- IDEAS FOR ADVANCING THE UPCOMING DEBATE ON SAVING THE SOCIAL SECURITY SYSTEM

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

IDEAS FOR ADVANCING THE UPCOMING DEBATE ON SAVING THE SOCIAL SECURITY
SYSTEM

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

HEARING

before the

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

__________

NOVEMBER 19, 1998

__________

Serial 105-52

__________

Printed for the use of the Committee on Ways and Means

U.S. GOVERNMENT PRINTING OFFICE
53-030 cc 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

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

C O N T E N T S

__________

Page

Advisory of November 4, 1998, announcing the hearing............. 2

WITNESSES

Department of the Treasury, Hon. David W. Wilcox, Assistant
Secretary for Economic Policy.................................. 21

______

Cogan, John F., Hoover Institution............................... 53
Gramm, Hon. Phil, a U.S. Senator from the State of Texas......... 9
Reischauer, Robert D., Brookings Institution..................... 65
Social Security Advisory Board, Stanford G. Ross................. 76
Stein, Herbert, American Enterprise Institute for Public Policy
Research....................................................... 60

SUBMISSIONS FOR THE RECORD

DeLauro, Hon. Rosa, a Representative in Congress from the State
of Connecticut, statement...................................... 93
Edelman Financial Services, Inc., Fairfax, VA, Ric Edelman,
statement and attachments...................................... 94
Forsman, Edwin E., Futura Magazine, Phoenix, AZ, statement....... 98
Generation X Committee on Social Security, Tax Reform and
Economic Justice, statement.................................... 101
National Conference of State Legislatures, Norma Anderson, and
John Hurson, letter and attachment............................. 105
Ramstad, Hon. Jim, a Representative in Congress from the State of
Minnesota, statement........................................... 108
Retired Public Employees Association, Inc., Albany, NY, Cynthia
Wilson, statement.............................................. 108
Sanders, Hon. Bernie, a Representative in Congress from the State
of Vermont, statement.......................................... 109
Seidman, Laurence S., University of Delaware, statement.......... 110
Smith, Hon. Nick, a Representative in Congress from the State of
Michigan, statement............................................ 112
Society for Human Resource Management, Alexandria, VA, statement. 113

IDEAS FOR ADVANCING THE UPCOMING DEBATE ON SAVING THE SOCIAL SECURITY
SYSTEM

----------

THURSDAY, NOVEMBER 19, 1998

House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to call, at 11:05 a.m., in room
1100, Rayburn House Office Building, Hon. Bill Archer (Chairman
of the Committee) presiding.
[The advisory announcing the hearing follows:]

ADVISORY

FROM THE
COMMITTEE
ON WAYS
AND
MEANS

CONTACT: (202) 225-9263
FOR IMMEDIATE RELEASE

November 4, 1998

No. FC-14

Archer Announces Hearing on Saving Social Security

Congressman Bill Archer (R-TX), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold a hearing on
ideas for advancing the upcoming debate on saving the Social Security
system. The hearing will take place on Thursday, November 19, 1998, in
the main Committee hearing room, 1100 Longworth House Office Building,
beginning at 11:00 a.m.

In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses include representatives of the Administration, former Members
of Congress, and other notable experts. However, any individual or
organization not scheduled for an oral appearance may submit a written
statement for consideration by the Committee and for inclusion in the
printed record of the hearing.

BACKGROUND:

With the elderly living longer and the advent of a larger retired
population from the baby boom generation, the financial problems of the
Social Security system will be felt as soon as 2013. At that time, the
program will expend more than it takes in from payroll taxes and the
Government will have to increase borrowing, reduce spending, or raise
revenues to honor its commitments to the Social Security Trust Funds in
order to pay benefits. Without reform of the system, Social Security
will be unable to pay full benefits in 2032, according to the latest
report of the Social Security Board of Trustees.

Social Security has faced financial difficulty on a number of
occasions since the mid-1970s. In certain instances, Congress and the
President were facing a more immediate crisis unless action was agreed
to, benefit payments were not going to be issued. Ultimately, a
bipartisan agreement was reached by the legislative and executive
branches of Government. Lessons learned from these past reform efforts
are critical in creating an environment within which Social Security
reform can successfully take place.

In announcing the hearing, Chairman Archer stated: ``History shows
that without a climate of bipartisan cooperation and true
statesmanship, there will be no hope of truly saving Social Security.
That is why I have decided to hold this hearing on ideas for addressing
the debate on saving Social Security. Because of the historic window of
opportunity before us, I am inviting the Administration and others to
testify now before the opening of the new Congress.''

FOCUS OF THE HEARING:

The Committee will seek guidance from the Administration, former
Members and other notable experts on what can be learned from the
experiences of past Social Security reform efforts, as well as
recommendations on the best strategic ``road map'' to result in a solid
and fair plan to save Social Security for all Americans.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect 5.1 format, with their name, address, and
hearing date noted on a label, by the close of business, Thursday,
December 3, 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 distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Committee office, room 1102 Longworth House Office
Building, by close of business the day before the hearing.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.

1. All statements and any accompanying exhibits for printing must
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1
format, typed in single space and may not exceed a total of 10 pages
including attachments. Witnesses are advised that the Committee will
rely on electronic submissions for printing the official hearing
record.

2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.

3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the
name, company, address, telephone and fax numbers where the witness or
the designated representative may be reached. This supplemental sheet
will not be included in the printed record.

The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press,
and the public during the course of a public hearing may be submitted
in other forms.

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

The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.

Chairman Archer. We are going to have a little competition
across the street in the Rayburn Building this morning, but
hopefully the country will be as interested, I would hope more
interested in the most important issue to affect all of us,
namely Social Security, than in the issue that is going on over
in the Judiciary Committee this morning. But surely we need to
convey to the American people that the President's questions
are not going to deter us from doing our job, particularly on
the big issues that affect all of us to such a high degree.
Before I make my remarks this morning, I want to--well, not
only want to, I am going to express my strong fondness for
Barbara Kennelly, as well as appreciation and respect for the
work she has done on this Committee, inasmuch as this is a lame
duck session of this Congress and will be her last meeting on
the Ways and Means Committee. I hope we will have no more this
year. And so, Barbara, I think all of us are sad to see you
leave, wish you well, will miss you, and hope that you will
come back often and give us the benefit of your counsel and
your advice.
[Applause.]
And I am sure there are Members of the Minority party who
would like to also express their feelings about Barbara
Kennelly, and I think Mr. Levin has asked to be recognized.
Mr. Levin. Unless, Mr. Coyne, would you like to go first?
Mr. Coyne. Well, thank you.
Mr. Chairman.
Chairman Archer. Mr. Coyne.
Mr. Coyne. I too want to express my deep appreciation for
the service that Mrs. Kennelly has given to the country and the
friendship that she has provided to all of us here, and
particularly her leadership on an issue that is very important
to the American people, and that is Social Security. Being the
Ranking Member of the Social Security Subcommittee was not
always an easy task for anyone to assume, but Mrs. Kennelly did
it well and with great dedication, and I pay tribute to her
here today and wish her well in the future.
[The opening statement follows:]

Opening Statement of Hon. William J. Coyne, a Representative in
Congress from the State of Pennsylvania

We are here today to discuss the future of Social Security.
While Social Security's long-term financial problems are
serious, we should not forget what the program has achieved.
Social Security provides benefits to over 27 million
retirees. In my Congressional district, almost half of retirees
depend on Social Security for all of their income, and many
others would be extremely poor without it. Social Security's
guaranteed benefit is particularly critical to women,
minorities, and low-wage workers, who are less likely to have
any kind of private pension.
Social Security also provides benefits to 4.5 million
disabled workers and over 12 million dependents and survivors.
We often think of Social Security as a retirement program, but
over a third of its payments go to workers and families who
lost their main income because of death or disability.
It may take a while to come to consensus about the best way
to strengthen Social Security. I welcome a thorough discussion
of the options, which will result in a better solution for
Social Security. However, I am concerned that some will see
this period of discussion as an opportunity to squander the
short-term surplus in the Trust Fund on tax cuts. I believe we
can work in a bipartisan way to improve Social Security for the
future. An important first step is to agree that there will be
no further attempts to violate budget rules and raid the Trust
Fund for tax cuts.
It is important to deal with Social Security's future
financing problems. But we also need to protect its Trust Fund
in the present and build on the successes of the past. Many of
the people who depend on Social Security have no where else to
turn. They are counting on us to address these problems without
putting them at risk.

Chairman Archer. Mr. Levin.
Mr. Levin. Thank you very much, Mr. Chairman.
We have had the honor of serving with Barbara Kennelly. She
has been one of our leaders on many issues as Vice Chair of the
Caucus. She has been a special leader on the Ways and Means
Committee on so many issues; Social Security perhaps the most
important, but so many others. On child support, I remember we
all drew from her emphatic leadership on that, and so many
other issues relating to taxation and human resources.
I have had the privilege, Barbara, of serving with you on
the Social Security Subcommittee, and you will truly be missed.
Your depth of knowledge and commitment has meant a lot on our
side and I think, as expressed by our Chairman, it cuts across
the aisle.
This is a lame duck session but we are entirely certain,
Barbara, that you are not a lame duck. Your public service has
been exemplary, and we expect in one way or another to continue
our friendship and, hopefully, our relationship. The State
needs that, the Nation does, and we, as your friends, do. So we
say bon voyage, but just temporarily.
Mr. Lewis. Mr. Chairman.
Chairman Archer. Mr. Lewis.
Mr. Lewis. Mr. Chairman, I would like to join you and my
colleagues in wishing a friend and a colleague, the gentlewoman
from Connecticut, Mrs. Kennelly, the very best.
I have had an opportunity since being here in the Congress
to work with Barbara Kennelly, and she is always there. She is
a person of strength, a person of courage, a person of vision.
I have had an opportunity to visit her district, to get to know
her family, and to stay in her home. We served together for a
while as Chief Deputy Whips. This one Member will greatly miss
Barbara Kennelly, and I just want to thank her for her great
service to this Committee, to the Congress, and to the American
community.
I think when historians write about the Congress during
this period, pick up their pens and write, they will have to
say that Barbara Kennelly made a difference not just for the
people of Connecticut but for the people of America. Thank you,
Barbara.
Mr. Stark. Mr. Chairman.
Chairman Archer. Mr. Stark, you have been demoted.
Mr. Stark. I just wanted to say, Mr. Chairman, thank you
for having the vision to see me here.
Barbara sits in a chair that is normally occupied by Mr.
Rangel, our Ranking Member, and it would be remiss for me not
to say how much we will miss Barbara on this Committee, in the
Congress.
As John Lewis said, many of us have visited Barbara in her
home and know her family and know her record. I think that she
will be with us for many years to come in one capacity or
another. And I look forward to continuing to work with her,
because her spirit, her determination, and her concern for all
Americans, particularly the people in Connecticut, has been
evidenced for a long time, and we will miss you, Barbara.
I know we will continue to work together, and I like seeing
you snuggled right up there next to Chairman Archer. I hope in
your future years you continue to do so as he needs some help
on the Social Security issue, and I know you will be able to
continue to do that. Thank you.
[The opening statement follows:]

Opening Statement of Hon. Pete Stark, a Representative in Congress from
the State of California

Most Americans living today were born well after the Great
Depression. They are not marked by the fear of economic loss
because--as a society--they have not experienced it.
It may well be that those who have not lived through the
Depression do not appreciate the need for a social safety net,
such as the one provided by Social Security.
It's true that by historical standards, the United States
has enjoyed very good economic times for the past 30 years with
only short recessions. Today's adults almost assume that a good
economy will last forever.
In such a climate, more people may be less appreciative of
safety nets, like Social Security, and more convinced that
self-reliance will suffice.
But economic self-reliance is only workable for those who
are reasonably well off and who understand the value of
savings. Nobel prize winning economist Modigliani, my economics
professor at Massachusetts Institute of Technology, taught me
this lesson: people save only when they have money to save and
perceive the need to save. With our national savings rate at an
all time low of 3.8% of disposable income. I cannot help but
conclude that Americans today do not perceive the need to save
for the future.
Self-reliance also assumes a certain level of
sophistication to ensure that invested savings will grow. That
requires knowledge about how to balance investment
opportunities and risks. Most Americans do not have this type
of advanced knowledge.
Although privatization of Social Security is the topic de
jour, we have an example of a safety net that has worked--and
worked well--for over 60 years. We should focus on maintaining
its solvency past 2032, not dismantling the program. The Gramm-
Felstein proposal would lay the foundation to do just that--
dismantle Social Security.
Social Security replaces about 40% of pre-retirement wages
for average earner and 57% for low-earners. By design, it
cushions those who have fewer resources to save. In 1996,
Social Security lifted 11.7 million elderly people out of
poverty. Proposals have been made to redistribute the
progressive payment system of Social Security in order to
subsidize individual private accounts.
Two-thirds of elderly receive most of their income from
Social Security. Without Social Security, one-half of older
Americans would live in poverty. In addition to the elderly,
3.5 million non-elderly adults and 800,000 children were lifted
out of poverty by Social Security in 1996.
Its mandatory nature assures that all workers start their
retirement nest egg with their first paycheck and increase
their savings amounts automatically as their wages increase.
Its social insurance component shields families from a wage
earner's untimely death or disability, and subsidizes the
lowest paid wage earners with the earnings of others.
Social Security works because it is more than an savings
account for individuals--it is a commitment that our society
makes to its members that there will be a safety net for
workers and their families in the event of their disability or
death during wage earning years.
Individual accounts take care of those who are
sophisticated enough to invest their funds well; they leave the
low wage folks, the unsophisticated, the disabled, the widows
with young children out in the cold. Is that what America is
about?
Has the ``responsibility and self-reliance'' mantra erased
any trace of collective responsibility for the less fortunate
in our society? I think not.
I encourage my colleagues to work together in a bipartisan
fashion to save Social Security for future generations. Most
Americans need a sound retirement system they can rely on more
than they need some fast talking Wall Street broker.

Chairman Archer. Mr. McNulty.
Mr. McNulty. For all of the reasons outlined by the other
Members, I am sorry to see Barbara leave the U.S. House of
Representatives, but I would remind everyone that while Barbara
will no longer be a colleague, she will still be a friend, and
that is so much more important.
Thank you, Mr. Chairman.
Chairman Archer. Mr. Thomas.
Mr. Thomas. Thank you, Mr. Chairman. The gentlewoman from
Connecticut and I have pretty well paralleled our time on this
Committee and, as is the case with many Members of this
Committee, there are quality people in the House and at some
time or another they often seek higher office. So we were going
to lose her either way and it was going to be our loss.
But the thing I remember most in dealing with Barbara was
that, in the highest tradition of this Committee, although
oftentimes we would come from opposite sides of a point or an
argument as we attempted to do the people's work, it was always
done in a very pleasant, very civil way, because that is who
she is. This Committee will suffer her loss in more ways than
most people will realize, because what she did was quietly and
constantly knit the fabric of the Ways and Means Committee
together, and someone else is going to have to do that now. It
is our loss.
Mr. Tanner. Mr. Chairman.
Chairman Archer. Mr. Tanner.
Mr. Tanner. Thank you, Mr. Chairman. I had the privilege of
serving with Barbara on the Subcommittee over the last 2 years,
and in my opinion she is the personification of one of the
highest compliments one can pay another, and that is simply she
looked for the best in others and gave the best she had, and we
are going to miss her.
Chairman Archer. Mr. Houghton.
Mr. Houghton. Thank you, Mr. Chairman.
This is a very important Committee, and I respect the
Members on it tremendously: Very bright people, articulate,
legal craftsmen. But the element I think we prize the most,
particularly as we strive for bipartisanship, is fairness, and
I don't think there is anybody that I have known in this
Congress who represents that element of fairness the way
Barbara does. Thank you.
Chairman Archer. Mr. Becerra.
Mr. Becerra. Thank you, Mr. Chairman. I would like to
associate myself with all the remarks that have been made and,
Barbara, only to add that we will miss you. You have left us
with a paradigm of statesmanship which I hope will hold us well
into the future, and I thank you for your service.
Chairman Archer. Mr. McDermott.
Mr. McDermott. Thank you, Mr. Chairman.
Senator Gramm, these accolades to Barbara are two-edged.
One is that we want to say goodbye to her, and we are going to
miss her an awful lot, but we also want you to know how much we
think of her, if she should by any chance be appointed by the
White House to something and needs Senate confirmation.
Senator Gramm. Well, fortunately, she has always been very
sweet to me.
Mr. McDermott. I am pleased to hear that you will whistle
her confirmation through without any problem whatsoever. We are
sure the White House will find something, Barbara, to use your
extraordinary talents toward, and it has been a real pleasure
to serve with you. Thank you.
Chairman Archer. Mrs. Thurman.
Mrs. Thurman. Barbara, I have to say to you publicly that I
would not be on this Committee had it not been for your
encouragement. You became a friend early on. You continued to
guide me through this. I will miss your wisdom and your
insight.
I think this country owes you a debt of gratitude for what
you have done in articulating better than anybody the
importance of families in our country and the struggles that
they go through. I think you also have been a model for women
across this country. You have given hope to every woman who
wants to come to political life as an example that we should
all follow, and you have given us that opportunity to serve
after you.
I only wish you the best, and I hope you will let me make
that phone call when I need your wisdom and guidance again.
Chairman Archer. The Chair plans to recognize Mr. Kleczka
and then Mrs. Kennelly for any comments that she might like to
make, and then would encourage other Members to place any
comments about Mrs. Kennelly in writing in the record.
Mr. Kleczka.
Mr. Kleczka. Thank you, Mr. Chairman.
Mr. Chairman, I would like to add my voice of thank you to
Barbara Kennelly, not only for her work on the Committee but
also for her work as part of our leadership team which brought
issues to the forefront of national debate, and she did so very
well.
After Jim McDermott's remarks, I don't know, Barbara, if I
should call you Ambassador Kennelly, or is that letting
something out of the bag? But, nevertheless, it is amazing,
Bill Thomas indicated that over the years that you and he have
been on the opposite sides of many issues and arguments. But in
my tenure on the Committee I always found that you were on the
right side. So, Barbara, we are going to miss you, and
Godspeed.
Chairman Archer. Mrs. Kennelly.
Mrs. Kennelly. Thank you, Mr. Chairman. And I certainly
didn't expect this, but I wanted to be at this meeting, a
meeting on Social Security, an issue that is incredibly
important to me.
First let me thank the Members for those very, very kind
words. And please excuse us, Senator, for holding this up. We
will be almost ready to go. And, Mr. Chairman, thank you very
much for letting this take place. This was not planned and it
moves me greatly.
I want to thank the staff for always being so incredibly
nice to me. Janice Mays has been wonderful to me. When I first
came on the Committee in 1984, I knew nothing, and she taught
me a great deal of what I know today and made me the success I
was able to be in legislation. And Sandy Wise, I want to thank
you very much for taking me through the whole picture of Social
Security.
I love the nice words, I love the compliments, but I am
asking you for something else. And I look right down at the
testimony that I am about to say, and I pick one paragraph out
and say to you, the Social Security Program has some built-in
protections to benefit those who are most vulnerable. Women, in
particular, benefit greatly from Social Security. Sixty percent
of Social Security beneficiaries are women, and Social Security
is often the only source of retirement income for a majority of
these women.
I am saying to you, I love the kind words, but promise me
that you will remember in any changes in Social Security to
remember the women. Women, widows, people left with children
alone, people in great need, older women, the majority of older
women in this country have depended on Social Security. Social
Security has kept hundreds of thousands of older women out of
poverty.
And as we in the new Congress, the 106th Congress, begin
the venture into reforming Social Security and protecting it
and keeping it for future generations, I ask every one of you
who said kind words about me this morning and those that feel
them, promise that you will remember the women as you reform
Social Security. Think about someone who has never worked. How
do they have an individual retirement account? Think about
someone left with three children and no money. What happens to
them in a new plan? Remember them, I ask you, in memory of
Barbara Kennelly, who has served many years on this Committee.
Thank you, Mr. Chairman.
Chairman Archer. The Chair believes it is very, very good
for us to enter into what is the end of this Congress and, in
effect, the beginning of the next Congress with what is a
spirit of cordiality, a spirit of civility, a spirit of
cooperation to work on a very, very bipartisan basis on the
major issue that will face the Congress, the next Congress, and
the next generation in the next century, namely Social
Security. This cannot be solved on a partisan basis, it can
only be solved on a bipartisan basis, and today marks the
beginning of our effort to save and strengthen Social Security.
It is my sense, from having talked to Members on both sides
of the aisle, that there is a strong commitment by all
Republicans and all Democrats to succeed in this effort. And to
start off our hearing this morning, my friend and colleague
from the State of Texas, the senior Senator from the State of
Texas, is appearing because he has given a lot of thought to
Social Security and has asked to be able to make a presentation
to the Committee this morning.
And we more than welcome you here and we will be glad to
here your comments, Senator Gramm. So welcome to the Committee.

