[House Hearing, 105 Congress]
[From the U.S. Government Printing Office]
THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT:
IMPLICATIONS OF RAISING THE RETIREMENT AGE
SUBCOMMITTEE ON SOCIAL SECURITY
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FEBRUARY 26, 1998
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
52-247cc WASHINGTON : 1999
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
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C O N T E N T S
Advisory of February 13, 1998, announcing the hearing............ 2
Social Security Administration, Hon. Kenneth S. Apfel,
Actuarial Sciences Associates, Christopher M. Bone............... 116
American Academy of Actuaries, Ron Gebhardtsbauer................ 86
American Federation of Labor and Congress of Industrial
Organizations, David A. Smith.................................. 128
Association of Private Pension and Welfare Plans, David M. Walker 122
Bernstein, Merton C., Washington University...................... 67
Burkhauser, Richard V., Syracuse University...................... 75
Myers, Robert J., Silver Spring, MD.............................. 64
SUBMISSIONS FOR THE RECORD
Employee Benefit Research Institute, Kelly Olsen, statement...... 137
Forman, Jonathan Barry, University of Oklahoma, statement........ 139
THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT:
IMPLICATIONS OF RAISING THE RETIREMENT AGE
THURSDAY, FEBRUARY 26, 1998
House of Representatives,
Committee on Ways and Means,
Subcommittee on Social Security,
The Subcommittee met, pursuant to notice, at 1:02 p.m., in
room B-318, Rayburn House Office Building, Hon. Jim Bunning
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON SOCIAL SECURITY
FOR IMMEDIATE RELEASE CONTACT: (202) 225-9263
February 13, 1998
Bunning Announces Eighth 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 eighth 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 implications of raising the
retirement age. The hearing will take place on Thursday, February 26,
1998, in room B-318 Rayburn House Office Building, beginning at 1:00
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.
The Subcommittee's first seven hearings in the series have focused
on: the recom-mendations of the Advisory Council on Social Security,
the fundamental issues to consider when evaluating reform options, the
findings of the 1997 Social Security Board of Trustees, the experiences
of other countries, the views of policy experts, organizations with
different generational perspectives, business and labor
representatives, Members of Congress on Social Security reform, and the
current state of public opinion on the future of Social Security.
When major changes were last made to Social Security in 1983, a
provision was included that will gradually raise the ``normal''
retirement age--the age at which one receives unreduced benefits--from
age 65 to age 66 over the period 2003 to 2008, and to age 67 from 2022
to 2027. Today, as concern continues about the long-range solvency of
Social Security, proposals have been made to increase the ``normal''
retirement age even further.
A substantial portion of a growing long-range deficit in Social
Security financing is being attributed to projections of a decreasing
ratio of workers to recipients in the future, especially when the baby-
boom generation begins to retire. It has been argued by many that
raising the retirement age would offset, at least to some extent, the
deficit in Social Security's long-range financing. However, there are
many issues surrounding a further increase in the retirement age that
require consideration, including: projected life expectancy increases
and whether those increases are accompanied by improvements to workers'
health, effects on the labor market, the impact on employer-sponsored
benefit plans, public reaction to additional increases in the
retirement age, and the extent to which savings to the Old-Age and
Survivors Trust Fund will be offset by costs to the Disability
Insurance Trust Fund, among others.
In announcing the hearing, Chairman Bunning stated: ``Raising the
normal retirement age is one of those options that may sound simple,
when you consider how life expectancies have been rising. However, like
so many of the proposed options for Social Security reform, although
they may sound easy, in fact, the impacts are wide-spread and
significant. Through this hearing, I look forward to fully exploring
both the intended and unintended effects of raising the normal
FOCUS OF THE HEARING:
The Subcommittee will receive the views of actuaries, social
insurance experts, employers, and employee representatives on proposals
to raise the normal retirement age. Specifically, Members of the
Subcommittee would like to hear from each witness regarding their views
on the various proposals to raise the normal retirement age and what
they see are the intended and unintended effects.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
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format only, with their name, address, and hearing date noted on a
label, by the close of business, Thursday, March 12, 1998, 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
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accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
Chairman Bunning. The Subcommittee will come to order. I'd
like to welcome all our guests and those that are going to
testify. Today marks our eighth hearing in the series on the
Social Security future for this generation and the next. During
this hearing, we will focus on the implications of raising the
Since our last hearing, Social Security has taken center
stage. In his State of the Union Address, the President made a
commitment to save Social Security, reserving 100 percent of
future budget surpluses until necessary measures have been
taken to strengthen the Social Security system. Although
clearly sounding as though the Federal budget surplus would
somehow be credited to the Social Security Trust Funds, to the
contrary, the President's budget proposed nothing new.
There are no new Social Security Trust Fund investment
strategies nor any changes to the Social Security taxes or
spending. That's why I will introduce legislation which creates
a new treasury account, the Protect Social Security Account,
into which each year's budget surpluses will be deposited. In
essence, my bill would wall off the budget surplus so they
could not be spent until a solution to the Social Security is
We have a fantastic window of opportunity right now to do
what we all need knows to be done. We have to do this; to
reform Social Security to make surely it remains solvent beyond
the baby boomers; beyond the year 2029, well into the next
century. The fact that today we are on the verge of a balanced
budget with a potential of significant budget surpluses for the
next 10 years gives us a golden window of opportunity to
strengthen the Social Security system. We should not let that
opportunity pass us.
Today, we examine the reform solution many have discussed:
Raising the retirement age. What many Americans may not yet
realize, however, is that the normal retirement age, currently
age 65, will soon begin to increase beginning in the year 2000.
The retirement age will gradually increase over a 22-year
period to age 67. We know people are living longer, but we also
know that people are choosing to retire early. In 1996, for
example, almost three-fourths of those who retired received
reduced benefits due to retiring before the age of 65.
Raising the normal retirement age is one of those options
that may sound simple, however, like so many of the proposed
options for Social Security reform, although they may sound
easy, in fact, the impacts are widespread and significant.
Additional years of trust fund solvency would be added by
providing benefits for fewer years or by reducing workers'
benefits even further if they retire before reaching the normal
retirement age. However, raising the retirement age would not
be advantageous for those who are unemployed or working arduous
occupations. Low-wage earners who have poor health or fewer
skills would be adversely affected as would certain minority
groups with shorter lifespans. More workers age 62 and older
probably would continue to work at least part time. Working
seniors would be encouraged making greater use of older workers
and increasing national productivity. But retirement income
might be lower for those who cannot work longer due to
employers continuing to provide incentives for older workers to
retire and make room for younger workers.
Younger individuals who already will not receive as many
benefits from the program as current retirees would see even
fewer benefits. Social Security disability program costs
probably would be raised as seniors would have an incentive to
apply for disability benefits rather than wait to receive full
retirement benefits, especially since early retirement benefits
would be subject to further reductions. In addition, costs of
other disability programs: Workers' compensation, employee
pension programs, and unemployment compensation would also
More details on these effects and many others will be heard
today from the experts who have joined us. I look forward to
hearing their views on both the intended and unintended effects
of raising the normal retirement age. In the interest of time,
it is our practice to dispense with opening statements except
from the Ranking Democrat Member. All Members are welcome to
submit statements for the record. I yield such time as she may
consume to Congresswoman Kennelly for any statement she wishes
Mrs. Kennelly. Thank you, Mr. Chairman, and I enjoyed
listening to your presentation and the legislation that you're
going to introduce, and I think it's fine that both of us agree
so definitely on what should be done with the--so-called budget
But I want to welcome the Commissioner here and make a
brief statement. With today's hearing, we begin an important
year in the discussion of Social Security reform. The President
in his State of the Union Address challenged us to save Social
Security first. I've recently introduced the legislation along
with Ranking Member Charlie Rangel and other Members of the
Ways and Means Committee which would implement the President's
call. It would do so by creating a Save Social Security First
Fund and reserve any budget surplus until action has been taken
to strengthen Social Security for the 21st century. In my view,
we need to keep old promises before we make new ones.
Raising the Social Security retirement age is among the
many proposals made to reduce Social Security outlays. Today's
witnesses will lay out for us some of the policy considerations
of lifting that age. Some people argue that raising the
retirement age makes sense, because life expectancy has
increased. Others argue that an increase in the retirement age
would fall disproportionately on certain groups of people; for
example, the people who are unable to continue working. This
might include workers in heavy industry; workers subject to
downsizing, and workers in poor health.
We are lucky to have the Commissioner of Social Security
with us today and a fine panel of witnesses to share the views
that they have with us. I look forward to a full discussion on
this issue. I thank you, Mr. Chairman.
Chairman Bunning. Thank you, Barbara. First, we will hear
from the Commissioner of the Social Security Administration,
Kenneth Apfel. This is the first time a Commissioner has
appeared before this Subcommittee during our hearing series on
the future of Social Security. I am very pleased that you could
join us and hope you will come back often. Mr. Apfel, would you
like to begin?
STATEMENT OF HON. KENNETH S. APFEL, COMMISSIONER, SOCIAL
Mr. Apfel. Thank you, Mr. Chairman and Members of the
Subcommittee for inviting me here today to discuss the future
of Social Security for this generation and the next. I'm
especially pleased that the topic of my first hearing as
Commissioner for this Subcommittee and in the House is to
discuss how to begin to strengthen Social Security for the 21st
century. I can think of no issue more important for the
As you know, President Clinton has made Social Security
reform a top priority. The President proposed in his State of
the Union Message that none of the surpluses should be used for
tax cuts or additional spending until we address Social
Security's long-range financing problem. He said that we must
save Social Security first, and the reasons are quite clear.
Since its creation in 1935, Social Security has become the most
successful domestic government program in the nation's history
and our most effective antipoverty program, especially for
older Americans. More than 9 of 10 older Americans receive
Social Security and about 40 percent are kept out of poverty by
their monthly benefit payments.
The importance of retirement income will only grow in the
future. Today, there are 34 million older Americans; by 2030,
that number will have more than doubled as the 76 million baby
boomers move into retirement. At the same time, the growth in
the number of senior citizens will outpace the number of
workers. Today, there are 3.3 workers for each beneficiary; by
2030, there will only be about 2. These demographic trends have
large implications especially for the Social Security Program.
These changes will place great strains on America's retirement
system and raise serious long-range financial issues. If these
issues are not addressed by the United States now, future
generations of Americans will not be able to enjoy the same
sense of economic security in retirement as have previous
The President wants the American people to become involved
in determining the future of this venerable program. He's
called for a year-long dialog on the issue of Social Security
reform and has challenged every American to become involved. In
December of this year, the President will convene a White House
conference on the issue, and following that conference, he's
called for bipartisan negotiations on long-term Social Security
reform. I believe that the President's plan of national
discussion and bipartisan political action provides a process
for measured yet timely action.
We now stand at the beginning of this process in which the
options for reforming Social Security should be discussed,
examined, and debated, but any option for change should also be
considered within the context of total program reform. By that,
I mean that any change in one area, such as retirement age,
would affect a degree of change that is practicable or
desirable in other areas.
Let me now turn to the specific focus of this hearing: the
retirement age. It's a complex issue and raises questions that
are indicative of the tough choices facing this Nation. Too few
Americans--as you pointed out, Mr. Chairman--are aware that the
normal retirement age for Social Security is already scheduled
to increase beginning in the year 2000 as a result of the
amendments in 1983. Those amendments provided for a gradual
increase in the age at which unreduced benefits are first paid
from age 65 to 67. The increase will be phased in over a 22-
Now, some individuals propose that the normal retirement
age be raised beyond this already scheduled increase or raised
faster than is now legislated or tied to increases in
longevity. In general, the higher the age you set for full
benefits, the greater the effect in improving the program's
long-range financial condition, but asking future beneficiaries
to work beyond the already legislated age of 67 is clearly
imposing a sacrifice on future workers, and the American people
have to weigh this option against the other options for
improving the financial condition of Social Security.
Let's look at some specific retirement age issues. Those
who favor a further increase usually point first to longevity.
The life expectancy for a 65-year old in 1940 was 12.5 years
and today it is 17.5 years and rising. Proponents of raising
the normal retirement age say that if the normal retirement age
had been pegged to reflect longevity when the 1983 amendments
were passed, the normal retirement age now would be 65 and 10
months today and would reach age 68 in 2054. Had the normal
retirement age been pegged to reflect increases in longevity
since the program's inception, it would be over 70 today.
Proponents also note that there are many indications that the
health of older workers is improving. If these gains continue,
the period of dependence, or ill health, sometimes associated
with old age could be reduced. Improved health could herald
longer periods of career productivity and with a declining
birth rate, older workers could be in demand in the future.
But others look at the notion of raising the retirement age
differently. They say that there is little public support for a
higher retirement age. Three out of four workers, today, take
reduced Social Security benefits just so they can retire before
age 65. Workers in heavy industry would be less able to work
additional years because of the physical demands of their jobs,
and even some people not working in physically demanding jobs
will face pressures. I think of the kindergarten teacher--
that's certainly doesn't count as a physically demanding job--
but would all 67-year-old kindergarten teachers want to
continue to be kindergarten teachers past age 67? I know from
my experience, those are tough jobs. They certainly don't count
as physically demanding jobs, but they have major workload
implications for the individuals who provide that work.
There's a pivotal difference between longer life expectancy
and longer healthy life expectancy. A higher, full retirement
age would drive up Social Security disability claims to some
extent, and I think we'll talk about that today. Some
individuals also point to concerns about the impact of raising
the retirement age on American business practices. The effect
of raising the retirement age on employer behavior would have
to be considered. How might businesses change their employment
and compensation policies in response to the aging population
that wants to work? Will the labor market open up large numbers
of jobs to older workers? These are important questions.
Most importantly, we should remember this: While we can
evaluate the merit and pitfalls of individual proposals such as
increases in the retirement age, the eventual solution to the
long-range financing problem will very likely involve many
elements in a larger reform package. While we must understand
the impact of each of those elements in isolation, we must also
recognize that the elements will interact in a context of a
broader reform package, and those interactions must be fully
understood before any final conclusion can be reached. In the
end, we need reforms that strengthen and protect Social
Security for the 21st century while maintaining the
universality, the fairness, and progressivity of the system.
We're strongly committed to a system that maintains the
basic public trust embodied in the Social Security system that
provides a benefit that people can count on. The American
public needs to understand a number of these complex issues if
they are to eventually support reform measures. They need to
understand that there are tough choices ahead. No option for
resolving the long-term financing problems facing Social
Security is perfect. Any proposal for making substantive
changes in the current Social Security system, such as raising
the retirement age, will need careful study and broad public
discussion. The President, of course, has said that he wants
just such discussion on the entire subject of Social Security
reform throughout this year.
The Social Security Administration will work to educate the
public about what Social Security has achieved, how the program
works, and the nature of the long-range solvency problem. We're
committed to working closely with the Members of this
Subcommittee and other Members of Congress in a bipartisan
effort to save Social Security first. Thank you, and I'll be
happy to answer any questions that you have.
[The prepared statement follows:]
Statement of Hon. Kenneth S. Apfel, Commissioner, Social Security
Thank you for inviting me here today to discuss the
``Future of Social Security for this Generation and the Next.''
I am especially pleased that the topic of my first hearing as
Commissioner of Social Security before this Subcommittee, and
in the House of Representatives, is to discuss how we begin to
strengthen Social Security for the 21st Century. I can think of
no issue more important than preserving the program for future
generations of Americans. Mr. Chairman, you and Ms. Kennelly
have already contributed a great deal of vital information to
this important discussion. I commend you for the work you have
done by holding this series of hearings.
These hearings will help to make the national debate on the
future of Social Security successful and informative. A full
and honest discussion of the issues facing Social Security will
allow Americans to understand and participate in the decisions
that must be made in order to put Social Security on a sound
financial footing. I strongly support the President's call for
all Americans to be involved in the national dialogue on Social
Security in the coming year.
President Clinton's message on Social Security in the State
of the Union was clear: Save Social Security first. Our fiscal
house is now in order. For the first time in more than a
generation, the Nation will enjoy a Federal budget surplus, not
only in the coming year, but for many years to come. But the
President has also stated that any budget surplus must be
reserved pending Social Security reform. He has made it clear
that he intends to work with Congress in a bipartisan effort to
preserve and strengthen the program.
I am very pleased to be here today to discuss the
ramifications of proposals to raise the Social Security
retirement age. Today I will review with you the President's
process for reform, and in the spirit of that process, try to
provide a full overview of the issues that must be addressed
when we are asked to evaluate proposals to raise the retirement
President Clinton wants to use this year to raise the
visibility of Social Security reform. He has challenged every
American to attend a conference or forum on the issue--or to
organize and host one if none are planned in the community.
This national call to action must spread to every corner of the
The President and Vice President will be actively
involved--they will be attending several nonpartisan
conferences convened jointly by the Concord Coalition and the
AARP on Social Security reform. The first of these will take
place on April 7, in Kansas City. They will also be
participating in events organized by the Pew Charitable Trust,
the first of which will take place March 21.
In December of this year, the President will host a
bipartisan White House conference on Social Security as a
culmination of the various conferences, forums and discussions
held throughout the year. The purpose of the White House
conference is to bring together the lessons learned from the
Following the White House conference in December, the
President and his team will begin bipartisan negotiations with
congressional leaders in early 1999. The President is firmly
committed to strengthening Social Security for the 21st
Preserving the Successes of the Program
As we begin this dialogue, we need to reflect on what
features have led to Social Security's success. The dialogue
will most certainly be about how to address the challenges
facing Social Security in the future, but it will also be about
how we preserve and protect the accomplishments of the program
that has served this nation so well for over sixty years.
First of all, Social Security is dependable. Social
Security has been there each and every month. Millions of
Americans count on the arrival of their Social Security
benefit. Today, more than 90 percent of the elderly in this
country receive Social Security. Americans of all ages must be
able to count on Social Security in the future. We have an
obligation to provide a dependable source of income that
Americans can use to plan their financial future with
In addition, Social Security is efficient. Less than one
penny of every dollar collected is used for administering the
Social Security program. It is a program that is portable and
it is a program that provides benefits that are indexed to
Social Security is also the greatest anti-poverty program
ever created. Without Social Security, nearly 50 percent of
today's elderly would be living in poverty. Social Security
doesn't make people rich, but it gives Americans rightly
deserved financial independence. This financial protection,
however, is not just for the elderly. Social security also
protects working families through disability and survivors
Social Security ensures that all workers receive an
equitable benefit through a progressive benefit formula. It is
a program that is universal and fair. Proportionately larger
benefits are provided to lower income workers who will need it
Finally, Social Security is a public trust. Social Security
spreads the risk associated with disability, premature death,
and old age among the entire working population and provides a
guaranteed benefit that is adequate and fair.
During this discussion, we would do well to question
whether changes to the program preserve and protect these
important accomplishments: whether Social Security continues to
be a benefit people can count on; whether the elderly,
disabled, and survivors of workers are protected from financial
hardship; whether the program is efficient; whether the program
is universal and fair; and whether the program is maintained as
a basic public trust. The dialogue about how we ensure the
solvency of Social Security in the 21st century will need to
include these critically important questions.
Need for Public Debate
As President Clinton has said, we must inform Americans
about Social Security and the issues confronting it. The
President's proposal to conduct regional forums to raise public
awareness of the problems facing Social Security acknowledges
an important truth: the broad-based participation of the
American public is critical to achieving a resolution of the
long-term solvency issue. An accurate understanding of the
facts is needed as the foundation for public discussion. We
have been focusing our efforts on educating the public about
Social Security programs to put them in the best possible
position to be able to enter into public debate about options
for the future of Social Security.
Before having discussions about reform proposals, it is
important that Americans understand the Social Security
program. What do I believe Americans should understand about
our Social Security program? What is it about this program that
reduced to its essentials makes it of such importance to the
I want all Americans to understand what Social Security has
meant to older Americans. The plight of older Americans used to
be a disgrace. Now, Social Security provides them with a solid
measure of economic security even if they outlive the actuarial
tables, and their savings. It also provides many of them, and
their children, the advantages that only living independently
I want all Americans to know that Social Security is more
than a retirement program. I want younger people to know that
not only will Social Security be there for them in the future,
it is there for them NOW. How many people know that 1 out of
every 3 Social Security beneficiaries is not a retiree but a
disabled worker, or a member of his or her family, or a
survivor of a worker who has died? They need to know that.
I want all Americans to know that Social Security was never
intended to provide for all of a worker's retirement income
needs. Pensions and personal savings have always been and
should be part of a sound financial retirement plan.
I want all Americans to understand that the changing
demographics of the country are the primary driver of the need
for change. There is an unalterable dynamic at work: by 2030,
there will be nearly twice as many older Americans as there are
today, putting great strains on our retirement system.
I want all Americans to understand the economic facts about
Social Security. Beginning in 2019, the trust funds will start
declining and will be exhausted by 2029, if no changes are made
to the current program. After the trust funds are exhausted,
however, annual revenues will be able to pay three-quarters of
Finally, I want all Americans to understand one important
fact: as attractive as any option for change might be, there
are tradeoffs that must be accepted if we choose it. These are
complex issues, and the advantages and disadvantages of each
will have to be discussed and examined.
SSA will play a vital role in helping to make
understandable the elements that will lead us to long-range
solvency. We have made strengthening the public's understanding
of the Social Security programs one of our five strategic goals
in our recently published Agency Strategic Plan. Through a
comprehensive education campaign, Americans will better
understand the value of Social Security, while recognizing that
its benefits supplement savings, investments, and private
pensions in planning for a comfortable retirement.
As this Subcommittee is well aware, our population is
changing. Americans are living longer and we are having fewer
children. The number of older people--those over 65--is
climbing. In fact, the population of the elderly, now 34.2
million strong--will more than double by the year 2030, to 69.4
The number of workers collecting Social Security is
increasing much faster than the number of workers contributing
to Social Security. Today, there are 3.3 covered workers for
each beneficiary, but by 2030, there will be only about 2
covered workers per beneficiary.
Now is the time--when the economy is strong, the budget is
balanced--to begin to address the economic security for future
generations of retirees. Now is the time--when the program is
not in crisis--to face the long-range solvency problem and to
begin to deal with it. It is important that we address this
problem sooner rather than later so that changes can be made
gradually and that there will be time for people to adjust
their retirement plans.
The President's approach--to use this year for national
discussion and debate; to bring our ideas together in a series
of forums culminating in a White House conference this coming
December--provides an ideal process for measured, yet timely
Raising Retirement Age
And now to turn to the focus of this hearing: The issue of
retirement age, whether it should be raised and how raising it
would affect the millions of future retirees who will depend on
Social Security, is a perfect example of the complex issues and
the tough choices facing us as a Nation.
As you know, the normal retirement age is already scheduled
to increase, beginning in the year 2000, as a result of the
Social Security Amendments of 1983. Those amendments provided
for a gradual increase in the age at which unreduced benefits
are first paid from 65 to 67. The increase in the retirement
age will be phased in over a 22-year period, with an 11-year
hiatus at which the retirement age will remain at 66.
Some have proposed raising both the normal retirement age
and the early retirement age beyond what it is under current
law. The retirement age changes that are being proposed are
intended to help address the long-range solvency problem facing
Social Security. Some proposals would raise the full benefit
retirement age past age 67 to 68 or even higher. In general,
the higher the age is set for full benefits, the greater the
effect on improving Social Security's long-range financial
condition. Asking future beneficiaries to work beyond age 67 is
clearly imposing a sacrifice on these workers, and the American
people will have to weigh this option against the other options
for improving the financial condition of Social Security.
Another element in some retirement age proposals is the
rate at which the increase in the full benefit retirement age
is achieved. Some proposals would simply eliminate the present
law ``hiatus,'' so that full benefits would still be paid at
age 67, but about 11 years sooner than scheduled under current
law. Other proposals go beyond age 67 and do so very gradually,
or relatively quickly. In general, the faster the higher age is
reached, the greater the impact on reducing the Social Security
long-range deficit, but the shorter the period that people
would have to plan for the new retirement age.
Longevity and Health
Proponents of raising retirement age tell people that this
change makes sense because Americans are living longer. When
benefits were first paid in 1935, a 65-year old on average
lived about 12.5 more years. Today, a 65-year old could expect
to live about 17.5 more years and by 2070, life expectancy at
age 65 is projected to be 20.5 years.
Because of the improvements in longevity, some experts
argue that it is reasonable to continue to adjust the
retirement age to encourage people to work longer. They say it
is appropriate for the ratio of years-of-work to years-of-
retirement to stay relatively constant from generation to
generation. Had the normal retirement age been pegged to
reflect increases in longevity when the 1983 Amendments were
passed, the normal retirement age would be 65 and ten months
today, and would reach 68 in 2054. Had the normal retirement
age been pegged to reflect increases in longevity since the
program's inception, it would be over 70 today. While it is
quite clear that medical and technological breakthroughs have
had the effect of extending life spans for many Americans, we
do not know what proportion of those extra years are spent in
good health and what portion reflects extra years of illness
before death. I think we can all agree that, when we talk about
raising the retirement age, there is a pivotal difference
between longer life expectancy and longer healthy life
Some research suggests that the health of older Americans
has increased through the 1980s and into the 1990s. Arguments
have been made that these gains are likely to continue, and can
be expected to have the effect of reducing the period of
dependence or ill health sometimes associated with old age, at
the same time that life expectancy is increasing. On the other
hand, more research is needed to clarify whether gains in
longevity and health would mean most workers could extend their
worklives. Critics of raising the normal retirement age have
pointed out that this could have a disproportionately large
impact on older workers in physically demanding jobs. Many
analysts suggest that even if the normal retirement age is
increased, it may be important to continue to allow early
retirement at age 62, with the appropriate actuarial adjustment
to benefits, as I will discuss in a moment. While it is
expected that there will be fewer physically demanding jobs in
the future, these jobs will not disappear. One study released
in 1986 looked into the issue of whether people would be able
to extend their work careers in the future because of the
decline in the number of jobs that would require physical
strength and endurance. The study concluded that the proportion
of jobs in physically demanding employment will decline
slightly from about 11 percent in 1982 to 7-9 percent in 2020.
Another consideration is the effect of raising the
retirement age on employer behavior. How might firms'
employment and compensation policies change in response to an
aging population that wants to work? Older workers often earn
higher wages, often accrue more expensive pension rights that a
firm must honor, and can increase an employer's health
insurance costs. On the other hand, in many respects the older
worker is a prized commodity for potential employers.
Knowledge, experience, and dependability are characteristics
usually associated with the older worker.
Some have raised concerns about whether the labor market
can accommodate a steady increase in the supply of older
workers. Many experts believe that the U.S. labor market has
always expanded to accommodate large, sustained increases in
the supply of workers--witness the expansion of jobs for women
in the decades after World War II, and the increased employment
opportunities that met the baby boomers' entry into the work
force. However, as skeptics point out, the continued employment
of older workers is not without problems. Skills can obsolesce
and health often deteriorates. Firms often have financial
incentives to substitute cheaper factors of production,
including both younger workers and new equipment. We need to be
aware of the potential problems and employment barriers some
older workers might face if they attempt to remain in the labor
market, as well as the potential contributions they can make.
Another issue is how employer-provided pensions relate to
Social Security. If the full benefit retirement age is raised
for Social Security, how will this impact on private pension
protection? We need to fully examine and discuss the
interaction between employer-provided pensions and Social
Changes to EEA
Some have proposed to leave the ``earliest eligibility
age,'' or EEA, at age 62 while raising the age at which full
benefits are paid. EEA benefits are actuarially reduced to take
account of the longer period over which they will be paid.
Maintaining EEA at age 62 and raising full retirement age has
the effect of stretching the interval over which benefits need
to be actuarially adjusted, and the result is that the
adjustment in benefits at age 62 would need to be greater to be
For any given couple, the decision to take a reduced
benefit may be reasonable to that couple when they reach age
62. The availability of benefits at 62 may make it possible to
travel, pursue hobbies, and, in general, to reap the rewards of
retirement. The cost of choosing early retirement, however, is
an actuarially reduced benefit throughout their retirement
years. Today, almost three out of four workers retire before
reaching age 65--electing reduced benefits--showing a strong
preference of the American people to retire earlier, rather
Relationship between Retirement and Disability Programs
Many have noted that issues of raising retirement age
necessarily include issues of health and ability to work.
Raising the retirement age would have repercussions for the
disability program. As the normal retirement age increases,
there is an increased incentive for workers eligible for early
retirement benefits to apply for disability benefits because,
unless they are similarly reduced, the disability benefits will
be more attractive to older workers.
Opponents of raising retirement age emphasize that some of
the savings from raising retirement age would be offset by
increased costs under the disability program. Some proposals
call for a reduction in disability benefits as a form of early
retirement to avoid such an outcome.
Another approach that has been suggested by some would be
to make changes in the disability benefits program to take
account of those older workers who are unable to extend their
work lives for health reasons. This approach was suggested by
the Greenspan Commission before the 1983 legislation to
gradually raise the retirement age was enacted. As a majority
of the Greenspan Commission noted:
``...because some workers, particularly those in physically
demanding employment may not benefit from improvements in
mortality and be able to work longer, we assume that the
disability benefits program will be improved prior to
implementation of this recommendation to take account of the
special problems of those between age 62 and the normal
retirement age who are unable to extend their working careers
for health reasons.''
While SSA regulations already provide more relaxed
eligibility requirements for workers who become disabled after
age 55 when vocational factors are taken into account, the
question is raised as to whether this is sufficient. There is
no easy answer here.
Interactive Nature of Individual Elements
This complicated relationship between retirement and
disability brings me to my final point. That is, we can
evaluate proposals as to their individual merits, but the final
solution to the long-range solvency problem will very likely
involve many elements comprising a larger package. While we
must understand the ramifications of each of those elements in
isolation, we also must recognize that the elements will
interact in the context of the entire package, and that those
interactions also must be fully understood before any final
conclusions can be drawn.
Raising the normal retirement age involves issues that need
to be examined and discussed by all Americans. We must hear
from the people, because Social Security is their program.
Every one of us, young and old, needs to understand that
there are tough choices ahead of us. No option for resolving
the long-term financing problems facing Social Security is
perfect, and, as we have seen today in this discussion of
raising retirement age, every option involves tough choices.
SSA will continue to take an active role in the process
outlined by the President. We will continue to educate the
public about Social Security; how it works, what is has
achieved, and the nature of the long-range solvency problem. I
look forward to working closely with members of this Committee
in a bipartisan way to fashion solutions important to this
Nation. I will be glad to answer any questions you may have.
Chairman Bunning. Thank you, Mr. Commissioner. Yesterday, I
asked Treasury Deputy Secretary Summers about the President's
proposal on Social Security, and as Commissioner of this vital
program, I would like to hear your views as well. Would you
please explain for me the President's proposal for the
treatment of the budget surpluses and reform of Social
Mr. Apfel. The President has strongly suggested that we
save Social Security first by reserving the budget surpluses
pending Social Security reform and that we use our current
budget rules to assure that those surpluses are not drained
away through either tax cuts or other spending increases until
we address the issue of Social Security reform. I should also
indicate that our current budget projections show that the
first surpluses will arrive at the end of fiscal year 1999, and
it's our belief that we can get this whole issue completed,
legislation enacted, before the end of fiscal year 1999, before
those first budget surpluses start to come on stream. The
President has not specifically proposed that the budget
surpluses be provided to the Social Security Trust Fund at this
time. We have not at all ruled out the possibility of a whole
series of different ways the surpluses could be used to
strengthen the Social Security system. But that's really what
this year is about, how to assure the long-term future of
Social Security and how those surpluses could be used to help
strengthen Social Security.
Chairman Bunning. In other words, in his proposed budget,
there is nothing to change the current law as far as taking the
FICA taxes and investing them in nonnegotiable bonds and then
spending that money. There is nothing--no change.
Mr. Apfel. There is no proposal to do that in this budget.
We do not think it's necessary at this time given the fact that
the surpluses will be coming on stream in 1999. I would note
that you've indicated an interest in legislation to organize a
form of an accounting mechanism to assure that those surpluses
would be walled off. Mr. Rangel, Mrs. Kennelly, I believe, have
a similar approach. We would be open to discussing those with
the Congress. At this time, we haven't seen the need for
legislation to do that because of our desire to complete action
on this in 1999, but we're not at all opposed to discussing
whether a specific mechanism, an accounting mechanism, should
Chairman Bunning. Certain members of the administration
have discussed transferring a part of the surplus to the trust
funds. In essence, this would mean a huge transfer of general
tax receipts into the trust funds. In your view, should any tax
receipts be used to fund Social Security? Should taxpayers feel
any connection between the taxes they pay and the benefits they
receive? And I'm speaking, then, in that tax receipt about FICA
tax. The budget surplus is separate. Some members of your
administration suggested that we transfer the surplus into the
trust funds. I think there has to be a connection between the
FICA tax and the benefits.
Mr. Apfel. No members of the administration have proposed
that the surpluses be transferred. One of the options that
needs to be considered this year--and there's been internal
discussion and there will be discussions all year--is this is
one option that I think deserves considerations: Whether the
surpluses would be transferred in whole or in part in some form
to the Social Security Trust Fund. There are other options as
well: Whether the surpluses would be invested in equities and
provided to the trust fund. Another option that some have
proposed is to use the trust fund balances and invest part of
those balances in equities; not transferring new moneys into
the Social Security Trust Fund, but, in effect, using some of
the surpluses in equity investments which would also have the
effect of using up part of the surpluses.
Chairman Bunning. I want to--I don't mean to cut you off,
but someone in the administration did suggest that, and it was
Deputy Secretary Summers, and he argued with me in testimony
yesterday, and before the Senate Finance Committee he said,
that maybe when we get to $100 billion in surplus, maybe we
could make a massive transfer to the trust funds.
Mr. Apfel. I was at that hearing, sir--also testifying----
Chairman Bunning. Well, but I'll go get you to the
testimony if you'd like, and I don't want to argue about what
Mr. Apfel. One of the hypotheticals would be, if $100
billion were transferred in, what would be the potential
effect? But we've been very clear that we have not proposed any
one of those solutions, and that's really what part of this
debate is all about, sir.
Chairman Bunning. Barbara.
Mrs. Kennelly. Thank you, Mr. Chairman. Obviously, raising
the retirement age is likely to fall the hardest on those with
little or no pension benefits. Less than half of Americans
working right now have pension benefits. If the retirement age
is raised, what will happen to the half of America that doesn't
have pension benefits and then wait longer for their Social
Security? I'm sure you've thought about it, and how do you
Mr. Apfel. Well, it is true that about half of all Social
Security recipients receive virtually no pension or asset
income and are heavily, heavily relying on just Social
Security. Any change in the benefit structure will fall most
heavily on that group of individuals. A change in the
retirement age has the effect of affecting all individuals,
particularly those nearing retirement by reducing benefits for
everyone at a given age. There are other alternatives, other
benefit changes, that need to be weighed and considered with
regard to their effect on low-income Americans.
Mrs. Kennelly. Well, my concern is that an awful lot of
those individuals are older, poor women with really very little
to fall back on and living literally penny to penny to penny;
watching every penny, and this is a concern because they just
don't have any other alterative other than to be poor.
Mr. Apfel. Women retire somewhat earlier, which means they
have a somewhat deeper reduction in actual values in terms of
their benefits from Social Security. They also, because of
earnings, receive somewhat lower benefits, and they also, as
you know, live considerably longer and, potentially----
Mrs. Kennelly. And we haven't figured out any way for
anybody else to have the baby, so they go in and out of the
work force, and therefore have the zero earning years too.
Everything's going against them.
Mr. Apfel. So, there are a whole number of issues----
Mrs. Kennelly. In Social Security.
Mr. Apfel. That's right; that's right. But there's a whole
series of issues about women that relate to retirement age and
also any of the other proposals that are on the table. It's one
of the reasons that we have to look at this change combined
with any other changes that can be done in a system to
determine how the entire package that is developed in the
course of the months ahead will provide the strongest floor of
protection in a progressive way for all workers, particularly
those with lower incomes.
Mrs. Kennelly. A lot of things have not changed.
Generational relationships with more women working have but
we've got a whole new group of single heads of households going
into the work force, so we'll have many of the same problems
with women who stayed at home.
So, it's a problem that really has to continually be
addressed and it's the reason we can't do anything else but
address the whole future of the Social Security system, and no
matter how erudite you get, you come back to that every time,
so I have to mention it every time.
Let me talk about another group. The Heritage Foundation
has argued that the African-American men get a very bad deal
from Social Security because of their shorter lifespan. In
addition, those who oppose raising the retirement age point out
that raising the retirement age would disadvantage people who
have a shorter life. Now, that's obvious; that's very obvious,
but as we do this, we have to keep remembering why we have
Social Security, and how do you respond to that?
Mr. Apfel. If I could comment on the Heritage study. The
Social Security actuaries developed an analysis of the Heritage
study on rates of return and indicated that there were some
errors that were made in that study, and I would ask for the
record if we could include the Social Security actuaries'
response to the study. One of the conclusions was that there
are significant negative rates of return which we don't think
Chairman Bunning. Without objection, we'll let you put it
in, and we also will put the Heritage's report in, so that
there's a comparison.
Mr. Apfel [continuing]. And if it's their rebuttal which I
heard there was----
Chairman Bunning. Well, we'll let them put their report in.
Mr. Apfel. Great.
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Social Security's Rate of Return by William W. Beach and Gareth E.
No. 98-01 January 15, 1998
What can Americans expect in future Social Security
retirement benefits? A Heritage Foundation study reveals that
the Social Security system's rate of return for most Americans
will be vastly inferior to what they could expect from placing
their payroll taxes in even the most conservative private
investments. For the low-income African-American male age 38 or
younger, the news is particularly grim: He is likely to pay
more into the Social Security system than he can ever expect to
receive in benefits after inflation and taxes. Staying in the
current system will likely cost him up to $160,000 in lifetime
income in 1997 dollars.
If Americans were allowed to direct their payroll taxes
into safe investment accounts similar to 401(k) plans, or even
super-safe U.S. Treasury bills, they would accumulate far more
money in savings for their retirement years than they are ever
likely to receive from Social Security. For example:
Social Security pays a very low rate of return for
two-income households with children.--Social Security's
inflation-adjusted rate of return is only 1.23 percent for an
average household of two 30-year-old earners with children in
which each parent made just under $26,000 in 1996.\1\ Such
couples will pay a total of about $320,000 in Social Security
taxes over their lifetime (including employer payments) and can
expect to receive benefits of about $450,000 (in 1997 dollars,
before applicable taxes) after retiring at age 67, the
retirement age when they are eligible for full Social Security
Old-Age benefits.\2\ Had they placed that same amount of
lifetime employee and employer tax contributions into
conservative tax-deferred IRA-type investments-such as a mutual
fund composed of 50 percent U.S. government Treasury bills and
50 percent equities-they could expect a real rate of return of
over 5 percent per year prior to the payment of taxes after
retirement. In this latter case, the total amount of income
accumulated by retirement would equal approximately $975,000
(in 1997 dollars, before applicable taxes).
\1\ This rate of return calculation assumes that both adults were
born in 1967.
