we've had 
with past commissions.
    The other recommendation is education. I was very involved 
in education on the Medicare issue over the past 2 years. I 
worked with seniors and tried to understand their concerns. 
Ninety-five percent of the American people, approximately, know 
there's a problem with Social Security. As for the younger 
people, most of them believe in UFOs than think Social Security 
will be there for them. So people are aware that there's a 
problem.
    In listening to seniors talk, one of the things I found is 
that people have stereotyped the seniors, that ``we all just 
want more for ourselves.'' Seniors lived through the Great 
Depression. Seniors lived through World War II. They know what 
sacrifice is, and they understand the problems. They are 
concerned about their children and grandchildren's future. I 
think seniors want to be part of the solution, and we want to 
make sure they're a part of it, but not the only solution. They 
want to contribute to the solution and make sure it's a fair 
solution.
    I think the basic message should be to assure everybody 
that Social Security is going to be there for the current 
retirees, that they're not going to lose anything. It's very 
important that we assure them it's going to continue to exist. 
We also need to get the message out that Social Security was 
intended as a supplemental source of income, not the only 
source of income. We need to encourage people to have IRAs and 
401(k)s and move in that direction. And we need to make people 
aware that the trust fund does not exist. There are no cash 
reserves.
    As we move toward a negative cash flow in Social Security, 
we have got to address that issue. The trust fund moneys are 
not there. I think we can address the issue and come up with 
common sense solutions that's a ``win, win, win.'' It has to be 
a win for the seniors, a win for our generation, and it has to 
be a win for the younger generation. It can be by a combination 
of allowing some direction of private investment of the total 
amount of Social Security.
    I'm glad that as we move toward the balanced budget, we can 
address the issue now. I'm excited that your Subcommittee is 
moving in that direction.
    Thank you for allowing us to testify today.
    [The prepared statement follows:]

Statement of Hon. Dan Miller, a Representative from the State of 
Florida

    Mr. Chairman and members of the Social Security 
subcommittee, thank you for the opportunity to testify today 
and share my concerns about the current path of Social 
Security. As you may know, I represent the Congressional 
district that has more seniors than any other so the solvency 
of Social Security, like Medicare, is especially important to 
me and my constituents. But I am also concerned about the 
viability of this program not only for today's seniors but for 
their children and grandchildren.
    Congressional Budget Office figures show that entitlement 
spending accounted for 55 percent of our Fiscal Year 1996 
budget. This percentage is expected to rise as Baby Boomers 
retire and become eligible for both Social Security and 
Medicare. Without reform, entitlements will eventually consume 
our entire budget and our deficit and debt will explode. 
Already, a child born today will pay $187,000 in taxes over his 
lifetime just for interest on the current debt.
    This is why I believe the moral challenge of our time is to 
balance our budget so that our children can have a brighter, 
freer and more prosperous future, but to do this, we must have 
the courage to reform Social Security so that all Americans are 
secure in their retirement years. Specifically, I believe we 
should consider reform proposals which allow workers to direct 
at least a portion of their Social Security tax into a private 
investment account. This is especially important given the 
tremendous demographic changes we will witness in the 21st 
century.

                 From Baby Boom to Social Security Doom

    In 1900, only one in twenty-five Americans was over sixty-
five. The vast majority of these people were self-supporting or 
supported by their families. In 1935, when Social Security was 
created, forty-five workers were paying into the system for 
every retiree drawing benefits.
    Today 31.2 million Americans are over 65 and the ratio of 
workers to retirees is about 3 to 1. By 2040, one out of every 
four or five Americans will be over sixty-five, and the ratio 
of workers to retirees could be lower than 2 to 1. These 
numbers are not fictional. They come from the 1996 Social 
Security Administration Board of Trustees Report. As the Baby 
Boomers cross into retirement and life expectancy continues to 
increase, the number of Americans eligible for Social Security 
increases at a rapid rate. Meanwhile, the ratio of workers 
paying taxes to support the elderly inversely decreases. So, as 
good as it has been, Social Security is fundamentally 
unsustainable in its current form and the American people know 
it.

        Specific Recommendations to Congress as We Move Forward

An Education Campaign

    As early as 1995, 47 percent of Americans said that Social 
Security was not ``a good program for today's younger 
workers.'' And I am sure you have all heard that more young 
people today believe they will see a UFO before they will ever 
receive a Social Security check. Americans--young and old--know 
there is a problem, but they are not sure why this problem 
exists or how to solve it. Further, many seniors and Baby 
Boomers think Social Security is intended to be their sole 
source of retirement income and that the Trust Fund really 
exists. It is just such confusion and misinformation that I 
believe to be the largest obstacle to Social Security reform.
    I know this because I conducted many town hall meetings on 
Medicare during the public debate last year. Medicare, as you 
may remember, was a very volatile issue. But once I explained 
to Seniors in my district that Medicare would go broke if we 
didn't make changes, they began to view reform in a positive 
light. Seniors care about this great country and they care 
about their children and grandchildren. They want to be part of 
the solution, but they need reliable information first.
    We need to develop a similar education campaign which 
dispels the myths and tells the truth about Social Security: 1) 
SS was intended to be supplemental income 2) There is no money 
in the Social Security Trust Fund and 3) We can save the system 
if we make common sense changes. This campaign must clearly 
explain the reform options and allow for thorough debate and 
discussion among senior citizens, Baby Boomers and young 
people. I have come before the committee today to emphasize how 
important it is to bring these groups together as we begin 
discussing options for reform.
    There will also be legitimate questions raised that must be 
clearly answered if we are to succeed. For instance, many 
people are concerned that if Social Security were privatized 
that a recession or stock market crash could devastate 
retirement savings. While we cannot predict the future, studies 
have shown that for investors holding corporate securities over 
any 20-year period that the best return was 12.6 percent and 
the worst return was 1 percent. The worst case was still a 
positive return and ironically just one point shy of the 
current Social Security rate of return. Since savings would 
begin at an early age, participants could greatly benefit from 
the market's long-term financial growth irrespective of the 
market's short-term ups and downs.
    Another concern that has been voiced is that many people 
don't understand how to manage their money. But my question is 
``Don't we trust the American people?'' Every day Americans 
make important choices. They choose elected officials, spouses 
and how to spend their after-tax dollars. Furthermore, any 
change would be set up like a 401K plan or an IRA. In other 
words, participants would have some limit to their investment 
choice--so Americans couldn't invest their retirement savings 
in a junk bond or high risk venture.
    Finally, Americans want proof that reform can work and that 
it will be advantageous to all Americans. We can provide them 
with both an international and a domestic example. Chile was 
one of the first nations to adopt a Social Security system and 
in 1981 they became the first nation in the world to completely 
privatize one. They survived this transition and the benefits 
of privatization are compelling. Chilean retirement benefits 
have been anywhere from 50 to 70 percent higher under the new 
system.
    More importantly, we have already tried this here in 
America--and it works. In 1981, employees of Galveston County, 
Texas, chose by a vote of 78 percent to 22 percent to leave 
Social Security for a private alternative. In essence, the same 
amount is contributed from both the employee and employer as in 
Social Security, but is instead deposited into private 
investment plans. This change has made a world of difference to 
county employees of Galveston. First Financial Benefits Inc., 
which originated and administers the plans, reports that a 
person retiring today at age 65 with 40 years of deposits and 
an annual salary of $20,000 would retire with $383,032 in a 
personal account. This means that a retired $20,000-per-year 
worker with the personal retirement account would receive 
$2,740 each month at current interest rates, while Social 
Security benefits would be closer to $775. And this is the 
lower end of income, the benefits significantly increase for 
those with higher salaries.
    But if the benefits are so much better, why aren't more 
Americans opting out of Social Security like the people of 
Galveston? The reason is that Congress passed a law in 1983 
which prohibited the American people from following the 
Galveston County example. In other words, the American people 
were forced to participate in a low-yielding retirement program 
which supposedly funded a Social Security Trust Fund.

               But Is there a Social Security Trust Fund?

    American workers pay 15.4 percent of their income to 
provide Social Security for themselves and their families in 
retirement. But, each American does not have his own special 
account where his huge payroll tax contribution is stored. 
Social Security does not invest the majority of the money it 
collects each year. Instead, 90% of annual payroll tax receipts 
are paid out as benefits to current social security recipients.
    This pay-as-you-go system does not allow for the 
accumulation of wealth. Social Security's rate of return is 2.9 
percent compared to 9.3 percent in the private market. 
Simplified this means that a 50-year old person has to 
contribute $1,000 to get $1,900 worth of benefits at age 75. In 
a private market, that person would only have to invest $206 to 
get the same benefits. While I am not advocating that the 
government invest Social Security dollars in the private 
market, I do believe individuals should have the option for the 
greatest return on their retirement savings--particularly since 
this savings is compulsory. The obvious lack of return has been 
acknowledged by the Social Security Trustees in their report 
which offers three options for reform.

     Advisory Council on Social Security--A Critique of the Options

Option 1: Maintaining Benefits Plan

    On January 6, 1997, the 1994-1996 Advisory Council on 
Social Security issued its report on ways to solve the 
program's long-range financing problems. Because the Council 
could not reach a consensus, the report contains three 
different proposals that are intended to restore long-range 
solvency to the Social Security system. The first proposal, 
labeled the ``Maintaining Benefits'' plan, keeps the program's 
benefit structure essentially the same by imposing tax 
increases and minor benefit cuts. To close the remaining 
financial gap, it recommends trust fund investment in the stock 
market be considered.
    After examining the demographics, let's consider the 
magnitude of the tax increases necessary to maintain current or 
slightly reduced benefits in the 21st century. By 2040, the 
cost of Social Security (without reforms) as a share of worker 
payroll is expected to rise from today's 11.5 percent to 22 
percent. Add Medicare Part A, which currently costs the 
equivalent of 5.3 percent of payroll and is expected to rise to 
8 percent by 2030, and at least 30 percent of every worker's 
paycheck will go to the federal treasury before we even start 
to pay for the rest of what government does. Tax increases of 
this size would devastate the economy and destroy opportunities 
for young American families.
    The taxpayer is already overburdened by the federal 
government's runaway spending. In fact, Americans are spending 
more on taxes than food, clothing, shelter and transportation 
combined. Of 365 days this year, Americans will spend more than 
half of them effectively laboring for the government. According 
to Americans for Tax Reform, it was not until July 3 of this 
year that people finally started working for themselves. This 
is unacceptable and given the ``Maintaining Benefits'' option 
proposed by the Advisory Council this date will continue to 
fall later with each passing year. For these reasons, I do not 
believe this first option is true reform--instead, it is 
reminiscent of other short-sighted, quick fixes applied to 
Social Security over the years.

Option 2: Individual Account Plan

    The second alternative, labeled the ``Individual Account'' 
plan, restores financial solvency mostly with reductions in 
benefits, and in addition imposes mandatory employee 
contributions to individual savings accounts. This plan too 
would increase payroll taxes by an estimated 1.6 percent, but 
is less burdening to the taxpayer than the ``Maintaining 
Benefits'' option. The ``Individual Account'' is also a 
moderate improvement over the status quo because monies 
designated for an individual are invested and will have a 
higher rate of return.
    While the individual could allocate among different 
government-managed index funds, the concern is that these 
accounts would be held and invested by the government. We do 
not want that amount of wealth and capital to be controlled by 
the federal government. This would simply concentrate too much 
decision making authority and pose massive conflict of interest 
problems. In my opinion, the ``Individual Account'' option 
would not adequately reform Social Security.

Option 3: Personal Security Account Plan

    The third option, called the ``Personal Security Account'' 
plan, achieves long-range financial balance through a major 
redesign of the system that gradually replaces a major portion 
of the Social Security retirement benefit with individual 
private savings accounts. It would divert 5 percent of the 12.4 
percent payroll tax into a private account for each American. 
The remaining 7.4 percent would pay each beneficiary a flat 
retirement benefit and provide a safety net. Unlike the 
Individual Accounts which would be held by the government and 
annuitized upon retirement, these accounts could be placed with 
private investment companies and individuals would have broader 
choice over how the savings are paid out during retirement.
    Of the three options offered by the Advisory Council, the 
``Personal Savings Account'' plan offers Americans what they 
deserve--the opportunity for the highest rate of return on 
their retirement savings. And, I believe this should be a main 
component of any future congressional legislation.

                How Soon Is Congressional Action Needed?

    We need to begin the education campaign today. I encourage 
each of you over the August recess to begin the dialogue and 
tell the truth about Social Security. There are many grassroots 
organizations that have begun this process. We should encourage 
them and help by participating in the debate. The longer we 
wait the more expensive and more painful this transition will 
be. We owe it to our children--the future of our country--to 
reform Social Security now.
    I want to thank the Chairman and the Social Security 
subcommittee for this opportunity today to share my perspective 
as a Representative who has seen how providing clear, concise 
and honest information to Seniors transformed the Medicare 
debate in my district. It worked with Medicare and we must now 
communicate the realities of our country's future if Social 
Security is not reformed.
      

                                

    Mr. Bunning. Thank you, Dan.
    My good friend from Indiana.

STATEMENT OF HON. DAN BURTON, A REPRESENTATIVE IN CONGRESS FROM 
                      THE STATE OF INDIANA

    Mr. Burton. I want to thank my good friend, Mr. Bunning, 
the Chairman for this.
    I would just like to ask Dan one question. Aren't there 
UFOs? [Laughter.]
    Mr. Miller. No.
    Mr. Burton. It has been said that if we tinker with the 
Social Security system, we're gambling with a lot of people's 
futures. Conversely, I believe that if we don't do something 
about the Social Security system, we're not just gambling with 
their future but we're guaranteeing that they're going to have 
big problems.
    If you look at the statistics, it shows that the Social 
Security system is going to be insolvent by the year 2029, and 
over the past 10 years, that date has dropped eight times. It 
was way above 2029. It's going down every year because, when 
they figure it actuarially, they see that we're in deeper 
trouble than we thought we were the year before. So we have to 
come up with some innovative ideas to deal with this long-term 
liability.
    We're talking about over $5 trillion, five thousand billion 
or five thousand thousand million in Social Security Trust Fund 
liabilities, and that doesn't include the national debt. Now, I 
went down as a Member of the International Operations Committee 
to Chile--and I would like to submit my whole statement for the 
record, Mr. Chairman.
    Mr. Bunning. Without objection.
    Mr. Burton. I went down to Chile last year and I talked to 
them about their social security system. I know that the 
population is much smaller down there, so it would be a much 
more difficult problem to implement that up here. But it is 
something we ought to look at.
    That country was in dire jeopardy of complete chaos. They 
had hyperinflation, and in large part it was caused because of 
the unfunded liability in social security and they had to print 
money to pay the bills. So they hired an American college 
professor to come down there, who had economics expertise, and 
he came up with a plan that they thought might work. They 
advertised it on television.
    What it involved was the employer and the employee, just 
like we do here in this country, are taxed, but the money goes 
into a private investment pension fund. Those who choose to go 
into it would be able to pick, within certain parameters, what 
those investments would go to. They couldn't get into 
speculative stocks or gold stocks or anything like that. But 
blue chips and things that were on the approved list could be 
invested in.
    They expected that they would get 2 or 3 percent of the 
population to invest in the first year, if they were lucky. 
Twenty-five percent went into it in the first year. Now they 
have 93 percent participation and they have the most burgeoning 
economy in all of Latin America.
    Now, the next question is, how do you deal with the people 
who are already retired or about to retire that can't get into 
the new plan? What they did there was they sold long-term 
bonds, and they paid those off incrementally over the years to 
take care of the unfunded liability. But the people who are 
young, who wanted to have a retirement plan, went into the new 
one. Now 93 percent of them are in it and they're very happy 
and the economy is really going bananas.
    Now, these people are going around with their little cards 
and going to computers all over the country, and they check on 
a daily basis to see how much their investment has improved. 
This was a communist country under Allende. You couldn't get 
them to go back to communism with a ball bat, because they see 
what their investments, through free enterprise and free 
investment, is doing for them.
    Now, we face something in this country that is very dire. 
Are we going to have a bankrupt Social Security system, or 
hyperinflation, because we're trying to pay bills that we can't 
possibly pay, and have the young people around here saying 
there won't be anything left for them when they retire in 60 
years, 30 years or 40 years? Because that's what we're facing. 
We have to come up with an innovative idea to deal with this.
    I submit to you that the CATO Institute, the Chilean 
Government, the professor that worked on this down there, 
should be consulted by this commission or this Subcommittee, 
and we should look at that very seriously. I think it will 
work----
    Mr. Bunning. Congressman Burton, he has already been 
consulted.
    Mr. Burton. He has? Well, what do you think?
    Mr. Bunning. Well, he, along with all of your ideas and all 
of the other people we're listening to, will be eventually----
    Mr. Burton. As usual, Mr. Chairman, as a ``hall of famer,'' 
you're ahead of the pack. [Laughter.]
    I just want you to know that I'm very happy that----
    Mr. Bunning. The ``Social Security Hall of Fame,'' of 
course.
    Mr. Burton. Of course. Maybe a little baseball, too.
    Let me just say, Mr. Chairman, that I'm happy that that's 
the case. I hope that you and your colleagues on the 
Subcommittee, and the commission, whatever it happens to be, 
will look favorably upon this kind of an approach. Because I 
really believe it's the only solution to the problem.
    With that, thank you very much.
    [The prepared statement follows:]

Statement of Hon. Dan Burton, a Representative in Congress from the 
State of Indiana

    Chairman Bunning: Every American looks forward to the day 
that they can retire. The New Deal guaranteed that the Federal 
government would save a portion of every working American's 
hard earned salary, over their lifetime, for their retirement. 
We have made a solemn promise to the American people to return 
their money in the form of a monthly annuity after they retire. 
Due to unsound policy, we are in jeopardy of breaking our 
promise to the American people.
    The Social Security system in the United States is facing 
profound financial insolvency. According to the latest report 
of its Board of Trustees, the Social Security system will be 
insolvent in the year 2029. Last year their report announced 
insolvency in 2030, in fact, in the past ten years the 
insolvency date has been lowered eight times. Very simply, we 
have already spent the money that we had promised to save for 
the retirement of our seniors. We have taken their money out of 
the Social Security Trust Fund, and replaced it with IOU's. 
Depending on how it is measured, this unfunded liability of the 
system ranges from $3 trillion to $5 trillion. In addition to 
these IOU's, the Federal debt currently exceeds $5 Trillion. 
Mr. Chairman, the American people owe nearly $10 Trillion 
dollars. Given the current budget agreement, how do we expect 
to pay $5 trillion back to the Trust Fund? Where is the plan 
for the repayment of this debt? Even if we could find a way to 
pay for this debt, the trust fund will still be completely 
exhausted in 2029.
    We could pay back the Trust Fund and continue to fund a 
Social Security System through a series of conventional reforms 
that include raising payroll taxes and reducing future 
benefits. I contend that raising taxes on the young, and 
slashing the benefits for the retired, is a blatant violation 
of our promise to the American people.
    The American-people want their money back, and rather than 
allowing the Federal government to save their money for them, 
they want to save it themselves. Allowing Americans to invest 
in Personal Security Accounts (PSA's), similar to Individual 
Retirement Accounts (IRAs) and 401Ks, will allow Americans to 
see their retirement savings as an asset, not as some dubious 
Federal promise. These accounts would be fully portable and 
stay with the employee from one employer to the next. 
Individuals would be free to invest their money through 
qualified money management companies in bonds, stocks and other 
investments. Government control would then be limited to 
defining the options that could be offered for investments in 
order to limit riskiest speculation. Even the Social Security 
Advisory Council has proposed limited privatization. Similar 
proposals have proven highly successful in Chile and in a 
number of other countries.
    I have witnessed the success of the Chilean system first-
hand. Under Chile's PSA system, neither the worker nor the 
employer pays social security tax to the state. Instead, during 
their working life they automatically have a percentage of 
their wages deposited into their own PSA account. Chileans 
choose from one of the private pension fund administration 
companies to manage their PSA. A separate government agency 
provides oversight over this program to prevent theft and 
fraud.
    Workers are free to change from one administrating company 
to another. This provides competition among the companies to 
provide a higher return on investment, better services, or 
lower commissions. This is very similar to the Federal Employee 
Health Benefits Plan (FEHBP), where people can choose between 
competing health plans to find the best benefits at the lowest 
costs.
    Each worker is given a PSA passbook so they can watch their 
savings grow. They receive quarterly statements informing them 
on how well their investment funds have performed. They use 
ATM-like machines that permit the workers to calculate the 
expected value of their future pension based upon their 
contributions, and the age at which they wish to retire. 
Conversely, a worker may type in how much money they want to 
receive when they retire, and at what age, and the computer 
will tell them how much they will need to contribute to achieve 
their desired outcome.
    Upon retirement, a worker may choose from two general 
payout options. A retiree may use the capital in their PSA to 
purchase an annuity from any private life insurance company, or 
the retiree may leave his funds in the PSA and make programmed 
withdrawals, subject to limits based on the life expectancy of 
the retiree and his dependents. If there is money left in the 
retiree's PSA account upon their death, the remaining funds in 
their account form a part of his estate.
    The Chilean system has a strong safety net for those who 
have contributed to the system. Retirees who have contributed 
to the system for at least 20 years, but who's PSA, upon 
reaching retirement age, is below the legally-defined minimum 
annuity, receives the minimum annuity from the state once his 
PSA has been depleted. Those that have not contributed for 20 
years are also protected by the safety net. They are able to 
apply for a welfare-type supplement to the pension that they 
have saved. The PSA system also includes insurance against 
premature death and disability. Insurance policies are funded 
through private insurance companies, and paid through a nominal 
payment to the company that administers the retirement account.
    The Chilean reforms also recognized that the employer's 
contributions that were being made on behalf of the employees, 
belonged to the employees. They included these contributions as 
a part of the employees earnings. By renaming the employer's 
contribution, the system makes it evident that workers make all 
contributions to their PSAs out of their wages.
    How to make the transition from our current pay-as-you-go 
Social Security system to a system of PSA accounts is the 
question most people ask. One thing is clear, we must ensure 
that:
    1. The government guarantees those already receiving a 
Social Security that their monthly payments would be unaffected 
by the reforms.
    2. All employed people already contributing to the Social 
Security System should be given the choice of staying in the 
current system, or moving to the new PSA system. If they decide 
to switch to the PSA system their contributions to the Social 
Security System should be recognized in their PSA.
    3. All new entrants to the labor force would be required to 
enter the PSA system. The current pay-as-you-go Social Security 
System should be closed to new workers because it is 
unsustainable.
    When the PSA system was inaugurated in Chile in 1981, 
workers had the choice of entering the new system or stying in 
the old one. One fourth (\1/4\) of those eligible chose the new 
system, and joined in the first month of operation alone. 
Today, more than 93 percent of Chilean workers save for their 
retirement under the new PSA system. These PSAs are the 
property of each employee, and are the primary source of 
retirement security for Chileans. These PSA accounts have 
become the number one asset for Chileans. It is a real tangible 
asset that, for many Chileans, is worth more that the equity in 
their homes.
    Before the end of this century, several other countries, 
including many of our neighbors, will have privatized their 
government-run retirement systems using the Chilean model. This 
will mean a massive redistribution of power from the state to 
individuals, enhancing personal freedom for all, promoting 
economic growth, and securing the retirement of all seniors.
    Finally, the Chilean reforms have had a very important 
political and cultural impact. The new PSA system has given 
Chileans a personal stake in the economy. Chileans are 
personally interested in the behavior of the stock market, and 
the movement of interest rates. They understand that their 
retirement depends on the well-being of the economy, and their 
contribution to it. They no longer worry about whether or not 
their pension check will come when they retire. They know it 
will, because they have the money in an account with their name 
on it, and have seen it grow as a result of their efforts.
    Americans today, face the same concerns regarding whether 
or not Social Security will be there for them when they retire. 
The United States Government has made a promise to the American 
people to keep their retirement safe, and I for one intend to 
keep that promise. Mr. Chairman, we need to give the American 
people their money back. I am confident that they will be able 
to look after it better than we in Congress ever could.
    Thank you for your time today Chairman Bunning.
      