STATEMENT OF HON. PHIL GRAMM, A U.S. SENATOR FROM THE STATE OF
TEXAS

Senator Gramm. Thank you, Mr. Chairman.
Chairman Archer. You are our leadoff hitter. I hope you end
up crossing on base before it is all over.
Senator Gramm. Well, Mr. Chairman, first of all, I
appreciate you and the Committee giving me this opportunity.
What I wanted to do this morning was to try to make five points
that I think are relevant to this debate no matter how you come
at the debate, and I think they are basically points that
ultimately there will be an agreement that these are all
relevant. In the final analysis, there will be disputes about
them as to how we deal with them.
The first point is that this is not just an American
problem, this is a worldwide problem. Our Social Security
system is really a follow on to a program that started in
Germany under Chancellor Von Bismark in the 1880's. Bismark was
a political genius who united the country, and one of the
uniting principles was the recognition that it was possible to
bypass a generation of effort in accumulating, saving and
creating wealth by taxing current workers to pay benefits to
current retirees. And in doing so, Bismark established a system
whereby the foundation of the funding of the system was a
commitment to tax generations yet unborn.
This system started in Germany in the 1880's. It spread all
over Europe, was in Australia by 1909, and came to the Americas
in Chile in 1925. The United States was one of the last major
industrial nations to adopt it in 1935.
But all of these programs have two things in common: The
first thing is, none of them accumulate any wealth, none of
them make any investment, none of them accumulate any real rate
of return, and therefore a fundamental problem that all of
these programs worldwide have is they do not benefit from what
Einstein called the most powerful force in the universe, and
that was the power of compound interest.
The second problem with all of them is, they are all
victims of demographics. They work great when you have a very
young population, when you have massive numbers of people
coming into the labor market, but they all begin to break down
when you have large numbers of retirees and relatively low
numbers of workers. We all know that America is looking 25
years from now at having two workers per retiree, but the
important thing to note is, it has already happened. It
happened in Japan.
One of the fundamental economic problems in Japan is their
aging population and the fact that the payroll tax in Japan to
fund their basic retirement programs is now over 30 cents out
of every dollar earned by every worker in Japan. Germany is
facing the same problem. They are about 20 years ahead of us.
We are looking at the certainty, if we do not change the
current system and if we preserve current benefits, that we
will have to double the payroll tax over the next 30 years to
pay for Medicare and Social Security.
The second point I want to make is that there is no Social
Security Trust Fund. I think one of the things that distorts
this debate is that every day we pick up a newspaper and we
read about money going into the Social Security Trust Fund.
But, in reality, if we are to reform the system and strengthen
it, I think we have got to begin by admitting that there is no
Social Security Trust Fund today. There are no investments.
There is no compound interest. Nothing is paying for Social
Security benefits except payroll taxes.
Now, I can explain it in two ways, and let me try to do it.
First of all, the Social Security Trust Fund is not a debt of
the Federal Government. When interest is paid to it, it is not
an outlay of the Federal Government. If you think of it in
terms of a family, let's say that you are throwing the
newspaper and you give your mama money to set aside for you and
you assume she is putting it in the cookie jar.
If she actually puts it into the cookie jar, it is an
independent trust fund because she can take money out of it to
let you spend it without affecting the family budget. But if
she simply takes the money and makes it part of the family
budget, then there is no money available, and the only way she
can give you your money back is if she takes it out of the
family budget, works more, earns more, spends less, or borrows
more.
The reality of the situation today is that while we have
piled up a paper debt to the Social Security Administration
since 1983, in reality no expenditure can be made out of that
trust fund unless we raise taxes, unless we cut spending, or
unless the Federal Government borrows money. And those are all
the things we would have to do if there were no trust fund. So,
in reality, the trust fund represents a moral obligation which
we all share but it represents no resource that can be used to
fund Social Security.
The third point is that ultimately, if we are to have a
real trust fund, a decision is going to have to be made as to
who invests the money. And I believe that ultimately, on a
bipartisan basis, we are going to decide that government cannot
invest the money. I believe that we have had, in essence, a
system since 1935 where government was supposed to invest the
money.
It is very instructive, and I would urge people interested
in this subject to go back and read the debate on Social
Security in 1935 and to look at the structure we established.
And what you will find is that we were supposed to raise
payroll taxes in 1937-41 to build up a trust fund which could
be invested, but Congress never raised the payroll tax. No
trust fund was ever built up.
No balances were ever really established until 1983, when
we had the legislation to try to deal with the crisis in Social
Security. That created a surplus. But every penny of that
surplus since that date has gone into the general government
fund and has made it possible for us to spend more, tax less
and borrow less than we would have in its absence.
The fourth point that we are going to have to look at is
how should we integrate any new investment-based system with
the old system. There are really two approaches to it. One is
to cut benefits in the old system and count on investments to
make up for those benefit cuts. There have been several
proposals that have been made along those lines. I think when
reasonable people look at it, we are going to decide not to do
it that way. The problem is you almost always have one group of
people who are losing benefits, another group of people who are
gaining from the investment, and they are generally not the
same people.
I think we will decide in the end to integrate investment
into the system and use the benefits from an investment-based
system to pay benefits that are guaranteed under the old
system. And I think the good news is that we have a sufficient
surplus now and projected into the future as to make it
possible for us, if we are willing to plow back most of the
benefits of an investment-based system to paying benefits to
people who are already in the system, that we can for all
practical purposes avoid any changes in benefits for people who
are already in the system.
The final point I would like to make, Mr. Chairman, is the
President in his State of the Union Address said ``Save Social
Security First.'' We all stood and applauded. It was a great
line, but to this point it is just a slogan. At some point the
President is going to have to come forward with a proposal.
My own opinion is that unless the President does that very
quickly, that one of two things is going to happen: One, we are
going to have to go on and try to move with a program in the
absence of a Presidential or executive branch proposal; or,
second, there are going to be many people who are going to
conclude that this was all a ruse to prevent Congress from
cutting taxes. And I think at that point we are going to see a
movement toward having a very substantial tax cut.
Certainly, our experience in the last week of this session
of Congress was a very disappointing experience because, in the
end, despite the fact that the administration had said all year
do not use the surplus, do not spend it, do not use it for tax
cuts, the President had opposed a tax cut that would have taken
$6.6 billion of that surplus this year, but in reality in the
last week of the Congress we spent $21 billion right out of the
surplus, every penny of which was taken away from Social
Security, and every penny of which we will wish we had next
year when we get ready to try to fix Social Security.
So I think these are the key points that we are going to
have to address. I think we have a historic opportunity to make
the system better. I don't think anybody in the end will be
able to defend the status quo, because the status quo is going
to mean benefit cuts that no one can live with. The status quo
is going to mean increases in taxes that no one is going to be
willing to impose. And I think there is only one thing we can
do in the end that can work, and that is to try to build
investment into the system. And I think if we do it right, we
can do it on a bipartisan basis. And I thank you, Mr. Chairman.
Chairman Archer. I thank you for your input, Senator Gramm.
Are there any Members of the Committee who would like to
inquire of the Senator?
Mr. Crane.
Mr. Crane. Senator, you mentioned Bismark starting the
Social Security system in Germany. What was the average
lifespan at that time in Germany, and at what age did you
qualify for your benefits?
Senator Gramm. Well, it was pretty similar to ours. I am
not sure what the numbers were in Germany, but when we paid the
first benefits in 1937, the average life expectancy was 61.
There was no early retirement. You did not get benefits until
you were 65.
So we literally had a situation where we passed the hat
around, workers put in 2 percent of the first $3,000 they
earned, and that paid benefits to one retiree. I think there
were 42 workers per retiree. Today when we are passing the hat,
we have 3.3 workers per retiree and they are paying 12.4
percent out of the first $68,500 that they earn to support one
retiree.
You do not have to be a mathematician to look at the
demographics to understand that there are two powerful forces
at work: One is people are living much longer. And as we all
get older, we appreciate it. And the second thing is people are
having fewer children. Even with our massive immigration, legal
immigration coming into America, we are looking at two workers
per retiree 25 to 30 years from now. And the arithmetic of that
is obviously frightening.
Mr. Crane. My recollection is that the average lifespan was
in the midfifties.
Senator Gramm. Probably was.
Mr. Crane. And the eligibility date was in your midsixties.
So we could solve it by the way Bismark did, by raising the age
for eligibility to 85.
Senator Gramm. Well, I know you are joking, but let me
respond to that by saying I hear people talking about raising
the retirement age to 70. I have what I call a calluses test on
raising the retirement age to 70. You show me somebody with
calluses who believes it is workable, and I would take it
seriously.
The problem is, while we look at the fact that people are
living longer and we think since we have white collar jobs that
we could all, like Strom Thurmond, work indefinitely, the plain
truth is if you go out in the real world, you do not see people
up on scaffolding or using jackhammers that are 70 years old.
And I think, in the end that if we do that, that what we are
going to do is end up with a huge number of people on
disability. If you look at Sweeden, which has taken that
approach, they end up with 24 percent of their people on
disability.
So I think in the end, obviously the attractiveness
economically of raising the retirement age is you cut benefits
by about $46,000 per couple by raising the retirement age to
70. The problem is, for white collar workers it might work. I
am just doubtful you are going to see people 70 years old able
to do blue collar work.
Chairman Archer. Anyone else wish to question?
Mr. McCrery. Mr. Chairman.
Chairman Archer. Mr. McCrery.
Mr. McCrery. Senator Gramm, you said if we do nothing we
will have to double the payroll tax to finance benefits. Now,
some of the later witnesses are probably going to tell us that
that is not true, we can just increase the payroll tax now by 2
percent and that will take care of the problem.
Would you agree with that analysis, and in any event, would
you recommend that as a course of action?
Senator Gramm. Well, there is no way a 2-percent increase
in the payroll tax will take care of the problem because every
penny of it would go into a phony trust fund and we would still
have massive tax increases 20 years from now. Nor do you gain a
whole lot by raising the wage base that you apply to--I think
it is very tempting to sort of portray every debate as we can
just tax rich people a little more to pay for it. The plain
truth is that to generate the kind of revenues you need, the
burden is going to have to be borne basically by middle income
workers. The more you raise the wage base, the more unfair the
system gets in terms of people putting money into it.
If you look at the demographics of two workers per retiree
25 or 30 years from now, I think that really dictates the
arithmetic. When you figure out that you have two workers
paying for Social Security benefits and for Medicare benefits
for one retiree, then I think you start to look at how
difficult that is going to be, and the attractiveness of some
kind of investment system where you can get the power of
compound interest working to help pay those benefits, to lessen
the burden on the worker, starts becoming more attractive.
But I think one of the things that we are going to have to
do in the debate, and I think it is really happening in the
Senate, is that the more people have looked at the problem, the
more sobering it is and the more bipartisan the whole debate
becomes. Because I think people have realized that have really
looked at these cuts, really looked at raising the retirement
age, really looked at means testing and benefit cuts, have
realized that in the end that is probably not going to be
doable given the social fabric of society, and raising the
payroll taxes is not going to be doable.
One of the reasons Japan has this terrible structural
problem is they are becoming noncompetitive with the 30-
percent-plus payroll tax. We talk about stimulating their
economy, but the reality is that they have some very real
structural problems, and this aging population and the cost
that imposes through the payroll tax is one of their huge
unsolved and, in the short run, unsolvable problems.
Mr. McCrery. Thank you, Mr. Chairman. Thank you, Senator.
Chairman Archer. Mrs. Johnson.
Mrs. Johnson of Connecticut. In view of the number of
panelists we have ahead of us, Senator, let me make a brief
comment.
You are absolutely right. The more you look at the numbers,
the more awesome the problem. I would just like to urge you, as
one of the people in the Senate who has given this a lot of
attention and is going to continue to give it a lot of
attention, to think about the reforms that we have to think
about at the same time we think about saving Social Security.
Because one of its odd flaws is that it looks at your 30-year
average, and if you have a zero earning year in that 30 years,
it is counted in because they want consecutive years.
This is a big disadvantage, particularly to young women who
typically now have a career for 8 or 10 years. Many more of
them are choosing then to stay home with their children, so
they will have those zero years. I think we really have to look
at the kinds of reforms that say your 30 consecutive earning
years and do not penalize people for dropping out of the work
force to stay home to take care of their kids.
So I think there are some new sort of value challenges in
this reform that were not as much a problem in 1982, and we
should be sure to get them on the table so that we know both
what the cost and the benefit of those would be.
Senator Gramm. Well, let me just respond with two points.
Number one, I think whatever you do in the system, you have to
have a minimum benefit where people get to the end of their
work lives, and because they have taken time out to have
children or because they have been sick or because they have
been unemployed, I think everybody has got to know if they get
to the end of their lifetime with their glass half full, that
up to some minimum we are going to fill it up. Also, one of the
benefits of an investment-based system is that during the 8 to
10 years that woman is out of the work force, her investments
will continue to grow.
Second, there are terrible inequities in the current
system. The child of a poor family that goes to work when they
are 16 or 17 years of age only gets benefits on their 35 years
of earnings, so everything they do before they are 30 years of
age, they get no benefit for. Whereas the child of a rich
family goes to college, goes to graduate school, goes to law
school, travels in Europe, finds themselves, and then starts to
work at 30, every penny they pay into the system they get
credit for.
So there are terrible inequities in the system. The system
is very anti-blue-collar worker, because blue collar workers
tend to start working sooner and demographically they do not
tend to live as long. And I think those kind of problems, which
nobody ever foresaw when the average life expectancy was 61, I
think now that we are going to go back and restructure the
system in some form, these are things we need to fix.
Mrs. Johnson of Connecticut. Thank you.
Chairman Archer. Ms. Dunn.
Ms. Dunn. Thank you, Mr. Chairman.
Senator, we talked about this last year, about using 90
percent of the surplus we expect over the next decade for
Social Security and 10 percent for tax relief. I frankly think
that it was unwise of us to have moved off that position, but I
specifically wanted to ask you, Senator, if you could go into
specifics so that everybody would understand, when we talk
about using the surplus to save Social Security, how would you
see that surplus expended in bolstering up the system?
Senator Gramm. Well, first of all, I think we need to admit
to ourselves that, number one, just running a surplus does
nothing to benefit Social Security. Just running a surplus,
assuming we can do it, remembering we spent a quarter of the
surplus this year, but just running a surplus reduces the
indebtedness of the government relative to what it would be
otherwise. But none of that money goes to Social Security, none
of that money is invested in Social Security, and no earnings
from it are available to Social Security.
The only way you can invest in Social Security is to
actually have the money invested in real assets. If you are
going to pay real benefits at the end, you can pay for them
only in two ways: One, at that point taking the money away from
workers in a payroll tax; or, two, building up real assets in
the interim to help pay for some of those benefits.
So what I am talking about, and what I think increasingly
people are talking about, is a system where part of the payroll
tax would be invested. Under the proposal that I am for, the
worker would own it but the worker would not directly
participate in the investment. They would choose a qualified
company that would do it under the supervision of a Social
Security Investment Board, and they would, in their working
lives, build up assets.
If at the end of their working life they do not have enough
to pay for their benefits, then part of the payment would come
out of the old system, part of it would come out of their
investment. If they have enough to pay for it, then we would
not have to pay for it by payroll taxes at that point.
It can be structured in many different ways, but the point
is that in the end, unless we bring some new force into Social
Security like the power of compound interest, there is no way
you can avoid either cutting benefits or raising payroll taxes
and doing it dramatically. And that is what is going to produce
the bipartisanship, in my opinion, because when people look at
these cuts and look at these payroll taxes, they are going to
decide that is something they do not want to do or cannot do.
And when you start looking at alternatives, there is really
only one alternative, and that is what Franklin Roosevelt
envisioned the system as being to begin with. When you go back
and read the debate and you read the proposals coming from the
administration in 1935, the President envisioned an annuity. He
used the term all the time. And the idea was that workers would
build up investments that would accumulate earnings, and they
would have the knowledge and satisfaction and guarantee of
knowing they helped fund their own retirement.
The problem is we never set up the system like that, and I
think in the end we will decide to move in that direction. But
what we have got to do is decide how to mix the new system with
the old system, and how to do it in such a way as to get people
to accept it. And quite frankly, in the end I believe that to
get it accepted during this transition period for the first 30
or 40 years, almost all the benefits of the investment will
have to go to paying off the debt of the old system.
Ms. Dunn. Thank you.
Chairman Archer. Thank you, Senator. You have given us a
good start in our discussion on moving forward on saving Social
Security.
The Chair at this time would invite David Wilcox to take a
seat at the witness table. And while Mr. Wilcox is moving to
the witness table, the Chair will make his opening statement.
I believe that today's hearing is exceedingly important as
we move into finding a bipartisan solution for Social Security.
It is the beginning of this effort, and this Committee will be
the focal point for the determination in the end as to what we
do on a bipartisan basis for Social Security.
Social Security is a vital thread in our Nation's moral and
economic fabric. It has reduced poverty for seniors, it has
protected seniors, and it has given greater freedom to the
continued working generations in knowing that their parents and
their grandparents at least have a modicum of dependable
income. It has helped to make this strong Nation a great
Nation, and thanks to it, we are all better off.
I welcome President Clinton's commitment to saving Social
Security, and I look forward to undertaking the serious and
bipartisan effort. Mr. Wilcox is with us today representing the
Treasury. I welcome you and I look forward to your answers on
behalf of the administration.
But I must say that I was troubled and terribly
disappointed that Secretary Rubin refused to accept my
invitation to be with us today. He is the Chief Trustee of the
Social Security system. He should be here to set the tone for a
bipartisan beginning and reaching a solution. It must be
bipartisan and it must be fair. The Secretary's absence begins
the process on the wrong note and on the wrong tone, and I
regret his decision.
In all cases, I intend to proceed in a bipartisan manner. I
am fully prepared to help President Clinton get a bill through
the Congress. The American people expect us to work together,
and that is what I intend to do. But make no mistake, this job
will be one of the most difficult undertakings that the
Congress has ever begun to work on.
Social Security is not going to be technically broke for 34
years, so current beneficiaries and beneficiaries to come over
the next 10, 20, 30 years will have their benefits and will
receive them. They are protected even if we do nothing. But we
owe it to the next generation in the next century to move on
this now. The longer we wait, the more difficult it will be.
I believe that President Clinton faces a test, perhaps the
greatest test of his leadership, to see if he can fashion a
solution to the problem this far away from the crisis. To his
credit, the President made this our Nation's number one
priority almost 1 year ago. And having done so, it is fair to
ask the President now what he intends to recommend to the
Congress in a specific proposal to solve this problem. Will he
submit a specific plan? If so, when? And if not, why not?
We understand that this year has been absorbed with a
national dialog on Social Security to attempt to let all the
American people have their input across this great Nation. The
President will culminate this with a White House Conference
next month. At the conclusion of that bipartisan White House
Conference, the time will be there for the President to step up
and accept the leadership mantle and send to us a proposal as
his recommendation for the solution of the Social Security
problem, and we will accept it happily and readily and begin to
move on it.
Without a specific plan from the President, a very
difficult job will become much, much harder. Some might say it
will even be impossible. The Congress, with all of its varied
ideas, varied approaches, one from another, Democrat and
Republican, will have a very, very difficult time coming
together internally on an ultimate solution.
This issue is so electric and so sensitive that I expect
that there will be, in spite of the efforts on the part of
constructive people on both sides of the aisle, there will be
efforts on the part of individual Members to get political
advantage out of the issue going into the next election. The
one way to override that is for the President to submit a
proposal, defuse the issue, and give us a chance to go to work
on it.
I felt during this year that we needed a bipartisan
proposal--specific proposal, not a group of alternative
options--that would be designed by commission of bipartisan
individuals who would get together and be forced, in the end,
to submit one proposal, again with a majority of the commission
on both sides, or all sides, on a bipartisan basis, standing
behind the focus of that proposal, and let the Congress begin
to work on it. That is what happened in 1982.
I was personally a Member of President Reagan's National
Commission on Social Security Reform. Without that Commission,
I know, from having been at that time a Member of the Social
Security Subcommittee on the Ways and Means Committee, no
resolution would have occurred.
But unfortunately, the White House felt that the creation
of a Commission was not the right way to go, and I respect
their decision. But having defeated that Commission and said
that we should have this national dialog with a White House
Conference, I think it behooves the President more than ever to
submit a specific plan at the end of that White House
Conference.
Not simply to bundle up all of the varied proposals and
inputs from the people who attend the conference, send it up to
Capitol Hill, and say go to work on it, we will try to help
you. That will not solve this problem.
America needs leadership today from the one individual who
was elected by the people of this country to provide that
single leadership. And, again, I say I stand ready to roll up
my sleeves and to work with the President when we receive that
proposal.
If President Clinton believes that we can get this job done
without his leadership or without a specific plan, I believe he
will be making the biggest miscalculation of his presidency.
General principles will not get this job done, and history has
shown that to be true when we deal with the highly sensitive
issue of Social Security.
Let it not be again that what we learn from history is that
we never seem to learn from history. Let us learn from history
and proceed, having learned from it. Broad outlines will not
work. It will take presidential leadership. It requires
specifics. In short, it takes a President.
If President Clinton were here today, I would close with
this message to him: Mr. President, as you and I first
discussed when we met together privately in the Oval Office in
December 1996, we cannot miss this opportunity to do this for
future generations. I know you agree with that because you
spoke to it strongly in that first meeting. Mr. President, do
not miss this opportunity.
Just as only President Nixon could go to China as a
Republican, no Democrat President could have gone to China and
gotten away with it, you, Mr. President, you alone as a
Democrat can change the course of Social Security. When good
presidents lead, great nations follow. Lift up our Nation, Mr.
President. Put principles before politics and ideas before
ambition. If you lead, we can be successful. Like no other
issue, this one will test your presidency. I think you are
willing to lead. Will you be specific? I commit to you that I
will do everything necessary to strengthen and save Social
Security and to work with you.
[The opening statement follows:]

Opening Statement of Hon. Bill Archer

Today's hearing marks the beginning of our effort to save
and strengthen Social Security.
Social Security is a vital thread in our nation's moral and
economic fabric. It has reduced poverty, protected seniors, and
enriched our families. It has helped make a strong nation a
great nation. Thanks to it, we are all better off.
I welcome President Clinton's initiative to save Social
Security first, and I look forward to undertaking this serious
and bipartisan effort.
Mr. Wilcox, I welcome you and look forward to your answers
on behalf of the Administration. I must inform you, however,
that I am troubled that Secretary Rubin declined my invitation
to testify. If we're going to work on Social Security together,
it must be bipartisan and it must be fair. The Secretary's
absence begins the process on the wrong note and I regret his
decision.
In all cases, I intend to proceed in a bipartisan manner. I
am fully prepared to help President Clinton get a bill through
the Congress. The American people expect us to work together
and that's what I will do.
Make no mistake, this job will be difficult. Since Social
Security won't really be broke for thirty-four years, President
Clinton faces a test of his leadership to see if he can fashion
a solution to a problem this far from crisis.
To his credit, the President made this our nation's number
one priority almost one year ago. Having done so, it's fair to
ask the President what he intends to do now.
Will he submit a specific plan? If so, when? If not, why
not?
Without a specific plan from the President, a very
difficult job will become much, much harder. Some might say it
will be impossible. If President Clinton believes he can get
this done without his leadership or without a specific plan, he
may be making the biggest miscalculation of his Presidency.
General principles won't get the job done. Broad outlines
won't work. It will take Presidential leadership. It requires
specifics. In short, it takes a President.
If President Clinton were here today, I would close with
this message to him.
Mr. President, don't miss this opportunity. Just as only
President Nixon could go to China, you alone can change the
course of Social Security. When good Presidents lead, great
nations follow. Lift up our nation, Mr. President. Put
principles before politics and ideas before ambition. If you
lead, we can be successful. Like no other issue, this one will
test your Presidency. Are you willing to lead? Will you be
specific? I commit to you that I will do everything necessary
to strengthen and save Social Security. I look forward to
working with you.

Chairman Archer. And now I am happy to yield to Mrs.
Kennelly, representing the Minority, for any statement that she
might like to make.
Mrs. Kennelly. Thank you, Mr. Chairman, and as I look out
at this audience this morning, each and every individual in
this room understands that Social Security faces future
financial challenges through the increasing life expectancies
and the approaching retirement of the baby boom generation. I
look out and see many faces that understand this problem, many
people looking at this situation, getting ready to resolve this
situation. And I say to you this morning, Democrats want a
bipartisan, constructive approach to strengthening Social
Security for the 21st century.
Criticism is so easy, but as a great Republican President,
Theodore Roosevelt said, it is not the critic who counts, not
the man who points out the strong man's stumbles or what the
doer of deeds could have done better. The credit belongs to the
man--and may I say the woman--who is actually in the arena. If
both Members of Congress and the administration come together
to work out a truly bipartisan plan, it will serve the American
people much better than if we sit and wait for the other party
to give something for us all to criticize.
I heard your remarks this morning, Mr. Chairman. I
understand with your long history, with your knowledge of the
Ways and Means Committee, with your former experience in Social
Security, I know how sincere those remarks are. But may I say
to you that the Minority welcomes Hon. David Wilcox. He is the
point man for our President at this very moment concerning
Social Security matters. You may be sure that Secretary Rubin
will be with this group. I won't be here, but these Members
will be here in this room, and the Secretary of the Treasury
will be sitting right down there being part of finding a
solution to the Social Security problem.
And may I say to you loud and clear, the President of the
United States, William Clinton, will be very much involved in
resolving this situation. If nothing else, we all learned when
we tried to reform health care that only the administration and
only the Members of Congress can carry out and find a solution.
If we let the special interests in, if we let the special
interests be the ones that are looking for the solution and
calling the tune, we will not resolve this problem.
You say that this might be impossible. I know you, Chairman
Archer. This is not impossible. You would not be Chairman of
the Ways and Means Committee if you did not look at things that
were terribly difficult and find solutions to them. No Member
of the Democratic team says this is impossible because we know
the American people demand that we resolve this situation, that
we make sure that the American people always have Social
Security.
So we come this morning, and it is a gathering and an
important gathering, but it is only a gathering of the 105th
Congress. Next month or 2 months from now you will have the
106th Congress which will have as a number one priority--I
heard Speaker Livingston talk about it yesterday, I know that
Mr. Gephardt is talking about it, I know how clearly and how
importantly the President of the United States feels that this
has to be resolved.
So I wish I was going to be with you. I won't be. But I
will be watching you, like all Americans will be watching. And
this is one issue where we have to be bipartisan or we will all
lose, but most importantly, the American people will lose. So I
wish you well, Chairman Archer, I wish the Minority Members
well, and I say to all of you: Resolve this situation. You can
prove once again that the Congress of the United States is very
important and they can work with the President of the United
States.
[The opening statement follows:]

Opening Statement of Hon. Barbara B. Kennelly

Mr. Chairman, Social Security faces future financial
challenges due to increasing life expectancies and the
approaching retirement of the ``baby boom'' generation. The
time has come for us to consider seriously ways to address
these challenges while strengthening our system for current and
future generations.
The Social Security Act of 1935 is perhaps the most
successful program enacted in the twentieth century. The
creation of the Social Security program has changed America's
way of life by providing important financial benefits to our
elderly, disabled, and survivors both old and young. Indeed, if
it were not for Social Security, half of our nation's elderly
would live in poverty. Social Security provides a solid,
inflation-adjusted, guaranteed benefit that enables our seniors
to live in dignity for as long as they live.
The Social Security program has some built in protections
that benefit those who are most vulnerable. Women in particular
benefit greatly from Social Security. Sixty percent of Social
Security beneficiaries are women and Social Security is often
the only source of retirement income for a majority of these
women. Any proposals for strengthening our system must consider
carefully the impact change would have on women.
Democrats want a bipartisan, constructive approach to
strengthening Social Security for the 21st century. Criticism
is easy. But, as the great Republican President Theodore
Roosevelt said, ``It is not the critic who counts, not the man
who points out how the strong man stumbles or where the doer of
deeds could have done them better. The credit belongs to the
man (or I might add, the woman) who is actually in the
arena...'' If both members of Congress and the Administration
come together to work out a truly bipartisan plan, it will
serve the American people much better than if we sit and wait
for the other party to give us something to criticize.
I am hopeful that this hearing represents a first step in a
bipartisan effort, and I welcome our distinguished panel of
witnesses.

Chairman Archer. Thank you Mrs. Kennelly.
Without objection, Members may insert written statements in
the record at this point.
[The prepared statements follow:]

Statement of Hon. Robert T. Matsui, a Representative in Congress from
the State of California

Thank you Mr. Chairman. I'd like to take a few moments to
thank Barbara Kennelly for her contributions to this committee
and to this institution. Her unwavering leadership on
protecting women and families will be a strong legacy as we
work toward Social Security reform measures next year. We will
miss your guidance and your friendship. I look forward to
working with you, Barbara, in other capacities in the future.
Thank you.

Statement of Hon. Jerry Weller, a Representative in Congress from the
State of Illinois

Mr. Chairman,
Thank you for calling us here today for this extremely
important hearing. The 106th Congress is just around the corner
and we certainly have our work cut out for us. By 2030, the
number of elderly in America is expected to double more than 77
million due to the rapidly aging baby boom population. Fixing
Social Security is certainly one way to address the future
needs of these retirees. The future financial security of
America's retirees is also distinctively liked with their
health care needs. So, in addition, Congress must address the
comprehensive needs of America's retirees, not only from an
income perspective, but also from a health care perspective.
Over the past two years, the Social Security Subcommittee,
under the leadership of Chairman Jim Bunning, has held a series
of hearings to explore the various options for saving and
strengthening Social Security. We have heard many different
views, opinions and solutions. However, we have not heard the
views, opinion, or solution from one very important person--the
President of the United States. The President talks about
saving Social Security; but the President has not shown any
leadership. Chairman Archer asked the Clinton Administration to
come to this hearing today and present a plan--to show some
leadership on this issue. Unfortunately, the Administration is
neglecting to step forward and take a stand--taking a back seat
on one of the most important issues he will have the
opportunity to work on.
As I said earlier, we in Congress have our work cut out for
us. During the coming year, we will be making some tough
choices--choices that are necessary to ensure the solvency of
Social Security. I look forward to today's hearing and would
like to wish Chairman Bunning well in his new role in the other
body.

Chairman Archer. Now, Mr. Wilcox, we are happy to have you
with us today. Again, I am sorry that your boss, Secretary
Rubin, could not be with us, but we are more than pleased to
have you here, and we would be pleased to hear whatever
statement or presentation you would like to make to the
Committee.

STATEMENT OF HON. DAVID W. WILCOX, ASSISTANT SECRETARY FOR
ECONOMIC POLICY, U.S. DEPARTMENT OF THE TREASURY

Mr. Wilcox. Thank you very much Mr. Chairman, Members of
the Committee. I am honored and pleased to have this
opportunity to meet with you today.
Because this is my first appearance before this Committee,
I thought I might begin by briefly sketching my professional
background. I am the Assistant Secretary for Economic Policy at
the Treasury Department, a post which I have held for exactly 1
year as of this week. Prior to that, I was on the staff at the
Federal Reserve Board for 10 years; for the first 5 years with
responsibility in the macroeconomic forecasting area and for
the second 5 years more directly related to monetary policy.
I am pleased to be here today to discuss with you the
vitally important issue of restoring Social Security to sound
financial footing. I know that Secretary Rubin, Deputy
Secretary Summers, and others in the administration look
forward to working with you and the other Members of this
Committee on this crucial issue.
As we begin this important undertaking, it is worth
returning to fundamentals and reminding ourselves why it is so
important that we move with dispatch toward achieving a
bipartisan agreement. The case for rapid action rests on two
key propositions. First, the sooner we move, the more we can
take advantage of the economy's extraordinary performance
achieved under President Clinton's economic strategy. Right now
our economy is remarkably strong and the budget is the
healthiest it has been in a generation. Unemployment has been
at or below 5 percent for 19 months. Inflation is low and
stable. Real incomes are rising again, breaking out of the
pattern of stagnation that had persisted since the seventies.
And for the first time since 1969, the Federal Government has
posted a unified budget surplus.
But we may not always be in such a strong position, and we
will likely never be in a stronger position to face the major
challenge ahead of us associated with an aging society. One key
fact illustrates the dramatic demographic elements that lie
ahead. In 1960 the number of American workers for every Social
Security beneficiary was 5.1 to 1. Today it is 3.3 to 1. In a
little more than 30 years' time when there will be twice as
many elderly as there are today, the ratio will be 2 to 1 and
falling.
A second reason for moving expeditiously is that the sooner
we place Social Security on a sound financial basis, the less
we have to do to restore balance. The cost of waiting is that
we would be confronted with a more painful set of choices down
the road.
As you will recall, the President in his State of the Union
speech last January called for 1 year of national dialog on
Social Security. That year is now almost over. The President
and Vice President have contributed an enormous amount of their
personal time and energy toward this enterprise. The
administration conducted three regional forums to discuss
Social Security with the American people. Each forum involved
Members of both parties, serving to broaden the range of ideas
explored and giving concrete evidence of the administration's
commitment to a bipartisan process.
These forums were jointly sponsored by the Concord
Coalition and the American Association of Retired Persons in
conjunction with Americans Discuss Social Security. In
addition, many Members of Congress held forums in their own
States. During this process, we have heard from the American
people about their concerns, hopes, and fears about retirement
and their views on Social Security.
What we have learned has been critical to the process and
will help guide us from here. One of the many lessons from
these national forums is that the American people, both young
and old, are concerned about the health of the Social Security
system, and are supportive of efforts to ensure that the system
will provide benefits not only for them but for their children
and grandchildren as well. These forums have laid the
groundwork for the next stage of the reform process, including
next month's White House Conference on Social Security.
This year of dialog has provided many opportunities for us
to improve our understanding of the myriad issues involved.
Through this process, three themes have been especially clear.
First, the final reform package will no doubt assimilate a lot
of good thinking from many quarters, and we should be receptive
toward taking that thinking on board. The administration
believes the many proposals put forward by the Members of
Congress, think tanks, academics and interest groups have been
constructive in fostering this year of bipartisan discussion.
Second, it makes little sense to judge specific policy
options in isolation. They can only be adequately assessed in
combination with all the elements that would be required to
accomplish the full job.
Last, the administration believes that any plan should be
consistent with the five principles that the President
articulated at the regional forum held in Kansas City. I have
spelled out these principles in some detail in my written
testimony, but allow me just to list them for you.
First, reforms should strengthen and protect Social
Security for the 21st century.
Second, reforms should maintain the universality and
fairness of Social Security.
Third, Social Security must provide a benefit people can
depend on.
Fourth, Social Security must continue to provide financial
security for disabled and low income beneficiaries.
Finally, Social Security reform must maintain America's
fiscal discipline.
Another step in the year of national dialog will be the
White House Conference scheduled to take place on December 8
and 9. The administration views this conference as an outgrowth
of the public discussions and the consultations that we have
been having with Members of Congress from both sides of the
aisle throughout the past year. In the time ahead, we intend to
broaden and deepen both aspects of this communication.
We fully intend the conference to be bipartisan, to include
Members of Congress, representatives of the public, and experts
holding all views. The President has always believed that the
only way to achieve Social Security reform will be on a
bipartisan basis, and we intend for this conference to reflect
that view.
Throughout the year, a number of observers have asked
whether the administration might be putting forward a plan of
its own for Social Security reform, and if so, when. The bottom
line answer here is that the administration is committed to
whatever course will be most conducive toward arriving at a
bipartisan agreement that assures the American people of a
stronger Social Security system.
It has been the President's judgment thus far that for us
to put out a plan would not have been helpful and could have
served to polarize the debate. He will continue to review on an
ongoing basis whether proposing a specific plan would help move
the process forward. We will obviously be consulting heavily
with Members of Congress from both parties on this important
issue.
Finally, with regard to engaging the Congress on our shared
objective of achieving a bipartisan agreement, the President
has consistently stated his intention to begin ongoing
bipartisan discussions early next year. The administration
recognizes the important role that the Ways and Means Committee
will play on this crucial issue. Consultation with all the
Members of Congress will be important, but consultation with
this Committee will be especially so, and I fully expect the
administration to pursue such consultation vigorously as we
work toward our objective of forging a bipartisan solution to
this challenge.
Mr. Chairman, today virtually every working man and woman
in America is protected by Social Security. As we debate which
policies will best strengthen of the Social Security Program,
there should be no question of the importance of restoring
financial balance to the system in a bipartisan manner as early
as possible. The administration looks forward to working with
the Members of this Committee and with others in Congress as we
take on this critical challenge. Thank you, and now I would
welcome your questions.
[The prepared statement follows:]

Statement of Hon. David W. Wilcox, Assistant Secretary for Economic
Policy, U.S. Department of the Treasury

Mr. Chairman, Members of this Committee, I thank you for
this opportunity to meet with you to discuss the vitally
important issue of restoring Social Security to sound financial
footing. I know that Secretary Rubin, Deputy Secretary Summers,
and others in the Administration look forward to working with
you and the other Members of the Committee on this issue.
During my remarks today, I would like to touch on four
issues: first, the reasons why it is important to move
expeditiously next year to secure a bipartisan agreement to
preserve and strengthen Social Security; second, what we have
learned during the national dialogue of the past year; third,
the principles that the President has put forth to guide Social
Security reform; fourth, how to best move forward to reach a
bipartisan agreement that puts Social Security on solid
financial ground for future generations.

The Importance of Social Security

As we begin this important undertaking, it is worth
returning to fundamentals and reminding ourselves why it is so
important that we move with dispatch toward achieving a
bipartisan agreement. The case for rapid action rests on two
key propositions.
First, the sooner we move, the more we can take advantage
of the economy's extraordinary performance achieved under
President Clinton's economic strategy. Right now our economy is
remarkably strong and our budget is the healthiest it has been
in a generation.
Unemployment has been at or below 5 percent for 19
months.
Inflation is low and stable.
Real incomes are rising again, breaking out of the
pattern of stagnation that had persisted since the 1970s.
And for the first time since 1969, the Federal
government has posted a unified budget surplus.
But we may not always be in such a strong position. And we
will likely never be in a stronger position to face the major
challenges ahead of us associated with an aging society. One
key fact illustrates the dramatic demographic developments that
lie ahead: In 1960, the number of American workers for every
Social Security beneficiary was 5.1 to 1. Today it is 3.3 to 1.
In a little more than 30 years' time, when there will be twice
as many elderly as there are today, the ratio will be 2 to 1,
and falling.
Second, the sooner we move to place Social Security on a
sound financial basis, the less we have to do to restore
balance. The cost of waiting will mean we will be confronted
with a more painful set of choices down the road.

The President's National Dialogue on Social Security

As you will recall, the President in his State of the Union
speech last January called for a year of national dialogue on
Social Security. That year is now almost over. The President
and Vice-President have contributed an enormous amount of their
personal time and energy in this enterprise. The Administration
conducted three regional forums to discuss Social Security with
the American people. Each forum involved Members of both
parties, serving to broaden the range of ideas explored, and
giving concrete evidence of the Administration's commitment to
a bipartisan process. These forums were jointly sponsored by
the Concord Coalition and the American Association of Retired
Persons, in conjunction with Americans Discuss Social Security.
In addition, many Members of Congress held forums in their own
states.
During this process, we have heard from the American people
about their concerns, hopes, and fears about retirement, and
their views on Social Security. What we have learned has been
critical to the process and will help guide us from here. One
of the main lessons from these national forums is that the
American people--both young and old--are concerned about the
health of the Social Security system and are supportive of
efforts to ensure that the system will provide benefits not
only for them, but for their children and grandchildren as
well. These forums have laid the groundwork for the next stage
of the reform process, including next month's White House
conference on Social Security.
In the remainder of my remarks, I would like to outline
some of the Administration views and objectives for building on
the national dialogue.

The President's Principles

This year of dialogue has provided many opportunities for
us to improve our understanding of the myriad issues involved.
Through this process, three themes have been especially clear.
First, the final reform package will no doubt assimilate a
lot of good thinking from many different quarters, and we
should be receptive toward taking that thinking on board. The
Administration believes the many proposals put forward by the
Members of Congress, think tanks, academics, and interest
groups have been constructive in fostering this year of
bipartisan discussion.
Second, it makes little sense to judge specific policy
options in isolation. They can only be adequately assessed in
combination with all the elements that would be required to
accomplish the full job.
Third, the Administration believes that any plan should be
consistent with the five principles that the President
articulated at the first Social Security forum in Kansas City.
First, reform should strengthen and protect Social
Security for the 21st Century. Proposals should not abandon the
basic program that has been one of our nation's greatest
successes. The importance of Social Security can hardly be
overstated. Eighteen percent of our seniors--more than one in
six--receive all of their income from Social Security. The
bottom two-thirds of the aged population, in terms of income,
receive half of their income from Social Security. Without
Social Security, nearly 50 percent of aged Americans would be
in poverty.
Second, reform should maintain the universality
and fairness of Social Security. For half a century, Social
Security has been a progressive guarantee for citizens. It
should be kept this way.
Third, Social Security must provide a benefit
people can depend on. Regardless of economic ups and downs,
Social Security must provide a solid and dependable foundation
of retirement security.
Fourth, Social Security must continue to provide
financial security for disabled and low-income beneficiaries.
Unfavorable comparisons are often made between the returns on
contributions offered by Social Security and the returns
offered by the market, but Social Security is much more than
just a retirement program. We must never forget that roughly
one out of three Social Security recipients is not a retiree.
Any reform must ensure that Social Security continues playing
these other important roles in the future.
Finally, Social Security reform must maintain
America's fiscal discipline. Six years ago the deficit reached
a record $290 billion. In the just-ended fiscal year we
achieved a record surplus of $70 billion in the unified budget.
In choosing the way forward on Social Security reform, we will
need to continue that strong record.