\2\ Total taxes paid and benefits received are expressed in 1997
inflation-adjusted dollars. Social Security taxes are defined as Old-
Age and Survivors Insurance (OASI) contributions, less (where
applicable) an amount which would buy a life insurance policy
equivalent to the value of the coverage provided by (pre-retirement)
Survivors Insurance. In 1997, the tax rate for OASI is 10.7 percent of
all wages and self-employment income less than $65,400, as of year-end
1997. Unless stated otherwise, a discount rate is not applied to these
The rate of return for some ethnic minorities is
negative.--Low-income, single African-American males born after
1959 face a negative real rate of return from Social Security.
For every dollar he has paid into Social Security, a low-
income, single African-American male in his mid-20s who earned
about 50 percent of the average wage, or $12,862, in 1996 can
expect to get back less than 88 cents. This negative rate of
return translates into lifetime cash losses of $13,377 (in 1997
dollars) on the taxes paid by the employer and employee.
African-American females typically live longer than their
male counterparts, yet even they have a rate of return lower
than the general population. An African-American single mother
21 years old who in 1996 made just under $19,000 (the average
for African-American females) can look forward to a real rate
of return on her Social Security taxes of only 1.2 percent.
Under conservative assumptions, if she had saved those same tax
dollars in a private investment account composed of government
bonds, she would have received a real return of around 3
percent per year. With a mixed portfolio of bonds and equities,
she could expect a return on her investments of at least 4.35
percent. This means that even with a low risk/low yield
portfolio composed entirely of Treasury bills, this single
mother could have generated at least $93,000 more in retirement
income (in after-tax 1997 dollars) than she would enjoy under
\3\ Assuming that upon retirement this single woman is able to
annuitize the lump sum at retirement that she accumulated at a real
interest rate of 2.7 percent over 15 years. The current federal income
tax rates (with current rate structure, exemptions, tax bands, and
deductions adjusted by inflation as mandated in current legislation)
are applied against this annuity income.
The rate of return has a damaging impact on
communities.--The cumulative effects of Social Security's
dismal rates of return can be appreciated by considering a
hypothetical community. Suppose there existed a city entirely
of 50,000 young, married double-earner couples in their
thirties, with each person earning the average wage, and each
couple had two children. The cumulative amount such a community
could save in a private pension plan by retirement with the
same dollars they currently pay in Social Security taxes is
over $26 billion greater than these couples will get in Social
Security benefits. This amount is roughly equal to the amount
the federal government currently spends on food stamps each
year for the whole nation, and nearly as much as direct federal
spending on education.\4\
\4\ Scott A. Hodge, ed., Balancing America's Budget: Ending the Era
of Big Government (Washington, D.C.: The Heritage Foundation, 1997).
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Why Rates of Return Matter
The defenders of Social Security argue that rates of return
are irrelevant to the Old-Age and Survivors Insurance (OASI)
portions of the program. Social Security, they suggest, was
intended to provide a basic but decent retirement income to
beneficiaries and stop-gap incomes for surviving spouses.
Future Social Security beneficiaries, they argue, should be
saving now for additional retirement income to supplement
benefits from the Old-Age and Survivors Insurance. Thus, they
argue that comparing rates of return on private pension
investments with those from a public program intended to pay
out during retirement at least 35 percent of the wages an
average worker earned prior to retirement is like comparing
apples with oranges.\5\
\5\ See Social Security Administration, ``Findings and
Recommendations,'' 1997 Annual Report of the Board of Trustees of the
Federal Old-Age and Survivors Insurance and Disability Insurance Trust
Funds, Communication from the Board of Trustees of the Federal Old-Age
and Survivors Insurance and Disability Insurance Trust Funds, House
Doc. 104-228 (Washington, D.C.: U.S. Government Printing Office, 1997),
Table R1, p. 36.
This line of reasoning contains a fundamental flaw. If
Social Security taxes were low enough to allow workers to save
these additional dollars for their retirement, apologists for
the system might conceivably be correct in characterizing
Social Security as a pension program of last resort. But Social
Security taxes are not low, and they are crowding out the
ability of most low-and middle-income Americans to save for
retirement. Thus, the rate of return on these taxes is very
important, especially for those Americans for whom Social
Security is their main retirement savings.
Crowding Out Savings. As payroll taxes have risen, many
more Americans have few dollars left over for supplemental
retirement investment. Over the past 25 years, Congress and the
President have increased Old-Age and Survivors benefits so
often and so much that today the high payroll taxes needed to
pay those current benefits crowd out private retirement
investments.\6\ In 1972, the average worker (with his or her
employer) paid 8.1 percent in Old-Age and Survivors payroll
taxes on the first $9,000 of wages and salary (equivalent to
about $21,500 in 1997 dollars);\7\ in 1997, that worker paid
10.7 percent on the first $65,400 of ``earned'' income (or the
first $27,340 in 1972 dollars).\8\ Moreover, between 2020 and
2046, the Old-Age and Survivors tax rate will have to rise to
14.4 percent from today's 10.7 percent if benefit costs are not
\6\ See Martin Feldstein, ``The Missing Piece in Policy Analysis:
Social Security Reform,'' A.E.A. Papers and Proceedings, May 1996, pp.
\7\ Social Security Administration, 1997 Annual Report of the Board
of Trustees, Table II.B1, pp. 34-35. The percentage of wages and
salaries taxed to support the Old-Age and Survivors and Disability
Insurance programs (Social Security taxes) equals the 50 percent paid
directly by the employee plus the 50 percent paid by the employer on
the employee's behalf. The employer's half comes from wages the family
would have earned had there not been a payroll tax.
\8\ Taxable threshold levels for 1972 and 1997 adjusted by the
index value for the Consumer Price Index--All Urban Series. See
Economic Report of the President (Washington, D.C.: U.S. Government
Printing Office, 1997), Table B-58, p. 365.
\9\ Heritage Foundation estimates based on data from the Social
Security Administration's 1997 Annual Report of the Board of Trustees,
Table II.F14, p. 112.
Because of rising payroll taxes for retirement, increasing
numbers of poor and middle-income workers do not have the
after-tax funds needed to create private supplemental pension
investments.\10\ In fact, Social Security taxes now consume as
much of the average family's budget as do outlays for housing,
and nearly three times more than annual health care
\10\ This is complicated by the decreasing number of firms that
provide company pensions to their workers. Rising taxes of all kinds,
costly regulations, and increasing pressures on the bottom line have
led many firms away from the practice of providing pensions for long-
\11\ Data on average family consumption expenditures from U.S.
Department of Labor, Bureau of Labor Statistics, ``Consumer
Expenditures in 1995,'' June 1997, Table A. This report estimates
average family income before taxes to be $36,918. Heritage analysts
added $2,289 to reflect additional wages the average worker would
receive if the employer's share of Social Security was converted to
Because of the long-term financial problems of the Social
Security trust fund, calculations of the rate of return for
Social Security are likely to prove optimistic. The fact is
that Social Security will not be able to pay out old-age
benefits to the ``Baby Boom'' generation without additional tax
increases on workers or benefit cuts. These tax increases or
benefit cuts will further reduce the Social Security rates of
return for those workers currently in their twenties, members
of the so-called Generation X, and their children. As Social
Security's rates of return fall, the relevance of rates of
return on private pensions rises. That is, members of
Generation X are not simply going to ignore the decaying
prospects for adequate income during their retirement years.
Rather, they will insist increasingly on more opportunities for
creating pensions to supplement Social Security's Old-Age
benefits. Thus, comparing rates of return for private and
public pensions will become even more important to each new
In addition, the rate of return is important because the
crowding-out effects of high Social Security taxes on private
savings for low-and middle-income workers affect the wealth
that can be left to the next generation. Few aspects of Social
Security are as unintended or as damaging to low-and middle-
income workers as the squeeze that high payroll taxes put on
the formation of intergenerational wealth transfers. The
inability of poor workers to accumulate enough savings to leave
a nest egg to their children can mean that their children will
be as dependent as their parents could be on their monthly
Social Security check. It means that poor communities will not
have as much ``home grown'' capital with which to create new
jobs and sources of income. Without these new jobs and income,
members of the next generation will be less able to save for
retirement than they could be. Thus, by taxing away one
generation's opportunity to help the next generation start
earning at a higher level, the Social Security system acts as a
drag on future generations.
Cumulative Effect on Communities. Although a low rate of
return on rising Social Security taxes reduces the potential
retirement savings of individual households, it is important to
appreciate the cumulative effect this has on communities. In
both rich and poor communities, less money accumulated in each
household for retirement years means less money in the
community not just for living expenses, but also for new
businesses, for sending children to college, and generally for
giving the next generation a more secure financial foundation.
In short, each succeeding generation in a community is weakened
financially by a poor rate of return from Social Security.
For a very rough picture of the cumulative impact on a
community, consider a hypothetical small community of 200,000
residents. In this imaginary community, there are 50,000
families of four; all the parents are age 30; and both parents
work, earning the average wage of $26,000 (in 1997 dollars).
Assume that nobody migrates into or out of this neighborhood.
In this greatly simplified hypothetical community, the
difference between the lifetime amount of savings the parents
would accumulate by placing their Social Security tax dollars
in conservative portfolios and the amount actually obtained
from Social Security would be approximately $26 billion in 1997
dollars (based on family cases analyzed later in this study).
This is the savings they must forego due to the failing Social
Security tax system and, in effect, is money drained from their
community during their working years.
To be sure, this example is completely fictitious, and
actual calculations for real communities would vary widely. But
this example serves to illustrate that the deficiencies of
Social Security for individual households imply a significant
impact on the long-run financial health of American
[GRAPHIC] [TIFF OMITTED] T2247.039
Social Security's Rates of Return for Households
The authors calculated Social Security's inflation-adjusted
(or ``real'') rates of return for various segments of the
population and compared these returns with the rates of return
workers could receive if they were allowed to invest their
Social Security taxes in safe, private retirement
investments.\12\ These calculations show that families at all
income levels receive dismal returns for the lifetime taxes
\12\ Heritage analysts reduced all rates of return and related
calculations presented in this paper by the annual inflation rates for
the years between 1997 and 2040, as forecast by the Board of Trustees
of the Social Security Old-Age and Survivors Insurance Trust Fund in
their 1997 annual report. This adjustment to rates of return, Social
Security benefits, and privately managed savings means that the reader
is always shown sums and earnings ratios in terms of a dollar's
purchasing power today. Thus, the statement ``Social Security will pay
out an annual amount of $17,000 in the year 2040'' means that the
program will pay enough to allow a beneficiary to purchase then what
$17,000 will purchase now. In order for a beneficiary to have that much
``purchasing power'' in the year 2040, as he has today, Social Security
will actually have to send this person around $100,000 annually. The
difference between the two amounts is explained by the effects of
inflation on the dollar's value, or by what a dollar will buy in 2040
after years of decreasing value due to inflation.
Defenders of Social Security often argue that Old-Age and
Survivors benefits help low-income workers especially. But do
they? Does Social Security give low-income Americans a decent
return on all of the taxes they pay into the system over their
lifetime of work? \13\
\13\ Generally speaking, a low-income earner is defined in Social
Security Administration simulations as someone who earns 50 percent of
the average wage. In 1996, a person defined as low-income earned
approximately $12,862 per annum.
As Chart 1 indicates, a low-income family will likely
receive at best a mediocre and at worst a very poor real rate
of return from Social Security, despite the fact that Social
Security's formulae are designed expressly to redistribute
income toward workers with low income. Single-earner low-income
couples born before 1935, who have paid much lower lifetime
payroll taxes, are better than do much younger workers.
However, even the best-case rate of return (5.37 percent for a
single-earner couple with children in which the worker was born
in 1932) lies below 7 percent, a conservative estimate of what
economists estimate to be the long-range real rate of
[GRAPHIC] [TIFF OMITTED] T2247.040
return on equities.\14\ Every other low-income group lies below
this rate of return, or well below the rates of return
available to Americans who have opportunities to invest in
stocks and bonds for the long term. Double-earner low-income
families, as well as single low-income males and females, fare
badly under Social Security. Low-income single males are hit
particularly hard because of the lower male life expectancy and
absence of spousal and survivor's benefits. The expected real
rate of return from Social Security for low-income males falls
from a high of 3.6 percent for those born in 1932 to 1.0
percent for those born in 1976-well below what could be
realized from a prudent private investment portfolio.
\14\ Report of the 1994-1996 Advisory Council on Social Security,
Vol. I: Findings and Recommendations, p. 35.
Chart 2 shows rates of return for average-income
families.\15\ All of the groups fare badly under Social
Security relative to the return that they could receive from a
conservative private investment portfolio. A married couple
with two children and a single earner fare best, receiving 4.74
percent if the earner was born in 1932. This expected rate of
return falls gradually to less than 2.6 percent for those born
in 1976. As in the low-income scenario, single males fare worst
of all. An average-earning single male born after 1966 can
expect to receive an annualized real rate of return of less
than 0.5 percent (less than one-half of 1 percent) on lifetime
\15\ An average-income family is defined by the Social Security
Administration as one in which the earners receive the average wage
earned by all of those covered by Social Security. In 1996, earners in
such families are estimated to have received $25,723.
[GRAPHIC] [TIFF OMITTED] T2247.041
Table 1 shows selected Social Security rates of return for
the general population, for African-Americans, and for
[GRAPHIC] [TIFF OMITTED] T2247.042
What Do These Rates of Return Mean in Dollar Terms?
Due to the power of compound interest, even what appears to
be a relatively small difference in the real rate of return can
have significant implications for a family's lifetime
accumulated wealth. In order to analyze the dollar implications
of Social Security's lower rate of return, the authors
calculated the inflation-adjusted differences between Social
Security's benefits and what a fairly conservative investor
could accumulate by retirement from a portfolio split equally
between long-term U.S. Treasury bills and broad market equity
A low-income single-earner couple with children whose wage
earner is 41 years old in 1997 can expect to receive about
$202,000 in Social Security benefits in return for a lifetime
of payroll taxes. Those 31 and 21 years old in 1997 can expect
to receive around $215,400 and $240,200, respectively, in
benefits. However, by investing these same tax dollars in a
portfolio made up of 50 percent U.S. Treasury bills and 50
percent blue-chip equities, these three wage earners could
accumulate by retirement an estimated $230,200, $241,000, and
$249,000 in 1997 dollars, respectively.\16\
\16\ These amounts reflect the buildup of retirement savings in
tax-deferred IRA-type investment portfolios and are prior to the
payment of any applicable income taxes.
Hence, staying in the Social Security program means that
low-income married couples will bear a cost of about $28,200,
$25,600, and $8,800 for wage earners who were born in 1956,
1966, and 1976, even though this group has the highest rate of
return from Social Security. Indeed, these amounts are likely
to underestimate the gain from a private retirement plan, since
they do not include any of the interest a couple can expect to
earn on the accumulated sum in the period after retirement.
Social Security poses even greater costs for groups with
lower rates of return than low-income single-earner couples. A
single male earning what the Social Security Trustees call ``an
average income'' (or $25,723 in 1996) is particularly hard-hit
by Social Security's low returns. A 21-year-old single male
making an average income throughout his lifetime can expect to
lose $309,400 in potential retirement income by staying in
Social Security when compared with what he would earn if he
invested his payroll taxes in a safe, conservative private
retirement fund made up of 50 percent equities and 50 percent
government bonds. A 31-year-old single male who earns what the
Social Security Trustees call an average income will lose
$311,000 over the income a conservative private portfolio would
likely yield, while a similar 41-year-old will forego $296,000
(in 1997 dollars).
[GRAPHIC] [TIFF OMITTED] T2247.043
[GRAPHIC] [TIFF OMITTED] T2247.044
Social Security and African-Americans
Due to generally lower life expectancies, African-Americans
experience particularly poor rates of return from Social
Security. This means, among other things, that Social Security
taxes impede the intergenerational accumulation of capital
among African-Americans, a group which has found it difficult
to acquire capital. In fact, even under the most optimistic
assumptions, Social Security taxes actually shrink the lifetime
net earnings of some of the least advantaged members of the
Despite efforts to transfer resources toward low-income
individuals through Social Security, low-income African-
American males realize particularly dismal rates of return from
Social Security, even under the most favorable assumptions.
Chart 5 shows the real rate of return from Social Security for
African-American males who earn what the Social Security
Trustees call ``low-income'' annual earnings throughout their
life-about $12,862 in 1996. Chart 5 also illustrates how the
best intentions of Social Security's defenders to help low-
income minorities are frustrated by the program's dismal rates
\17\ Indeed, life expectancy for this African-American male is
likely to be lower than the one used. Life expectancy is closely
related to earnings, and while the average African-American male worker
in the last quarter of 1996 had earnings of 82.8 percent of the
national average, the above worker has only earnings of 50 percent of
the average. See footnote 11, supra.
[GRAPHIC] [TIFF OMITTED] T2247.045
An African-American, low-income single male born in 1932
and retiring today can expect a rate of return of approximately
3.23 percent on his lifetime contributions. However, this rate
of return falls for younger African-American males. Indeed, the
expected rate of return from Social Security for those born
after 1959 is negative. This means that a typical, low-income
African-American male 38 years old or younger can expect to pay
more into the Social Security system than he will likely
receive after inflation and federal income taxes. Put another
way, this person's lifetime purchasing power, or the ability to
buy the same goods and services in retirement that he buys
today, actually shrinks as a result of his participation in the
Social Security program.
To gauge how much of his purchasing power this future
retiree may forego by staying in Social Security, the authors
calculated the amount of money that a 25-year-old, low-income
African-American male could accumulate by retirement if he
invested his payroll taxes privately. This inflation-adjusted
sum was compared with the amount he can expect to receive from
Social Security, all in 1997 dollars.
Three scenarios for alternative rates of return are
presented in Chart 6. They examine the after-federal-income tax
benefits, assuming the contributions were placed in a tax-
deferred IRA-type account.\18\ The first scenario assumes that
the worker invests 50 percent of his taxes in U.S. Treasury
bills and 50 percent in a broad equity index. The second
scenario assumes that all payroll taxes are invested entirely
in T-bills. The third scenario assumes the worst case: that the
worker invests 50 percent in U.S. Treasury bills and loses all
of the remaining half in bad investments.
\18\ The amounts below assume that the worker pays out the amount
he has accumulated in an annuity over his lifetime and receives an
interest rate of 27 percent. The current federal income tax rates (with
current rate structure, exemptions, tax bands, and deductions adjusted
by inflation as mandated in current legislation) are applied against
this annuity income.
As Chart 6 shows, the current Social Security system can be
expected to shrink this individual's net lifetime income by
$13,377 in terms of 1997 dollars. He is likely to fare better,
even if he were to lose half of his invested tax dollars
completely, by an amount of $13,089, compared with Social
Security's rate of return.
[GRAPHIC] [TIFF OMITTED] T2247.046
Moving beyond the extreme worst-case outcome, the results
are even more striking. Under conservative assumptions, a 100
percent T-bill portfolio will result in an increase in a
lifetime income net of taxes of $79,846, while a 50 percent
bond/50 percent equity portfolio will likely result in a net
increase in post-tax lifetime income of $145,764.
The nature of the current Social Security system also
imposes a heavy burden on single-parent families. Chart 7
illustrates some of the total lifetime costs experienced by two
typical African-American single mothers of different ages but
each earning an annual salary of $18,650 in 1996. The expected
total Social Security benefits are presented in the chart, as
well as the amount that each woman would have accumulated by
retirement had she been able to invest her Social Security
taxes under two sets of assumptions: (1) an ``ultra-
conservative'' portfolio in which all of her taxes were
invested in U.S. Treasury bills, and (2) a portfolio in which
50 percent was invested in Treasury bills and 50 percent in a
broad equity fund.
[GRAPHIC] [TIFF OMITTED] T2247.047
In return for a lifetime of contributions to Old-Age and
Survivors Insurance, the 50-year-old single mother can expect
to receive, on average, $155,903 in Social Security benefits
while a 21-year-old can expect to receive $190,767. In each
case, private strategies yield much higher returns than Social
Security. An ultra-conservative investment program in which all
of their savings are invested in long-term government bonds
would yield post-tax lifetime amounts of $213,220 and $284,098
for the 50-year-old and 21-year-old, respectively-a net gain
over Social Security of $57,317 and $93,330.\19\
\19\ The current federal income tax rates (with current rate
structure, exemptions, tax bands, and deductions adjusted by inflation
as mandated in current legislation) are applied against this annuity
The gains from a prudently mixed portfolio of bonds and
equities are even greater. Had their taxes been invested in a
mixed portfolio of 50 percent bonds and 50 percent equities,
the 50-year-old would receive at least $280,016 in lifetime
post-tax income and the 21-year-old would receive $382,840 (in
1997 dollars). This represents, respectively, $124,113 and
$192,073 more than they could expect to receive from Social
Social Security and Upper-Middle-Income Americans
Even for affluent groups, with their ability to supplement
Social Security, the lifetime cost of the current Social
Security system is by no means trivial in terms of economic
well-being. Chart 8 shows the effects on the lifetime wealth
and savings of an upper-middle-income, white married couple in
New York who have two children and who, in 1996, each earned
$77,166 (for a combined income of $154,332).
[GRAPHIC] [TIFF OMITTED] T2247.048
For such couples, the lifetime inflation-adjusted Social
Security tax burden will increase from $323,500 for those born
in 1932 to just over $902,050 for those born in 1976. By
contrast, this couple would likely gain enormously from private
investment of their tax dollars. For couples born in 1932,
1950, and 1976, investing their tax dollars in a broad market
equity fund would generate $900,426, $2,304,370, and
$3,104,259, respectively, in after-tax lifetime 1997
dollars.\20\ This can be compared with their respective
expected total lifetime Social Security benefits of $602,776,
682,372, and $956,959.\21\
\20\ The current federal income tax rates (with current rate
structure, exemptions, tax bands, and deductions adjusted by inflation
as mandated in current legislation) are applied against this annuity
\21\ In line with upper-bound estimates of the effects of higher
income on life expectancy, the remaining life expectancy of this couple
is increased by 10.2 percent for the male and 8.2 percent for the
female. See footnote 28, infra.
The economic costs of the current system become even
clearer when lost capital accumulation and income opportunities
are assessed. Not only does Social Security reduce the income
and the ability of these New York couples to save, but their
reduced savings translate into less capital for expanding
businesses, fewer jobs for others, and, ultimately, a lower
standard of living for the entire community.
Why would economic activity be lower if Social Security
taxes come back to the community in the form of Social Security
benefits? Most economists agree that savings and investment
contribute more to economic growth than personal consumption
spending. Newer and better machines make workers more
productive than longer vacations and a new pair of exercise
shoes. Even new savings invested in government bonds cause
interest rates to fall and increase private investment.
However, under the current pay-as-you-go system, Social
Security taxes are consumed primarily in paying benefits to
current retirees who spend nearly all of their income on
personal consumption items. In a privatized system, these funds
would be transformed into investments, adding to the capital
stock of the nation and enhancing productivity and economic
If the upper-middle-income couple born in 1950 had been
allowed to invest their tax dollars in U.S. Treasury bills,
they would have accumulated $1.22 million in 1997 dollars by
the date of retirement.\22\ A portfolio composed entirely of
high-grade stocks would have created $2.58 million in new
private capital by retirement. For a high-income couple born in
1972 (25 years old today), the investment of their Social
Security taxes in private equities would have created $3.65
million in new capital by the date of retirement. By contrast,
other than the relatively small surplus that is invested in the
trust funds, the current pay-as-you-go Social Security system
creates no new savings or capital.\23\
\22\ These amounts differ from the amount a lifetime income
investment of their savings will generate because they do not include
interest on these amounts following retirement or the income taxes paid
on them when they are drawn down by the retired couple.
\23\ In 1996, a little under 14.5 percent of all OASDI tax and
interest receipts was added to the OASDI trust funds. See Social
Security Trustees Report, Table II, C1.
When the Social Security system began, its aim was to help
ordinary Americans and those in disadvantaged positions to have
adequate financial security in their retirement years. However,
as this analysis has shown, the current Social Security system
may actually decrease the lifetime well-being of many
socioeconomic groups, even under the most favorable
assumptions. Among the groups who will lose out under the
current system are single mothers, low-income single males,
average-income married couples with children, and even affluent
professionals. Indeed, many ordinary Americans already
understand that the Social Security system is a bad deal.
Recent surveys have shown that many workers expect to pay more,
in real terms, into the system than they ever expect to receive
in retirement benefits.\24\
\24\ See Michael Tanner, ``Public Opinion and Social Security
Privatization,'' Cato Project on Social Security Privatization S.S.P.
No. 5, August 6, 1996.
This analysis of the Social Security system almost
certainly underestimates its total economic costs. It makes no
attempt, for instance, to include the benefits from faster
economic growth, higher wages, and increased employment
generated by a retirement program in which individuals are
allowed to invest their Social Security tax dollars and build
the wealth necessary to sustain them in their old age.
Although the debate on Social Security reform at times may
focus on technical terms (such as the ``replacement ratio'' and
the trust fund's ``long-range actuarial balance'') which mean
little or nothing to ordinary American families, there is
little doubt that the outcome of the debate will be profoundly
important to them. For example, whether or not the current
system will continue to exist--perhaps sustained by benefit
cuts and tax increases--is a matter of great concern to the 21-
year-old African-American single mother described earlier.
Under a system where she could invest her own tax dollars, this
woman perhaps could accumulate enough to buy an annuity upon
retirement that would pay about $28,800 a year after taxes,\25\
almost twice what she would receive from Social Security, or an
annuity equal to her Social Security retirement benefits and
pass on the remainder, around $200,000, to her children.
\25\ Based on an interest rate of 2.7 percent and a lifetime
expectancy of 15 years.
But this debate is also a concern to the thirty-something
married couple who earned a combined income of $52,000 in 1996
and struggle to put away enough for retirement while paying
over one-eighth of their income into a Social Security system
that is likely to yield a real return of less than 1.7 percent
on their contributions. Moreover, it will influence the life of
people, perhaps not yet born, who quite possibly could become
employed by a business that is created by the retirement
investment of the young high-income New York couple.
For almost every type of worker and family, retirement
under Social Security means receiving fewer dollars in old age
and passing on less wealth to the next generation than they
could if allowed to place their current Social Security tax
dollars in private retirement investments.
--William W. Beach is John M. Olin Senior Fellow in
Economics at The Heritage Foundation and Director of Heritage's
Center for Data Analysis.
--Gareth G. Davis is a Research Assistant at The Heritage
Basic Assumptions and Methodology
The authors used The Heritage Foundation's Social Security Rate of
Return Microsimulation Model to compare the benefits different types of
families can expect to receive from the Old-Age and Survivors Insurance
(OASI) with the Social Security taxes they pay during their working
The Heritage model treats taxes paid over a worker's lifetime as a
series of investments. Social Security's rate of return is the rate of
return on payroll taxes that would buy an annuity equal in value to the
Social Security benefits payments. This yield is the difference between
Old-Age and Survivors benefits payments (after subtracting any
applicable income taxes) and the amounts paid to the Old-Age and
Survivors Insurance trust fund through payroll taxes. Throughout the
model and this paper, all amounts are adjusted for inflation and
expressed in terms of 1997 purchasing power.
The Heritage Foundation model includes both portions of Old-Age and
Survivors Insurance taxes: the share paid by employers and the share
paid directly by the employee. However, in calculating the return, an
amount is removed from taxes paid that is equal to the premium on a
term life insurance policy which has the same value as benefits that
are paid to children of workers (and the spouse caring for their
children) who die before retirement. This means the calculations do not
unfairly include the cost of the spousal benefit when figuring the rate
of return in terms of retirement income. Heritage analysts also assume
that, from 2015, tax rates will increase by the amount that the Board
of Trustees of the Social Security Administration consider to be
necessary to finance the Old-Age and Survivors Insurance benefits
contained in current law.
The earnings to which OASI tax rates are applied are based on a
proportion of the Social Security Administration's Average Wage Index.
Average-income workers are assumed to earn 100 percent of this wage,
and low-income workers are assumed to earn 50 percent of this wage.
Past values of this wage are taken from historical data contained in
the Board of Trustees' 1997 Annual Report, and future wage growth is
based on the Trustees' best guess of what the rate of increase in the
average wage will be. All workers are assumed to begin work on their
21st birthday and to continue to work right up to the age on which they
become entitled to Social Security's full Old-Age and Survivors
benefit. For those retiring in 1997, this is age 65; but under current
law, this retirement age is scheduled to increase gradually until
reaching 67 for those born in 1960 and later.
The model calculates post-retirement Old-Age and Survivors benefits
to individuals according to formulae stipulated in current law and the
``best guess'' economic assumptions contained in the 1997 Annual Report
of the Board of Trustees, up to the date on which their life expectancy
expires. Neither Disability Insurance taxes nor benefits are included
in the model.
The model uses life expectancies drawn from the National Center for
Health Statistics' 1992 Life Tables for the United States.\26\ Heritage
analysts adjusted these life tables for future changes in life
expectancy, using the mid-range projections of the 1997 Trustees
Report. For African-Americans, a ``convergence factor'' is included
that assumes, in line with U.S. Census Bureau projections, that
African-American life expectancy converges with that of the general
U.S. population by 2070.\27\ Income itself plays a role in influencing
life expectancy: For example, access to health care and nutrition
improves as income rises. Heritage analysts incorporated this influence
by increasing the life expectancy of both spouses in line with
scientific evidence for workers who earned more than the average wage.
However, they did not decrease life expectancy for workers who earned
less than the average wage. The possible effect of decreased life
expectancy due to poverty on the rates of return experienced by low-
income individuals can be seen in Chart 9.
\26\ National Center for Health Statistics, Vital Statistics of the
United States, 1992 Life Tables, Vol. II, Section 6, 1997.
\27\ This estimate has been criticized as too optimistic. Analysts
have pointed out that life expectancy data since the late 1980s have
shown little evidence of racial convergence. Indeed, some claim that
the gap is widening. See Paul E. Zopf, Jr., Mortality Patterns and
Trends in the United States (Westport, Conn.: Greenwood Press, 1992).
[GRAPHIC] [TIFF OMITTED] T2247.049
Statistical studies \28\ have estimated that for males who earn 50
percent of the average income, their remaining life expectancy is
lowered by a factor of between 5.6 percent and 12.8 percent. Even if
the most conservative assumption (5.6 percent) is used to adjust the
life expectancy of a low-income single male, the result would be a
substantial reduction in his rate of return from Social Security.\29\
\28\ For an analysis of the effects of income on life expectancy,
see E. Rogot, P. Sorlie, and N. Johnson, ``Life Expectancy by
Employment Status, Income, and Education in the National Longitudinal
Mortality Study,'' Public Health Reports 107CH, July-August 1992, pp.
457-461, and J. Duggan, R. Gillingham, and J. Greenless, ``The Returns
Paid to Early Social Security Cohorts,'' U.S. Treasury Department,
Office of the Assistant Secretary for Economic Policy, 1993.
\29\ As well as an undermining of the ``progressivity'' of the
Throughout this study, comparisons are made between what families
could accumulate during their working lives if they were able to invest
their Social Security Old-Age and Survivors taxes (less the life
insurance premium equal to the value of pre-retirement Survivors
Insurance benefits) and what they can expect to receive, on average, in
Old-Age and Survivors benefits. Different assumptions are entertained
regarding the composition of the worker's portfolio of private
investments. For years prior to 1997, the historical inflation-adjusted
rates of return on long-term U.S. Treasury bills \30\ and U.S. equities
\31\ are used to determine, respectively, the rate of return on bonds
and the rate of return on equities. For the period 1997 onwards,
Heritage analysts used forecasts of the real rates of return on 30-year
long-term U.S. Treasury bonds to estimate returns on bond investments.
These forecasts were made by WEFA, Inc., an economics consulting firm,
and published in its Long-Term Macroeconomic Forecast for October
1997.\32\ The eventual long-run average of these forecasts is a 2.8
percent real rate of return. The annualized real rate of return on
equities is assumed to be 5.7 percent, which lies at the lower boundary
of professional estimates of the long-run returns to equities.\33\
\30\ Based on the real rate of return for long-term U.S. Treasury
bills. The Federal Reserve Board's 10-to 15-year Treasury Bond Index is
used from 1950 to 1975; the 20-year Treasury Bond is used in 1976. From
1977 on, the 30-year bond is used.
\31\ Based on the real rate of return for the Standard and Poors'
500 Equity Index.
\32\ WEFA, Inc., formerly known as Wharton Econometric Forecasting
Associates, is an internationally recognized economics consulting firm.
Fortune 500 companies and prominent government agencies use WEFA's
forecasts and consulting products.
\33\ The 1994-1996 Social Security Advisory Committee, for example,
found that a long-run real rate of return on equities of 7 percent
existed. Report of the 1994-1996 Advisory Council on Social Security,
Vol. I: Findings and Recommendations, p. 35.
The Heritage Foundation Social Security Rate of Return Microsimulation
The Heritage Foundation Social Security Rate of Return
Microsimulation Model computes the expected annualized rate of
return from Social Security on the basis of the taxes that
individuals or couples are projected to pay and the benefits
they can expect to receive during their lifetime. The focus of
the model is not to provide estimates of the ``average'' rates
of return to existing populations, but rather to use data to
construct representative individual and family types and to
estimate the rates of return that those representative types
can expect to receive.
Internal Rate of Return
The internal rate of return is defined as the rate which
will set the expected discounted value of the stream of Social
Security Old-Age and Survivors Insurance tax payments (i.e.,
taxes [Ti]) equal to the expected discounted stream
of income from the system (i.e., benefits [Bi]).
[GRAPHIC] [TIFF OMITTED] T2247.050
The taxes paid by an individual are calculated by
multiplying the individual's taxable earnings and self-
employment income in a given year by the Old-Age and Survivors
Insurance (OASI) tax rate in that year. Each individual is
assumed to begin work on his or her 21st birthday and to cease
working on the date on which he or she is entitled by law to
collect the full Social Security Old-Age benefit. The OASI tax
rate is taken from current law until the year 2015, after which
tax rates are adjusted annually so that income and expenditures
of the Old-Age and Survivors Insurance program are equal.\34\
\34\ These tax rates are calculated using the intermediate
assumptions in the 1997 Annual Report of the Board of Trustees of the
Federal Old-Age and Survivors Insurance and Disability Insurance Trust
The tax revenue in a given year is calculated by means of
multiplying the earnings for that person by the OASI tax rate
Ti = xi*Wi-Li
where x is the OASI tax rate for year i, Wi
is the total taxable wage, salary, and self-employment income
for year i; and Li is an amount equivalent to the
value of a life insurance premium equal to the actuarial value
of pre-retirement Survivors Insurance coverage.
The individual's annual earnings are assumed to be a fixed
proportion of Social Security's ``Average Wage Index'' \35\ for
employed and self-employed workers.
\35\ As defined in the 1997 Annual Report of the Board of Trustees
of the Federal Old-Age and Survivors Insurance and Disability Insurance
Trust Fund, p. 208.
``Average-income'' individuals are assumed to earn 100
percent of the average wage index during their lifetime; ``low-
income'' individuals are assumed to earn 50 percent of the
population's average wage; and ``high-income'' individuals are
assumed to earn 300 percent of the average wage. In 1996, the
value of these amounts was estimated to be, respectively,
$12,862, $25,723, and $77,169.\36\
\36\ Ibid., Table II.E.2.
For periods subsequent to 1996, the average wage index is
assumed to grow at the rate assumed under the ``intermediate''
projections made by the Social Security Board of Trustees in
their 1997 Annual Report.\37\ In the case of the ``Single-
Earner Married Couple'' scenario, it is assumed that one spouse
pays no OASI taxes during his or her lifetime. In the case of
the ``Double-Earner Married'' couple scenario, each earner is
assumed to pay OASI taxes.
Post-Retirement Old-Age and Survivors Benefits
OASI benefits are calculated on the basis of the ``bend
point'' formulae--the earnings levels from which benefit
amounts are calculated--as specified under current law. For
example, in order to calculate the monthly benefit amount for
an individual who first becomes eligible for full Social
Security Old-Age Benefits in 1995, the individual's Average
Indexed Monthly Earnings (AIME) is calculated according to the
formulae contained in current law. Individuals receiving
benefits for the first time in 1997 are paid 90 percent of
their AIME up to the $437 bend point, 32 percent of any
earnings between the $437 and $2,635 bend points, and 15
percent of any amount in excess of $2,635 (up to the maximum
amount of earnings which are taxable). For years after 1997,
these bend points are indexed at rates in the ``intermediate''
range projections made in the 1997 Trustee's Report.
Benefits are paid up to the point of the individual's life
expectancy. These tables are adjusted to fully incorporate the
effect of changes in life expectancy that are estimated by the
Trustees of the Social Security Trust Funds to occur over the
For married couples, the value of pre-retirement Survivors
Insurance--paid to children of deceased covered workers and the
spouse taking care of them--is approximated by subtracting from
taxes (Ti) the premium required to buy an equivalent
term life insurance policy. Covered individuals are assumed to
carry two 10-year term life insurance policies over 20 years
between the ages of 35 and 55. For each covered worker turning
35 in 1997 who has two children and earns an average wage, the
Survivors Insurance policy is estimated to be equivalent to a
10-year term life insurance policy worth $295,000. For each
average-wage covered worker with two children who turns 45 in
1997, the Survivors Insurance policy is assumed to be
equivalent to a 10-year term life insurance policy worth
$194,700. The market insurance annual premiums required to buy
every $250,000 worth of insurance (in 1997) were estimated,
respectively, to be $167 and $345 for a male and $150 and $230
for a female.\38\ The estimates of the life insurance component
are indexed to changes in the earner's Primary Insurance
Amount, \39\ which is used to calculate the worker's retirement
\38\ Based on lowest quotes available for contract from
Budgetlife's World Wide Web page, www.budgetlife.com, on September 24,
\39\ As defined in the Annual Report of the Board of Trustees of
the Federal Old-Age and Survivors Insurance and Disability Insurance
Trust Fund, p. 216.
In the case of the single-earner married couple, each
spouse is assumed to be the same age. After retirement, the
couple is paid 150 percent of the benefit amount payable to a
single beneficiary during the lifetime of the husband. During
the period between the death of the husband and the death of
the wife, the wife is paid 100 percent of the benefit amount
payable to a single recipient.\40\
\40\ All life expectancy data used in this paper show that women
have longer life expectancies than men.
Life expectancy by worker's age in 1992 is estimated based
on data contained in the National Center for Health Statistics'
1992 Life Tables.\41\ However these estimates reflect only the
demographic conditions that prevailed in 1992 and do not
reflect the long-term secular upwards trend in life expectancy
that improved health care and better nutritional standards will
\41\ National Center for Health Statistics, Vital Statistics of the
United States, 1992 Life Tables, Vol. II, Section 6, 1997.