                                

    Mr. Bunning. I thank the panel.
    We will ask the next panel to step forward. Congressmen 
Lindsey Graham of South Carolina, Mark Neumann of Wisconsin, 
Mark Sanford of South Carolina, Dennis Kucinich of Ohio, and 
John Tierney of Massachusetts. We have four out of five.
    Mr. Graham, would you please begin.

 STATEMENT  OF  HON.  LINDSEY  O.  GRAHAM,  A  REPRESENTATIVE  
      IN  CONGRESS  FROM  THE  STATE  OF  SOUTH  CAROLINA 

    Mr. Graham. Thank you, Mr. Chairman, and thanks for having 
the hearing. I think it takes a lot of courage to openly talk 
about this in public. But apparently you're like Dan said, way 
ahead of the ball game. The details are coming from Mark 
Neumann and Mark Sanford, and I'm sure from Mr. Kucinich here.
    I want to make a comment or two to people who are not here, 
to the President. I'm sure he's out doing things that he needs 
to be doing as President. But he has made an effort to try to 
create a legacy for himself about race. I admire him for doing 
so. That's something the country needs to talk about. But there 
are some things we can and cannot do, and we'll do what we can 
on that issue.
    But we certainly can, in both parties, do something about 
Social Security. What I am here to do is encourage you and 
others to continue the fight that you've started. The country 
is dying to be led on this issue. They're way ahead of us. 
There is no one in my district who doesn't understand that 
Social Security has a problem. We're the only people in the 
world, I think, afraid to talk about this.
    I would encourage the President to sit down with you and 
others and try to create a legacy that really will be of 
benefit to many, many people. That is to come up with a plan to 
save Social Security, do something about Medicare, and reform 
the welfare system. All these are entitlements. But Social 
Security, as everybody has told you probably ad nauseam, is not 
going to make it.
    My aunt and uncle are 67 and 68 years of age. They had no 
IRAs. They worked in the cotton mills all of their lives. They 
live off of Social Security and they have Medicare for their 
health care. We can't do anything in a reform measure that 
would jeopardize them because they've got no place to go. We're 
two or three generations deep with people who did not have the 
opportunity to save outside of Social Security because the 
cotton mills in South Carolina didn't have a private pension 
plan. I'll bet you in Kentucky a lot of employers during the 
fifties, sixties and seventies did not have private pension 
plans. So Social Security was it.
    To those people we're going to keep our word and we're 
going to maintain the solvency of this system. But to my 
cousins who are in those same cotton mills, they have a chance 
to save. We're going to improve that with the tax bill. They 
have IRAs. They have 401(k) plans. That's good, but it's not 
enough. We need to take the involuntary withholding that we're 
doing today and give them a chance to do what Dan Burton talked 
about, so that when they're my aunt and uncle's age, they don't 
have to ask their nephew every time he comes back from Congress 
``What are you going to do with Social Security and am I in 
trouble? What are you going to do with my Medicare?''
    I can't tell you strongly enough how many senior citizens 
in my district who are trapped in the Medicare and Social 
Security system, with no way out, who live in dread of what we 
do. They're afraid about what we may do. They hope we do 
something for their grandchildren, but they're worried about 
themselves.
    It's a dilemma that need not exist in this country. We're 
very smart and we've gone through a lot of problems in our 200-
plus year history. This is one time politicians are way behind 
the people. The people are ahead of us. They want to be led. 
Let's do some leading. I encourage the President, and anybody 
from the administration that may be here today, don't worry 
about the public. The public is with us. They want their 
grandchildren to have a future, and they want what is due them. 
We can do both. Let's lead. Let's don't be afraid of the 
voters.
    I love the job, but I don't want the job if I can't talk 
honestly about why Social Security is going broke. I would like 
to help President Clinton be a historic figure. The only way he 
is going to achieve that goal, in my opinion, given the 
peacetime world, which is good news, is to head directly into 
the entitlement reform debate and join us, and join you, Mr. 
Chairman, to fix Social Security before we run out of time.
    Thank you very much.
    [The prepared statement follows:]

Statement of Hon. Lindsey O. Graham, a Representative in Congress from 
the State of South Carolina

    Mr. Chairman, I appreciate the opportunity to testify on 
this most important issue. By holding this hearing and inviting 
your colleagues to bring their suggestions to the table, you 
have shown great leadership and I commend you for your efforts.
    Social Security, by which I mean the Old Age and Survivors 
Insurance portion of the program, has served the nation and our 
nation's seniors well for many years. The program was 
originally designed to offer all Americans what President 
Franklin Roosevelt's Administration referred to as a ``floor of 
protection'' against destitution in old age. The program 
worked. The poverty rate among our nation's elderly has dropped 
significantly.
    However, while we have significantly improved the condition 
of our nation's elderly, the current system has left us with 
significant demographic difficulties and severe budgetary and 
economic outcomes.
    For young people, actuarial realities indicate that the 
current system will never provide them with sufficient 
benefits. In all likelihood, they will pay in far more than 
they will ever receive. We know that the significant payroll 
taxes faced by today's workers has hindered economic and job 
growth.
    It is also important to note that those with less than full 
life expectancies, in particular black Americans, do not 
receive much from the old age benefits. In 1992, the average 
age of death for black men in the United States was 55.3 years 
old, almost ten full years short of receiving full old age 
benefits.
    According to the Social Security Trust Fund trustees, under 
the current system Social Security tax revenues plus interest 
on the Trust Funds will be insufficient to pay current benefits 
by the year 2020. However, much earlier than that, in about 
2013, current tax revenues will no longer pay for current 
beneficiaries. If the system remains as it is and benefits are 
maintained at current levels, the payroll tax will have to rise 
from 12.4 percent to 19 percent. A payroll tax increase of this 
magnitude is economic suicide.
    It is time to admit the obvious. Common sense tells us that 
the current system must be changed.
    I believe that the public is ahead of us on this issue. 
They know that changes must be made. The young people in 
America today do not believe they will ever see any Social 
Security benefits. Moreover, America's seniors don't want to 
bury their children and grandchildren under a mountain of 
payroll taxes to prop up an untenable system.
    We face a generational deficit that must be addressed and 
must be addressed soon. The longer the Congress waits to take 
action, the more difficult and divisive the solutions will be.
    I do not believe that we can continue a pay-as-you-go 
publicly-funded retirement program that is totally dependent on 
the federal government.
    Pay-as-you-go systems unlike fully funded plans, provide 
benefits to the elderly that are tied not strictly to their own 
lifetime contributions, but mainly to taxes on younger 
generations of active workers. These systems depend critically 
on the support ratio--the number of people in the prime labor 
force participation age groups of 20 to 64 available to support 
pensions of those aged 65 and over. These support ratios have 
been falling in the United States. In the U.S., the ratio has 
declined from 7.1 in 1950 to 4.7 in 1990, and it is expected to 
drop to 3.3 in the year 2020. This is a demographic nuclear 
weapon aimed right at our federal budget and our nation's 
economy. And the fuse gets shorter every day.
    What should we do? We should continue some of the steps the 
Congress has taken over the past two and a half years: raising 
the earnings limitation, simplifying pension regulations to 
allow more companies to offer simple pension plans, working to 
expand individual retirement accounts, balancing the budget and 
providing tax relief to help Americans better save for their 
retirement.
    Additionally, all serious proposals to alter the Old Age 
and Survivors Insurance program must be considered in order to 
protect benefits for seniors, our federal budget from 
disastrous deficits, and future generations from devastating 
taxes. Wealth Testing. Privatization. Private accounts with 
compulsory savings. Private sector investments. All of these 
should be given an open hearing and receive the thoughtful 
scrutiny that they deserve.
    I would also suggest that the Congress approve a 
demonstration program similar to the one implemented last year 
for Medical Savings Accounts. A certain number of individuals 
would be allowed to partially opt out of future Social Security 
old age benefits in exchange for a lower payroll tax.
    Lastly, we must work to ensure that the American people 
receive better, more accurate information about the current 
state of the Social Security system and what their likely 
return on the taxes will be.
    However, we need to be clear on one point. While the 
Congress works to protect the future of America's young workers 
and families, we must keep the promises made to our nation's 
senior citizens.
    That said, time is short.
    It is time for us to lead and to act.
    As a nation we have overcome problems and challenges in our 
past and we will overcome them in our future. We have faced 
great challenges with determination, will, persistence and a 
calling to do what is right for future generations.
    Again I thank the chairman for his leadership, and I look 
forward to working with him and other members of Congress to 
protect our nation's elderly, economy and posterity.
      

                                

    Mr. Bunning. Thank you, Lindsey.
    Mark Neumann, would you please begin.

STATEMENT  OF  HON.  MARK  W.  NEUMANN,  A  REPRESENTATIVE  IN  
           CONGRESS  FROM  THE  STATE  OF  WISCONSIN

    Mr. Neumann. Thank you, Mr. Chairman. I thank you for 
holding this hearing, too.
    As you well know, I am very, very concerned with the issue 
of Social Security, and I am very concerned in particular when 
we reach the year 2012 and there's not enough money coming in, 
how we're going to repay the IOUs that are currently in the 
trust fund.
    Social Security, as you know, is an extremely important 
program to my parents, to people of my generation, and to the 
younger generation. The problem that we have is, when we talk 
to young people, they don't believe Social Security is going to 
be there for them when they retire. As a result, they don't 
understand why we're taking money out of their paychecks and 
putting it into the Social Security system.
    One of the things that bothers me most, as we look at how 
people are addressing the problems that face the Social 
Security system, is most people start talking about the 
problems developing in the year 2029. In fact, the shortfall 
starts to occur in the year 2012, because the money that's in 
the trust fund, the nonnegotiable Treasury bonds, there is 
currently no plan on the table that would allow us to repay 
those nonnegotiable Treasury bonds.
    That's why we are about to introduce a bill, the National 
Debt Repayment Act, which would establish a stream of revenue, 
or perhaps put real assets in the trust fund, or whatever this 
Subcommittee deems the most appropriate way to do it. But one 
way or another, it's going to establish a means that, when we 
reach the year 2012, we're not going to have to go out to our 
senior citizens and say there's no money here for Social 
Security.
    I think, as I look at the situation, and as we study what's 
happening in Social Security today, what bothers me the most, 
and what bothers the senior citizens that I talk to, is that 
the government is taking money out of the paychecks of 
virtually every American. My 14-year-old son earned $900 mowing 
lawns last year, and the Social Security system took $128 from 
my 14 year old. They're taking money out of virtually every 
paycheck in America today, and they're taking more money out of 
those paychecks than what they're paying back out to our 
seniors in benefits.
    That extra money is supposed to be set aside in a savings 
account, but it goes into the general fund. The government 
spends everything in the general fund so, of course, there is 
no money left in the end. It then issues a nonnegotiable 
Treasury bond that doesn't even show up when we report our 
deficits of this country. That's wrong and that's a practice 
that needs to be stopped.
    We've had a lot of discussions on how we go about fixing 
that problem, and I'm not sure I'm smart enough to come up with 
the right answer. But I'm sure that as we start looking at this 
problem, and start thinking about the year 2012, something 
needs to be done because that's not very far away.
    If we do not address the problem now, we will shortly find 
ourselves in a situation where we have basically three choices. 
One choice is to tell seniors they're not going to get the 
Social Security benefits they've been promised. And from what 
I've seen of the folks in Washington, I don't think that's very 
realistic.
    The second choice is to go out and raise taxes on all the 
working people, and take more money out of their paychecks. And 
the third choice is to go to the employers and demand more 
money from the employers as well.
    There are some articles that I brought with me, and I would 
like to request that my entire statement be submitted for the 
record.
    Mr. Bunning. Without objection, it will be.
    Mr. Neumann. Thank you.
    There are a couple of articles to which I would like to 
call to the Subcommittee's attention. The Social Security Trust 
Fund is all part of the $5.3 trillion debt that faces our 
Nation today. When we start thinking about the IOUs in the 
trust fund, if you like, or any of those other debts, T-bills 
or whatever you want to call them, that make up this $5.3 
trillion debt, I would just like to call attention to this 
Subcommittee to the Washington Post article of June 24, 1997. 
It reported on a 192-point drop in the stock market on June 
23rd. The reason for the drop in the stock market is the 
Japanese Prime Minister announced that he was going to cash in 
United States T-bills if Japan didn't get a more desirable 
exchange rate on the yen to the dollar. He issued the first 
threat that I can remember to cash in T-bills to upset the 
financial stability of our Nation if he didn't get his way on a 
political issue or on a different issue.
    That is the threat that is staring us in the face when we 
look at the Social Security Trust Fund, and that is the threat 
that stares us in the face with this $5.3 trillion debt.
    Here is another article on the same issue. Investors 
Business Daily, July 7, 1997, analysts are forecasting a surge 
in the amount of U.S. debt held by China potentially for the 
same reason, to in the future hold this government hostage to 
whatever it is that on that particular week or that particular 
month they want.
    It brings us back to the fact that we can't afford, as a 
Nation, to have a $5.3 trillion debt staring us in the face, 
part of which is the Social Security Trust Fund.
    I might have other articles here that I would very much 
appreciate taking a look at, where it does define the actual 
dollars in the trust fund as IOUs.
    Again, I very much appreciate the effort that you're 
putting into this. It's a very serious problem facing the 
country and I look forward to working with you on the 
solutions.
    Thank you.
    [The prepared statement follows:]

Statement of Hon. Mark W. Neumann, a Representative in Congress from 
the State of Wisconsin

    Mr. Chairman, I want to thank you for this opportunity to 
speak here today about the future of the Social Security system 
for our seniors and for the next generation.
    Social Security is an extremely important program for our 
seniors. It is a program they have come to rely on for their 
retirement benefits because they have paid into the system for 
many years. America's seniors have placed their faith and trust 
in the federal government to watch over that money for them so 
that it will be available when they settle down to enjoy their 
retirement years.
    Social Security is also an important program for folks in 
my generation who also have been paying into the system now for 
many years.
    Unfortunately, people in my generation and my kids' 
generation simply don't have the confidence in the Social 
Security system. They do not believe that Social Security will 
be there for them when they decide to retire and enjoy their 
benefits.
    In the short time that I have had the privilege of being a 
Member of this House, I have spent a considerable amount of my 
time looking at the Social Security system and how we can save 
it and keep it solvent for years to come.
    Mr. Chairman, as you well know, in 2012, Social Security 
will begin to pay out more in benefits than it collects in 
taxes. We simply can not wait for this day to arrive, we must 
work now to extend the life of the Social Security Trust Funds.
    How do we accomplish this goal, Mr. Chairman?
    One solution which I would like to advance here today is 
the idea of paying off the national debt, because the national 
debt has a direct relation to Social Security.
    The national debt--which will severely hamper the ability 
of our children to buy their first home, start their own family 
or save for their retirements--now stands at $5.4 trillion. 
This is the amount of money Washington has borrowed over the 
years (plus interest which has accumulated) and spent on many 
programs which, in my humble opinion, were wasteful and 
frivolous. This debt is a pile of IOUs--claims against the 
government--that real people and real institutions hold and 
demand repayment on. Many of these IOUs are now in the Social 
Security Trust Fund.
    The question becomes, how do we get to a point where we can 
repay these notes when they come due? The answer to that 
question is simple. We must take full advantage of this era of 
prosperity to not only balance the budget, but to run large 
budget surpluses and use most of the surplus to pay off the 
national debt.
    I will soon introduce legislation to pay off the national 
debt and begin restoring the Social Security Trust Fund. My 
bill simply stipulates that once we attain a balanced budget, 
we cap the growth of federal spending at a rate one percentage 
point less than the rate of revenue growth. That creates a 
surplus which would then be divided by allocating two-thirds to 
pay off the debt and one third to provide additional tax relief 
for more Americans.
    A report in the Washington Post yesterday draws attention 
to the fact that we could very well reach our goal of a 
balanced budget by next year if economic growth continues to 
grow at current levels and I just want to mention that to 
underscore the fact that the issue of paying off the national 
debt is something we will have to address sooner, rather than 
later.
    Further, the more debt that this country accumulates, the 
more danger it poses to Social Security and the nation as a 
whole. I want to bring the Committee's attention to two recent 
reports about the debt which is being held, and possibly 
accumulated, by foreign investors.
    First, the Washington Post (June 24, 1997), reported on a 
192 point drop in the stock market on June 23rd of this year, 
due to public remarks by the Japanese Prime Minister (Ryutaro 
Hashimoto) who threatened to sell large amounts of U.S. 
Treasury bills if U.S./Japan currency exchange rates did not 
become more favorable for Japan.
    In a more recent report in Investors Business Daily (July 
7, 1997), analysts are forecasting a surge in the amount of 
U.S. debt held by China to potentially gain political or 
economic influence over U.S. policy.
    The IOUs, which are the debt, are financed in large part by 
foreign investors (estimated at 22 percent) and I think it is 
not only an embarrassment to this country, but it is dangerous 
for us and for our senior citizens.
    I have referred a great deal to the IOUs which Washington 
owes and those that are in the Trust Fund. I just want to 
expand on that point briefly.
    Currently, the Trust Fund takes in more in taxes than it 
pays out in benefits. This Social Security surplus, however, is 
then spent by Washington on other government programs. The 
government ``borrows'' the money from the Social Security Trust 
Fund, writing an IOU in the form of a non-negotiable Treasury 
bill. These non-negotiable bills are not real tangible assets 
and have no value in the real world: they are nothing more than 
IOUs--promises by the government to repay the money 
``borrowed'' from the Trust Fund. The Trust Funds must contain 
real assets, not IOUs.
    And others who follow this issue have realized the 
significance of keeping IOUs in the Trust Funds as well.
    USA Today wrote, ``Social Security surpluses now are spent 
immediately on other federal programs. The Trust Fund's assets 
are nothing but a pile of IOU's....(The) Trust Fund is a 
fraud.'' (5/30/96 emphasis added)
    CNN correspondent Jim Angle reported, ``Social Security 
gets your payroll taxes then turns around and pays most of it 
out in benefits. The rest is supposed to go into the Social 
Security Trust Fund and earn interest. Instead, the government 
has been pocketing the money, spending it on other government 
programs and giving the trust fund IOU's.'' (October 3, 1996)
    David Koitz of the Library of Congress wrote in a special 
report, ``When the Government posts a security to one of its 
own accounts, it hasn't purchased anything or established a 
claim against some other person or entity. It is simply 
creating an IOU from one of its account to another. Hence, the 
building up of Federal securities in a Federal trust fund--like 
that of social security--is not a means in and of itself for 
the Government to accumulate assets. It certainly has 
established claims against the Government for the social 
security system, but the social security system is part of the 
Government. Those claims are not resources the Government has 
at its disposal to pay future social security benefits.'' 
(emphasis added) (CRS Report #93-643 EPW, December 30, 1993)
    I think the public understands the significance of having 
IOUs in the Trust Funds and I think it is time that this 
Congress looks at alternative forms of keeping our seniors 
money so that it will be available for them and it will be safe 
from the reaches of big government.
    With that I will wrap it up, Mr. Chairman, and again I want 
to thank you and the Committee for the opportunity to share my 
views with you today.
      