Moving Forward Toward a Bipartisan Agreement

Another step in the year of national dialogue will be the
White House Conference, scheduled to take place on December 8th
and 9th. The Administration views this conference as an
outgrowth of the public discussions and consultations that we
have been having with Members of Congress from both sides of
the aisle throughout the past year. In the time ahead, we
intend to broaden and deepen both aspects of this
communication.
We fully intend the conference to be bipartisan, to include
representatives of the public, and to include experts holding
all views. The President has always believed that the only way
to achieve Social Security reform will be on a bipartisan
basis, and we intend for this conference to reflect that view.
Throughout the year, a number of observers have asked
whether the Administration might be putting forward a plan of
its own for Social Security reform, and if so, when. The
bottom-line answer here is that the Administration is committed
to whatever course will be most conducive toward arriving at a
bipartisan agreement that assures the American people of a
stronger Social Security system. It has been the President's
judgment thus far that for us to put out a plan would not have
been helpful and could have served to polarize the debate. He
will continue to review on an ongoing basis whether proposing a
specific plan would help move the process forward. We will
obviously be consulting heavily with Members of Congress from
both parties on this important issue.
Finally, with regard to engaging with Congress on our
shared objective of achieving a bipartisan agreement, the
President has consistently stated his intention to begin
ongoing bipartisan discussions early next year. The
Administration recognizes the important role that the Ways and
Means Committee will play on this crucial issue. Consultation
with all the Members of Congress will be important, but
consultation with this Committee will be especially so, and I
fully expect the Administration to pursue such consultation
vigorously as we work toward the objective of forging a
bipartisan solution to this challenge.
Mr. Chairman, today virtually every working man and woman
in America is protected by Social Security. As we debate which
policies will best strengthen the Social Security program,
there should be no question of the importance of restoring
financial balance to the system in a bipartisan manner as early
as possible. The Administration looks forward to working with
the Members of this Committee and with others in Congress as we
take on this critical challenge. Thank you, and I would now
welcome your questions.

Chairman Archer. Thank you, Mr. Wilcox.
Any Member of the Committee wish to inquire?
Mr. Crane.
Mr. Crane. I am pleased to hear your presentation and the
acknowledgments from both sides of the aisle about the
nonpartisan aspect of this, and to be sure, it is nonpartisan
since it affects us all equally.
One of the things I am curious about is when did the
administration get concerned about this pending bankruptcy of
Social Security?
Mr. Wilcox. The long-term financial health of the Social
Security system has been a concern of the President's for some
long period of time.
Mr. Crane. Like what time?
Mr. Wilcox. I am not familiar with his thinking on when he
first began to focus on the importance of this, but this has
been a concern of the President's for--on a consistent basis.
Mr. Crane. Well, the reason I ask that, and I should yield
here to the Chairman of our Health Subcommittee, that we only
took up our awareness of the bankruptcy of Medicare like 1 year
ago, wasn't it? Two years ago? And it was scheduled to go
bankrupt in the year 2001, not 2032. I know that we addressed
that, but that is only to buy life for another decade with
respect to Medicare, and it has the same kind of problems
confronting beneficiaries that Social Security does.
One of the things I find interesting at home in town
meetings is the only folks paranoid about Social Security have
white hair. And the ones who are going to lose any benefits,
the younger kids, are the ones that are bored whenever you
bring up the subject of Social Security. They would rather
listen to more meaningful topics. Yet it is something that I
think truly is a potential calamity if not addressed properly
by Congress and the administration.
Let me ask you, since there have been many forums since the
first of this year on Social Security, have you learned
anything? Have you ruled anything in or ruled anything out in
reforms?
Mr. Wilcox. Our view is that we have learned a great deal
from the forums. We have heard from the American people about
how important the Social Security system is to them. We have
heard about how many different ways Social Security affects the
lives of ordinary Americans. We have heard from people whose
college educations have been funded by survivors' benefits from
Social Security. We have heard from disabled individuals whose
livelihood has been sustained by the DI, disability insurance
program, of Social Security.
We have heard from, of course, from the large number of
retirees who have counted on Social Security to provide them
with a sound financial footing. And I think one of the most
important messages that we have heard out of the forums is how
supportive the American people will be of bipartisan efforts to
place the program on a sound financial footing for the
longterm.
Mr. Crane. Are tax hikes an option for saving Social
Security?
Mr. Wilcox. Sir, the President has indicated that he
expects to be able to achieve a bipartisan agreement for Social
Security without resorting to an increase in the payroll tax
rate.
Mr. Crane. So, you pushed aside the idea of any tax
increase to try and resolve the problems?
Mr. Wilcox. The President has indicated that he expects to
be able to do that without an increase in the payroll tax rate.
Mr. Crane. What about benefit cuts?
Mr. Wilcox. The President, I think, quite consistently, has
maintained a stance of attempting not to comment on specific
proposals, but in order to allow full discussion so that all
proposals and all avenues toward solving this problem can be
explored, the President has tried to remain in an open-minded
stance, in a belief that through a bipartisan and thorough
discussion we can arrive at the best possible solution.
Mr. Crane. So you are saying that benefit cuts could be a
consideration?
Mr. Wilcox. None of the alternatives, sir, are attractive,
and benefit adjustments are one of the approaches that might be
part of an overall package.
Mr. Crane. And how about retirement age?
Mr. Wilcox. Again, the administration has taken the view
that as much as possible, what should be happening now is a
full and open discussion of all possible avenues toward
achieving sound financial footing for this system.
Mr. Crane. So retirement age is then under consideration
too.
Let me ask one final question. That has to do with the
privatization programs in Chile, for example, and Australia. I
have been told that there are disagreements on the part of some
who have looked at the privatization approach to dealing with
the pending bankruptcies of their own Social Security programs.
Chile's I have been told is a very successful program. Over 90
percent of Chileans have opted to go that route. I am not
conversant with Australia's program.
You have looked, I am sure, at other privatization programs
that other countries have experimented with. What is your
assessment?
Mr. Wilcox. Certainly, the international experience will be
an extremely helpful laboratory for us to look to for lessons
in how we proceed.
In a system of the type that Chile has adopted, England as
well, there are a number of advantages and disadvantages. The
control, for example, that individuals have over their own
retirement financial destiny is an important advantage of a
system of that type.
By the same token, a number of observers have expressed
concern over the level of cost that is built into that system.
By contrast with our current Social Security system, wherein
more than 99 cents of every dollar taken in in payroll taxes is
paid out in the form of benefits, in Chile--in both Chile and
in England, 20 to 30 cents are absorbed in the form of
administrative costs. So I think there is an important
cautionary aspect from the experience of those countries, as
well.
Mr. Crane. Thank you.
Chairman Archer. Mr. Matsui.
Mr. Matsui. Thank you very much, Mr. Chairman. Thank you
for your testimony, Secretary Wilcox.
I just want to make a couple of observations. One, I think
these regional forums are extremely important, not so much to
come up with a specific plan but to show how important Social
Security is to the life of an average family in America.
I think in one of the hearings--one of the forums--it came
out that if we did not have Social Security, over 50 percent of
the senior citizens in America today would live in poverty. And
I think the public needs to know those kinds of facts.
In addition, I think your regional forums have brought out
the fact that we need to fix the system; that over a period of
time now, it has been pretty well established among average
citizens that Social Security does have a 2 percent of payroll
problem over the next 35 years or so, and in fact we have a big
job ahead of us. And so I think those two points have been made
by the administration.
I don't believe that the purpose of these forums is
necessarily to come up with a specific fix. Obviously, you have
got to demonstrate that there is a need for a fix first, and I
think you have pretty much reached that point. Perhaps a little
more work needs to be done.
It is my hope that over the next year or two, depending
upon how long it takes before we actually come up with a
solution, that all of us, both parties, work together in good
faith. I think that is going to be extremely critical. Second,
I think, as Representative Kennelly said, we should not be out
to try to criticize. And, third, I think this is as important
as anything else, that we shouldn't play the blame game, and I
am afraid that has already started today and we need to really
avoid that if we possibly can.
We all know the political dimensions of Social Security and
how it could affect the parties, and it is my hope that we all
try to do this with a good deal of openness, without
immediately trying to find ways in which the other party is at
fault.
Let me ask you, Mr. Wilcox, in terms of the issue of the
surplus, the President has said that he wants to preserve that
surplus, obviously for the purpose of dealing with the Social
Security problem. Could you perhaps elaborate on why
maintaining the surplus without using it for tax cuts or
spending programs, big new spending programs, is important, and
why it is important not to have tax cuts before we actually
solve this problem?
Besides the fact--and I might just add this--that it will
be important to show the senior population, if we have to make
some tough decisions down the road, that we are acting in good
faith in terms of their interests. So perhaps you could respond
to that. There has been a lot of talk about enormous tax cuts,
and we need to find out whether or not that is an important
element.
Mr. Wilcox. Congressman, you asked why is it important to
preserve the surplus. I think the simplest formulation I can
give of that is that we have an extraordinarily favorable
situation over the forecastable future. Whereas earlier we had
deficits as far as the eye can see, today we are in the
wonderful position of having surpluses as far as the eye can
see. Those surpluses in the unified budget represent a very
large financial asset.
We have in the Social Security system a very significant
challenge ahead of us. The gist of the President's policy to
reserve every penny of the unified budget surplus pending
agreement on a bipartisan basis toward a Social Security
solution, the gist is we should not dissipate that asset before
we know the nature and form of the solution that we intend to
use in terms of putting Social Security on a sound footing.
Mr. Matsui. Is my understanding correct that we have a 2
percent of payroll problem over the next generation, the next
35 years or so, and by dipping into that surplus for new big
spending programs or tax cuts, that this could make the 2
percent of payroll problem worse?
Mr. Wilcox. The gist of it is that we do not know exactly
how much we are going to need, and therefore the policy is
let's set aside every penny of that surplus until we know what
course we choose to take.
Mr. Matsui. Not knowing what the solution is, obviously we
don't know the impact.
Mr. Wilcox. That is exactly right. Precisely right, sir.
Mr. Matsui. Thank you.
Chairman Archer. Mr. Wilcox, I had planned not to do any
questioning, but I think there are a couple of threads that
need to be pulled together just to have a foundation on which
this discussion continues. It sort of piggybacks on what my
friend Bob Matsui was getting at.
When the payroll taxes come in, taken from the workers to
go into the trust fund for Social Security benefits--and I must
say I take some issue with my friend Phil Gramm's presentation
today, and I think we need to set the record straight. Correct
me if I am wrong. When those payroll taxes are collected, they
come into the Treasury of the United States and they are
immediately invested in government bonds paying market interest
rates; is that correct?
Mr. Wilcox. That is correct, sir.
Chairman Archer. And when the need for Social Security
benefit payments arises every month, the Social Security Trust
Fund submits the amount of securities or reduction that are
necessary to pay those benefits every month; is that correct?
Mr. Wilcox. That is correct, sir.
Chairman Archer. Can those securities be redeemed for any
other spending purpose?
Mr. Wilcox. My understanding is that they cannot.
Chairman Archer. That is mine too. In fact, that is the law
of the land. Now, it has often been said by both liberals,
moderates, and conservatives that there is nothing in the fund,
that the money has been spent. But the money has been borrowed
by the Treasury to pay other operating bills, and the Social
Security Trust Fund retains the Treasury securities to
represent the moneys that will ultimately be paid in the
redemption of those bonds. Now, challenge me if anything that I
say is incorrect, because I think it is very important that the
Members of this Committee and the people of the United States
understand the fundamentals of Social Security.
Under those circumstances, how would it ever be possible to
raid the Social Security Trust Fund, whether it be for other
General Treasury spending or for General Treasury tax relief?
Can you explain to this Committee how under any circumstances
it would be possible to raid the Social Security Trust Fund
when you give a tax relief out of the General Treasury?
Now, I am not talking about payroll tax relief. If you took
payroll taxes and reduced them, you would be taking money out
of the fund, money that would go into the fund. But inasmuch as
all of those payroll taxes are immediately invested in Treasury
securities--which are, by the way, the safest investment in the
world and why interest rates are going down, because foreigners
are now running to buy Treasury securities which are the safest
investment in the world. And it is those securities that are
held by the Social Security Trust Fund, backed by the full
faith and credit of the United States of America.
Now, again, how would it be possible by either an
appropriation spending bill or a general tax relief bill out of
the General Treasury to raid the Social Security Trust Fund?
Mr. Wilcox. Sir, I am not sure I can answer that question
without knowing the precise details of what you have in mind,
but the conversation I was having----
Chairman Archer. Let me it more specific. Inasmuch as the
trust fund is represented by Treasury securities that can be
redeemed only to pay for Social Security benefits, which you
said was correct, in what way does a general tax reduction or
tax relief bill in any way attach to those securities? Are they
going to be redeemed for the general tax reduction?
Mr. Wilcox. The gist of my conversation with Congressman
Matsui was that the administration's position is specifically
with respect to the disposition of the unified budget surplus.
Chairman Archer. I understand. That is not the question I
am asking. I am asking you specifically whether those bonds
that are in safekeeping in the trust fund and which represent
all of the payroll taxes that have been paid in, whether they
can be redeemed in any way or undermined in any way by a tax
relief bill that does not involve the payroll taxes? It
involves income tax relief. Can they in any way be undermined
or used for that purpose?
Mr. Wilcox. As you observed, sir, my understanding is, as
well, that the only purpose for which those securities may be
redeemed is for purposes of payment of benefits.
Chairman Archer. All right. So the answer, then, is if the
Congress elected to give tax relief on the income tax, that
would in no way legally ever be able to raid the Social
Security Trust Fund which is represented by bonds that are held
in that trust fund; is that correct?
Mr. Wilcox. That would not compromise the validity of the
securities held by the Social Security Trust Fund.
Chairman Archer. So under no circumstances could that be
expressed in the terms of ``raiding'' the Social Security Trust
Fund; correct?
Mr. Wilcox. I would hesitate to characterize what other
observers might have in mind when they speak of raiding.
Chairman Archer. I am not asking about other observers. I
am asking you and then I want you to tell me how it would raid
the Social Security Trust Fund, inasmuch as all of those bonds
are still intact.
Mr. Wilcox. I do not think I am prepared to characterize
off the cuff whether that would constitute raiding----
Chairman Archer. Well, think about it a moment so it does
not have to be off the cuff.
Mr. Wilcox. I, sir, have stated that I agree with you that
the only purpose for which those bonds may be redeemed is for
purposes of paying benefit obligations of the Social Security
system, and I believe we are in full agreement on that point.
Chairman Archer. Thank you. Because I think that is very,
very important, number one, to lay the predicate for the
American people to understand.
Second, and where I disagree with my friend Phil Gramm,
those bonds that are held by the Social Security Trust Fund
have the same full faith and credit as a double A bond or any
other Treasury securities that are bought by the general
public. Is that not correct?
Mr. Wilcox. That is absolutely correct. They have the same
legal standing, sir, as marketable Treasury securities.
Chairman Archer. So if those who say there is nothing in
the trust fund believe that inasmuch as the money has been
spent and there are only bonds held by the trust fund, would it
not also be fair to say that those Americans who have bought
double A bonds should go home and burn them because they are
worthless, because the money has already been spent?
Mr. Wilcox. My understanding is that, unlike many of us who
hold Treasury securities in an electronic form, there are
literally, my understanding, physical certificates that are
held in a vault in West Virginia, I believe.
Chairman Archer. That is good to know, too, but
irrespective, it is a legal obligation of the United States of
America, and it is the safest investment in the world, and the
mere fact that the money that was given to buy the bonds has
been spent does not in any way mean the bonds don't have a very
real value, does it?
Mr. Wilcox. They are backed by the full faith and credit of
the U.S. Treasury.
Chairman Archer. Absolutely. And many of my conservative
friends do not understand that.
Mr. Wilcox. Well, together we can proselytize----
Chairman Archer. I apologize for the time taken today, but
I think it is very, very important for people to understand
exactly what is involved here. And now, what interest return do
these bonds give to the Social Security Trust Fund today? There
is the myth that there is no compounding of interest on these
bonds that are held by the fund.
Mr. Wilcox. This is a complex topic. I will do the best I
can to give you the broad outlines of it.
The securities pay a rate which is tied to the rate
actually observed in the marketplace on coupon securities with
4 years and more to maturity. The securities are issued in a
laddered set of maturities from 1 to 15 years, and all the
securities of different maturity issued on the same date pay
the same rate of return, which is that average on marketable
coupons of 4 years and more. And if I have stated that
incorrectly, I hope someone will correct me.
Chairman Archer. Well, the important thing is, I am told
that currently the rate of return on the bonds to the Social
Security Trust Fund is 7.5 percent APR.
Mr. Wilcox. I don't know that figure off the top of my
head.
Chairman Archer. I would like for you to research that and
confirm that, but it doesn't really matter. The important thing
is that there is a significant compounding of interest into the
fund today. And it is, for the safety of the securities that
are held there, it is one of the highest returns that you can
find anywhere in the world, for the very reason that you
mentioned as to how the bonds are set up. So it is important
for everyone to know as we go into this process that there is a
compounding of return to the Social Security Trust Fund for the
bonds that are held there.
[The information was subsequently received:]

The combined interest rate earned by the OASDI Trust Funds
in calendar year 1997 was 7.5 percent; 7.6 percent for the OASI
program and 7.0 percent for DI. The interest rate on the
special issues purchased by the Trust Funds in June 1997 was
6.875 percent. (Source: 1998 Trustees Report)