The Board of Trustees of the Social Security Trust Fund,
for example, estimates that between 1997 and 2070 life
expectancy at birth will increase by 5.8 years for males and
4.6 years for females, and that life expectancy at age 65 will
increase by 3 years for females and 2.9 years for males.\42\ In
order to create life expectancy projections that embody these
projected trends, it is necessary to adjust the 1992 Life
First, Heritage analysts made a slight adjustment in the
1992 Life Tables by applying to them an age-weighted index that
adjusts for the estimated increase in life expectancy over
Q = E + J,
and J = ((O/65)*S + ((65-O)/65)*X)
Q = 1997 ``adjusted'' static life expectancy;
J = age-weighted increase in life expectancy age between
1992 and 1997;
E = life expectancy based on 1992 ``static life tables'';
O = age in 1992 (ranges from 16 to 60); and
S and X = respectively, the increase in life expectancy at
birth and age 65 over 1992-1997.
Second, Heritage analysts recognized that the gains in life
expectancy in the post-1997 period will not be uniform across
the age distribution. The Social Security Administration
estimates that life expectancy at birth will increase much
faster than life expectancy at age 65. In order to calculate
the gain in life expectancy for individuals between these two
points (birth and 65), an age-weighted index is used:
G = (A/73)*B + ((65-A)/73)*x'
G = overall gain in life expectancy for a particular age
group over 1992-2070;
A = age in 1997 (ranges in model from 21 to 65);
B = gain in life expectancy at birth between 1997 and 2070;
x' = gain in life expectancy at age 65 between 1997 and
G can be used to construct a projected life table for the
single year 2070, where L is life expectancy for each age group
in 1997 and G is the gain in life expectancy expected to occur
for that particular age between 1997 and 2070:
L = Q + G.
However, this projection must also take into account the
fact that life expectancy gains will be distributed over time
as well as across the age distribution. The gains in life
expectancy projected to occur will be spread across a period
between now and 2070. The later a cohort is born, the greater
the proportion of this increased longevity will be from where
the cohorts can be assumed to benefit. In order to estimate the
degree to which a given cohort will benefit from this increase
in life expectancy, the following linear weighting equations
``Dynamic'' Life Expectancy = Y+ R*(G)
Y = Q, or life expectancy in 1997;
R = ((2070-V)/73); and where
V = year in which the individual's life expectancy expires.
For African-Americans, Heritage analysts added a
convergence factor. It is assumed in the model, in accordance
with U.S. Census Bureau \43\ projections, that African-American
life expectancy at birth converges with white life expectancy
at birth between 1989 and 2070. This assumption is incorporated
by assuming that the gap between African-American and white
life expectancy closes by a fixed fraction each year between
1989 and 2080. This convergence factor is assumed to increase
with the year in which an individual is born. The gap between
African-American and general population life expectancy at
birth is assumed to diminish by a factor of 1/154th (or 0.6494
percent) for each birth year between 1927 and 2080. Hence, for
each African-American born in 1932, the current gap between
life expectancy and general life expectancy is assumed to
diminish by 3.25 percent; and for an African-American born in
2080, it is assumed to diminish by 100 percent.
\43\ Zopf, Mortality Patterns, op. cit.
The authors are grateful to Bruce Schobel (Fellow of the
Society of Actuaries and formerly with the Social Security
Administration) for his valuable suggestions on an early
version of this study.
Mr. Apfel. But the issue of African-Americans receiving a
lower rate of return which is one of the conclusions of the
report is inaccurate, and part of that is the methodology that
was used in developing the report. Also, disability benefits
were not taken into account. If we look at African-Americans,
there is a shorter life expectancy of about 2 years compared to
whites. There are also somewhat lower earnings. There is also
higher disability program participation as well as survivors
African-Americans make up about 12 percent of the
population and receive about 20 percent of survivors and
disability benefits. There is a relationship between income and
disability, and this is the case with African-Americans, so
when you take into account survivors and disability insurance,
when you look at the whole floor of protection as well as the
progressive nature of the benefit structure, it makes up for
the lower life expectancy, so I would like to include this
report in the record.
Mrs. Kennelly. I have another thought, but will follow up
in the future. Thank you, sir.
Chairman Bunning. Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman, and good afternoon,
Commissioner. Good to have you here.
Mr. Apfel. Great to be here.
Mr. Weller. I represent a fairly diverse district. I
represent part of the City of Chicago and the south suburbs in
Illinois and also a lot of rural areas, so I always look for
the things that are consistent when I'm listening and learning
concerns in town meetings. And the questions I always get
asked--of course, we all remember that very visual photo of the
President drawing the zero on that piece of cardboard when he
unveiled his new budget proposal for this year. And, of course,
part of that--one the significant things about the zero is it
means there's no surplus in his budget to set aside for Social
Security. And at the same time, the President unveiled a whole
new list of new spending initiatives, and what do they total?
The new spending initiatives above and beyond what we've funded
this past year.
Mr. Apfel. I'll have to get that.
Mr. Weller. About $70 billion?
Mr. Apfel. I'll have to get that for the record for you,
[The information follows:]
[GRAPHIC] [TIFF OMITTED] T2247.002
Mr. Apfel. As for the Social Security piece--I've got the
Social Security piece; I don't have the other pieces on the top
of my head, but there were a significant number of very
important proposals, all paid for through offsets. One of the
things that the President did indicate when he put out his
budget request was that--again, given the traditional PAY-GO
rules that you operate under here in the Congress--which are
appropriate--that any new spending activity be offset through
either reductions in spending or increases in revenues, and the
President's proposal was consistent with that in terms of
living within the budget rules by funding new activities
through other offsets.
Mr. Weller. Now, some might argue that one way of creating
a surplus to save Social Security would be to spend less money
on new spending initiatives, and as the Social Security
Administrator, would you suggest that Congress look at that as
an approach? You know, make these new spending initiatives a
secondary priority to saving Social Security and creating that
surplus that we can then use long term to save Social Security.
Which is a bigger priority, the new spending initiatives or
saving Social Security?
Mr. Apfel. Well, the President said--and it's something
that I strongly support--to take all budget surpluses that are
projected and reserve them pending Social Security reform. We
anticipate next year to be in a position to, working with this
Subcommittee, come up with a proposal to ensure the long-term
security of Social Security.
He also proposed a series of activities that were paid for
throughout the budget that seem to me to be a legitimate part
of government to find ways to pay for new activities by
reductions or decreases in other parts----
Mr. Weller. But these pay-fors that create revenues that
are used to offset new spending, if we would take less of those
pay-fors to offset new spending and use those pay-fors that,
perhaps, the President's suggesting to save Social Security,
which is a higher priority for you? Is it a higher priority to
save Social Security or spend on new initiatives?
Mr. Apfel. Well, I think the budget proposal does both, and
I think that's an appropriate activity. One, it creates the
framework, working with the Congress, to reserve the surpluses
to create a major incentive to come around the table and save
Social Security next year. Two, it also--as every budget always
does--reallocates moneys within the budget for different
activities which is the tradition of budgeting for years and
years, so I think both----
Mr. Weller. One of the frustrations I hear whether I'm with
seniors or 20-year-olds just starting in the work force who are
wondering whether or not their contract with Social Security is
going to be honored. Is there concern about this time honored
tradition that President and Congress have had in the past, and
the President does it in his budget this year where they use
the surplus in the Social Security Trust Fund to offset new
spending. How much--in the President's budget, how much of his
new spending is paid for offsets from the Social Security Trust
Mr. Apfel. How much of the new spending?
Mr. Weller. Well, how much of the Social Security Trust
Fund surplus is used as part of his budget?
Mr. Apfel. If we look over the course of the last 10 and 15
years when we were running significant budget deficits in this
country, we were in a hole in economic terms. As of next year,
we are now in a position for the first time to finally start
digging out from underneath that significant debt problem. That
puts us in a much stronger position to take on the Social
Security reform issue now in this nation.
Mr. Weller. If the President's budget did not use the
surplus in the Social Security Trust Fund to produce on paper a
balanced budget, how large would the deficit be?
Mr. Apfel. The Social Security surpluses in the Social
Security Trust Fund are larger than--like this year, the Social
Security Trust Fund----
Mr. Weller. Seven billion dollars? A hundred billion
Mr. Apfel. The Social Security Trust Fund surplus is
projected at almost $100 billion; money comes into the system
in terms of both added payroll revenues as well as interest
coming into the fund.
Mr. Weller. So, if you were to remove that $100 billion
surplus, we would have a $100 billion deficit in the
Mr. Apfel. Well, that would be the--that's the
hypothetical. That's correct, sir. The point is that it's one
of the reasons why we have argued very strongly about reserving
those surpluses. We are now, for the first time, in a position
where we're moving into the surplus world where we can, for the
first time, start to dig out from the economic problems that
we've had in the past several years. We believe that this sets
the stage by reserving those surpluses rather than having them
go to tax cuts or for added spending that would put us in a
deeper hole for dealing with the long-term Social Security
issue. So, we believe it's very important that those surpluses
be reserved pending the Social Security action that we intend--
Chairman Bunning. The gentleman's time has expired.
Mr. Weller. Thank you, Mr. Chairman.
Chairman Bunning. Mr. Neal.
Mr. Neal. Thank you, Mr. Chairman. Commissioner, I was
delighted when you, in your opening statement, noted the fact
once again, that oftentimes is lost around here, that beginning
in 1935 with the inauguration of Social Security that we
present this today as the most successful domestic initiative
that has ever been undertaken and, indeed, on a contractual
basis from generation to generation it gives us a sense of
community, and it does tie us together as members of the
American family, but--and I also speak to this with some
personal experience which we could, perhaps, save for a later
day--but I went to college on Social Security. People forget
that, and I've never lost contact or respect for this
initiative that has given many of us in this nation a chance,
sometimes against serious odds.
And the point that I make is that I've been involved with
the savings coalition here because I do, indeed, think we can
do a better job of educating the American people as to how they
prepare for retirement. I think we lose sight of the fact in
this debate just what Social Security has accomplished, and I'm
troubled by that generation just a bit behind me that looks at
Social Security, and they do, obviously, raise questions about
whether or not it's going to be there for them. That's
understandable, but I also think they, for a variety of
reasons, perhaps, have not zeroed in on what Social Security
did for millions and millions and millions of Americans and how
they've enjoyed their retirement years.
All of us go out campaigning to one religious stop and
that's the senior center, and when we go into the senior center
I dare say there aren't many of us who say that we ought to
curtail Social Security benefits and that we ought to cut back
on Social Security initiatives, and we don't engage the grand
debate in that room about the merits of Social Security. We
subscribe to a basic fact and that is that Social Security has
been an extraordinary success, and the people in that room
always know it.
But my point is as we begin these discussions about Social
Security--and I wish to be part of them--how would you, if you
were to suggest things because I'm sure you've had discussions
about it--how would you talk about establishing a higher
retirement age? How would you begin that process? What would
you say if you were drafting the parameters of that discussion?
How would you point out to the American people that because of
life expectancy and a host of other things that people do,
indeed, live longer? How would you frame that discussion?
Mr. Apfel. Before answering the retirement age question, I
want to comment on your opening remarks which I think are very,
very powerful. One of things that we need to educate the
American public about this year is the importance of Social
Security in our lives. Back in 1935, the plight of older
Americans was a national disgrace, and Social Security provided
an enormous platform for older Americans. It's true for young
Americans today that there is a serious concern out there. I
think one of the ways that we address the retirement age issue
and many of the other issues that we face is by acknowledging
that we have a long-term demographic issue that we need to
confront in this country and how it will create great strains
on our social insurance system.
And the question for young people is will Social Security
be there in the future? And the answer is, absolutely, it's
going to be there in the future, but it's going to have to go
through some changes. We're going to have to make some changes.
As you pointed out about going to college, my wife, when she
was a little girl her father died leaving her mother and three
sisters with a Social Security check. It is part of the
foundation of American life. It's part of our fabric. So for
young Americans, it's not only a question of whether Social
Security is going to be there 30 and 40 years from now, it's
also a question of whether it is there now? And it is, but
given those demographic issues--those long-term demographic
issues--we've got some tough choices to make to assure that we
will have a foundation of support for all Americans in the
And one of the issues that's got to be discussed as part of
that is whether--given the fact that life expectancy has
increased--whether people should be working longer. As the
Chairman said, I think eloquently, there are tradeoffs to every
one of the options that we confront, and on the retirement age,
there's a whole series of them that have to be thought through
very carefully: Whether there will be jobs for older Americans;
whether the people who are working in physically demanding jobs
will be able to continue to work; what the implications for the
disability system will be. Those are some of the issues that
we'll have to think through, but is raising the retirement age
one of the legitimate issues that we've got to think through to
assure that we can have in the 21st century this foundation of
support? I think the answer is yes, and this will be one of the
ones that we'll have to talk through very carefully.
Mr. Neal. For my family, for my sisters and I, it was $119
a month, but it was the difference between that and an
orphanage. We lose sight of that here.
Mr. Apfel. Very powerful.
Mr. Neal. I would also like to close on this comment--I
thank the Chairman for the time--I think William Buckley, that
sage of liberal thought, summed up the best when he said
conservatives hate the new deal; they just don't want to give
Mr. Apfel. Thank you, sir.
Chairman Bunning. Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman. Commissioner, you're
right, there are a lot of people in--Mr. Neal, you're right--
there are a lot of people who have benefited greatly from the
Social Security Program, and it's one that will be here for, I
assume, as long as we have a Republic. There will have to be
changes made to it. I'm very much concerned of the fact that
some people would like to extend the age for retirement. It's
kind of like moving the goal line once the game has begun, so I
have great concerns over that.
I have a little bit of a difference of opinion as to how
the Social Security actually came about. It was during the time
of the Depression, before my time, but both of my parents lived
during that time, and we're trying to raise families. But, to
me, it was a payroll tax sold under the disguise of an old-age
pension program. Had it been a true old-age pension program, I
think a lot of those contributions to the fund would have drawn
some type of return, such as a compounded interest or some type
of return on the investment, rather than just being put into
the pool, and the government use those funds at will, and then
made the benefits when the time came of eligibility. So I
differ somewhat with why and how Social Security came about.
That's the reason I think a lot of our young people today
are very much interested in seeing a change that would allow
the funds that they contribute to be able to have a return to
them based on that vested interest of that money that's
deducted. It would be compound interest on a daily basis
through interest. So I think there are a lot of changes and a
lot of things that we're going to be looking at over the next
few months or a couple of years when it comes to Social
In 1995, the President was at Warm Springs, Georgia, the
country home or the little White House of Franklin Delano
Roosevelt, and he and I were standing there in the little White
House having a farewell discussion, and we had been together
for a couple of hours that day, and as he was going to fly back
to Washington, I was going to stay there in my district. And I
told him, I said, ``Mr. President, I want to leave you with
thought, and that is, Social Security is my old-age pension.''
And I say it again, Social Security is my old-age pension. I
turned down the congressional pension. My small business
doesn't have a pension program. I have an IRA, and Social
Security is my old-age pension.
But, really, Social Security has been a payroll tax on me
for a number of years--with only the return based on the
benefits that Congress will set, not what it drew based on my
deposits, and a return on those deposits, or how my family
would benefit from those deposits based on the return on those
Thank you for your time.
Chairman Bunning. Mr. Levin.
Mr. Levin. Welcome. I'm sorry I missed your testimony, but
I did have a chance to read it, Mr. Apfel. Your career has been
an outstanding one, and we're glad you're where you are.
Mr. Collins--I wasn't going to raise this, but just so the
record's clear. Isn't it correct, Mr. Apfel, that for those who
have retired up until now who have been drawing benefits, they
by and large have been receiving back far more than they put
into the fund?
Mr. Apfel. Yes, that's true.
Mr. Collins. Will the gentleman yield on that?
Mr. Levin. Yes.
Mr. Collins. But is it not also true that, as time has
changed and the rate of taxes changed, it will also take longer
for those who are young today to receive their benefits back?
Mr. Apfel. That is true also. The early years of the
Mr. Collins. We understand where you're coming from, but it
does not take away from my view that it was a payroll tax and
not a true pension program from the beginning, and I thank you
Mr. Levin. Except it was an insurance program that has paid
back recipients up to this point on the average considerably
more than they put in, even if you would add a compounding
factor. And the problem we face now is what Mr. Apfel has
pointed out and the President has pointed out: That people are
living much longer, and we're facing a problem ahead from the
baby boomers, and those who are younger ask the question: Are
they going to not receive a pension, and Social Security? Under
any circumstances a considerable portion of their benefit would
be there, but whether all of the benefit could be there, plus
essentially a growth factor, as has been true for most of those
who have received Social Security up until now, is the issue
confronting us. They've had a growth factor, haven't they?
Mr. Apfel. Yes.
Mr. Levin. And that's the dilemma that we face and that we
need to solve, it seems to me, together. And I think, isn't it
true, Mr. Apfel, that's one reason the President has suggested
that we not expend any surplus coming from Social Security
until we solve the long-range problem? Isn't that exactly
what's motivating the President?
Mr. Apfel. That is absolutely what's motivating the
President. This is the most important government program in the
nation's history. There is no crisis today, but we do face a
long-term issue that we need to confront, and that this
Subcommittee has been in the leadership position. This is your
eighth hearing, my first before you, but there will be many
opportunities, I'm sure, in the future. We've got to take
actions in the future to assure the long-term security of the
Social Security system.
The goal of the President, by reserving the surpluses,
calling for the year of discussion, and then bipartisan
negotiations next January, is aimed at resolving this issue
next year, to increase public confidence that Social Security
will be there for future generations by those actions.
Chairman Bunning. Sandy, would you yield just a minute?
Mr. Levin. Yes.
Chairman Bunning. So there's no misunderstanding what you
asked and what you said, you didn't say the surpluses in Social
Security, as I heard you say; you didn't mean that?
Mr. Levin. No.
Chairman Bunning. You meant the surpluses, if there is any,
in the overall budget.
Mr. Levin. I think what I said was, the surplus that has
come from Social Security. Part of the reason the deficit
surplus issue would be different, if one did not take into
account the present surplus in Social Security, more coming in
than paid out----
Chairman Bunning. That's correct.
Mr. Levin [continuing]. What the President has been saying,
as I understand it, is the budget, the overall budget, is
affected by the present surplus coming from Social Security.
It's projected we would not have one if it weren't for that
surplus, we wouldn't have an overall surplus in the unified
budget. We should not take any of that proposed surplus and
spend it on other programs until we have a long-term solution
to Social Security. Isn't that what the President is saying?
Mr. Apfel. Yes, sir. The----
Chairman Bunning. No, I can't believe that because--and I
don't want to get into a three-way discussion with you--for the
simple reason it's all recycled into new debt, every penny that
comes in in the Social Security Trust Fund is recycled by
selling out bonds into new debt in the Uniform Budget.
I think the President's statement was the exact opposite.
He said, when we get to a surplus in the overall budget--we're
in a surplus; we've been in one in the Social Security Trust
Fund for years. It's about $700 billion.
Mr. Levin. And that's exactly what I said, Mr. Chairman.
That's exactly what I said--that the surplus in the Unified
Budget exists, when it comes, it will exist, reflecting the
surplus in Social Security, and therefore, before we spend any
of the surplus in the Unified Budget on any other programs, we
ought to solve the long-term problem for Social Security. Isn't
Mr. Apfel. And there may be uses for that surplus at that
point in time for Social Security, but that's really what part
of the debate is about over the course of this next year.
Chairman Bunning. Sandy, I'll give you as much time as you
want, but the fact of the matter is that when we bring money
into the trust funds now, the law requires us to buy
nonnegotiable bonds, which in turn are used for spending under
the budget right now.
Mr. Levin. I'm not saying----
Chairman Bunning. No, no, no, but----
Mr. Levin [continuing]. Anything different.
Chairman Bunning [continuing]. The surplus that the
President talked about was the surplus in the overall budget--
Mr. Apfel. The Unified Budget.
Mr. Levin. Right.
Chairman Bunning. And so he didn't propose any changes. I
asked you earlier--any changes in the law as far as the FICA
tax. We're going to still spend that money.
Mr. Apfel. We do not think that there is, as I said, a need
for a law change right now----
Chairman Bunning. Yes, until we get to a surplus.
Mr. Apfel. Well, because we're not going to see that
surplus right now projected until the end of next fiscal year--
Chairman Bunning. Well, that's debatable----
Mr. Apfel [continuing]. And by that time----
Chairman Bunning [continuing]. Also, but I'm not going to
get into that debate with you, either, because, according to
which scorekeeper you get, Congressional Budget Office or
Office of Management and Budget, you get different numbers. So
we shouldn't debate that because we'll find out.
Mr. Levin. But whatever the number is, I think the fact
remains that the Unified Budget, to the extent there's a
surplus, reflects the surplus coming in through Social
Security, and the President is saying, solve the long-term
problem before we use that surplus for any other purpose.
Chairman Bunning. Mr. Portman.
Mr. Portman. Mr. Commissioner, thank you for being here
today, and I'd like to nominate Sandy Levin for President
because I think he has explained this problem in a way that the
American people need to hear it, and that's not what I heard
the President say, incidentally, at the State of the Union, nor
in his follow-up press conferences and other communications,
either from Director Raines or from Deputy Secretary Summers
yesterday. I think Sandy Levin has it just right, which is, in
fact, there is not only a pay-as-you-go system, and we need to
explain that to the American people, but there's also a trust
fund which is being borrowed against every day, and without
that trust fund surplus, we would have no balanced budget this
year, should we have one.
So I think your formulation is exactly right, but that's
not what I've heard our President say to the American people,
nor, when you talk, as we did yesterday, and Jim Bunning asked
the question to the administration--in this case it was the
Deputy Secretary of the Treasury--you know, they still haven't,
frankly, figured out what he means in terms of the mechanics of
it. Save Social Security first is very popular, and I think all
of us would agree with it, but the question is: Do you do it
through the Unified Budget or do you do it somehow with the
trust fund? I'm sort of intrigued by what I infer from what
you're saying, Mr. Levin, which is that maybe we should focus
more on that trust fund and look at it in the way it, in fact,
does operate, which is to say that, without it, we would have
no budget surplus this year. In fact, we're in a deficit
position, if it was properly accounted for, and maybe we ought
to look at the surplus, whether it's the $70 billion or whether
it's the $90 billion that we'll accumulate this year alone, and
start working through that as our vehicle to save Social
Mr. Levin. Would the gentleman yield?
Mr. Portman. So I'd be happy to yield. I do have a couple
of questions for the Commissioners, but sure.
Mr. Levin. I think that's what the President is saying,
that while there is a present surplus when you look out over a
number of years, a surplus in Social Security, that gets eaten
up. So you don't want to use that surplus until you make the
long-term decisions on financing Social Security.
Mr. Portman. Again, reclaiming my time, maybe I haven't
been as attentive as others in this room have been, but I
certainly have not heard our President talk in those terms, and
I wish he would, because honestly I think that the top priority
right now is to educate the American people as to what the
reality is with Social Security. And part of it, as I said
earlier, is that it's a pay-as-you-go system, and with the
demographic shift, you're going to have a problem, and the
train wreck can be avoided if we begin to take steps now. I
wish he had said that in the State of the Union.
The second part is the trust fund that you've just
explained, which I think is the reality, again, that at least
my constituents aren't aware of, and I think the President
could play an important role there.
Let me ask you a specific question on that, I,
unfortunately, was not able to be here for your testimony also,
and I apologize. Unlike Mr. Levin, I didn't read it in advance,
but I did skim it when I got here, and it's very good. And you
talk about these conferences the President's holding around the
country with AARP, the Concord Coalition. We're doing one in my
district that I'm involved with--I think probably every
congressional district. And we have the White House Conference,
as you talk about, and you mentioned some other potential
forums where the President would be talking about this issue,
including a White House Conference with the Congress sometime
in early 1999.
Is the Social Security Administration involved in these
conferences around the country? Are you directly involved in
giving input to the White House as we go through this process?
Mr. Apfel. Yes. In terms of the conferences, directly
involved with both the AARP and Concord Coalition, because
those forums are going to be theirs. I've also been in contact
with Pew Charitable Trusts. As you know, the Pew Charitable
Trusts is going to be doing several forums around the country.
I'll be attending several of those as well.
The Social Security Administration will be part of this
debate. I have been actively involved through the last 4 or 5
months, since my confirmation. I've been around the country
many times already. I intend to be involved over the course of
this year. The Social Security Administration as a whole will
also be involved actively with our public affairs offices in
the public discussions. We want to be able to talk to the
American people about the importance of Social Security, the
fact that there are the long-term issues that we need to
confront, and that we need to move forward on them. It's one of
the roles and responsibilities that I view as central to the
Social Security Administration.
Mr. Portman. So you will have a specific role in these
regional conferences as a participant?
Mr. Apfel. I don't know about each and every one, but I
know many of them. I'll be traveling outside more than I would
like, in terms of going around the country and being away from
my family, for them, but I think it's very important that I be
Mr. Portman. I think it's essential that Social Security is
Let me ask one other specific question, because I see my
time is running out, and that is with regard to the earnings
limit. As I looked through your testimony--and perhaps I missed
some earlier dialog on this--I didn't see it touch on the
question of the earnings limit. In my view, it's directly
related to all questions about Social Security, because I think
the earnings limit has a perverse effect on our economy and on
But, specifically, to the age issue, because, as I
understand the way the earnings limit works, once you're over
the age of 70, it would no longer apply. If we're talking about
raising the age on Social Security, and as you point out in
your testimony, of course, it's already being raised
incrementally in a steady, but slow fashion, what is your
recommendation with regard to the earnings limit? I suppose if
you raise the age to 70, there would be no earnings limit, to
take it out logically to the logical extension, but should the
earnings limit be changed as you change the age limit, either
as under current law or in a more aggressive fashion?
Mr. Apfel. If I could back up first and indicate, again, on
the President's proposal, I believe he has been very clear that
we would preserve those surpluses pending Social Security
Mr. Portman. Which surpluses?
Mr. Apfel. The Unified Budget surpluses pending----
Mr. Portman. OK, that's what I've heard, too.
Mr. Apfel [continuing]. Pending Social Security reform;
that the decision as to the particular use of those surpluses
within the Social Security system is one that needs to be
debated this year. Some have proposed investing some of those
surpluses in equities. Some have proposed providing them to the
Social Security Trust Fund. Some have proposed individual
accounts. These are all things that need to be debated this
year. So I think the policy is very clear, and we do hope on a
bipartisan basis to work together to develop what I think is a
very important thing for the American public, which is next
year a proposal to assure long-term security for Social
On the earnings limit issue, I think it is an important
one. The administration worked with the Congress to raise the
earnings limit to $30,000 by the year 2002.
One of the issues that would have to be addressed in terms
of raising it further or eliminating it altogether is the
short-term cost. The cost of that would be about $4 or $5
billion a year. There are not long-term costs for eliminating
the earnings limit cap, because of the way that the delayed
retirement credit works, but there are short-term costs that
would have to be taken into account. So is it something that
should be considered as part of the overall reform efforts? I
would say that it absolutely should be considered. The
administration does not have a position one way or the other on
it, again, because we want to see the entire package, working
with the Congress, to see how each of the individual pieces
would fit in together.
Mr. Portman. My time's up, but the point I was making was
the interaction between the age issue, so you might want to----
Chairman Bunning. Thank you, Mr. Portman. Your time has
Mr. Portman. Thank you, Mr. Chairman.
Chairman Bunning. Thank you, Commissioner. I have no more
questions for you. I don't know if anybody else does.
Mr. Neal. Do you want to go through again what the
President said once more? [Laughter.]
Chairman Bunning. I think he said it very clearly, what he
said in his last statement.
Thank you very much.
Mr. Apfel. It's an honor to be here, sir.
Chairman Bunning. Commissioner, we may be submitting
additional questions in writing for you to answer for the
record. We appreciate your testifying.
[Questions were submitted by Chairman Bunning to Mr. Apfel.
The questions and responses follow:]
1. You mention in your testimony that the Greenspan Commission (who
made their recommendations 15 years ago) suggested that changes should
be made in the disability benefits program to take account of those
older workers who are unable to extend their worklives for health
reasons. What research have you completed on this issue. Are you
prepared to submit a legislative remedy?
Much of the SSA research that addresses the general issue of
raising the retirement age (see question 4) seeks to estimate the size
of the group whose health problems make further work difficult or to
better understand the relationship between ill health and retirement.
While SSA has not conducted separate studies of how particular
changes in the disability insurance program might interact with
retirement age increases, SSA has undertaken the collection and
development of information to support analyses of disability program
modifications. For example, SSA has created a microsimulation model of
the Social Security (OASDI) program, with an initial focus on the
disability program. (The model is based on a linkage of Social Security
records to the Survey of Income and Program Participation.) Estimates
from the project show that a substantial minority (17-30 percent
depending on the indicator) of OASI beneficiaries aged 62-64 report
significant health problems. When completed, the model will give SSA
the capability to analyze distributional and behavioral effects of the
current program and proposed alternatives.
SSA is also designing the Disability Evaluation Study (DES), which
combines survey reports, clinical examinations, and medical evidence of
record so that we can make accurate determinations of disability rates
throughout the general population. The DES is carefully designed to
include workers up to age 69 so that we can assess alternative
retirement ages and alternative disability standards for specific age
groups. Also underway is a literature review and analysis of vocational
factors of age, education, and work experience; results of that project
will help frame the problem of older workers unable to extend their
working lives. SSA also supported the special disability data
collection of the Health Interview Survey and supports the Health and
Retirement Survey. Both of these databases allow study of disabilities
and health problems of older workers.
Changes to the disability program to take account of increases in
the retirement age need to be consolidated in the context of Social
Security reform. As with any possible element of a solvency solution,
such changes must be developed in a bipartisan manner and reflect,
insofar as is possible, a consensus of the American people. To this
end, this year has been dedicated to a national dialogue on Social
Security solvency. The Agency has participated in over 5,000 events and
media opportunities, including town hall meetings and other public
events. The ideas that flow from this process should equip the
Administration and the Congress with a firm foundation on which to
build together a bipartisan legislative agreement. Without the benefit
of this debate on these critical issues, it would be premature to
submit legislative remedies.
2. Your testimony mentioned nothing about the senior earnings
limit, the amount of wages seniors can earn before their benefits are
offset. Have you thought about the effects of increasing the retirement
age on the earnings limit? Do we continue to need to penalize seniors
for trying to be productive?
As you know, present law provides two different earnings tests, one
for beneficiaries who have reached normal retirement age and another
for those who have not.
The Administration supported the 1996 legislation which roughly
tripled the earnings test to $30,000, by 2002, the amount that
beneficiaries who have reached normal retirement age can earn before
their benefits are reduced. In doing so, the Administration noted that
``Raising the earnings test will increase the standard of living of the
elderly and help the Nation's economy by increasing the supply of
workers to the labor force.'' One of the issues that needs to be
considered as part of the solvency debate is whether further changes
As normal retirement age increases, the number of beneficiaries
subject to the earnings test that applies before normal retirement age
will increase. However, there are issues that need to be considered
with regard to liberalizing the earnings test for beneficiaries who
have not yet reached normal retirement age. Doing so could encourage
workers to file at age 62, even though they are still working (i.e.,
when they may not be as dependent on Social Security benefits) and
receive permanently reduced benefits. These permanently reduced
benefits may be inadequate to support them in later years when they are
unable to work.
Today, workers retiring at age 62 have their benefits reduced by 20
percent. The amount of this reduction will increase as normal
retirement age increases, reaching 30 percent when normal retirement
age reaches age 67.
3. You say you want Americans to understand the facts about Social
Security, that the trust funds will start declining in 2021 and will be
depleted by 2029. What about the fact that outgo exceeds revenues in
2013? Shouldn't Americans understand that as of 2013 the government is
going to have to begin paying back the money it owes the trust funds
and what that will mean to the federal budget?
I agree that the 2013 date is also very important. In 2013, OASDI
expenditures will begin to exceed annual tax revenues. At that time,
some of the interest income on the trust funds will be needed to pay
benefits. It is correct that using trust fund interest income to pay
benefits, rather than to purchase Treasury securities, will have a
negative impact on the federal budget.
However, in the President's Budget, which was submitted in
February, the Office of Management and Budget projects that the
operating budget--that is, the budget not including Social Security--
will be in surplus by 2007, six years ahead of the 2013 date. As a
result, by the time the trust funds need to use interest income for
benefit payments, the rest of the budget will no longer be reliant on
those trust funds. This is why it is so important to continue to pursue
a course of fiscal discipline. By doing so, we will be better able to
respond to the challenges associated with the retirement of the Baby
4. What research has the Social Security Administration completed
on the issue of raising the retirement age?
The work and retirement decisions of older workers have been
extensively studied. A considerable amount of this research (listed
below) was conducted at the Social Security Administration, or was
funded by the Agency. Retirement research has carefully documented
long-term trends in the American work force, identified many of the
likely determinants of those trends, and estimated the size of the
effects of specific causal factors. The retirement literature was
reviewed and summarized in a 1996 Social Security Bulletin article
(Vol. 59, No. 4, Pp. 2950).
The labor force participation rates of men aged 55 or older
steadily declined from the early 1940s until the mid-1980s. During the
past decade participation rates have risen slightly (i.e., 1-3
percentage points) for some age groups, particularly among men 65 and
older. The rate of decline in propensity to work at older ages was
particularly pronounced during the 1970s and early 1980s. The main
impetus appears to have been the increased ability of older men to
afford to retire at earlier ages. Growth in lifetime real incomes has
enabled men to finance increased consumption of goods and services and
earlier retirements. Much research has shown that the availability of
Social Security benefits and private pensions have been important
influences in the trend for men to retire at younger ages.
Many of the retirement studies have focused on the specific
retirement incentives associated with Social Security and private
pensions. To the extent that Social Security has caused individuals to
accumulate more assets to finance retirement than they would have saved
in the absence of the program, then Social Security has been at least
partly responsible for the trend to earlier retirement. The best
evidence suggests that Social Security benefit levels have been
responsible for no more than a quarter of the decline in older men's
labor force participation rates.
Nearly all retirement research has studied the behavior of men.
Much less is known about women's retirement decisions. The labor market
activity of older married women appears to respond positively to
earnings opportunities, but is less responsive to the availability of
unearned income and wealth than is the case for older men. Their
retirement decisions appear to be very much influenced by the
retirement status of their husbands. The labor supply of unmarried
older women is responsive to financial incentives such as wage offers,
unearned income, and wealth, including increases in Social Security
wealth through additional earnings. Because of the large changes over
time in the extent of women's lifetime labor force attachment, these
findings should be confirmed with data on more recent retirees.
Research has examined specific administrative features of the
retirement program to discern which Social Security elements might be
responsible for particular features of observed retirement patterns
(e.g., the popularity of retirement at ages 62 and 65). Benefit
amounts, the retirement test, the delayed retirement credit, and the
early and normal retirement ages have all been scrutinized. The general
conclusion has been that the overall effect of Social Security on the
average age of retirement is small relative to other factors that
influence older workers' labor supply such as pensions, income levels,
earnings opportunities, and health. In particular, the influence of
Social Security's Normal Retirement Age (NRA) has been estimated to be
modest. The evidence from several of the best studies suggests that
increasing the NRA by 2 years would, other things equal, probably
result in a 2-5 month increase in the average age of retirement.
Until the 1970s, researchers generally believed that health
problems caused most retirements. Since then, the view has evolved that
most retirements are voluntary and that individuals respond primarily
to economic incentives, although health plays a role in inducing some
retirements, particularly early ones. Poor health can cause retirement
via three links: 1) it can make work more arduous and increase
preferences for retirement, 2) it can lower wage offers that the
individual can command, and 3) it can decrease life expectancy. The
prevalence of work-limiting health conditions among the older
population is not well-known, in part because of data limitations.
There is some evidence that health status and capacity to work have
been gradually improving since the early 1980s for individuals in their
50s and 60s. This improvement probably reflects many factors including
long-term effects of healthier lifestyles adopted by an increasing
number of Americans since the1950s, improvements in medical practice,
and the lessened physical requirements of many jobs. A large majority
of retirees are probably physically capable of working somewhat longer
than they have been in recent years. Nonetheless, many individuals--but
a distinct minority--have health-related work limitations that will
contribute to some hardship if either Social Security's NRA or early
retirement age is increased. Much research remains to be done to
identify and count this subset of the population, to ascertain the
nature of their impairments, (particularly as these health conditions
relate to their education levels and work experience), and to determine
their socioeconomic and demographic characteristics.
Most of the best retirement research has used data from the
Retirement History Study (RHS), a database sponsored by the Social
Security Administration beginning in 1969. Thus, much of what we know
about retirement is heavily dependent on the retirement behavior of
cohorts who retired a couple of decades ago and are currently in their
late 80s. To the extent that these cohorts experienced unique
circumstances during their lives (surviving the great depression,
coming of age during World War II, receiving large real transfers of
wealth from the start-up phase of the Social Security system), it is
possible that later birth cohorts will react differently to changing
circumstances. Therefore, further study of retirement using more recent
data on current retirement such as the Health and Retirement Survey
(HRS) is greatly needed. In the next several years researchers will
have an opportunity to verify many of the findings from the earlier
RHS. One key question to address will be whether these later birth
cohorts appear to respond to financial incentives any differently than
the RHS cohorts. We enter this new phase of retirement research with a
provisional view that the effects of Social Security provisions in
retirement patterns are probably not very large.
The following bibliography lists internal research and literature
reviews and summaries of SSA-funded research on the retirement age and
issues surrounding a retirement age increase.
Internal Research and Reviews
Chapman, Steven H., M. LaPlante, and G. Wilensky. 1986. ``Life
Expectancy and Health Status of the Aged,'' Social Security Bulletin,
Vol. 49, No. 10, pp. 24-48.
Holden, Karen C. 1988. ``Physically Demanding Occupations, Health,
and Work after Retirement: Findings from the New Beneficiary Survey,''
Social Security Bulletin, Vol. 51, No. 11, pp. 3-15.
Leonesio, Michael V. 1993. ``Social Security and Older Workers,''
Social Security Bulletin, Vol. 56, No. 2, pp. 47-57.
Leonesio, Michael V. 1996. ``The Economics of Retirement: A
Nontechnical Guide,'' Social Security Bulletin, Vol. 59, No. 4, pp. 29-
McMillen, Marilyn M. 1984. ``Sex-Specific Equivalent Retirement
Ages: 1940-2050,'' Social Security Bulletin, Vol. 47, No. 3, pp. 3-10.
Packard, Michael D. and V. Reno. 1989. ``A Look at Very Early
Retirees,'' Social Security Bulletin, Vol. 52, No. 3, pp. 16-29.
Program Analysis Staff. 1982. ``Mortality and Early Retirement,''
Social Security Bulletin, Vol. 45, No. 12, pp. 3-10.
Sammartino, Frank J. 1987. ``The Effect of Health on Retirement,''
Social Security Bulletin, Vol. 50, No. 2, pp. 31-47.
Straka, John W. 1992. ``The Demand for Older Workers: The Neglected
Side of a Labor Market,'' Studies in Income Distribution, No. 15. 43
U.S. Department of Health and Human Services. 1986. ``Increasing
the Social Security Retirement Age: Older Workers in Physically
Demanding Occupations or Ill Health,'' Social Security Bulletin, Vol.
49, No. 10, pp. 5-23.
