[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.
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1. All statements and any accompanying exhibits for printing must
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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:
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[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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[GRAPHIC] [TIFF OMITTED] T1071.009
[GRAPHIC] [TIFF OMITTED] T1071.010
[GRAPHIC] [TIFF OMITTED] T1071.011
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\
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\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.]
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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.
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\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.])
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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\
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\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.
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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.
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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.]
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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\
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\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.]
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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.
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\11\ Myers, Robert J., Social Security, Second Edition, p. 262.
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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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