Chairman Archer. These are all facts, and I hope the
American people will learn more about it. Let me ask you one
last question.
Inasmuch as the surplus, depending on how you define it, is
generated by an unexpected increase in income tax revenues and
a decline in spending that was not in the baseline that
generate this so-called surplus, how would you use, in your
plan to save Social Security, how will you use the General
Treasury funds that are a part of this surplus to save Social
Security? What would be options for the infusion of General
Treasury funds, inasmuch as we have already established that
the payroll taxes are going in, they are there, they stay
there. That is not an issue of debate. The surplus now we are
talking about is what do we do out of the General Treasury to
save Social Security? What options would the administration
consider for the use of these General Treasury funds to save
Social Security?
Mr. Wilcox. First, Mr. Chairman, I should emphasize there
is no administration plan, and therefore I can't speak as to
how they would be used in an administration plan. The
administration policy that does exist that is relevant to this,
is the policy that we have been discussing of reserving the
unified surplus pending bipartisan agreement on how to address
this problem.
There have been a number of proposals put forward, and I
expect that you will hear in your later panels from some
witnesses who will discuss this, but there is a wide variety of
proposals for how the unified surplus might be applied to the
problem of solving the Social Security financial status.
Chairman Archer. Well, let me go back to the basics again.
Whatever portion of the ``unified surplus'' is a result of the
payroll taxes that are coming in, have they not already been
reserved, inasmuch as they have gone into bonds and cannot be
spent for anything else? Does the law not already preserve that
in toto?
Mr. Wilcox. Again, I return to the basic observation that
the unified surplus is an important asset that we must
preserve.
Chairman Archer. I understand. But I am trying to be a
little more specific because this gets confusing for the
American people.
Mr. Wilcox. I appreciate that, sir.
Chairman Archer. And I am asking the specific question of,
to whatever degree the unified surplus is a result of the
payroll taxes going into the Social Security Trust Fund, which
are represented immediately by government bonds, they cannot be
used for any other purpose, is that not already protected under
the law to be used only to save Social Security?
Mr. Wilcox. To the extent that payroll taxes exceed benefit
obligations and administrative expenses, the balance in the
Social Security Trust Fund rises by that amount.
Chairman Archer. Yes, and to the extent that that is a part
of the unified surplus which you have referred to, that is
already protected under law, is it not?
Mr. Wilcox. Well, I mean----
Chairman Archer. Why do we have to go back through this?
You just said it cannot be spent for anything else, it must be
protected.
Mr. Wilcox. It is protected in the trust fund. The reason
why these issues are diffuse and difficult to get a hold of is
that it is impossible to identify which dollar in the unified
surplus came----
Chairman Archer. So it is not. You know exactly how much
money is going into the Social Security Trust Fund from the
payroll taxes in excess of the benefits that are paid out. You
know exactly every year. It is not difficult. It is a very
simple arithmetic formula. And to the degree that that amount
of money is a part of the surplus, it is already protected, is
it not? Why is it so hard for you to say yes to that when you
said yes to all of the preliminary questions?
Mr. Wilcox. Sir, the thing that I am saying yes to is the
President's determination to save the unified budget.
Chairman Archer. But that is a generality. I am trying to
get basic information out so we can understand exactly where we
are.
Let me ask you one more time. To the degree that the moneys
coming into the Social Security fund each year are in excess of
administrative costs and benefit outlays, to the degree that
that is a part of the unified surplus, that is already
protected under law, is it not?
Mr. Wilcox. To the degree that the payroll tax revenue
exceeds benefit obligations and administrative costs, the trust
fund is going up by that amount.
Chairman Archer. That is already protected for the purpose
of saving Social Security because it cannot be spent for
anything else.
Now, that is a part of the unified surplus which is already
protected. Now, the issue then comes to the other part, which
is the general operating Treasury and its role relative to the
unified budget, and that is a different issue. Now, inasmuch as
the part that is going into the Social Security fund and the
payroll taxes is already protected to save Social Security
under the concept in the mantra of ``save Social Security
first,'' we must only be talking about the operating Treasury
moneys as their role in the surplus. And I am asking you the
question, what options are there to take that General Treasury
money to save Social Security?
Mr. Wilcox. And what I am attempting to state as clearly as
possible, sir, is that there is at this point no administration
position on how the unified budget surpluses might be applied
toward the problem of addressing the Social Security problem.
There have been a wide range of proposals put forward by others
and we are interested in studying those proposals.
Chairman Archer. No, I understand that. But I am asking you
for specific options that you would rule in and specific
options that you would rule out relative to the use of the
General Treasury surplus, whatever it might be, in the saving
of Social Security. And I hate to repeat this again, but
inasmuch as we have already established that the Social
Security moneys that may be a part of the unified surplus are
already committed to saving Social Security, now let's look at
the other part, because you must be talking only about that
when you say save Social Security first before you use any of
it for tax reduction.
Mr. Wilcox. ``Save Social Security'' refers to the entirety
of the unified budget surplus.
Chairman Archer. Well, I am obviously not going to get an
answer to this question. But what I am trying to get at is that
Social Security's sanctity over the years has always been that
it is independent of General Treasury funds; that it is an
insurance contract between the government and workers as a
result of what they have sent to the fund under the payroll tax
structure, and their benefits are directly related to what they
paid in during their work life in the payroll structure.
Now, when you start talking about the unified budget
surplus as a solution to Social Security, you must have some
plan or some ideas about how General Treasury funds are going
to be infused into the Social Security fund. And many, many
people will come unglued when that happens because they will
see the sacredness of the contract of Social Security
undermined and the beginnings of it becoming a welfare system.
Mr. Wilcox. Perhaps, sir, I could give an illustration of
one way that the unified surplus might be used, and this
illustration has been put forward by a number of alternative
observers.
Chairman Archer. Since the payroll taxes are already
protected, let's talk about how you are going to use General
Treasury funds out of the surplus to save Social Security. What
options are available, in the way that you look at it?
Mr. Wilcox. One option that has been put forward by a
number of advocates would be to take those special purpose
bonds that are in the trust fund that we have been talking
about and redeem those for the purpose of purchasing private
sector securities. This option would have the effect of
reducing the unified surplus.
In the first instance it would maintain the level of the
Social Security Trust Fund exactly at its same level because it
is a swap of equal value assets. Dollar for dollar, it would
reduce the unified budget surplus, and so that would be a way
of using the assets in the Social Security Trust Fund, reducing
the unified budget surplus for the purpose of improving the
financial status of the Social Security system.
Chairman Archer. OK. All right. I apologize for the length
of my inquiry, but I wanted to set some sort of basic
foundation for the balance of the discussion today.
And let me recognize Mr. Thomas.
Mr. Thomas. Thank you, Mr. Chairman. I am already fairly
heavily engaged in a bipartisan effort to save Medicare as the
administrative Chair. One of the things we have tried to do, to
not just maintain as a statement that we are in favor of a
bipartisan solution, is that we have attempted to conduct
ourselves in a bipartisan way.
Mr. Secretary, I read your statement very carefully, and
notwithstanding in your second paragraph the statement how to
best move forward to reach a bipartisan agreement, and then
moving forward toward a bipartisan agreement, in your opening
section on the importance of Social Security, what you outline
is nothing more than a campaign statement on what has occurred
over the last several years.
Now, perhaps you didn't intend that, but my recollection is
that President Clinton was elected in 1992 and he had a
Democratic majority in both the House and the Senate, and the
American people in their wisdom decided to change that in 1994.
And in three successive elections the Republican Party has
controlled the House and the Senate, at which time the balanced
budget was achieved.
And if your opening statement is going to be simply
President Clinton's economic strategy, without any
acknowledgment or willingness to admit that there has been a
cooperative effort to reach the current economic state that we
are in, what you have just made is a very partisan campaign
statement, and that is your opening statement to this Committee
that you want to be bipartisan. That kind of pitch has to stop.
Saying you want to be bipartisan also has to be followed up by
being bipartisan, both in word and in deed.
President Clinton is not going to run again. If he really
wants a fundamental benefit legacy, it is not only Social
Security, it will be Medicare reform, but time is running out.
And I listened carefully to some of the responses to my
friend and colleague from Illinois about changes that are more
often than not kind of boilerplate discussed, and in response
to the change that was made in 1983 by the Congress, to an age
change from 65 to 67, you have indicated that you did not
contemplate any age change, and that, I think, is a very clear
and easy answer. The problem is, the plan that was passed moved
the retirement age from 65 to 67, not until 2027.
So is the administration in any way contemplating an
adjustment within the current legal age limit requirement? That
is, moving forward the achievement of the 67 age date prior to
2027?
Mr. Wilcox. Sir, let me begin by complimenting your
leadership on the Medicare Commission----
Mr. Thomas. I appreciate that, but I have got 5 minutes and
that light is going to move really quickly.
Mr. Wilcox. The administration is studying a wide range of
proposals, including those that deal with benefit adjustment,
retirement age, revenues----
Mr. Thomas. So nothing is off the table?
Mr. Wilcox. Nothing is off the table. As I said earlier,
the President has indicated that he expects to be able to
accomplish this without recourse to an increase in the payroll
tax rate.
Mr. Thomas. And you very carefully said that, and you
repeated it very carefully again, and I will reference the
discussion with the Chairman: No payroll tax rate increase. But
fairly obviously there are a number of schemes that are
available to utilize dollars that are, in fact, raised through
taxes that are not rate increases. Is that what I understand
your statement to be?
Mr. Wilcox. The administration has not taken a position on
those, and we seek to leave an open and free----
Mr. Thomas. So you haven't ruled that out.
Mr. Wilcox. That is correct, sir.
Mr. Thomas. So tax increases are on the table. They have
not been ruled out, but no payroll tax rate increase, and I
understand that.
Now, let me urge you folks--and I understand, your
concern--but, boy, you sound like you are bobbing and weaving,
waiting for the next election. There is no next election for
this President. He did invest a year going out, reaching out
with the various hearings. He is going to have a bipartisan
conference next month. That is 1998.
In 1999, can we expect the President to offer some
specifics? Not principles. We spent a whole year searching,
listening, wandering in the wilderness for principles. Can we
get some specifics at the State of the Union? Yes or no?
Mr. Wilcox. Sir, the President will put forward a plan if
and when he determines that it would be helpful to moving the
debate ahead.
Mr. Thomas. How about budget time, around April? Yes or no?
Mr. Wilcox. My answer would be the same.
Mr. Thomas. How about fiscal year, around October?
Mr. Wilcox. My answer remains the same.
Mr. Thomas. This guy is not going to run again. You are
blowing a really wonderful opportunity by acting like he is
going to run again. You cannot keep bobbing and weaving. It is
tough and difficult, but just like we are doing on the Medicare
Commission, we are grappling with specific provisions.
Principles are fine, but you are going to have to start pulling
them together.
If you are unwilling to commit by October 1, fiscal year,
and you still may be mulling over the principles, you are in
fact not stating that you are willing to join with us as a
bipartisan way to solve Medicare. You have got to think just
what you are going to be saying over the next couple of months,
especially leading up to and after the State of the Union. I
want a bipartisan solution, I believe you do, but this campaign
rhetoric mode has got to end.
Thank you, Mr. Chairman.
Chairman Archer. Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman.
Mr. Secretary, I wonder if you could outline what classes
of workers in the economy would be most at risk in a system
where Social Security benefits, both disability and retirement,
are not guaranteed to the workers?
Mr. Wilcox. I think in order to answer that, you would look
to the classes of individuals for whom Social Security
currently is most important. Social Security is extremely
important for low-income workers. The replacement rates for
low-income workers are considerably higher than for average-
and high-income workers. So clearly a core element of our
concern in the design of a plan should be to examine carefully
the possible impact of a Social Security reform plan on low-
income workers.
The second class of individuals for whom Social Security is
extremely important is disabled individuals.
Mr. Coyne. What was that?
Mr. Wilcox. Disabled individuals. It is not commonly known
that fully 10 percent of Social Security beneficiaries are
disabled. This for a family of four, age 30, is roughly
equivalent to a life insurance policy of about $300,000.
The third class of individuals for whom Social Security is
extremely important is women. Women make up 60 percent of the
total number of beneficiaries of the Social Security system,
and there are a number of features of that system that make it
especially important to them.
Mr. Coyne. Thank you.
Chairman Archer. Mr. Shaw.
Mr. Shaw. Mr. Wilcox, I would like to follow up with your
answer to Mr. Coyne regarding the importance of Social Security
to your lower income people. Is the President thinking about
means testing as far as the beneficiaries of the Social
Security Program are concerned?
Mr. Wilcox. Sir, one of the principles that the President
articulated in Kansas City was that Social Security should
remain a universal system, although I could not speak to
whether a proposal to means test the system would threaten that
principle without seeing the precise details. Certainly, we
would want to assess that proposal against the backdrop of the
President's principle.
Mr. Shaw. Dr. Wilcox, you have a very distinguished
academic background, and I can see you are visibly not very
comfortable in the spot you are in right now. You brought us a
message that you want to strengthen and protect Social
Security. You want universality and fairness. You want to
provide benefits that people can depend upon. You want to
provide financial security and fiscal discipline. Well, I guess
everybody wants to do that. But I must express the
disappointment of this Committee that you were not allowed to
bring us today some type of solution, and that we don't even
have a timetable in which the President would bring us that
type of solution.
As a matter of fact, I can find only one portion of your
statement which I can take some encouragement from, and that is
that the President will continue to review on an ongoing basis
whether proposing a specific plan would help move the process
forward. I think the Chairman has made it very, very clear that
it would be extraordinarily helpful, and I think everybody on
this Committee would agree that it would be helpful. And if
there is anyone on the other side of the aisle who thinks this
would not be helpful, that that would be destructive to the
process, I would enjoy hearing that explanation.
The President was the one who made that famous statement of
``Save Social Security first.'' Why is it that the President--
who said that any tax cut would in some way invade the Social
Security Trust Fund, which you made it clear that it would not
raid the Social Security fund in the more political dialog, who
insisted on more spending which did invade the surplus that we
have, who has characterized himself as the defender of Social
Security--why is it that he cannot come up with a plan that
would assist us?
I can assure you that this Committee is extraordinarily
anxious to work with this President on the Republican side and
the Democrat side. We did it, we fought for a few years on
welfare reform, but then we came together. On this particular
issue, we are running out of time. We have a limited window of
opportunity, and if it is not done during the term of this
administration, it is going to be looked back on as one of the
tragedies of this administration.
But if the President would sit down and all of us could
talk just frankly, forget the rhetoric, and be open with each
other, whether it be an open session or closed session, if we
could do that I think we could come to some type of solution. I
am looking forward to the White House Conference on Social
Security. But from what you have told us today, I think that
our expectations should be very small as to what is going to
come out of that conference.
What do you think will actually come out of that
conference? What do you think would be accomplished by even
having the conference?
Mr. Wilcox. Oh, I think the conference will be a very
important opportunity to summarize the events of the last year
from the regional forums, to engage further in the consultation
with Members of Congress, because I know the administration
views that as an essential part of the process for moving
forward.
Mr. Shaw. You think a solution will come out of the
conference? You think the President might draw from the
conference in order to draw a plan to send to us?
Mr. Wilcox. I don't think--I myself would not expect a 2-
day conference to yield a solution to the Social Security
question.
Mr. Shaw. So you do not think the President is going to
develop a plan out of this conference. That certainly is
disappointing.
I would hope the next time the President sends people down
here, particularly people such as you, from your academic
background, who have so much to offer, I would hope he would
give them a longer leash so they could work with this Committee
and try to get things done and get a solution to a tremendous
problem.
The American people are tired of the politics, even though
the politics of this seems to still be working. It is a
tragedy. And representing the district that I represent, as one
of the most elderly in the Nation, I can say that it is most
disappointing that we are not moving forward and we are not
moving the ball at all.
Thank you, Mr. Chairman.
Mr. Crane [presiding]. Mr. Levin.
Mr. Levin. I am disappointed because essentially what the
majority has said so far, lead by the Chairman, is that a
bipartisan solution requires that the President should go first
with his specific plan. That is essentially what you are
saying. That is your definition of a bipartisan approach.
I think that sells this Congress short. I don't think we
should be a junior partner. That wasn't the model that was used
in 1982. That isn't the model that was proposed by the Chairman
himself, that there be a commission. That isn't the model that
is being used with Medicare.
Mr. Shaw. If the gentleman will yield, the President
rejected the proposal by our Chairman.
Mr. Levin. I don't think it ever got out of the Senate, Mr.
Shaw. There was a lot of objection to that in the Senate.
I think there is a different model we might use, and that
is to try a bipartisan effort within this Committee. We did not
do that in the last session on any major legislation, maybe
with one exception. But the rest of the proposals were written
within caucus and then essentially presented to us. So the
effort to say bipartisanship won't work unless the President
unveils a specific plan I think falls short in terms of what we
as Members of Congress can do.
The other argument used by Chairman Archer is that the
President should desensitize the issue politically, otherwise
we cannot proceed, and the Nixon to China example is used, but
I think that that isn't a good analogy. We are all deeply
familiar with the Social Security issue, and I think our
constituents are, and I don't think that we should say a
prerequisite is a specific plan from the President.
I don't think the way to achieve a bipartisan result is to
maneuver as to who goes first, and that is essentially what has
been endeavored here. And I think, Mr. Wilcox, you have handled
yourself with candor and confidence.
Let me just say one last word about the surplus. ``Save
Social Security first,'' as Mr. Wilcox has said, was a position
that we should not spend the unified surplus until we save
Social Security first. There would not be a surplus without the
surplus in Social Security. That is what was said. And if we
used moneys--and we can argue about the emergency funds, and
they were increased in part because of an initiative from the
Republican leadership in this House--the position of the
President was that if we used the unified surplus before we
save Social Security, it would make much more difficult or
likely make more difficult saving Social Security for the long
run.
We are going to hear from witnesses today, including those
who propose overall privatization, whose plans, it would
appear, would depend on some use of General Treasury funds, if
not this decade or the next decade, the decade thereafter. So I
think the position as explained by Secretary Wilcox and others
is very clear, that we should not be spending the unified
surplus until we make a mammoth effort to save Social Security
for the long run.
I would urge that instead of trying to smoke out each
other's positions, instead of a ``them'' and ``us'' approach,
that we in this Committee set the example of starting to work
on this on a bipartisan basis. We did not do that on key issues
last session; we ought to do it this session.
Mr. Crane. Mr. Hayworth.
Mr. Hayworth. Thank you, Mr. Chairman, and let me
apologize, because I have the scourge of what every Congressman
fears, and that is losing one's voice. But I know for some of
my adversaries their prayers have been answered in that regard,
with my voice not here.
Mr. Wilcox, welcome. Thank you for coming for the first
time to see us. And with all due respect to my friend from
Michigan, I would just take it a step further. Let's set this
not on a bipartisan plane but on a nonpartisan plane. And in
that spirit, one of the basic fundamental tenets that every
student learns in school, in elementary civics and government,
is the notion that the President proposes, the Congress
disposes.
And on something this important, free from partisan rancor,
just simply the notion that the President proposes a plan
rather than using the bully pulpit to simply articulate
principles, I think as a notion is well deserved. And it is in
that spirit, Secretary Wilcox, that I return to your statement,
quoting now from what you testified to: ``It has been the
President's judgment thus far that for us to put out a plan
would not have been helpful and could have served to polarize
the debate.''
Let me ask you, Secretary Wilcox, when was the last chance
you had to brief the President on the different alternatives
and options involved in saving Social Security?
Mr. Wilcox. I believe--time, if you will forgive me, time
has run together a little bit here lately.
Mr. Hayworth. Understandable.
Mr. Wilcox. Either last week, I believe, sir, or the week
before.
Mr. Hayworth. And, again, based on that time in the last 2
weeks, the President still feels no need to step forward with a
plan?
Mr. Wilcox. The President is firmly committed toward
achieving a bipartisan solution. I can tell you, based on my
own personal observation, of the seriousness that the President
attaches to this enterprise. The President is engaged on this
issue and he is firmly committed toward seizing the opportunity
of the current moment. He also has exhibited enormous
leadership in bringing the process to this phase.
Mr. Hayworth. Mr. Secretary, we all agree that listening is
a very important part of leadership. I think, again, that is a
nonpartisan principle. It transcends political labels.
What I would like you to convey to the administration and
my other friends who join you here from Treasury--and sadly,
again, I must also say it is unfortunate that the Secretary,
for whatever reason, could not join us here today--but let me
humbly and respectfully request that, whether in the wake of
this conference that takes place at the White House in a couple
of weeks or in some other venue, that the President not
hesitate to lead.
Constructive criticism is not always partisan, even in the
wake, sadly, of the Medicare debacle of 1996. A plan is not
there to always be attacked, and the President does enjoy the
advantage of the bully pulpit. I would simply ask you to convey
to the President our challenge: To step up and lead.
I thank you for your attendance. I have no further comments
or questions.
Mr. Crane. Mr. McDermott.
Mr. McDermott. Welcome, Mr. Wilcox. I don't remember your
being up before the Committee, but you are being treated to
what in the animal kingdom is probably analogous to porcupines
making love. And given the way the last session ended, I think
there is a certain amount of reluctance on the part of the
majority to make love in this porcupine atmosphere.
The incoming Speaker has announced that his first bill will
be H.R. 1, to take Social Security off budget. Now, I don't
remember if it is two or three times we have already done that
in the Congress. If I am wrong I want to be corrected. I want
to know if you can conceive of any way that those payroll taxes
can be put in such a place that they can never be reached by
the Congress. Outside of what I think you already suggested,
which was some kind of investment in the private sector, is
there any other way that that can happen?
My understanding is, if the money is gone, then it cannot
be used for any kind of tax cuts or anything else. My second
question is, if we took all the surplus and put it in the
private sector, out in Wall Street, and invested it, there
would be no way it could be used to balance the budget and
still give tax cuts; am I correct?
Mr. Wilcox. As you correctly observe, sir, there have been
a number of proposals from Members of Congress and from think
tanks, academics and so forth, that would involve using the
resources of the Social Security Trust Fund to purchase private
sector securities. And those proposals, that act of purchasing
private sector securities would reduce the unified surplus.
Mr. McDermott. So the practice that was begun when Mr.
Reagan was President and the Senate was in the hands of the
Republicans, to use that surplus as a budget balancing
mechanism, would be over; is that correct?
Mr. Wilcox. I think I would have to think through the
analytics of exactly how that would work. I am not sure I can
give you a blanket answer as to how it would work. There are
different varieties of proposals.
Mr. Crane. Mr. McDermott, would you yield just a second?
Wasn't that Lyndon Johnson that folded it in so we could hide
our annual spending deficits?
Mr. McDermott. I think Senator Gramm testified it was in
1983 when the proposal was made to make, the changes, that that
is when they began using it as a part of the unified budget. Am
I incorrect?
Mr. McCrery. No, that is not correct.
Mr. McDermott. Well, now, let the witness answer. It is my
time.
Mr. Wilcox. I have just been informed that your earlier
statement is a correct statement.
Mr. McDermott. Is correct?
Mr. Wilcox. Yes, sir.
Mr. Crane. This did not happen in 1968?
Mr. Wilcox. What did not happen?
Mr. Crane. Folding Social Security into the budget. The
total budget.
Mr. Wilcox. I don't recall the chronology of the various
times when Social Security has been brought in and taken off
and so forth.
Mr. McCrery. If the gentleman will yield, I think if you
will check, Social Security was made part of the unified budget
under President Johnson.
Mr. McDermott. If I may reclaim my time, there was no
surplus in Social Security until 1983, so that is when it began
to be used. Lyndon Johnson may have considered it, but it was
not possible because they were in deficit during the war.
Mr. Wilcox. Right. I think the unified budget as a
conceptual framework was established in 1967. The emergence of
substantial surpluses, for the purpose of partial prefunding of
the system, was a consequence of the 1983 set of reforms.
Mr. McDermott. But my second point was, if it is somehow
taken off budget, and really taken off budget--we have done
this scam on the people two times at least, where we have said
we have moved Social Security off budget but we haven't. We
keep playing a game. If we really moved it off budget, there
would be no way, without unbalancing the budget and borrowing
more money, for us to give a tax reduction, would there?
Mr. Wilcox. I believe that is correct, sir. That is right.
Your statement is correct.
Mr. McDermott. So the incoming Speaker is setting himself
up in a box where he cannot deal with any kind of tax
reductions, if I understand what you are saying.
Mr. Wilcox. I would like to consult with my budgetary
expert here.
Yes, sir, your observations are correct.
Mr. McDermott. So his only choice would be further to
reduce spending in order to give a tax break, if he was going
to give a tax break.
Mr. Wilcox. I believe that would be correct, sir.
Mr. McDermott. Thank you, and I yield back the balance of
my time.
Mr. Crane. Let's see. Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman. I believe Mr. Wilcox
has pretty well answered my question in Mr. McDermott's
questioning, and that was, you referenced possibly using
general funds to redeem the Treasury notes that are now held
for the trust fund from that of government securities to
private sector securities. Is that what I heard?
Mr. Wilcox. What I gave was one possible mechanism where a
unified surplus could be used in a way that would strengthen
the financial standing of the Social Security system. The
particular mechanism, just to be clear, that I outlined was
taking existing securities already in the trust fund, redeeming
them and using the proceeds to purchase private sector
securities. This is a proposal that a number of outside
advocates have advanced as one possible approach.
Mr. Collins. But the reality of that would be that there
would still be securities or IOUs in the trust fund.
Mr. Wilcox. Unless, I suppose, in the extreme one redeemed
all of the special purpose treasury securities for the purpose
of purchasing private sector securities.
Mr. Collins. No matter where you purchase securities, it is
still an IOU to the trust fund, some type of security. There
are still no funds in the trust fund as such, and there will
always be an investment of those positive cash flows in those
trust funds in some type of securities.
However, you earlier stated that the government security,
as the Chairman stated, is the safest investment in the world,
but yet you would entertain moving them from the safest
investment on behalf of those who work and have those taxes
reduced from their payrolls to another type of investment. It
could possibly be even a less secure investment for the Social
Security Program.
Mr. Wilcox. Right. I think you make----
Mr. Collins. Did I hear you say right?
Mr. Wilcox. I think you make two very important points with
which I agree. First of all, inherent in a policy proposal of
the nature that I gave would be a tradeoff between risk and
return. This is a fundamental tenet of financial markets, that
higher return is not available without assuming additional
risk. So to move from special issue Treasury securities, backed
by the full faith and credit of the U.S. Treasury, to equities
of private sector U.S. corporations would be a move in advance,
in the anticipation toward higher return, but also at the same
time inherently involves assumption of additional risk.
Mr. Collins. In other words, if you move those funds from
government securities to private securities, you are increasing
the risk of those securities.
Mr. Wilcox. Absolutely.
Mr. Collins. Those funds that are deducted from every
worker's payroll check.
Mr. Wilcox. Absolutely. That is an important consideration
that has to be taken into account in assessing the advisability
of a proposal of this nature.
Mr. Collins. Well, under that type of scenario, would the
trust fund be the recipient of the return on the investment? Or
do you have some type of idea or plan how that would be
converted to an individual recipient as the form of investment?
Mr. Wilcox. I haven't seen anything fully ``spec''-ed out
in a way we could hand it to the managers of the trust fund and
just say ``Execute this.'' As it is commonly talked about, with
sometimes the shorthand that the academics and other
nonoperational folks have the luxury to use, what people
envision is that simply in place of those special issue
securities that the trust fund currently holds, that one might
end up holding the common stock of a wide range of U.S.
companies. The S&P 500 is prominently mentioned in these
proposals as the type of thing, or even broader indexes of U.S.
equities.
Mr. Collins. Would that not increase the possibility of
politics entering into those type of investments based on
contribution lists versus government securities?
Mr. Wilcox. Oh, I think one again would have to think very,
very carefully before undertaking a step of this nature. In
return, on the one side of the ledger, that increased
prospective rate of return is very, very attractive. On the
other side of the ledger one has to take account of very
important factors such as the ones you are talking about.
Walling off these securities from political influence, the
investment policy from political influence, would be of extreme
importance if one were to undertake this. Proper appreciation
of the additional risk being assumed by the Social Security
Trust Fund, and a full analysis of the implications of that
risk for the overall fiscal standing of the Federal Government,
would have to be undertaken.
So there are a number of very important factors that would
have to be taken into account.
Mr. Collins. The number one risk factor is the taxpayer
that must be considered.
Mr. Wilcox. The taxpayer would be the ultimate bearer of
the risk.
Mr. Collins. Thank you, Mr. Chairman.
Mr. Crane. Mr. Becerra.
Mr. Becerra. Thank you, Mr. Chairman. In the time that I
have been here, I have seen many thousands of legislative
proposals come before the House and the Senate. We introduce
legislation all the time. We introduce scores of legislative
proposals that are extremely important, of major national
magnitude, and I am not aware of on each occasion the author of
that legislation or the leadership in the House or the Senate
first requesting the administration's input and the issuance of
its own proposal before Members of Congress move forward to
initiate that legislative proposal and work it through the
process.
Certainly with Social Security, everyone is talking about a
bipartisan process, but I know that you have been peppered with
a number of questions about why the President hasn't come
forward with his solution to the challenges facing Social
Security. Let me ask you: Are you aware of whether or not
Congress has forwarded to the President its solution to the
problems facing Social Security?
Mr. Wilcox. I am not aware of that, sir.
Mr. Becerra. The President has given us the principles he
believes are most important in defining any solution for Social
Security. Are you aware of whether or not Congress has
forwarded its principles on what it believes should be most
important in resolving the challenges facing Social Security?
Mr. Wilcox. I am not aware of any agreed upon set of
principles that the Congress would use.
Mr. Becerra. So at least at this stage it appears that
while the President hasn't come forward with any solution,
neither have those who are actually responsible for enacting
legislation, Members of Congress, who must initiate the
proposal, get it passed, before the President has any
opportunity to sign any legislation into law, neither have
those Members of Congress forwarded to the President what they
believe would be the solution to resolve the challenges facing
Social Security; is that correct?
Mr. Wilcox. That is correct, sir.
Mr. Becerra. And you had an opportunity to engage in, I
wouldn't call it a dialog, but an exchange of thoughts with the
Chairman of the Committee on this whole issue of the trust fund
and whether it would be raided if we took moneys and used it
for other purposes. Let me try to play this out, because I know
it gets very confusing, as the Chairman said.
You are the government; I am a worker. I pay to you a
portion of my wages as a Social Security contribution, which
ultimately will help me and others pay for a retirement benefit
that I will get from the government. You get that money that I
contribute, and you do not just hold it. What you do is you
issue a Treasury certificate, a bond or whatever other
government security you have, and you say ``This certificate is
now your proof that you will get that money that you have
invested into the Social Security Trust Fund once you retire.''
You then take the money that you take in lieu of the
certificate that you have now told me is out there to secure my
money, and you use that money for the operation of the
government, for whatever purpose it might be. Is that correct?
Mr. Wilcox. Yes, sir.
Mr. Becerra. Once you use that money, whether it is for
cutting taxes for corporations or estates or individuals or for
programs that the Federal Government operates, transportation
programs, military programs, health programs, and so forth.
Once you spend that money that you initially received through
that employee's contributions, the money is gone; correct?
Mr. Wilcox. Correct.
Mr. Becerra. At some point I get to reclaim the moneys that
I contributed, that are now secured by that government
security; correct?
Mr. Wilcox. And you are the Social Security Trust Fund?
Mr. Becerra. No, I am an employee. At some point, when I
decide to retire, I get to collect the moneys that I have
contributed that have been secured through those government
securities.
Mr. Wilcox. When you retire, the Federal Government pays
out a benefit which is based on your earnings record. And your
earnings record was also the basis for determining what your
contributions were into the system.
Mr. Becerra. And all along, the American worker is being
told because the money is secured through government
securities, the money is safe.
Mr. Wilcox. Those securities that the trust fund has
invested in are on equal standing with the safest securities in
the world.
Mr. Becerra. At some point those securities will have to be
paid out. Someone will have to be able to pay for that. The
government somehow has to be able to pay for the security that
it issued so it can spend the money now in its operating
budget. No money is free. There is no program that is free
here. There is cost involved, and it is a zero sum game. If I
put in a dollar, ultimately I am going to be able to take it
out at some point. And current workers, who are on the verge of
retiring, whether today or in 30 years, who have been
contributing, know that as well.
So whether or not you call this raiding the Social Security
Trust Fund or not, somewhere, if you spend $1 dollar now, you
are going to have to pay for it, whether today, tomorrow, or in
30 years. And if you have spent it in a way that you cannot
have it in your pocket ready to pay out, you are going to have
to find it from some other source, whether you have to cut
education programs, whether you have to cut health programs,
whether you have to cut military programs, because you have to
ultimately pay those dollars that you said were secured by
those government securities; is that correct?
Mr. Wilcox. I believe you have given a very succinct and
nice summary of the underlying fundamental rationale, sir, for
why the President's determination is so great for preserving
the unified surpluses until a solution for Social Security can
be found.
Mr. Becerra. Mr. Chairman, I know my time has run, but I
want to ask one last question.
So if you, as government, decide you want to give a tax cut
or spend more on a government program with moneys collected
through the Social Security contributions of American workers,
ultimately that money will come due and you will have to be
able to pay that worker his retirement benefits, and you have
to find the money to pay for that somewhere because you spent
the money he initially contributed on some other program once
you got it.
Mr. Wilcox. I believe that would be correct, sir.
Mr. Becerra. Thank you. Thank you, Mr. Chairman.
Mr. Coyne. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman, and thank you, Mr.
Wilcox, for being here. I just want to thank my colleague for
laying out the gravity of the situation we find ourselves in
and the reason, among others, that we cannot move forward
without Presidential leadership. Whether it is a specific
legislative proposal or whether it is the answers to the dozens
of questions that have been raised today, Congress, as a
practical matter, is not able to do this alone and in the end,
of course, would require Presidential signature in order to get
it done.
I would ask some of my colleagues who think we need to do
this as a Congress whether they support the Stenholm-Kolbe
plan, whether they support the Stanford plan, whether they
support the Gramm plan we basically heard today, or the Kerry
plan? There are very few cosponsors on these pieces of
legislation. And the reason is there is a great fear that you
get out front on these issues without presidential support and
leadership, at least on the basic questions that have to be
answered, that you have the limb cut out from under you.
I don't know if Mr. Becerra is a cosponsor of any of those
legislative priorities, but we have spent a year now in a
concerted effort to gather the knowledge and wisdom of the
American people, and it has been great. I have had a lot of
hearings on it, both here and back home. We have had to
exercise some hard choices in my district, and so on. It is
time for leadership, and it is urgent.
I look at the testimony today, and we have something from
Mr. Cogan where he says that delaying reform for 10 years is
going to require a 25-percent benefit reduction. We have the
1994-96 Social Security Advisory Council report saying reform
will be very costly, and said it will be necessary to reduce
benefits by 15 percent even if legislation were enacted today.
This is, I think, a crisis. And to say that it is an issue we
can wait and resolve closer to the year 2034 I think is
misleading to the American people.
I also note in Mr. Cogan's testimony he says every
President from President Roosevelt has been actively engaged in
this, and ensuring the solvency of the fund has been a priority
and something the administrations have taken the lead on.
Having been at the other side of Pennsylvania Avenue on this on
other issues, I don't see how this one can be solved otherwise.
So I think we need to work together. It needs to be
nonpartisan. I agree with my colleague from Arizona on that. I
think it is how we did the IRS reforms and were successful on
it. So I would urge you to take back the message, I know you
have heard it loud and clear from everybody else, which is we
need to see some answers to these questions, if not a specific
proposal.
I would just briefly ask you a couple of things. One, does
the administration support the Commission that passed the
House?
Mr. Wilcox. I'm sorry?
Mr. Portman. Does the administration support the
legislation that Mr. Levin referred to earlier, which was for a
Commission?
Mr. Wilcox. I'm not familiar with what specifically.
Mr. Portman. I am not sure you were here several months ago
when that proposal came before the House. Do you recall the
proposal?
Mr. Wilcox. I'm not----
Mr. Portman. It was reported out of this Committee and
voted on in the House and it was not voted on in the Senate.
Did the administration support that proposal? It is a yes or no
answer.
The answer is no. Thank you, Linda.
Mr. Wilcox. I am advised the answer is no.
Mr. Portman. It is, and that is just counter to what we
heard earlier, just to set the record clear. I think because of
that, frankly, you guys have taken on an additional
responsibility, despite what we have heard earlier today. It is
clearly the responsibility of this administration, if they do
not want to have a bipartisan commission, to step up to the
plate and give us some specific ideas.
I want to go through some of these ideas quickly. You said
earlier, basically you will not rule out any options, which is
fine, but then every time we raise an option, you raise five or
six major concerns, and there are major concerns. This is all
about tradeoffs. I guess, again, that would just underscore for
me the need for some leadership.
I would ask you about payroll taxes again. Is it the rate
of payroll taxes that is off the table?
Mr. Wilcox. Indeed.
Mr. Portman. The tax rate?
Mr. Wilcox. The President has indicated he expects to be
able to accomplish this without increasing the payroll tax
rate.
Mr. Portman. Does the President support or do we still have
the idea of private accounts on the table, where we take some
of the Social Security and put it into private accounts?
Mr. Wilcox. Clearly, individual accounts are on the table.
The President will be inspecting those proposals for individual
accounts very carefully for conformance with what he thinks is
really a core principle, and that is the maintenance of a
predictable and secure Social Security benefit.
Mr. Portman. I would say again, there are specific
proposals out there on that from Bob Kerry to Phil Gramm, and
on our side, and I would love to know what the administration
thinks about those proposals.
I would also say that is counter to what I have heard from
Vice President Gore. Does he not represent the administration
on that position?
Mr. Wilcox. With respect to individual accounts?
Mr. Portman. With respect to private accounts.
Mr. Wilcox. Oh, I think what the administration has taken
off the table--I am not familiar with what statement you may be
referring to of Vice President Gore.
Mr. Portman. At the Rhode Island conference the Vice
President took a strong position against what he called
privatization, which was described in that conference as
individual accounts.
Mr. Wilcox. Right. I was there, and my recollection is that
what he ruled out is what he called radical
privatization.
Mr. Portman. Radical. All right. None of us want to be
radical, so that is OK.
I would just make one final point, and it is in the form of
a question, really. Has the administration taken a hard look at
the possibility, assuming individual accounts with some private
investment is not off the table, of a nexus of reform of our
pension system and expanding the availability and access to
pensions with Social Security? In other words, having
portability earlier, vesting higher limits on what you can
invest into private pensions being part of Social Security
reform.
Mr. Wilcox. I think we have just really begun to scratch
the surface on that. The Secretary and the Deputy Secretary, as
you know, feel extremely strongly about national saving
measures to improve personal saving, and they view Social
Security reform in a context as part of a fabric that will
involve hard work, inspecting the pension system, and other
measures to improve personal saving. We would like to work
closely with you on proposals to advance those.
Mr. Portman. I think it is something that holds tremendous
promise. Time's a-wasting. We have had a good year, a lot of
debate, and I would hope the administration could help us with
regard to a leadership role on, again, being able to identify
what options are not just on the table but are realistic, and
then to help us create that nexus, which I think is a
tremendous opportunity for the American worker to be able to
put private savings together with a reformed and much more
accessible and available pension system. And I thank you for
your time today.
Mr. Wilcox. Thank you.
Mr. Shaw [presiding]. Mr. Nussle.
Mr. Nussle. Thank you, Mr. Chairman. My question is about
the Social Security Trust Fund itself.
My understanding is that, aside from all the history we
have heard today, that we have a separate Social Security Trust
Fund; is that correct?
Mr. Wilcox. Yes, sir.
Mr. Nussle. And is that walled off from the general fund?
Mr. Wilcox. That is distinct from the general fund, yes,
sir.
Mr. Nussle. And are there any other fire walls, by
legislative enactment, that are necessary, in the opinion of
the administration, in order for it to be any more off budget
or any more secure or any more fire walled, or any more
separation than what we currently have? Are you aware of
anything that is necessary in order for us to have any more
separation than we currently enjoy?
Mr. Shaw. I will not charge this time against the
gentleman.
Mr. Nussle. This is going to be a good answer.
Mr. Wilcox. I think the answer is we would like to come
back to you in written form and address this.
[The following was subsequently received:]

Question: And are there any other fire walls, by
legislative enactment, that are necessary, in the opinion of
the Administration, in order for it to be any more off budget
or any more secure or any more fire walled, or any more
separation than what we currently have? Are you aware of
anything that is necessary in order for us to have any more
separation than we currently enjoy?

Answer: The Congressional Budget Act already has firewalls
and off-budget status for Social Security. The Budget
Enforcement Act of 1990, which amended and added to the
Congressional Budget Act which existed at that time, moved
Social Security off-budget for all purposes of the Budget Act--
including the annual Congressional Budget Resolution--for all
purposes of the Budget Enforcement Act, and for purposes of the
President's annual budget submission and mid-session review of
the budget.
Of special note, the requirement for pay-go neutrality
(which pertains to changes in revenues and mandatory spending
programs) in the Budget Enforcement Act applies to the non-
Social Security budget. The pay-go neutrality requirement is
enforceable by an automatic sequester of some mandatory
spending programs, including Medicare. This neutrality
requirement prevents a surplus in the Social Security portion
of the budget from being used as the justification for a
deficit-increasing change in the non-Social Security budget.
Under current law, there are points of order in both the
House and the Senate which prevent surpluses or Trust Fund
balances of Social Security (in general) from being reduced by
legislation. In the Senate, these points-of-order can only be
waived with a supermajority of 60 votes.
The Administration is open to examining any new ideas on
how best to run responsible fiscal policy today, so that we can
help meet the challenges of aging of America. Of course, we are
open to examining any new ideas and suggestions that Members of
Congress may propose. In addition, as Social Security financing
legislation moves forward, if we subsequently develop any new
proposals of our own, we would want to discuss those proposals
thoroughly with the Congress.

Mr. Nussle. Good answer. Let me ask you this. Let me tell
you what my understanding is, and I would be interested in your
reaction to this.
My understanding is that the reason we are even here today
having this argument is because of the unified budget. It is
walled off. My grandmother, her money she put in there is
walled off; right? Can I please call my grandma up and tell her
everything is fine with her money? Can you give her that
assurance here today?
Mr. Wilcox. I think what you can call up your grandma and
tell her is that the administration and the Congress----
Mr. Nussle. No, no, no, no, don't give me that, Mr. Clinton
and his principles. You tell me, Mr. Wilcox, is her money safe
today? That is what I want to know.
Mr. Wilcox. Her money is safe today, yes, sir.
Mr. Nussle. Thank you. That is what I want to know because
I have heard a lot of stuff, and people are running around
saying some people may not get their checks and all sorts of
stuff like this. And that is a lot of nonsense, from what I
understand. And if you think it is nonsense, I wish you would
just tell me that so I can give her and other grandmothers
across the country a little confidence tonight that their money
is safe.
Mr. Wilcox. That is correct, sir. I think the other part of
your message to your grandma might be that for the sake of her
grandchildren and her grandchildren's grandchildren----
Mr. Nussle. Do I need to play any music behind this
commercial? Let's get on with it, all right?
My understanding is the reason we are here today to discuss
this whole issue of on budget, off budget surplus, and all this
other stuff is because of this little word called ``unified''
budget. And because the CBO, Congressional Budget Office, and
the OMB, Office of Management and Budget, report the budget
surplus and/or deficit together on the same page--which they do
by, I believe by law, if I am not mistaken--there is a
reporting requirement that when they report the figures of the
budget, that there is an on budget surplus and an off budget
surplus. They are basically one line removed, and they are on
the exact same page of their report. Is that correct, based on
your budget guru, too?
Mr. Wilcox. Yes, sir, they are required by law to be on the
same page.
Mr. Nussle. OK. If we separate that page, and we have an on
budget surplus and a Social Security surplus or balance,
however you want to put it, and put it on a separate page, how
would that grab you?
Mr. Wilcox. I don't think it would change the fundamental
analytics of fiscal responsibility.
Mr. Nussle. I understand that, but it would change whether
or not the Wall Street Journal or the Washington Post or the
President or the Congress or a Congressman or a Congresswoman
or Senator would be able to say, ``This year we ran a
surplus.'' Because that is currently what is done.
And I guess my challenge to you is, since this is where we
are coming down, I understand privatization and all that kind
of stuff down the road is on the table for discussion, and we
will have bipartisan all sorts of things for that, but I think
the real challenge this year, if the President wants to show
some leadership and wants to really demonstrate to the American
people how seriously he wants to tackle this issue of the
budget and budget surpluses and the Social Security surplus, is
to join with us to change the law, separate the reporting
mechanisms for these two different issues, which are different.
You are basically saying it is Social Security. It
shouldn't be used for tax cuts. It shouldn't be used for
general fund spending. We agree. I think we could probably have
a vote on that today and we would have a huge majority vote for
that.
There is only one problem. When the President submits his
budget, it won't be in balance. And when the Republicans pass
their budget, it won't be in balance unless a whole heck of a
lot of work gets done on the spending side or on the increase
of the revenue side, and that is the reason why we are having
this problem.
So my challenge to you is, let the President know that we
are willing to have this discussion, but let's separate, let's
really separate the trust fund, and we will pass whatever law
we need to do in order to make sure he can do a reporting
requirement. But let's separate this on budget surplus from the
off budget surplus. Let's separate Social Security, and let's
let the President submit a budget without Social Security and
without Social Security revenue included in that.
Would the administration go along with that?
He wants to give you something. I think it is the answer.
Mr. Wilcox. We will have to take that under advisement,
sir.
Mr. Nussle. OK. You are going to let the President know
that, though?
Mr. Wilcox. Yes, sir.
Mr. Nussle. OK, that would be great, because that is the
bottom line here. It is the reporting of this that gets
everybody mixed up. The Republicans want to be able to say they
have balanced the budget, the President wants to be able to say
he has balanced the budget. If Social Security is in it, you
can't say that. You cannot hold Rose Garden ceremonies, you
can't hold Capitol steps ceremonies. That is the reason this is
going on.
I think for both sides, if they want to get serious about
it, let's separate the reporting mechanisms for Social Security
and let's separate the budget in the reporting fund mechanisms.
Separate them at least by one page. I would even suggest let's
separate them by days or weeks, so that we cannot say we have
got a balanced budget with Social Security included.
When the President has the guts to do that, because I have
already introduced legislation that is done in a bipartisan
way, and I believe we are going to have a chance to move that
in the next Congress, I believe we are going to have an
opportunity to actually get past the first hurdle. And that
first hurdle is, where is the money? Where is the money? That
is what is scaring everybody right now.
Once we get past where is the money--show me the money--
after we get past that part, then I think the rest of it, we
can have an intellectual discussion. But up until that point we
have all sorts of people running around the country trying to
scare people that their money isn't there. And that is making
it pretty darned difficult for my grandmother to allow me to
join in this kind of discussion without her getting a little
bit concerned about whether or not her check is coming, because
she has got people scaring her, telling her that it isn't going
to come if we have this discussion.
So I would hope the President would consider that as a
possible first step reform, separating the reporting mechanism
for Social Security in the budget so we can get on with the
discussion and the debate.
Mr. Shaw. Mrs. Johnson.
Mrs. Johnson of Connecticut. Mr. Wilcox, I am sorry I
missed your testimony, but I did look through it while I was
elsewhere, and I do want to focus just very, very briefly on
the conference that you scheduled on Social Security at the
White House December 8 and 9.
First of all, it is my conclusion that minorities and women
are particularly disadvantaged under our Social Security system
for a lot of reasons. Would you agree?
Mr. Wilcox. Oh, on the contrary. I think the Social
Security system is especially important to minorities and
women.
Mrs. Johnson of Connecticut. It is especially important to
them, but it is very hard for them to get a decent benefit
under it.
Mr. Wilcox. No, I think there are a number of features of
the Social Security system that are very constructive from the
point of view of----
Mrs. Johnson of Connecticut. I do appreciate that the
Social Security system better rewards lower earners than higher
earners, but in general the pattern of women's work lives, who
they work for and all those things, end up with women and
minorities, on the whole, leaving them for the most part with a
minimum benefit.
I am concerned about your conference on Social Security for
the narrowness of its focus. I chair the Subcommittee on
Oversight. We are going to be very heavily into pension reform
this year. The administration and the Treasury is very aware
that we did a lot of work on it last session and, frankly, I
was very disappointed at the lack of vision from the Treasury
in terms of pension reform.
Only 50 percent of Americans have any pension benefit
program. Same percentage as many years ago. There are more
employees, there is a bigger number, but it is the same
percent. And the same people are disadvantaged under our
pension laws as are disadvantaged under other health insurance
laws. It is the same small employers who cannot afford to
provide pension benefits to their employees.
And frankly, if we do not do something far more aggressive
to simplify our pension laws, we won't possibly be able to help
people develop the modest savings that they desperately need.
Because living on a minimum Social Security benefit now is
impossible, with Medicare not covering drugs, for one thing,
but it is going to be even more difficult in the future because
the minimum benefit is very, very low. And while it is
accommodated for inflation, inflation doesn't well reflect the
changes in cost of living in various areas, some areas where
rentals are high above the norm, for example.
So it does worry me that the administration is approaching
reforming Social Security without looking at the real issue,
which is retirement security. And I consider Social Security a
key element of retirement security, like I consider Medicare a
key element of retirement security. But if we aren't as dead
serious about pension reform and savings reform, people won't
have retirement security.
So I would hope that you would plan the program, and I
would be delighted to work on this with you and to participate,
but if we do not lay out at that conference the public support,
the dollars we spend through the tax system to support pension
savings, and where that goes and who gets it, then we do not
get a clear picture of how public resources do and do not
support retirement security.
So I would urge you to broaden the focus of your conference
on December 8 and 9 to include also pension reform and savings
reform, with at least an eye to laying out the problems, as we
did in our hearings earlier this session, somewhat earlier this
year, to demonstrate truthfully the enormity of the problems of
retirement security for our people. Social Security is only one
problem that is not going to solve, as important as it is, the
issue of retirement security. We have to look at how we manage
our pension systems and how the law discourages employers from
participating and discourages employees from participating.
So I urge you to think that through before you solidify the
program for your White House Conference on December 8 and 9.
Thank you.
Mr. Shaw. Dr. Wilcox, thank you. You have been sitting
there for well over 2 hours, so you can take a much deserved
rest. Thank you.
Mr. Wilcox. Thank you, sir.
Mr. Shaw. We next have a panel of witnesses. Hon. John F.
Cogan is a senior fellow of the Hoover Institution, Stanford,
California, former Assistant Secretary of the U.S. Department
of Labor, and former Deputy Director of the Office of
Management and Budget; Dr. Herbert Stein, senior fellow of the
American Enterprise Institute for Public Policy Research; Hon.
Robert D. Reischauer, senior fellow at the Brookings
Institution; and Hon. Stanford G. Ross, Chair of the Social
Security Advisory Board.
We welcome all of you. We have your full statements. You
may care to summarize. We appreciate your being here.
I would say to all of you, I think it is very obvious from
the former witness that there is great hesitation in politics
on taking the first step on something that is this complicated,
so perhaps you might be able to shed some light on it and help
us find the way.
Mr. Cogan.