Weaver, David A. 1994. ``The Work and Retirement Decisions of Older
Women: A Literature Review,'' Social Security Bulletin, Vol. 57, No. 1,
Weaver, David A. 1993. Review of ``As the Workforce Ages: Costs,
Benefits, and Policy Changes,'' Social Security Bulletin, Vol. 56, No.
3, pp. 100-103.
Ycas, Martynas A. 1987. ``Recent Trends in Health Near the Age of
Retirement: New Findings from the Health Interview Survey,'' Social
Security Bulletin, Vol. 50, No. 2, pp. 5-30.
Extramural Research Reports and Summaries
Anderson, Patricia, A. Gustman, and T. Steinmeier. 1994. ``Trends
in Labor-Force Participation and Retirement: A Nontechnical Summary of
a Final Report to the Social Security Administration, September 1994.''
Social Security Bulletin, Vol. 57, No. 4, pp. 55-58.
Clark, Robert and A. McDermed. 1989. ``Determinants of Retirement
by Married Women,'' Social Security Bulletin, Vol 52, No. 1, pp. 33-35.
Crimmons, Eileen M. and S. Reynolds. 1997. ``Trends and Differences
in Health and Ability to Work,'' Social Security Bulletin, Vol. 60, No.
3, pp. 50-52.
Gustman, Alan L. and T. Steinmeier, 1991. ``The Effects of
Disability Insurance, Health Status, Mortality and Physically Demanding
Occupations on Labor Force Activity and Retirement: Estimation and
Policy Simulation with an Econometric Model,'' Final Report. Photocopy.
Hurd, Michael. 1989. ``The Joint Retirement Decisions of Husbands
and Wives,'' Social Security Bulletin, Vol. 52, No. 1, pp. 29-32.
Nestel, Gilbert. 1989. ``Functional Capacities of Older Men for
Extended Work Lives,'' Final Report. Photocopy.
Peracchi, Franco and F. Welch. 1995. ``Research Summary: Trends in
Labor-Force Behavior of Older Americans,'' Social Security Bulletin,
Vol. 58, No. 4, pp. 133-138.
Tolley, H. Dennis and K. Manton.1996. ``Disability Adjusted Cost
Savings for Changes in Normal Retirement Age,'' Social Security
Bulletin, Vol 59, No. 4, pp. 71-74.
Research Underway or Planned
Several simulation models are being developed to
investigate distributional effects of retirement age changes.
The models will also simulate effects of simultaneous changes
in other program features.
It is expected that the new Retirement Research Consortium
will produce short policy analysis papers on the impact of
retirement-age increases on the disability program and other
critical reform topics. (For the Consortium, cooperative
agreements with two universities will be in place by the end of
The impacts of changes in the early and normal retirement
age and the ability of people to work longer given later
retirement ages will be assessed. For example, planned studies
include the likely effects of raising the early retirement age,
focusing on financial asset levels and health and disability
patterns of affected workers. Effects on labor supply will also
Several data development efforts are continuing which
provide essential data for analysis of reform proposals. They
include the Health and Retirement Survey, the National
Longitudinal Surveys of Women, the Survey of Income and Program
Participation, and the Survey of Asset and Health Dynamics of
the Oldest Old.
Related projects include study of labor force transitions
of older workers, projections of the types of Social Security
benefits that baby boomer women will receive, and analysis of
health status, beneficiary status and employment of persons in
Chairman Bunning. Testifying on the second panel today are
Dr. Robert J. Myers, the former Chief Actuary and former Deputy
Commissioner, and the institutional memory on Social Security
here in the Congress of the United States.
Merton Bernstein is Coles professor of law, emeritus, at
Washington University in St. Louis, Missouri.
Dr. Richard Burkhauser is from the Center for Policy
Research at Syracuse University in New York.
Ron Gebhardtsbauer is the senior pension fellow at the
American Academy of Actuaries.
Dr. Myers, would you please be our first to start? Pull it
right over [referring to the microphone] and let it rip.
STATEMENT OF HON. ROBERT J. MYERS, FORMER CHIEF ACTUARY AND
FORMER DEPUTY COMMISSIONER, SOCIAL SECURITY ADMINISTRATION; AND
FORMER EXECUTIVE DIRECTOR, NATIONAL COMMISSION ON SOCIAL
Mr. Myers. Thank you, Mr. Chairman. I'd like to begin by
discussing the definition of ``old age.'' For at least the past
half century, this definition in the United States has almost
universally been that people age 65 and over are classified as
being in old age. The reason for this is that age 65 is the so-
called normal retirement age under the Social Security Program
as it was originally established, and has been maintained
static over the years of operation of the program, although, as
you pointed out, in the future, under present law, it is
scheduled to rise slowly to age 67 for people reaching that age
In my view, the definition of old age should not be a
static one, but rather it should reflect changes in longevity,
taking into account also work ability and availability of
employment. Age 65 was originally selected as the normal
retirement age just as a rather arbitrary thing. Age 60 was too
low; age 70 seemed too high, and 65 was a nice round figure. I
think, as it has worked out, that was a quite good choice. For
some people, even particularly back in the early days, age 65
might have been too high an age because of their ability to go
on working, but on the whole I think it was a good choice.
However, I think that a mistake in the original planning of
the system was that this age would not be indexed in some way
or another to increasing longevity. The effect of increasing
longevity and continued work ability, of course, is very slow
and gradual, but it accumulates to a considerable amount. I
believe that, in future years, if longevity rises, so too
should the normal retirement age, assuming that work ability
also keeps pace, as I believe that it should.
Now if we say that age 65 was right in the beginning, and
we say, assuming that were the case, what should it be
currently? If we examine for a group of young workers entering
the labor force at age 20 and compute based on 1940 mortality
what the retirement life expectancy is on the average, and also
what the working life expectancy is on the average, and say
that the relationship of those two should remain constant, then
retirement expectancy is about 21 percent of the worklife
expectancy. If that were done based on 1990 mortality, the
normal retirement age would now be about 70\1/2\, and
projecting it ahead a little for today's mortality, that normal
retirement age would be 71. So you can see how significant is
these slow, gradual increases in longevity.
I think that it may be a case of which comes first, the
chicken or the egg, but I think that the fact that the normal
retirement age is 65 has had an effect on when people desire to
retire, and also on the labor market and on employers'
attitudes toward employing older workers. If we had had a
gradual increase in the normal retirement age in the past, I
think things would look quite a bit different now as far as
work ability and work availability are concerned.
The actual schedule for increasing the normal retirement
age that was adopted in 1983 was only a small step, in the
right direction, but it was very difficult to achieve at that
time, and it was done in the right way. It was done on a
deferred basis and gradually, and anything that is done about
changing the normal retirement age should be something that is
gradual, and also something that does not happen too quickly,
because it is not fair to people to suddenly change the rules
of the game as to when they may retire in the next decade or
Very simply, Mr. Chairman, my proposal is that the normal
retirement age should be increased, beginning in 2003, just as
under present law, by 2 months a year for each year-of-birth
cohort. Instead of leveling it off at 66 for 11 years, and then
only going to 67, I would increase it indefinitely into the
Now this will come perhaps as quite a shock to some people,
when I point out what this will do. This means the normal
retirement age would reach 70 in the year 2037 and 75 in the
year 2074. But I believe that if people are shocked by these
ages, it is because they are considering it in a static manner
of today's economy and today's demography, and I think that in
the future these ages will be reasonable; in fact, they'll
probably be less than age 65 was relatively in 1940.
This proposal would reduce the long-range actuarial deficit
of the program by approximately two-thirds. The remaining third
can be obtained by several minor, relatively noncontroversial
amendments, so that the system could be made secure for the
Thus, in summary, Mr. Chairman, I believe that the
demographic problem of increasing longevity, which causes most
of the long-range actuarial deficit, should be solved by
demographic means, significantly raising the normal retirement
age in a gradual manner over the long run.
Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of Hon. Robert J. Myers, Former Chief Actuary and Former
Deputy Commissioner, Social Security Administration; and Former
Executive Director, National Commission on Social Security Reform
Mr. Chairman and Members of the Subcommittee: My name is
Robert J. Myers. I served in various actuarial capacities with
the Social Security Administration and its predecessor agencies
during 1934-70; being Chief Actuary for the last 23 of those
years. In 1981-82, I was Deputy Commissioner of Social
Security, and in 1982-83, I was Executive Director of the
National Commission on Social Security Reform (Greenspan
Meaning of Concept of ``Old-Age''
Commonly, the concept of ``old-age'' in the United States
is considered as involving all persons aged 65 and over.
However, this static basis is not really meaningful over the
long run. Certainly, several centuries ago, it would have
involved far fewer persons than would have been reasonable.
Actually, the concept should be based on longevity and work
ability, and thus it should be dynamic over time.
The element of longevity is relatively easy to measure, but
this is not the case as to work ability. The latter depends on
the ever-changing nature of the labor market and the extent to
which employers will adapt their employment practices to the
changing abilities of persons as they become older. I believe
that, over the years. The possibility of efficient employment
of older workers, considering the offsetting effect of long
experience as against possibly declining physical ability, will
keep pace with increasing longevity. Or, in other words, as
people live longer, they should:--and will--be able to work
longer. Thus, the definition of where ``old-age'' is first
applicable should be a dynamic one.
Why Age 65 Was Initially Selected As The Normal Retirement
The Normal Retirement Age (NRA) under the Social Security
program was established as 65 in the original Social Security
Act (1935). The NRA, which is sometimes referred to as ``the
full-benefits retirement age,'' is the youngest age at which
reduced benefits are first available. Some persons believe that
age 65 was selected because Bismarck used this age at the
initiation of the German national pension plan in the late
1880s, the first such program in the world. However, this was
not the case, because such age was 70.
Instead, the NRA was set at age 65 in 1935 as a matter of
compromise. The Townsend Plan, which would have provided $200
per month to all retired persons (and was really economically
unsupportable), had an NRA of 60, and had strong public
support. Some private pension plans had a NRA of 65, while
others, generally in the railroad industry, had a NRA of 70.
So, the ``natural'' compromise of the round figure of 65 seemed
logical for the new Social Security program.
Increase In NRA Made By 1983 Amendments
In 1982-83, the Social Security program had serious
financing problems, both short-range and long-range. Among the
benefit and financing changes made by the 1983 Amendments to
solve these problems was a deferred, gradual increase in the
NRA, which in fact was the final, balancing change. As a
result, under present law, the NRA increases by 2 months for
those who attain age 65 in 2003 and by an additional 2 months
for each successive year-of-birth cohort until it reaches age
66 for those who attain that age in 2009. It then remains at
age 66 until rising by 2 months for those attaining age 66 in
2021. Then, there are successive 2-month increases for each
further year-of-birth cohort until it reaches age 67 for those
who attain that age in 2027.
It may be noted that the plateau at age 66 for those
attaining age 66 in 2009-20 resulted from the circumstance that
the change in the NRA was supposed to produce exact estimated
long-range actuarial balance for the total package of changes.
If the NRA had ``logically'' moved up steadily beginning in
2003, by 2 months per year, until reaching age 67 in 2016, a
small actuarial surplus would have been shown. Thus, the goal
of a close estimated actuarial balance could only be achieved
by deferring for a few years the increase in the NRA beyond age
Much opposition was present with regard to even this small
increase in the NRA, even though it was deferred and gradual.
Many persons viewed retirement at age 65 (or even a few years
earlier) as a basic right, regardless of work ability or
employment availability. In my view, from the standpoint of the
nation's well-being, the definition of ``old-age'' should not
have been kept static over the years as longevity increased. By
doing so, we have had a hidden continual liberalization of the
program. Instead, we should have maintained the NRA at a level
equivalent to what it was at the start. Specifically, the
relationship between the retirement-life expectancy for a
person aged 20 and the working-life expectancy of such a person
should have remained about the same over the years.
Based on mortality rates in 1940, the retirement-life
expectancy of a person aged 20 was 8.36 years for a NRA of 65,
or 20.8 percent of the working-life expectancy of such a person
(40.18 years). Using mortality rates of 1990, such a 20.8-
percent relationship would be achieved with a NRA of 70.6
years. Thus, the increasing schedule of NRAs legislated by the
1983 Amendments was well below the NRAs equivalent to the
relationship between the retirement-life expectancy and the
working-life expectancy for a person aged 20 with a NRA of 65
at the inception of the program would have produced by 1990,
let alone by 2027.
My Proposal For The NRA In The Future
I believe that the NRA should begin to increase for those
who attain age 65 in 2003, as in present law, but when it
reaches age 66, it should continue to increase by 2 months for
each year-of-birth cohort indefinitely into the future, rather
than remaining at that age for 12 years and then rising only to
age 67. Thus, the NRA would become age 70 for those who attain
that age in 2037 and age 75 for those who attain that age in
2072. At first glance, these rises might appear to be extreme,
but it should be kept in mind that, with increasing longevity
and accompanying work ability, the resulting NRAs will be well
below the equivalent NRAs comparable to a NRA of 65 in 1940
certainly for many years to come and perhaps always so. In
other words, if the NRA had originally been indexed to
longevity, it would have been higher than would arise under my
proposal to revise present law.
In the event that the proposed schedule of NRAs will, after
many years, apparently exceed the NRAs equivalent to what age
65 was in 1940, this will be determinable well in advance.
Appropriate action can then be taken to slow down or eliminate
future scheduled increases, and this can easily be done both
actuarially and politically.
As to the Early Retirement Age (age 62 in present law), I
believe that it should remain at age 62 until the NRA reaches
age 67, and then it too should rise, always being 5 years lower
than the NRA. My proposal would have a significant effect on
the estimated long-range financial status of the program. The
long-range actuarial deficit of 2.2 percent of payroll
according to the intermediate-cost estimate would be reduced by
about two-thirds. The remaining deficit could easily be handled
by such small and relatively non-controversial changes as
covering all new state and local government employees, making
the provisions for income-taxing benefits the same as are
applicable to private pensions, and correcting the Consumer
Proposals To Index The NRA To Longevity
Proposals have been made to index, beginning in some future
year, the NRA based on changes in retirement-life expectancy.
In theory, this is an excellent approach, but it cannot be
applied in a satisfactory manner. If the increase in the NRA is
made shortly after the increase in life expectancy has been
determined to have occurred as measured in some recent past
year, the beneficiaries will not have had sufficient advance
notice so that they can plan accordingly. On the other hand, if
the indicated increase in the NRA is deferred and graded in for
many years, the change will not have been sufficiently cost
effective. Of course, it may be said that my proposal does
involve indexing as a limiting factor that the Executive Branch
and Congress would undoubtedly consider continuously over the
years, so as to make ad hoc changes when indicated as being
The Social Security program has, according to the
intermediate-cost estimate, a serious long-range financial
problem. This has been due, to a considerable extent, to
increased longevity--both in the past and very likely over the
long-run future--coupled with maintaining a static NRA in the
past and with only small increases therein scheduled for the
The demographic problem involved should be solved by
demographic means--namely, a continuous small annual increase
in the NRA in all future years. If this results, at some
distant time, in the NRA becoming too high as measured by
conditions then or relative to what age 65 was at the start of
the program, it will be a relatively easy matter both
actuarially and politically to slow down or cease the rises in
the NRA. But it should be realized that the NRA should be on a
dynamic basis so as to keep pace with increasing retirement-
life expectancy, considering also work ability.
Chairman Bunning. Go right ahead.
STATEMENT OF MERTON C. BERNSTEIN, COLES PROFESSOR OF LAW,
EMERITUS, WASHINGTON UNIVERSITY, ST. LOUIS, MISSOURI; AND
FORMER PRINCIPAL CONSULTANT TO THE 1983 NATIONAL COMMISSION ON
SOCIAL SECURITY REFORM
Mr. Bernstein. Thank you, Mr. Chairman. I want to
congratulate this Subcommittee for launching these hearings.
There's no domestic issue of greater importance to all
generations than securing the future of Social Security. And
I'm very much encouraged by what I've been hearing.
Certainly, there's been a tremendous amount of interest in
normal retirement age. But the interest in it is exceeded only
by the extent to which it is misunderstood. Most people seem to
think that Social Security normal retirement age means the age
at which most people retire. That is not the case. Most people
retire before age 65, the current age.
Raising normal retirement age means simply cutting
benefits--cutting benefits for everyone who retires after the
effective date of the change. Now that is something that people
don't understand. They don't understand that it cuts periodic
benefits, no matter at what age they begin benefits. They don't
understand that raising normal retirement age means cutting
lifetime benefits for everyone who retires, who becomes
eligible to retire after the effective date. This issue is
primarily an issue with the baby boomers and their children.
And they ought to understand what's involved, that it's their
benefits that would be cut, and cut substantially, roughly 5
percent a year--5 percent for each year of raising the normal
retirement age. We can't have an intelligent discussion of this
issue until we know what it means.
I think it's a very radical thing to do. The long-term
shortfall of Social Security is quite manageable without taking
such radical steps.
Economists frequently talk about retirement age as if it is
wholly or primarily a matter of choice. Well, for some people,
happily, it is a matter of choice. But for tremendous numbers
of people it is not a matter of choice. We have just gone
through the wrenching years of downsizing, and they're not
over. We have lost whole industries that were great employers.
For many people the reality frequently is that they're at
work; they get an announcement that there will be downsizing of
``X'' number, ``X'' hundred or thousand of employees. That is
coupled with what's called an early retirement incentive
program. What's the early incentive program? It says retire
early; you have one chance to elect to do so, and we'll carry
you along until Social Security kicks in.
Those programs, which have been used again and again
throughout American industry and business, put people to the
test. They know that if they don't elect the early retirement
option, they're likely to be laid off. So they take it. That's
not a choice in my book.
Mr. Bunning, yesterday, you may have noticed the Philip
Morris Co. announced just such a program for it plants in
Richmond and Louisville. You've got several hundred people who
are facing just that choice right now. Are they choosing to
retire, if they elect to go out at age 57, 58, 59? I don't
Further, rather than talking solely in terms of people
choosing, we ought to be looking at the impediments to
continued employment of older people. One is higher pay.
Employers, personnel directors, managers know that frequently
it costs more to continue to employ an older worker than a
What happens? Well, frequently, that higher pay provides
employers with an incentive which is, unfortunately, acted
upon. Another major disincentive to the employment of older
people is health care costs. Any health insurer will charge
more for older people on the payroll than for younger people.
Again, personnel managers don't have to be rocket scientists to
know that when they do hiring. And although discrimination
based on age in employment is illegal, the law is very hard--
very hard--to enforce.
I do urge upon you to consider the very many other quite
appropriate measures that can be taken to assure Social
Security solvency without resorting to this quite radical step.
[The prepared statement and attachments follow:]
Statement of Merton C. Bernstein, Coles Professor of Law, Emeritus,
Washington University, St. Louis, Missouri; and Former Principal
Consultant to the 1983 National Commission on Social Security Reform
Some advocate raising Social Security's normal retirement
age so as to trim program costs. Few proposals are as
misunderstood. Many think it means that people will work
longer. But, most studies show that increases, if any, would be
measured in weeks or months, not years. In fact, raising the
normal retirement age would:
(1) Reduce periodic benefits--throughout retirement--for
the baby boomers
(2) Produce program savings by reducing benefits for all
(3) Increase Social Security Disability insurance outlays
(4) Provide little or no net program income gain; higher
benefits for those working longer would offset additional
(5) Cut benefits disproportionally for the low paid
(6) Bear most heavily on those already out of the work
force: those who are ill, lack currently needed skills, worked
in obsolete industries, are stranded by shutdowns
(7) Increase employer pension costs
(8) Work at cross purposes with private pension provisions
and practices that permit and encourage earlier retirement
(9) Ignore disincentives to employing older workers--their
higher pay and health insurance costs
Many working people do not have the choices some advocates
of change assume. Backers of higher NRA seem to ignore that
labor participation rates leveled off in the mid-1980s. The
focus on changing Social Security ignores the probably more
powerful effect of employer-sponsored plans.
1. Higher Normal Retirement Age Cuts Social Security Benefits For Baby
Raising normal retirement age means raising the age at
which full benefits become payable. The effect is to reduce the
periodic and life time benefits of all who retire thereafter.
It is an issue that affects those still working
Lifetime benefits begun either before or after normal
retirement age equal, on average, benefits begun at normal
retirement age. With a higher normal retirement age, periodic
benefits (the amount received each month), are reduced compared
with those payable at a lower normal retirement age.
Currently, full benefits become payable to those who start
benefit receipt at normal retirement age of 65. A person
beginning benefits at age 62, the earliest age of eligibility
for Social Security retirement benefits, receives 80% of a full
benefit, with proportional reductions for those beginning
benefit receipt in any month prior to age 65.
When normal retirement age becomes age 66 in the next
decade, a full benefit becomes payable to those starting
receipt at that age. Benefits begun at age 65 will be 95% of a
full benefit. Those begun at age 62 will equal 75% of a full
benefit. When normal retirement age becomes 67, the benefits
begun at 62 become 70% of a full benefit. Under the 1983
amendments, the deferred retirement credit (an increase for
delaying benefit receipt beyond normal retirement age) moves up
slowly until, in 2009, it becomes the full actuarial equivalent
of starting benefits at normal retirement age. From that date
onward, retirements delayed past the normal retirement age
would produce no savings for the program.
When normal retirement age gets raised, all benefits begun
thereafter, no matter at what age, are 5% less for each year of
increase. Those reductions continue throughout retirement.
2. Program ``Savings'' Come from Benefit Cuts
When normal retirement age goes up, benefit cuts are a
certainty. Reported ``savings'' derive primarily from the
described benefit reductions. Indeed, the ``savings'' to the
program reported by the Social Security Administration's Office
of the Actuary consist almost wholly of such benefit
reductions. (See the attached 1984 memo from the Office of the
Actuary projecting program savings from the 1983 amendments
raising normal retirement age in the next century. No later
comparable analysis exists because the Actuary assumes almost
all of the program gain derives from benefit reductions.)
But many suppose that the system would obtain more revenue
through people working longer and therefore paying more FICA
(payroll tax). Whether any significant number would do so is
speculative. Simulation studies project that additional work,
if any, would be measured in weeks or months, not years.
Whatever the sums so derived, they would produce little or no
net gain to the Social Security program.
3. Higher Normal Retirement Age Boosts Disability Insurance Outlays
As the attached analysis by the Social Security
Administration's Office of the Actuary shows, increased Social
Security Disability Insurance (DI) benefit payments would
cancel some of the ``gain.'' DI benefits, which are not reduced
because of the age at which they start, become regular
retirement benefits when an individual on DI reaches that age.
When that normal retirement age goes up, more of those already
on DI will continue on those rolls and more possible eligibles
will seek them.
4. Continued Work Does Not Improve Program Income; Additional Payroll
Tax Yield Offset by Deferred Retirement Credit and Higher Benefits from
Whether a significant number of people would feel impelled
by the benefit cuts to continue at work is wholly speculative.
But their numbers do not matter greatly because that additional
work would not yield a significant net gain to the program. The
deferred retirement credit confers an actuarial benefit
increase for each month of delayed retirement. On average,
lifetime benefits are the same, regardless of when people start
to collect benefits; and higher credited earnings may increase
the benefits due, thereby offsetting higher FICA payroll tax
Each month an individual works after the earliest age of
benefit eligibility, now 62, improves his/her benefits by about
5% a year . The delay raises periodic benefits to their
actuarial equivalent. That means that the program, on average,
pays out an equal amount over the beneficiary's lifetime no
matter at what age he/she starts receipt of benefits. In sum,
no matter how long an individual delays the receipt of
benefits, the program, on average, pays out the same amount
over that individual's lifetime.
Further, that additional work may boost the average of
lifetime earnings on which his/her benefit computation is
based. Such increased credited pay would boost benefits,
thereby canceling some portion of the additional FICA tax paid
on the additional months of work.
These factors explain why the attached analysis by the
Social Security Administration's Office of the Actuary
attribute almost all of the savings from the 1983 amendments
boosting normal retirement to benefit reductions.
5. Cuts Bear Disproportionally on the Lower Paid
One justification claimed for raising normal retirement age
is that we are living longer, are healthier and can work
longer. Further, it is claimed, the benefit reductions produced
by raising the normal retirement age will be offset by longer
periods of retirement and hence longer periods of benefit
payment. On average, that's true.
But that analysis does not hold up for low-pay people,
especially minority men, who tend to die earlier than the
statistical average. The low paid have higher mortality rates
and have the least chance of getting average lifetime benefits.
In any event, reductions in current benefits bear most
heavily on low-income people because a proportionally larger
part of their income goes for essential expenditures--for food,
clothing, and shelter. Indeed, it is for that very reason that
the Social Security benefit formula is weighted in favor of
From the program's point of view, total payout is not
affected by how long people work. Whenever benefit payments
begin, on average, they total the same over a lifetime. But,
from the individual's point of view, it is the amount of
current benefits that determine one's living standard. That is
especially true for those most heavily dependent on their
Social Security benefits--people who earned low or modest pay.
6. The Hardest Hit: The Lowest Paid, Those Already Out of the Work
Force, Those Lacking Currently-Needed Skills; Those Who Worked in
Obsolete Industries; Those Who Cannot Work Due to Illness or Family
Program data show that almost all working people start
Social Security benefit receipt before age 65, many at the
earliest possible moment. Many such takers were out of work for
six months or longer before beginning benefits. In reality,
many such people are already out of the work force for good.
Plant and other unit shutdowns, downsizing, former employment
in obsolete industries, obsolete skills and illness account for
many who begin benefit receipt at the earliest age of
eligibility or soon thereafter because they are the least able
to get work.
7. Raising Retirement Ages Will Boost Employer Pension Costs
Early retirement incentive programs that seek to induce
employees to retire early typically offer bridging benefits
until employees become eligible for Social Security benefits.
Delaying that time by raising the age of earliest eligibility
for retirement obviously will require employers to pay bridging
benefits for a longer time. Reducing early retirement benefits
by raising normal retirement age probably would have the same
effect. When I testified in 1980 before Representative Ferraro
on this subject, John Fibiger, representing the American
Council of Life Insurance declared that employer costs would go
up to offset the reduction in periodic benefits caused by
boosting normal retirement age. (Hearings about Social Security
retirement age before the U.S. House Committee on Aging (p. 81,
8. Raising Normal Retirement Age Works at Cross Purposes with Private
Pension Provisions and Practices That Permit and Encourage Early
For decades, private and state and local government pension
plans have provided for retirement at much earlier ages than
Social Security does. It is common for private plans to permit,
even encourage, retirement--with full benefits--as early as age
62, 60, 58 and even 55. This indicates that employers find it
desirable to facilitate employee retirement before Social
Security provides full benefits or even reduced benefits.
Remember, too, that private pension plans receive tax
favorable treatment. Why have we never heard proposals to
withhold favorable tax treatment to plans with early retirement
Bear in mind also that private plans tend to be
concentrated among the better-paid portion of the population.
Professor Burkhauser's article and editorial (``Who Takes Early
Social Security Benefits,'' 36 Gerontology, No. 6, pp. 789 and
726 (1996) found that more than 6 out of 10 who take Social
Security early retirement also received employer pensions; 2
out of 3 early retirees (at age 62) lived in households
receiving an employer pension. From this he argues that
depriving them of Social Security prior to age 65 would not
Isn't it curious that those who propose radical changes in
Social Security retirement age so as to discourage early
retirement make no such proposal for employer-sponsored plans?
Do we really want policies that facilitate early retirement for
high-pay employees but cut benefits to all others so as to
discourage their retirement?
9. Older Workers' Higher Pay and Health Insurance Costs Discourage
Currently, employers pay higher health insurance premiums
for older workers and frequently higher compensation as well.
Despite the ban on discrimination in employment based on age,
these factors give employers strong incentives to minimize the
employment of older workers.
One reported mass separation illustrates how powerfully
these disincentives operate to curtail the employment of older
people. Despite some 3,000 unfilled teaching jobs in New York
City, the Board of Education implemented its second ``buy-out''
(that is, early retirement incentive plan) so as to trim higher
paid teachers from the payroll. It seemingly did not matter
that this move aggravated an existing shortage of math and
science teachers. (New York Times, July 29, 1996, page B1
Moreover, the law requires employers providing health
insurance to offer those eligible for Medicare the choice of
making the employer's plan primary and Medicare secondary. I
have not seen any study of either employer or employee conduct
in the light of that requirement enacted to reduce Medicare
costs. But surely some employers, knowing of the possible
employee election of the employer's plan, will find them more
expensive, less attractive employees. And, as if that's not bad
enough, the law also requires that dependents eligible for
Medicare be given the same choice. You might wonder why
employees and dependents would elect the employer's plan. The
answer: many private plans cover prescription drugs and
Medicare does not.
It seems both prudent and fair to remove health-care cost
and Medicare election requirements, clearly impediments to
continued employment, before trying to force people to work
longer by cutting their Social Security benefits.
Many Do Not Choose to Retire; They are Made to Retire
Much of the discussion about retirement age assumes that
almost all people choose to retire. That's a decidedly
questionable assumption to make in the era of downsizing--which
isn't over yet.
Just ask the people living in the cities and towns once
populated by the aircraft, clothing, electronics, farm
equipment, hat, photographic, shoe, steel, and textile
industries, just ask the mayors of cities whose downtowns have
died, whether employees chose to give up their jobs. For
example, Missouri was the last bastion of the domestic shoe
manufacturing industry. One by one the shoe plants, strung
along Interstate 44 in small towns, shut down. Their former
employees didn't have many choices, certainly not where they
Read any story about downsizings and you will see that they
feature early retirement incentive plans. When many large
companies announce plans to trim hundreds or thousands of jobs,
they offer older employees the choice of retiring early with a
payment to bridge the time until Social Security kicks in.
Employees know that if too few ``choose'' to retire, the
necessary number will be fired. Such offers usually get
accepted and often are oversubscribed.
It is no secret that older separated employees have a tough
time finding employment, let alone obtaining jobs as good as
the ones they lost. Two studies of major layoffs showed that
about half of each group numbering in the hundreds of thousands
got no job or ones inferior to the jobs they lost. Older
employees especially suffered economic demotion.
Many economists talk about the factors that affect employee
``choice'' whether or not to retire. Those discussions and
analyses make some daunting assumptions--that people know what
their pension plans provide, how much in benefits they can
expect under varying retirement age scenarios, and what Social
Security provides at differing ages. And how many people know
and understand Social Security's retirement test and can do the
math to show the interaction of earnings and benefits as well
as apply the differing formulas for those aged 62-64 and those
65 and older?
Most people start Social Security benefit receipt well
before age 65--despite the fact that Medicare does not become
available to them until age 65. That seems to argue that the
inadequacy of benefits does not discourage retirement. And how
many know that the courts allow employers to cancel their
promise to pay for retiree health insurance?
I suggest, the rational choice picture drawn by economists
is highly questionable--certainly for the mass of the
Some employed people may have sufficient knowledge about
their pension plans and Social Security benefits to make a
rational choice about what their income would be if they
retired. Even if they do, can we expect that reducing periodic
benefits by 5% or even 10% will shape their decision?
On top of that, to have a choice, older employees must have
the prospect of continuing in a job or getting a new one.
Often, that's the rub.
Raising Age of Earliest Eligibility--a Disaster for the Low Paid, Low
Skilled and Ill; Program Savings, Little or Nothing; Economic Gains
Speculative at Best
Some advocate not only raising the normal retirement age,
but also raising the age of earliest eligibility--with quite
The employees who have no choice but to retire tend to be
the people with ill health, obsolete skills, and those marooned
in communities in which the major employer has disappeared. We
know that people with low income are the people who rely most
heavily on their Social Security benefits. Making them wait
until age 65 could be disastrous.
What also makes this proposal questionable is the structure
of Social Security benefits. If benefits begin at age 65, they
will be larger than they would be at age 62--their total, on
average, should be equal actuarially over the beneficiaries'
lifetime. Put another way, changing the age of earliest
retirement would not save Social Security any money on average,
because the deferred retirement credit purposely makes average
life-time benefits equal no matter at what age a person begins
Professor Burkhauser reasons that more people at work will
produce more goods and services, more for all of us to share.
That surely is a worthy goal. We ought to pursue that enlarged
pie by removing impediments to employment of older people, by
providing fuller opportunities for education and training at
all ages. But bludgeoning some people to work--primarily those
without second pensions--seems a very distasteful way to go
about creating a larger pie.
Moreover, labor participation rates leveled off in the mid-
1980's. So, the proposal to rectify the trend to earlier
retirement is a bit like the Maginot Line. It's designed for
the last war.
Before making any radical changes in Social Security, we
should turn our attention to the costs and benefits and roles
of employer-provided pensions, especially when their coverage
is shrinking, having fallen below half of the full-time work
Let's Keep an Eye on Death Rates and Longevity
A funny thing happened to the death rate in 1993--it went
up. Concomitantly, life expectancy dropped for both males and
females, both at birth and at age 65, not by very much, to be
sure. (See attached Table II. D2 from the 1997 Annual Report of
the OASDI Trustees, page 63). While the death rate dropped
again in 1994, it was above the 1992 rate, with no longevity
improvement at age 65 for women.
Missouri health officials speculated that the increased
death rate might reflect the greater use of living wills. A
later survey elsewhere noted that health care providers tend to
ignore patient wishes on terminating life. Heightened interest
in this subject could lead to more self-determination about
when to end one's own life. Just where that movement will go,
can hardly be foretold just now. But, it could lead to much
more such decision making.
Were that to develop, earlier deaths would have only slight
effect on Social Security outlays but probably a more
substantial effect on Medicare expenditures. Moderating that
program's costs would make meeting Social Security's
obligations more manageable.
Summary--Raising Social Security Normal Retirement Age and Earliest Age
of Eligibility Make Questionable Public Policy
Raising Social Security's normal retirement age has an
initial plausibility. But, when the public discovers that
raising normal retirement age would reduce benefits to all
qualifying for retirement thereafter, that option becomes less
attractive. The chilly public reception given to raising the
age of eligibility for Medicare suggests that changing normal
retirement age will be greeted skeptically, at best.
As we explore ways to assure Social Security solvency, as
the media and public become better acquainted with the modest
measures capable of achieving that desirable goal, more radical
measures like changing normal retirement age will appear less
urgent and that much more undesirable.
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Chairman Bunning. Thank you, sir.
Dr. Richard Burkhauser.
STATEMENT OF RICHARD V. BURKHAUSER, SYRACUSE UNIVERSITY, CENTER
FOR POLICY RESEARCH, SYRACUSE, NEW YORK
Mr. Burkhauser. Thank you, Chairman Bunning.
I'd like to agree with Mr. Neal that our Social Security
system was the best system the government could have devised to
protect older persons in the thirties. It met the needs of a
country in which average life expectancy was about age 60, and
little of value to society was expected from those lucky enough
to reach age 65 and beyond.
Furthermore, the Great Depression had shaken the belief
that our economy could grow enough jobs for those who wanted to
work. Under the circumstances, setting a retirement age at 65
and penalizing those who worked beyond that age through lost
benefits made some policy sense. Two major changes have
occurred in our society since the thirties that make it
painfully obvious that the norms of that long ago period do not
describe our country as we approach the 21st century.
The first is life expectancy. Life expectancy is now
approaching age 80. And even more important, most Americans can
expect to be free of severe work impairments well into their
seventies. We are a much healthier society, measured either by
morbidity or mortality, and society has much to gain by
encouraging older persons to continue to work.
Second, our economy has proven to be the job creation
marvel of the world. Those who argued that the great
transformation, for instance, of women into the work force
would displace men have been grossly proven wrong. Today,
unemployment rates are lower than they have been since the
The issues for the 21st century will revolve more around
how to retain highly skilled and healthy members of the aging
baby boom generation, of which, by the way, I'm the oldest
member, than figuring out how to force older people out of the
labor force, which was much of what the early Social Security
retirement benefit program was about.
The good news is that policy changes already made in the
1983 amendments to the Social Security Act are working. The
trend toward earlier and earlier retirement is over. If you
look at Tables 2 and figures 1 and 4 in my formal statement,
you'll see that the labor force participation rates of men aged
60 and 64 and 65 to 69 between 1985 and 1996 are far above what
straightline projections, based on the previous 25 years of
experience, would have predicted. The same is true for older
Raising both early and normal retirement ages will even
further increase work at these ages, and as our healthy
lifespans increase, it makes sense to do so, both from a social
and a financial perspective.
Now will there be hardships? Yes. This will cause hardships
for some. However, we have great data--the Health and
Retirement Study which the Congress has financed since 1990
through its appropriations to the National Institute on Aging.
This study follows the latest group of people moving toward
early retirement age, so we can actually see what the
characteristics of people who are taking early Social Security
In tables 3 and 4 of my formal statement, I look at the
current cohort of men and women who first took Social Security
benefits at age 62 in 1992-94, and compare them with those who
postponed benefits. The big story is, on average, early takers
are as healthy and as wealthy as postponers. The stereotype of
an early taker, unable to work and lacking private pension
protection, does not fit most early takers. On average, men who
take early Social Security benefits at age 62 appear to be
nearly as well off financially and as healthy as men who
postpone acceptance. Overall, women who take early Social
Security benefits at age 62 are better off financially, but
less healthy than women postponers.
If you look at the typical male early Social Security
taker, black or white, that person is also eligible to receive
employer pensions. Among white males, 66 percent of early
takers have employer pensions. Among black males, 61 percent
have employer pensions.
The typical male taker, black or white, has no health
condition that affects his ability to work. Few male takers,
black or white, fit the stereotype of being both in poor health
and dependent on Social Security as their only source of
pension income. I estimate about 7 percent of white males and
11 percent of black males fit this stereotype.
These results from the Health and Retirement Study suggest
that the majority of men who take early Social Security
benefits at age 62 are also eligible to receive an employer
pension, are in good health, and have assets similar to those
who postpone Social Security benefits. It's the rare male taker
who is both in poor health and dependent on Social Security.
Most older workers who retire early do so because they are
financially able to. For such workers, raising the early
retirement age will not cause major hardships and will increase
The 1935 Rolls Royce was undoubtedly the greatest car made
up to that time, but no one would argue that the 1935 Rolls
Royce is the car that we ought to be driving around in today.
There have been changes in society and changes in technology
that make this obvious. When I argue for changes in the Social
Security system I am not arguing that the system has failed;
rather, I am arguing that our society has changed and the
Social Security system should change with it.
[The prepared statement follows. Additional materials are
being retained in the Committee files.]
Statement of Richard V. Burkhauser, Syracuse University, Center for
Policy Research, Syracuse, New York
The Report of the 1994-1996 Advisory Council on Social
Security (1997) finds a deterioration in the long range
financial condition of Social Security and urges that
concentrated action be taken promptly to reverse this trend.
Raising both the normal retirement age and the earliest age of
retirement is one method of accomplishing this result.
In contemplating such increases in the retirement ages for
Social Security, two issues arise: (1) would a larger number of
people stay in the work force past age 62? (2) would this cause
serious and widespread economic hardship to a large number of
people who would still not work past age 62? Preliminary
evidence suggests the answers are yes and no respectively.