                                

    Mr. Bunning. Thanks, Mark.
    Dennis, go right ahead.

   STATEMENT OF HON. DENNIS J. KUCINICH, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF OHIO

    Mr. Kucinich. Thank you very much, Mr. Chairman, and Mrs. 
Kennelly.
    I want to thank you for the opportunity to speak here 
today. Social Security is a guarantor of economic rights for 
the aged, for widows, for victims of circumstance, and for the 
disabled. Social Security is one of American Government's 
greatest achievements and success stories.
    Those who have always been opposed to Social Security or 
see financial advantage in its radical undoing purposely equate 
the depletion of the trust fund with insolvency. They 
exaggerate Social Security's actuarial imbalance and call it a 
crisis.
    First of all, I submit, Mr. Chairman, there is no crisis. 
Social Security tax income exceeds Social Security benefits 
until the year 2012. After that date, shortfalls are made up by 
drawing upon the accumulated surplus in the trust fund and the 
interest it earns. With current tax and benefit rates remaining 
constant, Social Security will pay 100 percent of benefits of 
future recipients until 2029, without any change whatsoever.
    Once the trust fund is depleted in 2029, Social Security's 
annual tax income is sufficient to pay 76 percent of the 
benefits of future recipients. The system largely works.
    The magnitude of the problem, therefore, is making up a 
projected 24-percent shortfall, and we have 33 years in which 
to phase in a solution. There is no crisis.
    Those who have always been opposed to Social Security or 
see financial advantage in its radical undoing are calling for 
privatization. I view Social Security privatization as turning 
over this program and accumulated surplus to profiteers and 
turning back on our commitment to intergenerational security, 
economic freedom and fairness.
    Privatization would dismantle a hugely popular and 
successful government program, and with its accumulated surplus 
of over $570 billion in the trust fund--we do have a trust fund 
surplus--and over $500 billion in annual revenues, would 
deliver a hugely profitable kitty for Wall Street investors to 
charge fees on. A standard 5.75-percent management fee on the 
annual revenues would generate $28.75 billion in new 
compensation annually for Wall Street brokerage houses, at the 
expense of the humble occupants, trusting occupants, of main 
street.
    Privatizing Social Security is a radical, extreme measure. 
For every winner in the stock market, there will be a loser. 
Privatizing Social Security guarantees, by a law of averages, 
that there will be retirees who grow poor because their private 
investments fail. That new reality would undermine one of the 
wonders of Social Security, that it has saved millions of 
seniors from the despair of poverty because it guarantees 
benefits.
    The guarantees that Social Security provides have enabled 
seniors to have the lowest rate of poverty in the population. 
By privatizing the trust fund, we would take the enormous risk 
of pushing many seniors into poverty.
    The plans of privatizers replace Social Security's 
guarantee with a Wall Street gamble. And the big secret of 
privatization is that the two most radical plans require a huge 
tax increase. Both the Gramlich plan, individual accounts, and 
the Weaver plan, personal security accounts, require tax 
increases to make up for the shortfall they create by diverting 
FICA taxes away from paying benefits. The Weaver plan's 
transition tax lasts for 72 years and still requires further 
Federal borrowing.
    Social Security once experienced a great crisis. That was 
in 1983, when Social Security was within months of insolvency. 
At that time, and only because the crisis was real, there was 
bipartisan agreement that Congress had to take action, and that 
every sector of the population would have to contribute toward 
the solution. There was no talk of privatization. At that time, 
President Reagan and Speaker O'Neill, Senator Robert Dole and 
Senator Moynihan all concurred.
    But today we have 30 years before anything approaching a 
genuine crisis is upon us. It serves the interest of the 
privatizers to perpetuate hysteria about Social Security. But a 
problem that could develop in 30 years is not a crisis. It is a 
projection.
    Let's take time to craft real solutions to real problems. 
We have the time. We needn't radically dismantle Social 
Security to do it.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Dennis J. Kucinich, a Representative in Congress from 
the State of Ohio

                                   I.

    I want to thank you for the opportunity to speak here 
today. Throughout my political career I have been dedicated to 
protecting the rights of working and middle income people. 
Social Security is a guarantor of economic rights for the aged, 
for widows, for victims of circumstance, and for the disabled. 
Social Security is one of American government's greatest 
achievements and success stories.
    Those who have either always been opposed to Social 
Security or see financial advantage in its radical undoing 
purposely equate the depletion of the trust fund with 
insolvency. They exaggerate Social Security's actuarial 
imbalance and call it a crisis. First of all, there is no 
crisis. Social Security tax income exceeds Social Security 
benefits until 2012. After that date, shortfalls are made up by 
drawing upon the accumulated surplus in the trust fund and the 
interest it earns. With current tax and benefit rates remaining 
constant, Social Security will pay 100 percent of the benefits 
of future recipients until 2029 WITHOUT ANY CHANGE WHATSOEVER.
    Once the trust fund is depleted in 2029, Social Security's 
annual tax income is sufficient to pay 76% of the benefits of 
future recipients. The system largely works [cite: ``Long 
Range, Table 2, CRS publications, Tax income in 2030/Outgo in 
2030 = 2301.4/3004.7 = 76%]
    The magnitude of the problem, therefore, is making up a 
projected 24 percent shortfall, and we have 33 years in which 
to phase in a solution. Expressed another way, the actuarial 
imbalance as calculated today is only a little over 2 
percentage points. [The actuarial balance, of course, is the 
amount by which Social Security revenue would have to increase 
in order to meet current benefit levels for the next 75 years.] 
There is no crisis.

                                  II.

    Social Security is a popular, efficient and effective 
program which deserves our care and support.
    1. Social Security is the safety net that saves many 
retirees from poverty and it is the foundation of the entire 
retirement system.
    In 1959, the Census Bureau estimated that 35% of elderly 
Americans were poor. During the 1960's, elderly Americans had 
twice the poverty rate of all other Americans. By 1994, in 
large part because of changes in Social Security, the poverty 
rate among senior citizens was lower than the rate of other 
adults.
    Social Security plays a crucial role in providing income 
for most senior citizens. Six out of 10 seniors get more than 
half their total retirement income from Social Security.
    2. Social Security is a highly efficient, uncomplicated 
program without loopholes and complex administrative 
requirements.
    The program runs smoothly, regardless of political or 
economic events. Despite wars, economic recessions and recent 
government shutdowns, Social Security checks have always 
reached recipients in a timely fashion and in their full 
amount. Unlike other entitlement, such as Medicaid and TANF, 
Social Security does not require state and local governments to 
participate in program financing or administration.
    Administrative costs for Social Security are about 1 
percent of benefits. Comparatively, according to the American 
Council of Life Insurance, administrative costs for private 
insurance are between 12 and 14 percent of annual benefit 
amounts.
    3. Social Security has always paid its own way
    Social Security has always paid its own way as a program by 
collecting taxes earmarked solely for the payment of benefits. 
Furthermore, From its creation in 1935 until today, the Social 
Security system has operated in the black. Social Security is 
not responsible for any growth in the federal deficit. Social 
Security has enjoyed broad public support since its creation 
and recent studies show that 90% of Americans favor the 
continuation of Social Security.
    4. Social Security is progressive.
    Americans who earned more during their working years 
receive higher benefits, but the portion of each worker's 
earnings that Social Security will replace rises as the 
worker's income falls, a factor directly responsible for 
raising senior citizens largely out of poverty, relative to the 
rest of the population.

                                  III.

    Those who have either always been opposed to Social 
Security or see financial advantage in its radical undoing are 
calling for privatization. I view Social Security privatization 
as turning over this program and accumulated surplus to 
profiteers and turning back on our commitment to 
intergenerational security, economic freedom and fairness.
    Privatization will dismantle a hugely popular and 
successful government program, and, with its current 
accumulated surplus of over $570 billion in the trust fund, 
would deliver a hugely profitable kitty for Wall Street 
investors to charge fees on. A 5.75 percent management fee on 
the trust fund would generate $32.8 billion in new compensation 
for Wall Street brokerage houses.
    Privatizing Social Security is a radical, extreme measure. 
Privatizing Social Security guarantees by the law of averages 
that there will be retirees who go poor because their private 
investments fail. For every winner in the stock market there 
will be a loser. That new reality would undermine one of the 
wonders of Social Security--that it has saved millions of 
seniors from the despair of poverty because it guarantees 
benefits. The guarantees that Social Security provides have 
enabled seniors to have the lowest rate of poverty in the 
population. By privatizing the trust fund we take the enormous 
risk of pushing many seniors into poverty.
    The plans of privatizers replace Social Security's 
guarantee with a Wall Street gamble.
    And the big secret of privatization is that every plan 
requires a huge tax increase. Both the Gramlich plan 
(Individual Accounts) and the Weaver plan (Personal Security 
Accounts) require tax increases to make up for the shortfall 
they create by diverting FICA taxes away from paying benefits. 
The Weaver plan's ``transition'' tax lasts for 72 years and 
still requires further Federal borrowing!

                                  IV.

    A little historical perspective is required. Social 
Security once experienced a genuine crisis. That was in 1983, 
when Social Security was within months of insolvency. At that 
time, and only because the crisis was real, there was 
bipartisan agreement that Congress had to take action, and that 
every sector of the population would have to contribute towards 
the solution. At that time, President Reagan and Speaker 
O'Neill, Senate Majority Leader Robert Dole and Senator 
Moynihan all concurred.
    But today, we have 30 years before anything approaching a 
genuine crisis is upon us.
    It serves the interest of the privatizers to perpetuate 
hysteria about Social Security. But a problem that could 
develop in 30 years is not a crisis. It is a projection.
    Let us take the time to craft real solutions to real 
problems. We have the time. We needn't radically dismantle 
Social Security to do it.

                                   V.

    Social Security has sustained economic downturns, wars as 
well as a widening gap between the wealthy and the rest of us.
    Privatizing Social Security replaces a guarantee of 
benefits and economic freedom with a Wall Street gamble.
    I submit that the people of this nation did not elect us to 
gamble with their lives, but rather to protect one of the few 
guarantees Americans have in life, as little as that may be.
    Thank you.
      

                                

    Mr. Bunning. Thank you, Dennis.
    Mark, go right ahead.

     STATEMENT  OF  HON.  MARSHALL  ``MARK''  SANFORD,  A 
  REPRESENTATIVE IN CONGRESS FROM THE STATE OF SOUTH  CAROLINA

    Mr. Sanford. Thank you, Mr. Chairman, and thank you, Mrs. 
Kennelly, for letting me be with you.
    I would say first off, though, that I couldn't disagree 
more with Dennis. We don't see eye to eye on this one, in that 
I think we do have a crisis. The Social Security 
Administration's own numbers show that a black male in America, 
who is unmarried, is getting a negative 6-percent rate of 
return on his Social Security investment, or for that matter, 
anybody born after 1948 is getting a negative rate of return on 
their Social Security ``investment.''
    But leaving that aside, I would just like to touch on one 
thing, and that is the politics of Social Security. I would 
take you back to the Saturday before the elections in November. 
On that Saturday, Jose Pinera, who had been the Labor Minister 
in Chile at the time that they changed their system, was in my 
district to attend meetings with us. We started up in Myrtle 
Beach and we worked our way down the coast and finished in 
Charleston, holding a number of Social Security town meetings.
    We were in a place called the Canterbury House, which is a 
senior citizens home, and there were a couple hundred people 
there. Two agitators stood up, trying to blow holes into the 
idea of change in Social Security. An 80-year-old woman, gray 
haired that she was, stands up before I could respond or before 
Jose Pinera could respond, and looks at the fellows and says, 
``Look, if you've got something meaningful to say, say it. If 
not, sit down and shut up.''
    Now, that was an 80 year old woman that said this. Jose and 
I looked at each other just flabbergasted. I think it gives us 
a very strong indication, as Lindsey Graham had suggested, of 
where the politics in Social Security are today.
    I know for a long time it's been considered the ``third 
rail'' of politics, and I know that maybe back in 1977 or back 
in 1983 possibly it was. But I think the politics have changed 
considerably.
    So I would put myself in the camp of ``privatizers,'' if 
you want to call it that. I think we would have to define 
privatization. If it's the laissez faire style of 
privatization, I don't believe in that. I believe in a 
sustained public/private partnership, where it is still a 
mandatory payroll tax deduction. It is not money that you can 
get your hands on until after you retire. There is SEC-like 
oversight, so that you can't have a financial advisor take 
advantage of those who would invest some money. You have 
management expertise. You've got capital adequacy requirements. 
You've got a number of different safeguards. But within those 
safeguards, I think privatization has been demonstrated around 
the world to work, to work very, very well.
    In essence, you shift from a system wherein you send your 
money to Washington and then you hope it comes back 30 or 40 
years later, to a system wherein your money goes into your own 
private savings accounts. You get a monthly statement on it, 
and you know to the penny how much money is in there. People in 
my district have been remarkably receptive to that idea.
    As you might know, the World Bank did a study looking at 
this idea, and what they found was that, for all developing 
nations and developed nations, that this was a timely idea. As 
well, you might know of a poll where they asked young people, 
``Do you think you'll get the full value of Social Security 
investment?'' To make a long story short, by a 2 to 1 margin, 
they were more likely to believe in UFOs than to believe they 
would get the full value of their Social Security.
    I know from firsthand experience in our district, where we 
have had a couple hundred neighborhood office hours, a couple 
hundred townhall meetings, numerous op-ed pieces, radio shows 
and whatnot, all on this issue of privatization, that it proved 
not to be the ``third rail'' of politics. There was a natural 
constituency of young people, and to people's surprise, there 
was also a natural constituency of older folks, because they 
care about their grandkids. Their grandkids are talking to them 
about this subject.
    Then there are a number of surprise entrants, if you want 
to call it that, who you wouldn't think would be supporters of 
the idea of changing Social Security. For instance, 3 weeks ago 
we had a Social Security meeting in the district with a number 
of national experts, and the National Association for the 
Advancement of Colored People, NAACP, chapters in the 
Charleston area were cohosts in this event. A lot of people 
said that doesn't make sense to me. But again, if you look at 
the actuarial tables for black males, for instance, and you can 
see very compellingly why they would be cohosting this type of 
event.
    It's an idea that I think is supported from the left and 
right. Any time you have Sam Beard, who comes from the opposite 
political philosophy of my own, behind an idea like this, I 
think there's something to it. Most of all, I would stress that 
this is an idea whose political time has come.
    Mr. Chairman, we were both in a meeting the other morning 
and the head of Americans For Tax Reform was talking about the 
cost of waiting to reform Social Security. That would just be 
the last thought I would leave with you. They handed out this 
sheet with different folks----
    Mr. Bunning. Mark, would you like to enter that into the 
record?
    Mr. Sanford. Yeah, if I could. I would appreciate it.
    Just the cost of waiting, most of all the cost would be the 
biggest for my three kids, 5, 3, and 1.
    Anyway, thank you. I yield back.
    [The prepared statement and attachment follow:]

Statement of Hon. Marshall ``Mark'' Sanford, a Representative in 
Congress from the State of South Carolina

                                The Plan

     All individuals would maintain a Retirement 
Security Account (RSA), which is an IRA-like savings plan 
administered by a custodian.
     An amount equal to 6% of income is automatically 
deducted from each paycheck. It is matched by the employer for 
a total contribution of 12%. (Self-employed individuals 
contribute 12%.) Of that total, 8% goes into the individual's 
RSA. The remaining 4% goes to the government to help pay for 
benefits due under the current Social Security system.
     Individuals may also contribute any amount above 
the required minimum. Married couples with a non-working spouse 
are encouraged to also contribute to that spouse's account.
     RSA's must be invested in a mutual fund-type 
portfolio until enough is accumulated to pay for an annuity 
that would provide the equivalent of a 1996 minimum wage level 
income ($8500 annually). Amounts above that could be invested 
in any type of asset. Custodians would be regulated by the SEC 
based on capital adequacy and managerial expertise. Fees would 
be clearly disclosed up front, and accounts would pay an annual 
premium for insurance (see below).
     Investment principal up to the amount needed for a 
minimum wage-level annuity would be insured against loss by the 
Securities and Exchange Commission or a similar existing 
government agency. Premiums, collected by the custodian, will 
be based on investment risk. Principal amounts above that 
level, and all investment earnings, are uninsured.
     Upon retirement, an individual could choose to 
purchase a lifetime annuity, to live off of the interest, or to 
withdraw portions of the principal. Withdrawals will be taxed 
at the ordinary income tax rate.
     Any amount remaining after the retiree's death 
becomes part of their estate and could be willed to survivors 
or charities.
     At all income levels, RSA provides higher 
retirement benefits than the current Social Security: 
[GRAPHIC] [TIFF OMITTED] T1071.002

                     Changes to the Current System

     RSA adopts the proposed Kerrey-Simpson reforms to 
the current system. These include raising the retirement age to 
70 by the year 2029, and early retirement age to 65 by 2017, 
and several other minor changes that lower the cost of Social 
Security.
     COLA increases will be capped at 0.5% below actual 
inflation increases to approximate a re-estimate of the 
Consumer Price Index.
     Disability benefits do not change. A separate 
disability trust fund is created and funded by a dedicated 
payroll tax. RSA also does not affect Medicare.

                             The Transition

     The current system would end on 12/31/99. People 
receiving Social Security retirement benefits continue to 
receive their full benefits for life, and cannot move to RSA.
     People 35 and above on 12/31/99, and who are not 
receiving benefits, may either remain in the current Social 
Security system or move to RSA. Those who remain continue to 
pay Social Security taxes at the prevailing level. These taxes 
go into general revenue.
    Upon retiring, those who join RSA will receive monthly 
pension payments equal to the proportion of Social Security 
benefits they have earned through 1/1/2000 in addition to what 
they have saved under TIA.
     People below the age of 35 must move to RSA. Upon 
retirement, they will also receive monthly payments equal to 
the proportion of Social Security benefits that they have 
earned through 1/1/2000.
     Social Security taxes end on 12/31/99 for everyone 
who moves to the RSA.
     All future benefits are paid out of general 
revenue. The trust fund is dissolved.
     A plan to cover additional transition costs will 
be developed by a bi-partisan commission. Congress could accept 
or reject the commission's recommendations, but not amend them. 
Funds could be raised through self-liquidating debt, sales of 
federal assets, reductions of other federal expenditures, and 
if absolutely necessary, additional revenue measures.
     After the transition, Social Security is fully 
funded: 
[GRAPHIC] [TIFF OMITTED] T1071.003

      

                                

[GRAPHIC] [TIFF OMITTED] T1071.004

[GRAPHIC] [TIFF OMITTED] T1071.005

      

                                

    Mr. Bunning. I thank the panel for their input. I 
appreciate your participation.
    Before I introduce our final panel, there are two other 
Members who have provided written testimony, Patsy Mink and Tom 
Coburn. We would like to allow any statement they submit to be 
entered into the record.
    [The prepared statements and attachments follow:]

Statement of Hon. Tom A. Coburn, M.D., a Representative in Congress 
from the State of Oklahoma

    Mr. Chairman, members of the Committee, I would like to 
take this opportunity to relay to the Committee my concerns 
regarding the Social Security Administration's (SSA) use of an 
automatic recomputation system to determine increases of 
benefits due to those receiving disability assistance.
    As you are all aware, disability benefits are only paid 
after SSA determines that an individual is unable to engage in 
substantial gainful activity. After entitlement to disability 
benefits, posted earnings as a result of employment should 
trigger a review of the individuals entitlement to disability 
assistance. In some cases, posted earnings indicate recovery 
from the disabling condition, which may result in cessation of 
benefits.
    Under current SSA policy, however, posted earnings result 
in a computerized, automatic readjustment of benefits. By 
employing the automatic recomputation system for disability 
cases, increased benefits are payed before SSA personnel have 
the opportunity to reevaluate a beneficiaries eligibility for 
benefits. As a result, some beneficiaries are not only 
receiving checks to which they are not entitled, they are also 
receiving an increase in benefits to which they are not 
entitled. I have been informed of four cases in my hometown of 
Muskogee in which disabled individuals received a total of 
$89,849 they were not due. In most cases, the individuals have 
already spent this money before SSA even learns of its mistake. 
As you are aware, recovering overpayments is difficult, time 
consuming, and often unsuccessful.
    In order to correct this problem a claims representative in 
the SSA office in Muskogee filed an employee suggestion form 
recommending that the computer system be programmed to prevent 
automatic recomputations on disability beneficiaries prior to 
review by SSA personnel. In other words an increase in posted 
earnings would automatically signal a continuing disability 
review (CDR). The Division of Operations Management responded 
that this was not possible. They explained that an audit 
conducted by the Inspector General in 1994 determined that SSA 
was not paying potential under payments to beneficiaries if 
there was a pending disability review. Since SSA was not 
processing reviews in a timely fashion and consequently some 
beneficiaries were not receiving the increases due them in a 
timely fashion, the requirements were changed to allow 
automatic recomputation of benefits prior to a review. SSA 
admits that this system, ``may result in some overpayments, but 
this is the only way of ensuring that beneficiaries entitled to 
under payments receive them.''
    While I am well aware of SSA's past difficulties in 
processing disability reviews in a timely fashion, I hardly 
think it is appropriate simply to abandon the process in favor 
of an automated system. In fact, it is questionable whether 
SSA's current policy is even cost effective. An October 1996 
General Accounting Office report stated that:
    In Fiscal Year 1996, SSA limited its selection for CDRs to 
a portion of SSI recipients it consider cost-effective to 
review. In general, these include recipients for whom medical 
improvement is either expected or is possible...'' (GAO/HEHS-
97-17)
    SSA estimates that these targeted reviews will result in at 
least $3 in federal program savings for every $1 spent 
conducting CDRs. It stands to reason that the one group we 
should target for disability review, even before those for whom 
medical improvement is possible, are those who have posted an 
increase in earnings, which in many cases signals recovery from 
the disabling condition.
    I applaud SSA's attempt to improve its timeliness on 
completing benefit readjustments as a result of changes in 
posted income. However, SSA should not attempt to improve 
timeliness by eliminating the review process. In attempting to 
solve one problem, SSA is creating an even larger one. In my 
opinion current policy of automated recomputations indicates a 
complete lack of regard on the part of SSA to its 
responsibility to properly manage the Social Security 
disability system.
    While the SSA administration has rejected the suggestion to 
discontinue automatic recomputations for disability cases, the 
proposal is not without support. The Director of the Center for 
Disability for the Dallas Region speaking for both the Dallas 
and Denver Regions outlined in a memo their concerns with the 
current system of recomputation and encouraged the 
administration to consider the suggestion that disability 
recomputations only be performed after the performance of a 
disability review. I have attached this memo as well as the 
original suggestion form and the corresponding responses for 
your review.
    SSA has asserted that it simply does not have the resources 
to perform these disability reviews in a timely fashion. I 
would like to point out, however, that last year this 
Subcommittee uncovered that SSA had authorized 1,800 employees 
to spend time on union representational activities. A total of 
146 individuals were employed as full time union 
representatives. In 1995 SSA employees spent 413,000 on union 
business. If SSA is truly understaffed, I would suggest that 
they begin to fully utilize the employees that are currently on 
their payroll. As far as I am aware the primary duty of SSA is 
the administration of the retirement and disability trust funds 
not the employment of union representatives. I can personally 
attest to the fact the citizens who utilize the Muskogee Social 
Security Office would be better served with an additional case 
manager rather than the full time union representative 
currently employed there.
    I would encourage SSA to reconsider its policy regarding 
automatic recomputations as well as its policy to pay union 
representatives out either the Social Security Trust Fund or 
there appropriated operating expenses. Permitting 
recomputations only after a disability review will restore some 
integrity and fiscal sanity to our disability system, by 
ensuring that only those eligible for disability benefits 
actually receive those benefits. This seems to be the least we 
can do to ensure we continue to have the resources necessary to 
provide assistance to the disabled.
      