STATEMENT OF HON. JOHN F. COGAN, SENIOR FELLOW, HOOVER
INSTITUTION, STANFORD, CALIFORNIA

Mr. Cogan. Thank you, Mr. Chairman, and thank the Committee
for the opportunity to testify.
As the Committee begins its work, it might be helpful to
consider in a historical context the enormity of the challenge
that lies before you. I have prepared a chart which shows what
will happen to Federal expenditures if we fail to address the
Social Security financing problem. The chart places these
consequences in a long historical perspective. The chart is in
my testimony.
The bottom line of the chart, Mr. Chairman, is that
financing the promised benefits with taxes will require a
doubling of the Social Security and Medicare payroll tax by the
year 2040. Financing promised benefits with debt will raise
Federal spending to over 40 percent of gross domestic product
as interest compounds upon interest. As the chart shows, this
level of spending is unprecedented in our history, except for a
single year at the peak of World War II. This level exceeds the
largest annual expenditure during the War of 1812, the Civil
War, World War I, Vietnam and Korea combined.
Regarding the process of reform, I would emphasize two
points very briefly, since both of them have been touched on
before. First and foremost, it is the case that substantial
Presidential leadership and a creditable executive branch
proposal are essential to achieving effective reform on a
timely basis. This is a fact of life in Social Security's
history.
Throughout this history, the process of enacting virtually
every significant change in the program has begun with a well
developed presidential proposal. President Roosevelt presented
a very specific plan for creating the program. Presidents
Truman and Eisenhower led the efforts to make the program
universal. Social Security benefits were indexed to inflation
only after President Nixon proposed to index them. President
Carter's proposals to restore the solvency of the program were
crucial in the 1977 amendments. President Reagan, undeterred by
the pasting that his proposals received in 1981, worked through
the Greenspan Commission to enact the 1983 reforms.
The history of Social Security legislation is clear: A well
developed presidential proposal can greatly expedite the
legislative process. An ill-formulated proposal will
significantly delay the process. No presidential proposal
usually means no legislative action.
A second point concerning the process that has also been
made several times here today is that bipartisanship is
essential. Now, Social Security legislation has not always been
bipartisan, but given the highly charged atmosphere within
which legislation occurs, this is not surprising. In the
current context, however, I do believe that bipartisanship is
very essential for the enactment of reform. There are over 40
million beneficiaries and nearly 150 million workers who pay
taxes into the system. Acceptance of a significant reform
package across such a wide segment of the American population
requires that most of its elements be supported in Congress on
a bipartisan basis.
Regarding the proper road to take to Social Security
reform, I would like to emphasize two points: One is that an
approach to avoid is one that attempts to build and maintain a
large trust fund reserve. Social Security's legislative history
offers a clear assessment of this approach. It won't work. From
time to time, policy decisions, wartime economic conditions,
and business cycle expansions have generated the buildup of a
reserve or the prospect thereof. Each time the reserves have
generated pressures for greater spending. Each time Congress
has invariably responded by raising benefits or expanding
eligibility. As a result, the projected reserves have never
materialized.
Now, there are many that will argue that today's situation
is different. The fact of the baby boom generation nearing
retirement age might be argued to dissuade the Congress from
spending the surplus in response to the political pressure that
invariably comes with them. But I would say this: There is
nothing in Congress' past history or recent history that
suggests that they will be able to resist the pressures to
spend surplus funds.
My other point is that I would recommend that the Committee
be very cautious about following the legislative approaches of
1977 and 1983. The focus of each of these laws was primarily to
fix the short-run financial problem that the program
confronted. Fixing the long-run problem that was known at the
time was a low priority.
Both laws relied primarily on raising revenues to finance
the existing benefits. They solved the short-run problem but
they did not solve the long-run problem. As my chart makes
clear, the solution to Social Security is in reducing long-term
liabilities, not in trying to finance the large obligations
that we have promised current beneficiaries.
In closing, let me say that I applaud the Committee for
holding these hearings. Looking at the process of reform is
indeed the right place to start, and I would be happy to
elaborate on any of my points or to answer any questions you
might have.
Thank you, Mr. Chairman.
[The prepared statement follows:]

Statement of Hon. John F. Cogan, Senior Fellow, Hoover Institution,
Stanford, California

Thank you for this opportunity to appear before your
committee today to discuss the process of social security
reform. There is no topic more deserving of the consideration
of this committee than reform of the social security program.
Social security is financially insolvent. Although annual
Social Security Trust Fund receipts currently exceed
expenditures, this situation will be reversed when the baby-
boomers begin retiring. In 2012, the fund will begin to draw
upon its accounting reserves. By the year 2032, the program
will have exhausted these reserves.
There are many ways to measure the enormity of the
financial problem that social security creates for the federal
government. One that I have found useful is to place the impact
that social security will have on the federal budget in
historical terms. Chart 1 shows actual federal outlays as a
percentage of gross domestic product (GDP) from the year 1800
to the present and the projected outlays as a percentage of GDP
for the next 50 years.
The chart illustrates the consequences of failing to
address social security's and Medicare's financial problems.
Without reform, federal spending on social security and
Medicare will double as a percentage of GDP by 2040. Government
borrowing to finance these higher expenditures alone will push
federal spending upward to over 40 percent of GDP in 50 years.
Financing this growth will require a doubling of the federal
government's tax claim on private sector resources. This
projected level of spending dwarfs any previous level our
nation has experienced except, of course, the level temporarily
reached at the peak of World War II. A solution to the social
security problem must be found soon if we are to avoid imposing
a crippling tax burden on future generations of workers. The
first portion of my testimony presents my thoughts on the means
of creating a proper legislative environment for reforming the
program. The second part presents my views on what we might
learn about the proper road to reform from the program's
legislative history.

I. Creating a Proper Legislative Environment for Achieving Reform

A. Substantive Presidential Leadership and a Credible Executive Branch
Proposal are required.

When one reviews the long history of Social Security legislation,
one cannot help but be impressed with the important role of the
President and the Executive Branch in this process. The process of
enacting the initial Social Security program and virtually all
significant changes to the program, whether expansions or contractions,
have begun with specific well-developed presidential proposals.
In 1935, President Roosevelt began the legislative process of
creating social security by sending to Congress a fully developed plan
for the program. All of the plan's chief architects; Edwin Witte, Labor
Secretary Frances Perkins, and Treasury Secretary Henry Morgenthau,
testified before this committee on the proposed plan. When short-
comings of the proposal's financing became apparent, the President sent
Henry Morgenthau back to this committee with a revised proposal. Over a
seven-year period following World War II, 1948-54, Presidents Truman
and Eisenhower submitted specific legislative initiatives proposing to
increase benefits and expand coverage. As a result of their initiatives
and legislative action by the Congress, social security coverage was
nearly universal among private sector workers by the mid-1950s. The
process of enacting the benefit hikes of the latter half of the 1960s
and early 1970s all began with presidential proposals. Although
proposals for an automatic cost-of-living-adjustment (COLA) for social
security benefits had been put forward since the 1950s, legislation
creating the COLAs was not enacted until President Nixon proposed them
in 1971. In 1977 the program faced its first near-term financial
crises. President Carter's package of legislative reforms, submitted
less than five months after his inauguration, served as the starting
point for the legislative reforms of that year. When it became clear in
1981 that the social security program was again in near-term financial
crisis, President Reagan did not shy away from leadership. In May of
that year, he proposed a set of initiatives designed to restore the
program's near-term solvency. Although his initiatives met with a
severe negative reaction, the president remained committed to reform.
He proposed what has become known as the Greenspan Commission. The
Commission was the vehicle by which the Executive and Legislative
Branches would work together to develop a solvency package. This
package was enacted virtually intact in early 1983.
In order for any other presidential proposal to be helpful in
initiating a successful legislative process, it must not only be
specific, it must be credible. A proposal that fails the credibility
test will only delay the legislative process. Credibility is often in
the eyes of the beholder. It is not easily measured nor known in
advance of its being publicly released. President Carter's 1977 reform
package was at the time judged as credible. It received serious review
in Congress, served as an impetus for Congressional action, and large
components of it were enacted into law. President Reagan's 1981
package, in retrospect, was judged by Congress as less credible.
Although most of the provisions of his package had been individually
proposed earlier, they were viewed as ``dead on arrival'' when combined
into a single package. These proposals not only failed to serve as an
impetus for Congressional action, they actually contributed to delay
Congressional deliberations over reform.
The history of social security makes clear that a specific and
credible presidential proposal combined with the active involvement of
senior executive branch officials can serve to expedite the process of
enacting legislation. President Roosevelt submitted his proposal to
create the social security program in January of 1935. With the help of
his Committee on Economic Security, Congress enacted the new program in
only seven months. The same number of months elapsed between the
submission of President Carter's 1977 reform package and its final
passage. In 1983, only two months elapsed between the issuance of the
Greenspan Commission's recommendations and enactment of the 1983
Amendments.
In general, a minimum criterion for a plan to be credible is that
it addresses the problem at hand. In the current context, the problem
is not a near-term financial shortfall. The problem is that our society
cannot afford to deliver currently promised social security benefits to
persons retiring in twenty-five years. Thus, any credible plan must
contain provisions for a reduction in future social security
liabilities. A plan that proposes to maintain these liabilities and to
finance them by raising taxes or asserting high returns on federal
government investments of the social security trust fund will not pass
the credibility test.

B. Strive for Bipartisanship

Bipartisanship with adherence to principles is a well-established
recipe for developing and enacting successful social security reform.
Attacks that serve short-term partisan ends generally produce failure.
Throughout its long history, the social security program has been
subjected to an extraordinary amount of demagoguery. Early opponents
attacked the program as ``a scheme of hollowness and humbuggery,'' and
``a solemn and cruel hoax.'' Recent reformers have been lambasted as
``heartless'' and ``meanspirited.'' Given the highly charged atmosphere
in which social security issues are usually debated, it is remarkable
how often social security legislation has enjoyed widespread support
from both sides of the political aisle. This has been true not only
when the Congress has risen above partisanship to dip into the Treasury
and raise benefits, as it did in 1972; it has also occurred when
Congress moved to contract benefits, as it did in 1983.
In the current context, bipartisanship requires, above all else,
political restraint. The temptation to attack the other party's
proposal for short-term political advantage is ever-present. The
temptation should be resisted. Inevitably, such attacks delay the
enactment of reform. In 1981, the attacks on President Reagan's
proposed social security reform package so permeated the atmosphere
that enactment of needed reform legislation proved impossible for the
remainder of the 97th Congress. Enactment of a reform plan had to wait
until the Greenspan Commission made its recommendations and the 98th
Congress convened.
In the current context, delay is costly. Each year's delay worsens
the financial problem and deepens the magnitude of the required
solution. As the 1994-96 Advisory Council on Social Security noted in
its report, a reduction of just over 15 percent in social security
benefits would be required to make the program solvent if legislation
were enacted today. If, however, legislation is delayed by ten years,
the required reduction rises to 25 percent.

C. Use Prudent Economic, Demographic, and Behavioral Assumptions

At the outset of the committee's legislative deliberations, create
a clear and firm set of rules about how the budgetary impact of
proposed policy alternatives will be measured. These rules will guide
the measurement of a budget baseline and your assessments of
alternative reform proposals.
Often, as many economists know, the easiest route to solving a
difficult problem is to assume it away. In the context of social
security, this can be accomplished by adopting overly optimistic
economic and demographic assumptions. Avoid this temptation and err on
the side of using prudent assumptions. Keep ``Rosie Scenario'' locked
in the attic. This will ensure that your policy solutions are real and
not illusory. It will also enable you to avoid revisiting the same
issues in a short period of time as the promised results fail to
materialize.
At the same time, recognize that the economic and demographic
assumptions you adopt are only forecasts of an uncertain future. The
legislative impact of many of your provisions will occur twenty or
thirty years from now. The ability of the best economists and
demographers to forecast future trends and events occurring even a
short time from now is severely limited. At the time of the 1977
Amendments were passed, the best forecast indicated that the trust fund
would remain solvent until the year 2035. By the very next year,
unforseen economic circumstances had shortened the forecasted period of
solvency considerably.
One important dividend of proper social security reform is higher
economic growth. Social security need not be a ``zero-sum'' game.
Higher growth will raise the standard of living enjoyed by our children
and all subsequent generations of American citizens. Higher growth
increases the amount of resources that will be available to help
finance future retirement obligations.
As economists who have previously appeared before the committee
have testified, the current structure of social security induces young
people to save less and induces others to work less, especially as they
near retirement age. Each of these unintended consequences harms
economic performance. When individuals reduce their savings and the
federal government doesn't increase its savings by an offsetting
amount, there is less money available to finance productive private
sector investments. The cost of less investment is slower economic
growth and, hence, a lower standard of living for future generations.
When productive individuals choose to retire early because social
security imposes a financial penalty on continued labor force
participation, the economy operates at a permanently lower level and
everyone loses. Although economists may differ about the precise
magnitude of the current program's adverse impacts, there is general
agreement about their direction. The current structure of the program
is working against improvements in our standard of living. Proper
reform can make the social security program work for our economy and an
improved standard of living. The magnitude of the improvement will
depend upon the particulars of the reform plan.

D. Try to Reach Agreement on a Set of Principles at the Start of the
Process

Attempt to agree to a set of principles at the outset of your
deliberations before proceeding to work out the legislative details.
Finding agreement on broad principles is often easier than finding
consensus on the specific means by which these principles can be
achieved. Moreover, reaching agreement on principles often facilitates
reaching agreement on specifics. A few areas in which the committee
should attempt to reach agreement on principle are:
the degree to which individuals would be permitted to
invest their social security contributions in privately owned
retirement accounts,
the degree to which such investments should be regulated
by the federal government,
whether the federal government should be permitted to
invest surplus social security funds in private securities, or whether
such funds should continue to be exchanged for U.S. Treasury
securities.
the extent of a guaranteed minimum social security benefit
and method of financing it,
whether current retirees should be asked to bear any of
the costs in terms of lower benefits

II. Lessons from the Past about the Proper Road to Reform

The history of social security legislation strongly
suggests that certain approaches to solving the program's
financial problem are not likely to work. The timely enactment
of effective reform is enhanced by learning from this history,
recognizing the pitfalls of these earlier approaches, and by
avoiding these earlier mistakes.

A. Attempts to Build a Large Social Security Reserve Within the
Federal Budget Will Fail

One approach to be avoided is to maintain the social
security program's current structure and attempt to build and
maintain a large reserve fund. Social security's legislative
history offers a clear assessment of this approach: it won't
work! From time to time throughout the program's history,
policy decisions, wartime economic conditions, and business-
cycle expansions have created large reserves or projections
thereof. Those reserves have generated pressures for greater
spending. Congress has invariably responded to this pressure by
raising benefits or expanding eligibility.
During the development of the original Social Security
program in 1934-35, there was widespread recognition that the
program's future costs would be higher than its initial costs.
The demographic projections at the time were much like those of
today. The projected 30-year growth in the elderly population
relative to the total population was, in fact, larger than it
is today. The issue of how to finance these higher costs
received paramount attention throughout the development of the
initial program. The original Social Security Act of August
1935 adopted a financing plan under which payroll taxes would
initially exceed benefit payments and a large reserve would be
built. Interest earned on the reserve would be available to
defray the program's future costs. This seemed at the time like
an eminently sensible idea. However, within four years this
reserve policy collapsed under an avalanche of criticism and
rising pressure to expand benefits. The criticism and the
pressure came from both sides of the political aisle. By 1939,
the sizeable reserve that had seemed such a good idea four
years earlier had become a political liability. That year,
Congress enacted legislation to dissipate the reserve mainly by
expanding eligibility and increasing benefits.
During the 1940s, the wartime economy generated a series of
annual Social Security surpluses. By 1950, the trust fund
balance had grown to a level large enough to finance benefit
payments for the next decade. The large balance generated
spending pressures. During the 1950s, Congress responded to
this pressure every two years. In each election year from 1950
to 1960, Congress raised eligibility or expanded benefits. The
benefit increases were large. The Social Security Amendments of
1950-54 more than doubled the typical recipient's benefits.
During the 1960s, the U.S. economy entered into a decade-
long period of strong economic growth which fueled large
increases in payroll tax revenue. Forecasts of the trust fund's
near-term growth during 1965-73 were consistently the largest
in the program's history. But, instead of holding the surplus,
Congress expanded benefits. In the brief span of nine-years
(1965-73), Congress enacted seven across-the-board increases
that raised benefits by 83 percent, a third more than the
amount required to compensate recipients for inflation. This
period of extravagance ended with a 20 percent across-the-board
benefit increase which first appeared in social security checks
five weeks before the 1972 elections.
According to some observers, because the enormous future
costs of financing the baby-boom generation's benefits are so
widely recognized that Congress will be able this time to
resist the inevitable political pressure to spend any surplus.
However, social security's demographic problem is not new.
Knowledge of large projected increases in the size of the
beneficiary population have not previously deterred elected
officials from spending surplus social security funds. As I
noted earlier, in the 1930s, the projected 30-year growth in
the elderly population relative to total population, was even
larger than it is today. Yet, political pressures caused the
federal government to spend the reserve by adding new
categories of beneficiaries and increasing the level of
benefits. In early 1950, the social security actuaries
estimated that the number of beneficiaries per worker would
rise by 270 percent in the ensuing 30 years, compared to
today's 30-year estimate of only 70 percent. Yet, a few months
later, the federal government granted a 77 percent increase in
benefits for current and future retirees.
Observers also point to the absence of legislation
expanding benefits during the late 1970s and 1980s as evidence
to support their contention that Congress will be able to
resist the pressures to spend that come with a large reserve.
Persistently low trust fund balances during these years are the
more likely reason for the lack of benefit expansion.

B. Past Approaches Are Unlikely to Succeed in Making the
Program Solvent

Only twice in social security's history has Congress been
confronted with the difficult task of addressing the prospect
of financial insolvency: 1977 and 1983. In each instance, the
trust fund faced a short-term financial crisis and a long-run
financial problem. Projections made in early 1977 indicated
that the trust fund's balance would fall to less than one
month's worth of benefits by 1982. The long-term actuarial
balance reached its lowest level in the program's history. In
late 1982, the short-term problem was much more acute. The
trust fund balance would be depleted in a matter of months. The
long-term problem was less severe.
In each case, the primary means of restoring solvency was
the same: rely primarily on higher revenues. In 1977, 90
percent of the projected short-term (3-year) solution and 70
percent of the improvement in the long-term actuarial balance
was achieved by raising revenues. In 1983, the corresponding
estimates were 63 percent for the short-run and 84 for the
long-run.
Given the acute nature of the short-term financial crises
in 1977 and 1983 and the extraordinary political difficulty of
reducing near-term benefit payments below previously promised
levels, the heavy reliance of enacted legislation on higher
revenues in the short-run is not surprising.
Many observers claim that the 1983 Amendments began the
process of building a reserve to finance future liabilities.
Much of this acclamation is misplaced. First, as is shown in
Chart 2, the actual growth in the beginning of year trust fund
balance relative to that year's outgo is quite modest. Last
year, the trust fund balance was still less than two years of
trust fund outlays. Second, the principal focus of the 1983
Amendments was solving social security's short-term financial
crisis. As part of this focus, the amendments were designed to
build reserves sufficient only to protect the fund against
economic downturns. Any growth in the balance above this level
is due primarily to the strong economic growth since 1983.
[GRAPHIC] [TIFF OMITTED] T3030.008

The situation facing policymakers in 1999 is radically
different from the short-run financial crises of the late 1970s
and the early 1980s. There is no short-term crisis. Unless
Congress can change its behavior from its 60-year norm of
spending social security surpluses, adding revenues will not
solve the problem. To the contrary, by attempting to add to the
reserve will create political pressure to add to spending.

Mr. Shaw. Thank you, sir.
Dr. Stein.

STATEMENT OF HERBERT STEIN, SENIOR FELLOW, AMERICAN ENTERPRISE
INSTITUTE FOR PUBLIC POLICY RESEARCH

Mr. Stein. Thank you, Mr. Chairman. The last 3 hours have
been very instructive to me. I would like to comment on the
question that most of you seem to be concerned with, which is
who should go first.
I think it is clear somebody has to go first, and I think
the ball is in the President's court, just considering what
time of year it is. But I think there is another reason why the
President ought to take the leadership, other than any I have
heard discussed, and that is because I think this question
involves issues that are beyond any congressional Committee;
that is, it is not just a question for the Ways and Means
Committee, it is a question about the policy with respect to
the budget, the long-run questions with respect to the budget,
and it is also involves important questions with respect to
planning for the future growth of the American economy.
So I think it is only the President who really can
integrate all those concerns and who has the staff capacity for
doing it. I think for that reason, among others, I would look
forward to his coming ahead in the budget, in the economic
report, in the State of the Union, and giving us some kickoff.
And I think in that way he can raise the level of discussion to
a higher point than it has commonly been raised in the
political process.
With respect to the substance of the matter, as I
understand the present situation, it has two parts. One is that
the present reserves of the Social Security system, plus the
future inflow of funds from the payroll tax, are estimated to
become insufficient to pay the benefits provided by current law
at some time in the next generation. The other is that with
present taxes and expenditure programs, the unified Federal
budget is in surplus and will remain so for some years to come.
The question is what to do with the combination of conditions.
I believe we have a moral commitment not to disappoint the
expectations of presently covered workers. I excuse myself from
all that. I think I have been receiving these benefits for
longer than anyone else in this room, and I am not sure that I
expect to survive to receive them after you have completed your
reform. But I think with respect to the workers who are now
covered, and the younger ones who are already receiving
benefits, their expectations should not be disappointed.
Some adjustment of benefits would be consistent with that
to take account of unexpectedly long-life expectancy and an
overstatement of the inflation rate in the official
measurement, but I assume such adjustments will not bring the
system into balance. If they would, then I think we do not have
much of a problem.
The gap, the excess of expected benefits over the present
resources of the system, will have to be made up by transfer of
income from the rest of society, from the people who are
earning incomes when the next generation is retired. And
nothing you do about what is in the trust fund account, what is
in some other account, will affect that. When people retire in
the year 2040, their benefits will really have to be paid out
of the income that is generated in that year.
The prospective surplus can help reduce the burden of this
transfer on the rest of society. The budget surplus should be
saved, that is not used to cut taxes or increase expenditures,
but used to retire publicly held Treasury debt. That will give
the present holders of the debt funds that they can invest in
productive assets, which will raise the incomes of future
generations and make it easier for them to pay the benefits
expected by retired persons.
When I say they should not be used to cut taxes, They
shouldn't be used very much. As I said in my prepared
statement, I was around when Senator Dirksen said a billion
here, a billion there adds up to money. Well, that is no longer
true. A billion here, a billion there does not add up to money
in this economy.
The strength of the commitment of future income earners to
support the future of Social Security beneficiaries might be
increased by depositing additional Treasury bonds in the Social
Security account. That would be merely a symbolic gesture. For
all that people have been saying here this morning about how
your benefits are assured because money is in the account, if
you were to decide tomorrow, I think--I think, maybe there are
lawyers present--but I think if you were to decide tomorrow not
to pay any benefits out of those accounts, I don't think
anybody could sue you.
So nobody holds an insurance contract that he can sue you
about if you don't pay the benefits. The payment of the
benefits--relies on the moral sense of the American people and
of the Congress and of course on their political awareness.
I think it might be easier to establish the commitment of
future generations to pay these benefits to the large number of
retired people if there were some securities in the account
which you could point to and say ``That is yours,'' and of
course there is no necessary connection between the securities
in that account and the surplus in any budget. The Treasury
could just write 500 billion dollars' worth of debt and put it
in the Social Security account--and it would be a claim. But I
don't recommend that because people wouldn't understand it.
I do not believe that investing the Social Security funds
collectively or individually in private assets would reduce the
burden on the rest of society of supporting the beneficiaries.
The Social Security funds would earn higher yields. But if the
Social Security funds hold more private assets they will hold
less government securities, and private investors as a whole
will have to hold more government securities. To induce them to
do that will require an increase in the interest rate on the
government securities, on all government securities. The rest
of the society, the taxpayers will indirectly pay for the
higher earnings of the Social Security accounts by paying
higher interest on the publicly held debt.
The critical question is whether privatizing the system in
the sense of turning over to private ownership some of the
funds collected by the system would increase private saving
beyond the amount of funds so transferred. This is a question
on which economists are divided. And this Committee did have a
report from the CBO which was very relevant to the subject, a
report on Martin Feldstein's proposal.
I think that unless the system were so changed as to reduce
the amount of benefits covered workers expect, there would be
no increase in private savings except for the amount of funds
transferred to the private accounts. The amount of government
savings, the government surplus, would be reduced by the same
amount. In that case there would be no increase in total
national savings, no increase in the rate of economic growth,
and no additional source out of which to pay benefits.
As I see it, privatization in the form of converting some
of the Social Security accounts into privately owned accounts
would have one advantage. It would get some money out of the
budget surplus and so reduce the temptation to cut taxes or
raise expenditures. I am open minded about whether we need that
kind of self-deception. Thank you.
[The prepared statement follows:]

Statement of Herbert Stein, Senior Fellow, American Enterprise
Institute for Public Policy Research