Thus, I favor raising the retirement age as one method of
adjusting Social Security policy to the improved health and
life expectancy of the baby boom generation.
I. Would Raising the Earliest Retirement Age to 65 Increase Work? \1\
Table 1 shows the labor force participation rate of older
males from 1940 through 1996. There is now general agreement
that disincentives to work at older ages contained in both
Social Security and employer pension plans played an important
role in the dramatic drop in retirement age from 1950 through
1985 as shown in this Table. (See Quinn and Burkhauser 1994 for
a review of the literature.) Nonetheless, skepticism exists
over the ability of policy changes to both stop this trend and
increase work at older ages. In my view, not only is it
possible for social policy to encourage workers to stay in the
work force longer, but changes in public policy already set in
motion by the 1983 Amendment to the Social Security Act,
together with a strong economy, have already ended the trend
toward early retirement. Figures 1 through 4 in Burkhauser and
Quinn (1997) show how profoundly the trends in labor force
participation rates have changed for older men and women since
1985. The figures show the labor force participation rates of
older men (aged 60 to 64, aged 65 to 69) and older women (aged
55 to 59, aged 60 to 64) from 1964 through 1996, and use a
linear time trend based on the 1964 to 1985 data to project
labor force participation rates from 1986 through 1996. In all
cases, projected rates are far below actual rates. Table 2 from
Burkhauser and Quinn (1997) plots these differences and finds
that over two million more older men and women in these age
ranges are in the labor force than would have been predicted
based on past trends. While it is difficult to disentangle the
relative importance of specific policy changes from
macroeconomic factors and changes in personal characteristics
\1\ The discussion in this section of my talk is based on
Burkhauser and Quinn (1997).
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[GRAPHIC] [TIFF OMITTED] T2247.023
[GRAPHIC] [TIFF OMITTED] T2247.024
over the period, it is possible to say from Table 2 that the
long post-World War II trend toward early retirement is over.
Removing disincentives to work or constructing incentives
to work would have no impact on the labor force participation
of older persons if they had no desire to work longer. But this
is not the case, as McNaught, Barth, and Henderson (1989)
report using Harris poll information. This survey evidence
suggests that many older Americans would like to work more than
they do. Quinn and Burkhauser (1994) analyzed the subsample of
this survey who were still employed and found that a
substantial minority--over one million--expected to stop work
before they wanted to. Many more older workers preferred part-
time work than had it. These are the ``unexpected'' older men
and women workers captured in Table 2.
Returning the Social Security earliest retirement age to
its 1960 level of age 65 as the normal retirement age is
increased to 67 or higher over the next two decades would send
an important market signal to employees and employers that
additional work at older ages is expected. In my view such a
change in Social Security policy would have a substantial
impact on employment at those ages. But additional research is
necessary to more accurately determine the size of this change.
Fortunately a major new data set--the Health and Retirement
Study--will allow researchers to make such estimates.
II. Would Raising the Earliest Retirement Age to 65 Cause Widespread
Economic Hardship \2\
Raising both the normal and earliest age of eligibility for
Social Security benefits would increase employment among older
people and delay acceptance of Social Security benefits.\3\
This would both reduce the future liabilities of the Social
Security system and increase general economic production. But
these advantages of returning the first age of eligibility for
benefits to 65 must be weighed against the negative impact on
economic security it would cause at ages 62 through 64,
especially for those who are limited in their ability to work
because of health or who have no employer pension plan to
cushion their transition out of the labor force and into
\2\ The discussion in this section of my talk is based on
Burkhauser and Phillips (1997).
\3\ Under current Social Security rules, the normal retirement age
will gradually increase to age 67 over the first part of the 21st
century, but the earliest age of benefit eligibility will remain age
62. Burkhauser and Quinn (1994) review the economic literature and
conclude that, unless major changes take place in employer pensions,
these changes alone will have only a minor effect on employment.
[GRAPHIC] [TIFF OMITTED] T2247.020
Policymakers considering an increase in the minimum age for
early Social Security benefits need to know how workers
currently transition into retirement and to understand the
circumstances surrounding this important life event. If early
beneficiaries were in good health and could work, or could rely
on employer pension income to support their decision to retire
earlier than age 65, then such a change, while painful, would
be unlikely to have serious economic consequences. However, for
early beneficiaries who are limited in their ability to work
because of health or are not eligible for employer pensions,
raising the early Social Security retirement age to 65 could
cause serious hardship.
Evidence from the Health and Retirement Study (HRS)
The HRS is currently following a cohort of men and women
who were aged 51 to 61 in 1992 when they were first surveyed.
The second wave of data, which contains information on these
same people in 1994, provides a first look at the
characteristics of early Social Security retirees. Using data
from the HRS, Table 3 looks at men and women who turned age 62
between wave 1 and wave 2 and compares the employer pension
eligibility, net assets, health, and household pension receipt
of those who took Social Security benefits at age 62 (takers)
to those who did not (postponers). This is done for the entire
population and by race and gender groups. (This table is an
extension of work first developed in Burkhauser, Couch, and
Key Points of Table 3
On average, men who take early Social Security
benefits at age 62 appear to be as well off financially and as
healthy as men who postpone acceptance.
Overall, women who take early Social Security
benefits at age 62 are better off financially but less healthy
than women postponers.
There are clear differences between racial groups.
Black men this age have substantially less wealth and poorer
health than white men. Black male takers are wealthier but in
poorer health than black male postponers. Black women have
substantially less wealth than white women. Black women takers
are wealthier and healthier than black women postponers.
Table 4 separates takers and postponers based on employer
pension and health status within race and gender groups.
Key Points of Table 4
The typical male early Social Security taker
(black or white) also is eligible to receive an employer
pension--white males 66 percent, black males 61 percent.
The typical male taker (black or white) has no
health condition that affects his ability to work--white males
(79 percent), black males (72 percent).
Few male takers (black or white) are both in poor
health and dependent on Social Security as their only source of
pension income--white males (7 percent), black males (11
Women takers (black or white) are less likely to
have an employer pension than male takers and more likely to be
in poor health.
These results from the HRS suggest that the majority of men
who take early Social Security benefits at age 62 are also
eligible to receive an employer pension, are in good health,
and have net assets similar to those who postpone Social
Security acceptance. It is the rare male taker who is both in
poor health and dependent on Social Security benefits as his
sole source of pension income--7 percent for white males, with
only a slight increase to 11 percent for black males.
These results do not suggest that raising the earliest
retirement age would be painless or that some workers would not
suffer major losses in economic well-being. But it does suggest
that in 1994, the typical male worker taking Social Security
benefits at age 62 was physically able to continue working or
was eligible to receive an employer pension benefit and thus
unlikely to be devastated financially by legislation raising
the earliest age of eligibility for Social Security retirement
[GRAPHIC] [TIFF OMITTED] T2247.021
[GRAPHIC] [TIFF OMITTED] T2247.022
These early results from the HRS only begin to reveal the
health and economic characteristics of today's older workers as
they make the transition between work and retirement. As
additional waves of data become available and are linked to
previous data waves, as well as to Social Security records,
researchers will be able to more fully explore the transition
into early retirement from a multi-period perspective. This
will allow researchers to see better how the economic well-
being of this cohort changes and to measure the degree to which
our retirement system protects older people from dramatic drops
in economic well-being, or even from a fall into poverty.
More importantly, these results begin to identify the
critical variables that influence the work to retirement
transition. While these results suggest that the majority of
workers who retire early do not have work-limiting health
conditions and are not significantly worse off financially or
from a health perspective from those who postpone early Social
Security acceptance, more sophisticated analysis is necessary
to estimate the importance of health, employment conditions,
and government policy on the retirement decision of older
Disentangling the importance of policy variables from
changes in health is the critical unresolved behavioral
question with respect to the retirement decision. Aggregate
data in Table 1 and in the figures show that the trend toward
earlier retirement that characterized the American labor market
from the end of World War II through 1985 has ended. The labor
force participation rates of both older men and women are
higher than straight line trends predict. Some of this increase
is the result of policy changes which have reduced the anti-
work aspects of Social Security. The HRS data will enable
researchers to more fully unravel the factors behind the
retirement decision by looking at how public policy variables,
such as Social Security and employer pension benefit levels,
and changes in these levels based on additional work years,
interact with health and general economic conditions, which are
less affected by public policy, on the retirement decision.
Advisory Council on Social Security. 1997. ``Report of the 1994-
1996 Advisory Council on Social Security.'' Washington, DC: Social
Security Administration, January.
Burkhauser, Richard V., Kenneth A. Couch, and John W. Phillips.
1996. ``Who Takes Early Social Security Benefits: The Economic and
Health Characteristics of Early Beneficiaries,'' The Gerontologist,
36(6) (December): 789-799.
Burkhauser, Richard V. and John W. Phillips. 1997. ``Who Takes
Early Social Security Benefits: Results from the Health and Retirement
Study,'' Center for Policy Research, Research Note, The Maxwell School.
Syracuse, NY: Syracuse University.
Burkhauser, Richard V. and Joseph F. Quinn. 1994. ``Retirement and
Labor Force Behavior of the Elderly.'' In Linda Martin and Samuel
Preston (eds.), Demography of Aging. Washington, DC: National Academy
of Science, pp. 50-101.
Burkhauser, Richard V. and Joseph F. Quinn. 1997. ``Pro-Work Policy
Proposals for Older Americans in the 21st Century,'' Center for Policy
Research Policy Brief No. 9, The Maxwell School. Syracuse, NY: Syracuse
McNaught, W., M.C. Barth, and P.H. Henderson. 1989. ``The Human
Resource Potential of Americans over 50,'' Human Resource Management,
Phillips, John W. 1997. ``Essays on the Accumulation and Transfer
of Wealth at Older Ages,'' Ph.D. dissertation, Department of Economics,
Syracuse University. Syracuse, NY, April.
Quinn, Joseph F. 1997. ``Retirement Trends and Patterns in the
1990s: The End of an Era?'' The Public Policy and Aging Report
U.S. Department of Health and Human Services. 1996. Annual
Supplement to the Social Security Bulletin. Washington, DC: U.S.
Government Printing Office.
Chairman Bunning. You got that all in in less than 5
I messed up your name the first time. So I'm going to call
you ``Mr. G.''
STATEMENT OF RON GEBHARDTSBAUER, SENIOR PENSION FELLOW,
AMERICAN ACADEMY OF ACTUARIES
Mr. Gebhardtsbauer. That's what my Dad was called.
Good afternoon, Mr. Chairman, Members of the Subcommittee.
My name is Ron Gebhardtsbauer, and I'm the senior pension
fellow with the American Academy of Actuaries. The Academy is
the nonpartisan organization for actuaries in the United
States, and as such, we don't endorse legislation. Rather, we
analyze it for its advantages and disadvantages.
We're here today to talk about raising the normal
retirement age because we're living a lot longer, and it seems
like the logical solution to solving Social Security's
financial problems. But it has many complex interactions, as
you mentioned, Mr. Chairman, with other programs and difficult
effects on various subgroups.
As my written testimony shows, I can get into a lot of
those issues, but I'd like to save time to avoid the red light
and move on, focusing on, what are some of the options that we
can use in order to make some of these ideas of raising the
retirement age more workable. For instance, using Social
Security to enable people to phase into retirement and go into
part-time employment, and get a part-time Social Security
But before I get into that, let me first talk about some of
the concerns. First of all, it was mentioned earlier that
raising the Social Security normal retirement age decreases
everybody's benefits, but one advantage of increasing the
normal retirement age is it doesn't decrease everybody's
benefit; it doesn't decrease the benefits for disabled people.
They will still get 100 percent of their benefit.
One other concern is that, by increasing the normal
retirement age, benefits at age 62 become smaller and smaller,
and could become inadequate for some people with low incomes.
There are some options here that maybe you might want to
consider, and of course one of them is to not give a benefit
age 62 anymore, to increase the age at which you can get your
benefit at the earliest age. Another idea, another option, is
to maybe guarantee a benefit equal to the poverty level, a
minimum benefit of that amount.
Of course, these options not only have advantages, they
also have disadvantages. For example, not having benefits at 62
anymore would be a special difficulty for people who have more
strenuous jobs, who often retire early, or people who are
partially disabled and can't get a disability benefit because
they're not disabled enough. For those people, they won't be
able to get a Social Security benefit, and they may have a hard
time finding a job.
Also, there's concerns for people who are minorities and
people with low incomes who don't live as long, but as we
discussed a little bit earlier, Social Security is not a
regressive system. The tilt in the benefit formula (and the
survivor and disability benefits) make it progressive, even for
minorities who don't live as long.
Another thing we need to think about before we raise the
retirement age are these two questions: Can we work past 67?
And as discussed already, not only are we living longer, but
we're also healthier at older ages, and in fact these studies
indicate that someone age 70 now is more healthy than someone
age 65 back around when Social Security was created.
Another question is, will employers keep us beyond age 67?
And the evidence is there that employers are less likely to
hire older employees, and one of the reasons is because older
workers, as mentioned earlier, do cost more. Their health
insurance, for instance, is more expensive. (However, their
pension and post-retirement health costs can be lowered, when
they work longer.)
So let's talk about the effects on employers of raising the
normal retirement age. While increasing the normal retirement
age will keep the employer's FICA taxes down, it may shift the
cost of retirement to the employers instead. They may end up
with older work forces, and their benefit costs will go up. If
the employers decide that they want to encourage the employees
to retire at a younger age, they could do it by increasing
their pension benefits, but then that will also cost a lot.
We want employers to buy into this idea, too. Maybe we have
an option here. How can we get employers and employees to buy
into this? Well, I've got a chart over here on my left that I'd
like you to look at, and it illustrates something that would be
helpful. If you look at this chart, it shows the average annual
increases in the labor force, and back in the sixties and the
seventies, because of all the women coming into the work force
and the baby boomers, increases in the labor force were big.
It's now plummeting, though, and in fact when you reach the
year 2008, the increase in the work force will be less than the
increases in the population--for the first time in 50 years,
So that may change our thinking. Employers may want to
rethink their retirement strategies. Instead of pushing
employees out when they reach a certain age, they may want to
encourage employees to stay.
Well, there are ways in which Congress can help on this. If
Congress, for instance, lets people choose when they want to
retire and how to phase in their retirement, instead of having
Social Security determine when you retire by using this
earnings test, as we discussed earlier, then there's more
choice involved, but also it gives employers the chance to
continue employing their workers, maybe at a part-time level,
but also not have as high payroll costs, due to the payment of
a partial Social Security benefit. This could encourage
employees to work longer (although part time), rather than the
earnings test which discourages work.
Also, it's already being done. The Federal Employee
Retirement System already pays part-time benefits to part-time
retirees that have already retired. And you may want to give
this option to employers to allow them to phase-in retirement
for their employees by giving them part of their pension at an
This has some advantages, as I mentioned before, but it
also has a disadvantage that was mentioned earlier. If you
eliminate the earnings test, you end up having cash problems
now, but in the long run it does not lose Social Security
money. So that's another option that we might want to think
And I see my red light came on, so I'd better stop here.
[The prepared statement and attachments follow:]
Statement of Ron Gebhardtsbauer, Senior Pension Fellow, American
Academy of Actuaries
The American Academy of Actuaries is the public policy
organization for actuaries of all specialties within the United
States. In addition to setting qualification standards and
standards of actuarial practice, a major purpose of the Academy
is to act as the public information organization for the
profession. The Academy is nonpartisan and assists the public
policy process through the presentation of clear, objective
analysis. The Academy regularly prepares testimony for
Congress, provides information to federal elected officials and
congressional staff, comments on proposed federal regulations,
and works closely with state officials on issues related to
Chairman Bunning, committee members, staff, and fellow
panelists, Good Afternoon. My name is Ron Gebhardtsbauer and I
am the Senior Pension Fellow at the American Academy of
Actuaries. The Academy is the nonpartisan public policy
organization for actuaries in the United States and does not
endorse or propose legislation. Instead, we analyze the
potential effects of legislation and evaluate its advantages
and disadvantages relative to current law.
In the interest of time, I have provided the subcommittee
with copies of my full testimony on this subject, so that I can
focus on the most important points at this hearing, namely:
(1) What effects would an increase in the Normal Retirement
Age have on individuals, employers, and the Social Security
(2) If Congress decides to increase the Normal Retirement
Age, what should it be?
Effects of an Increase in the Normal Retirement Age (NRA)
Many proposals to solve Social Security's financial
problems have suggested that the retirement age should be
increased, because our life expectancies are much higher today
than they were when Social Security was created. Currently, the
Normal Retirement Age, or age for full retirement benefits, is
65, the same as it was at the beginning of Social Security. It
starts to gradually increase to age 67 in just 2 years (the
year 2000) at which point the Normal Retirement Age will become
65 and 2 months for people born in 1938. If these people still
retire at age 65, their retirement benefits will be about 1%
lower \1\ than if the Normal Retirement Age had remained at 65.
If the NRA had increased to age 66 all in one year, benefits
would have dropped immediately by about 7%. This large decrease
would be similar to the notch baby benefit decreases which
caused much alarm among the elderly in the 1980's. Phasing in
the increase in retirement age over 6 years from 2000 to 2005
avoids this problem. Eventually the NRA reaches age 67 in 2022
for people born in 1960 and later. (A chart in my attachments
provides these changes in detail, along with the retirement
ages proposed by the Advisory Council.)
\1\ Since people born in 1938 get their wages indexed one more year
than people born in 1937 (and one less COLA), there is little
likelihood that a notch will occur (assuming the wage index for 1997
wages will be more than the COLA in 1999). Even a 4 year phase-in would
probably not create a noticeable notch.
Effects on Individuals
Thus, any proposal to gradually increase the normal
retirement age by 1 year is similar to a proposal to gradually
decrease the benefit formula by about 7% for people who still
desire to retire at the same age.\2\ Because we are living
longer (on average), some contend that this is not a decrease
in benefits at all--it is keeping total lifetime benefits the
same. These people argue that keeping the retirement age frozen
at 65 is actually a benefit increase, because benefits are
gradually being paid for more years. However, if you look at it
from the point of view of money's worth calculations, you will
see that the return for future beneficiaries will not be as
good as the returns received by current beneficiaries (but that
is also because of other factors).
\2\ Increasing the retirement age by 3 years from 67 to 70 would be
similar to a proposal decreasing retirement benefits by about 21%.
Disabled beneficiaries will not be hurt. Raising the NRA
will not seem like a good idea for someone who cannot work any
longer. If they qualify for a disability benefit, however,
there is good news. Disability benefits will not be reduced by
an increase in the retirement age. Disabled individuals will
still get 100% of their full benefit (or Primary Insurance
Amount), no matter how young they are at disablement (and they
will get the benefit as long as they are disabled). This will
encourage more people around age 65 to file for disability
benefits (thus offsetting some of the savings of the higher
NRA), and the actuaries at Social Security have taken this into
account in their cost projections for the current system and
the various proposals.
Current beneficiaries and some future dependents and
survivors won't be hurt. Other people who will not be affected
by an increase in the retirement age are current beneficiaries
(due to the prospective phase-in), survivors that are age 60 or
younger on entitlement \3\, children, and parents (or
grandparents) caring for eligible children. Of course, this
means that increasing the retirement age doesn't save quite as
much as an across the board 7% decrease in benefits, but that
is intentional, and not a surprise. \4\
\3\ The early retirement reduction for spousal survivors at age 60
is frozen at 71.5% of the PIA by law.
\4\ Disability benefits can be decreased too, if so desired. The
PSA proposal suggested decreasing disability benefits by the same
percent as retirement benefits payable at age 65. This would save 0.5%
of covered payroll or almost 1/4th of Social Security's total financial
problem. However, in 2083 when the NRA reaches 70, this proposal would
reduce disability benefits by 30% from what someone retiring at age 70
Inadequate Benefits: A concern with raising the Normal
Retirement Age is that it could create inadequate benefits at
age 62. For example, if the normal retirement age becomes 70,
then the age 62 benefit will be only 55% of the age 70 benefit.
Some people who opted for the age 62 benefit might use up their
savings quickly and need public assistance (thus costing the
government more elsewhere). This could be happening at the same
time that employers are reducing their post-retirement medical
plans, and government may have to cut back on Medicare and
Medicaid. Thus, retirees would need more income, not less. The
Gramlich Individual Account proposal addressed this concern by
decreasing benefits by 7% but only for benefits above the first
bendpoint. Proposals to raise the NRA can also resolve this
through minimum benefits, or by increasing the earliest
retirement age (i.e., the Earliest Eligibility Age), or people
could work longer.
Minimum Benefits: A minimum benefit equal to the poverty
level (or some percent of poverty) might resolve this concern
about inadequate benefits. However, it would have to be
implemented carefully, since there are numerous concerns, such
(2) Who is eligible for it? (i.e., should someone who
worked only 10 years under Social Security get the minimum
(3) Would it be phased in (i.e., Should someone who worked
15 years get as much as someone with 40?)
(4) Once someone qualifies for a year of work or becomes
eligible for it, there is no more incentive to report income or
pay the tax.
(5) Would it be reduced for early retirement?
(6) Would disabled beneficiaries get it? Receipt might
discourage rehabilitation and going back to work.
Increase the Earliest Retirement Age: Another solution for
inadequate benefits at age 62 is to increase the earliest
retirement age when increasing the normal retirement age. This
would be a revenue raiser, and it would solve 10% of Social
Security's actuarial imbalance. However, some people (such as
blue-collar employees who commonly retire at a younger age) may
need Social Security income to start at age 62. The reason the
earliest eligibility age was lowered to age 62 in 1961 (1956
for women) was due to a lack of jobs and the large number of
unemployed. A response might be that people need income only if
they can't work, and the disability benefit is for that
purpose. But some older people may not be able to get jobs if
unemployment levels are high \5\ or if they are disabled, but
not quite enough for Disability Benefits. Finally, if
proponents of keeping age 62 are correct, then they would be
just as correct about some people needing the income at age 60.
Should the eligibility age be lowered to 60 or 55 then? That
would be expensive, and the benefits at age 55 would be very
\5\ Unemployment levels may be low now, but what happens when they
go back up? Could the eligibility age be indexed to unemployment levels
for older workers?
Blue Collar Workers: As noted above, there is a concern for
blue-collar workers (and others with strenuous jobs) who are
often retired or laid off early. Increasing the retirement age
affects these workers (and their employers) disproportionately.
For example, if the NRA became 70, they would need their
employer-sponsored pension plan to pay pension supplements for
5 more years. Employers will resist this due to the larger
expense entailed. If pensions become much more expensive for
these workers, employers may speed up the automation of their
jobs. Alternatively, blue collar workers may need retraining to
obtain another (and very different) job to tide them over that
extra 5 years until they can get a full Social Security
benefit. Getting a new job at an advanced age is quite
difficult though, especially if your prior job was very
Low Income Workers: There is also a concern for lower
income workers who often don't save (or can't save) and who
have little or no pension from their employer. For them, Social
Security is their primary (and sometimes only) source of income
in retirement. If they still retire at a young age, their
Social Security benefits will be much lower, which makes it
much more likely that their income will be below poverty
levels. Establishing a minimum benefit will help them.
Otherwise, they will have to work longer or resort to SSI (thus
increasing Federal and State costs). This may not be as bad as
it seems, since there are job opportunities for elderly
workers, but they are more likely to be at low wages.
Minorities: There is also a concern for minorities that
have lower life expectancies. This may actually be more a
function of income level, and would apply to blue-collar
workers too. They often do not live as long as white collar and
higher income workers. This reduces the return on the
contributions they made into the system. Some people say the
benefits are regressive because of this. However, studies by
Robert L. Brown at the University of Waterloo and other
actuaries show that the progressive tilt in the Social Security
formula (along with the disability and survivor benefits) more
than offsets their shorter life spans. This would still apply
after the change in retirement ages. A guaranteed minimum
benefit could also help allay this concern.
Partially Disabled Older Workers. Another group of concern
is the older person whose health is poor, but not poor enough
to satisfy the disability definition. They will have a
difficult time getting a job. Currently, if they are age 65 or
older, they get a full benefit. In the future, that will not be
so. Of course, determining whether someone is disabled is not
easy, especially at older ages. But Social Security already has
a more lenient rule for determining disablement at older ages
in regulation Sec. 404.1563, which may address this concern to
Finally, the number of unhealthy people at older ages is
much less than the number of healthy people. Should they drive
the retirement age policy for everyone? Maybe not, but we have
to answer 3 questions:
(1) Can we work past age 67?
(2) Will we work past age 67? and
(3) Will employers keep us past age 67?
Can we work past age 67? Currently about 20% of men age 70
work. In 1940 (before Social Security), the workforce
participation rate for males age 70 was almost 50% (see chart).
If we are healthier now and jobs are less strenuous and
unemployment is down, then maybe more than 50% could work now.
Older People are More Healthy Now than in the Past: Recent
studies show that not only are we living longer, but we are
healthier (physically and mentally) at older ages than people
in the past. Rates of impairment among the aged are down.\6\
Indeed, the average person age 70 now is probably healthier
than the average person age 65 when Social Security was
created. In addition, health issues can affect the retirement
decision in different ways. The onset of a disability will
induce us to retire, since we can't work any longer.
Alternatively, if we are just healthy enough to work, there are
incentives to work until we can get Medicare (or until we can
get Post-Retirement Medical coverage through our employer plan,
if sooner). If we can't get Medicare until age 70, it may
encourage some of us to work until then.
\6\ See Chronic disability trends in elderly US populations: 1982-
1994 by Manton, Corder, & Stallard. In 1982, 14.1% of elderly between
65 and 74 were IADL (Instrumental Activities of Daily Living) or ADL
impaired or institutionalized. In 1994 this decreased to 11.5%. For
ages 75 to 84, it dropped from 31.9% to 26.9%.
Will We Work Past Age 67? Even if we can work past age 67,
will we? We may just prefer to retire earlier. Retirement is
not just a decision regarding our health, nor is it just a
decision regarding our preference for leisure over work. It is
also a financial decision. Many people don't have the finances
to retire when they want. For example, work force participation
rates in 1940 were high because the income was needed. In the
1960s, work force participation rates for men dropped
dramatically because they could get a Social Security benefit
at 62 (enacted in 1961 for men and 1956 for women) and Medicare
was available (enacted in 1965). Employer Pensions and Post-
Retirement Medical plans also help us retire early.
Do Later Retirements Increase National Productivity?
Earlier retirements, of course, means the nation loses out on
some of the productivity that our seniors could have given us.
On the other hand, some productivity of a younger person could
be lost, when unemployment levels are high. When someone
retires, it opens up the possibilities of getting more
productivity from younger people. Not only can the younger
employee be more productive, by having the job (or a better
job), but now they won't need to worry about supporting their
Can We Be Encouraged to Work Longer? (and How?) Recently,
however, work force participation rates have increased at age
70, possibly due to a relaxation of the Social Security
earnings or retirement test.\7\ At least some of us can work at
age 70. Completely eliminating the retirement test after age 65
would encourage even more work. An attached chart shows that
many older people have jobs that pay at the earnings limit.
These people would probably work more, produce more, and pay
more taxes if the limit were removed. While this proposal will
increase current cash outlays (because some benefits would no
longer be reduced), it doesn't hurt Social Security's long
range financial problems.\8\ That is because getting benefits
sooner reduces future benefits (since they get less of an
actuarial increase) and it would increase FICA tax income.
\7\ Workers over 70 can now earn a wage and not have their Social
Security benefit reduced.
\8\ See page 236 of Volume I of the 1994-1996 Advisory Council
Smaller pensions from our employers may also cause us to
work longer. For example, 401(k) plans don't subsidize pensions
at younger ages, like traditional retirement plans. If you want
to retire early, you will have to suffer the full actuarial
reduction. This may force many people to work longer.
Higher retirement ages (for Social Security and Medicare)
may encourage us to work longer, especially lower income
workers who won't be able to retire for financial reasons. It
may not affect wealthier people as much, because they can rely
on their other resources.
Other proposals to decrease benefits may also encourage us
to retire later. However, even though they are similar to
proposals that increase the NRA, they may not register until
too late. Most people don't know what their Social Security
benefit amount is, so decreasing it won't affect their thinking
now. Only when they reach age 65 will they realize how much the
benefits dropped. At that point, they will finally realize that
they have to work until a much later age. Thus, raising the
retirement age could be the more effective way of making
changes to Social Security. It is more likely to affect our
thinking now than just decreasing benefits.
Congress Should Coordinate its Policies on Retirement Age:
In addition, Congress should coordinate its national retirement
policy, because right now it is sending inconsistent signals.
Social Security is moving its retirement age to 67, but
Medicare is still 65. In addition, the federal laws for
employer-sponsored pension plans still use age 65. (Note: If
Congress amended pension law to use the same ages as Social
Security, some companies might take advantage of it. This could
be a revenue raiser for the government, because employer
contributions could go down--or at least not go up.) Another
inconsistent signal is the requirement that IRA's and certain
pension benefits begin their distributions by age 70\1/2\ even
if the individual wants to continue to work. Raising the 70\1/
2\ would defer government revenue however. You could also raise
the 59\1/2\ age for earliest distributions, but that could
discourage people from putting money into IRAs and 401(k)
plans, since it would lock the money up longer. It would also
be a revenue loser for the government. Of course, much of this
depends on whether there are jobs for older Americans.
Will Employers Keep Us Past Age 67? Some employers believe
that older workers may be less productive and less adaptable to
change than younger workers. The older employees can limit the
promotion possibilities of younger workers to the point that
the younger employees may quit. Older employees' benefits may
also cost more. An older worker's employee benefits (Health
Insurance, Long Term Disability, Pension, Life Insurance,
Annual Leave, and Sick Leave) could cost $10,000 more per year
than those for a younger worker. On the other hand, not having
to pay Post-Retirement Health benefits \9\ and Pension benefits
\10\ while the older person is working could offset this
amount. However, these cost reductions in Post-Retirement
Health and Pensions don't apply to elderly employees who were
recently hired. In fact, newly-hired elderly workers could
increase employee health, post-retirement health, and pension
costs (if they work long enough to become entitled to these
retirement benefits). Laws that require their full coverage can
make it a very costly decision for employers to hire older
workers. If these laws were somewhat relaxed, employers might
hire more older employees. For example, if an older worker can
be hired at a lower salary that compensates for the extra cost
of benefits, then cost will be less of an issue.
\9\ Post-Retirement Health plans would not have to pay amounts paid
by their active employee health costs if they are between their
earliest retirement age and age 65. If the employee is over 65, the
employer plan would only benefit from the non-Medicare benefits that
their post-retirement health plan would have paid. However, the active
employee health plan would have to pay all health costs since Medicare
is the secondary payer there. It would be difficult for Medicare to
become the secondary payer to a post-retirement plan, because then
employers would drop the plans. Employers can't drop their active life
plan (unless they drop it for all active employees) because of ADEA.
\10\ For example, the employee could lose a temporary supplement.
Or costs could decrease if the employee is no longer accruing benefits
due to a service maximum. If the employee is older than their NRA or
the first age for unreduced benefits, their retirement benefit can be
suspended while they are working, if they are notified.
Employer Demand for Older Workers: An SSA publication by
John Straka, The Demand for Older Workers, asserts that
employers that limit the number of older workers (or reduce
their earnings) do so for productivity and market efficiency
reasons and not for prejudicial discriminatory reasons. He
bases this on his theory that (ultimately) in an efficient
market, people are paid what they are worth. He also says that
job opportunities for older workers will be mostly confined to
relatively low-paying, labor-hungry sectors and occupations
such as certain retail and clerical work and part-time or
temporary work (e.g., on holidays). These jobs may not be
attractive to many elderly workers who once had well-paying
jobs. His position is that the Age Discrimination in Employment
Act (ADEA), shortages of younger workers, and SSA policies to
encourage work will not be adequate to both get jobs for the
elderly and safe-guard their well-being. He suggests more
subsidized training and resources for older job searchers.
Labor Force Considerations: As noted above, the reason the
earliest eligibility age was lowered from 65 to 62 was due to a
lack of jobs and the large number of unemployed. However,
because of today's booming economy and low levels of
unemployment, this might not be as great a concern. In fact, if
the Social Security retirement age is not changed, Social
Security actuaries predict that the rate of increase in the
labor force will continue to decline dramatically to less than
1% when the baby boom starts retiring. By 2008 it will be less
than the annual increase in the population for the first time
since 1960 (see chart). This could lower unemployment levels
(something which may have already started happening). The lack
of workers (i.e., supply) could push wages up, unless
individuals become much more productive or unless we get more
workers from other countries or can convince our older workers
to remain in the job market. Employers may want to keep their
older employees (at least part time). However, these good
economic times may not last forever, so the rules need to work
in times when unemployment isn't low.
Kinds of Jobs: Today's economy is more service-oriented
(and less in need of heavy physical labor) than in 1940, which
makes it easier for older individuals to work. Factors working
in the other direction, however, include the rapid pace of
change which makes it more difficult for older workers to keep
up. (Training may not pay off if the worker might retire soon.)
This may be particularly true of the many jobs in the high tech
industry. These jobs are less physical, but they also change
Part-Time Work and Phased Retirement: One way to help older
employees to keep working would be to provide more part-time
opportunities for them as they phase-out to retirement.
However, many employers don't find part-time jobs very
efficient, especially if they incur the same fixed overhead and
benefit costs. It is also difficult to decrease an employee's
pay by a substantial amount. One way to make this easier
however, would be for Social Security to allow workers over age
65 to declare that they are switching to half-time, and request
half of their Social Security benefit. Then it would be easier
to pay them less. The federal retirement plans already do this.
This declaration could replace the earnings or retirement test
and be done in a way that is actuarially neutral to Social
Security. \11\ Essentially, this would be giving people more
choice. People would choose their own retirement age and how to
phase it in, and not Social Security through the earnings test,
which people dislike. It would also bring in more payroll taxes
than if the worker completely retired. Allowing employer
pension plans to pay a partial pension while they are still
working (in service benefit) would be important for consistency
purposes too. Mechanisms would be needed to make sure that an
employee's pension benefit is not hurt by low wages in their
final years of employment (such as annualization of pay or
\11\ For example, if a retiree receives 50% of his/her Social
Security benefits, then the actuarial reduction (or actuarial increase)
applicable at the commencement of the remaining half of their benefit
would apply only to the remaining half of the benefit.
Effects on Employers
Increasing Social Security's Normal Retirement Age will keep FICA
taxes down, which employers will like. However, it may put more
reliance for retirement benefits on the private pension system--
employers and employees. Thus, employers with retirement plans may end
up paying for the Social Security fix anyway, through higher pension
contributions.\12\ Employers without pension plans will get off free,
unless their employees use this as a chance to demand a plan.
\12\ Social Security Offset plans (and plans with temporary
supplements to the Social Security NRA will automatically get more
expensive, unless employers amend them.
Alternatively, if employers don't improve their pension benefits,
employees may end up working longer (if they can). An older work force
will increase employer costs for other employee benefits (such as
employee health, disability, life insurance, annual and sick leave) by
as much as $10,000 per older employee that could have been replaced by
a younger employee.\13\ If employers don't want an older work force and
the associated costs, they can lay off the older employees (always a
difficult thing to do) or encourage them to retire by improving the
company pension plan, which also will be costly.
\13\ Retaining older employees could decrease post-retirement
health costs, but this would be offset to the extent that Medicare also
increases its retirement age. Pension costs could also decrease for
employees over the Normal Retirement Age (unless actuarial increases
are provided along with accruals).
Due to a huge increase in the number of retirements that will occur
early in the next century, unemployment will probably continue to
recede. When the labor force decreases in size (i.e., low supply),
wages tend to increase. This could occur unless each worker becomes
much more productive, or foreign workers are used. Later retirement
ages (normal and earliest) in Social Security and employer pension
plans could help reduce this concern. Employers may want to rethink
their retirement strategies and encourage employees to stay on (at
least part-time). Phased retirement may become popular, but IRS
regulations \14\ would need to be revised to allow in-service
distributions to be payable before a pension plan's Normal Retirement
Age. In addition, it is quite difficult for employers to increase their
Retirement Ages in tandem with Social Security, unless pension law
allows higher normal retirement ages than age 65 and relaxes the rules
against decreasing benefits.\15\ Otherwise, employers will have to
calculate 2 separate pension amounts for service before and after each
change in the retirement age. This will be very complex. It appears
that Congress can increase Social Security retirement ages the easy
way, but they won't allow employers to. Finally, decreased Social
Security benefits could necessitate changing the nondiscrimination
rules to reduce the disparity in benefits.
\14\ For example, Sec. 1.401-1(b)(1)(i) requires that retirement
plans be exclusively for retirement and other incidentals.
\15\ See the definition of Normal Retirement Age (65 & 5) in
Sec. 411(a)(8), the maximum distribution age of 70\1/2\ for owners in
Sec. 401(a)(9), the anti-cutback rule in Sec. 411(d)(6), and the
commencement rules (65 & 10) in Sec. 401(a)(14).
Effects on the Social Security System
Increasing the Normal Retirement Age would significantly
reduce Social Security's long-term deficit and could add
additional years of solvency to the trust fund. For example,
gradually increasing the NRA to age 70 would solve about half
of its financial problems. Increasing the NRA to age 73 would
nearly eliminate the deficit.
Increasing the earliest retirement age would reduce outlays
(creating more surplus) in the years that it is implemented. It
would also solve about 10% of the long-term deficit. This
occurs even though the early retirement reductions are
actuarially equivalent,\16\ because they only compensate for
the fact that the recipient gets the benefits for more years.
It doesn't compensate for the fact that Social Security will
get tax contributions for fewer years.\17\ This is particularly
significant if the NRA moves to age 70 and the Earliest remains
\16\ Social Security's actuarial reductions are somewhat liberal
when interest rates are high.
\17\ One way to remedy this is to determine average earnings over
40 years instead of over 35 years, as is currently done. However,
Congress might want to allow drop out years for years of pregnancy and
child care. There is already a rule for this in certain disability
Indexing the Normal Retirement Age to increases in
longevity (for example, by 1 month every year or two) would
keep the system from going out of balance due to longer life
spans. Then Congress wouldn't have to continually readdress
this painful issue of fixing Social Security every 20 years,
unless the economy went sour or birth rates decreased
Medicare, on the other hand, is not helped as much by an
increase in its Retirement Age. For example, age 70 would
reduce Medicare's deficit by only 0.3% of payroll or about 15%
of its long-term deficit (Hospital Insurance only). This is
because (1) disabled people would continue to get the Medicare
benefits anyway and (2) most of HI's expenses are at very old
ages. This also points out, however, that most of us are quite
healthy between the ages of 65 and 70. Changing just Social
Security's NRA to 70 (and not Medicare's) would also help HI's
deficit, because Medicare is a secondary payer to employee
health plans), but it would be less than the 15% solution cited
All the above changes also encourage people to work longer.
If the right jobs are available, this could increase the
nation's productivity. This in turn increases both FIT and
FICA/SECA taxes, which is good for government and can help us
either lower taxes or improve other government programs.
What Should the Normal Retirement Age Be?
The last question is ``If we do increase the retirement
age, what should it be?'' Here are some choices.