                                

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Statement of Hon. Patsy T. Mink, a Representative in Congress from the 
State of Hawaii

    Chairman Bunning, Ranking Member Kennelly, and Members of 
the Subcommittee: I thank you for the opportunity to testify on 
an issue of great interest to individuals bearing the burden of 
spinal cord injury.
    Approximately 906 individuals per million Americans suffer 
from traumatic spinal cord injury, as estimated by the 
Paralyzed Veterans of America (PVA). These individuals have 
lost the freedom of mobility and must endure a compromised 
lifestyle, generally at a point later in life.
    Disabled veterans who had been stricken with spinal cord 
injury while serving our country represent about a fourth of 
those afflicted with this condition.
    Significant risk of spinal cord injury to those older than 
60 years of age has been attributed to falls, pedestrian 
accidents, and medical and surgical complications, according to 
PVA.
    The Social Security Disability program helps those with 
spinal cord injury by providing benefits to those who qualify. 
Unfortunately, current law says that these people lose their 
benefits if they are able to earn more than $500 per month 
(known as the Substantial Gainful Activity amount, or SGA). The 
only exception is for individuals who are blind, who are 
allowed to earn up to $1000 per month before losing benefits.
    I recently introduced a bill, H.R. 577, which would 
increase the SGA for severely spinal cord injured individuals 
to the same level as that for blind recipients. My bill has 
been referred to this subcommittee for which I respectfully 
urge the subcommittee's action.
    Earlier in the year, it won PVA's support. I would like to 
submit a copy of the PVA position paper for the record.
    A tremendous financial burden is borne by those with spinal 
cord injury at an estimated $95,203 for initial hospitalization 
expenses and an additional $8,208 for at-home modifications, 
according to PVA. Following recovery and rehabilitation, 
individuals can expect to pay $7,866 per year on the average 
for medical services, supplies, and adaptive equipment, with 
personal and institutional care expenses adding approximately 
$6,269 per year.
    Persons with spinal cord injury cannot be expected to 
survive solely on their Social Security disability benefit plus 
maximum monthly earnings of $500. If they can help themselves 
notwithstanding their disabilities, they should be encouraged 
to do so. Enactment of my bill H.R. 577 will help.
    Again, thank you for the opportunity to testify and for the 
subcommittee's consideration of my bill H.R. 577.
      

                                

[GRAPHIC] [TIFF OMITTED] T1071.006

      

                                

    Mr. Bunning. We also submit for the record any opening 
statement that Mrs. Kennelly was prepared to make.
    Mrs. Kennelly. Thank you, Mr. Chairman.
    [The opening statement follows:]

Opening Statement of Hon. Barbara B. Kennelly

    Today we hold the fifth in the series of hearings on the 
future of Social Security. These hearings have given us the 
opportunity to review issues both large and small relating to 
our national retirement system.
    We have heard much debate about whether to restructure the 
Social Security program. Such restructuring would mean moving 
from a system based on wages and shared risk to a system which 
would grow with capital wealth and which would be based on 
individual risk.
    Are Americans ready to take on this additional risk in 
exchange for a system which is tied to capital growth? Surveys 
show that--at this stage in the debate--the public has mixed 
feelings. One survey found that 63 percent of non-retirees 
thought they might do better investing for themselves. But 85 
percent of non-retirees--and, surprisingly, 91 percent of those 
in the so-called Generation X--wanted to know that Social 
Security would be there ``just in case.''
    We have a long way to go before we reach a national 
consensus on this issue. It seems that there are not many 
people who are yet willing to come down one mountain in order 
to go up another.
    They need more information before they can make a decision. 
They need to know how not only how a plan would be structured, 
but how it would be implemented and how it would affect them.
    Social Security is only one piece of our national 
retirement system. Employer pensions and private savings all 
play a role. It would be a mistake to look at Social Security 
in insolation and not take into account the impact that changes 
in Social Security would have on other forms of pensions and 
savings.
    I look forward to hearing from my colleagues in the 
Congress and from employers and employees about both the big 
issues of growth and risk and about the smaller issues of 
administration and implementation. All of these issues will 
have to be addressed before we can move forward--as we must--to 
assure a secure retirement for current and future generations.
    We have all heard a lot about the survey which found that 
more people believe in the existence of UFO's than believe in 
the future of Social Security. It is our responsibility to see 
that Americans change their views. It is our responsibility to 
reassure Americans that they can count on a secure retirement.
    Most Americans look positively at the prospect of 
retirement. The view retirement as a time when they can have 
more freedom, pursue their hobbies and spend more time with 
their families. But they worry about their financial resources. 
Contrary to popular belief, young people do not blame their 
sense of financial insecurity about retirement on older people. 
They blame it on waste, fraud and abuse in government. A recent 
survey showed that three-quarters of those surveyed thought 
they should be saving more.
    Today we hold the fifth in a series of hearings on the 
future of Social Security. We have already heard from think 
tanks, economists, interest groups, and others about how to 
strengthen the Social Security program. Today we will hear from 
employers and employees as well as from Members of Congress 
about their proposals.
    It will take some time, however, before a consensus emerges 
on this issue.
      

                                

    Mr. Bunning. The witnesses for our final panel of business 
and labor representatives are next. Thank you very much for 
waiting and for your patience during this long day of 
testimony.
    Our witnesses are Bruce MacLaury, chairman of the 
Subcommittee on Social Security Reform, Committee for Economic 
Development; Scott Macey, chairman, ERISA Industry Committee; 
Warren Batts, chairman of the National Association of 
Manufacturers, and Dr. David Smith, director of public policy, 
American Federation of Labor, Congress of Industrial 
Organizations, the AFL-CIO.
    Dr. MacLaury, would you please begin your testimony.

   STATEMENT OF BRUCE K. MACLAURY, CHAIRMAN, SUBCOMMITTEE ON 
SOCIAL SECURITY REFORM, COMMITTEE  FOR  ECONOMIC  DEVELOPMENT;  
       AND  PRESIDENT  EMERITUS,  BROOKINGS  INSTITUTION

    Mr. MacLaury. Thank you very much, Mr. Chairman, Mrs. 
Kennelly. It's a pleasure to be here.
    I am president emeritus of the Brookings Institution, but I 
am here today, as you said, as a trustee of the Committee for 
Economic Development and chair of its subcommittee on a task 
force that produced a report, which I believe is in your 
folders, Mr. Chairman. I would like to refer to it and ask you 
to refer to it, if I may.
    [This report can be found on ``Committee for Economic 
Development'' website. http://www.ced.org/DOCS/REPORTS/ANNUAL/
Ar--intro.htm. This report is being retained in the Committee's 
files.]
    The Committee for Economic Development feels that the 
process by which we arrived at our recommendations is as 
important as the recommendations themselves. By that I have two 
things in mind.
    First of all, we established a set of principles which 
guided our effort, and if I may, I would refer to those on page 
36 of that report. The first is maintaining a minimum 
retirement income; the second is increasing national savings; 
the third is not derailing efforts to eliminate deficits, and 
so forth and so on. There are 11 such principles, Mr. Chairman, 
that informed our judgments as we went along.
    It also caused us, as we looked at other plans and 
suggestions that have been made, to rule out such suggestions 
as full privatization, ``carve-outs,'' as they are called, 
taking present contributions and using them to privatize. It 
also caused us to not recommend raising taxes, not means 
testing, and not artificially reducing the CPI adjustment.
    All of those fell out of the effort to apply certain 
principles, and I would hope that as your Subcommittee works on 
a solution to this, what I would call an urgent problem, you 
will take those principles and apply them yourselves as you 
best see fit.
    Second, with respect to process, we defined the problem as 
a twofold problem, not one. The first is fiscal solvency--and 
we've heard a lot of comments about that, and that, as people 
have correctly said, can only be solved by cutting benefits or 
raising taxes.
    But the second is equally important. It is the political 
acceptability of whatever solution is found. That means that, 
whatever is done, Social Security has to remain a good 
investment. It cannot simply be a negative rate of return on 
contributions or people will not support it. That's why we saw 
it as a twofold problem, and if you solve the first, fiscal 
solvency, by reducing benefits or raising taxes, you have 
worsened the problem of rate of return on the investment of the 
contributor. So these two problems have to be reconciled, and 
that's why the CED came out with a twofold proposal.
    That is to say, we would propose to restore the solvency of 
the existing program by gradually--and I emphasize the word 
gradually--reducing the benefits for the upper- and middle-
income components of the retired population, and second, we 
would add on a required savings plan.
    Now, some people will characterize that as an increase in 
taxes, but we characterize it as a required savings plan to 
invest in private sector securities at a higher rate of return 
to enhance the rate of return on the total invested funds.
    So, with that as background as to process, please turn to 
page 40 of this report, because I think that most effectively 
lays out the suggestions that we are making.
    The first of those suggestions has to do with reducing the 
benefits, benefits prospectively--and I emphasize the word 
prospectively--not for current recipients and not for those who 
are about to retire.
    Our first suggestion is that the primary insurance amount, 
as it is called, or the first year's income after one begins 
drawing in benefits, be gradually phased down. In the past, all 
of the adjustments have been to maintain the benefit levels. We 
think that, over time, those benefit levels for the upper- and 
middle- incomes have to be reduced. We would increase the 
normal retirement age from 65 to 70; we would gradually 
increase the number of years that have to be included from 35 
to 40; and we would tax all of the benefits above those 
contributions of the individual as regular income. And there 
are a couple of other changes that I would leave to your 
discretion.
    May I ask you now to turn to page 18, where we lay out the 
add-on component--that is to say, the required thrift plan, if 
you will. We suggest that there be mandatory contributions of a 
total of three percent for covered employees, paid half by 
employers and half by the individual. Those go into private 
accounts, privately managed, and privately held.
    We would also recommend that they not be borrowed against. 
They are for retirement only and may not be used for college 
educations. We would argue that they should be annuitized at 
the end, so that they serve the purpose they were intended for, 
to cover retirement.
    Thank you, Mr. Chairman.
    [The prepared statement and attachment follow:]

Statement of Bruce K. MacLaury, Chairman, Subcommittee on Social 
Security Reform, Committee on Economic Development; and President 
Emeritus, Brookings Institution

                              Introduction

    Thank you, Mr. Chairman. My name is Bruce MacLaury. I am 
President Emeritus of the Brookings Institution. I also serve 
as Chairman of the Emergency Transitional Education Board for 
the District of Columbia Public Schools. Today, I am here as a 
trustee of the Committee for Economic Development, which is the 
nation's oldest business-led education and policy research 
organization. I recently chaired a group of CED trustees that 
produced a policy statement, Fixing Social Security,\1\ on 
which my testimony is based. I will refer to this report from 
time to time and I ask that it be made part of the official 
record.
---------------------------------------------------------------------------
    \1\ Committee for Economic Development, Fixing Social Security 
(1997), NY (61 p).

---------------------------------------------------------------------------
CED and Social Security Reform 

    The Committee for Economic Development is an independent, 
nonpartisan organization of approximately 250 national business 
and education leaders who, for the most part, are CEOs of 
business firms or universities. CED trustees produce policy 
statements from the perspective of the national interest on 
many of the major economic and social issues of our time. For 
over half a century, CED has crusaded for policies that would 
lead to higher economic growth and greater economic 
opportunity. Only last year, CED completed a study and issued a 
report, Growth With Opportunity, which reasserts this 
fundamental position.
    The need to reform Social Security stands squarely in this 
tradition. The challenge is not simply to ``fix'' Social 
Security and enhance retirement security, but to do so in a way 
that is consistent with higher economic growth and greater 
economic opportunity for the benefit of all Americans. My 
purpose today is to place Social Security reform in this 
context by first explaining how CED defined and approached the 
problems of Social Security and then describing the change in 
direction we recommend.

                          What is the Problem?

    What is the project on Social Security is the second of a 
two-part effort to focus attention on the economic security of 
our aging population, and its relation to our nation's number 
one long-term economic problem--low national saving, 
investment, and growth. Chart 1, which is Figure 13 in Fixing 
Social Security, illustrates this problem. CED's Social 
Security statement, issued last February, followed a statement 
issued two years earlier on problems with private retirement 
saving in this country, entitled Who Will Pay for Your 
Retirement? The Looming Crisis. That statement called attention 
to the significant regulatory disincentives for retirement 
saving in the current private pension system. Fixing Social 
Security focuses primarily on the public side of the retirement 
saving problem.
    In its deliberations, CED concluded Social Security faces 
two fundamental problems: Social Security is not only out of 
fiscal balance, it is also out of political balance owing to 
declining support among younger workers, who correctly perceive 
Social Security as a ``bad deal'' for them. Consequently, 
failure to address both imbalances would doom any serious 
reform effort.
    In the course of our study and deliberations about the 
problems confronting Social Security, we found no magic bullet. 
We did, however, develop a proposal that will address both of 
these problems. CED does not have any easy fixes, such as 
privatization schemes that often skirt the question of 
transition costs. Quite the contrary, we believe that fixing 
Social Security will involve some sacrifice. But failure to 
address the fiscal and political imbalance problems head-on, 
and soon, will necessarily make reform far more costly, 
painful, and politically difficult later, when the need to 
reform takes on crisis proportions.

                 CED's Social Security Reform Criteria

    CED trustees first defined a set of criteria against which 
reform options should be evaluated. These criteria also helped 
us identify realistic reforms and reject unfeasible ones. om 
the onset that it is impossible to fully satisfy all criteria 
simultaneously.

Fundamentally, CED believes that Social Security must be 
fiscally sound with an adequate safety net for all 
participants, but with increased funding of future benefits so 
as to reduce intergenerational inequity. Specific reform 
criteria, taken from our report (p. 36) are:

     Social security should provide a minimum 
retirement income, that is, a safety net, for all workers and 
their families.
     A fundamental objective of Social Security reform 
is to increase national saving, so that the burden of 
supporting rising numbers of elderly is made less onerous by 
more rapid capital accumulation and economic growth.
     Social security reform should not derail the 
critical economic objective of eliminating deficits in the 
federal budget.
     The Social Security benefit structure should 
retain an element of income redistribution, whereby the ratio 
of benefits to contributions is higher for lower-income 
workers.
     Participation in the Social Security benefit 
system by workers should be universal because the burden of 
supporting the redistribution and insurance elements of Social 
Security should be shared as broadly as possible.
     Reform measures should be administratively 
feasible, should not raise administrative costs significantly, 
and every effort should be made to minimize management fees 
arising from investments in private assets.
     Social Security reform should strive for greater 
equity between generations and for better returns on 
contributions than the present system will provide for future 
retirees.
     It should also seek greater equity among current 
participants, particularly between workers with nonworking 
spouses and other retirees.
     Reform measures should minimize disincentives for 
labor force participation by the elderly and encourage private 
saving.
     Changes that have a continuing positive effect on 
the system's actuarial balance and provide automatic responses 
to changed circumstances (such as larger-than-an-anticipated 
increase in life expectancy) are preferable to one-time changes 
that merely postpone insolvency.
     Changes in Social Security benefits should be 
enacted promptly and phased in gradually. Workers need 
reasonably accurate information concerning expected Social 
Security income in order to make informed decisions about 
retirement saving and retirement age, and they require adequate 
lead time to plan and adjust their behavior to any changes in 
the system.

Through CED's deliberate, analytical approach, we were able to 
reject several approaches:

     We reject ``full privatization'' because such a 
system is unlikely to preserve an adequate social safety net 
and faces difficulties in financing the transition to a 
private-based system--the so-called ``double-burden'' which 
must be paid by some group of tax payers who must meet the 
obligations of the already, or soon-to-be, retired, as well as 
their own retirement. Many advocates of privatization fail to 
address this transition cost at all, or dismiss it by arguing, 
quite unconvincingly in my view, that it can be easily 
resolved. When pressed, their solutions often involve totally 
unrealistic and unacceptable schemes,\2\ including higher 
taxes, and/or debt and deficits.
---------------------------------------------------------------------------
    \2\ Some of these include sale of government assets (such as public 
land), a national sales tax, and elimination of ``corporate welfare.''
---------------------------------------------------------------------------
     We also reject the ``partial privatization'' 
schemes that divert or ``carve out'' a large portion of the 
existing payroll tax to fund private personal security accounts 
(PSAs). The primary reason for rejecting this approach is the 
enormous build up of public debt that would be necessary to 
make up the loss of income to the trust fund that results from 
the carved-out revenue. Some advocates of the carve-out 
approach argue that this added debt is not a problem because it 
merely makes unfunded federal obligations explicit rather than 
implicit as they are in the current pay-as-you-go system. 
However, this argument fails to recognize the economic 
difference between an unfunded liability, which can be altered 
by law, and a contractual debt, which cannot be wiped clean 
short ofrepudiation, with its unacceptable, even catastrophic, 
consequences. We also rejected the PSA approach because the 
reductions in the basic benefit would reduce the social safety 
net to levels below which CED finds necessary to protect all 
members of society.
     CED also rejects the so-called ``maintain 
benefits'' approach because its implausibility it ignores the 
political dimension of declining support for Social Security, 
especially among young people. The falling support is related 
directly to the ``moneysworth,'' or rate of return, issue. As 
noted above, CED believes that failure to address the issue of 
falling political support along with the problem of fiscal 
solvency can only lead to a far more costly reform in the 
future.
     Nor do we agree with the argument made by 
advocates of the ``maintain benefits'' approach that implies 
that Social Security's fiscal problem is relatively small and 
therefore can be easily fixed. Even using the Social Security 
actuaries' intermediate projection, which many regard as 
optimistic, the current 75-year actuarial deficiency is 2.2 
percent of taxable payroll. This translates into a 17.4 percent 
increase to the current payroll tax today. I see very little 
support today for tax increases in general, let alone one of 
that size and for this purpose. I emphasize this last point 
because I ask you to keep in mind the fact that this actuarial 
deficiency increases with delay; the cost in terms of abrupt 
change--that is, a larger tax hike or benefit cut--goes up each 
year reform is delayed.\3\ Moreover, CED is skeptical that the 
added revenue from such a tax increase would be saved rather 
than spent by the government, and we are concerned that such a 
tax increase would raise labor costs and make the U.S. economy 
less competitive.
---------------------------------------------------------------------------
    \3\ The 75-year actuarial deficit deteriorates simply do to the 
passage of time. Each year, when the projection is updated, a 
``surplus'' year is dropped and a ``deficit'' year is added to the 
projection horizon.
---------------------------------------------------------------------------
     Finally, with respect to this approach, CED 
strongly opposes the proposal to invest public trust fund 
assets in private securities. We regard this as posing an 
unnecessary and undesirable risk to the independence of the 
private sector.

                       CED's Plan/Recommendations

    I turn now to CED's plan for reform of Social Security. 
CED's approach fits best in the so-called ``add-on'' category 
of reform proposals because we would add a second tier to the 
basic Social Security system. Consistent with our ing Social 
Security must address both the fiscal and political 
sustainability problems, we have proposed a two-pronged reform 
package.