I explained to your staff director that I am not an expert
on Social Security. But since he persisted in inviting me
despite that, I will offer some thoughts on the subject.
As I see it, our present situation is that we have a
problem and an opportunity. The problem is that by common
estimates the reserves in the Social Security trust fund plus
the inflow of payroll tax receipts dedicated to the fund will,
at some future date, be insufficient to pay the benefits
provided by existing law. The opportunity is that by common
estimates the Federal budget--the unified budget including the
trust accounts--will be in substantial surplus for the next
several years, if present tax rates and expenditure programs
are continued. I emphasize the words. ``by common estimates.''
I recognize the uncertainty of all these estimates, but I am
unable to make such estimates by myself, and I only proceed on
the assumption that the estimates are correct.
So, we have two questions. What should we do about the
deficit in the Social Security accounts, which will become
evident some time in the future if nothing is done? What should
we do about the surplus in the unified budget that is now
present?
I shall start with the Social Security question.
One course would be to cut the benefits that are provided
in existing law. The government has no legal obligation to pay
the existing benefits. No one can sue you if you decide to
change the law. But I believe that there is a moral obligation
not to disappoint the expectations on which generations of
workers have counted, and I think that most people would agree
with that.
There are some changes of benefits that could be defended
as not denying previous expectations. People on the average
live longer than they used to live, and will receive benefits
for a longer period than was contemplated even a few years ago.
Some adjustment was made for that in 1983 by an increase in the
retirement age. A further increase could probably be justified.
Also, when social security benefits were first indexed to the
cost of living, in 1972, we did not realize by how much the
official measurement might overstate the increase in the cost
of living. Some adjustment for that might be justified .
Whether adjustments of this kind would be sufficient to
bring the Social Security accounts into long-run balance I
don't know. I shall be assuming that they are not sufficient,
and a significant deficit remains.
Before I proceed further I want to make clear that my
adherence to the present benefit schedule is entirely based on
the fact that it has become expected. If we could start over, I
would prefer a different system, that would be smaller and
cheaper, providing a low-level equal retirement benefit for
everyone. In fact, it might be a good idea to start developing
a system that would apply to everyone born after the year 2000,
who could not claim that his or her expectations had been
denied. But that is a subject for another day.
So, suppose we start with the proposition that even after
the benefit scale has been adjusted the reserves and future
receipts of the system will be unequal to the planned benefits.
What will be the source of the additional funds that will be
needed?
The additional funds will have to come out of the income of
the rest of the society--the part that is not drawing the
benefits. There are two questions here. One is how to make the
transfer of income from the rest of the society to the
beneficiaries as painless as possible. The other is how to make
the commitment of the rest of the society to support the
beneficiaries as strong as possible.
The surplus now in prospect can provide an answer to both
questions. The best way to facilitate the support of the next
generation for the social security beneficiaries of that time
is to make the national income of the next generation higher--
that is, to raise the rate of economic growth over the next
generation. And the most reliable thing the government can do
to raise the income of the next generation out of which
benefits will be paid is to save the budget surpluses now in
prospect. By saving them I mean refraining from cutting taxes
or enlarging expenditure programs but using the surpluses to
reduce the outstanding Federal debt to the public. If we do
that the savers who would otherwise be holding Federal debt
will have funds available to invest in private productive
assets, and that will raise the income of future generations.
I am not a fanatic about the surpluses. There may be tax
cuts or expenditure increases of small size and large benefits
that should be made. Contrary to what Senator Dirksen said
about 50 years ago, a billion here and a billion there no
longer adds up to money. But I am talking about saving most of
the surplus.
Even if we have done what we can to raise the income of the
next generation, how can we make sure that the active earners
of the next generation will make the payments needed for the
benefits of retirees? The literal answer is that we cannot. We
cannot now commit the voters and Congress of the year 2040 to
pay those benefits. But we can do some things that will add
assurance. If we do not cut taxes now or embark on additional
expenditure expenditures now it will be less necessary in the
future to raise taxes or cut expenditures, which is always
difficult.
Beyond that, we of this generation could make a
contribution to the Social Security reserves. That would be an
act of only symbolic significance, without immediate fiscal or
economic consequences. The Secretary of the Treasury could
write a check for any amount, say $100 billion, and deposit it
in the Social Security trust fund, where it would be used to
buy Treasury bonds. That would not change the unified budget
surplus, it would not change the debt held by the public, it
would not change national savings and would not change the rate
of economic growth. But the symbolism might be important,
because the enlarged reserve of the trust fund might seem to
make more concrete the obligation of the next generation to pay
the promised benefits.
There is no necessary connection between the size of this
contribution to the social security reserves and the size of
the unified budget surplus. Nevertheless, the idea might be
easier for people to understand and accept if the policy were
seen as contributing a surplus to the reserves. The surplus in
the social security accounts is automatically contributed to
the reserves. By present calculations in about five years the
surplus in the unified budget will begin to exceed the surplus
in the social security accounts, That is, the rest of the
budget, excluding the social security accounts, will begin to
run surpluses. One possible policy would be to contribute these
surpluses, in addition to those in the social security
accounts, to the social security reserves. That might continue
until the reserves were sufficient, along with future payroll
tax revenues, to pay the promised benefits for some long period
into the future.
Up to this point I have not mentioned the magic word
``Privatization.'' Privatization has two meanings. The first is
that the funds of the system should be invested, in whole or in
part, in private assets, instead of in Treasury securities, as
they now are. The second meaning is that the funds should be
owned, in whole or in part, privately by individual covered
workers or beneficiaries.
These two meanings are not necessarily connected. One can
imagine a system in which each covered worker receives each
year a Treasury non-negotiable bond with his name on it, equal
to some fraction of his contribution for that year, and
redeemable for cash when he begins to draw his benefits. This
bond would be his private property, and the system could be
called privatization. It would have one advantage. It would
reduce the apparent budget surplus and so reduce the temptation
for the government to spend the surplus. Otherwise this nominal
form of privatization would make no difference.
The great interest in privatization is connected with the
first meaning, to invest some of the funds in private assets,
rather than in Federal securities. The attraction of this idea
is the observation that on the average private investments
yield more return than Treasury securities yield. Investment of
the social security funds in private assets would increase the
earnings of the system and so enable the system to pay the
planned benefits. This spread, the excess of the yield of
private assets over the yield of government securities, would
seem capable of bringing the system into balance without--and
this is the critical point--without having to take anything
away from anyone.
I believe that on this critical point the argument for
privatization is wrong unless privatization adds to total
saving. If it does not add to total saving it will not add to
total national income, and if it does not add to total national
income the increased earnings of the social security accounts
will be balanced by less earnings of the rest of the society.
Privatization would then be an indirect way of abstracting
money from the rest of the society and transferring it to
Social Security beneficiaries.
I have this schematic view of the way the transfer would
occur.. There are two kinds of assets in the country--private
assets and Treasury securities. The private assets yield more
return than the Treasury securities. There are two portfolios
in the country--the Social Security accounts and the sum of
private portfolios. At present the Social Security accounts are
entirely invested in Treasury securities and they earn a lower
rate of return than the private portfolios. Suppose we now
decide to invest some of the Social Security accounts in
private assets, and therefore invest less in government
securities. Then more government securities have to be held in
private portfolios. But the private people whose portfolios
those are cannot be forced to hold more Treasury securities.
They have to be induced to do so. And what will induce them is
a rise in the yield on the Treasury securities, narrowing the
spread between the yield on Treasury securities and the yield
on private assets. So taxpayers will have to pay more interest
on the Federal debt, and that is the form in which they will
transfer income to the Social Security accounts. It seems to me
that either private investors will earn less on their total
assets or taxpayers will pay more in interest on the publicly-
held debt. The increase in the income of the Social Security
accounts will not be costless for the rest of the society.
The picture might be different if privatization resulted in
an increase in total saving. Then one could see an increase in
the total national income and an increase in the total earnings
of assets, so that the Social Security accounts could earn more
without anyone earning less. But this seems to me an entirely
unlikely development. This is probably clearest if the
privatization takes the form of changing the assets held in a
collective pool in the Social Security accounts. Nothing has
happened to the surplus or deficit in the Federal unified
budget. And nothing has happened to make private people want to
save more. The rate of return on Treasury securities will be
higher than it was and the rate of return on private assets
will be lower, because the Social Security accounts will now be
in the market buying some of those assets.
But the situation is not really different if some of the
Social Security funds are returned to covered workers and they
are allowed to invest them as they choose. The amount that
would be returned to them would have been saved in the Social
Security accounts anyway. They will have no different incentive
to save any other income than they already have.
I understand that his is a complicated subject and that
there are people whose opinion I respect who disagree with me
about the consequences of privatization for total saving. But
this is where I come out. Setting up private retirement
accounts out of money that would otherwise have gone into the
Social Security accounts is a way of getting that money out of
the apparent surplus and so reducing the temptation of the
government to spend it. But that would happen whatever the
private retirement accounts were invested in.
In conclusion:
1. Except for possible adjustments relating to the
retirement age and the indexing formula we should meet the
benefit schedules that are in current law for all workers now
covered.
2. We should preserve most of the forthcoming surplus in
the unified budget--that is, not use it for tax cuts or
expenditure increases but use it to retire some of the
publicly-held debt.
3. We should contribute the publicly-held debt we are
retiring to the Social Security accounts as a symbol of our
intention to provide the benefits that presently-covered
workers expect under current law.

Herbert Stein is a Senior Fellow of the American Enterprise
Institute. The views expressed are his own.

Mr. Shaw. Mr. Reischauer.

STATEMENT OF ROBERT D. REISCHAUER, SENIOR FELLOW, BROOKINGS
INSTITUTION

Mr. Reischauer. Mr. Chairman, Members of the Committee, I
appreciate this opportunity, which I will need to touch on
several points that are made in my prepared statement.
The first of these is that it is terribly important that we
all realize how unusually favorable and yet how fragile the
current policy environment is for dealing with the Social
Security issue. I say that notwithstanding the sparring that
took place with Secretary Wilcox over the previous 2 hours.
Representative democracies with 2-year election cycles rarely
address problems before action is absolutely unavoidable.
Nevertheless, we have a situation now in which both
political leaders and the public seem willing to take up the
long-run problem of Social Security several decades before it
will become a full blown crisis. This favorable policy
environment has a number of elements.
First, Members of Congress have a broad understanding about
the problem and the need for a solution. Second, the public
accepts the reality that something will have to be done sooner
or later to sustain the system. Third, many Members of Congress
have exhibited courage by fashioning specific proposals, some
of which are quite radical. Fourth, the President has been
willing to provide leadership and to organize the reform
effort. And, finally, the budget and economic conditions that
Secretary Wilcox talked about are very favorable.
In short, the planets are aligned about as well as one
could hope for, but these conditions could deteriorate very
rapidly and the window of opportunity that we now have could
close abruptly, not to reopen for several decades. If that
happened, your successors will find the options available to
them severely constrained. Ideas that are considered now will
be summarily ruled off the table, and there is a high
likelihood that increased payroll taxes will constitute a very
large portion of whatever solution is adopted.
The second point I would like to touch on is that there are
lessons that we can learn from past efforts to deal with Social
Security's long-term fiscal problem. These lessons are obvious
but they are worth repeating.
First, change has to be bipartisan. A party that goes
forward on its own does so at considerable peril. Neither
Republicans nor Democrats should look ahead and hope that at
some point in the future they may control both houses of
Congress and the White House and, therefore will be able to
adopt their favorite restructuring of Social Security. I think
divided government is, in fact, the appropriate environment in
which to reform a program as important as Social Security.
Second, significant change should be done only with long
lead times, lead times that allow affected individuals and
interests sufficient time to adjust to the new regime.
And, third, many small steps are more viable than a few
giant leaps, even when both take you to the same end position.
Let me now turn to a third topic and say a few words about
the relative desirability of the two broad approaches that
exist to solve Social Security's long-run problem, namely
establishing individual accounts that would be used to
supplement a sharply scaled back defined benefit program; and,
second, strengthening the finances of the existing defined
benefit system by shaving future benefits and increasing the
program's income in ways that preserve the underlying
principles of this important program.
When evaluating these two broad approaches for reform, I
urge to you keep the fundamental purpose of the Nation's
mandatory pension system clearly in focus. That purpose is to
provide workers with a secure and predictable basic retirement
pension, one that lasts as long as the worker and the worker's
spouse are alive and one that provides benefits whose
purchasing powers is not eroded by inflation.
As you begin to deliberate, I also urge to you lay out
explicit criteria for evaluating specific plans. My colleague
Henry Aaron and I have spelled out four such criteria in a book
that will be released on December 1 when you will all receive
copies.
They are, first, the adequacy and equity of the benefits
provided by the proposed system; second, the degree to which
the proposed system protects participants against risks which
they are ill-equipped to bear; third, the system's
administrative costs and complexity; and, fourth, the impact of
the new system on national saving.
Taking into consideration both the fundamental purpose of a
mandatory retirement system and the four criteria I have just
listed, I have concluded that it would be best to work to
strengthen the long-term fiscal position of the existing
defined benefit program. There are many ways in which that
might be accomplished. The specific measures endorsed in our
book are laid out in Table 1 of my prepared statement. Together
they are more than sufficient to close the program's long-term
deficit.
Most of the specific changes included in our reform package
are familiar to those of you who have been around this debate
for the last few years. However, the largest of our proposed
program changes is not. It involves investing a portion of the
trust fund's balances in private bonds and equities. While
shifting trust fund investments from government to private
securities would not have a direct or immediate affect on
national saving, investment, the capital stock, or production,
the trust fund would earn higher returns because it would hold
assets other than relatively low-yielding government
securities.
This would reduce the size of the benefit cuts and payroll
tax increases needed to close the program's long-run deficit.
While this is attractive, the concern that investing the trust
fund reserves in private securities might lead to an
inappropriate government influence over the private sector is
valid, and if institutional safeguards were not available to
reduce the risk of political interference to a de minimis
level, I would strongly oppose such investments. I think,
however, that such safeguards can be established, and they are
laid out in some detail in our book and, in a shorter form, in
my prepared statement.
While privatizing Social Security has attractive elements,
I think that individual accounts should not be part of the
Nation's mandatory pension system for several reasons. First,
such accounts introduce added risk and unpredictability into
retirees' basic pensions. Second, it is difficult to maintain
adequate social insurance in a system in which individual
accounts play an important role. Such assistance has made
Social Security the Nation's most important and least
controversial antipoverty program. Third and finally,
individual accounts unavoidably will increase the complexity
and administrative costs of the Nation's basic pension system.
Let me conclude by noting that whether we decide to
strengthen the existing defined benefit program or restructure
that program and supplement it with a system of individual
accounts, the reform is going to involve some sacrifice by
taxpayers, beneficiaries, or, most likely, both. In recent
months some analysts have suggested that this need not be the
case, that there exist ways to save Social Security that are
painless. Some even go so far as to promise future
beneficiaries all of the benefits called for by current law
with no increase in payroll taxes.
By and large, these plans utilize the projected unified
budget surpluses to fulfill their promises of a free lunch.
These surpluses are very uncertain and if they materialize,
there are other worthwhile uses to which they could be put.
This Committee should carefully consider those other uses.
Moreover, it is important to realize that for the next 5 years
or so there are no surpluses other than those that are being
created by the Social Security Program itself.
Thank you.
[The prepared statement follows:]

Statement of Robert D. Reischauer, Senior Fellow, Brookings Institution

Mr. Chairman and Members of the Committee, I appreciate
this opportunity to discuss the future of the Social Security
program with you. My statement deals with three issues:
The surprisingly fortuitous environment that
exists today for reforming or restructuring the nation's
mandatory pension system,
The lessons that can be drawn from past efforts to
reform Social Security, and
The broad options available to strengthen or
restructure the program.

The policy and political environment

Restructuring the largest and most popular federal program,
one which touches the lives of virtually all Americans, is a
monumental challenge. Such an effort can only hope to succeed
if policy makers and the public understand the nature of the
problem and the need for change, if Republicans and Democrats
are willing to forgo short-run political advantage and agree to
cooperate for the long-run national good, if the economy
remains strong and the budget in surplus, and if there is
strong leadership. On all of these dimensions, conditions are
unusually favorable as the nation approaches the new
millennium.
Every member of Congress understands the nature of the
problem. Each knows that while Social Security currently is
recording substantial surpluses which add to the Trust Funds'
reserves, those surpluses will turn into deficits around 2021,
and by 2032 reserves will be depleted (see Figure 1). When the
Trust Funds are exhausted, substantial benefit reductions or
increases in payroll taxes will be needed to sustain the
program. The widespread appreciation by lawmakers of the
problem has generated a broad bipartisan commitment, at least
at the rhetorical level, to address the problem sooner rather
than later.
The public is also well aware of the long-run difficulties
that face Social Security. For at least a decade, the media,
pundits, and politicians have bombarded Americans with the
consequences of the retirement of the baby boom generation for
Social Security and Medicare. Polls indicate that most people
realize that the program, as currently structured, is not
sustainable. Polls also show that the public would like its
political leaders to address the problem. Because the economy
is strong, incomes are rising, and inflation is low, the
majority puts ``fixing Social Security'' high on the list of
public sector priorities--higher than expanding various social
programs or cutting taxes.
For over a decade, the unified budget deficit problem has
cast a pall over virtually all policy initiatives. With the
focus on deficit reduction, any initiative to strengthen Social
Security's financial position could have been characterized as
an attempt to balance the unified budget on the backs of Social
Security beneficiaries or taxpayers. Three multi-year deficit
reduction packages, enlightened monetary policy, a strong
economy, and a hefty dollop of good luck have combined to
banish the deficit scourge, at least for the next few years.
According to CBO's baseline projections, the unified budget
should be in surplus until around the middle of the second
decade of the next century. If policies are not changed,
aggregate surpluses over the next decade will amount to roughly
$1.5 trillion; if these surpluses are used to pay down the
national debt, the ratio of debt to GDP by 2015 will be lower
than at any time since before the Great Depression. Of course,
over the next few years, Social Security will account for all
of the projected unified budget surpluses; non-Social Security
taxes are expected to fall short of covering the costs of the
government's non-Social Security activities until after 2004
(see Figure 2). Nevertheless, the projected unified budget
surpluses should provide a bit of fiscal flexibility that
policy makers may use to ease the transition to a reformed
Social Security system.
[GRAPHIC] [TIFF OMITTED] T3030.001

[GRAPHIC] [TIFF OMITTED] T3030.002

In the past, few politicians have been eager to lead Social
Security reform efforts because such undertakings are fraught
with political risks. Over the course of the 1990s, however,
many Members of Congress have put forward proposals that would
fundamentally restructure Social Security in an effort to
strengthen the program for the long term. Their courage has
stimulated a lively debate and reduced the political risks of a
frank discussion of this issue. Constructive as this has been,
someone of national stature must provide leadership, structure
the debate, communicate with the public, and push the effort
forward when, as it inevitably will, movement stalls.
Realistically speaking, this role can only be filled by a
president. Barring an immediate crisis as there existed in the
early 1980s, however, few presidents will volunteer for this
assignment. President Clinton, a president with a keen sense of
history, a desire to leave a significant legacy, and the
freedom that comes with a second term, has stepped forward to
provide such leadership. It may be some time before another
chief executive is willing to fill that role.
As we inch closer to beginning a national dialogue and
debate on how best to ensure that future generations have
adequate incomes in retirement, both policy makers and the
public should understand that a very unusual confluence of
circumstances has created the current environment in which it
is possible to consider addressing Social Security's long-run
fiscal problems before they reach crisis proportions. But this
environment is as fragile as it is rare. It far from guarantees
that the effort will succeed or even get off the launching pad
without exploding. Rather, it means that reform has become a
long shot rather than an impossibility.
Some will argue that there is no need to act preemptively.
They will point out that, under current projections, the Trust
Funds will not be depleted until 2032 and that long-run
projections are fraught with uncertainty. Small increases in
trend economic growth, the fertility rate, immigration, or real
interest rates could push the date of insolvency off for a
decade or more. The effect that small changes in current
economic conditions and those assumed for the future can have
on the long-run outlook was illustrated dramatically when the
1998 Trustees report estimated that the date at which the Trust
Funds would be depleted was 2032, not 2029 as estimated in the
1997 report. Some analysts expect the 1999 Trustees report to
contain another small reprieve.
The fact that current projections do not point to an
immediate crisis should not be used as an excuse to put off
action. Uncertainty is a two edged sword. Current projections
of the Trust Funds' balances could prove to be too optimistic
if medical advances and improved personal health add more to
average life expectancy than the actuaries have assumed or if
economic growth falls short of expectations. Moreover, Social
Security will begin to put pressure on the budget long before
the Trusts Funds are exhausted. The position of the unified
budget is improved by Social Security only as long as the
program's primary surplus--its non-interest income less its
expenditures--grows.\1\ This primary surplus, which was about
$52 billion in fiscal 1998, will begin to decline by a few
billion dollars a year after 2003 (see Figure 1). When this
occurs, the unified budget's position will begin to deteriorate
if taxes are not raised or spending is not cut. If the unified
budget is in surplus, this deterioration may be viewed as
acceptable because it will be attributable to the shrinking
primary surplus of Social Security. The situation will become
more severe around 2021, however, when Social Security's
income, including interest receipts, falls short of covering
benefit payments and administrative expenses, forcing the
program to redeem some of the Treasury securities held by the
Trust Funds. Unless the on-budget accounts are in substantial
surplus at that time, the nation will be faced with the
unpleasant choice of increasing borrowing from the public,
hiking taxes, or slashing expenditures.
---------------------------------------------------------------------------
\1\ From the unified budget's perspective, interest is a wash
because it is an on-budget expenditure and an off-budget receipt of
equal size.
---------------------------------------------------------------------------
While there may be no fiscal imperative to act this year to
reform Social Security, the sooner we begin to strengthen the
fiscal position of the nation's mandatory pension system the
easier decisions will be, the more gradual the process can be,
the less wrenching the adjustments need be, and the more
options policy makers will be able to consider.
Retirees and those approaching retirement often have little
or no ability to compensate for or adjust to benefit reductions
or tax increases. Both political reality and considerations of
equity, therefore, require that whatever shape reforms take
they not change significantly the rules of the game for such
individuals. This judgement is reflected in the proposals that
would partially privatize Social Security, virtually all of
which leave those age 55 and older under the existing system.
This means that if decisions concerning how best to reform
Social Security are postponed until action is unavoidable two
decades from now, the bulk of the large babyboom generation
will not contribute to solving the problem and the burden on
younger generations will be all the larger. Even a decade from
now the politics of reform will be much tougher than they are
now. Starting in 2002, the fraction of the adult population age
55 and over will begin to rise more rapidly than it has during
the demographic holiday the nation has enjoyed over the past
decade (see Figure 3). By 2021, when Social Security's
surpluses are projected to turn into deficits, 39 percent of
the adult population will be age 55 or older, up from 29
percent this year. The growth in the importance of retirees and
near retirees among likely voters is even more dramatic because
older citizens tend to vote at higher rates than do younger
Americans. While less than one third of voters in the 1996
presidential election were age 55 and over, 45 percent of
voters in the elections of 2020 will be in this age group if
current age specific voting patterns persist. In such an
environment, increased taxation of benefits and delays or
reductions in COLAs will probably be ruled out. The longer
decisions about reform are put off, the greater the role
payroll tax hikes are likely to play in the solution. Because
delay constrains the policy options that realistically can be
considered to strengthen the system, it would be wise to act
now even if the program changes agreed to are not phased in for
a decade or two.
Favorable economic, budget and political conditions have
opened a window of opportunity for reform. This window may
close abruptly and not reopen before today's problem has been
transformed into a full blown crisis which demands precipitous
action, as was the case in 1983.
[GRAPHIC] [TIFF OMITTED] T3030.003

Lessons from Past Efforts

Policy makers have addressed Social Security's long-run
fiscal problems a number of times over the course of the last
quarter century. The two most substantial initiatives--those of
1977 and 1983--were prompted by the impending exhaustion of
Trust Fund reserves. Unlike the current situation, some
immediate corrective legislation was unavoidable. Despite this
key difference, the experiences of the past offer some simple
and obvious lessons for the current situation.
The first of these is that policy makers should refrain
from portraying the reforms they are proposing as the solution
to the problems of the nation's mandatory pension system for
all times. Undoubtedly, economic, demographic, and social
developments over the next half century will not follow the
paths that seem most likely today. Further adjustments may be
required quite soon after any major reforms are adopted, as was
the case after the 1977 legislation was enacted.
A second obvious lesson is that significant changes are
more acceptable if the workers and taxpayers are given a
considerable amount of time in which to prepare. For example,
the increase in the age at which unreduced benefits are
available that was enacted in 1983 will first affect those
turning age 62 in 2000. The seventeen year delay between
enactment and implementation has given those affected fair
warning and an opportunity to change their personal saving
behavior and work effort to compensate for the reduction in
benefits that this change represents.
A third lesson that can be garnered from the experiences of
the past is that successful reform efforts usually involve
gradual, rather than abrupt, change. A giant leap is often
unacceptable whereas a series of small steps that end in the
same place is viable. For example, the two year increase--from
age 65 to 67--in the age at which unreduced benefits will be
paid will take place two annual month steps stretched over a 23
year period. Similarly, the bite imposed by subjecting a
portion of benefits to the income tax will grow gradually each
year because the income thresholds above which this policy
applies are not indexed.
Finally, the experience of the past suggests that
bipartisan cooperation is indispensable if the reform effort is
to succeed. Debates over Social Security offer unlimited
opportunities to engage in demagoguery for political advantage.
The issues are complex, the consequences of some reform
proposals are unknown, many people do not understand how the
program now works, and the program's benefits are vitally
important to the well being of most older Americans. Such
conditions create a highly combustible environment in which to
hold a national debate about restructuring. It will take
immense self restraint and rhetorical moderation on the part of
lawmakers, policy experts, and interest groups to move forward
without touching off a conflagration that could scar the
political landscape so badly that few would risk raising the
issue again until the problem has become a full blown crisis.
Divided government--Republican majorities in Congress and
Democratic control of the White House--may improve the outlook
because the responsibility for governing the nation and for
policy development is shared by both political parties.

Evaluating the Broad Options for Reform

The debate over how best to provide basic income for future
retirees has been about two broad options. Advocates of the
first of these, which goes under the generic label of
``privatization,'' believe that the nation's interests would
best be served if Social Security were scaled back and a
defined-contribution pension plan consisting of individual
accounts were established to supplement Social Security.
Proponents of the other approach believe that it is important
that the nation's mandatory pension system remain exclusively a
defined-benefit plan. They therefore seek ways to strengthen
the long-run financial position of the current system through
measures that would increase the program's income and reduce
its expenditures while preserving Social Security's underlying
principles. Each broad approach has advantages and
disadvantages. In addition, as is so often the case, the
details of each specific proposal make a great deal of
difference.
When evaluating the broad options for reform, it is
important to keep the fundamental purpose of the nation's
mandatory pension system clearly in focus. That purpose is to
provide workers with a secure and predictable basic retirement
pension, one that will last as long as the worker and the
worker's spouse are alive and one whose purchasing power will
not be eroded by inflation. This pension should be viewed as
the foundation upon which other sources of retirement income
are built.
It is also useful to lay out explicit criteria for
comparing the broad options and specific plans. My colleague
Henry J. Aaron and I have spelled out four such dimensions in a
book (Countdown to Reform: The Great Social Security Debate)
that will be released by The Century Foundation Press on
December 1. They are the adequacy and equity of the benefits
provided by the system, the degree to which the system protects
participants against risks which they are ill equipped to bear,
the system's administrative costs and complexity, and its
impact on national saving.
Taking into consideration both the fundamental purpose of
the mandatory retirement system and the four criteria
enumerated above, I have concluded that it would be best to
work to strengthen the long-run fiscal position of the existing
defined-benefit program. There are many ways in which this
might be accomplished. The specific measures Henry Aaron and I
have endorsed in our book are laid out in Table 1. Together,
they are more than sufficient to close the program's long-term
deficit. This means that some recommended program changes could
be phased in more gradually than we have proposed or even
dropped from the package of reforms without compromising the
objective of closing the long-term deficit.

Table 1.--Closing the Projected Long-term Social Security Deficit
------------------------------------------------------------------------
Deficit
or Change Proportion
in of
Deficit Adjusted
As Long-term
Percent Deficit
of Closed
Payroll
------------------------------------------------------------------------
Projected long-term deficit--1998 Trustees Report 2.19 n.a.
Effects of correcting the Consumer Price Index... -.45 n.a.
Adjusted long-term deficit....................... 1.74 n.a.
Program Changes
1. Gradually reduce spouse's benefits from one-
half to one-third of the worker's benefits and
raise benefits for surviving spouses to three-
quarters of the couple's combined benefit. +.15 -9
2. Cut benefits by increasing the unreduced
benefit age--raise the age to 67 by 2011 rather
than by 2022 and thereafter raise the age at
which unreduced benefits are paid to keep the
fraction of adult life spent in retirement
constant........................................ -.49 28
3. Increase the initial age of eligibility from
62 to 64 by 2011 and thereafter raise the age of
initial eligibility at the same pace as the
unreduced benefit age........................... -.23 13
4. Increase the period over which earnings are
averaged from 35 to 38 years.................... -.25 14
5. Cover all newly hired state and local
employees....................................... -.21 12
6. Tax Social Security benefits the same as
private pension income.......................... -.36 21
7. Gradually invest the trust fund's balances
that exceed 150 percent of yearly benefits in
common stocks and corporate bonds............... -1.20 69
----------------------
Total Program Changes -2.59 148
------------------------------------------------------------------------
Source: Estimates from the Office of the Actuary, Social Security
Administration.

The particular changes included in our reform package were
chosen not simply to close the deficit. They were also intended
to modernize Social Security in ways that reflect the economic
and societal developments that have occurred over the last half
century. Most of these changes are familiar to those who have
followed the Social Security discussion during the past few
years. However, the largest of the proposed program changes--
investing a portion of the Trust Fund balances in private
equities--is not and, therefore, needs some further
explanation.
Shifting Trust Fund investments from government to private
securities would not have a direct or immediate effect on
national saving, investment, the capital stock, or production.
The Trust Funds, however, would earn higher returns because
they would hold assets other than relatively low-yielding
government bonds. This would reduce the size of the benefit
cuts and payroll tax increases needed to close the program's
long-run deficit. While this is attractive, the question which
has troubled many since the inception of Social Security
concerns the possibility that Trust Fund investments in private
securities might lead to inappropriate government influence
over private companies. For example, Social Security trustees
might be subject to political pressures that would force them
to sell shares in companies that produce products some people
regard as noxious (for example, cigarettes or napalm) or that
pursue business practices some people regard as objectionable
(such as hiring children or paying very low wages in other
countries, polluting, or not providing health insurance for
their workers) or to use their stockholder voting power to try
to exercise control over private companies.
If institutional safeguards were not available to reduce
the risk of such interference to a de minimis level, I would
oppose such investments. But such safeguards can be
established. The core of this protection would be provided by a
new institution, the Social Security Reserve Board (SSRB),
which would be modeled after the Federal Reserve Board. The
governors of this independent entity would be appointed by the
president and confirmed by the Senate for staggered fourteen
year terms. They could not be removed for political reasons.
The SSRB would be empowered only to select on the basis of
competitive bids a number of fund managers. The fund managers
would be authorized only to make passive investments in
securities--bonds or stocks--of companies chosen to represent
the broadest of market indexes. These investments would have to
be merged with funds managed on behalf of private account
holders. To prevent the SSRB from exercising any voice in the
management of private companies, the fund managers could be
required to vote the Trust Funds' shares solely in the economic
interest of future beneficiaries.
Such a system would triply insulate fund management from
political control by elected officials. Long-term appointments
and security of tenure would protect the SSRB from political
interference. Limitation of investments to passively managed
funds and pooling with private accounts would prevent the SSRB
from exercising power by selecting shares. The diffusion of
voting rights among independent fund mangers would prevent the
SSRB from using voting power to influence company management
and would protect voting rights of private shareholders from
dilution. Congress and the president would have no effective
way to influence private companies through the Trust Fund
unless they revamped the SSRB structure. While nothing, other
than a constitutional amendment, can prevent Congress from
repealing a previously enacted law, the political costs of
doing so would be high.
While ``privatization'' proposals are attractive on some
dimensions, I think that individual accounts should not be part
of the nation's mandatory pension system. Such accounts
introduce added risk and unpredictability into retirees' basic
pensions. With individual accounts, benefits will vary
depending on when during their lives individuals worked and
contributed to their accounts, what assets they invested their
account balances in, and market values when workers retire.
Unless retirees are required to convert their individual
account balances into inflation-protected annuities upon
retirement, there would be no guarantee that they would have
adequate income through their final years.
Furthermore, it is difficult to maintain adequate social
assistance in a system in which individual accounts play an
important role. The social assistance provided through Social
Security has helped workers with low lifetime earnings, spouses
with limited or no participation in the workforce, survivors,
and divorcees. It has made Social Security the nation's most
important and least controversial anti-poverty program.
In addition, individual accounts, unavoidably, will
increase the complexity and administrative costs of the
nation's basic pension system. Added burdens will be imposed on
employers, workers, and the government. Under some
privatization plans, the administrative load could be
sufficiently onerous as to make the proposed system unworkable.
Under other privatization plans, the impact of added
administrative costs would largely be felt through reduced
returns on individual account balances. Even this effect could
be significant. A one percent annual charge--which is close to
the average mutual fund fee--imposed over a forty year career
would reduce the size of a retiree's pension by about 20
percent.