Keep the NRA at age 65. It might be easier to understand
this question if we look at extremes. Suppose for example that
we lived on average to age 110. If the NRA stayed at age 65, we
would receive benefits for 45 years on average, or as many
years as we worked. Dependency ratios could be around one (1)
worker per beneficiary, which is much worse than today. Thus,
the system would be very expensive. In addition, indexed life
annuities at age 65 might cost 90% more than they do today.
Thus, a funded system would also be very expensive, because we
would have to save 90% more over the same 45 year working
lifetime to get the same replacement ratios. It's easy to see
the financial difficulties with keeping the retirement age
fixed at 65 forever.
Pay Benefits for the Same Number of Years. Thus, one might
consider indexing the retirement age, just like we now index
the initial benefit to productivity levels at retirement. One
way to do it would be for Social Security to provide benefits
for the same number of years (i.e., keep the life expectancy at
NRA the same). When Social Security was created, life
expectancies at 65 were about 12.7 years.\18\ If we used this
method, the NRA would be around age 72 today. It would have
gone up 7 years in 6 decades. In that case, the ratio of
workers to beneficiaries would continually go up and thus the
costs of our unfunded system would generally decline under this
suggestion. Similarly, in a funded system, the costs of buying
the indexed annuity would remain the same. However, since it
can now be funded over 7 more years (i.e., ages 65 to 72), the
annual amount that needs to be saved would continually
\18\ The Trustees' report uses composite life expectancies based
solely on the death rates for the year in question. Actual life
expectancies (with an assumed mortality improvement) for people living
in that year might be more appropriate, especially in a funded system.
Keep the ratio of years in retirement to the working
lifetime the same. Another way to index the retirement age
would be to determine the age that maintains the same ratio of
retirement years to working years. This could be accomplished
in several ways. One example would be to divide the life
expectancy at NRA by the potential years worked (e.g., the
years from age 20 to 65). This would be a compromise between
freezing the NRA at 65 (which would dramatically increase
costs) and freezing the life expectancy at NRA (which could
dramatically decrease costs). In fact, it was recommended by a
majority of the members of the 1983 National Commission on
Social Security Reform. This idea could stabilize the costs of
the system and it wouldn't go out of balance every year as
another deficit year was added to the 75-year projection. If
this idea had been used since the creation of Social Security,
the NRA would be age 70 now. This is an easy calculation.
However, it doesn't reflect whether our health is continuing to
improve also. This could be handled by using a health index.
For example, we could look at the disablement rates (or some
sort of health index) at the NRA and prohibit an increase if
the rates (or index) were getting worse. However, this has
problems. A health index could be quite subjective and it could
trap us into setting different Retirement Ages for men and
women, and for different worker classifications, minorities, or
income levels. Multiple retirement ages and provisions are some
of the reasons the Chilean and other foreign systems were
collapsing, so we may not want to open that Pandora's box.
Maintain Same Cost Levels: Another method would be to use
the calculation of the NRA to maintain a level cost for the
system. Other similar methods would be to maintain the same
dependency ratio of workers to retirees. In a funded system, it
would require an actuarial calculation to maintain the same
contribution or savings rate for each person. However, these
methods entail a much more difficult calculation, and it would
depend on many different assumptions about the future. For
example, it could mean that the NRA could go up even if we
weren't living longer--for example, if fertility rates declined
or if the economy got worse. That might not be appropriate. In
fact, it might be more appropriate for those variables to
affect the tax rates. For example, if national birth rates
decline, then maybe we should contribute more, not raise the
\19\ Congress could index the system now, or wait until the
problems occur. If they decided to index, there would need to be rules
on how big the problem would have to be before change occurred, and how
to phase it in gradually. Changes could be subject to an override by
Congress and would need a cap on how much change could occur and how
often a change could occur. There are many issues which would have to
be worked out on this.
Raising the retirement age is a difficult decision and
gives us much to consider. We can't move ahead with it unless
the people understand Social Security's financial problems and
the effects of increasing the Retirement Age. It seems like an
obvious fix since people are living so much longer. However, if
raising the retirement age does not work because (1) many
elderly people can't work longer (because of health reasons or
mental inability), or (2) a huge percent just end up with
disability benefits, or (3) the elderly can't get a job for
lack of demand, or (4) because people perceive too little value
for their contributions, then we will need to find other ways
to fix Social Security. Whether privatization or focusing more
benefits on low income workers (and reducing benefits for
higher income workers) will solve the problem is unclear. What
is clear however, is that Social Security will cost us a lot
more if we cannot increase the retirement age (or decrease
benefits). We would suggest that Congress use 1998 to educate
the public and sufficiently consider all of the ramifications
of any possible solution. Once again we commend the
subcommittee for taking a leading role in educating the public
on a very complex, but important topic.
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Chairman Bunning. Thank you very much.
I'd like, since we have another panel to follow, and some
of us have other places to be, Dr. Burkhauser, in your
testimony, you seem the most convinced, out of all our
panelists today, that not only is it possible for Social
Security policy to encourage workers to stay in the work force
longer, but that changes in the public policy in a strong
economy have already ended the trend toward early retirement.
At least that's what I heard you say.
Would you provide more details as to how you reached this
conclusion? And do your conclusions differ based on specific
cohorts by gender or by ethnic background?
Mr. Burkhauser. These aren't my statistics. These come from
the Current Population Survey, which looks at the labor force
participation rates of men and women by age group. If you go
through some of the tables in my formal statement, you'll see
that, since 1985, the trend toward lower labor force
participation rates, which had gone on since the fifties, has
stopped, and in fact in certain age groups over the age of 62
they actually increase. For women, that's happening mainly
because labor force participation rates of younger women are
rising, and therefore, there are more women in the labor force
in their fifties. For men, I believe it's occurring because men
are not so much staying longer at their career jobs, but are
working in a new job after they've left their career jobs.
The evidence is now very strong that this trend toward
earlier and earlier retirement is over, and it's in part due to
the 1983 Social Security Amendments which have reduced a lot of
the biases in the Social Security system against working at
older ages. Congress has raised the actuarial adjustment after
age 65. You've also raised the earnings test amounts, and these
signals that work will be rewarded have been picked up. Older
people are working more because of them.
Chairman Bunning. Do you think the employer also adjusts?
Mr. Burkhauser. I think that employers are very sensitive
to the rules of the game. For instance, a few years ago, to
save some money, Congress changed the way that Medicare
payments were paid. Medicare used to be the first provider of
health insurance for older people. To save some money for the
government, Congress made private employers the first payer. If
you look at where the jobs are increasing for older people,
they're mostly in companies that don't have health insurance
because in those companies, whether you're old or young doesn't
make any difference. If you wanted to do something about
allowing older workers to stay longer in the workplace, go back
to making Medicare the first provider of health care. Don't
penalize workers by lowering the value of their Medicare
protection because they want to work.
Mr. Bernstein. Mr. Bunning, may I comment on that? I agree
with that. It's in my prepared testimony, that the Medicare
requirement's not only for retirees, but for their dependents,
create a hurdle for the continued employment of older people.
Chairman Bunning. Under a program where the employer
furnished medical benefits?
Mr. Bernstein. That's correct.
Chairman Bunning. OK.
Mr. Bernstein. I would point out also that Social Security
probably plays a much more minor role than private pensions do.
That's the import of the data presented by Dr. Burkhauser.
Footnote 3 of his statement, he says, ``Unless major changes
take place in employer pensions, these changes alone in Social
Security will have only a minor effect on employment.''
Mr. Gebhardtsbauer. Mr. Chairman, I was just wondering if I
could add one thing. Employer pension plans right now often
have used 65 as the age for retirement, and the laws in the
pension law right now make it very difficult to increase that.
Congress has increased Social Security's retirement age to 67,
but it's more difficult for employers to do something like that
now. And you might consider some consistency there in allowing
employers to do the same thing.
Chairman Bunning. Most employers set that as the normal
retirement age, but they allow you to take early retirement,
just like Social Security, with a lesser pension or a lesser
program actuarially from the 65 years. The buyouts and things
that are being offered by major corporations are trying to get
people to age 65, generally speaking.
Mr. Bernstein. Frequently, though, when they permit people
to go out, to retire before age 65, it's without actuarial
Chairman Bunning. Well, as an incentive to get them out.
Mr. Bernstein. No, as a regular proposition.
Chairman Bunning. I haven't run into many of those people.
Mr. Portman. I want to thank the panelists. I have a lot of
questions, but I'm really intrigued by this notion that was
raised by Mr. Gebhardtsbauer at the end about part-time work
and phased retirement and getting back to the earnings limit
discussion that we started to have earlier with the
I've read your testimony on it, and I've heard what you
have to say. You've obviously given this some thought, and I
think it would be helpful to the Subcommittee if you would
flesh it out even further.
But I think what you're saying--and correct me if I'm
wrong--is that, particularly as we get beyond this 2008
crossing of the lines where there will be more encouragement
naturally among employers to keep older workers and to provide
opportunities for them, is to allow people to take a part of
their benefit, maybe half of their Social Security benefit, and
continue to work. In essence, that would replace the earnings
limit. It would have an impact similar to the earnings limit,
but not as onerous, because they could still get half their
Social Security benefit. So, in essence, the benefit would be
postponed, but they'd be working part time.
What would the impact be on the Social Security system?
Have you analyzed that?
Mr. Gebhardtsbauer. OK, thank you for asking. By the way,
the reason why I came up with this idea, or some of us came up
with the idea initially, was regarding choice. In the
individual account area you have more choice in your retirement
age than in the Social Security area. I thought, well, what's
the concern there? I realized, oh, it's the earnings test.
That's sort of Social Security telling you when you really are
retiring. If you're earning some money, then you really
haven't, so they deduct something from your benefits.
Mr. Portman. I guess one of the intriguing parts about it--
it does give older Americans more choice.
Mr. Gebhardtsbauer. Right.
Mr. Portman. Many, perhaps, as Mr. Bernstein was saying
earlier, don't feel they, in fact, have.
Mr. Gebhardtsbauer. In addition, as you point out, if we
get to the point where employers want more labor, they may use
this idea to keep their part-time employees, because, as we
mentioned earlier, it's more expensive to have them, but if you
can reduce their pay, then the expense doesn't go up. So it
helps you keep people around working, but the payroll doesn't
continue to go up, and have all these more expensive benefits.
Finally, how would you do it? You said it pretty clearly.
Like the Federal plan, for instance, a retiree can come back to
work and work, say, 60 percent, 3 days a week and get 40
percent of their Federal benefits.
And, finally, the effect on Social Security, right now
we've talked about how you have a delayed retirement credit.
It's sort of an actuarial increase. If you work longer and
don't get a benefit, then your benefit is much larger when you
actually do get the benefit. So by getting the benefit now,
you're getting less. So in the long run, it's about the same
amount of money if the actuarial reduction is about right or if
the actuarial increase is about right.
There are a couple of other concerns, and I wanted to
mention them earlier. And one is that there are other reasons
why you improve your benefit, if you continue to work, and that
is, you continue to improve your 35-year average salary. But
after a certain point, after you've gotten 35 years, it doesn't
really help you that much. So you might want to consider
changing that to make it more cost neutral to Social Security,
so that it becomes something like a 40-year average instead of
a 35-year average. That would make it even more cost neutral.
But initially, you would have the problem that more people
would be getting benefits now, and so cashwise up front and
short term it is a little bit more expensive. But in the long
run, it's cost neutral to Social Security.
Mr. Portman. Because of the fact they would be paying in
during that period as well, and not taking the benefit as soon?
Mr. Gebhardtsbauer. Right.
Mr. Portman. Dr. Myers.
Mr. Myers. With regard to the suggestion that the
computational period ought to be extended and be longer than 35
years and go up to 40 years, I think this would be very
undesirable because it would primarily affect women workers,
because they have enough trouble getting 35 years, of covered
employment, considering that many of them are homemakers for a
while. So I think increasing the averaging period would be a
step in the wrong direction.
Mr. Gebhardtsbauer. I have something in my testimony that
speaks to that, because that's a very good point. What you
would do is you would have dropout years for women for child
care, for reasons like that, you drop out the years. So instead
of having 40, they would get 40 minus 5, or 35, if they had 5
years of child care and pregnancy. In fact, that's already done
in the disability area a little bit. So it's not something that
would be impossible to do.
Mr. Burkhauser. You should be careful about whether it
affects homemakers, though. Most homemakers are married. Their
benefits are based primarily on their husband's earnings, not
on theirs. What they pay into the system, They often get no
additional benefits out of what they pay into the system, and
there are almost no women whose survivors' benefits are based
on their own contributions; almost they are based solely on
Mr. Gebhardtsbauer. And that's another area where you
should be looking into making changes to the system.
Mr. Portman. I'm making a general comment. I think what we
talked about today in terms of the earnings limit and its
replacement by something like this has a lot of potential, and
obviously it has an impact on pension policies, you said, and I
agree with you on the age 65 and the pension policy. That's
quite controversial, and we need to be sure it was done in
concert with these other things.
In Medicare, as you said--it reminds me a little bit of the
welfare debate. To get people to work and to encourage people
to work, it needs to be looked at at a much broader context. So
I hope that you can provide some more information on that, and
other panelists as well.
I'm going to ask one final question, and I'm going to put
it out on the table here at the start, Mr. Chairman. I'm 42.
Can we go through the panel here--is this a privacy matter that
we shouldn't get into? Dr. Myers, can you tell us your age?
Mr. Myers. Yes, 85.
Mr. Portman. Eighty-five?
Mr. Bernstein. Next month I'll be 75.
Mr. Portman. Seventy-five. You're 85 and 75. I want to
commend you both for your excellent testimony today.
Dr. Burkhauser, you called yourself a baby boomer.
Mr. Burkhauser. Fifty-two.
Mr. Portman. Fifty-two--we'll let you in on the edge.
Mr. Burkhauser. OK.
Mr. Gebhardtsbauer. And I'm in the middle of the baby boom;
Mr. Portman. All right, thank you, Mr. Chairman. Thank you,
Chairman Bunning. Gentlemen on this panel, I want to make
sure you understand that we may submit further questions in
writing to you, since we have another panel following you.
Thank you for your testimony.
[Questions were submitted by Chairman Bunning to Mr. Myers.
The questions and responses follow:]
Question 1. In your testimony you say that you believe that as
people live longer, they should and will be able to work longer. Thus
the definition of retirement age should be a dynamic one. Yet, Dr.
Myers, we know that last year three/fourth of those who retired,
retired early. Do you see it as the Congress's job to require people to
stay in the workforce? While older individuals may in fact want to stay
in the workforce, how can we be sure that employers will make jobs
The first question relates to my belief that, as people live
longer, they should and will be able to work longer. I fully realize
that, currently, most people retire early and that, in the future, they
may wish to also do so. However, the Social Security program and its
financing should not be an undue burden on the working population, and
its costs should not be excessive because of people's early retirement.
If people wish to retire early, they should finance it themselves.
Question 2. You mention that current law provides just over a 10-
year plateau at age 66 before the retirement age begins gradually
moving up again to reach 67. Would you provide more details as to why
the law provides for this plateau?
The second question relates to the 10-year plateau in the full-
benefits retirement age when it first reaches age 66. This was done in
the 1983 Act, rather than going continuously up to age 67, because the
latter course of action would have produced a significant estimated
positive long-range actuarial balance (or surplus), and the intention
underlying the legislation was to have a very close to zero actuarial
Question 3. You propose eliminating the plateau in current law, and
also continuing increasing the retirement age by two months for each
year of birth indefinitely into the future. You also advocate for
raising the early retirement ago once the normal retirement age hits
67, so that it is always 5 years lower than the normal retirement ago.
The remainder of the long-term deficit in your view, could be made up
by what you consider ``noncontroversial'' changes such a covering all
new State and local government employees, making the provisions for
income-taxing benefits the same as are applicable to pensions, and
correcting the consumer price index. Most, if not all of these
``fixes'' are controversial, and translate into real benefit cuts for
our young people today. Do you have any suggestions for program changes
that would be embraced by young people?
The third question relates to what I referred to as
``noncontroversial'' changes. I used this phrase because all such
changes were agreed to unanimously by the recent Advisory Council on
Social Security. I believe that these changes are reasonable and are
fair to young people. As to changes which would be embraced by young
people, within the context of the present program, most persons like
neither benefit-cost reductions or tax increases, and yet one or the
other (or both) seem to be needed.
Question 4. I'm interested in knowing your views on the degree to
which age discrimination may ultimately prevent increased participation
of older workers in the work force.
The fourth question relates to possible age discrimination
ultimately preventing the increased participation of older workers in
the work force as the full-benefits retirement age is increased.
Because such increase is very gradual, I believe that, in one way or
another, such discrimination will not occur, as the country (and
especially the employers) realize that this should not occur, in the
best interest of all concerned.
Question 5. Will there be enough jobs for older workers, jobs with
the level of physical activity that most persons over age 67 can
The fifth question relates to whether there will be enough jobs for
older workers, considering the level of physical activity which they
will have. I believe that, as in the past, there will be fewer and
fewer jobs requiring a high level of physical activity. Even more
importantly, I think that, as longevity increases, so too will the
ability to do physical activity at any particular age (e.g., in the
distant future, a person aged 70 will have at least as much ability to
do physical activity as can a person aged 65 today).
Question 6. Do you have thoughts on how the increasing number of
older workers might impact rates of unemployment, job opportunities,
and career advancement for younger workers?
The sixth question relates to whether the increasing number of
older workers might impact rates of unemployment, job opportunities,
and career advancement for younger workers. Considering that the
relative (but not necessarily, absolute) number of younger workers will
decrease over the long run, I believe that a gradual increase in the
number of older workers as the full-benefit retirement age rises, would
likely work out equitably for both younger and older workers.
Obviously, if older workers tend to continue retiring at age 65 (or
even earlier), this would be more favorable job-wise for younger
workers (although they would have to pay more, directly or indirectly,
for the support of the aged population). However, I think that a good
and equitable balance as to employment conditions would develop as
between younger and older workers.
[Questions were submitted by Chairman Bunning to Mr.
Gebhardtsbauer. The questions and responses follow:]
1. In your testimony, you discuss the importance, when increasing
the retirement age of avoiding any sudden decline in benefits, and
therefore avoiding a ``notch.'' How was this avoided in the 1983
amendments and how can we be sure to avoid it in the future, should an
increase in the retirement age occur?
There were many changes in the 1983 amendments that did not
decrease benefits and thus avoided the notch problem. However, it did
increase the Normal Retirement Age (NRA), or age for full benefits,
which could be perceived as a decrease in benefits, if someone still
takes their benefit at the same age. As I stated in my testimony
(including footnote 1), if someone born in say 1938 ``still retires at
age 65, their retirement benefit will be about 1% lower \1\ than if the
Normal Retirement Age had remained at age 65. If the NRA had increased
to age 66 all in one year, benefits would have dropped immediately by
about 7%. This large decrease would be similar to the notch baby
benefit decreases which caused much alarm among the elderly in the
1980's. Phasing in the increase in retirement age over 6 years from
2000 to 2005 avoids this problem.'' As I stated in my footnote, when
wage increases exceed the CPI, it reduces (and can eliminate) the size
of the notch. By a notch, I mean someone getting a benefit in early
January that is less than a similar person (born a week earlier)
retiring in late December of the prior year. In addition, the change
was delayed until the year 2000, so not much fuss was made over this
change in 1983. It only affected people who were age 45 or younger at
the time. That was probably more than enough lead time back then.
\1\ Since people born in 1938 get their wages indexed one more year
than people born in 1937 (and one less COLA), there is little
likelihood that a notch will occur (assuming the wage index for 1997
wages will be more than the COLA in 1999). Even a 4 year phase-in would
probably not create a noticeable notch.
Some people do not consider increasing the retirement age as a
decrease in benefits because we are living longer. They would contend
that future retirees will live longer than current retirees, and thus
get benefits for just as many (or more) years. In town hall meetings
across the country sponsored by Americans Discuss Social Security and
the Pew Charitable Trusts, we have found that people don't categorize
``Increasing the Retirement Age'' with benefit decreases. In
electronically-taken votes, people ranked the 3 major benefit decreases
(benefit decreases across the board, reduced COLAs, and increased taxes
on Social Security benefits) at the bottom of 10 options, while ranking
``Increase the Retirement Age'' at 3rd from the top. See chart showing
rankings at the forums.
Thus, ways to avoid the notch problem are to:
(a) Phase-in each one-year increase in Normal Retirement Age over 6
years (4 years might be enough, if wage increases are expected to
exceed the CPI by more than 1%), and
(b) Delay its effective date (so that near-retirees who are already
planning their retirement are not affected).
Other ways, of course, are to not decrease benefits directly (e.g.,
increase payroll taxes, increase coverage, increase taxes on benefits,
delay or reduce COLA's, or decrease the benefits of a small group,
2. What are the advantages to creating a minimum benefit level
through Social Security reform and how would that work? What are the
advantages and disadvantages?
We will respond to this question, by analyzing the proposal for a
minimum benefit equal to 100% of the poverty level from the National
Commission for Retirement Policy (Center for Strategic and
Minimum Benefit would offset benefit decreases to low paid: Under
the CSIS/NCRP proposal, Social Security would provide a minimum benefit
equal to 100% of the poverty level (currently almost $8,000 per year),
beginning in 2010. This would offset to some degree changes in their
proposal that decrease benefits (e.g., Increasing the Normal Retirement
Age (NRA), using more years in Average Indexed Monthly Earnings (AIME),
BLS reductions in the CPI that is used for indexing benefits, reducing
survivor benefits, reducing the benefit formula, no mandatory
annuitization or pre-retirement withdrawal restrictions \2\).
\2\ It was unclear whether CSIS/NCRP mandated annuitization of
their Individual Security Accounts or restricted pre-retirement
Cost: Of course, a minimum benefit also increases costs, but
probably not as much as expected, due to the progressive nature of the
benefit formula and subsidies in spousal benefits.\3\ It would reduce
the costs of the Supplemental Security Income (SSI) program.
\3\ The CSIS/NCRP proposal for a minimum benefit equal to the
poverty level could also have been deceptively less expensive, since
poverty levels may only increase with inflation. However, it appears
that they did not take the easy (less expensive) choice. Their initial
minimum benefit is wage-indexed after 2010. This implies that
productivity gains in the economy will be shared with all retirees (at
the point of their retirement), including low income ones. After
retirement, their benefit would increase with just inflation, like
other retirees' benefits.
Disincentives to Work: Flat minimum benefits can create a
disincentive to work, once their eligibility rules have been satisfied.
(After that point, the marginal money's worth can drop to zero for
awhile.) The NCRP proposal reduces this concern by phasing the minimum
benefit in over 40 years of work.\4\ Thus, the more years worked, the
greater the benefit. Under their proposal, the 60% of poverty benefit
after 20 years of work would phase into 100% after 40 years of work. A
low income person would have some disincentives to work (or report
income or pay taxes) after 40 years of service, which could be reached
by someone age 58. If the formula was 2 % times the number of years
worked, the incentive to work would continue beyond 40 years of work.
Someone with 50 years of work would then get 125% of poverty level.
This approach may not increase costs much. If you want to preserve the
60% after 20 years of work, the formula could use 3% times the first 20
years worked. Under this formula, someone with 50 years of work would
get 120% of the poverty level. The costs should not be much different.
\4\ This would need to be defined. It could be say 15% of the wage
base. Once reached, some might stop working.
Some will not receive the full poverty level benefit: In order to
have incentives for working, some people (who cannot work the full 40
years) will not receive the 100% poverty benefit. Therefore, the NCRP
proposal's benefit reductions will create some inadequate benefits for
some people. The government may have to pay them public assistance,
which means government may have to pay the costs anyway. Furthermore,
without a full poverty benefit, a proposal may then have to mandate
annuitization of the Individual Accounts.
No Minimum for 19 years of work or less: The NCRP proposal creates
a large cliff at 20 years of work, below which, a worker would get no
minimum benefit. Providing proportionately lower benefits for workers
with less than 20 years of work should not cost much. The benefit would
be inadequate of course, but so is the benefit after 21 years (equal to
62% of poverty level). We are unaware of any concern, abuse, or moral
hazard that minimum benefits would cause for people with short work
histories. Eliminating the 20-year requirement would be simpler,
provide benefits proportional to years that contributions were made,
and not have any cliff effect, which would primarily affect low-paid
immigrants and women who care for children. In fact, lowering the 20-
year requirement could create incentives for people with short work
histories to work more.
Early Retirement Reductions: If the minimum poverty level benefit
is not reduced by early retirement reduction factors (and increased by
delayed retirement factors) just like other PIA benefits, there will be
a strong incentive to retire when first eligible. If it is reduced,
then the benefit payable before NRA will be less than the poverty level
(e.g., it would be 30% less in 2029 when the NRA reaches 70 for someone
retiring at age 65). If the minimum benefit was set at 150% of poverty
levels at the NRA then the age 65 ERA benefit would be at least 100% of
poverty level. The benefit could reach 150% at age 70, if the formula
was 3% times years worked (e.g., 3% x 50 years of work = 150%).
Disability Benefit: Under the NCRP proposal, it is unclear whether
an individual receiving the disability benefit would get the minimum.
If yes, and if total income exceeded income while working, there would
be little incentive for rehabilitation and returning to work. Current
rules limit disability benefits so that total income is less than 80%
of average earnings, and that could help allay this concern if applied
Spouse Benefits: Should the dependent spouse of a worker receive
the full poverty minimum? If yes, then the couple will receive more
than the poverty level for a couple. If the spouse receives 33% of the
poverty level, it will be closer to the poverty level for a couple.
Also, we assume that the surviving spouse will also receive the minimum
poverty benefit because very elderly single women have the highest
poverty levels among the elderly.
Minimum could be a windfall: The minimum could provide an
individual with a benefit that is larger than recent salary amounts for
the person, and thus could encourage them to retire. Having a maximum
equal to the worker's Highest 5 year salary average (or something
similar to the disability maximum) would reduce this problem.
3. Can Americans be encouraged to work longer? (and how?)
Retirement policy is one way to affect American's retirement
decisions. Here are some ideas:
Retirement Ages May Be Increasing: Recently, labor force
participation rates (see charts) have increased, possibly due to (for
example) a relaxation of the Social Security retirement earnings
test.\5\ This also shows that some people can work at age 70. In
addition, 401(k) plans don't subsidize pensions at younger retirement
ages, like traditional retirement plans. If 401(k) participants want to
retire early, they have to suffer the full actuarial reduction. This
may force many people to work longer in the future.
\5\ Workers over 70 can now earn a wage and not have their Social
Security benefit reduced.
Delayed Retirement Ages or Reduced Benefits: The labor force charts
also show that Americans used to work to later retirement ages. The
average male worked to age 70 before Social Security and Medicare
(inter alia) inadvertently encouraged them to retire earlier. With not
only our life spans improving, but also our health improving,\6\ it
would be possible for most people to work longer. If Social Security,
SSI, Medicare, and Medicaid delayed or reduced benefits at younger
ages, people would be more likely to work longer in order to have a
secure retirement. Eliminating benefits at younger ages would have an
especially powerful effect. That's because many people may still take
reduced benefits at younger ages even if they are not adequate.
\6\ See Chronic disability trends in elderly US populations: 1982-
1994 by Manton, Corder, & Stallard. In 1982, 14.1% of elderly between
65 and 74 were IADL (Instrumental Activities of Daily Living) or ADL
impaired or institutionalized. In 1994 this decreased to 11.5%. For
ages 75 to 84, it dropped from 31.9% to 26.9%.
Decrease Social Security Benefits: Proposals to decrease Social
Security benefits may also encourage us to retire later. However, even
though they are similar to proposals that increase the NRA, they may
not register until too late. Most people don't know what their Social
Security benefit amount is, so decreasing it won't affect their
thinking now. Only when they reach age 65 will they realize how much
the benefits dropped. At that point, they will finally realize that
they have to work until a much later age. Thus, raising the retirement
age could be the more effective way of making changes to Social
Security. It is more likely to affect our thinking now than just
Relax or Eliminate Retirement Earnings Test: Another chart shows
how Social Security has a clear and direct impact on people's decision
to work. The chart shows that large numbers of older people work up to
the retirement earnings test exempt amounts and then stop. This not
only shows that Social Security affects our decisions, it also points
to another way for Social Security to encourage us to work--by
eliminating (or increasing) the retirement earnings test exempt
amounts. Social Security actuaries estimate that this would not hurt
the actuarial balance. However, it does increase cash outlays in the
35-Year Average Earnings: Another way is to modify the benefit
formula. Currently, many people commence benefits at age 62. That's
because, even though there is a 20% penalty for early retirement, the
Social Security PIA benefit is not improved much after a person has 35
years of work. Paying more contributions after 35 years of work does
not improve the benefit much. This could be changed by determining
average wages over say 40 years rather than 35 years (or NRA minus 20
minus 5 drop out years, which would automatically update it when NRA is
changed). However, this change could hurt women who leave the workforce
for children. This concern can be alleviated by allowing additional
drop out years for taking care of children up to age 5 for example. The
law already allows drop out years for women caring for children for
some disability calculations.
Allow/Encourage increased retirement ages in Private Sector Pension
Plans: The current Internal Revenue Code (IRC) still references age 65,
59, and 70 for various pension-related rules.\7\ (A couple IRC rules
reflect the new Social Security NRA, but not many.) These ages could be
updated, to encourage employers to raise the ages in their pension
plans. In addition, Congress changed the Social Security NRA without
protecting prior benefit promises. If Congress gave employers some
flexibility in this area, it might make it easier for employers to
increase retirement ages in their pension plans. This should be changed
only after careful study.
\7\ See the definition of Normal Retirement Age (65 & 5) in
411(a)(8), the maximum distribution age of 70 for owners in 401(a)(9),
the anti-cutback rule in 411(d)(6), and the commencement rules (65 &
10) in 401(a)(14).
Provide some flexibility to employers to encourage hiring older
workers: As I testified, older workers can cost more due to higher
health costs, etc. If Congress added some flexibility to the Age
Discrimination in Employment Act, so that total compensation costs for
older employees did not have to increase, then employers might be more
willing to hire and retain older workers. Rules making it easier to
have phased-retirement would also help. For example, IRS regulations
could be changed to allow in-service distributions to be payable before
a pension plans's NRA \8\ and partial Social Security benefits could be
paid to reflect an older person's phased retirement.
\8\ IRS reg 1.401-1(b)(1)(i) requires that retirement plans be
exclusively for retirement and other incidentals.
4. How is the Congress sending mixed signals about its policies on
retirement age and what issues are the most important for us to address
to ensure consistency?
Social Security is moving its retirement age to 67, but Medicare is
still 65. In addition, the federal laws for employer-sponsored pension
plans still use age 65. (Note: If Congress amended pension law to use
the same ages as Social Security, some companies might take advantage
of it. This could be a revenue raiser for the government, because
employer contributions could go down--or at least not go up.) Another
inconsistent signal is the requirement that IRA's and some certain
pension benefits begin their distributions by age 70 even if the
individual wants to continue to work. Raising the 70 would defer
government revenue however. You could also raise the 59 age for
earliest distributions, but that could discourage people from putting
money into IRAs and 401(k) plans, since it would lock the money up
longer. It would also be a revenue loser for the government.
5. What do you see as possible options for indexing the retirement
age and what are the advantages and disadvantages of each?
As provided in my written testimony, here are some choices.
Pay Benefits for the Same Number of Years. One way to index the NRA
would be for Social Security to provide benefits for the same number of
years (i.e., keep the life expectancy at NRA the same). When Social
Security was created, life expectancies at 65 were about 12.7 years
\9\. If we used this method, the NRA would be around age 72 today. It
would have gone up 7 years in 6 decades. (This figure is cited to show
what the effects would be if this had always been in law. If you change
the law now, you would probably not go back to the 1930's, but start
the change at a current or future date.)
\9\ The Trustees' report uses composite life expectancies based
solely on the death rates for the year in question. Actual life
expectancies (with an assumed mortality improvement) for people living
in that year might be more appropriate, especially in a funded system.
Under this method, the ratio of workers to beneficiaries would
continually go up and thus the costs of our unfunded system would
generally decline under this suggestion. Similarly, in a funded system,
the costs of buying the indexed annuity would remain the same. However,
since it can now be funded over 7 more years (i.e., ages 65 to 72), the
annual amount that needs to be saved would continually decrease.
Keep the ratio of years in retirement to the working lifetime the
same. Another way to index the retirement age would be to determine the
age that maintains the same ratio of retirement years to working years.
This could be accomplished in several ways. One example would be to
divide the life expectancy at NRA by the potential years worked (e.g.,
the years from age 20 to 65). This would be a compromise between
freezing the NRA at 65 (which would dramatically increase costs) and
freezing the life expectancy at NRA (which could dramatically decrease
costs). In fact, it was recommended by a majority of the members of the
1983 National Commission on Social Security Reform. This idea could
stabilize the costs of the system and it wouldn't go out of balance
every year as another deficit year was added to the 75-year projection.
If this idea had been used since the creation of Social Security, the
NRA would be age 70 now. This is an easy calculation. However, it
doesn't reflect whether our health is continuing to improve also. This
could be handled by using a health index. For example, we could look at
the disablement rates (or some sort of health index) at the NRA and
prohibit an increase if the rates (or index) were getting worse.
However, this has problems. A health index could be quite subjective
and it could trap us into setting different Retirement Ages for men and
women, and for different worker classifications, minorities, or income
levels. Multiple retirement ages and provisions are some of the reasons
the Chilean and other foreign systems were collapsing, so we may not
want to open that Pandora's box.
Maintain Same Cost Levels: Another method would be to use the
calculation of the NRA to maintain a level cost for the system. Other
similar methods would be to maintain the same dependency ratio of
workers to retirees. In a funded system, it would require an actuarial
calculation to maintain the same contribution or savings rate for each
person. However, these methods entail a much more difficult
calculation, and it would depend on many different assumptions about
the future. For example, it could mean that the NRA could go up even if
we weren't living longer--for example, if fertility rates declined or
if the economy got worse. That might not be appropriate. In fact, it
might be more appropriate for those variables to affect the tax rates.
For example, if national birth rates decline, then maybe we should
contribute more, not raise the retirement age.\10\
\10\ Congress could index the system now, or wait until the
problems occur. If they decided to index, there would need to be rules
on how big the problem would have to be before change occurred, and how
to phase it in gradually. Changes could be subject to an override by
Congress and would need a cap on how much change could occur and how
often a change could occur. There are many issues which would have to
be worked out on this.
NRA changes in law or updated by Social Security's Actuaries: The
law could specify the increase in the retirement age, as it does now.
Currently, the law stops the increases at age 67. If, as expected, we
continuing living longer, the system will go out of balance again. A
gradual increase in the retirement age would keep the system in balance
(which keeps the trust fund stable in the out years). Thus, some
proposals increase the NRA by 1 month every 2 years. Other proposals
increase it by as much as 2 months every year. One can use different
periods in the past (or in projections) to support either of these
indexing proposals (or something in between).
An alternative, would be to set the increase in law, but allow the
Social Security Actuaries to adjust it if and when life spans change
faster or slower than expected (within constraints set by Congress and
subject to their override). This would help Congress avoid reopening
the difficult debate on how to fix Social Security every 20 years or
so. However, some people might contend that it is not appropriate for a
non-elected individual (Social Security's Chief Actuary) or agency to
adjust something this important. (However, it should be noted that BLS
economists can affect the COLA amounts, and Canada has invested similar
powers in its government actuary.) Another concern is that people like
to know their NRA in advance. A response would be that Congress could
set constraints on the adjustments, so that no one over age 55 would be
6. I'm interested in knowing your views on the degree to which age
discrimination may ultimately prevent increased participation of older
workers in the work force.
An SSA publication by John Straka, The Demand for Older Workers,
asserts that employers that limit the number of older workers (or
reduce their earnings) do so for productivity and market efficiency
reasons and not for prejudicial discriminatory reasons. He bases this
on his theory that (ultimately) in an efficient market, people are paid
what they are worth. He also says that job opportunities for older
workers will be mostly confined to relatively low-paying, labor-hungry
sectors and occupations such as certain retail and clerical work and
part-time or temporary work (e.g., on holidays). These jobs may not be
attractive to many elderly workers who once had well-paying jobs. His
position is that the Age Discrimination in Employment Act (ADEA),
shortages of younger workers, and SSA policies to encourage work will
not be adequate to both get jobs for the elderly and safe-guard their
well-being. He suggests more subsidized training and resources for
older job searchers.
My expertise in this area is limited, so I will just discuss those
areas with which I am familiar. In my testimony I noted that in 10
years, employers may need more workers due to the start of the
retirement of the baby boomer generation. (See chart showing declines
in Increase in Labor Force.) This may already be happening.
Unemployment levels are decreasing dramatically, and this could
encourage the retention and hiring of older workers. Anecdotal evidence
is that many older workers that were laid off in the early 90's have
been rehired (at least on a part-time basis).
However, it is still true that the employee benefits of older
workers can cost more \11\ than for a younger employee. Unless
employers can offset this higher cost somewhere else, they may prefer
hiring anyone else that is cheaper (e.g., younger workers, aliens,
part-time older workers who don't have to get employee benefits, etc.).
Thus, ironically, Congress could decrease discrimination by relaxing
the Age Discrimination in Employment Act to allow, for example,
employers to offset salary increases by increases in an employees
\11\ Especially health costs, although the existence of a post-
retirement health plan or unreduced pension plan benefit can offset
this higher active employer health cost.
7. Will there be enough jobs for older workers, jobs with the level
of physical activity that most persons over age 67 can perform?
The issue of whether there will be enough jobs ultimately depends
on the nation's economy/productivity. However, as discussed above, the
retirement of the baby boomers (see chart) should dramatically increase
job opportunities in the first 30 years of the next century. However,
the question for older workers is not whether the jobs are there, but
whether they will get them. If as discussed in #6 above, it is not
efficient for an employer to hire the older worker, then the older
worker could lose out to younger workers, aliens, etc. Whether older
workers will be able to perform the jobs of the future is better
discussed by gerontologists, futurists, and others. Many will be,
especially now that our economy has more service-oriented jobs than
physically-arduous ones, especially if an older worker's knowledge is
valued. However, older blue collar workers will have to be trained for
the less physically demanding jobs. In addition, your decisions now on
the NRA will apply in future years, long after the baby boom retires.
Whether there will be enough jobs then, is difficult to predict.
8. Do you have thoughts on how the increasing number of older
workers might impact rates of unemployment, job opportunities, and
career advancement for younger workers?
The issues you note in these last 3 questions are all very
important and call for the expertise of many professionals in addition
to actuaries. Raising the retirement age and encouraging people to work
longer can increase unemployment and reduce job opportunities and
advancement for younger workers.
However, the aforementioned graph of increases in labor force shows
it is now lower than in any time on the graph (and soon will be less
than the increases in the total population for the first time since
1960). Thus, you could increase the NRA and still keep the labor force
increase below the increase in the population. In fact, you might ask
the Social Security actuaries to revise this forecast based on various
proposed changes to Social Security.