Part I--Restore Solvency to the Current Basic Benefit System 

    A solvent and viable defined benefit system very similar to 
the current program is integral to CED's plan. CED would ensure 
long-term solvency of the current system by preserving the 
existing financing base--the payroll tax--and by gradually 
making equitable reductions in Social Security benefits.
    Our recommendations for benefit changes to the Social 
Security trust fund are similar to those made by others in this 
regard. But, unlike other proposals, the savings from CED's 
proposed reforms exceed by a substantial margin the amount 
necessary to meet the 75-year actuarial requirements. We did 
this for two important reasons: 1) to provide a cushion in 
light of previous overly optimistic projections, and 2) to 
ensure fiscal balance beyond the 75-year projection period (not 
simply making it to the 75th year, and then going belly-up).
    Specifically, CED's recommendations would:
    1. Gradually reduce the growth of the initial benefit (the 
PIA);
    2. Gradually increase the years of covered employment 
necessary to receive full benefits from 35 to 40 years;
    3. Gradually raise the normal retirement age to 70 years 
(while preserving a less generous early retirement option at 
age 62);
    4. Tax Social Security benefits in excess of contributions, 
as is now done for private pensions (a long-standing CED 
recommendation).
    These changes would have little or no effect on current 
beneficiaries or older Americans near retirement. Given current 
long-run projections, the modest changes to the current benefit 
structure recommended by CED should be more enough than to 
restore 75-year actuarial balance. And if current projections 
turn out to be correct (i.e., if they do not deteriorate with 
time as they have in the past), you or your successors can have 
the pleasant task of restoring benefits or cutting payroll 
taxes.

Part II: A Second Tier--Private, Individual Retirement Saving 
Accounts

    As I argued above, addressing only the fiscal imbalance in 
the current system ignores the political reality of the growing 
dissatisfaction with the current system that stems from the low 
rate of return received by younger workers on their 
contributions. In CED's view, the Social Security problem will 
not be solved unless the overall ``moneysworth'' of Social 
Security is raised. In fact, fixing the fiscal side of the 
problem--which necessarily means raising taxes and/or cutting 
benefits--would further reduce the rate of return, which in 
turn would further undercut the crucial political support for 
Social Security.
    To accomplish this CED therefore proposes a new, compulsory 
saving program that will help restore the moneysworth of Social 
Security contributions. We believe it will also significantly 
raise national saving. Our country's chronically low saving 
rate is especially relevant in the context of Social Security 
reform because higher national saving is essential to produce 
the higher productivity gains needed to support equitably 
future workers and retirees.
    Specifically, we recommend adding a system of universal 
Private Retirement Accounts (PRAs) to Social Security. PRAs 
would be funded by a mandatory contribution, amounting to three 
percent of payroll, split evenly between employees and their 
employers. This increased contribution would represent an 
increased cost, but because those making the contribution would 
own the resulting PRAs' assets(through a non-governmental 
intermediary), contributions should not be seen as a tax. The 
government would not have access to these funds. The mandatory 
contribution would be similar to a state mandating that drivers 
obtain private automobile insurance. Funds in PRAs would be 
managed by individuals and could only be invested in approved 
financial instruments, including private securities. That the 
funds would not be held by the government distinguishes CED's 
recommendation for private retirement accounts from the ``add-
on'' approach suggested by Chairman Gramlich of the Advisory 
Council, which recommends that the accounts be held by the 
government (Gramlich's proposal calls for a 1.6 percent 
contribution by individuals, with no contribution from 
employers). The reason this approach should add to national 
saving is that many Americans currently do not save, or save 
very little, and would therefore be unable to divert 
contributions from other saving plans to their PSA 
contributions. Moreover, about half of all workers currently 
are not covered by private pension plans; under CED's proposal 
for universal mandatory PSAs, all workers would have a defined-
contribution, private pension plan.
    Quite apart from esoteric arguments of budget scorekeeping, 
we believe there is a fundamental, and economically important, 
difference between the federal government holding these assets 
and individuals holding them. If the government holds the 
accounts, there is a real risk the money will be spent by the 
government.\4\
---------------------------------------------------------------------------
    \4\ When Congress refused to raise the federal debt limit in late 
1995, Treasury Secretary Rubin delayed interest payments and withdrew 
funds from the individual accounts of federal employees in order to 
avoid default (see Fixing Social Security, op cit, p. 47).
---------------------------------------------------------------------------
    Contributions to the private accounts would made from pre-
tax income, similar to 401(k) contributions, and would be 
fulthey are withdrawn. Regulation would also be similar 
401(k)s. Funds must be held until, and annuitized at, 
retirement. We elaborate on these and related recommendations 
in our report. Adding a second tier of PRAs to a fiscally-
solvent Social Security would achieve several desirable 
objectives (the following are taken from p. 54 of the CED 
report, Fixing Social Security):
     Protect the basic economic security of future 
retirees by 1) ensuring the solvency of the basic defined-
benefit system and 2) creating a new, privately owned source of 
retirement income for all workers;
     Raise national saving and thereby provide for 
greater capital formation needed to achieve higher long-term 
economic growth (thus making it easier to finance the nation's 
retirement needs);
     Prevent the return on contributions from falling 
to unacceptable levels and restore the faith of younger workers 
in the Social Security system; and
     Help part-time, self-employed, and contingent 
workers adjust to changing labor market conditions by providing 
a new source of fully portable retirement benefits for those 
without employer-provided pensions.

                           Concluding Remarks

    The costs of not acting expeditiously to reform Social Security are 
high. We are on an unsustainable course, which means it is meaningless 
to compare future benefits based on current law to benefits of various 
reform options. Likewise, it is wrong to look at the trust fund's 
balances and conclude that there is plenty of time to act. The trust 
fund is an accounting construct that bears little or no relation to the 
long-term fiscal health of the economy as a whole. Long before the 
trust fund would become technically insolvent (around the year 2029) 
its outlays would greatly exceed revenues, forcing the government to 
borrow massively to redeem the trust fund assets. The economic 
consequences of borrowing to pay our liabilities under the existing 
program will bite and bite hard. There is no ``drop dead'' date, but 
the impact will be felt in credit markets around 2010, whon after the 
baby boomers begin retiring.
    Waiting until the problem becomes a crisis will entail not just 
incalculable political pain, but far greater costs. Facts alone 
apparently will not carry the day. Political leadership is needed. Only 
policy makers--Republicans and Democrats, Congress and the 
Administration--can put Social Security reform on the table and then 
act in the best public interest. Acting now would allow gradual phase-
ins of program modifications; acting later will not. As we conclude in 
our report, acting now, ``is the only way to avoid harmful tax levels, 
benefit cuts, or massive budget deficits in the future'' (p. 54).
    Finally, I would like to make a personal observation consistent 
with what I have just said. It strikes me as possible that enactment of 
the balanced budget agreement will provide a window of opportunity for 
Social Security reform, when the issue can be faced not in the context 
of balancing the budget or deficits, but rather in the context of 
protecting the system and its present and future beneficiaries.
    (i) In accordance with the disclosure rules of the U.S. House of 
Representatives applicable to witnesses, The Committee for Economic 
Development does not accept federal funds.
      

                                

[GRAPHIC] [TIFF OMITTED] T1071.012

      

                                

    Mr. Bunning. Thank you, Doctor. If you would stay around, 
we would like to ask questions of some of you.
    Mr. Macey.

STATEMENT OF SCOTT J. MACEY, CHAIRMAN, ERISA INDUSTRY COMMITTEE

    Mr. Macey. Good afternoon. I am Scott Macey. I'm appearing 
in my capacity as chairman of the ERISA Industry Committee. We 
appreciate the opportunity to testify before the Subcommittee.
    We are not here today to evaluate or comment upon the need 
for Social Security reform or specific proposal regarding 
Social Security reform. Rather, our primary concern today, and 
ongoing, is the interrelationship of Social Security and the 
private pension system. We respectfully urge the Subcommittee 
to study and evaluate the role of the private pension system in 
retirement security and the impact any reform proposal or 
actual legislation is likely to have on the employer-sponsored 
pension plan system. It is somewhat like a necessary ``pit 
stop'' at the Indy 500. It's critical to the ultimate success 
of whatever this Subcommittee, and ultimately the Congress, 
does.
    We note with agreement that Congressman Pomeroy from North 
Dakota commented at length upon the critical and significant 
contribution of the private pension system to the well-being of 
millions of Americans.
    We have submitted written testimony, and we call your 
attention to it. In the few minutes available this afternoon, 
we would like to comment on a few of our primary concerns. 
Before that, I would like to mention a few background facts.
    First, there is widespread and increasing participation in 
private pension plans. Second, there is widespread and 
increasing receipt of benefits by millions of Americans under 
those plans. These private plans are important to employers, 
but they're critical to the financial security of millions of 
American families. In fact, private pensions now pay as much 
annually as the Social Security system does in the total amount 
of benefits.
    The key point, and our critical concern, is the 
relationship and interrelationship of Social Security and 
private pension plans. These two systems, in a way, are joined 
at the hip. Almost all plans take Social Security into account, 
either implicitly or explicitly, in one fashion or another, and 
frequently both in the design and in the determination of the 
amount of benefits. Any changes to Social Security will 
necessarily impact the private pension system and the design 
and operation of private pension plans.
    It is critical that the consequences of Social Security 
reform on the private employer pension system be evaluated by 
this Subcommittee and Congress as a whole. Such consequences 
could be significant; and they could be adverse. They could be 
adverse to the employer sponsors, but, more significantly; and 
they could be adverse to millions of working Americans and 
their families.
    Social Security does not operate in a vacuum. Rather, it is 
only a part of a sound retirement policy, which also includes 
private pensions and individual savings. The total dollars 
employers have available to spend between Social Security and 
employer provided benefits under the private system are 
limited. Any reform will not cause the size of that pie to 
grow. We hope that, whatever reform emerges, it does not 
inadvertently result in shifting responsibilities, or is not a 
veiled attempt to shift responsibilities of the public system 
to the private sector, which is already funding and 
administering a multitrillion dollar system on behalf of tens 
of millions of Americans. Our concerns include shifting to the 
private sector any responsibility to manage and administer the 
public system.
    The nature and specifics of Social Security reform will, of 
course, dictate the specific issues affecting pensions that 
will need to be addressed. But in any reform, issues such as 
benefit levels and design, changes to employee expectations 
that may change employee behavior with respect to pension 
plans, and administrative challenges and funding issues will 
need to be explored.
    We urge this Subcommittee and all of Congress to evaluate 
the reform proposals with a clear focus on the impact on the 
private system. There is no easy fix; there is no easy answer. 
The issues are complex and they are deserving of detailed 
attention.
    The term may be trite, but in reality, we are dealing with 
a zero-sum game. We hope that we don't take pressure off the 
Social Security system and cause problems or put pressure on 
the private system. The Social Security and private retirement 
systems really operate together, and any reform in one must 
consider the impact on the other. Also, in any reform proposal 
or actual legislation, we hope that there is sufficient lead 
time and transition time so that the private system and 
millions of Americans will have the time to react to those 
changes and plan for their retirements.
    In a way, this whole process reminds me somewhat of a 
Chinese ideogram, the Chinese ideogram for crisis. I am told--
and I don't study the Chinese characters personally--but I'm 
told the Chinese ideogram for crisis is really two separate 
symbols, one for danger and one for opportunity. We hope that 
this Subcommittee and Congress heed some of the warnings of the 
dangers that Social Security reform could have for the private 
pension system if the issues aren't evaluated, and take the 
opportunity to review the private pension system and the impact 
on the private pension system that any of these reform 
proposals will have.
    Thank you very much for the opportunity to testify.
    [The prepared statement follows:]

Statement of Scott J. Macey, Chairman, ERISA Industry Committee

    Mr. Chairman, members of the Subcommittee, my name is Scott 
Macey. I am Executive Vice President, General Counsel of AT&T/
ASA Actuarial Sciences Associates, Inc. I appear before the 
Subcommittee in my capacity as Chairman of The ERISA Industry 
Committee, and my remarks represent solely the views of that 
organization.

                      The ERISA Industry Committee

    The ERISA Industry Committee (ERIC) represents the employee 
benefits interests of over 130 of America's largest companies. 
ERIC's members provide comprehensive retirement, health care 
coverage and other economic security benefits directly to some 
25 million active and retired workers and their families. Thus, 
we have a strong interest in proposals affecting our members' 
ability to deliver those benefits, their cost and 
effectiveness, as well as the role of those benefits in the 
American economy.

                              Introduction

    Too often, discussion of Social Security reform treats the 
Social Security program as though that program operates in 
isolation and independently from other significant sources of 
retirement security. Retirement income security today is 
provided not just through Social Security but also through 
voluntary, employer-sponsored retirement plans, individual 
savings, family support, and, increasingly in recent years, 
part-time work \1\. In fact, Social Security provides less than 
one half of the combined income of individuals age 65 and 
older.\2\
---------------------------------------------------------------------------
    \1\ At the end of 1993, according to the Bureau of Labor Statistics 
(BLS), 1.4 million male retiress age 50-64 also worked, up from 1 
million in 1984, even though the size of the cohort of all males aged 
50-64 (working, partially retired, and retired) was approximately 15.8 
million in both years. In most cases they worked full time for an 
employer other than the one providing their pension. Among those age 
55-61, 49% had jobs in 1993 compared to 37% in 1984; and 73% of male 
pension precipients age 50-54 also had jobs, up from 64% in 1984. [AARP 
Bulletin, July-Aug 1995, p. 8.]
    \2\ In 1993, individuals age 65 and older received 42.3% of their 
income from social security, 20.5% from pensions and annuities, 18.6% 
from income-producing assets, 15.1% from wages, and 3.4% from other 
sources. [EBRI tabulations of the March 1994 Current Population Surveys 
(CPS), as reported in the June 1995 EBRI Notes.]
---------------------------------------------------------------------------
    If any other source of retirement income is highlighted at 
all in discussions of Social Security reform, it is usually 
individual savings. Seldom, however, is the role of employer-
sponsored retirement plans considered.
    While Congress may need to enact Social Security reform in 
the near future, I am not here today to offer our opinion on 
the need for Social Security reform nor to discuss the merits 
of one set of reform proposals over another. The ERISA Industry 
Committee and its members are, like this Subcommittee, 
reviewing all the available data, and as a group have not 
determined what is appropriate Social Security reform.
    I am here instead to urge that the Subcommittee begin now, 
as part of its examination of the challenges and options facing 
the Social Security program, to consider the role of voluntary, 
employer-sponsored retirement plans and the impact of Social 
Security reform on those plans. Failure to do so likely will 
result in significant disruption to the private retirement 
system and the possible loss of valuable retirement benefits to 
millions of workers.

            The Role of Employer-Sponsored Retirement Plans

    First, it is helpful to review the scope of the present 
employer-sponsored retirement system:
     Retirement as an Option. In recent decades, 
choosing to retire while still physically vigorous became an 
option for a rapidly increasing percentage of workers. This is 
especially evident in statistics tracking retirement practices 
of male workers. In 1970, 83% of all men aged 55-64 and 26.8% 
of men aged 65 and over were in the work-force. By 1994, only 
65.5% of men aged 55-64 and 16.8% of men aged 65 and over were 
work force participants.\3\ The availability of employer-
sponsored pensions has been a critical factor in these trends.
---------------------------------------------------------------------------
    \3\ Statistical Abstract of the United States 1995, page 399. 
(Note: Interestingly, and perhaps for unrelated reasons, the workforce 
participation rate for women aged 55-64 actually increased during this 
period and remained relatively constant for women age 65 and over. [see 
EBRI Issue Brief #140, Aug 1993.])
---------------------------------------------------------------------------
     Widespread Participation. In 1993, 51 million out 
of 118 million civilian workers (43%) participated in (i.e., 
were accruing benefits under) employer-sponsored retirement 
plans. Of those 51 million, 44 million already had a vested 
(i.e., nonforfeitable) right to a benefit.\4\ Plan 
participation is concentrated among workers most likely to 
require benefits in excess of Social Security in order to 
retire. Participation in plans is lower for younger workers and 
increases dramatically for older workers. In 1993, plan 
participation for workers age 41-50 was 62%.\5\ Participation 
also increases dramatically for workers earning more than 
minimal wages. Among men earning between $30,000 and $39,000 in 
1993, 75% participated in a plan, and women at these wage 
levels had a slightly higher participation rate than men.\6\
---------------------------------------------------------------------------
    \4\ EBRI Issue Brief #153, Sept. 1994, p. 21; EBRI tabulations of 
April 1993 CPS employee benefit supplements.
    \5\ EBRI Issue Brief #151, July 1994, pp. 19-20; EBRI tabulations 
of April 1993 CPS employee benefit supplements.
    \6\ Schieber, Sylvester J., and Laurene A. Graig, U.S. Retirement 
Policy: The Sleeping Giant Awakens, The Wyatt Company, 1994, pp 24-25.
---------------------------------------------------------------------------
     Widespread Receipt of Benefits. Since 1974 (the 
year the Employee Retirement Income Security Act, ERISA, 
reforms were enacted), the number of individuals and retired 
families receiving benefits from employer-sponsored plans has 
climbed steadily, due in part to ERISA's vesting rules, benefit 
protections, and funding standards. In 1974, approximately 25% 
of retired families received benefits from employer plans; by 
1988, 40% of retired families were receiving such payments. By 
2018, when the baby-boom cohort will be moving rapidly into 
retirement, the 40% is expected to climb to over 75% of retired 
families, and to pass the 80% mark shortly thereafter.\7\ That 
80% of retired families in the U.S. will receive benefits from 
a voluntary employment-based system is a mark of the private 
sector's success under current federal law in establishing and 
expanding employer-sponsored plans. It is also evidence of the 
importance of supporting this system for the future as the 
baby-boom generation retires.
---------------------------------------------------------------------------
    \7\ EBRI Databook, pp. 105 & 115. ``Retired families'' are defined 
as married couples living together where at least one spouse is age 55 
or over and nonmarried persons aged 55 and over. The data assumes that 
lump-sum distributions are preserved until retirement and that income 
is paid in the form of an annuity, but provide a realistic estimate of 
the proportion of baby boomers who will earn pension wealth and benefit 
from it economically.
---------------------------------------------------------------------------
     Value to Employers. Employers traditionally have 
valued retirement plans as effective management tools to 
attract and retain employees, to motivate employees, and to 
facilitate the departure from the workforce of older employees 
who either cannot or do not desire to continue working.\8\ 48% 
of U.S. workers surveyed in the 1994 EBRI/Greenwald Retirement 
Confidence Survey responded that money provided through 
employer-sponsored pension or savings plans would be their most 
important source of retirement income. This compares to 27% who 
expect personal savings or investments to be the most important 
source, 14% who named social security, and 9% who named other 
sources as most important. [EBRI Issue Brief #156, p. 12.] More 
recently, it is also clear that the impact on employees due to 
the downsizing and reorganizing of many U.S. companies in 
recent years was dramatically reduced through the flexible use 
of early retirement options under employer-sponsored pension 
plans.
---------------------------------------------------------------------------
    \8\ The value of employer-sponsored pension plans to employers, who 
must effectively manage their workforces, and to employees who desire 
personal economic stability may be reflected in survey responses that 
indicate that current workers expect that funds provided through 
employer-sponsored pension or savings plans will be their most 
important source of retirement income. Of U.S. workers surveyed in the 
1994 EBRI/Greenwald Retirement Cindfidence Survey, 48% responded that 
funds provided through employer-sponsored pension or savings plans 
would be their most important source of retirement income. [EBRI Issue 
Brief #156, June 1994, p. 16.]
---------------------------------------------------------------------------
     Critical Component of Retirement. For the past 
several years, annual benefits paid from employer-sponsored 
retirement plans have matched those paid from the Social 
Security system.\9\ Employer-sponsored plans also hold the bulk 
of funds in retirement savings plans. In 1994, of the $5.9 
trillion in all retirement plan trusts (including public 
employer plans, private employer plans, Individual Retirement 
Accounts (IRAs), and Keogh plans), over $4.9 trillion was in 
public employer and private employer-sponsored plans.\10\
---------------------------------------------------------------------------
    \9\ In 1994, employer plans paid $313 billion in benefits compared 
with $312 billion in benefits paid from the combined Social Security 
Old Age and Survivors and Disability (OASDI) programs. [Unpublished 
updated table for EBRI Databook, p. 14.]
    \10\ IRA and Keogh plan assets totaled $975 billion in 1994. 
[Unpublished EBRI data.]
---------------------------------------------------------------------------

       The Role of Social Security as a Basis for Employer Plans

    Congress must recognize that changes to the Social Security 
program will trigger changes in the employer-sponsored 
retirement plan system. While it cannot stand by itself in 
providing adequate retirement income to the elderly, Social 
Security has been a bedrock of the U.S. retirement system since 
it was introduced in 1935. Almost all pension plans, including 
those sponsored by the employers ERIC represents, take into 
account as part of their design the government's promise that 
Social Security benefits will be paid at a certain age in 
certain amounts. If Social Security, which already accounts for 
a significant part of the employer's total compensation cost, 
does not deliver the benefits currently scheduled to be 
provided, employers will not be able to make up the difference 
without adverse consequences elsewhere, including reduced 
business competitiveness or reduced employment.
    Employer-sponsored retirement plans take many forms. 
Employers often design their retirement plans to further 
business and workforce goals. An employer may sponsor a 
traditional defined benefit plan or a traditional profit-
sharing or defined contribution plan. But the employer may also 
choose among a growing number of plan designs. The most popular 
``new'' plan by far is the 401(k) plan, but other plans such as 
target benefit plans, age-based profit-sharing plans, cash 
balance plans, pension equity plans, floor offset plans, or 
retirement bonus plans may be used by an employer to meet its 
workforce needs. Social Security reform could impair the 
ability of these plans to meet business and workforce needs and 
to deliver benefits to employees.
    Each substantive Social Security reform proposal is likely 
to be compared in detail to the present Social Security program 
in terms of benefit adequacy, benefit equity, financial 
stability, and impact on the economy. The important point is 
that each such proposal also must be analyzed to determine how 
it will affect employer-sponsored plans and their ability to 
meet their own objectives. Once reform is enacted, we can be 
certain that each employer sponsoring a plan or plans will ask 
those questions--and will modify its plans accordingly.
    Finally, once the effect of the proposed Social Security 
reform on current employer-sponsored plan designs is 
understood, we must also ask whether the new combined system is 
likely to meet societal goals of providing retirement income to 
individuals, since neither the Social Security system nor the 
employer-sponsored pension system has been designed as stand-
alone retirement programs.