Conclusion

Strengthening the long-run fiscal position of the existing
defined-benefit Social Security program or restructuring that
program and supplementing it with a system of individual
accounts is going to involve some sacrifice by taxpayers,
beneficiaries, or, most likely, both. In recent months, some
analysts have suggested that this need not be the case--that
there exist ways to ``save Social Security'' that are painless.
Some even go so far as to promise that ``current law'' benefits
need not be reduced nor payroll taxes raised. By and large,
these plans utilize the projected unified budget surpluses to
fulfill their promise of a free lunch.
I would like to conclude with several cautions about these
tempting mirages.
First, the projected unified budget surpluses are
not manna from heaven that have no other uses. If they are used
to seed individual accounts in a privatized system rather than
to pay down the national debt, debt service costs will loom
larger in the baseline budget projections and national saving
may be reduced. Furthermore, if the surpluses are devoted to
``saving Social Security,'' they will not be available to
sustain Medicare, fund tax relief measures, or support expanded
spending on defense, medical research, education, or other
areas that many members of both parties regard as high
priorities.
Second, as the experience of the past few years
amply demonstrates, projections of the unified budget deficit/
surplus are very uncertain. Congress and the president can
enact policies that reduce surpluses, as was the case in
October. But even abstracting from policy changes, estimates of
the future position of the budget jump around from year to year
because economic assumptions and technical factors change.
Figure 4 provides my estimates of CBO's ten-year baseline
budget projections excluding the effects of policy changes.
Between the projection released in March 1995 and that issued
in July of 1998, the projected fiscal 2005 budget situation
improved by about $500 billion. While the budget projections
over the last few years have shown a steadily improving bottom
line, the experience of the late 1980s and early 1990s serves
as a warning that the budget outlook can deteriorate just as
rapidly and as significantly as it can improve. Given this
situation, there is a risk to linking the future of the
nation's mandatory pension system to surpluses that may or may
not materialize. If the expected surpluses are not realized, a
contentious debate could develop over whether the federal
government should incur deficits and borrow more money from the
public so that workers can deposit these funds in their
personal retirement accounts.
[GRAPHIC] [TIFF OMITTED] T3030.004

Finally, proposals that promise future
beneficiaries all of the benefits called for by current law
with no increase in payroll taxes are distributionally
inequitable and represent a misdirection of scarce resources.
One such plan would establish a refundable 2 percent income tax
credit for deposits workers make into personal retirement
accounts. The cost of this tax credit--some $3.4 trillion over
the next 25 years--would be financed largely out of the
projected unified budget surpluses. Upon retirement, the
account holder's Social Security benefit would be reduced by 75
cents for every dollar of pension provided by the personal
retirement account. In other words, no one would be worse off
and all those who had a positive account balance would be
better off.
Benefits under this approach would rise proportionately
more for high earners than for low earners. The contribution to
individual accounts and, hence, the size of account balances
would be a constant fraction of income. Social Security
benefits are proportionately larger for low earners than for
high earners. Since the plan would reduce Social Security
benefits by three-quarters of any benefits derived from
individual accounts, pensions for high earners would rise
proportionately more than would pensions of low earners as the
following simple numerical example illustrates.

Monthly Amounts
----------------------------------------------------------------------------------------------------------------
Change
Average Social Individual Total in
Earnings Security Account Pension Pension
----------------------------------------------------------------------------------------------------------------
Low Earner.................................................. $1,000 $560 $240 $620 +11%
High Earner................................................. $5,600 $1,375 $1,340 $1,720 +25%
----------------------------------------------------------------------------------------------------------------

Considering that high earners are more likely than low
earners to be covered by employer sponsored pension plans and
are more likely to have significant personal savings that they
can use in retirement, one may question the equity of a
proposal that would use budget surpluses to boost pensions
disproportionately for those who are well off. One may also
question whether the best way to ``save'' the nation's
mandatory pension system is to increase benefits for all future
retirees. It may be that the public sector is forced to
increase, above currently promised levels, the resources it
devotes to future retirees. But certainly the most likely area
for that pressure to manifest itself is in medical care which
may absorb amounts much larger than the surpluses projected for
the next decade and a half.

The views expressed in this statement are those of the author
and should not be attributed to the staff, officers, or
trustees of the Brookings Institution.

Mr. Shaw. Thank you, sir.
Mr. Ross.

STATEMENT OF STANFORD G. ROSS, CHAIR, SOCIAL SECURITY ADVISORY
BOARD

Mr. Ross. Thank you, Mr. Chairman and Members of the
Committee. I appreciate the invitation to testify today. The
Committee on Ways and Means bears a large share of the
responsibility for securing the future of the Social Security
Program. I commend you for moving promptly to address this
issue.
As Chair of the Social Security Advisory Board, I welcome
the opportunity to report to you on the work the Board is doing
to help with the Social Security financing debate and to
address other issues that are important to the future of Social
Security. I will also be making some remarks in my individual
capacity.
We have devoted a great deal of effort to the financing
issue, and this summer we issued a report entitled ``Social
Security, Why Action Should Be Taken Soon.'' It is a bipartisan
report, since we are a bipartisan Board, and it was based on
professional nonpartisan analysis. We hoped that in laying out
some basic facts about the problem, we would encourage others
to find common ground in order to develop the changes that are
going to be needed to preserve the Social Security system over
the long term.
In particular, I recommend that you look at two charts of
the report. They graphically show why it is important to take
action now and not to wait until the so-called crisis date of
roughly 2032. Chart 9 shows that if you wait until that date
and have to reduce benefits to level of the revenues that will
be available, it produces almost unthinkable results for
beneficiaries. Similarly, if you wait until 2032 and have to
address the problem by raising payroll taxes, you will need
about a 6-percentage point increase in payroll taxes, from 12
to 18 percent. This would be an unprecedented tax increase that
would have almost unthinkable economic repercussions.
[The charts follow. The full report, ``Why Action Should Be
Taken Soon,'' is being retained in the Committee files.]
[GRAPHIC] [TIFF OMITTED] T3030.005

[GRAPHIC] [TIFF OMITTED] T3030.006

The point of our report is to provide a great deal of
detail in order to make people understand that when we say
action should be taken soon, that there are real reasons for
that. It is not just a platitude, and if it is not done, the
Nation will have even more severe problems later from things
that are already built into the system.
Second, we are holding a series of forums on the impact of
raising the retirement age. We held one just a few weeks ago in
the Capitol. Polling data show that only one in five Americans
are aware that the retirement age is already scheduled to move
from age 65 to age 67 beginning in the year 2000. And a large
majority of the public, more than 70 percent, opposes an
increase in the retirement age when presented with that option
in isolation from any other reforms.
However, because an increase in the retirement age beyond
the increase that has already been legislated is part of many
reform proposals, and could make up a significant portion of
the financing shortfall, it is important to understand the
implications. We are bringing together some of the Nation's
outstanding analysts to talk about this subject and will make
our findings available to this Committee and the entire
Congress.
Social Security is also facing a number of other serious
challenges. One is the disability program, about which we
recently issued a report. This is now about a $75 billion a
year program providing benefits to over 10 million people.
Changes in the retirement age will impact the disability
program. And, indeed, as you go about your work in trying to
maintain solvency in the old age program, it is important to
recognize that you may have to deal explicitly with the
disability program. One of the problems will be establishing
appropriate criteria for determining disability in older
persons as part of further consideration of the retirement age
issue.
We have also issued reports on increasing public
understanding of Social Security and on policy and research
issues. We are now undertaking work to assess SSA's service to
the public and expect to issue a report on this topic early
next year.
I would now like to point out one problem which I think has
not received sufficient attention, and that relates to the
administrative issues that are raised by proposals to make
individual investment accounts a part of Social Security. Many
people feel that if a plan is adopted, the administrative
issues will be solved in due course.
This is one bridge we should not jump off without knowing
how and where we will land. Too much is at stake. I cannot
think of anything more likely to further undermine confidence
in government and in the wisdom of policymakers than taking
money from nearly all of America's workers to invest in the
markets and not accomplishing the task well and in a timely
way.
I have great doubts about the proposals to have the Federal
Government create and administer private accounts. In my view
there is a serious question about the capacity of the IRS and
SSA computer systems to set up the millions of accounts that
would be required in a cost-effective manner within a
reasonable timeframe.
Finally, in closing, I would make two quick points. I agree
very much with those who have noted that Medicare reform is on
the table at this time. These two programs affect the same
people and depend in large part on the same payroll tax base.
Even though you can only deal with one at a time as a practical
matter, I believe that you should have an integrated strategy
for addressing both programs so that you do not exacerbate the
difficulty of solving whichever problem comes second.
Similarly, I agree with Congresswoman Johnson and others
who have noted that all parts of the retirement income system
are in need of review. Social Security reform alone will not
get the job done. It must be combined with a strengthening of
all parts of the retirement income system. Considering Social
Security reform within this larger context is a vital aspect of
the reform process.
The task before this Committee is difficult, yet I am
confident that, as has been done in the past, the Members of
this Committee and others in Congress will find a way to come
together. The Congress has amended the Social Security law many
times since it was enacted in 1935. It has never allowed the
program to reach the point where promised benefits could not be
paid, and it is unthinkable that it would ever do so in the
future. As you undertake your work, I assure you that the
Social Security Advisory Board, and I myself as an individual,
stand ready to assist you in any way we can.
Thank you.
[The prepared statement follows:]

Statement of Stanford G. Ross, Chair, Social Security Advisory Board

Mr. Chairman, Mr. Rangel, and Members of the Committee, I
want to thank you for inviting me to testify today on the
important subject of Saving Social Security. As the Committee
of jurisdiction in the House of Representatives, the Committee
on Ways and Means bears a large share of the responsibility for
securing the future of the Social Security program. I commend
you for moving promptly to address this issue.
As Chair of the Social Security Advisory Board, I welcome
the opportunity to report to you on the work the Board is doing
to help with the Social Security financing debate and to
address other issues that are also important to the future of
Social Security. I will also be making some remarks in my
individual capacity.
Creation of an independent bipartisan Advisory Board was an
integral part of the 1994 legislation that established the
Social Security Administration as an independent agency. By
providing for a standing Board, the Congress recognized the
value of having a permanent institution to which the Congress,
the President, and the Commissioner can turn for bipartisan
advice and assistance.

The Mandate of the Board

The 1994 legislation gives the Board a challenging mandate.
It directs the Board to make recommendations with respect to
the quality of service that the Social Security Administration
provides to the public; the policies and regulations of the
Old-Age, Survivors and Disability Insurance (OASDI) and
Supplemental Security Income (SSI) programs; a long-range
research and program evaluation plan for SSA; and policies that
will ensure the solvency of the OASDI programs. Among its other
responsibilities, the Board is also directed to increase public
understanding of Social Security and make recommendations
relating to the coordination of the OASDI and SSI programs with
the Medicare and Medicaid programs.
This is a tall order for a part-time Board that by statute
is directed to meet not less than 4 times a year, and has
experienced several vacancies since it began its work in the
spring of 1996, including two vacancies at the present time.
Nonetheless the Board has undertaken an ambitious program of
work, and has generally been meeting monthly. We have issued
seven reports that respond to the mandate that you have given
us and have plans to issue more in the coming months.
Last week the Board sent to each Member of Congress its
first annual report for the fiscal year 1998. The report
describes the work the Board has completed and the work that is
under way. We will be issuing similar reports in future years
because we believe it is important that we be fully accountable
to the public.

The Board's Work to Date

A point that our report makes clear, and that I would like
to underscore today, is that Social Security is facing a number
of serious challenges in addition to the issue of program
solvency. Since it began, the Board has been working on a
bipartisan basis to address these challenges, and we hope that
our work will encourage others to examine them as well in a
professional, nonpartisan way.
I would like to describe briefly the work that we have been
doing.

Assuring Retirement Security for Future Generations

The subject of today's hearing--assuring retirement
security for future generations of American workers and their
families--has been a major focus of our efforts.
Many organizations and individuals have proposed plans to
reform the Social Security system. The Social Security Advisory
Board has chosen not to add to the abundance of specific
proposals. Instead, we are working to contribute to the debate
in ways that we hope will help in finding common ground on at
least some important issues. In addition to our joint efforts
as a Board, each of us individually is actively participating
in the discussion about the future of Social Security.
This summer we issued a report entitled ``Social Security:
Why Action Should Be Taken Soon.'' Our purpose was to provide
policy makers and the public with a source of reliable
information on the dimensions of the changes that are required
if the Social Security system is to maintain solvency beyond
2032, and the advantages of taking action sooner rather than
later. Our report also describes various options to address the
long-range solvency problem and their impact on the deficit. It
is a bipartisan report. Our hope is it will help others come
together to develop the changes that need to be made to
preserve the Social Security system over the long term.
The Board also recently sponsored the first of what will be
a series of forums on the impact of raising the Social Security
retirement age. This is one of the most sensitive public policy
issues that you have before you. Polling data show that only 1
in 5 Americans is aware that the retirement age is already
scheduled to move up from age 65 to age 67, beginning in the
year 2000. And a large majority of the public--more than 70
percent--opposes an increase in the retirement age when
presented with that option in isolation from any other reforms.
Nonetheless, because a further increase in the retirement
age is part of many reform proposals and could make up a
significant portion of the financing shortfall, it is important
to understand the many implications that such a change would
have for both employees and employers. We will be bringing
together some of the Nation's outstanding analysts on this
subject to share their research findings and their experience
in order to promote better understanding of the issues that are
involved.
In addition to the solvency issue, the Board has been
working on other matters that are important to the future of
Social Security. I would like to mention several of them.

The Disability Programs

In fiscal year 1998, the Social Security Administration
paid about $73 billion in Disability Insurance and SSI
disability benefit payments to some 10.3 million individuals.
These numbers have grown rapidly in the last decade and are
expected to continue to grow, although at a reduced rate. Apart
from the Social Security Administration, only the Defense,
Health and Human Services, and Treasury Departments have
budgets as large as the disability programs. As recently as
1994 the Congress had to take action to reallocate resources
from the Old-Age and Survivors Insurance program to the
Disability Insurance program in order to maintain solvency,
thereby increasing the financial shortfall of the Old-Age and
Survivors program.
I would also note that the increases in the retirement age
that have already been enacted, quite apart from any additional
increases, could have the effect of further increasing the
number of disability beneficiaries. This would be particularly
so if the age for early retirement (age 62) is raised, as some
have proposed, in order to keep the period between the normal
retirement age and the early retirement age at three years.
Indeed, the problem of appropriate criteria for determining
disability in older persons may need to be addressed explicitly
by the Congress as part of further consideration of the
retirement age issue. As the normal retirement age increases,
older workers will have a major incentive to apply for
disability benefits as a way to gain access to health care
(Medicare for Disability Insurance beneficiaries and Medicaid
for SSI disability beneficiaries). Thus, the issues of the
disability programs are an important aspect of the future
financial solvency of the Old-Age and Survivors Insurance
program.
Recognizing the importance of the disability programs to
policy makers and the public, the Board has made them one of
its highest priorities for review. Today, as in the past, there
are serious concerns about the lack of consistency in decision
making; unexplained changes in application and allowance rates;
the complexity, slowness and cost of the application and
appeals process; the lack of confidence in the system; and the
fact that few beneficiaries are successfully rehabilitated so
that they can become part of the economic mainstream.
The Board has issued an initial report with recommendations
that address these concerns in the context of the existing
system. Our work on disability will be ongoing, because we
recognize that the complex nature of the programs requires
continuing scrutiny and improvements, and at some point may
involve proposals for structural change.

Service to the Public

At the present time the Board is studying the Social
Security Administration's service to the public and we have
held two public hearings on this subject. Over recent months we
have met with hundreds of Social Security employees at all
levels of the agency. We have heard widespread concern about
the agency's ability in the future to provide high quality
service and insure program integrity.
In particular, the demographics of the SSA workforce are
troubling in that a large number of employees are in the latter
stages of their careers. Indeed, the expectation is that an
increasing portion of the staff will retire in the next few
years. Yet at the same time, because hiring was relatively
limited in the 1980s and 1990s as the agency underwent a major
downsizing of its staff, adequate numbers of experienced
replacements may be lacking. High levels of retirements will
coincide with an anticipated increase in the agency's workload,
as the baby boom generation enters the age of retirement and
experiences increased incidence of disability.
The Board is concerned that public confidence in the
program will be further eroded if the issues related to
maintaining a high quality of service are not addressed in
timely and effective ways, and we expect to issue a report with
recommendations for action early next year.

Increasing Public Understanding

Opinion polls show that few Americans understand how Social
Security financing operates or how it relates to the overall
Federal budget. The lack of understanding of Social Security's
principles, benefits, and costs increases the difficulty of
building the consensus that is needed to resolve important
policy issues. In September of last year the Board issued a
report that called upon the Social Security Administration to
take a far more active role in informing the public about the
Social Security program and how Social Security, combined with
pensions and savings, will fit into an individual worker's
long-term financial planning.

Research and Policy Development

When the Social Security Administration became an
independent agency in March 1995, it took on new responsibility
for Social Security research and policy development, a
responsibility that it formerly shared with the Department of
Health and Human Services. This was a responsibility that the
agency was ill prepared to bear. Its policy and research staffs
had been disproportionately affected by downsizing over the
last couple of decades, which critically weakened its capacity
to provide the information and analysis that policy makers and
the public need to make sound policy decisions.
The Board has issued two reports with recommendations on
the steps that SSA needs to take to rebuild the agency's
capabilities in these areas, and we are pleased that this
rebuilding process has begun. However, it will require the
continued commitment of the Commissioner, the Office of
Management and Budget, and the Congress to complete the job of
providing the Social Security administration with the capacity
to engage in the quality and quantity of research and policy
analysis that the program needs to be adjusted soundly to
changing circumstances.

Administrative Issues Raised by Individual Investment Accounts

Let me turn now to what is one of the most sensitive and
complex proposals before this Committee and the Congress, and
that is the proposal to make individual investment accounts a
part of the Social Security system.
Although I cannot speak for the Board on this matter, I
would like to express my personal view that before making
decisions, the Congress and the Administration need to conduct
a careful study of the administrative issues that are raised by
this proposal. How these accounts would be constructed and
operated is a matter of critical importance to this country,
and the stakes are enormous.
I have yet to see a plan presented in sufficient detail to
enable us to be confident that it can be administered in an
efficient and effective way. Creating and maintaining
individual investment accounts for the 147 million workers who
are now covered by Social Security would be one of the most
complex administrative challenges ever undertaken by either
government or the financial services industry.
The complexity is compounded by the fact that about a third
of all workers paying Social Security payroll taxes in 1994 had
covered earnings of $8400 or less. For them, a contribution of
2 percent of payroll would provide an account equal to $168 or
less. As a benchmark, maintaining an account in a well-run
mutual fund often costs $30 to $35 annually, although no-frills
accounts may reduce the cost. If small accounts such as these
are to be administered by the private sector, the issues of
relatively high costs for small contributors and potentially
heavy administrative burdens on employers must be addressed.
As an alternative to administration by the private sector,
some have suggested that the Federal government could
administer individual investment accounts, the suggestion being
that this could both lower costs and distribute the costs more
appropriately. In my view there is a serious question about the
capacity of the IRS and SSA computer systems to set up the
millions of accounts that would be required in a cost-effective
manner or within a reasonable time frame. Very likely the
government would need to outsource a great deal of the
development of the necessary systems and information technology
to establish these accounts. The appropriate roles of
government and of the private sector in providing the
infrastructure that would be required to administer individual
accounts is a major issue that must be addressed.
I cannot think of anything more likely to further undermine
confidence in government and in the wisdom of policy makers
than taking money from nearly all of America's workers to
invest in the markets and not accomplishing the task well and
in a timely way.
Based on my experience in the government and the private
sector, I urge you to look at administrative issues carefully.
They are critical regardless of how you view the merits of
making investment in individual accounts a part of the Social
Security system.
In my opinion there has been too much wishful thinking that
the many problems involved will somehow be solved in due course
once a plan is enacted. This is one bridge we should not jump
off without knowing how and where we will land. Too much is at
stake.
In closing, I would like to make two additional points.

Role of Medicare

Because Social Security and Medicare serve many of the same
individuals, and both are financed largely from payroll taxes,
they share the challenge of paying for benefits for an
increasing number of older persons at the same time that growth
in the workforce is slowing. In many ways, Social Security
reform is the easier of the two reforms to make. The shortfall
in Medicare is much greater, and it will occur much sooner--
within 10 years, according to the actuaries at the Health Care
Financing Administration. It will be important to consider the
impact that changes in one program may have on your ability to
assure the long-range solvency of the other. Ideally, an
integrated strategy for fixing both would be the prudent way to
proceed, even though realistically you will be addressing them
one at a time.

Need to Review All Parts of the Retirement Income System

Finally, it should be emphasized that all parts of the
retirement income system are in need of review. Americans as a
whole are not making adequate provision for their retirement.
Social Security reform should be combined with a strengthening
of the other parts of the retirement income system, including
employer pensions, individual retirement accounts, 401(k)
plans, and other savings mechanisms. Considering Social
Security reform within this larger context is a vital aspect of
the reform process.
Similarly, the entire health care system presents a myriad
of problems that need addressing. Considering Medicare reform
within this larger context is important so that any changes
preserve, or at least do not diminish, your ability to address
non-Medicare health care system issues. Again, an integrated
strategy for resolving clearly related issues would be the
prudent way to proceed, even if only one issue is being
addressed at a particular time.

Assuring Social Security for the Future

Again, I commend this Committee for its attention to this
important issue. Your task is difficult, yet I am confident
that, as has been done in the past, the Members of this
Committee and others in the Congress will find a way to come
together to assure that Social Security will be preserved for
future generations. The Congress has amended the Social
Security law many times since it was enacted in 1935. It has
never allowed the program to reach the point where promised
benefits could not be paid, and it is unthinkable that it would
ever do so in the future.
As you undertake your work, I assure you that the Social
Security Advisory Board stands ready to assist you in any way
we can.