We want to thank you again for holding the hearing and inviting us
to testify. We are more than happy to answer further questions or meet
with you to discuss these and other items at any time.
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Chairman Bunning. The final panel today is Christopher
Bone, the chief actuary of the Actuarial Sciences Associates.
David Walker is a partner and global managing director with the
international accounting and consulting firm of Arthur
Andersen, and David Smith is the director of the AFL-CIO Public
Mr. Bone, would you please begin?
STATEMENT OF CHRISTOPHER M. BONE, CHIEF ACTUARY, ACTUARIAL
SCIENCES ASSOCIATES, AT&T, SOMERSET, NEW JERSEY
Mr. Bone. Mr. Chairman, Members of the Subcommittee, thank
you for your invitation to appear. In your opening remarks and
in the last panel, we heard about the important of coordination
of Social Security changes with other plans. We welcome the
Subcommittee's emphasis on Social Security as part of an
integrated U.S. retirement income system.
Numerous observers have called for Congress to act soon on
changes to Social Security to enable workers sufficient time to
plan for retirement. An integral part of the planning process
will be undertaken not solely by workers, but by employers that
sponsor retirement plans. In choosing amongst alternative
reforms in the near future, it is imperative that the
Subcommittee consider the role of voluntary, employer-sponsored
retirement plans and the impact of Social Security reform on
those plans. Failure to do may result in significant disruption
to the private retirement system, and the possible loss of
valuable retirement benefits to millions of workers.
I'll focus the remainder of this discussion on employer
reactions and issues around raising the Social Security
retirement age. First, none of the proposals that would change
the retirement age would do so sufficiently to cure Social
Security's ills singlehandedly. Thus, in evaluating any
proposals to raise retirement age, and their impact on the
system, it's important to evaluate them as part of a package
and to review the alternative reforms that could be paired with
these types of changes.
Employers' responses to Social Security changes will be
made in the context of, at least as far as designing retirement
systems, the changes to the retirement plan that further their
business and work force goals. As we saw in the last session,
as labor markets change, it is to be anticipated that employers
will react to those changes in the labor force and design plans
that are tailored to attract and retain employees at those
To look at how a change in this proposal would affect the
private retirement system would require you to look at how
different types of current plans would be affected and how
those changes would change the employer's ability to meet
business objects. Thus, if we see changes in the demographics,
we can anticipate that employers will react to those changes in
the demographics at the same time, or perhaps at a later point,
than public policy reacts to them under Social Security.
The specifics of how employers are likely to react is work
that is yet undone. Employers are interested in the different
alternatives. Researchers are interested. One way to look at
this is to say, what would cause a disruption in the private
sector system? Disruptions are likely to occur if the amount
and incidence of the cost to the sponsor changes significantly
or if there is a sudden and sharp change in the behavior of
To the extent that proposals to increase Social Security
retirement age are based on an accurate scenario of the future
that reflects the availability of a productive work force,
employers will respond to the same trends by raising retirement
ages in tandem with Social Security. If changes in the
retirement age reflect changes in labor pools, changes may be
anticipated to have relatively small effects in terms of
disruption to the current retirement plans.
There do exist a group of plans for which changes in the
Social Security normal retirement age could be anticipated to
be disruptive currently. These plans provide benefits that
bridge the gap between actual retirement and commencement of
Social Security benefits. Any increase in the Social Security
normal retirement age that is sudden would create a cost to
sponsors who would then have to bridge these benefits for a
longer period of time; however, the cost to these types of
plans to be made manageable through appropriate delay in the
commencement date of any change in retirement eligibility.
The existence of a sufficiently long planning horizon can
enable these plans to adapt the general level of benefits to
the changed circumstances. It's important to note that we have
experience with similar changes under the 1983 Social Security
reforms. The long duration before changes in the normal
retirement age were effective gave employers the opportunity to
adjust pension plans to the changes.
Changes in the normal retirement age do not appear to
abruptly increase cost for employer plans, nor to unduly change
the system. Much more significant were the related changes of
the Tax Reform Act of 1986. In considering any changes to
Social Security retirement ages, legislators may wish to
consider the experience of the 1983 changes and provide similar
timeframes for employer-responsive plans.
In addition to sharp disruption in costs, the employers are
also concerned with sharp changes in employee reactions, in
particular whether or not an employee perceives that he/she
will be subject to a sudden prolonged delay in in the ability
I think that we have issues of worker productivity. The key
issue here for employers may be changes in retirement rules to
give employees the same sort of flexibility to make productive
arrangements for employees in the future.
Finally, I'd like to point out that in terms of disruption
to the system, changes in Social Security normal retirement age
are much less disruptive to the system of employee provided
benefits than are certain other proposed changes, including
changes in tax rates and in payroll benefits.
[The prepared statement follows:]
Statement of Christopher M. Bone, Chief Actuary, Actuarial Sciences
Associates, AT&T, Somerset, New Jersey
Mr. Chairman, members of the Subcommittee, my name is
Christopher M. Bone. I am the Chief Actuary of Actuarial
Sciences Associates (ASA), a benefits consulting firm that is a
wholly owned subsidiary of AT&T. I am speaking today on behalf
The retirement income system in the United States has often
been pictured as a three-legged stool; the three supports of
the stools being Social Security, employer-sponsored retirement
plans and individual savings. In this analogy, significant
changes in the length or strength of one leg of the stool may
be anticipated to require changes in the other legs. Yet, to
date, analyses of proposed social security reforms have
primarily focused on the effects of the proposed changes on the
Social Security program as a stand-alone entity. In designing
effective and coherent retirement policy it is imperative that
changes proposed for social security be reviewed in light of
the implications of social security reform for the second leg
of the stool--retirement plans sponsored by employers.
Numerous observers have called for Congress to act soon on
changes to Social Security, to enable workers sufficient time
to plan for retirement under the new rules. An integral part of
the planning process will be undertaken not solely by workers,
but by employers that sponsor retirement plans. In choosing
amongst alternative reforms in the near future, I urge that the
Subcommittee consider the role of voluntary, employer-sponsored
retirement plans and the impact of Social Security reform on
those plans. Failure to do so may result in significant
disruption to the private retirement system and the possible
loss of valuable retirement benefits to millions of workers.
Since the enactment of ERISA in 1974, the percentage of the
elderly population receiving pension and annuity income has
risen from 24% to 36%.\1\ Furthermore, because of the inherent
long time horizons of pension plans, these numbers
significantly understate the anticipated rates of participation
in the voluntary employer based retirement system that have
come about in the last 20 years; various studies have put the
projected rate of pension recipiency among the elderly as high
as 77% to 81% by the time period 2018 to 2030.\2\
\1\ EBRI Databook on Employee Benefits, 4th Edition, 1997, p. 60,
Table 7.4 based on EBRI Tabulations of March, 1975 and March 1996
Current Population Surveys
\2\ EBRI Databook on Employee Benefits, 4th Edition, 1997, p. 57,
Table 7.1 citing 1991 Advisory Council on Social Security, Future
Financial Resources of the Elderly and Lewin-VHI, Inc., Aging Baby
Boomers, How Secure is Their Economic Future?
How Can We Anticipate Responses of Employers and Employer-Sponsored
Plans to Increases in the Social Security Normal Retirement Age?
Today's hearing focuses on proposals to improve the
solvency of the Social Security system by raising the age at
which unreduced social security retirement benefits are paid.
Various proposals would:
increase Social Security Normal Retirement Age to
tie increases in the Social Security Normal
Retirement Age to increases in life expectancy,
change the age at which Social Security early
retirement benefits are first paid.
None of the proposals to date would change retirement ages
sufficiently to cure Social Security's ills single-handedly.
Thus, in evaluating proposals to raise retirement age it is
important to also evaluate the other alternative reform
proposals that could be paired with this change.
Employers' responses to Social Security changes will be
made in the context of designing retirement plans to further
business and workforce goals. To anticipate how employers would
react to potential changes, any change in Social Security
Retirement Ages must be analyzed to determine how the change
would affect each of the various current types of employer-
sponsored plan designs. More specifically, the analysis must
review how the proposed change might disrupt the ability of
that design to meet its business objective; whether the
objective be related to cash flow, financial statement impact
or human resource goals. This is work which has, as yet, only
begun to be performed by employers and researchers. At this
point it is difficult to see, with any degree of clarity, the
exact form that responses to Social Security changes would
take. However, one framework for evaluating likely changes by
employers is to review potential Social Security reforms in
the amount and incidence of the related cost to
the sponsor of the plan, and
the effect of changes on the behavior of plan
\3\ Bone, Christopher M., ``Actuarial Perspectives on Implications
of Social Security Reform for Employer Sponsored Pension Plans'',
Pension Research Council Working Paper 97-16, October 1997.
Amount and Incidence of Employer Cost. Increases in the
age of retirement decrease the underlying cost of employer-
sponsored pension plans in much the same way as they do for
Social Security. However, in addition to underlying cost, the
incidence of reported cost for financial statements is also of
concern. Most plans for employees, regardless of sector of
employment, feature an accumulation of capital or of retirement
benefits. Reported employer cost is typically a function of the
accumulation of benefits per year of service. If the date of
benefit commencement is delayed, accumulation continues for a
longer period and payout of benefits is over a shorter
duration. This allows the sponsor to provide the same level of
annual retirement income with a lower annual outlay of cost.
Thus, in an employer's plan, delayed retirement usually reduces
the employer's annual benefit cost.
However the retirement age for social security benefits is
not necessarily closely linked to retirement age for the
employer's plan; instead, employers typically design retirement
plans to reflect employer perceptions of workforce needs. To
the extent that proposals to increase social security
retirement age are based on an accurate scenario of the future
that reflects the availability of an active, productive older
workforce, employers may be expected to respond to the same
trends in worker productivity by raising pension plan
retirement ages in tandem with social security. This would
generally lead to slow reductions in benefit costs over time.
But, to date, employers continue to sponsor early retirement
incentives in defined benefit plans that encourage retirement
well before the age of earliest retirement under social
security, even as increases in Social Security Normal
Retirement Age are scheduled to begin under existing law. Thus
for these plans, changes in Social Security Normal Retirement
Age might be anticipated to have relatively small current
There exist a group of plans for which changes in the
Social Security Normal Retirement Age can be anticipated to
initially increase costs. These plans current provide benefits
that ``bridge'' the gap between actual retirement and
commencement of social security benefits. Any increase in the
Social Security Normal Retirement Age would create a cost to
sponsors who would then have to bridge these benefits for a
longer period of time. However, the cost to these types of
plans can be made manageable through appropriate delay in the
commencement date of any change in retirement eligibility under
Social Security. The existence of a sufficiently long planning
horizon may enable these plans to adapt general levels of
benefits to the changed circumstances. Alternatively, Congress
could avoid disrupting the private sector system by directly
coordinating legislation to increase Social Security retirement
ages with legislation that would hold sponsors of these type
plans harmless to increased benefits that are solely due to
reductions in government-promised Social Security benefits.
Other employer-sponsored defined benefit plans integrate
early retirement benefits very closely with social security
through the provision of elective forms of benefit that bridge
the gap until social security retirement age (either early or
normal) is reached. For these type of plans cost issues are
likely to be manageable. However, there will be increased
complexity of administration unless action is taken to hold
these plans harmless for changes that are designed to reflect
the new Social Security changes.
It is important to note that we have experience with the
cost effect of the 1983 Social Security reforms. The long
duration before changes in the Social Security Normal
Retirement Age were effective gave employers the opportunity to
adjust pension plans to the changes. Legislative changes to
conform the private pension plan rules to the new Social
Security law changes were part of the Tax Reform Act of 1986,
and employers were given an extended period to reflect the 1986
law. In fact, many other changes in the Tax Reform Act have
been cited as onerous and costly, but the effects of the 1983
legislated changes in the Social Security Normal Retirement Age
do not appear to have abruptly increased costs of employer
plans. In considering any changes to Social Security Retirement
Ages, legislators may wish to consider the experience of the
1983 law changes and provide similar time frames for employer-
sponsored plans to adapt to changes in the law.
Changes in the Behavior of Plan Participants: If the Social
Security Retirement Age is increased, an employee would be
forced to retire at a later age to be able to sustain a
consistent level of income. For an individual covered by both
Social Security and an employer-provided pension, the delay
would likely not be equal to the total increase in Social
Security retirement age, as it would be mitigated by the
compounding effect of increases in private pension
accumulation. However, a delay or a reduction in Social
Security benefits could certainly act to delay retirement
somewhat, particularly for lower-paid employees that are
relatively more dependent on Social Security. (Since the
progressive determination of the Social Security benefit tends
to provide relatively higher Social Security benefits for lower
paid workers, motivation to accumulate other sources of
retirement income is lower and reliance on Social Security
benefits is higher.) For lower paid individuals in physically
demanding jobs, there are concerns that, if the Social Security
retirement age is increased for these individuals without a
commensurate increase in productivity for workers nearing
current Social Security retirement ages, employers may incur
additional cost in providing retirement programs that maximize
the productivity of the labor force.
Similarly, many employers continue to restructure their
workforces as the nature and type of work required to compete
in the economy changes. For employers that attempt to
restructure primarily through voluntary early retirement
offerings, increases in Social Security retirement ages are
likely to lead to increased costs.
The Importance of Flexibility for Employer Plans as We Face an Aging
Social Security is not alone in facing the issues of an
aging population. For the country to be able to afford the
retirement of the Baby Boom generation, either we must
experience very significant increases in productivity for the
younger part of the population, or employees must be able and
employers must be free to enter into imaginative and flexible
arrangements that allow employees to remain employed and
productive to later ages. Current pension regulation provides
an inflexible approach to the ability of employees to gradually
reduce work hours with a career employer. Either an employee is
active or retired. Instead of remaining productively employed
with a career employer, employees now may migrate to a
retirement employer, where it possible for the employee to
reduce work hours without sacrificing pension entitlements. I
urge the members to coordinate efforts on Social Security
reform with efforts to increase the flexibility of private
sector retirement programs. As an example, truly flexible
retirement regulations could include changes to allow employees
to partially retire with a current employer, reducing work
hours while commencing a portion of the pension. Less
traditional work arrangements will allow employers and
employees to maintain productivity and reduce pressures on
Gauging the Effect of Alternative Proposals to Raise the Retirement Age
on Employer Sponsored Plans
Proposals that increase Social Security Normal Retirement
Age, either by indexing the age to life expectancy or by
raising the age to a specified starting point, will affect
employer plans in large part based on the amount of increase in
normal retirement age and the amount of time that employers
have to prepare before changes are required to be made to
pension plans by pension regulations and the amount of time
until actual increases in retirement age begin to apply to plan
participants. The primary driver of employer cost is the amount
of increase in normal retirement age from current law, whether
the mechanism is through an indexed increase or to a fixed age.
Employers are likely to find the uncertainty inherent in an
indexed retirement age, and in how an indexed normal retirement
age would interact with the complex pension rules,
unattractive. The resulting uncertainty and lack of clarity in
pension regulation may provide a yet another disincentive for
the establishment of new employer-sponsored plans, but is
unlikely to add enough cost to encourage employers to terminate
Proposals to increase the age of first eligibility for
Social Security benefits above age 62 have drawn much more
concern. In particular, employers that are dependent on workers
in physically demanding jobs are concerned that increased
retirement demands not fall on the employer, if Social Security
early retirement ages are increased. Increased pension costs
for low-paying, physically-demanding work would generally
increase the labor costs for low-skilled workers. This further
reduces the ability of low-skilled workers to compete in the
marketplace. Employers are also concerned over the potential
for increased disability benefit costs if the age for early
retirement under Social Security is increased.
Gauging the Effect of Increasing The Social Security Retirement Age vs.
Other Types of Proposed Social Security Reforms
While the effect of raising the retirement age on employer
plans is difficult to specify, it may be useful to compare the
effects we can see, with the projected effect of other Social
Security reform proposals. Of course, the degree to which
social security reforms determine changes in employer-sponsored
retirement plans will depend on the regulatory environment for
employer-sponsored plans and the desire of plan sponsors to use
plans to affect retirement decisions of their own workforce.
Preliminary analysis, based on the incidence of employer cost
and the effect on employee behavior, indicates that phased-in
changes in Social Security retirement ages may be much less
disruptive to the private plan system than certain other types
of reforms that have been proposed:
Increases in social security tax rates would
likely affect employer-sponsored defined contribution plans,
due to the interaction of decreased ability to save by lower-
paid individuals, with the nondiscrimination rules for defined
contribution plans. Alternatively, Congress could act to
simultaneously amend the non-discrimination rules to reflect
anticipated effects of the increased tax rate on lower-paid
individuals' ability to save.
Removing the limit on earnings subject to payroll
taxes would require immediate redesign of the majority of
private sector, defined benefit plans and presumably some
defined contribution plans as well if accompanied (as
anticipated) by the elimination of permitted disparity rules at
the time the cap on taxable earnings is removed. In conjunction
with the progressive nature of the determination of the social
security benefit, this could accelerate the trend to a two-tier
system of unfunded pension plans for the top paid group, and a
funded plan which is adequate for the lower paid and inadequate
for employees in the middle.
Proposals to change the investment policy pursued
by the Social Security Administration, or to add IRA-type
Social Security individual accounts will likely have effects
not only on benefit design costs but also could change capital
markets and financial cost drivers, particularly, for large
private sector plans. The administrative implications of a
switch to IRA type accounts could be extremely burdensome for
the employer who might have to maintain Social Security records
and balances for its employees, especially during periods of
transition or portability of its employees from one employer or
plan to another.
Thus, many of the alternative reforms have an immediate
impact on private sector plans. On the other hand, increasing
the Social Security Normal Retirement Age tends to have a
delayed effect on many plan sponsors, giving employers the
necessary time to implement adequate changes to their benefit
structure. To reemphasize, looking back to 1983 when the Social
Security Normal Retirement Age was increased to age 67, even
while some legislation was incorporated in the Tax Reform Act
of 1986, the ensuing changes did not have to be made
immediately. This allowed the employers to group the change in
the Social Security Normal Retirement Age together with the
other long term demographic needs of their company, and
gradually change the benefit structure to coincide with the
changing demographics, without disrupting the benefit programs
in place. Some employers are still today making changes to
their benefit programs, to reflect the 1983 increases in the
Social Security Normal Retirement Age.
The degree to which increasing the Social Security Normal
Retirement Age determines changes in employer-sponsored retirement
plans will depend on the regulatory environment governing these plans
as well as the desire of plan sponsors to affect retirement decisions
of their own workforce, to meet their human resources objectives.
Changes in the regulatory environment for pension plans will be needed
to reflect changes in retirement age. Additional changes in the pension
regulatory environment are needed to help employers and employees enter
into flexible arrangements to enhance employees' productivity as they
Increases in retirement ages are anticipated to have long-term
design implications for sponsored plans; but these may be manageable
with sufficiently long time horizons for plan sponsors to adapt to
changes. Short-term cost increases may be limited to plans that provide
early retirement supplements, or are restructuring. In comparison with
several other types of proposed reforms, increases in retirement ages
may prove less disruptive to private sector plans.
It is imperative that increases in the Social Security Normal
Retirement Age be evaluated not solely for effects on social security
benefits, but also with respect to effects on employer-sponsored
retirement plans, and the desire and ability of employees to save on
their own behalf.
Mr. Chairman and Members of the Subcommittee, I thank you for the
opportunity to appear before you, and I would be glad to answer any
questions you may have.
Chairman Bunning. Thank you very much.
Mr. Walker, please.
STATEMENT OF DAVID M. WALKER, CPA, PARTNER, GLOBAL MANAGING
DIRECTOR, ARTHUR ANDERSEN, LLP; AND MEMBER, BOARD OF DIRECTORS,
ASSOCIATION OF PRIVATE PENSION AND WELFARE PLANS
Mr. Walker. Thank you, Mr. Chairman. It's a pleasure to be
here this morning. The hat that I have on today is I'm on the
executive Committee of the board of the Association of Private
Pension and Welfare Plans. Its members collectively represent
about 100 million Americans covered by employee benefit
For your benefit and the benefit of the other Subcommittee
Members, I'm also a former Public Trustee of Social Security
and Medicare, and currently serve with Senators Breaux and
Gregg, as well as Congressmen Stenholm and Kolbe on the CSIS'
National Commission for Retirement Policy, which is looking at
reforming Social Security and the private pension system.
Mr. Chairman, what I'd like to do is to note that the APPWP
has formed a board-level task force to look at the issue of
Social Security. It's currently deliberating and has not
finalized its deliberations. When we do, we would be happy to
provide our recommendations. However, in the interim, certain
preliminary observations with regard to Social Security reform
and the possibility of raising the normal retirement age I
think are in order, given the subject of this hearing.
First, APPWP believes that Social Security should be
reformed in a comprehensive manner and on a reasonably timely
basis--sooner rather than later--in order to minimize the
disruptive effect, and provide adequate lead time for employers
and individuals to adjust to the changes. We also believe that
such reform needs to maintain the importance of the Social
Security Program as a foundation of retirement security for
current and future Americans. That's a very important element
to a sound National retirement system.
We believe that increasing the normal retirement age, and
possibly the early retirement age, should be seriously
considered as a possible element of overall reform, given the
fact that many have already recommended increasing normal
retirement age--for example, the Committee for Economic
Development. As was noted by my colleague, that would only have
resulted in about 44 percent of savings that are necessary to
put the program in actuarial balance over 75 years, but it is
an important fact to consider, not only for financial reasons,
but because of work force and labor force trends. The fact that
in 1950 we had 16 people working for every person drawing
Social Security; now it's down to 3.3 to 1, and by the year
2030, it will be less than 2 to 1.
In the final analysis, we need to analyze individual reform
elements, including raising the normal retirement age or early
retirement age, and other possible reform elements, to come up
with a balanced program and to consider the interactive effects
of those reform elements.
With regard to the specific possibility of raising the
normal retirement age, several preliminary comments are
appropriate. First, doing so would have significant
implications not only on Social Security, but also on other
government programs, such as the disability program, as well as
other employer-sponsored programs, such as pension, health,
disability, workers' compensation, and so forth. These have to
be properly analyzed and considered. It may result in
individuals needing to work longer, either on a full-time or a
We believe that consideration should be given to looking at
current laws that affect both government programs, as well as
private sector pension plans, to possibly allowing additional
flexibility for individuals who wish to retreat into
retirement, rather than a cliff approach into retirement, where
it's working full time on 1 day and not working at all the
next. We think it's important, given projected labor force
trends, that we look for more flexibility.
We also believe it's important to seriously consider
eliminating the earnings test on Social Security, as a way to
encourage people, but not require people to be productive
longer in the work force, given projected skills gaps that we
In addition, we believe that raising the normal retirement
age would serve to increase the importance of private employer-
sponsored retirement programs as an important supplement to the
base Social Security Program. It is important to also consider
ways that the private sector could be strengthened to
increasing coverage; enhancing benefit security, benefit
adequately, portability and preservation would be desirable.
And, last, but not least, Mr. Chairman, we believe that it
would be extremely important that any change in the normal
retirement age or early retirement age be phased-in over an
appropriate period of time in order to allow time for
individuals and employers to be able to adapt to that change,
and frankly, as a matter of fundamental fairness.
Mr. Chairman, I would be happy to answer any questions you
might have, and obviously, the APPWP and myself would be happy
to contribute in any meaningful way that you deem appropriate
in the future in this regard.
[The prepared statement follows:]
Statement of David M. Walker, CPA, Partner, Global Managing Director,
Arthur Andersen, LLP; and Member, Board of Directors, Association of
Private Pension and Welfare Plans
Mr. Chairman and members of the Committee, my name is David
M. Walker. I am a Partner and Global Managing Director with the
international accounting and consulting firm of Arthur Andersen
LLP. My background includes serving as one of two Public
Trustees of the Social Security and Medicare Trust Funds, as
Assistant Secretary of Labor for Pension and Welfare Benefits
and as head of the Pension Benefit Guaranty Corporation (PBGC).
I am also the author of a book entitled: Retirement Security:
Understanding and Planning Your Financial Future. In addition,
I currently serve as a member of the National Retirement Policy
Commission sponsored by the Center for Strategic and
International Studies (CSIS).
I am appearing before you today on behalf of the
Association of Private Pension and Welfare Plans (APPWP--``The
Benefits Association''), an organization of which I serve as a
member of the Board of Directors and the Executive Committee.
As a result, my testimony today is designed to reflect the
views of the APPWP rather than my personal views. The APPWP is
the national trade association for companies and individuals
concerned about federal legislation and regulations affecting
all aspects of the employee benefits system. The APPWP's
members represent the entire spectrum of the private employee
benefits community and either sponsor directly, service or
administer employee benefit plans covering more than 100
Today's subcommittee hearing is particularly focused on an
examination of the implications of raising the retirement
eligibilty age under the Social Security retirement income
program (i.e., the Old Age Survivors Insurance (OASI) program).
In my oral remarks today I will first outline certain
information contained in the 1997 Annual Trustees' Report. I
will then discuss some of the implications of increasing the
Social Security normal retirement age on the private pension
system and on retirement security in general.
Current and Projected Financial Condition of the OASI Program
The Trustees of the Social Security and Medicare programs prepare
an annual accounting of these programs for the Congress and the
American public. This annual accounting is due by April 1 of each year.
The 1997 Annual OASDI Trustees' Report (``the Annual Report'') was
issued in the spring of 1997 and covers the 1996 fiscal and calendar
years. It also included a projection of the financial condition of the
OASI program over the 75-year period ending in 2071. This long-range
projection is important as a means to advise the Congress and the
American people as to the likely condition of these programs in the
years in which several generations can be expected to receive OASI
program benefits. Specifically, a 75-year projection period is
necessary in order to assess the likely financial condition of the OASI
program for all individuals currently paying OASI payroll taxes,
including new entrants into the workforce.
According to the Annual Report, the OASI Trust fund held
approximately $514 billion in U.S. government securities as of December
31, 1996. In addition, the OASI program ran an approximate $56 billion
surplus for the year then ended. While the 1998 Annual Report has yet
to be issued, it is expected to show that OASI Trust fund assets
totaled approximately $589 billion at December 31, 1997. It is also
expected to show that the surplus for the year then ended amounted to
approximately $75 billion. Importantly, under current law, all annual
OASI program surpluses must be invested in certain U.S. government or
agency securities. The current government bonds held in the OASI Trust
Fund bear market rates of interest at their date of issue, carry
maturities of up to 15 years and are not readily marketable.
According to the Annual Report, the OASI program met the Trustees
short-term (10-year) test of financial solvency. The OASI program did
not, however, meet the Trustees' long-range (75-year) test of financial
solvency. The Annual Report also disclosed that the estimated 75-year
financial imbalance in the OASI program amounted to approximately 1.84%
of taxable payroll.
The Annual Report projected that, based on the Trustees'
intermediate (best estimate) set of assumptions, the OASI Trust Fund
would be exhausted in the year 2031. The projected exhaustion date is
significant since, beginning in that year, the government will no
longer be able to pay full OASI benefits on a timely basis. However,
while the program would not be able to pay full benefits, the OASI
program would still have a significant revenue stream for benefits and
program expenses. Specifically, the OASI program is expected to have
revenues equal to approximately 75% of projected benefit payments and
administrative expenses during the period 2031-2071.
Given the above, OASI program revenues would have to be increased
by 33% or benefit payments reduced by 25% beginning in 2031 in order to
restore the financial integrity of the current program. Alternatively,
more timely reforms would serve to lessen the degree of changes
necessary to restore the financial integrity of the OASI program.
The projected OASI exhaustion date of 2031 may be a number of years
away, however, history shows that it is likely to come sooner than
projected. Specifically, after Congress enacted the 1983 Social
Security reforms, the Trustees' projected that the OASI program would
have adequate assets to pay full program benefits on a timely basis
until about 2062. By 1991, the Trustees' projected exhaustion date had
accelerated to 2045. As previously noted, the Annual Report projected
the OASI Trust Fund will be exhausted in 2031. This is 31 years sooner
than predicted in 1983 and 14 years sooner than projected in 1991. All
of these projected dates are based on the Trustees' intermediate (best
estimate) assumptions for the respective years. Unfortunately, history
has generally shown that actual program experience is likely to fall
between the Trustees' best estimate and high cost sets of assumptions.
As a result, a further acceleration of the projected exhaustion date
would not be surprising.
While the Annual Report noted that the OASI Trust Fund would be
able to pay benefits on a timely basis until 2031, there is a much
earlier fiscal challenge relating to the OASI program which needs to be
addressed. Namely, based on the Annual Report, the OASI program is
projected to enter a negative cash flow position in the year 2014, just
two years after the first ``baby boomer'' is eligible for normal
retirement. Beginning in that year, annual benefit payments and
administrative expenses are expected to exceed payroll taxes and other
revenues. In addition, the projected annual OASI deficits accelerate
rapidly each year thereafter. For example, these annual OASI cash flow
deficits are expected to grow to over $358 billion in the year 2025
Once the program begins to experience a negative cash flow
position, the federal government will generally be required to take one
of three steps in order to generate the necessary cash to pay OASI
benefits and expenses on a timely basis. Specifically, beginning in
2014, the government will either have to increase OASI tax revenues,
decrease OASI benefits/expenses, or revise the current nature of the
government bonds held by the trust fund and sell them to willing third
party investors. Obviously, the government could also take some
combination of these actions in order to bring the OASI program into
annual balance if it so chose.
Implications for Employer-Sponsored Retirement Plans
One way that total OASI benefit payments could be reduced
is to increase the age at which normal retirement benefits are
available. To date, the APPWP has not formulated a policy
position with respect to the specific issue that you are
examining with today's hearing. However, it should be
recognized that changes in the eligibility age (both for normal
retirement age and early retirement age) raise a number of
important questions that extend beyond merely the impact on the
fiscal integrity of the Social Security trust funds themselves.
Such a change should be considered in the context of overall
reform of the Social Security system along with its effect on
the Medicare program, the labor force, employer-sponsored
benefit programs and individuals. It is APPWP's position that
the current Social Security program must be reformed in order
to assure its long term financial integrity and sustainability.
Such reform should be comprehensive in nature and enacted
sooner, rather than later, to minimize the cost and disruption
reform will have and to provide as much opportunity as possible
to prepare for the changes inherent in reform.
Raising the Social Security retirement eligibility age will
have very real implications for the employer-sponsored benefits
system, both retirement and health related benefits. It is
important that these implications be understood and analyzed.
Many retirement plan sponsors currently coordinate normal
and early retirement eligibility under their plans with the
Social Security eligibility age. In the past, employers have
often used enhanced benefits under a private pension plan as a
way of adjusting the level of a company's workforce without the
necessity of layoffs. However, in the near future the United
States is likely to experience a labor shortage, particularly
among skilled workers. In this regard, potentially one of the
greatest changes to the employer-sponsored retirement system
that could be caused by increasing the Social Security
eligibility age is a change in the retirement pattern of
workers. The primary expected change would be that workers may
remain in the workforce for longer tenures, either in the same
position, or at a different job.
Another pattern that can be anticipated is an increased
shift away from ``traditional retirement'' to ``phased'' or
``partial retirement.'' Traditional retirement is when a worker
totally exits the work force and commences distribution of his
or her entire retirement benefit. A phased retirement is
instead when a worker remains employed but at a reduced work
schedule and earns reduced wages, but simultaneously receives a
portion of his or her pension benefit. The combination of
reduced wages and a distribution of a portion of the pension
benefit results in the individual continuing to receive a
similar or slightly reduced amount of income from combined
sources. Raising the Social Security normal or early retirement
age would reinforce the need to consider allowing additional
flexibility under employer-sponsored retirement plans so that
workers can begin receiving a portion of their retirement
benefits before full retirement.
Certainly, continued employment on a part or full time
basis would help meet the economic demand for skilled workers.
However, some employers may want to continue to provide
incentives for older workers to retire from their jobs to make
room for younger employees. Plan sponsors who need this
flexibility to recognize their workforce realities (i.e.
recognizing the inability of some industries' workers to
continue working) will face increased costs.
In addition, some individuals may need or want to retire
earlier than the increased Social Security eligibility age. To
the extent that employers do not supplement the difference in
benefits there will be greater pressure on individuals who
want, or need, to retire earlier to rely on individual sources
of retirement security, including employer-sponsored plans.
This would serve to increase the importance of assuring that
federal laws and regulations are designed to encourage the
creation, maintenance and proper funding of employer-sponsored
retirement plans, including reasonable contribution and benefit
Also, an increased Social Security eligibility age would
likely result in greater use of employer-sponsored and
government disability programs. There will likely be greater
use of worker compensation and unemployment compensation
programs. In addition, increasing the Social Security
eligibility age may result in increases in the cost of
employer-provided health plans. This would translate into
greater costs for these programs due to longer coverage and
Recent OASI Program Reform Recommendations
A number of groups have recognized the projected financial
imbalance associated with the OASI program. In fact, a number
of groups have called for reform of the existing OASI program.
Many of these organizations have made specific recommendations
for consideration by the Congress and the Administration,
including the increase in the normal Social Security
The most notable OASI reform group that has already made
related recommendations is the 1994-1996 Advisory Council on
Social Security (the ``Council''). This statutorily mandated
group issued its report in December 1996. While the Council
agreed on the need to reform the OASI program, it did not fully
agree on how to do it.
A majority of the Council members favor speeding up the
current schedule for increasing the eligibility age for full
retirement benefits under Social Security. Under current law,
the eligibility age for full retirement benefits (currently 65)
will gradually increase to age 66 for workers who attain age 62
in 2005. It will then remain at age 66 for eleven more years
and then gradually increase to age 67 for workers who attain
age 62 in 2022 or later. The majority of the Council members
would speed up the schedule so that the age of eligibility for
full benefits increases to age 67 by the year 2011. According
to the Council's report, this change would save five percent of
Social Security's long term actuarial deficit. After 2011,
these same Council members would recommend a gradual increase
in the eligibility age in the line with longevity trends.
Findings of the Committee for Economic Development
In its report issued one year ago this month, the Committee
for Economic Development (CED) recommended a continuous two
month per year rise in the normal retirement age beginning in
the year 2000, until the age reaches 70 in year 2030. Further,
the CED recommended that increases in the normal retirement age
after 2030, should be linked (indexed) to changes in average
life expectancy in a way that maintains a constant average
ratio of working years to retirement years. This reduction
would eliminate about 44 percent of the 75 year acturial
deficit in the present program according to CED's report. The
CED report noted that in the future an extended work life will
be a necessity for most workers.
Among the members of the Committee's Subcommittee on Social
Security Reform there was a disagreement as to whether the
early retirement eligibility age should also be raised.
According to the report, benefits at early retirement should be
reduced actuarially to reflect the number of years of
retirement before the normal retirement age. Those retiring at
age 62 currently receive about 80 percent of the benefit at age
65. The present reduction along with maintaining the early
retirement eligibility age will ensure that the penalty for
early retirement at age 62 will rise as the normal retirement
age increases. A large reduction in benefits would be intended
to encourage individuals to work longer or to save more to
finance their early retirement. At least some of the
Subcommittee's members were of the view that the early
retirement age should also be increased. This is because the
availability of an actuarially reduced early benefit may serve
as a trap for the unwary. More specifically, individuals may
mistake the availability of an early retirement benefit as an
indication that the benefit will be a sufficient safety net
without understanding the full impact of the reduction on their
total retirement income. If the early retirement age were
increased, however, it would still be appropriate to consider
facilitating full access to actuarially reduced benefits as
early as age 62, but only for those individuals who retire
because they are unable to work.
The OASI program does not face an imminent financial
crisis. However, the APPWP recognizes, and many believe, that
we are beginning to experience an emerging crisis of confidence
among the American public in connection with the Social
Security and Medicare programs. This emerging crisis of
confidence is primarily attributable to the growing concern
regarding the financial integrity of these programs and the
historical inability of the federal government to communicate
candidly and deal effectively with the looming fiscal
challenges facing these important federal programs. Many of
these looming fiscal challenges are the result of known
Both the legislative and executive branches of the federal
government have a responsibility to address this growing crisis
of confidence. In addition, the private sector also has a
responsibility to take steps to eliminate this emerging crisis
While the OASI program does not face an imminent financial
crisis, it does face a midterm financial challenge due in large
part to known demographic trends. The most notable of these
trends relates to the need to finance the significant OASI
program obligations associated with the ``baby boom
generation'' in the face of declining worker/retiree ratios.
Specifically, we face rapidly accelerating OASI program
obligations beginning in 2014. In addition, the worker/retiree
ratio has declined from 16:1 in 1950 to 3.3:1 today. This ratio
is projected to decline to less than 2:1 by 2030. Importantly,
these demographic trends are a virtual certainty and the
related implications on the financial condition of the OASI
program must be addressed.
From a broader perspective, the challenges we face in
connection with the OASI program are a subset of a much larger
fiscal challenge. Specifically, according to estimates by the
Concord Coalition, total mandatory federal spending (e.g.,
entitlements and interest on the federal debt) are expected to
exceed projected federal revenues before 2020, if changes are
not made. In addition, entitlements alone are expected to
consume more than 100% of projected federal revenues by 2030,
if reforms are not enacted. Social Security is a major part of
these projected entitlement expenditures. Medicare and Medicaid
represent other major dimensions of the growing entitlement
Fair and timely action is needed to restore the financial
integrity of, and public confidence in, the OASI program.
Fairness requires that any related program changes be balanced
among different generations and that certain changes be phased-
in to allow individuals time to adjust. Timely action is also
appropriate since delay will only serve to increase both the
severity and the difficulty of achieving the needed OASI
Achieving the needed OASI program reforms will require the
development of nonpartisan policy options and the pursuit of
bipartisan legislative action. Any successful reform package
will also require a balancing of policy and political
considerations. Importantly, Congressional legislative action
will have to be preceded by a concerted national campaign to
educate the American public as to the nature and extent of our
challenges, various options, including raising the normal and
early retirement eligibility ages, and their implications, and
any recommended approaches to reform. These hearings, Mr.
Chairman, are clearly an integral part of that national
Finally, in pursuing reform of the OASI program,
policymakers must recognize that any modification of the OASI
program will also have a ripple effect on other important
retirement income programs. Specifically, OASI program reforms
will also necessitate congressional action designed to
strengthen employer and union sponsored retirement income
programs and individual retirement savings arrangements. Such
actions should include, but not be limited to, efforts designed
to rationalize existing retirement vehicles, review current
plan sponsorship requirements, facilitate employee savings
through payroll deduction, increase current contribution and
benefit limits, strengthen existing minimum funding standards,
eliminate inappropriate administrative burdens, enhance pension
asset portability, improve the fairness of PBGC variable rate
premium structure and encourage the preservation of pension
savings for retirement income purposes.
Chairman Bunning. Thank you, Mr. Walker.
Before I call on Mr. Smith, let me tell you, it took us 10
years to get the earnings limit moved from where it was at the
$11,250 to $30,000 over a 7-year period. It cost $7 billion to
get it done. We were trying to eliminate it, but it took 10
years and two administrations, and we finally got the second
administration to sign onto the bill. So I want you to know
that I'm for eliminating it completely, but, under PAY-GO, we
have to find the money to do it.