                  Specific Areas That Must Be Examined

    While the extent of changes triggered in employer-sponsored 
plans obviously will be determined by the contours of whatever 
Social Security reform Congress enacts, there are several areas 
of change that we believe will be important to examine in any 
reform effort. Employer plans currently rely on Social Security 
benefits of certain amounts being paid at specified ages. 
Indeed, according to Social Security expert Robert Myers, 
benefits provided under the Social Security program have been 
remarkably stable over the past six decades. According to his 
calculations, the wage replacement rate for an average worker 
in 1940 was 40 percent--approximately the same level that it is 
today.\11\ We are only now confronting the first increase in 
the age at which full benefits must be obtained.
---------------------------------------------------------------------------
    \11\ Myers, Robert J., Social Security, Second Edition, p. 262.
---------------------------------------------------------------------------
    Many of the various Social Security reform proposals 
introduced to date reduce Social Security benefit levels, 
further delay the age at which full Social Security benefits 
may be claimed, seek to approximate current Social Security 
benefit levels through a combination of a smaller defined 
benefit and an individual savings account plan, or some 
combination of these options.
    Any of these changes--which Congress may find necessary to 
preserve the basic integrity of the Social Security program--
will have effects on the future design and efficacy of benefits 
paid from employer-sponsored plans that must be taken into 
account. The effects that we at ERIC have identified to date 
fall into four general categories: (1) the design of employer 
plans and the benefit levels provided by those plans, (2) 
changes in employer plans prompted by employee responses to a 
changed Social Security program; (3) administrative challenges 
of moving to an altered Social Security program; and (4) other 
issues.

                       Benefit Designs and Levels

    The most immediate impact of changes in Social Security 
benefits levels will be on plans that are ``integrated'' with 
Social Security. Under the Internal Revenue Code, employers may 
take the availability of Social Security benefits into account 
in their benefit plan formulas either explicitly or implicitly. 
These provisions of law recognize that employers pay one-half 
of the Social Security taxes and that Social Security benefits 
are weighted toward lower wage levels.
    As the Subcommittee knows, Social Security benefits 
generally replace a little over 40 percent of the wages of a 
worker earning $26,000, and almost 60 percent of the wages of a 
$12,000-a-year low wage worker. However, Social Security 
benefits replace less than 20 percent of the wages of a worker 
earning $80,000 at the end of his or her career. In order to 
retire, the worker earning $80,000 at retirement must have a 
greater replacement of wages from his or her pension plan and 
private savings than the lower wage worker. If the defined 
benefit portion of Social Security is significantly reduced, 
benefits from the pension plan will, under some plan designs, 
automatically increase and become dramatically more expensive, 
and under other designs, result in a decrease in their 
essential value. Regardless of the plan design, however, 
employers necessarily will reassess the efficacy of their plans 
and make adjustments designed both to meet their business needs 
and to manage the financial costs.
    While the benefits provided under approximately one-half of 
pension plans are adjusted to reflect the availability of 
Social Security benefits, virtually all plans assume that their 
participants will receive Social Security benefits similar to 
those of current law. In addition, most plans are designed to 
allow employees to replace a certain portion of their wage 
income with both Social Security and pension benefits. Thus, 
all plans will be affected by reductions in the Social Security 
defined benefit whether or not the plan's design explicitly or 
implicitly links its benefits to Social Security benefits. We 
urge the Subcommittee to analyze the relationship between 
Social Security and private pensions in order properly to 
allocate the burdens and benefits of any changes and to allow 
for a significant transition period.
    Employer reactions could include increasing pension 
benefits at the expense of other components of the compensation 
package, relying on employees to provide a greater portion of 
their retirement income through personal savings, severing 
promised benefits from replacement rate targets, targeting a 
greater percentage of plan expenses on employees who are near 
retirement age compared to employees who may leave the company 
prior to retirement, or reassessing total workforce needs.
    Other areas where changes in Social Security benefits may 
have a direct impact on benefits provided under employer plans 
include:
     Plans that provide ``bridge benefits'' from the 
date of retirement under the plan until the employee reaches 
the Social Security retirement age could incur dramatic 
increases in cost; and
     Plans that provide a guaranteed minimum benefit 
level could be required to pay that benefit with greater 
frequency.

                           Employee Responses

    The ability of an employer's plans to meet its business 
objectives is significantly affected by employees' responses to 
the opportunities provided under those plans. For example, if 
an employer's plan is designed to provide employees with an 
income that will allow them to retire at a certain age, but the 
employees do not perceive that they will have sufficient income 
to retire at that age under a new Social Security system, then 
they will not retire when the employer expected. The employer 
must adjust the plan, slow down its hiring or increase layoffs, 
or make other changes in its business operations. If an 
employer plan is designed to provide employees with a certain 
level of personal savings, but employees, under a new Social 
Security system, either increase or decrease their 
participation in the employer plan, then the objectives of that 
plan, and its role in the employer's compensation package, will 
be reassessed by the employer. In order to meet employee 
expectations in a tight labor market, for example, employers 
may reduce support for such retirement plans in favor of cash 
compensation, reducing both national and personal savings.
    The Subcommittee should consider several critical questions 
in its deliberations:
     If a new Social Security system includes 
individual employee savings accounts, what impact will the 
existence of those accounts have on similar programs managed by 
employers? Will employees increase or decrease their savings in 
employer plans? Will the provision of matching savings by the 
employer make a significant difference in employee behavior?
     If a significant portion of the current Social 
Security annuity benefit is replaced by individual accounts 
where the employee bears the risk of investment performance, 
will employees ask employers to establish or increase benefits 
provided under defined benefit plans at the worksite? If they 
do, will the government be willing to reverse the trend of the 
last fifteen years and remove the many funding restrictions 
that have been imposed on these plans in order to raise 
revenues for federal government expenditures?
     If employees are denied pre-retirement access to 
savings in any new Social Security individual accounts, will 
that increase pressure to provide access to retirement savings 
in employer-sponsored individual savings plans? If employees 
are provided pre-retirement access to savings in Social 
Security individual accounts, will that increase or decrease 
pressure to provide access to savings in employer-sponsored 
plans?
     If the Social Security retirement age is 
increased, will that increase pressure on employers to provide 
``bridge'' benefits, even if other benefits must be reduced?
     If the Social Security retirement age is increased 
and pressure increases to delay retirement, what will be the 
impact on plans that cease accruals at a certain point (usually 
after a number of years of service)? And what will be the 
impact of the increased cost of delayed retirement on plans 
that provide accruals indefinitely?
     Finally, while employers already invest heavily in 
programs to educate their employees about retirement, Social 
Security reform will dramatically increase the need for such 
education. Will this be left to employers, or will this be a 
cooperative venture with the government?

                        Administrative Concerns

    Many questions already have been raised about 
administrative issues that would arise under some of the 
proposed changes to the Social Security program, especially a 
Social Security program that includes an individual account 
plan. We hope that this Subcommittee and the Congress does not 
assume that the burden of administering such a program should 
be shifted to employers. That burden would dramatically 
reducing the ability of employers to meet employee needs 
through their own plans. Moreover, relying on employers would 
vastly complicate the tracking of necessary information since 
the Social Security account would have to be transferred--
sometimes repeatedly--as the employee moved from workplace to 
workplace.
    Just as critical--and consistently overlooked--is the 
design and administration of the employer's own plans during a 
period of transition to a reformed Social Security program. It 
is entirely possible that an employer who now has a single 
retirement plan for its employees would be forced 
simultaneously to administer its current plan for older 
employees, who likely would be grandfathered under the current 
Social Security program, an entirely different plan for young 
employees, who expect to retire under a reformed Social 
Security program, and one or more other plans for middle-age 
employees who are under one or more transitional Social 
Security programs.
    Obviously, this complicates not just plan administration 
but employee education and could easily frustrate an employer's 
ability to meet its business objectives. Under such 
circumstances, many employers--particularly small employers--
may decline to offer a retirement plan to their employees. 
Increasing administrative expenses has, in the past, resulted 
in a measurable reduction in the number of employers who 
sponsored pension plans for their employees.

                              Other Issues

    Other issues have occurred to ERIC, and still more issues 
will come to light as we continue to study the important 
national policy concerns regarding Social Security. For 
example:
     Whether or not a defined benefit pension plan is 
well funded going into a period of transition will affect its 
flexibility in addressing issues raised by a reformed Social 
Security system. Yet the funding rules applied to defined 
benefit plans under current law are restrictive, arbitrary, and 
volatile.
     Whether a Social Security reform plan enacted by 
Congress maintains the current program's disability and 
survivor protections also will impact employer plans that 
depend on these protections being available.

                               Conclusion

    In summary, Mr. Chairman and Members of the Subcommittee, 
the task before us is large and daunting. Your diligence in 
seeking to understand as many aspects of the need for reform of 
the Social Security program as possible through this series of 
hearings is highly commendable. The stakes are too high and the 
opportunity to cause unnecessary harm too great to move forward 
without full deliberation. That does not mean, however, that 
the Subcommittee should deliberate until there is no choice but 
to act immediately. There is no area where early action is more 
important. Only through early action and an appropriate 
transition period will employers and workers have the 
opportunity they need to adjust to changes in this fundamental, 
universal national program.
      

                                

    Mr. Bunning. Mr. Macey, thank you very much.
    Dr. Batts.

  STATEMENT OF WARREN L. BATTS, CHAIRMAN AND CHIEF EXECUTIVE 
OFFICER, TUPPERWARE CORP., AND CHAIRMAN, PREMARK INTERNATIONAL, 
  INC.; ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

    Mr. Batts. Thank you. I am testifying today as chairman of 
the National Association of Manufacturers, NAM. I am also 
chairman and chief executive officer of the Tupperware Corp., 
and chairman of Premark International. In my time I would like 
to make three points, which we can discuss further.
    First, we in the NAM strongly believe that the two greatest 
threats to the long-term viability of the U.S. economy are two 
of our own Federal Government programs: One is Medicare, and 
the other is Social Security.
    Unfortunately, this statement is not meant for dramatic 
effect. Today, even more than the issues affecting trade, 
regulatory reform or tax policy, the NAM believes reform of our 
entitlement programs is the single issue most important to 
economic growth for American business and the economic security 
and independence of American citizens.
    If the budget is balanced in 2002, it will only be a 
momentary blip on the screen, as the deficit will soar shortly 
thereafter by the explosion of costs for entitlement programs. 
Why? Because the projected costs of the programs exceed the 
funds that will be available under any reasonable level of 
taxes or national debt.
    If our Social Security system is not reformed and the 
Government seeks to raise enough additional funds through new 
taxes, or issue the amount of new debt necessary to pay for the 
shortfall, the economy will simply be stood on its head.
    Let me give you an example. The amount of new debt required 
to reimburse or fund the Social Security Trust Fund after 2012, 
when the annual cash receipts from workers will be less than 
the benefits to retirees, will initially be $75 billion the 
first year and will increase to hundreds of billions of dollars 
a year until it peaks in 2030. Neither this economy nor any 
economy has the strength or resiliency to absorb the necessary 
level of increased taxes or debt necessary to pay for these 
programs and remain competitive in the global marketplace. If 
the United States can't compete globally, at best our economy 
will stop growing or, according to the Congressional Budget 
Office's estimates under its three scenarios, it will decline.
    My second point is to summarize the NAM statement of 
principles for the reform of the Social Security system which 
are attached to the testimony. While we do not endorse any 
specific reform or proposal yet put forward by legislators or 
the public policy institutions, NAM principles address the 
prerequisites of fundamental reform, features which the reform 
of the system should possess to achieve both the goals of 
fairness, which have been mentioned by several individuals 
today, and the continued growth of the economy.
    Principle number one is that the safety net, the protection 
against poverty in old age, must be maintained and enhanced. To 
protect every citizen from ending their days in poverty was the 
original purpose of Social Security. That goal is still valid 
and worthy of national support.
    Principle number two is that the individual should own the 
savings he or she accumulates over his or her working life. 
This means separating the Social Security tax into the safety 
net insurance and the retirement savings components. Individual 
ownership of and vested rights to his or her accumulated 
retirement savings are well established as legal principles and 
protected by Federal law. Whether such savings are to be 
accumulated until retirement and not used for any other 
purpose. In short, individuals should own their retirement 
savings, no less than they own the home they live in or shares 
of stock.
    Principle number three is that amounts saved by individuals 
for retirement should be held for the exclusive benefit of the 
person doing the saving. To this effect, the Government itself 
should defer to pension law already on the books. The so-called 
exclusive benefit rule under ERISA means the retirement savings 
exist for one purpose: To provide income to the individual who 
did the savings. The Government should have no right to control 
the investment of the funds. In addition, the NAM reform 
principles emphasize the importance of moving very rapidly.
    My final point is that we also believe it makes eminent 
sense to put Social Security reforms to a practical test. The 
NAM endorses the idea put forward by a Member of Congress for 
the creation of a demonstration program to test the feasibility 
and popularity of Social Security reform. Such a demonstration 
project would allow up to a half a million American workers 
between the ages of 20 and 30 to participate for a 5-year 
period in a program of individual retirement accounts in lieu 
of participation in the Social Security system. We believe that 
the demonstration program would prove very popular and that it 
would provide Congress with highly valuable information 
immediately in regard to levels of participation and choices 
made among retirement savings plans, and detailed data 
throughout the 5-year period on savings patterns, investment 
choices and operating costs for individual accounts.
    Mr. Chairman and Members of the Subcommittee, in closing I 
wish to emphasize again the seriousness of the threat to the 
individual and to the American economy from an unreformed 
program.
    Thank you.
    [The prepared statement follows:]

Statement of Warren L. Batts, Chairman and Chief Executive Officer, 
Tupperware Corp., and Chairman, Premark International, Inc.; on behalf 
of the National Association of Manufacturers

    Thank you Chairman Bunning. I am Warren Batts, Chairman and 
CEO of the Tupperware Corporation, and Chairman of Premark 
International, Inc., and of the National Association of 
Manufacturers. I am pleased to represent the NAM today in 
testifying before this subcommittee.
    This morning, I shall make observations concerning:
     The importance of economic growth to all 
Americans, and the negative effects of unreformed entitlement 
programs on such growth;
     Certain ``principles'' for reform of the current 
Social Security System, offered for the consideration of this 
Subcommittee; and,
     A suggested ``demonstration program'' as a way to 
test the popularity and feasibility of reforms.
    Entitlement programs, economic growth, and fundamental 
fairness to Americans.
    Mr. Chairman, two programs of the federal government 
present significant threats to the continued vitality of the 
U.S. economy: One is Medicare; the other is the Social Security 
retirement system.
    I don't make this statement for the sake of dramatic 
effect. In fact, if my objective were to shock the Subcommittee 
and members of Congress, I could find words more pointed than 
that the programs ``significantly threaten the vitality'' of 
our national economy. The truth of the matter is that Medicare 
and Social Security constitute promises which are beyond the 
ability of the government to pay. The projected costs of the 
programs exceed the funds that will be available. And if 
government sought to raise enough additional funds through new 
levels of taxes to pay for the continuing shortfall, the 
economy would simply get turned on its head, with both 
individuals and businesses contributing increasing portions of 
their earnings to pay for entitlement programs out of control.
    Neither this economy nor any economy has the strength and 
resiliency to absorb the necessary level of tax increases to 
pay for these programs and remain competitive in the global 
marketplace. Global competition destroys those who are 
complacent or inefficient, or those whose organizing principles 
come from obsolete ideologies. If we lose our ability to 
compete effectively in this marketplace, our economy becomes 
static. At the very least, it can no longer grow; in fact, it 
is far more likely to decline.
    And growth, Mr. Chairman, is what America is all about.
    America is an idea based on growth, where successive 
generations have invested their energy and human capital, no 
less than their savings, in hopes of material and social 
progress. And through economic growth, America has achieved a 
high degree of fairness for individuals. Indeed, any lack of 
growth by specific groups within our American society is taken 
as an immediate signal of a lack of fairness.
    As this century draws to a close, the rest of the world 
looks to us, even if it sometimes fails to admit it, and seems 
finally to have learned what Americans have known since the 
nation was founded: Economic growth is the best way of 
accomplishing fairness for individuals within a society. 
Nations have burned their ideological textbooks and are 
studying American institutions, beginning with the economic 
institution that is the individual. Growth is achieved through 
investment of human and fiscal capital in productive 
enterprise. Such investment will continue only if the 
government forebears confiscating the savings of individuals 
and businesses in order to pay the compounding liabilities of 
unreformed entitlement programs.
    Entitlement programs threaten our economic well-being 
collectively, and threaten the fairness to all of us as 
individuals.

Social Security reform and economic growth

    Economic growth through increased productivity and 
competitiveness of U.S. manufacturers remains the most 
significant goal pursued by the National Association of 
Manufacturers since its founding more than 100 years ago. The 
significant attention by the NAM to the critical need to reform 
our entitlement programs indicates the relative importance we 
accord the issue. Even more than issues affecting trade, 
regulatory reform or tax policy, the NAM has identified reform 
of the entitlement programs as the issue most important to 
economic growth for American business and economic independence 
for individuals.

Growing awareness of structural imbalance of the Social 
Security system

    Reform or restructuring of the Medicare system is, of 
course, an enormous issue. In recent weeks, Congress and the 
White House have shown increased awareness of the need to 
address Medicare more broadly. This series of hearings on the 
Social Security system provides evidence of increased debate of 
the issue. The title of these hearings, ``The Future of Social 
Security,'' itself underscores growing popular awareness that 
the future of the Social Security system actually is in doubt. 
The NAM regards such doubts as well taken.
    For over a decade, the NAM has warned of structural 
imbalance within the Social Security system and the necessity 
of fundamental reform. NAM attention to the issue quickened 
during 1995 and 1996, as popular perception of demographic 
changes affecting the system sharpened, and as the first 
legislative proposals appeared.
    At its September 1996 meeting, the NAM Board approved a 
resolution on Social Security reform. In April of this year, 
the Board approved a ``Statement of Principles'' outlining its 
position on reform in greater detail. The principles emphasize 
fairness for individuals and growth for the U.S. economy.
    The NAM Statement of Principles for Social Security reform.
    The Statement of Principles adopted by the NAM Board are 
attached to the written testimony provided in advance to the 
Subcommittee.
    While not endorsing any specific reform proposal yet put 
forward by legislators or public policy institutions, the NAM 
principles address prerequisites to fundamental reform--
features which a reformed system must possess in order to 
achieve the goals of fairness for individuals and growth for 
the U.S. economy.
    Less obviously, but no less importantly, the principles 
address the fact that structural imbalance of the current 
Social Security system, not merely insufficient funding, makes 
reform necessary. A fundamental distinction in testimony that 
this Subcommittee is likely to hear is between those who view 
``The Future of Social Security'' as a funding issue, and those 
who see reform as a way to address structural imbalance of the 
current system. Count the NAM among the latter.

Decoupling of retirement savings from the ``safety net'' of 
social insurance

    In addressing structural imbalance of the current system, 
the first principle for reform is that savings for retirement 
be separated from the ``safety net'' of protection against 
poverty in old age.
    Mr. Chairman and members of the Subcommittee, I probably 
don't have to tell you that what I've referred to as the 
``first principle''--that of segregating savings from social 
insurance--is the most controversial part of the debate over 
reform of the Social Security system.
    From the point of view of those advocating reform, a 
separation of the savings function from the social insurance 
element of the current system is overwhelmingly obvious. Any 
business-person immediately recognizes that accumulation of 
reserves--``savings''--as a function entirely separate from 
protecting those reserves through the medium of insurance. 
Thus, the reaction of pragmatists, such as NAM members, is to 
make a separate savings function the first principle and 
cornerstone of reform.
    I recognize, of course, that defenders of the current 
system are likely to disagree vehemently with my assertion that 
a decoupling of savings from safety-net is ``obvious.'' If I 
understand their position, it is that the Social Security 
retirement system represents the great achievement of Twentieth 
Century liberal democracy--an intergenerational social compact 
for centralized and scheduled redistribution of funds acquired 
through federal taxing authority.
    While I respect the right to such views, I disagree 
profoundly with the assumptions about individuals and about 
economics on which those views are based. But to spare this 
Subcommittee a discussion of political theory, I'll simply note 
that changing demographics are making the current system 
economically obsolete and unsustainable. Hence, our first 
principle for reform is that the social insurance element of 
``Social Security'' be separated from the accumulation of 
retirement savings.

Individual ownership of retirement savings

    The second NAM principle is that individuals should have an 
ownership interest in the savings that they accumulate over 
their working lives.
    Individual ownership of retirement savings is not only 
obvious, but well established as a legal principle under 
pension law. Individuals retain a vested right to their 
accumulated retirements savings, protected by federal law. 
Further, such savings are to be accumulated until retirement, 
and not used for other purposes. In the event of an 
individual's premature death, the accumulated savings are 
available to their survivors and heirs.
    In short, individuals should ``own'' their retirement 
savings, no less than they own a piece of real estate or shares 
of stock.

Investment of retirement savings free of government control

    The third NAM principle for reform is that amounts saved by 
individuals for retirement should be held ``for the exclusive 
benefit'' of the person doing the savings. To this effect, the 
government itself should defer to pension law already on the 
books. The so-called ``Exclusive Benefit'' rule under ERISA 
means that retirement savings exist for one purpose--to provide 
income to an individual in retirement. Such savings exist for 
the singular purpose of providing retirement income to the 
individual who has saved the money. The government should have 
no right to control investment of the funds.
    Accordingly, individuals' savings would be held in trust by 
fiduciaries responsible to the individuals who had saved the 
money. And within standards similar to those of ERISA, the 
individual would direct prudent investments. Obviously, this 
isn't to say that there would be no pooling of individual 
accounts--of course investment managers would pool accounts, in 
just the same way that hundreds of billions of dollars in 
pension plan investments and 401(k) plans are currently pooled.

Early implementation of reforms

    In addition, the NAM reform principles emphasize the 
importance of implementing reforms as soon as possible.
    We all recognize the enormity of the transition funding 
issue. And while detailed proposals for an equitable means of 
transition funding await the development of econometric models, 
one thing remains overwhelmingly clear:
    Any solution to the issue of transition-period funding 
ultimately turns upon early implementation of reforms, so that 
the greatest number of individuals have the greatest amount of 
time to accumulate individual retirement savings, and thus 
become less dependent upon the current Social Security system.
    Demonstration program for Social Security reform.
    Mr. Chairman, the NAM is an organization composed of more 
than 14,000 member companies that differ in the specifics of 
their businesses, but that share certain core assumptions. 
Among the most central assumptions is ``practicality''--whether 
a proposed strategy or activity will prove successful in 
achieving its goals.
    To this effect, NAM efforts in furtherance of Social 
Security reform have stressed practical economic and political 
concerns. We believe reform consistent with the NAM principles 
is not only an intelligent idea but an eminently doable 
undertaking.
    In making such arguments, the NAM has responded to those 
who oppose reform, ostensibly at least because they regard 
reform of the Social Security system as impractical. Opponents 
of reform argue that the detailed record-keeping and funds 
transfers under a system of individual accounts are not 
feasible, and further, that as a practical matter, little 
popular support exists for changing the current system.
    Okay then, let's put Social Security reforms to a practical 
test.
    The NAM, upon its own motion, has endorsed an idea put 
forward by a member of the Congress for creation of a 
demonstration program to test the feasibility and popularity of 
Social Security reform.
    Such a demonstration project would allow up to a half-
million American workers between the ages of twenty and thirty 
to participate for a five-year period in a program of 
individual retirement accounts in lieu of participation in the 
Social Security retirement system. Individuals would have 
choices among selected types of individual account plans. At 
the end of the demonstration period, the individuals would have 
the option of returning to coverage under the Social Security 
system, as though they never had participated in the 
demonstration project. In the alternative, the individuals 
could keep their account balances as savings for retirement, 
and have their Social Security benefits adjusted actuarially to 
reflect their five-year absence from the system.
    We believe that the demonstration program would prove very 
popular and that it would provide Congress with highly valuable 
information and detailed data throughout the five-year period. 
The program would give Congress a considerable amount of 
information immediately, regarding levels of participation and 
choices among retirement savings plans. Throughout the 
demonstration program, Congress would enjoy a continuing source 
of information on savings patterns, investment choices and 
operating costs for individual accounts.
    We at the NAM took up the idea of a demonstration program 
without prior discussion with other trade associations or 
public policy organizations. We welcome their commentary, but 
we strongly encourage this Subcommittee and Congress to act 
quickly, and, at the very least, enact legislation setting up 
the administrative structure for a demonstration program.
    Although we are cautious in speaking for them, we suggest 
that those in the business of pension record-keeping and funds 
management might be forthcoming with ideas and technical 
systems support for such a project.

Summary

    Mr. Chairman and members of the Subcommittee, in closing I 
again emphasize the seriousness of the threat to individuals 
and to the American economy from an unformed entitlement 
program. Secondly, I invite your attention to the NAM Statement 
of Principles for reform of the Social Security system. 
Finally, I encourage this Subcommittee to report out a bill 
establishing a demonstration program for Social Security 
reform.
    Thank you, Mr. Chairman. I look forward to answering 
questions.
      

                                

    Mr. Bunning. Thank you very much.
    Dr. Smith, if you will begin.

     STATEMENT OF DAVID A. SMITH, DIRECTOR, PUBLIC POLICY 
   DEPARTMENT, AMERICAN FEDERATION OF LABOR AND CONGRESS OF 
                    INDUSTRIAL ORGANIZATIONS

    Mr. David Smith. Thank you, Mr. Chairman, Mrs. Kennelly.
    I should begin by saying that your staff inadvertently 
promoted me. I taught for a long time, but I'm not Dr. Smith.
    Mr. Bunning. Oh, you're not Dr. Shame on my staff. 
[Laughter.]
    Mr. David Smith. I appreciate the promotion, but----
    Mr. Bunning. We consider you a Dr. Go right ahead.
    Mr. David Smith. I want to thank you, and actually, in 
passing, to congratulate you. This is serious business. It's 
not easy to sit here for 3 hours and listen to a bunch of us 
talk, and both of you are to be congratulated, both for holding 
the hearings and taking this question seriously.
    Let me begin actually by disagreeing a bit with my 
colleague from the ERISA Committee. Social Security is the 
central rock of our retirement system. For average working 
families, savings matter, private pensions matter, but Social 
Security provides the cornerstone and the bulk of the resources 
available for their retirement. In fact, the share of 
retirement income attributable to Social Security is growing, 
not diminishing. The continued slight decline in private 
pension coverage will cause those trends to continue to not 
diminish.
    For important subgroups in the population, Social Security 
is even more important. Three-quarters of the old-old, folks 75 
and above, depend on Social Security for 50 percent of their 
income. For almost half of African Americans, they depend on 
Social Security for almost 90 percent of their retirement 
income. And for the 40 percent of us in the two lowest 
quintiles of the income distribution, they depend on Social 
Security for over 80 percent of their retirement income. So 
we're not talking about a system here where Social Security is 
merely a piece of the retirement system; it is the cornerstone 
of it.
    Despite efforts, both promotion efforts and the expenditure 
of billions of dollars in tax incentives, in order to try to 
encourage private pension coverage and expand private pension 
coverage, they haven't really taken hold yet. Only one-third of 
current retirees are receiving private pension coverage, and 
again, it's even worse for certain groups in the population. 
Only one-quarter of retired women receive any private coverage.
    Last, for all of us, or almost all of us, with the 
exception of the most fortunate among us, private savings 
simply don't even show up on the score card as a significant 
contribution. I would point out that those distribution 
inequities are likely to be exacerbated in years to come.
    What we know about the shift from defined benefits and 
defined contribution plans is that low-income workers simply 
don't participate. They can't afford it. When they do 
participate, they tend to contribute relatively low amounts, 
that the buildup in assets is simply insufficient to make up 
for any radical diminution of their anticipated Social Security 
benefits.
    As with my colleague from NAM, the American Federation of 
Labor, AFL, hasn't endorsed any of the specific proposals that 
are out here, and we don't expect to. We see these proposals as 
a useful opening gun and an important national conversation. 
The decision that you and your colleagues will have to make 
won't be to pick between the Ball plan, the Weaver plan, the 
Gramlich plan. It will be to take those plans, contributions 
that are made by people at this table and elsewhere, and craft 
a solution which can command broad support. I think it's 
premature for us, and would argue it's premature for you, to 
rush to judgment.
    We do have a problem and we need to take it seriously, but 
it is a problem that doesn't confront us tomorrow morning. In 
that sense, it isn't a crisis. I agree with Congressman 
Kucinich. I disagree that this isn't something we need to take 
seriously now.
    Let me very briefly suggest some principles that we think 
ought to guide you in this effort. The program must be 
mandatory. Some have suggested moving to a voluntary program, a 
true privatization of the Social Security system. We would 
strongly disagree. This works because we're all in it together, 
because of its insurance dimensions. None of us are fortune 
tellers, and by sharing the risks we assure all of us the 
opportunity for a decent retirement.
    It must continue to assure and meet the test that my 
colleague said, that every American retires in dignity, that it 
maintains a minimum benefit level available to all American 
workers and their families, that will assure that none of us 
retire below the poverty level.
    The important family protections of the system must be 
maintained. As we think about this as a retirement system, we 
tend to forget the important survivor benefit questions, the 
spousal benefit questions associated with Social Security that 
simply aren't part of our private employee-owned retirement 
system.
    It should honor work, not good fortune. We should make sure 
that it's not the luck of the draw or where you happen to 
retire in the business cycle that determines your benefits, but 
your lifetime of work.
    Last, reinforcing a point I made earlier, many of us are 
living much longer than we thought we would. Many of us now are 
living longer than any of the annuitized plans thought we 
would. One of Social Security's enormously important 
characteristics is that we can't outlive it, and as more of us 
become part of the old-old, as more of us get to enjoy a longer 
retirement, it's terribly important that we not be able to 
outlive our retirement income.
    Those principles ought to guide you, at least in part guide 
you, in your thinking. There are a lot of suggestions. I think 
all of us would be surprised at the extent to which we agree 
about some of those suggestions. But they don't add up yet to 
an answer to the problems that we face, and the deliberations 
that you're engaged in are critical to that process.
    Thank you.
    [The prepared statement follows:]

Statement of David A. Smith, Director, Public Policy Department, 
American Federation of Labor and Congress of Industrial Organizations

    Good afternoon, Mr. Chairman. My name is David Smith, 
Director of the Public Policy Department of the AFL-CIO. On 
behalf of our thirteen million members and their families, I 
want to thank you for this opportunity to present our views on 
this important question.
    The key starting point for any discussion of Social 
Security is the system's central role as the retirement system 
for average wage workers. Elderly Americans rely overwhelmingly 
on Social Security benefits for a major part of their income, 
and a very substantial minority depend on Social Security for 
almost all of their support. The system provides two-thirds of 
the elderly with 50 percent or more of their income in 
retirement. For important subgroups of the elderly population, 
these benefits play an even more crucial role:
     Three-fourths of the oldest old (75 years and 
above) and the same proportion of nonmarried elderly women rely 
on Social Security for 50 percent or more of their income.
     Nearly one-half of the African-American elderly 
receive 90 percent or more of their income from the program.
     The two lowest income quintiles of older Americans 
rely on Social Security for 81percent of their aggregate 
income.
    While federal tax policy has generously dispensed tens of 
billions of dollars in tax expenditures annually to encourage 
employer sponsorship of private pensions, the returns are 
meager. Only one-third of private retirees receive any benefits 
from these plans. And unlike Social Security benefits, private 
pensions are not equally distributed across population 
subgroups. Only 23 percent of women retired from the private 
sector receive any pension income. Only 7 percent and 25 
percent of the lowest and second income quintiles receive 
private pensions. This is reflected in the shockingly low 
average annual benefit levels for those groups: $123 and $616, 
respectively. The conclusion is inescapable without a strong, 
solvent Social Security program, tens of millions of today's 
and tomorrow's retirees will simply not be able to make ends 
meet.
    The distributional inequities of the private pension system 
are likely to be exacerbated in the future by the ongoing shift 
by corporate America to defined contribution retirement plans. 
What we know thus far is that low-wage workers are the least 
likely to contribute to 401(k)-type savings plans, and that 
when they do contribute, it is typically a lower percentage of 
pay. Furthermore, there is evidence to suggest that these 
workers, when told to self-direct the investment of their 
accounts, opt for relatively conservative approaches that will 
yield considerably lower returns than would be produced by 
professional asset management. The end product may be fewer 
workers with even more meager benefits at retirement.
    In contrast to the failure of current pension policy to 
establish retirement income security for average wage workers, 
our commitment to a national social insurance program has paid 
off handsomely. Social Security's success is unequivocally 
evidenced by the dramatic decline in hardship among the elderly 
over the last three decades: The period from 1965 to 1995 
witnessed a three-fifths decline in the ratio of older 
Americans living below the poverty threshold (from 28.5 percent 
to 10.5 percent).
    Ironically, it may be the program's unmatched success in 
delivering upon its promised benefits that has created an 
environment in which some are willing to consider radical 
proposals to replace Social Security with untested individual 
investment programs. I want to underscore that it is Social 
Security, not the other legs of the retirement income stool, 
that guarantees the well being of the elderly, the disabled, 
and their families. And of course, the economic risks that 
Social Security was designed to insure against retirement, 
death, and disability still are and will continue to be a part 
of Americans' lives.
    The reason that we are here today discussing Social 
Security's future is the growing apprehension over the 
program's long-range financial outlook. Current concerns about 
the program arise out of the Social Security Trustees' annual 
look forward at the system's next 75 years. Based on the 
Trustees' most recent intermediate assumptions about the 
future, the program will have sufficient dedicated resources to 
meet all of its benefit obligations for the next 32 years, 
through 2029. Thereafter absent policy change, program revenue 
will cover roughly three-fourths of anticipated benefits.
    Fortunately, the Trustees' projections enable us to 
anticipate funding shortfalls with substantial lead time. This 
gives us the opportunity to examine the Social Security system 
in order to develop recommendations to assure its solvency. The 
AFL-CIO believes that changes need to be made to ensure the 
future integrity of the system. The challenge, as we see it, is 
to avoid hastily-conceived fixes driven by the rhetoric of a 
near-term crisis that does not exist.
    To this point, a broad range of proposals has been put 
forward to ``reform'' Social Security. These include the three 
packages endorsed by separate factions of the Social Security 
Advisory Council as well as other radical plans that would go 
far beyond dealing with the problem at hand securing the 
program's long-range financial balance and seek to supplant 
Social Security with completely unsecured privatized investment 
programs.
    The AFL-CIO has not endorsed any of the proposals that have 
been made to date nor do we expect to. We intend to join with 
you and others in a careful effort to craft proposals that are 
designed to strengthen our nation's most successful social 
program. We believe that effort should be guided by certain 
core considerations.
    The program must be mandatory. Social Security works 
because it has operated as a mandatory and near-universal 
program. These aspects of the current system have allowed its 
insurance-based features to be provided at extraordinarily low 
costs. Any reforms, to be successful over the long-term, must 
preserve these features and protect against efforts to erode 
them.
    The program must guarantee that workers and their families 
can retire with dignity. As the statistical picture painted 
above indicates, Social Security plays a vital role in 
delivering retirement security to most Americans. This derives 
from the important character of Social Security as a system of 
earned benefits defined in law, and not a welfare program. It 
is essential that our national retirement system retain its 
risk-spreading elements that provide income adequacy in old 
age. We should resist proposals to carve the program up into 
separate defined benefit and defined contribution features, as 
well as suggestions that certain features of the current 
system, such as disability and survivor insurance can be 
provided for through separate income assistance programs.
    It must be family based. Any reformed Social Security 
system must take into account the diverse needs of American 
families. Social Security plays a vital role in protecting 
families. Its benefit structure recognizes the importance of 
providing earned benefits not just to workers but to their 
spouses, children, and dependent parents. In addition to 
retired and disabled workers, the program counts millions of 
spouses and children among its beneficiaries. Too often, 
critics of the present system give little credit to this 
family-based benefits structure.
    It should honor a lifetime of hard work, not just good 
fortune. Social Security was designed to serve as the 
foundation of retirement security for all American workers and 
their families. Its defined benefit structure reflects this 
intention, guaranteeing workers benefits based on their 
lifetimes of hard work, not good fortune in their work lives, 
their investment acumen or the ups and downs of the securities 
markets.
    Any reformed Social Security program must recognize the 
needs of a heterogeneous workforce, particularly those groups 
who, without Social Security, would likely retire into poverty. 
They include lifetime low-wage workers, such as the 3.9 million 
poor families with children in which a parent works, who are 
likely to have few if any resources beyond Social Security when 
they reach the end of their work lives. In addition, the 
nation's basic retirement security program must take into 
account the large classes of workers who, before the end of 
their work lives, find themselves cast off by downsizing or 
dying companies and without marketable skills. Social Security 
should ameliorate the effects that these work patterns have on 
retirement security. Economic risks can and should be shared 
across the workforce through benefit mechanisms that are 
redistributional.
    Proposals to put all or part of Social Security 
contributions into privatized, individual investment accounts 
would impose substantial risk on workers. A substantial portion 
of benefits would be dependent upon the individual worker's 
investment skill as well as the performance of the securities 
markets during the prime working years of any particular 
cohort. This is contrary to the very intent of Social Security 
to provide workers with a secure base of guaranteed benefits 
regardless of transitory economic conditions or the vagaries of 
the business cycle.
    It must ensure that the old can not outlive their income. 
One of the most significant developments in the second half of 
the twentieth century is that people in industrialized 
countries are increasingly long lived. While this has 
contributed to the deterioration of Social Security's long-term 
financing outlook, it also reemphasizes the importance of its 
lifetime, inflation-adjusted benefits. As people live longer, 
there is a greater risk that they will outlive other sources of 
retirement income. This is already evident among the oldest of 
the old, who experience higher poverty rates than the total 
elderly population (13 percent versus 10.5 percent), and is 
particularly true among women ages 75 and over.
    Social Security plays an increasingly important role in 
retirees' income as they age. According to the Social Security 
Administration, among the elderly ages 65-69, Social Security 
represents 31.3 percent of aggregate income. Among those ages 
85 or older, it provides 56.5 percent. This is undoubtedly 
traceable to the dissipation of savings and decline in the real 
value of pension annuity benefits that occurs because so few 
pension plans provide for cost-living-adjustments to stem the 
erosion by inflation. Social Security's lifetime feature 
combined with the automatic benefit increases to counteract 
increases in the cost of living counter these effects.
    Social Security has played a principal role in defining 
post-Depression America. It expresses a commonality of interest 
in protection for workers and their families against economic 
insecurity. This spirit and vision of America must not be lost.
    Disclosure Statement: Neither the AFL-CIO nor David A. 
Smith received funds from the relevant statute(s) during this 
fiscal or the preceding two fiscal years.
      

                                