STATEMENT OF DAVID A. SMITH, DIRECTOR, PUBLIC POLICY
DEPARTMENT, AMERICAN FEDERATION OF LABOR AND CONGRESS OF
INDUSTRIAL ORGANIZATIONS (AFL-CIO)
Mr. Smith. Mr. Chairman, thank you. I know I'm the last
witness in a long day, so I will try to as brief as my
colleagues have set an exemplary example.
Let me try to respond to a couple of things that aren't in
my prepared testimony, but that have come up today. One of
them, and David mentioned it, as others have, is the labor
market effects of raising the retirement age. Frankly, Mr.
Chairman--and this may be unexpected coming from the AFL-CIO,
but it seems to me that this a case where we ought to assume
that the market will work. One of the questions--and I was
talking with Chairman Greenspan earlier last year about--how do
you explain what's happened to labor force participation really
at both ends of the cohort. Older Americans coming back in, as
we've testified, and among some young people who have stayed
out of the labor force for most of the last decade and are
finding their way back in. The answer here is simple: A very
low unemployment rate, some pressure on labor markets, and
employers figuring out ways to add men and women who weren't
previously in the labor force.
They will do that with older Americans as well as they will
continue to do it with younger Americans, and we won't want to
assume that, in the absence of a tight labor market, raising
the retirement, the normal retirement age, that that will
happen, or that not raising the normal retirement age in the
presence of a tight labor market won't yield precisely the same
phenomenon we've seen over the last 3 or 4 years. Working
people, men and women who have left the labor force, have been
downsized or forced out, come back in when they have those
opportunities. And I would expect that that will continue
regardless of what we do with the normal retirement age, as
long as labor markets stay tight. We ought to assume that the
market, as you so often note, Mr. Chairman, is pretty
thoughtful about these things, and this labor market will work
in that way.
A second issue which gets raised here, which I really do
want to emphasize--when I testified before this Subcommittee
last spring, I said something to the effect that this system
ought not to be thought of as a piece of the retirement system
for Americans. This isn't a leg of a roughly balanced three-
legged stool; this is the heart of retirement income for most
Americans, and will grow in its importance over the next two
decades, not diminish. Perhaps we would wish that not to be
true, but it is true.
And it's especially true for Americans who worked in low-
wage jobs, for Americans who have worked the nightshift, who've
worked the dirty jobs, who've worked in the more dangerous
jobs, and any increase in the normal retirement age, and
particularly if it were twinned, as Dr. Myers had suggested,
with a ratcheting up of the early retirement age, would have
particularly serious effects on those Americans, people who
have earned less in their lifetime and earned less probably in
a circumstance where they will more likely to be exposed to
health hazards, more likely to have been injured in a way,
while perhaps not qualifying for disability--made it tougher
for them at 62 than it did for some of the rest of us who had a
chance to grow old somewhat more gracefully and less arduously.
A few numbers I think help illustrate that, both the
reliance question and the vulnerability question. Now 46
percent of African-American older households rely on Social
Security for 90 percent of their retirement income. That's a
dramatically different figure than whites; only 28 percent of
white Americans rely on Social Security for 90 percent of their
Twenty-eight percent of African-Americans 62 years or
older, only 28 percent have any pension income whatsoever. When
we're talking about opening up this hole for a group of people,
we're not talking mostly about people in this room. We're
talking about people who do very different jobs, are exposed to
very different risks, and make a great deal less money.
Let me--one other: Precisely that same group of people, as
you know, and as has been testified today, any increase in the
retirement age is a benefit cut. It's widely understood that
Social Security is actuarially sound. Were we to push the
retirement age out, it would be a benefit cut for anybody. It
would be a larger benefit cut for those who are more likely to
die sooner. And African-Americans and other people of color are
much more likely to die in that window, Mr. Chairman, than
either you or I are. The death rate for males age 62 to 65 for
African-Americans is 150 percent of the death rate for the
white cohort during that same period.
So we're not talking, as some of the earliest testimony
suggested, we're not talking about a generalized either
circumstance with which we approach retirement or a generalized
impact on us from these kinds of changes. We need to be very
[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 and Members of the
Subcommittee, my name is David Smith. I am Director of the AFL-
CIO Public Policy Department. On behalf of our 13 million
members and their almost 40 million family members, I am here
today to express our great concern over proposals to increase
Social Security's retirement ages and the very serious
questions that they raise about fairness toward and protection
of some of the most vulnerable members of American society.
Benefit Cuts That Target the Economically Vulnerable
Let me begin today by posing this question: Assuming in the
first place that any Social Security benefit cutbacks are
warranted, should it be done in a way that has the greatest
negative impact on the group of workers who have spent their
working years in physically arduous jobs, who experience poor
health, who have the lowest levels of health insurance and
pension coverage, and who have seen their real wages drop
significantly over recent years? I hope it strikes you as
unfair, if not mean spirited, to balance the long-range
finances of the nation's principal family protection plan on
the backs of those who need it the most. That, however, is just
what an increase in the Normal Retirement Age would do.
Clearly, raising the full retirement age cuts benefits and
does so in two significant ways. First, all workers, whether
they delay retirement to the new full retirement age or
continue to retire early, will get reduced lifetime benefits.
Second, those who take early retirement will also receive lower
monthly benefit amounts that provide a less adequate income
throughout retirement. For example, under the current scheduled
increase in the full retirement age, an individual who elects
to begin receipt at age 62 will get a monthly benefit amount
equal to 70 percent of the full retirement benefit, compared to
80 percent under the rules currently in effect. A further
increase would cut this benefit even more. But this is not the
Keep in mind that for many retirement is not the beginning
of a golden age cruise, but rather an economically traumatic
event, especially for low-wage workers and people of color.
With the cutbacks Congress enacted in 1983 beginning to take
effect for early retirees in 2002, it may yet get worse.
Consider that a fourth of African Americans 60 years of age and
older live in poverty, compared to less than a tenth of White
Americans. An overwhelming majority of these workers lack
substantial sources of retirement income beyond Social
Forty-six percent of African American older
households and 44 percent of Hispanic older households rely on
Social Security for 90 percent or more of their income in
retirement. And nearly a third count on it for all of their
By contrast 28 percent of White retirees rely on
it for 90 percent of their income and 14 percent of them count
on Social Security for 100 percent.
Only 28 percent of African Americans 62 years of
age or older have any public or private pension income,
compared to 43 percent of Whites of the same age.
Furthermore, asset income, while more widely
received than pension benefits, amounts to very little for most
retirees regardless of race. For all of those 65 and older, the
median is $1,306. Looking at the least well off quintile, the
median annual asset income is a tiny $12 a month.
Also, it is critical to remember that any Social Security
cutbacks will be sliced off of a baseline that is already quite
low for the lower-income elderly. Among the poorest, the median
Social Security benefit is roughly $5,500.
This background information feeds directly into discussions
about raising the retirement age because an increase will hurt
these already vulnerable populations the most. The benefit cuts
imposed by an increase in the retirement age have a greater
impact on those population subgroups whose members die younger,
are forced to start benefit receipt earlier, and have few
alternative resources to enable delayed receipt of Social
Security or cover cuts in monthly benefit amounts. Those
beneficiaries affected most are minorities, particularly
African Americans, and all low-wage workers.
For workers who lack substantial alternative sources of
income, any cut in Social Security is going to be more painful
than it is for those who have other legs of the retirement
stool on which they can rely. A worker who relies entirely on
Social Security in retirement and retires at age 62 in 2022 and
later will experience an additional 10 percent cut in benefits
as a 10 percent cut in income. By contrast, an upper income
worker who relies on Social Security for only one quarter of
retirement income, as the top 20 percent of the elderly do,
would see less than a 4 percent cut in total income from the
same cut in early retirement benefits. The result will be even
less adequate retirement incomes for workers and families
already at the margin. The regressive nature of increases in
the normal retirement age has been confirmed by one study that
looked at the effects of an immediate increase in the Normal
Retirement Age to 67. It concluded that the cut in benefits
under a raised retirement age for incomes under $25,000 would
be one and one-half times higher than for incomes above
$75,000, measured as a share of lifetime income. (Wolff, Edward
and Howard Chernick, ``The Distributional Effects of Raising
the Social Security Normal Retirement Age and Partially
Indexing Benefits,'' EPI Working Paper No. 115, 1996.)
The argument that we should cut benefits by increasing the
Normal Retirement Age is ultimately based on two related
numbers: life expectancy and the percentage of the population
in retirement. These are the same basic facts that Congress
relied on in 1983 when it voted to increase the full retirement
age to 67 in the next century. It would be a mistake, however,
to treat life expectancy as a predictor of the health and well-
being of the elderly and near-elderly populations. More
importantly, a generalized treatment of these populations
glosses over the very substantial heterogeneity that exists
regarding life expectancy, health, job situation, and
alternative economic resources. The most salient differentials
exist between African Americans and White Americans, and poor/
lower-income and non-poor workers.
African Americans as well as the poor and near-poor have
shorter life expectancies than the population as a whole. The
differences between White and African Americans is clearly
illustrated in male mortality rates. While the magnitude of the
mortality gap narrows among the elderly, a substantial
difference persists. For example, the death rate from age 62 to
age 65 for African-American men is over one and one-half times
that of White men (8.9 percent versus 5.5 percent). An
increased normal retirement age would disproportionately impact
African American men simply because they are more likely to
retire early. There is a 15 percentage point gap in the Labor
Force Participation rates of White and African-American men
ages 60 to 64. If early retirement ages were bumped up, a
smaller percentage of age-62 African American men would survive
to the higher eligibility age than White men. While separate
life expectancy numbers are less well developed for poor versus
non-poor Americans, the available evidence also suggests a
substantial gap between the two groups. According to some
estimates the mortality rates among the young elderly may be
two times higher for the poor and near poor (the bottom 20
percent of income earners) than they are for the rest of the
While we do not know life expectancy by occupation, it is
clear that people who spend their work lives scrubbing floors
in a nursing home, moving 5 liter engine blocks around a
factory floor, pouring steel into a Bessemer mill, or hauling
bricks around a construction site can count on a shorter life
span and a shorter work life. They are more likely to
experience work place injuries and to lack the continued
physical endurance necessary to perform their jobs very far
into their 60's. We should not be telling them that they have
to postpone retirement or do with less.
Much has been made of the issue of whether near and young
elderly health is improving and will therefore enable longer
working lives. While the evidence is far from clear, it is
worth noting that health trends will likely be affected by
health insurance coverage. The news on the employer-based
health insurance front is not good. Eight million fewer
Americans had employer-based coverage in 1996 than in 1989, and
another 8.1 million can be expected to lose coverage between
now and 2002. And the lack of employer-based coverage is felt
most by low-wage workers: Whereas over 85 percent of Americans
in families with $50,000 and more in income had coverage in
1996, less than half of those in families with $15,000-$19,999
in income did.
Of course, the response to our criticisms is that workers
can simply make up the difference in benefits by accumulating
greater savings and pension benefits to enable early
retirement. However, it is difficult to argue that low- and
even average-wage workers will be able to save more given
recent wage trends. Between 1979 and 1995 the median wage
earner saw real wages decline by 6.9 percent. And wage drops
were greatest at the lowest wage levels: for workers at the
tenth and twentieth percentiles real wages declined by 17
percent and 11 percent respectively. That is not a recipe for
increased worker savings, as is evidenced by the decline in the
personal savings rate from 7.4 percent to 4.7 percent (of
disposable personal income) over that same period.
In conclusion, the most critical point in any discussion
about Social Security's future is necessarily its historical
and continuing role as the retirement system for average wage
workers. Social Security, not pensions or savings, provides
two-thirds of the elderly with 50 percent or more of their
income in retirement. Despite retirement policy rhetoric about
a three-legged stool of retirement income, for too many
Americans Social Security is the only leg on which they can
depend. Therefore, any changes to Social Security--while they
may seem reasonable to people who will actually have three legs
of retirement income--are potentially traumatic to large
numbers of American families. Raising the Normal Retirement Age
is clearly a change that would have harsh consequences for
those workers that Social Security counts among its most
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.
Chairman Bunning. Let me also say to you that we are going
to submit questions to you, individual questions on your
testimony, but I want to ask Mr. Smith--if in fact we rule out
any increase in retirement age, what are the other suggestions
that you might have for stabilizing and making sure that we
have solvency for all the boomers and those people past the
year 2029, when, if we do nothing, we reduce it to 75 percent?
Mr. Smith. Well, Mr. Chairman, as you know, we don't think
doing nothing or hoping that it will----
Chairman Bunning. I didn't say that. I'm looking for other
Mr. Smith. We could--and I'll make the suggestion that's
least popular--we could raise taxes, either on us in a way to
prefund the trust fund or on the cohort that will begin to
retire, that will be working in about the middle of the decade,
the second decade of the next century. There are a variety of
other less traumatic things that we could do. I think there's a
lot of imaginative work which can be done around the notion of
part-time retirement. I'm not sure that I understand how all of
those ideas would work, but it creates another option for older
American, which seems to me to be sensible and would take some
pressure off the trust fund.
I'll give the easiest answer here. We can continue to run
the economy as well as we've been running it. The increase in
the trust fund surplus at the end of 1997 was substantially
higher than had been projected only a year early. It's very
simple why that happened. More Americans were earning more
money, and that's good for the trust fund. A few more years
like this and we'll actually begin to see a material difference
in the deficit that we have to make up.
We ought to close the gaps and ensure that this almost
universal system becomes truly universal, and there are other
suggestions made, some of the consensus suggestions out of the
Grahamlich Commission which are well worth doing. I share some
of Bob Myers' concerns about increasing the base, but I do
think it might be done in a way that doesn't disadvantage women
workers, and we ought to look at that.
Chairman Bunning. Mr. Bone, in your statement you discuss
the importance of sufficient long-range planning. In 1983, the
long-range planning was the year 2000 all the way up for 20-
some years after that, to increase every 2 months, or
thereabouts, an increase in the age. If we plan to do anything,
and all of a sudden we're past the year 2030 or 2035, how long
a period are you talking about?
Mr. Bone. Well, I think there are two issues here. One is
in the early retirement age, if you look in the Social Security
Advisory Commission's Report, where one of the alternatives
would tie early retirement age increases to increases in the
normal retirement age, that's clearly too short for effective
planning, because you would have that affecting people as they
reach age 62 in the very near term future.
On the other, as far as inducing sudden cost changes to
employer plans, which might require some offsetting changes,
something that says moving the retirement age after age 66, for
instance, as Mr. Myers had suggested, allows sufficient time
for employers to begin to plan and for costs to be taken into
account in redesigning plans, as the labor markets commence to
Chairman Bunning. In other words, you're suggesting a 25-
Mr. Bone. I think that if you look at changes in the labor
force and look at changes in normal retirement ages that are
timed to occur around the time that we see significant
reductions in the increase in labor force participation rates,
that that's going to be more in tune with the changes that
employers would naturally be making to plans, and therefore,
less disruptive to the system.
Chairman Bunning. Mr. Portman.
Mr. Portman. I think it's great testimony; I wish everyone
could hear it in the Congress. It's really very helpful. I have
a bunch of questions. Let me just start with a couple of the
premises with which we're working.
One is the notion, Mr. Bone, you talked about, and it was
also mentioned by Mr. Walker, as to the growth of private
pension plans. Seventy-seven percent of Americans by the year
2018 are expected to be covered by some kind of a pension plan,
a retirement savings plan. Is that accurate?
Mr. Bone. That's a study cited in one of the EBRI data
books, assuming reinvestment of lump-sum distributions; that
over time--and once again if I can respond to some of the
comments over here, I think it's very important to look at the
generational effects of pensions as opposed to looking at
current coverage by participants within different groups. As
you look at changes in labor force participation by those
groups, the effect as to whether or not they're covered by
pensions changes dramatically.
Mr. Portman. OK. I'm encouraged by that. It surprises me.
Twenty percent of small businesses don't offer any kind of
pension plan at all, and that's 25 or fewer employees. What
we've been doing in Congress--Jim Bunning has been supporting
this--is simplifying our pension programs. The President just
made another proposal. The Simple Plan is doing well out there,
and we're making some progress, but I would find it hard to
believe that smaller employers would move that rapidly. It's
great news. If that's true, we truly have a third leg, as Mr.
Smith talked about earlier. At least one of the other two legs
is pretty well established.
Mr. Walker. There are still significant coverage gaps,
which are projected to continue, especially in the small
business sector. We still only have about 50 percent of the
full-time work force who's covered by private pension plans. In
addition, the assumption in that study assumes that people
reinvest lump sums, and the fact of the matter is that 70
percent of the people don't reinvest their lump sums. We're
moving to a defined contribution system.
I think the bottom line is, while don't get me wrong, I'm a
big believer in the private pension system; the organization
that I represent believes that if you make changes in Social
Security, especially raise the normal retirement age, you need
to look at how you can expand coverage, how you can strengthen
that system, provide additional flexibility and reduce burdens.
But I think the fact remains that if you look at income
dispersion, that low-income individuals rely extensively on
Social Security, and will continue to, as their primary form of
retirement income. The facts are there.
Mr. Smith. Mr. Walker said it all. The question here, Mr.
Portman, is not, does somebody have a pension, but does that
pension amount to very much? For a substantial plurality of us,
it really doesn't. Coverage, pension coverage, in the private
sector has slipped below 50 percent, and the trend is down, not
Mr. Portman. I think one of the challenges we have as a
Congress is to figure out ways to reverse that. I happen to
believe that the legs of the stool are different, but they're
all three very important, and you're not going to be able to
back up Social Security unless you provide more pension
alternatives, both defined benefit and defined contributions,
and I think particularly in the area of defined contribution
plans, we have a real opportunity with small businesses, and
that will cover a lot more Americans.
So I do think there are three legs we need to focus on, and
yet I'd be surprised if those numbers--and I guess the answer
is really there will be more coverage, but it may not,
depending on how the stock market goes. The coverage might not
be adequate to provide for even a basic retirement, if someone
were to retire or not have Social Security.
Mr. Bone. There are issues with the size of the benefit. I
also, though, would like to point out that, looking at a
snapshot of coverage at any point in time ignores the movement
of employees in and out of jobs that are covered by pensions.
So that, once again, there is an issue of the size of the
pension, and that we need to increase accessibility of pension
plans to a broader range of employers, but we do have a number
of employees who move in and out of pension coverage and retain
a right from it.
Mr. Portman. OK.
Mr. Walker. I think you've raised an excellent point. The
Commission that I'm working on, the CSIS National Retirement
Policy Commission, is looking at all three elements of
retirement income security: Social Security, private pensions,
as well as individual savings. That's critical. You need to
look at these things comprehensively because there is an
Mr. Portman. And all related to the age issue?
Mr. Walker. Well, they all are impacted by the age issue. I
think we have to keep in mind the first social insurance system
in the world was created by Otto von Bismarck in the 1870's.
The normal retirement age under his program was 70; whereas the
average life expectancy was 55. He had a great concept. He was
going to take care of people and it wasn't going to cost much
money. So there was a great politician for you. But times have
changed and we've got to change with the times.
Mr. Smith. Mr. Portman, you're absolutely right. The stool
needs three legs to stand up and we need to pay attention to
all of them. I would underscore what my testimony says about
the centrality of Social Security, and two other numbers: The
savings rate continues to trend down as a share of disposal
income. So whatever meager contribution private savings now
make, we should anticipate that for the next cohort of retirees
it will be even less, and pension coverage--it's not simply the
amount, although both my colleagues are right; the amount
matters a great deal, but the reach of private pension is
declining, unfortunately, has continued to even through these
last half dozen relatively robust years in the economy.
Mr. Portman. To make one final point, I had a broker in
today to see me from a small town in Ohio, and he said two
things. No. 1, the Simple Plan is very popular out there among
small businesses. His company sold 15,000 of them last year.
And second, there's this new Roth IRA. I hate when things are
named after politicians, but this one actually happens to be
successful, which is the third leg we talked about, and he says
this thing is selling like hotcakes. I think that's good,
because it's also in my view simplification because you don't
worry about the IRS, once you make your contribution. I think
there is hope out there, but I would hope that the AFL-CIO and
our business partners can work with us on trying to make those
other two legs work better as well to back stop it.
Thank you, Mr. Chairman.
Chairman Bunning. Mr. Portman, I can't resist. Just be
happy that the Simple Plan isn't called after a politician.
[Questions were submitted by Chairman Bunning to Mr. Bone.
The questions and responses follow:]
Question 1. You say that to date, employers continue to sponsor
early retirement incentives in defined benefit plans that encourage
retirement well before the early retirement age as defined by Social
Security (age 62), even as increases in the normal retirement age are
schedule to begin under current law. Is there anything in your view,
that will change this employer practice? In other words, will a
shrinking workforce require employers to take another look at these
practices in the future?
1. Specific employers are likely to continue to sponsor early
retirement incentive programs in defined benefit plans based on the
particular needs of their business, need for employees and competitive
environment. These programs satisfy a need for broad-based reductions
in workforce size that are popular with both terminated and remaining
employees and offer less negative effect on morale and marketplace
perception than an alternative such as layoffs. As the population of
workers entering the labor force begins to slow, I believe it likely
that the number and frequency of these programs will decrease. In a
marketplace that is increasingly competitive for employees, relatively
more employers will find it easier to attain a desired workforce size
reduction through attrition. Any downward changes in asset performance
of pension plans would also serve to make the offering of these
programs less attractive to employers. However, it is likely that some
level of these programs will remain in place as specific employers
adjust to the particular circumstances of their evolving competitive
Question 2. You suggest that Congress should hold sponsors of plans
harmless to increased benefits that are due solely to the reductions in
government-promised Social Security plans. Would you provide more
detail as to why this is important in your view and do you know whether
Congress instituted any ``hold harmless'' provisions when they raised
the retirement age in 1983?
2. Sudden changes in the system are the types of changes for which
employers may need to be held harmless. (Employers could be held
harmless by, for instance, granting them an exemption from the
requirements of Internal Revenue Code Section 411(d)(6) when employers
modify plans to reflect changes in Social Security benefit amounts.)
The ability of employers to plan and adapt to changes in an unhurried
and rational manner is important for many reasons:
Plans of many large employers have benefits directly
linked to Social Security benefits, retirement ages and/or the taxable
Changes in Social Security will have broad implications on
the availability of older workers.
To the extent that legislation directly impacts a plan's benefits
employers need time to evaluate costs, redesign plans, retool
administrative procedures, and communicate with employees. Pension
plans are also a significant item in a company's balance sheet,
financial statement, and its ability to borrow. To the extent that
protected benefits are automatically increased as a result of links to
Social Security, there could be a substantial impact on a company's
financial health. The voluntary private sector system cannot absorb
increases in costs due to unanticipated events without significantly
affecting the desire of plan sponsors to maintain plans and provide
retirement benefits to employees.
All companies, including those without plans that are directly
linked to Social Security, need time to assess the broader demographic
implications of legislation, not only on their benefits plans, but also
on their overall business plan.
In 1983, by providing a sufficiently long-time horizon to reflect
the emerging changes in Social Security, Congress effectively provided
an opportunity for employers to:
Adjust plans for future retirees through the ability to
redesign the pattern of future benefit accruals
Retain current plans for those near retirement without
Question 3. You discuss the importance of flexibility for employer
plans to enhance employee's productivity as they age. Would you provide
some examples for us on what you mean and how current law prevents this
3. Retirement is more than just a financial decision. It is
influenced by health, desire for leisure time, family considerations,
the non-financial rewards of employment and many other factors. Current
law makes it very difficult for employees to partially retire with
their current employer and receive both pension and a reduced wage in
exchange for reduced hours. Employees desiring partial retirement
generally change jobs. This results in lost productivity by both the
employer and employee as training of replacement employees occurs at
both the ``old'' and ``new'' jobs.
Current retirement plan law takes a ``one size fits all'' approach:
you are either active or you are retired. Among the roadblocks to
partial retirement are the following:
Distributions from pension plans cannot commence prior to
Normal Retirement Age unless an employee retires.
Retirement distributions cannot be pro-rated to reflect
Employment after Normal Retirement Age can require
expensive benefit accruals and, unless confusing ``suspension of
benefit notices'' are provided, actuarial increases.
The legal definition of Normal Retirement Age itself, and
many other rules that key off NRA have been unresponsive to the
increase in Social Security Retirement Age, remaining at age 65 with
five years of service.
Question 4. I'm interested in knowing your views on the degree to
which age discrimination may ultimately prevent increased participation
of older workers in the work force.
4. As the number of new entrants to the labor force decreases, and
if the health status of older workers continues to improve, I
personally believe that the employer's job requirements will adapt to
the available workforce. Certainly, the country has seen periods in the
past when labor force participation by older workers was much more
common than it is today. This may reflect today's demographics which
have a relatively larger number of qualified mid-career employees in
the labor force today, rather than any acceleration of age
discrimination in the recent past.
Question 5. Will there be enough jobs for older workers, jobs with
the level of physical activity that most persons over age 67 can
5. Projecting the number of jobs available for persons with the
level of physical ability of most persons over age 67 requires a
projection of both the level of future physical ability among older
individuals and a projection of the relative amount of physical
activity required in employment. Whether increases in longevity have
been linked to improvements in physical well being of older individuals
is the topic of active study. While neither a demographer nor an
economist, my understanding is that recent studies do appear to show
reductions in morbidity levels as well as in mortality rates. Levels of
physical activity required to perform jobs would appear to be
decreasing in the ``information economy,'' but I am not aware of any
reliable projections of future trends in required physical activity.
Question 6. Do you have thoughts on how the increasing number of
older workers might impact rates of unemployment, job opportunities,
and career advancement for younger workers?
6. This is an interesting area of exploration and modeling, but
outside my own area of expertise. In addressing these questions, it
will be imperative to link demographic studies with economic models. A
discussion of these and related issues is contained in the National
Research Council Report, Assessing Policies for Retirement Income,
Needs for Data, Research, and Models, Constance F. Citro and Eric A.
Hanushek, editors, National Academy Press, 1997.
Chairman Bunning. Thank you all for your testimony, and we
will stand adjourned.
[Whereupon, at 3:01 p.m., the hearing was adjourned subject
to the call of the Chair.]
[Submissions for the record follow:]
Statement of Employee Benefit Research Institute, Kelly Olsen
Analysis using the EBRI-SSASIM2 Policy Simulation Model has
shown that increasing the normal retirement age to 67 by the
year 2011 and indexing it to longevity thereafter would save
the Old-Age and Survivor's Insurance (OASI) program a projected
5.3 percent in total costs \1\ over 75 years and 13.56 percent
in annual costs in 2070.\2\ In light of such positive financial
implications, policymakers face the question of how a raise in
the normal retirement age would affect beneficiaries. Issues
include whether increasing the normal retirement age would be
an effective means of achieving the desired policy goals, from
what perspectives such a reform can be viewed by policymakers
and the public, and the extent to which such an increase would
disadvantage workers in physically demanding occupations.
\1\ Cost rates are the ratio of the present value of tax income to
the present value of taxable payroll for the years in a given period.
\2\ Saving projections are expressed relative to the current
In making these decisions, policymakers will likely find
the following three points of interest. First, few persons
today actually wait to retire at Social Security's normal
retirement age. Since 1960, the percentage of Social Security
beneficiaries with a reduction in benefits for early retirement
has grown from 11.8 percent to 71.1 percent (chart 1). In
addition, Employee Benefit Research Institute tabulations of
data since 1988 have shown an increasing percentage of early
retirees among those ages 55-64 (EBRI, 1997). In 1988, for
example, 10.4 percent of the population ages 55-62 were
retired, compared with 12.5 percent in 1996. In 1988, 32
percent of the population ages 63-64 was retired, compared with
36.5 percent in 1996, the last date for which data are
available. These data suggest that if the goal of raising the
normal retirement age is to encourage delayed retirement by
raising the ``age hurdle,'' the more significant hurdle in
reality for most workers is the early retirement age.
[GRAPHIC] [TIFF OMITTED] T2247.001
Second, an increase in the normal retirement age can, and
has often been, viewed as a benefit decrease. However, since
1960, remaining life expectancy at age 65 has increased almost
21.7 7 percent, giving the average American an extra 3.1 years
in later life (table 1). Had the Social Security retirement
ages been indexed to longevity since 1960, the normal
retirement age would be 68.1 years today, and the early
retirement age would be 65.1 years. Because the retirement ages
have not been indexed to longevity, beneficiaries have actually
been receiving progressively larger total expected lifetime
benefits since 1960, in part because they have been living more
years on the program. Depending on one's perspective, keeping
the benefit period steady rather than growing over time is, on
the one hand, a benefit cut and, on another hand, simply a way
of more closely maintaining the historical level of benefits.
Table 1: Life Expectancy at Age 65
Year Remaining Life
Source: U.S. Department of Health and Human Services, 1997
Finally, the prospect of raising the normal and/or early
retirement age raises questions about the ability of some
workers to continue employment until the eligibility
agespecifically, workers with physically demanding occupations.
While overall, research in this area is still in need of
support and continuation before such effects can be adequately
assessed, one ground-breaking study by Burkhauser, Couch, and
Phillips (1995) was done using data from the Health and
Retirement Survey (HRS).\3\ They found that ``the great
majority of those who take early benefits have both good health
and economic well-being.'' Contrary to popular conception, they
found that only about 5 percent of those taking early
retirement and 2 percent of those retiring at the normal
retirement age reported a health limitation. These results
suggest that an increase in the normal retirement and/or early
retirement age would not force droves of workers in poor health
to continue employment or to apply for Social Security
\3\ For additional analysis on the HRS, see Fronstin (1997).
However, whether those workers who are in poor health later
in life but who are too young to qualify for Social Security
retirement benefits should be forced to rely on disability or
welfare benefits for support is an important policy issue.
Today, Social Security disability benefits are issued only
through a complex determination process. As a society, we may
decide that persons in their sixties should not be held to the
same disability standards as younger persons. Burkhauser et al.
(1995) suggest that older workers with health limitations may
be particularly vulnerable to hardship in the face of an
increased normal and/or early retirement age. Among those who
reported a health limitation at early retirement age,
Burkhauser et al. found that the incidence of poverty was high.
While certainly not an exhaustive list, the above three
considerations are likely to be important to policymakers and
the public alike in deciding whether to raise the normal
retirement age. First, if delayed retirement is sought, an
increase in the early retirement age rather than (or in
addition to) the normal retirement age is a more likely
impetus. Second, because of increases in life expectancy at age
65, a raise in the normal and/or early retirement age(s) may be
perceived by policymakers and the public as a benefit cut or
alternatively as simply a means of maintaining historical
benefits. Finally, while it may be unlikely that a deluge of
beneficiaries would flock to the disability and/or welfare
rolls upon an increase in retirement age(s), present research
suggests that some innovative policy provisions will likely
need to be designed for those most vulnerable to adversity
under such a policy reform.
Employee Benefit Research Institute. EBRI Databook on Employee
Benefits, Third Edition (Washington, DC: Employee Benefit Research
Fronstin, Paul. ``Employee Benefits, Retirement Patterns, and
Implications for Increased Work Life'' EBRI Issue Brief no. 184
(Employee Benefit Research Institute, April 1997).
Burkhauser, Richard V., Kenneth A. Couch, and John W. Phillips.
``Who Takes Early Social Security Benefits: The Economic and Health
Characteristics of Early Beneficiaries.'' The Gerontologis. (Vol. 36,
No. 6): 789-799.
U.S. Department of Health and Human Services. Public Health
Service. Health United States, 1996-7. (Washington, DC: U.S. Government
Printing Office, 1997).
U.S. Social Security Administration. Social Security Bulletin
Annual Statistical Supplement 1997 (Washington, DC: U.S. Government
Printing Office, 1997).
Statement of Jonathan Barry Forman, University of Oklahoma
I am pleased to submit this statement for the record you
are compiling on The Future of Social Security for this
Generation and the Next. I am submitting this statement in my
individual capacity as a Professor of Law at the University of
Oklahoma College of Law where I teach courses on tax and
pension law and research primarily about tax, pension, and
Social Security policy. The purpose of this statement is to
discuss how the current Social Security system discourages the
elderly from working and to propose a solution to that problem.
Specifically, I recommend creating individual retirement
savings accounts (IRSAs)--but only for elderly workers. With
IRSAs for elderly workers, those who chose to remain in the
work force would no longer face the financial penalties of the
current Social Security system. Consequently, more elderly
workers would stay on the job, and that would enrich both them
and the nation.\1\
\1\ This statement is based on the author's forthcoming article:
Jonathan Barry Forman, Reforming Social Security to Encourage the
Elderly to Work, 9 Stanford Law and Policy Review--(forthcoming 1998).
Privatizing Social Security for Elderly Workers
Social Security is in financial trouble. The primary reason
for this trouble is that workers are living longer and retiring
earlier. Of course, it's great that we are living longer, and
it's wonderful that we can expect to have long and leisurely
retirements. But it has led to the current financing problem,
and the federal government must soon either cut Social Security
benefits or raise taxes.
In short, there are too many retirees and not enough
workers to support them. The ratio of workers-to-beneficiaries
has been declining for years. There were 16.5 workers for every
beneficiary in 1950, but, by 2015--soon after the baby boomers
start to retire--there will be just 2.7 workers per
Ironically, the current Social Security system actually
compounds its own financial woes by pushing elderly workers
into early retirement. A whole range of arcane rules discourage
most everybody from working past age 62. Not surprisingly, more
than half of all workers claim their Social Security benefits
at age 62, and 72 percent of workers claim them by age 65.
On the bright side, however, it should be possible to
improve Social Security's finances by encouraging the elderly
to stay in the work force. Keeping elderly workers on the job
would increase the worker-to-beneficiary ratio. That would
bring down costs for both Social Security and Medicare, and the
work efforts of these elderly workers would enrich them and the
Demography and Destiny. The primary reason for Social
Security's financial woes is that people are living longer but
retiring earlier. For example, a boy born in 1940 had a life
expectancy of just 61.4 years, but a boy born today can expect
to live to 72. Similarly, a man reaching age 65 in 1940 could
expect to live another 11.9 years, but a man reaching 65 today
can expect to live another 15 years.
Yet despite the fact that life expectancies have gone up,
there has been a marked trend towards earlier and earlier
retirement. For example, the average age at which workers begin
receiving Social Security has fallen from 68.8 years old for
men in 1940 to 63.6 years in 1994. Also, in 1995, only 16.8
percent of men and 8.8 percent of women aged 65 or older were
Social Security Discourages the Elderly From Working. The
federal government has little reason to intrude on an
individual's decision about when to retire. Nevertheless, the
current Social Security system actively discourages the elderly
Once a worker reaches age 62 and is eligible to receive
Social Security, delaying the receipt of benefits can actually
be quite costly. Those who delay retirement lose current
benefits, but the increases in benefits that can result from an
additional year of work rarely compensate for the benefits
lost. In fact, since only 35 years of work count for
determining a worker's Social Security benefit, each additional
year of work after age 62 usually squeezes out the benefits
earned in an earlier year. Moreover, elderly workers must
continue to pay Social Security taxes (and income taxes) on
Individuals who start to draw Social Security benefits at
age 62 but nevertheless keep working are particularly hard hit.
The so-called retirement earnings test takes a dollar of Social
Security benefits away for each dollar of earnings in excess of
$9,120 this year. Also, in addition to paying the usual income
and Social Security taxes on earned income, these workers may
have to pay income tax on up to 85 percent of their Social
Security benefits. The net effect is that many workers over the
age of 62 can face confiscatory tax rates on their earned
Workers who wish to work past age 65 face yet another work
disincentive. The delayed retirement credit increases the
monthly benefit paid to a worker who postpones retirement past
age 65 by just 5 percent for each year that a worker postpones
claiming benefits. Unfortunately, a 5-percent credit is
inadequate to compensate for a year of lost benefits. The
delayed retirement credit will increase gradually to an
actuarially fair 8 percent in the year 2008. Until then,
however, Social Security indisputably discourages the elderly
from working past age 65.
Finally, those who work until they drop leave nothing
behind for their estates.
Faced with these work disincentives, it's no surprise that
more than half of elderly workers retire as soon as they can--
at age 62--and that fully 72 percent of elderly workers retire
by age 65.
So what can be done to encourage the elderly to remain in
the work force?
One approach would be to repeal the earnings test, raise
the delayed retirement credit to 8 percent, and change the
other arcane rules that discourage the elderly from working.
And Congress might want to increase Social Security's early and
normal retirement ages to, say, 65 and 70 respectively.
An alternative approach would be to privatize the Social
Security system. Proponents of privatization typically call for
replacing the current system with individual retirement savings
accounts (IRSAs) that would operate pretty much like today's
Individual Retirement Accounts (IRAs) and 401(k) plans. The
Social Security taxes that workers now pay to the federal
government would go instead into these IRSAs and be invested in
the stock market.
Replacing all or a part of the current Social Security
system with IRSAs would help encourage the elderly to work.
Unlike the current Social Security system, payroll
contributions and the earnings on those contributions would
remain in individual accounts, and no money would ever be taken
from one worker to provide benefits for other workers or their
families. Consequently, there would be no penalty for working
past age 62: IRSA contributions made by elderly workers would
simply increase their own individual account balances.
Unfortunately, because there would be no redistribution
under a privatized system, there would be no redistribution to
those low-income retirees whose own individual account balances
would provide inadequate retirement incomes. Consequently,
unlike the current Social Security system, a privatized system
could leave millions of elderly Americans in poverty.
Individual Social Security Accounts for Elderly Workers. A
better approach would be to create individual retirement
savings accounts--but only for elderly workers. As under
current law, those workers who chose to retire immediately at
age 62 could claim the usual Social Security benefits. For
those workers who chose to work past age 62, however, an
individual retirement savings account (IRSA) would
automatically be opened. These accounts would be held by the
government, invested in the stock market, and annuitized on
The starting balance in each worker's account would be the
present value of that worker's Social Security benefit
entitlement at age 62. For example, an average-wage single man
who turned 62 and retired in 1997 could claim a Social Security
benefit of $743 a month. Each year that benefit will be indexed
for inflation, and it will continue until he dies. In effect,
he is entitled to an indexed lifetime annuity with a starting
payment of $743 per month. The starting balance for his IRSA
would be an amount exactly equal to the present value of that
annuity--about $116,000, according to the Social Security
Each worker's IRSA would be invested in a secure equity
fund and credited with investment earnings. Each IRSA would
also be credited with any subsequent payroll contributions for
that worker, and monthly statements would provide workers with
information about their accounts.
Once an elderly worker decided to retire, the balance in
that worker's account would be reconverted into an indexed
lifetime annuity. These annuities would be a good deal larger
than the benefits that were available at age 62. After all, the
starting monthly payment for a worker who postponed retirement
would be based upon the worker's then-higher account balance
and then-shorter remaining life expectancy.
Moreover, the account balance of any elderly worker who
died before retiring would be included in that worker's estate.
In short, individual Social Security accounts for the
elderly would reward them for working past age 62. As a result,
more elderly workers would stay on the job, and that would
enrich both them and the nation.