    Mr. Bunning. Mr. Smith, thank you very much. Let me begin 
with just a brief period of questioning, I hope, since we've 
been here for a long time.
    Doctor, in your proposal, personal retirement accounts 
would be funded through a mandatory additional contribution of 
3 percent, split between employee and employer, 1.5 percent 
each.
    What do you think the public reaction would be to our 
imposing, in essence, an additional 3 percent mandatory tax, 
even though they would have control over those moneys, knowing 
full well that presently approximately 78 percent of the people 
pay more in FICA tax than they do personal income tax?
    Mr. MacLaury. Well, Mr. Chairman, I think the key to the 
response is what you alluded to: these are personal funds that 
are at the discretion and disposal of the individual. It is 
like my father said to me, ``Son, you must save for your 
retirement.'' I think that the time has come when we know that 
the Social Security system cannot and will not pay all the 
freight for the retired population. There has to be more 
savings, both personally and nationally. This is one way to 
bring that about.
    Mr. Bunning. But the retort is, ``Son, you're already 
paying over 15 percent.'' You're paying 7\1/2\ plus and your 
employer is putting in another 7\1/2\ plus into a retirement 
account that guarantees you certain benefits.
    Now, you're going to say that, by contributing an extra 3 
percent, we are going to secure enough money to retire? We have 
a real problem funding the guaranteed benefits of the Social 
Security system now. The 3 percent I don't think would be 
enough to add on to that.
    Mr. MacLaury. We have a great problem funding the current 
benefits as projected. In fact, we cannot fund them, given the 
current tax levels, or benefit levels.
    Mr. Bunning. That's correct.
    Mr. MacLaury. Therefore, some adjustment must be made.
    As I said, the CED is proposing that gradually the benefit 
levels be brought into line with what the current contributions 
through FICA will pay for. This is reality and we're going to 
have to face it. The citizens are going to have to face it, and 
individuals are going to have to face that sooner rather than 
later, I believe.
    Now, why the extra 3 percent? Because the current system is 
so out of balance, that if you cut the benefits enough to bring 
them into balance alone, then the replacement ratios for income 
would fall substantially.
    There is a chart on page 52, that shows the replacement 
ratios of incomes for low-wage earners on top, average earners, 
and maximum earners. You will see that currently the low earner 
has a replacement ratio, through Social Security alone, of 
around 60 percent. When he retires, he gets about 60 percent 
from Social Security of what he earned before retirement.
    If you bring the current benefits into balance with the 
current payments, take a look at that dotted line. You'll see 
that for the low earner, that replacement ratio drops toward 50 
percent. We feel that is not acceptable and, therefore, the 
upper line is Social Security plus the 3 percent----
    Mr. Bunning. More desirable.
    Mr. MacLaury. It's more desirable to sustain it. But you've 
got to pay for it. You do have to pay for it. If you want the 
higher replacement ratio----
    Mr. Bunning. I understand that. There ought to be a 
transition period where you guarantee benefits to certain 
people, in my opinion. Where you take an age group and you say, 
if you're younger than this age, we will set up a 3 percent or 
a 5 percent diversion of your FICA tax, and we will guarantee 
benefits for all over that certain age. But we have to have a 
25- to 30-year transition period to do that.
    Mr. MacLaury. I couldn't agree more. And that is the nature 
of this proposal.
    Mr. Bunning. That solves a lot of problems that we have 
heard about, in trying to get a hold on this. There is no 
immediate need, but the planning for this has to be a long-term 
solution.
    Mr. MacLaury. For sure.
    Mr. Bunning. Go ahead, Barb.
    Mrs. Kennelly. Thank you, Mr. Chairman.
    Dr. Smith, I was absolutely delighted to hear you say that 
the AFL-CIO has taken no position at this time. I commend you 
for that, because I have heard some others, who you probably 
know, who say they had taken positions.
    This is our fifth hearing, and anyone who has listened to 
these hearings and prepared for these hearings knows that 
demographics don't lie. We have got to do something. If you say 
you're against, against, against, then you're not going to be a 
player. So the AFL-CIO, who I have great respect for, I'm 
delighted they are going to remain a player in this debate, 
which will go on because we've got to find a solution. I thank 
you and I'm delighted you're here today.
    Dr. MacLaury, I like your plan. It's great. It increases 
savings, it balances the trust fund, and it gives a good 
return. No transition costs. It goes right down the line. The 3 
percent is there. The public hue and cry is inevitable. But as 
I said to Dr. Smith, it's going to happen. Some people are 
going to be upset.
    What I'm concerned about is here we are trying to help 
people who need this peace in their older years. I'm concerned 
maybe you're increasing the payroll on the very ones that need 
the money at the other end of the stream. Do you have any 
concern about that? Someone who is well off, they can find that 
extra money. But someone who is counting every penny may be in 
a bind. Is there any way we can deal with that?
    Mr. MacLaury. Well, it is absolutely correct, Mrs. 
Kennelly, that if you require an individual who is employed to 
save an extra 1\1/2\ percent that he is not saving today, and 
put that aside for savings for his or her retirement, it is a 
cost and it means less consumption today.
    The question is, who is going to pay for the consumption of 
that individual 30 years from now, or 35 years from now, when 
he or she retires. We are saying it has to include that 
individual.
    Yes, it is a sacrifice. It is particularly a sacrifice for 
the low-income individual. But note that with respect to the 
current Social Security plan, the defined benefit plan, we are 
suggesting that benefits be reduced in the future for upper and 
middle but not for the lowest income group.
    Mrs. Kennelly. So your plan is progressive, as our present 
system is?
    Mr. MacLaury. Very much so. In fact, it will be more 
progressive. It becomes more progressive in the sense that the 
benefits of the lowest income group are maintained, but those 
of the upper groups, the replacement ratios are going to 
decline.
    Mrs. Kennelly. I look forward to reading the whole plan.
    Mr. MacLaury. Thank you very much.
    Mrs. Kennelly. Mr. Macey, I read some of your testimony. I 
haven't had a chance to read it all. You praise ERISA for 
having done a number of things since 1974, vesting, the 
protection of pension rights and all the rest. I salute you for 
that.
    What I don't understand, it seems to me that I heard 
somewhere that you are not in favor of--Senator Mosely Braun 
and I have a piece of legislation, which wants to provide the 
same protections to 401(k) plans. As we know, those are 
increasing in use, and the defined benefit plan is decreasing.
    I would like to know why you don't think a 401(k) plan 
should have the same kinds of protections that a defined 
benefit plan has.
    Mr. Macey. I'm not sure--they do have a number of the 
protections, including the vesting provisions and the 
antidiscrimination provisions and things like that. All of 
those things already are required----
    Mrs. Kennelly. I'm talking about the one we worked very 
hard on, the one where your spouse has to sign before you can 
give away everything you've saved.
    Mr. Macey. The concerns involve a number of things. We have 
studied it, we have gone out and asked our membership who 
administer these programs, ``would you have problems with this 
and, if so, can you talk to us about those problems.''
    We came up with a lot of administrative problems, many of 
which we detailed to members of your staff and other Members of 
Congress, and which we're pleased to discuss further.
    Every time there's a mandate, or something changes, there's 
a lot of unknown repercussions. It's generally the private 
sector that has to deal with all of those repercussions.
    What we would suggest in response to your concerns, and 
Senator Mosely Braun's concerns, is a study over the next 6 
months or 1 year to evaluate the need for such a provision, and 
the impact of such a provision on the administration and design 
of these programs. In fact, we've gotten a lot of comments from 
the various people in the private sector, including many women, 
that say they don't want this because this is their money, that 
they're earning, all the women in the work force--and I think 
it's been styled----
    Mrs. Kennelly. I would love the statistics on that one.
    Mr. Macey. Pardon me?
    Mrs. Kennelly. I would love the statistics on that one.
    Mr. Macey. Well, a lot of it is anecdotal, quite frankly. I 
don't know that we have definitive statistics.
    Mrs. Kennelly. No, I've had companies bring in that one 
woman. [Laughter.]
    Mr. Macey. I'm sure we can bring in more than one.
    Mrs. Kennelly. The Chairman says I'm the only one that 
works there. I knew I was the only one that made that much.
    Mr. Macey. I think that people in the work force are 
saying, wait, that was taken out of my pay and that was my 
benefit that I developed.
    But defined benefit plans are very much different from 
401(k) plans. In defined benefit plans there is generally one 
event of distribution, at retirement. 401(k)s and defined 
contribution plans have many events of distribution. In fact, 
one employer I'm told has approximately 200-300 defined benefit 
events a year, and 17,000 401(k) distribution events a year. So 
when you start talking about loans and hardship distributions 
and other in-service distributions, just the full panoply of 
the way that people can take money out and the various events 
that people use their 401(k) benefits for, it does have very 
dramatic and significant administrative impacts on these plans.
    We would urge you to pass something, if legislation is 
appropriate, that asks the relevant and expert Federal bodies, 
either the IRS or the DOL, to at least study the issue first 
before passing the legislation.
    Mrs. Kennelly. Mr. Macey, I apologize for my keeping 
smiling, but every time ERISA mentions there's a problem with 
administration, do you know the complaints we get about ERISA? 
That has caused many people across the country a great deal of 
heartburn with all the complications of ERISA.
    As to administration, you already have to oversee the 
signature situation with the defined benefit plan.
    Mr. Macey. Yes, we do.
    Mrs. Kennelly. I would dare say, Mr. Chairman, if we got 
out testimony at the hearings when we wanted to do that, we 
would probably have heard very many of the same things that 
we're hearing today. Because when you think what you have to 
administer, what you have to administer is two signatures on a 
piece of paper.
    Mr. Macey. Well, yes, but the process for administering--in 
a defined benefit plan, actually there is an automatic default. 
If you don't get the signature, you pay a lifetime joint and 
survivor annuity, if the individual is married. In a 401(k) 
plan, under the proposal you either can't pay the benefit out 
at all if you don't get the signature, or you have to establish 
some type of survivor or other types of lifetime or durational 
annuity process, which are actually inimicable and not set up 
under the 401(k) and other types of defined contributions plans 
now.
    Most 401(k) plans either provide for free access to the 
money upon certain events--and you can take a little or you can 
take a lot, you can take whatever you want--or they provide for 
lump sum distributions and rollovers to IRAs or other types of 
plans.
    Forgetting the merits, whether or not there is social or 
other type of merit to your proposal, just the impact of it and 
the need to change all types of detailed computerized and other 
types of systems, administrative systems, we would just urge 
you to have a study on it.
    Mrs. Kennelly. The Chairman is getting itchy because he's 
been here a lot longer than I have been. So you and I will 
continue at a later time.
    Mr. Macey. We would love to talk to you.
    Mrs. Kennelly. I know we will continue this conversation.
    Before I end on this subject, that woman who says ``it's 
mine,'' is just like the man who said ``it's mine,'' when we 
had to get that other signature on defined contribution plans. 
When you have two people, married, saving for their future--I 
know he wants me to hurry up--but there is all that that we 
have to think about. I just find this whole thing very 
interesting.
    Before we end, Mr. Macey, let me talk to you about one 
other thing that we've also had some talks about. You keep 
talking about the fact that if we reduce Social Security 
benefits, then, in fact, this could be a problem in relation to 
pensions and Social Security benefits.
    As you know, in 1986, it was my intention to make sure 
there was no integration. We wouldn't have this problem today. 
We wouldn't have to even be thinking about it. But hearing your 
testimony. I hope you're not saying that if Social Security 
benefits get reduced because we have to change due to the need 
for increased dollars, that you would think then that 
employees' pensions should also be reduced? If you reduce the 
benefits, then the employees' obligations have to be reduced?
    Mr. Macey. I'm saying essentially we start out with an 
assumption that it's a zero-sum game. There's a limited amount 
of societal and country resources to apply toward retirement.
    If one system that has a close interrelationship with 
another system--and the public system has a close 
interrelationship with the private system--and if one system is 
changed to either reduce benefits, to require people to wait 
longer for those benefits, or to attack the concept of pension 
integration with Social Security directly or indirectly, that 
will necessarily have an impact on the private system. Private 
employers who are supporting a multitrillion dollar system and 
supporting half of Social Security only have so many resources 
to put toward retirement.
    With a healthy economy, presumably we can grow this and 
people can achieve societal and individual security.
    Mrs. Kennelly. I'm glad I heard that testimony because it 
shows that I should continue to work toward getting rid of 
integration, and certainly beware that we don't go back to pre-
1986. So I'm glad I heard your testimony on that.
    Mr. Macey. Well, we would take issue with getting rid of 
integration. We don't think that that's the way to go.
    Mrs. Kennelly. We could go on all day.
    Thank you very much.
    Mr. Macey. We would love to meet with you separately and 
discuss some of these issues.
    Mr. Bunning. I have at least five questions for each of 
you, but I'm not going to ask them. I'm going to submit them in 
writing to you, and I would appreciate a written response, if 
that is not asking too much.
    We appreciate your participation in the panel. We will have 
some more hearings on this very important problem, as we see 
it. The Subcommittee is adjourned.
    [Whereupon, at 3:45 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of Hon. John Edward Porter, a Representative in Congress from 
the State of Illinois

    Mr. Chairman, the debate about whether to reform Social 
Security should be declared over. The conclusions reached by 
innumerable studies and commissions are unambiguous--our system 
is flawed and now is the time to fix it.
    As many on the Committee are aware, I've been working on 
Social Security reform issues since the early 1980s. In the 
past I have authored legislation that would change current 
policies regarding the management of the Social Security Trust 
Fund reserve in order to preserve benefits for current and 
future retirees. I've introduced legislation that would create 
Individual Social Security Retirement Accounts (ISSRAs) by 
placing annual Social Security Trust Fund surpluses under the 
control of individual workers in restricted accounts similar to 
Individual Retirement Accounts (IRAs).
    I have been working on this plan ever since, and I am 
continuing my legislative efforts by incorporating 
recommendations for Social Security Reform written by the well 
known economist Peter Ferrara.
    Accordingly, I will be introducing new ISSRA legislation in 
this session of Congress that will create a vastly more 
profitable Social Security option for all Americans.

                         The Porter ISSRA Plan

    My reform plan is based on three fundamental tenets. First, 
the plan would guarantee all current retirees the continuation 
of their current benefits with no reductions of any kind. 
Second, current workers would be given the option of staying in 
the current system, or opting out into a new private system 
utilizing ISSRAs. Third, no new taxes would be levied to 
finance the transition, and tax cuts would ultimately be 
available to those who opted out of the traditional system.
    For those who choose to utilize the private plan, Social 
Security taxes (currently consisting of 12.4% of wages equally 
paid by the worker and employer), would be redistributed. Under 
the Porter ISSRA plan, workers and employers would each 
contribute five percent of wages to an ISSRA. The remaining 
2.4% of wages currently paid as payroll tax would continue to 
fund the on-going Social Security Trust Fund, but could be 
eliminated in 10 years resulting in a 20% payroll tax cut. 
Current workers who opt out of the traditional Social Security 
system would receive recognition bonds from the federal 
government that would pay a portion of their eventual Social 
Security benefits based on the proportion of lifetime payroll 
taxes that they had paid.
    My ISSRA plan applies the same rules currently utilized for 
IRA account to the management of ISSRAs, with the exception of 
the right to withdrawal. All workers choosing the private 
option could choose from among approved private investment 
companies. This safeguard would make the system easy to use, 
and protect unsophisticated investors from potential fraud and 
abuse.
    Like the current system, employee contributions to ISSRA 
accounts would not be tax deductible, while employer 
contributions would remain deductible. Investment returns over 
the years would be tax free until withdrawal, in a manner 
identical to today's IRAs. During retirement, only half of the 
benefits would be included in taxable income.
    Benefits at retirement would be based on what the 
individuals ISSRA account could support. The worker could 
choose to purchase an annuity or make periodic withdrawals in 
such a manner that the account would not become exhausted 
within the beneficiary's lifetime. Retirement age for 
individuals choosing to utilize an ISSRA would be variable 
after age 59 and one-half, based on funds available in their 
account.
    As a safeguard, a minimum benefit would be guaranteed for 
all individuals assuring that no worker would fall below the 
minimum necessary for a dignified retirement. This benefit 
would supplement an individual's shortfall in private benefits 
and would be financed from general revenues and the eventual 
surplus in the Social Security Trust Fund.

                            Transition Costs

    Up until now, the costs associated with the implementation 
of a private Social Security system like my ISSRA plan were 
thought to be too severe to be addressed through reasonable 
measures. However, projections of the fiscal impact of this 
plan, as detailed by Mr. Ferrara, demonstrate that the 
transition can be financed without new taxes or benefit cuts 
for current retirees. According to his analysis, transition 
deficits would disappear within 14 years, after which a surplus 
would be generated by this plan.
    Under my plan, transition costs are accommodated through a 
number of ways. The first would be the displacement of Social 
Security benefits as workers choose the private system. 
Although starting slowly, these savings will grow substantially 
over time. An immediate saving would be realized by 
transferring responsibility for the disability and pre-
retirement benefits of all individuals who opt out to private 
disability and life insurance carriers. Rather than using 
Social Security funds, these benefits would be accommodated by 
the private marketplace through Treasury Department approved 
ISSRA fund managers. These savings would be immediate.
    Further savings would result from the waiver of past tax 
payments. Recognition bonds will be waived for individuals 
under the age of 30 who choose to utilize the new ISSRAs, and 
the Social Security Trust Fund will not be expended for their 
retirement benefits.
    Several sources of revenue would also be available to 
finance the transition. The continuing payroll tax of 2.4% for 
workers opting out of traditional Social Security would 
continue to be credited to the Trust Fund for a period of ten 
years. This revenue, plus the sale of a new issue of ``Social 
Security Trust Fund Bonds'' would finance the majority of 
transition costs. 

                                Results

    The net effect of these measures would be a Social Security 
Trust Fund with net revenues in a dozen years and a large 
positive balance after 20 years. Eventually these surpluses 
would grow large enough to cover losses in revenue from a 20% 
payroll tax cut, balance the budget and reduce the national 
debt.
    At the same time, benefits for individuals would grow 
substantially. The working poor would experience the largest 
gains in retirement benefits under my plan. An individual 
working for minimum wage would receive more than three times 
the benefits promised by our current system, and have the 
ability to leave substantial funds to their heirs thereby 
breaking the cycle of poverty.
    Not directly accounted for in my plan, but substantially 
aiding the federal government in meeting transition costs would 
be the generation of substantial new revenues as a result of 
new savings and investment in the private system. The net 
increased savings resulting from the implementation of my ISSRA 
plan would also lead to significanjobs.
    Mr. Chairman, in my judgment, the time is now for Social 
Security reform. We are on the verge of balancing the federal 
budget for the first time since 1969 and I believe that it 
would be a clear abdication of our responsibilities if we do 
not seize this historic moment to implement a lasting reform of 
Social Security. I offer the Porter ISSRA plan as a positive 
way to do so.
    I thank the Subcommittee for its time.
      

                                

Statement of Hon. Harry Reid, a U.S. Senator from the State of Nevada

    Chairman Bunning, and distinguished Ranking Member 
Kennelly, I am pleased to respond to your offer to provide 
testimony to the Subcommittee on Social Security for inclusion 
in the record regarding the hearing held on July 10, 1997 
addressing ``The Future of Social Security for this Generation 
and the Next.'' I appreciate the opportunity to share my views 
on this very important topic.
    Social Security is the most successful social program the 
world has ever seen. Nearly 230,000 Nevadans receive Social 
Security benefits each month. This includes 16,000 children, 
154,000 retired workers, 22,000 widows and widowers, 14,000 
spouses and 23,000 disabled workers.
    When President Roosevelt signed this momentous legislation 
into law on August 14, 1935, he said that Social Security would 
``give some measure of protection to the average citizen and to 
his family against the loss of a job and against a poverty-
ridden old age.'' Today, thanks to his actions, less than 
eleven percent of seniors live in poverty.
    When one realizes that two out of every three seniors rely 
on Social Security for more than half their income, it is easy 
to understand why we must do everything we can to preserve and 
protect this program. That is why I have fought so hard over 
the years to pass a balanced budget amendment which exempts the 
Social Security Trust Fund. The last thing we need to do is 
give Congress the power to permanently raid the Social Security 
Trust Fund.
    Contrary to what the swarm of Chicken Little articles which 
have appeared on the opinion pages of newspapers lately would 
have you believe, the sky is not falling on the Social Security 
system and the future of this fundamental American program is 
not facing immediate danger.
    Right now, the Social Security Trust Funds are not 
scheduled to run out until the year 2029. After that date, if 
we do nothing, beneficiaries will still receive almost 80 
percent of their benefits through revenue on current payroll 
taxes. Obviously, we must make some changes to the system to 
meet the needs of the retiring Baby Boomers generation. Granted 
the system needs adjustments, but let's try to treat the 
symptoms before we start hacking off its limbs. We still have 
time to make thoughtful, careful, and incremental changes.
    I am deeply concerned that all this doomsday rhetoric about 
the need for immediate privatization of the Social Security 
system and radical reform is nothing more than a front for 
those who want to dismantle the program completely for their 
own financial gain.
    Privatization of a portion of the Social Security trust 
funds may be part of the answer to preserving its long term 
solvency but it is not the only answer. This should be studied 
before we make a decision. First we must consider who would 
benefit from such a move. Is our first concern putting enormous 
commission fees in the pockets of Wall Street bankers and 
mutual fund partners or is it average workers, who barely have 
enough time to read to their kids at night, much less look at 
stock tables and calculate their maximum returns.
    If we were to move immediately to privatize Social 
Security, what is to happen to a worker if he or she should 
suddenly become disabled, like the 4.2 million disabled workers 
nationwide, before their ``nest eggs'' were allowed to build 
up? What would happen to the 3.8 million children in this 
country who currently receive benefits as a result of the death 
of one of their parents? Let us not forget that 20 percent of 
today's young workers die and 30 percent will become disabled 
before they reach retirement age.
    While I believe that there may be room for partial 
investment of the Social Security funds in the equity market, 
along the lines of pension funds and 401K plans, I would 
caution those who advocate for complete privatization, that 
markets are volatile and what is up today may be down 
tommorrow. Indeed, I shudder to think what could occur if a 
long term recession or depression were to hit.
    Not everyone has the experience or investment savvy to play 
the markets and win. In fact, I believe many seniors could and 
would lose their retirement security either due to a flux in 
the market or because they were swindled by a scourge of 
unscrupluous investors, who would prey upon them, much as they 
are being preyed upon today by illegal telemarketers and mail 
order scam artists.
    Social Security was designed to be a social insurance plan. 
It was never intended to be merely a finacial investment. It is 
misleading to frame any debate regarding the future of this 
program in terms of bottom line profits and maximizing returns.
    Social Security promotes our national community. It is the 
thread that binds each generation to the next and it is a 
thread well worth protecting, especially in a society where so 
much is done to separate the young and the old instead of 
promoting their integration and interdependence.
    Those seeking to dismantle Social Security oftentimes try 
to stir up fear in the younger generations that ``greedy 
seniors'' are eating up all their hard earned benefits. This 
kind of divisiveness will only hurt our nation. There is 
something very right about each generation working together to 
protect the generation of seniors who have given so much to our 
society.
    We have seen during times of trouble in this nation--war, 
depression, recession--the progress which can come when we all 
work together for the common good of our society. Let us all 
now pull together to mend our Social Security system. It is 
truly a system worth saving.
      

                                

Statement of Hon. James T. Walsh, a Representative from the State of  
New York

    Mr. Chairman: Social Security is the federal program with 
which most Americans identify as what is good about the U.S. 
Government.
    From the time it was instituted it has become a symbol of 
America. Far beyond the value of what is received in dollars, 
the ocial Security Trust Fund represents to a generation of 
Americans the government's ultimate safety net.
    The Social Security Trust Fund is threatened and we must 
protect it. Americans who have contributed to the Trust Fund 
during their working years must be secure in the knowledge that 
their benefits will be available to them upon retirement.
    Simply stated, the Trust Fund is going broke. The actuarial 
tables demonstrate clearly that there is more going out than 
coming in. The full faith and credit of the U.S. Government is 
at stake. If we cannot honor obligations to our elderly 
citizens, we will damage our reputation far beyond our borders. 
More importantly, as has been often said, Social Security is a 
sacred trust.
    Congress faced similar difficulties in 1983. Paying heed to 
economists who foresaw a problem, Congress reformed Social 
Security and guaranteed its existence for perhaps 20 years. We 
must take action now to make sure the program survives the turn 
of a new century. We need to pay serious attention today 
because our task is even more challenging than that of our 
predecessors.
    The ``baby boom'' generation, to which many of us belong, 
will present the federal government with a huge liability when 
its members start to retire. The claims on Social Security must 
not be allowed to bring the system down.
    The Commission has made suggestions and we need to look at 
them very seriously--as we need to consider the advice and 
suggestions of any other respectable authorities on the 
subject.
    My father was a memer of the U.S. House of Representatives 
during that period when adjustments were made to keep Social 
Security alive. It was a great accomplishment, of which he is 
very proud.
    It is my fervent desire that I will be able to tell my 
children, as my father told me, that I did take action to keep 
the Social Security Trust Fund intact--not only because our 
nation must always keep its word, but because the impact on the 
lives of so many Americans is so great.
    Thank you.

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