Mr. Shaw. Mr. Matsui.
Mr. Matsui. Thank you, Mr. Chairman. I would like to thank
all four of the panelists for their testimony. It was all very
enlightening and I appreciate it.
I would like to ask Dr. Ross, Chairman Ross, a question if
I may. You talked about the potential administrative costs in
terms of private accounts, should we move in that direction.
You didn't state a possible number. I have heard that figures
of up to 30 percent could be administrative costs, either the
Federal Government maintaining these costs or perhaps in some
other fashion.
Perhaps you can answer this first. Do you have an idea of
what the overall administrative costs might be? And perhaps
others could respond very quickly, because I have one or two
more questions.
Mr. Ross. I will take a first crack at it. The costs depend
a great deal on how you structure the accounts, who is going to
create them, and how they are going to be maintained. As a
benchmark, an account in a well-run mutual fund runs about $30
to $35 a year.
One of the things that compounds the problem is that about
a third of all workers paying Social Security taxes in 1994 had
covered earnings of $8,400 or less. For them, a contribution of
2 percent of payroll would provide an account equal to $186 or
less. That is a long-winded way of saying there is a real
problem because of the number and magnitude of these small
accounts. I think until you see a really specific plan, it is
going to be very difficult to get a cost number that is
reliable. But it is a major problem.
Mr. Matsui. Thank you, I perhaps will not ask the other
ones that, because I think you perhaps elaborated enough, but I
thank you very much.
Bob, we have been having this discussion about the unified
budget versus the not unified budget. If in fact we either have
a big spending program that pretty much eats up the surplus or
half the surplus, or perhaps a big tax cut that eats up the
surplus or half the surplus, even though we have a guarantee
that Social Security will be paid out if we do not change the
program substantially, if we do not have the money it means we
cut other social or defense programs or we increase taxes or we
have a budget deficit, a huge budget deficit.
Is that what our choices are if we make the decision of
spending programs or tax cuts before we solve the Social
Security problem?
Mr. Reischauer. Not quite. The formulation that you
presented was if we take half the projected surpluses and
devoted them to say a tax cut, what would happen. We would pay
down the national debt more slowly, interest costs would be
higher and debt relative to gross domestic product, GDP, in
2015 would be higher than it would otherwise be. At that point
when Social Security begins to run an annual deficit, it has to
begin turning in its IOUs and collecting money from the balance
of the government. We would have to cut spending more, raise
taxes more, or borrow more from the public than we otherwise
would.
The debt would be higher than it otherwise would be.
Probably the economy would grow a bit slower than otherwise
would be the case. And, as Dr. Stein pointed out, the pie
available to support both working people's needs and retiree's
needs would be smaller.
Mr. Matsui. Thank you.
Dr. Stein, you talked from a macroeconomic perspective in
terms of these private accounts, and I was impressed with your
comments. If the government, or individuals, but the government
is involved in these private accounts or individuals are, that
means somebody will still have to buy government bonds. And the
government bonds go up in terms of the interest that the
Federal Government has to pay or else, I guess, if they just go
unpurchased there is another problem to it.
What does this do in terms of the overall deficit? This is
not a freebie then, is it? Because overall we are just shifting
the costs from the Social Security system to some other
function of government; is that correct?
Mr. Stein. I think that is right. That is, I think we only
change the form of the obligation of the taxpayer. In one case
he has an obligation to the Social Security accounts, if its
own funds are inadequate. In the other case in which the Social
Security accounts have bought the private assets, the taxpayer
has to pay more interest, a higher rate of interest on the
Federal debt that is now held by the public in larger quantity.
I think if you go back to what Bob Reischauer says, he
doesn't think that the privatization will add to saving, will
not add to the national income, will not add to the economic
growth, then those additional earnings by the Social Security
account have to come out of somebody else's earnings. Or
another way to look at it is say, well, there is a certain
amount of capital income in this country. If more of that
capital income is going to be earned by the Social Security
accounts, less of it is going to be earned by somebody else.
Either the taxpayer will become liable for more interest
payment, or the owners of private accounts, private assets, are
going to earn less.
So the spread between the yield on government securities
and the yield of private assets will decline if the Social
Security accounts are no longer a captive buyer of Treasury
securities.
Mr. Matsui. Thank you. I want to thank all of you very
much. Dr. Cogan, I didn't ask you a question but that is just
because I ran out of time. Thank you, thank you all.
Chairman Archer [presiding]. If I may, let the Chair jump
in. I apologize that I had another meeting that I could not get
out of, so I was not here to welcome all of you when you took
the witness chairs.
But is it not true that the amount of money that we have to
borrow governmentally is determined by what happens within the
General Treasury rather than Social Security? In other words,
if we run an operating deficit in the General Treasury, is that
not the basis on which we have to borrow money?
Mr. Stein. The amount that you have to borrow from the
general public----
Chairman Archer. No, no, I'm talking about the total debt.
Whether the debt is held by Social Security or whether it is
held by the public, it is scored against the debt ceiling. And
the total debt that the Federal Government has must, as a
result, be determined by what we do within the operating
budget, within the General Treasury of the United States.
And we will, in effect, either borrow the money from the
Social Security Trust Fund or we will borrow it from the
public, but the debt will be the same in the aggregate. Whether
or not we run a Social Security surplus or not, irrespective of
the amount of the Social Security surplus within the trust
fund, that is the amount over and above what is paid out in
benefits and administrative costs each year.
I think we need to be clear on that. The debt that is owed
to the trust fund has the same full faith and credit and pays
market interest rates as the debt that is held by the public--
or the private sector.
Now, somehow as you begin to go through your analysis, it
gets confusing. But let's get back to the basics, and that debt
must ultimately be paid off out of General Treasury funds, not
out of the payroll tax funds.
Mr. Stein. I think you and I disagree about what are the
basics.
Chairman Archer. I don't know how there could be any
disagreement about that. I would be happy to have an
explanation as to why that is not accurate.
Mr. Stein. Because I think what is basic is the rate of
national saving, and that the Federal Government's effect on
the rate of national saving is the result of its unified budget
surplus or deficit. So that it is that borrowing, it is that
borrowing that is abstracting funds from the flow of private
savings and preventing it from being invested in private
productive assets. There is a certain special quality to the
borrowing that the Federal Government does from the general
public that is different from the borrowing it does from the
Social Security account.
Chairman Archer. But in the end, if you reduce the debt
that is held by the Social Security Trust Fund, you then
increase the debt that is held by the private sector.
Mr. Stein. Right.
Chairman Archer. At any one period of time, but the
aggregate debt remains the same.
Mr. Stein. Right.
Chairman Archer. OK. I just want that to be clear, because
I think that got a little confused in some of the responses to
my friend Bob Matsui. And so when people say, well, we are
really more concerned about the debt that is in the trust fund
or we are less concerned about the debt that is in the trust
fund, whether it is going to be paid off or not, and in the end
you are going to have to either cut spending or raise taxes to
pay it off, the same thing would apply if you had that debt
held by the public or private sector. You still are going to
have the same debt, you are still going to have to raise taxes
or cut spending in order to accommodate it. It is still going
to be a part of the debt ceiling.
Mr. Stein. Oh, yes.
Chairman Archer. This is in the First Reader, and I think
the----
Mr. Reischauer. It is still part of the debt ceiling, but
it doesn't have the same impact on national saving or economic
growth.
Chairman Archer. It may or may not.
Mr. Reischauer. That is important from the standpoint of
Social Security, because our ability to provide benefits to
future retirees will depend on the future strength of the
economy, not the number of IOU's that are floating around in
one account or another account.
Chairman Archer. Well, Bob, to some degree I agree with
that. But it has to be a combination of both, really, and it
seems to me that we get into some of these more macro concepts
of economics and a lot of that we need to think about. But if
you are taxing people to put it in the Social Security Trust
Fund, you are taxing potential savings. If you are borrowing
from the public and private sector, you are taxing potential--
you are taking away potential savings.
Mr. Reischauer. You are mostly taking away potential
consumption. We are a society that----
Chairman Archer. I don't agree with that, Bob, because for
right now in my own personal financial situation, I have
decided to take assets that are invested in equities which are
savings and convert them into Treasury securities. No
consumption is involved in that.
Mr. Reischauer. But there is somebody else who is buying
your other assets.
Chairman Archer. Well, perhaps. They may be buying them at
a lower price as a result of my selling, which means there is
no net increase in savings. This gets very complicated and we
are not going to solve all of it right here, but it is not as
simple as sometimes it is presented to be.
But in the end, it seems to me that when we talk about
whether we are going to save Social Security with the unified
budget surplus, I get lost because when somebody tells me that,
they have to also tell me how are you going to take the General
Treasury dollars and infuse them into the Social Security Trust
Fund to save it. Because as I went through the fundamental
analysis with Mr. Wilcox earlier this morning, the payroll
taxes are already saved. They are in there. They cannot be
spent for anything else.
So when you say we are going to save Social Security first
before we give income tax relief, you have got to be assuming
that you are going to take moneys out of the General Treasury
that are part of the unified surplus and some way infuse them
into the Social Security Program in order to save it, and I
wonder how you do that.
Mr. Reischauer. Well, if we had $100 billion surplus in our
non-Social Security accounts, the Treasury could go out and
buy, on the open market, securities that were held by
individuals and give them to the Social Security Trust Fund.
But you don't have to face that issue because we are a long way
from having a surplus in our non-Social Security accounts.
Chairman Archer. I think I understand what you are saying
but I would present it differently, because the Treasury has no
power to give anything to the Social Security Trust Fund.
Mr. Reischauer. It would only do that if you passed
legislation instructing the Treasury to do that.
Chairman Archer. OK. So that analysis then would presume
that the Congress would change the law and permit a direct
infusion of General Treasury funds raised out of the income tax
revenues, and put that in the Social Security fund to stabilize
it. And I would suggest to you that----
Mr. Reischauer. I am not advocating that.
Chairman Archer. I understand, but it is fair though to
think about what are potential analyses, and--because I want to
hear what are the options, because I think there is an
irrefutable opposition to every one of them, probably from
AARP. And so we need to clarify what we really mean when we say
``save Social Security first'' before we can give an income tax
reduction.
And also, it is very interesting to note that this issue
popped up this year in January for the first time. Where was it
last year when we did not have a projected surplus but had
projected deficits, and still gave tax relief? Wouldn't that be
an even greater undermining of Social Security?
Mr. Reischauer. It was----
Chairman Archer. It disappeared then because everybody said
``We are all for this and we can do this,'' and nobody said
anything about Social Security in a worse economic environment
than we have now. And now we are told because we have a better
economic environment, we cannot give a tax reduction until we
save Social Security.
Mr. Reischauer. But you combine that tax cut with even
larger cuts in spending, so the net effect was deficit
reduction over a 5- and 10-year period, not over the 1-year
period.
Chairman Archer. But, Bob, that does not matter. It does
not matter because the aggregate economic situation even with
the spending cuts was not as good as what the aggregate
economic conditions are today. And we still did not see the
argument that we are in some way jeopardizing Social Security.
Is that not accurate? You are nodding, so I assume it is.
Mr. Cogan would you like to comment?
Mr. Cogan. I would offer another observation. If without a
tax cut the government spends more money, as I think they did
with this recent budget agreement, then the alternatives are
not between a tax cut and reducing the national debt. They are
between higher government spending and a tax cut.
And Bob said something that is worth elaborating on in that
regard. Bob said that the strength of the economy is critical
for preserving Social Security's solvency. He is absolutely
right. One benefit of a tax cut--whether it is a benefit over
and above debt reduction I will not get into a discussion on, I
don't think there is a very good answer, although I don't think
that debt reduction is the alternative--one thing about the tax
cut is that it will be good for Social Security because it will
stimulate the economy. It will provide for higher economic
growth, and that higher economic growth will ultimately benefit
to some extent Social Security.
So I think that if the two alternatives are spending part
of the surplus as was done in the recent budget agreement, and
cutting taxes, I think you can make a compelling case on
economic grounds that it may be preferable for the Social
Security Program to have a tax cut.
Chairman Archer. Thank you for that comment.
Mr. Reischauer. Let me just say that I fundamentally
disagree with what John just said. We will duke it out in the
hall.
Chairman Archer. I understand that there is a division
between the economic ranks out there as to that issue. But Bob,
let me ask you this, because I have great respect for you and I
have great respect for the job you did here with CBO.
If we are to give an income tax cut this year, can there be
in any way the allegation that we have raided the Social
Security Trust Fund? And that is a simple yes or no answer. You
don't have to go into a long explanation.
Mr. Reischauer. You know analysts never have yes or no
answers. But in the accounting sense you are dead right.
Chairman Archer. OK. Now because if you had said it could,
then I would say to you we raided it double last year, then,
and it had the support of all of my Democrat friends and the
President of the United States. If in fact a tax cut, an income
tax cut is raiding the Social Security Trust Fund at this
present juncture in time, we did it in spades in 1997 with the
total approval of my Democrat colleagues and the President of
the United States.
I have more than exhausted my time, and I recognize Mr.
Levin.
Mr. Levin. I would love to carry on the discussion.
Chairman Archer. I suspected you might be tempted.
Mr. Levin. I think it really underlines the utility of our
having these discussions within our own ranks. While you were
gone, I commented on the notion that the President should go
first. I really think what we need to do is to have a
bipartisan discussion within the Congress.
Bob, I also wanted to say to the Chairman, I applaud you
for the composition of this panel. You know, on a lot of
issues, the majority--and we did it the same way--picks most of
the witnesses and then the minority picks its witness, and I am
not sure exactly who picked which witness. I have a hunch on
some of you, but I do not on the others. I don't know who
picked Dr. Stein, whose testimony I think has been very
helpful, or you, Chairman Ross.
I think, Mr. Chairman, the answer to your question is that
when we talked about saving Social Security first, what we
meant was that none of the unified surplus should be spent
until we put Social Security on a sound basis for the long
term. And a number of the proposals, especially of the
privatization proposals, indeed would seem to be utilizing the
unified surplus in the longer run if not in the shorter run,
because there is no other way in some cases, it would appear,
to make them work unless you drew upon the general operating
moneys.
And why was it not the same issue in 1997? In part it was
because we paid for the tax provisions. And I know that the
terminology that was used by some in the campaign maybe sticks
in the craw of you and others. I think now is the time, though,
to go on and talk about how we resolve the problem before us.
So let me just ask a quick question to Bob Reischauer.
There was reference in your testimony about the impact of
Social Security on the social safety net. I don't think it is
well understood, and it relates to women, I think, and the
disabled especially. Briefly describe what the meaning is. You
could call it the progressivity and related provisions in
Social Security.
Mr. Reischauer. The term that we have used in our book is
``social assistance.'' The Social Security Program provides a
lot of social assistance that could not be provided in a purely
privatized system. That social assistance comes in various
forms. It comes through providing workers with low average
lifetime earnings a higher payback on their payroll tax
contributions than workers who have had high earnings
throughout their lifetimes.
It comes through providing benefits to spouses who have not
participated in the paid labor force for sufficient time over
their life to get a worker's benefit. It comes in the form of
survivors benefits. When a spouse dies, the survivor gets 100
percent of the primary worker's benefit. It comes in the form
of benefits for divorcees based on their previous spouse's
earnings record. If you are an individual who has been married
for 10 or more years to a worker and you have not been
remarried when you reach retirement age, you get either a
worker's, a spouse's, or survivor's benefit based on the work
history of your spouse. And in a society where about half of
marriages end in divorce, this is a terribly important benefit.
There are many forms which social assistance comes.
Together they make Social Security the program that removes the
most people from poverty that we have in our arsenal of public
policies. It is one that has done this job without much
controversy. And so we should think very carefully about any
kind of reforms that might jeopardize that great achievement.
Mr. Levin. Thank you, Mr. Chairman.
Chairman Archer. Thank you Mr. Levin.
Which one of you wants to go first? Ladies first. Mrs.
Johnson.
Mrs. Johnson of Connecticut. Thank you, I would like to, if
we have time, Bob, hear you talk a little bit more about why
you think a tax cut funded by a surplus does not drive more
economic growth than spending from surplus. Because I think
those are--at least that is what I heard behind your
discussion. But I do have a larger issue. Let me put the larger
issue on the table.
Mr. Reischauer. I would make no distinction between a tax
cut or an increase in spending.
Mrs. Johnson of Connecticut. Well, really the debate, what
happened in the last session was we took $20 billion of the
surplus for spending. Some of us wanted to take a little of the
surplus for tax cuts, and it seems if you take surplus and you
spend it for tax cuts, you drive the economy more effectively
than if you take the surplus and spend it for spending.
Mr. Reischauer. That gets into the debate that I have with
John, which is which policy would produce more economic growth?
And the answer is in the detail. What kind of tax cut are you
talking about? What kind of spending increases are you talking
about? By and large, I think most of the tax cuts and spending
increases that the Congress has been considering and that the
administration has been proposing have very little to do with
economic growth and a whole lot to do with increased
consumption.
Mrs. Johnson of Connecticut. OK. The issue I want to put on
the table, though, goes sort of beyond that. There has been a
lot of discussion about generational equity. And those who want
to spend every dollar of the surplus to solve the problems in
Social Security are really taking the position that the current
generation, which sets aside 15 percent of its own income to
support retirees, must set aside 20 percent possibly of its
income to support retirees. I don't see that as any different
than outright raising Social Security taxes.
Mr. Ross' material shows that if you solve the Social
Security problem entirely by raising taxes, you go from 12
percent to 18 percent and eventually up higher. When you add
Medicare to that, you are basically looking at currently 15
percent up to 20 percent.
Frankly, I think that is just outright unaffordable,
unaffordable to the younger generation. They won't be able to
buy houses and educate their children and have the quality of
lifelong education they need for their careers and so on and so
forth.
So I think a 20-percent tax burden simply with the
retirement population is generationally unfair. But if you
dedicate every dollar of this surplus to that generational
purpose, you probably will effectively increase taxes just as
much. It will just be a different tax.
Now, I would like you to comment, because you have done a
lot of thinking about this, on this issue of generational
equity. What is our obligation to use some of this surplus for
other purposes, and to find a solution for Social Security that
does not take every dollar of the next 10 years of surpluses so
that one generation can support another generation?
Mr. Reischauer. In a very real sense this is water over the
dam, because for the first 40 or so years we ran a pay-as-you-
go Social Security system in which beneficiaries got a
tremendous payback. And we can argue about whether that was
fair or not. Many of us think, given the wealth of the country,
it was the appropriate thing to do.
Since 1977, and then reaffirmed in 1983, we have tried to
partially fund the Social Security system. Most of the reform
proposals that are being debated now suggest that we should
more fully or fully fund Social Security's obligations for the
future. I am in favor of doing that.
But if you decide to do fund the system, there is no way
around the fact that some generations are going to have to pay
twice, because $3 out of every $4 that everybody in this room
is sending into the Social Security system right now goes right
out the door to pay our parents or grandparents, our uncles and
so on, and very little is left over for us.
If we want to fully fund our retirement benefits, it is
going to cost us more as long as we decide not to cut back on
the benefits of current beneficiaries. And so this is a value
judgment for society. Should we fund the program more fully, or
is it more important to devote resources to education or to
reduce taxes? That is why we hire you.
Mrs. Johnson of Connecticut. That is why it makes it so
very important to look at the issue of how do we fully fund
those benefits. Do we fully fund those benefits for the current
generation and the coming generations through tax increases or
from one source or another, or do we fund them in part through
stimulating the investment of new capital into that system,
which is what the private investment and the compounding of a
higher return would do?
Mr. Reischauer. Or as Dr. Stein as pointed out----
Mrs. Johnson of Connecticut. One last statement. I don't
know whether in your book you look at whether or not the option
of doing this through--even through the pension system, so that
people who had pension plans subsidized by the government would
be affected by Social Security a little differently.
Mr. Reischauer. We do not look at that in the book,
although I would like to reiterate what you and others have
said which is that all retirement policy should be looked at as
a whole. That is really is a terribly important point. And I
agree with it completely.
Mrs. Johnson of Connecticut. Thank you. My time has
expired.
Mr. Shaw [presiding]. Mr. Collins.
Mr. Collins. No.
Mr. Shaw. I have a couple of questions. I haven't heard
anybody really touch on something that I think we should be
thinking about. Some of these graphs that have been supplied to
the Committee show very clearly that we are going to reach a
point where the trust fund is going to have meltdown, whether
it has private securities in it or public securities in it.
What effect is that going to have--or has anyone done any
research on the effect that you would guess that that would
have on the marketplace, when we start putting all of these
things into the marketplace and cashing them in in order to
take care of the benefits? I would throw that out to anybody
who might be able to shed some light on that.
Mr. Cogan. Well, the issuance of large amounts of debt--and
believe me, financing the currently promised Social Security
and Medicare benefits would involve issuing an extraordinary
amount of debt--cannot help but slow the growth of our economy.
The issuance of debt acts as a double tax on future
generations. One tax comes from the fact that the debt has to
be serviced and the second comes from the fact that the
standard of living will rise more slowly as the higher debt
retards economic growth.
Mr. Reischauer. Let me add a footnote to John's answer. If
the surpluses projected by the Congressional Budget Office or
by the Treasury really materialize, and are not spent, and the
assumptions are correct, by 2015, 2020, we would have very
little debt. By 2015 the debt-to-GDP ratio would be lower than
it has been since before 1920. This would mean that when you
tried to resolve the Social Security problem, you could go out
and borrow from the public without getting to a position
anywhere near where we are today for a few years.
But as John's tables show very clearly, that is not the
long-run solution. It buys you maybe 5 or 10 years of time to
adopt a solution, but at that point the politics of the
solution would just be, I think, impossibly difficult.
Mr. Shaw. Do any of you all care to comment on what was
just said? The point that I am trying to make, and I am
probably not making my question quite as clear as I should, is
when you start cashing in these securities, whether they be
stock, personal savings accounts, or all of these things, what
effect is that going to have on the market, whether we are
talking about Treasury bills, corporate bonds, or corporate
stock? Has anyone done any studies on the effect on markets?
Mr. Reischauer. Some of John's colleagues at Stanford have
done estimates. The real issue here is what is national and
world saving at that time. While the baby boomers might be
selling their assets, their stocks, there will be others who
are younger, who are richer than we ever hope to be, who will
be buying stocks. Those individuals might be people in Peoria
or they might be people in Singapore, now that we have an
integrated world market. You really do not know what is going
to happen to financial asset values as a result of the
disinvestment by baby boomers, if they had substantial
individual accounts with these assets in them.
Mr. Shaw. So you don't think it would have a marked effect
on the market?
Mr. Stein. But it is negative as compared to not having to
sell all of those.
Mr. Cogan. There is only the question of magnitude.
Mr. Reischauer. Is it a small effect or large effect? My
seat-of-the-pants estimate would be a small effect. But I would
defer to others who have studied this.
Mr. Cogan. We have never had to issue as much debt in
peacetime as we would. We have never had to sell off as many
equities as we would to finance the baby boom claims. So it is
very much outside of our experience. Hence, the calculations
that economists have made are very, very imprecise. As Herb and
Bob said, the direction is clear but the magnitude is quite
unclear.
Mr. Reischauer. The more interesting area, of course, is
housing values, because markets for financial securities are
worldwide and demand is insatiable. People do not own two
primary residences and people in Florida do not want to buy a
house in Elmira, New York. And so you could see, I would
imagine, much more substantial effects on real estate prices in
some parts of the country.
Mr. Matsui. Mr. Chairman, may I just ask Dr. Stein, he
was--Chairman Archer and Mr. Reischauer were talking and Dr.
Stein, I think you wanted to say something. Would you mind
stating what you were going to say?
Mr. Stein. I wanted to say something to Chairman Archer,
but he is gone so it doesn't really matter.
Mr. Matsui. Perhaps for the record, because I was following
the debate and I wanted to get your point of view.
Mr. Stein. I guess basically what I am trying to say is
that you need to get this analysis out of the framework of puts
and takes within the budget, between one budget and another
part of the budget. You need to put it in the system of
national accounts and see what it does to savings and
investment and consumption and to the rate of economic growth.
So I think one consequence of all of this discussion is
maybe to raise the stage a little bit to a more general world,
because these puts and takes between the two kinds of budgets
really don't matter. What matters in the end, if you are going
to pay these benefits, is you want to have a richer economy out
of which to pay them, and how do you do that?
And doing something about the surplus is one way, and maybe
doing something about the taxes and maybe doing something about
education, and of course it may be that we are on the brink of
a new technological revolution in which the economic growth
will be 3 or 4 percent per annum and not 2\1/2\ percent. That
will make a big difference in all of these things.
I think you have got to put these issues in a much broader
perspective, and that is one reason why I originally said I
thought we ought to get some overall view from the President,
not just about Social Security but about what is our policy
with respect to budget surpluses. We have--even without respect
to Social Security--we have no policy in this country about
budget surpluses. We only know deficits are a bad thing. We
don't know anything about surpluses and we don't know what we
think about economic growth, and that is all very relevant to
Social Security discussions.
Mr. Shaw. It has been a very interesting panel. We very
much appreciate you taking your time to be with us today. And I
think we all learned quite a bit from you. But you may be
called back because we might find ourselves in a deeper hole in
a couple of months. Who knows? Thank you very much.
[Whereupon, at 3:03 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

Statement of Hon. Rosa DeLauro, a Representative in Congress from the
State of Connecticut

On November 3rd, the American people sent Congress an
unmistakable and indisputable message: work together in a
bipartisan manner to forge a consensus on ``kitchen table''
issues important to their families, such as Social Security
reform. Social Security is one of our nation's greatest success
stories, especially for women. This financial safety net has
kept millions of seniors out of poverty, and is an essential
source of income for retired women. Although women make up
roughly half of America's population, they account for sixty
percent of Social Security beneficiaries. Three-quarters of
unmarried and widowed elderly women rely on Social Security for
over half of their income.
The aging baby boomer generation has precipitated a
national debate about how to best protect retirement security
in the future. As America's baby boomers reach their golden
years, there are fewer taxpayers to cover the cost of their
retirement. In 1950, there were 16.5 taxpayers for every Social
Security recipient. By 1997, this ratio had dropped to 3.3
taxpayers to every recipient, and it is expected to fall even
further.
The time for reform is now. As Congress considers the
various Social Security reform proposals that will be presented
over the coming months, it must consider the unique potential
effects these proposals may have on women.
Women spend less time in the workforce, because they take
an average of 11.5 years out of their careers to care for their
families. As a result, fewer women than men have private
pensions through their work: 40 percent of women, compared to
44 percent of men. These pensions tend to be worth less than
those received by men. According to the National Economic
Council's Interagency Working Group on Social Security, among
1993-1994 new private sector pensions annuity recipients, the
median annual benefit for women was $4,800. This is only half
the median benefit received by men. Furthermore, during their
years in the workforce, women earn an average of 70 cents for
every dollar men earn. In fact, the average female college
graduate earns little more than the average male high school
graduate. Thus, women receive lower Social Security benefits in
old age.
Any changes must be thoroughly researched and carefully
considered to maintain Social Security's successful underlying
foundation--a guarantee of financial stability in old age.
Women, and all Americans who work hard and play by the rules,
must be assured that their years of hard work will be rewarded,
not punished with risk and insecurity.
In August, I joined many of my female colleagues in the
House at a press conference to raise awareness of this
important issue in Congress. Social Security reform will top
the agenda of next year's Congress and women, now and in the
future, have a great deal at stake in the future structure of
the Social Security system. It is essential that Congress be
committed to ensuring that the financial security of women be
protected in their old age. I look forward to working with my
colleagues to meet this challenge in the coming months.

Statement of Ric Edelman, Chairman, Edelman Financial Services, Inc.

Mr. Chairman, I am honored to submit this statement to the
Committee on the future of the Social Security System and what
new, innovative ideas I might be able to bring to this debate.
I am also pleased that in seeking information on this issue,
the Congress has sought input from someone like me who has
spent the last 15 years of his life giving families sound
financial planning advice and guiding them towards financial
security.
My perspective comes from my activities both as a provider
of financial services and as one of the nation's leading
educators in the field of personal finance. By way of
background, I am the author of two New York Times bestsellers,
The New Rules of Moneyand The Truth About Money, with a revised
edition of the latter due in bookstores later this month. My
award-winning radio program, ``The Ric Edelman Show,'' is heard
on WMAL in Washington, D.C. and WLS in Chicago. I also host the
national television show ``Money University'' on America's
Voice cable network, write a syndicated column, publish a
newsletter, and run a major advice area for America Online. I
am on the faculty of Georgetown University, and my company,
Edelman Financial Services Inc., manages almost $1 billion in
client assets, establishing my firm as one of the largest
financial planning companies in the nation.
When I last came before this Committee's Subcommittee on
Social Security in June, I testified that giving Americans
unrestrained opportunity to privately invest their Social
Security assets in the equities markets was a mistake. In point
of fact, out of the nine panelists that testified, I was the
only one who did not believe that Social Security should be
completely privatized. I still do not.
Why? Because the majority of Americans do not understand
the basic principles of investing. Consequently, I think most
people would be exposed to fraud and abuse if left on their own
to invest for retirement.
Because of my background, you might assume that I would
have been strongly in favor of privatization, and the
incredible amount of money which would have flowed into the
stock market and into the money management and financial
planning industries.
But in the end, in my estimation, the risks do outweigh the
rewards. The majority of Americans do not know the proper way
to invest, nor do they know how to hire and work with a
financial advisor. Although I and my colleagues are trying to
make Americans more educated about investing and becoming more
involved in their own financial future, many still do not
understand such fundamental investment basics as the power of
compounding or diversification. Complicating matters would be
the contradictory advice emanating from the financial community
as each organization strives to capture the assets of American
workers. Furthermore, experience shows that most Americans tend
to emphasize risk over performance when it comes to investing
and left to their own discretion, far too many Americans would
invest their assets in the wrong asset classes, defeating the
goal of improved performance that this privatization issue
seeks to achieve.
This could lead to great, sudden stock market outflows of
Social Security assets by consumers, acting emotionally with
their investments, and having a disastrous effect on the stock
market. Today, too many consumers believe that stock prices
only rise. What will be the sentiment when stocks fall, as they
did recently when the Dow fell to about 7,000 and nervous
investors wondered whether to flee the market? As I
rhetorically asked in June, what happens when--not if--the
nation enters a true bear market--something that hasn't
happened for nearly 30 years?
Unfortunately, there is still some critical discussion
going on in some circles that urges investing Social Security
assets in the private sector. If the Congress still sees this
as a possible viable alternative to securing the System's
future, I would like to briefly reiterate my proposals on this
issue:
Prior and existing Trust Fund assets should not be invested
into equities.
A portion of new contributions to the Trust Fund should be
directed toward equities, limited by Congress to no more than
25% of future contributions.
Each American worker should declare annually on their W-9
form what portion of their current Social Security
contributions they wish to be invested into stocks, up to 25%.
Each annual election must be irrevocable, meaning that
workers will not be able to rescind their previous W-9
declaration, and such designated monies must not be withdrawn
from the stock market until the assets are needed to make
payments to Social Security beneficiaries. Withdrawals or
redemptions for any reason--and especially because of concerns
over current market conditions--must be strictly prohibited.
The equity portion of the Trust Fund would be invested into
a broadly-based equalization (unweighted) index comprised of at
least 2,500 U.S. stocks. A capitalization-weighted index must
not be used. As explained in my book, The New Rules of Money,
index funds that mimic the S&P 500 Stock Index are poor
investments, for the following reasons:
In a capitalization-weighted index, like the S&P 500, the
biggest companies have the biggest effect on the index, instead
of each stock having an equal effect. For example, a 10% gain
by the #1 company would have a much bigger impact on the index
than a 10% gain by the smallest company. It also means that the
index would buy more of the biggest stocks than the smallest
stocks. And the higher a company's stock price gets, the more
the index fund would buy it. It sounds bizarre, but it's true:
Index funds buy more of a given stock merely because the stock
has already risen in value.
Because index funds tend to hold disproportionate amounts
of stock--holding much more stock of big companies than it
holds of little ones--it's impossible to maintain a balanced
portfolio. If a stock grew in price, a typical money manager
might want to sell some of it. But in a capitalization index
fund, you can't. Instead, the fund will buy even more--at the
new higher prices. This explains why S&P Index funds have as
much money invested in the 50 biggest stocks as in the other
450 combined. The result is that such index funds make money
only if the biggest stocks make money, because big gains in
little stocks don't make much difference. Thus, index investors
were lucky in 1996: Six of the S&P 500's biggest stocks
collectively produced 26% of the index's total gain. Put
another way, just 1.2% of the holdings produced 26% of the
profits, while the other 494 stocks in the index earned the
rest. The Congress must not create an investment whose results
are so dependent on such lopsided performance.
The format I propose here is similar to that currently used
by the Federal Election Commission:
Previously-received federal revenue is not used for federal
matching contributions.
Congress determines the maximum annual allowable
contribution by each taxpayer; currently set at $3.
Each taxpayer chooses whether or not to make this
contribution.
Once the election is made, taxpayers cannot change their
mind.
The Government determines how the assets are to be
``invested,'' or distributed, among the candidates. The
individual consumer plays no role in this decision.
The Campaign Contribution program is very efficient and
effective, and a similar program can be created as easily by
the Social Security Trust Fund.
Now I would like to turn the Committee's attention to the
underlying question I often ask my clients: ``Do you think
Social Security will exist when you retire?'' When I ask that
question in my financial seminars, those over age 45 say
``yes'' and those under 45 say ``no.'' As a planner, I
personally believe and tell my clients that Social Security
will continue in some form, but I make no predictions about
what the benefit levels will be or how old you'll have to be to
receive them.
However, dire predictions of the demise or diminution of
Social Security benefits has made many of my clients concerned
that Social Security may not exist as they know it by the time
they are ready to retire, let alone be there for their children
or grandchildren.
That is why I am taking this opportunity to bring to this
Committee's attention the revolutionary new retirement planning
tool from Edelman Business Services Inc., known as the
Retirement InCome--for Everyone Trust^TM. In just the
past few months alone, hundreds of Americans have invested well
over $1.25 million in the RIC-E Trust^TM as a first
step towards ensuring the financial security of the kids and
grandkids they love and as an adjunct to the current Social
Security System.
Let me briefly explain the history of the RIC-E
Trust^TM, what it is, how it works and why I consider
it a viable and complimentary addition to the present Social
Security System.
More than a year ago, I took a call on my Saturday morning
radio show from a listener who wanted to save for his son's
retirement. I thought it was a crazy notion, but it got me
thinking: Imagine if you could set aside money for a child, for
50 or 60 years. The potential compounded growth, for example,
could be this: $5,000 invested for 65 years, assuming the 10%
annual return which the stock market has produced since 1926,
would grow to $2,451,854.\1\
---------------------------------------------------------------------------
\1\ Results based on $5,000 earning 10% per year, compounded
annually. Calculation does not reflect any charges or fees that might
be applicable; such charges or fees would reduce the return. This
figure is for illustrative purposes only and does not reflect the
actual performance of any particular investment. Investment results
fluctuate and can decrease as well as increase. Figures do not take
into consideration time value of money or any fluctuation in principal.
Your tax liability may vary depending on your particular circumstances.
Please consult your tax advisor.
---------------------------------------------------------------------------
Most people only think about saving for a child's college.
That's great, and certainly worthwhile. And if you start early
enough, you won't have to struggle as much to pay for college
when the bills come. But what's the real purpose of going to
college?
For many, it's so the child can get an education and get a
good job. Then, with a good job, he or she can earn a decent
wage so they can save for their own retirement and hopefully
live comfortably. Well, why not cut-to-the-chase and put some
extra money away for the child's retirement in the beginning?
You see, the biggest factor in a child's favor is time.
That's because time gives money the chance to grow, through
compounding. Given enough time, a tiny sum can grow into a
fortune.
Although this concept seems simple enough, making it a
reality is not. There were three major issues to creating the
RIC-E Trust^TM: taxes, the law, and the ability to
deliver it economically. First, investment profits are
typically subject to taxes, and when a trust is used as in the
RIC-E Trust^TM, the taxes are at the highest rate.
These taxes would be so costly, in fact, that it would be
virtually pointless to even create such a trust.
Second, if a Uniform Gift to Minors Account (UGMA) or
Uniform Transfer to Minors Account (UTMA) is used, the child--
by law--takes possession when he or she turns 18 or 21.
Clearly, a person that young is not thinking about retirement.
Therefore, it would be in the child's best interest to set
aside this money beyond their reach, so it'll be there for
their retirement.
Finally, the typical costs to hire a lawyer, trustee and
investment advisor would erode much of the economic gains that
the trust might enjoy.
After employing two accounting firms and 11 teams of
lawyers, the three obstacles facing the RIC-E
Trust^TM have been solved. Now every parent and
grandparent who opens a RIC-E Trust^TM, can be
assured that their contributions will be preserved for one sole
purpose: helping to secure their child's retirement.
As the creator of the RIC-E Trust^TM, I made
enrolling as easy as possible. First, an interested consumer
fills out and returns the enrollment form and one-time set-up
fee of $300. The consumer then receives a confirmation letter,
an attorney directory and a $150 certificate towards the
payment of that attorney's fee.
Since a trust is a legal document, an attorney is required
to prepare the RIC-E Trust^TM. That's why investors
will receive an attorney directory, which lists the names of
attorneys in their area who can prepare the trust for them.
After an investor obtains the RIC-E Trust^TM
Specimen Trust Agreement from their attorney, I or an associate
of my financial planning investment advisory firm, Edelman
Financial Services Inc., (or another individual financial
advisor selected by the client) will establish an investment
account in the Trust's name. Resources Trust Company, one of
the largest and most reputable trust companies in existence,
has agreed to serve as Trustee, and to do so for free for the
entire life of the Trust, provided that the investor uses the
pre-approved Specimen Trust Agreement. Resources Trust manages
more than 200,000 accounts holding nearly $14 billion in
assets. An investor can select a different trust company if
they wish, but they will need a Trustee who is able to serve
for the entire life of the child, and it is highly unlikely
that they will find another trust company willing to serve at
no cost.
When the child reaches retirement age (which is any age the
investor chooses, but no younger than 59) the Trustee will
distribute the assets to the child. I've included more
information about this and Resources Trust with my statement.
Once the Specimen Trust Agreement is in place, the investor
funds the Trust with their contribution ($5,000 minimum). The
Trustee will have this money invested in the proposed tax-
deferred investment, with the assistance of the financial
advisor the client selects. Using a tax-deferred investment is
important, because avoiding annual income taxes allows the
investor's contribution to grow and compound over the child's
lifetime, without paying taxes on the potential growth until
his or her retirement (more specific information on tax
deferral, and on selecting a financial advisor, is also
enclosed).
After the child grows up and reaches the ``age of
distribution'' (again a minimum of age 59\1/2\), he or she
receives the assets from the Trust. When the child receives the
money in retirement, he or she will pay taxes at that time. In
the event the child dies before reaching the distribution age,
the money reverts to their estate, and is distributed to his or
her heirs.
One important point about the RIC-E Trust^TM is
that each Trust is only established for one child. So, if an
investor wants to provide a RIC-E Trust^TM for more
than one child, he needs to create separate RIC-E
Trusts^TM. Each child can have an unlimited number of
RIC-E Trusts^TM and an investor can create as many
RIC-E Trusts^TM for as many children as they like.
One of my key goals as the creator of the RIC-E
Trust^TM was to make this revolutionary planning tool
affordable to the general public. In order to accomplish that
goal, it was important that the Trust's potential earnings not
be ``chiseled'' away with fees. That's why it's so important
that Resources Trust Company has agreed to serve as Trustee for
free (provided that the Specimen Trust Agreement is used). And,
if I or another associate advisor of my investment advisory
firm, Edelman Financial Services, serves as Financial Advisor,
the applicable investment advisory fees will be waived as well,
for every RIC-E Trust^TM created. The Financial
Advisor will receive compensation on the ultimate sale of the
investment used to fund the Trust. And in order for the client
to enjoy those free benefits, they must have the RIC-E
Trust^TM prepared by an attorney who's a member of
the RIC-E Trust^TM Attorney Network, because many of
these attorneys tell us that they often accept the $150
Certificate as full payment for their services.
What do ordinary, hard-working Americans have to say about
this new concept? Here's what three Northern Virginia families
think. Walt Szczpinski, an information technology executive and
former naval officer, said he has arranged this new Trust for
his three grandchildren, so they can have a secure financial
future long after he is gone. Renee Culbertson, a marketing
manager and widow, said she worries that Social Security may
not exist when her young daughter needs it. So Renee has put
money aside in the new Trust, assuring that money will be there
for her child's ``golden years.'' Financial planners John and
Mary Davis felt that by investing in this unique, planning
tool, their two young girls will have a great headstart on
their retirement savings, and can focus on other financial
challenges the kids will face as they grow into adulthood.
In summary, Mr. Chairman, I want to commend you and the
Committee for convening this hearing and having the political
courage to air out all of the new ideas aimed at saving -or as
in the case of the RIC-E Trust--complementing, the current
Social Security System. For many years, Social Security Reform
was the ``third rail'' of politics, and change was shunned by
both ends of Pennsylvania Avenue. It is healthy for this
Committee to discuss changes that were unthinkable just a few
years ago--cutting benefits across the board, raising the
payroll tax, raising the age at which retirees become eligible,
and yes, even letting workers contribute to their own security
accounts that the government or the workers would manage.
But as this debate moves forward, I want to point out to
this Committee and the Administration that some of the American
people are not sitting idly wondering if Social Security will
be there for future generations.
Instead, many investors, as evidenced by our own clients,
are taking the idea of ``privatizing'' the Social Security of
their own sons and daughters and grandkids into their own
hands, by investing in retirement tools such as my own RIC-E
Trust, as a form of ``safety net'' to the current Social
Security System.

[GRAPHIC] [TIFF OMITTED] T3030.009

[Enclosures are being retained in the Committee files.]

Statement of Edwin E. Forsman, Futura Magazine, Phoenix, Arizona

My name is Ed Forsman, I am an artist living in Phoenix,
Arizona, where I publish a magazine on the Internet as part of
my work. I am a private citizen representing my wife, my two
children, and my two parents. I am making a copy of this
testimony available on the Internet, to encourage other
citizens to step forward and add their voices in the debate
over Social Security Reform.\1\
---------------------------------------------------------------------------
\1\ URL: http://www.geocities.com/futura__zine
---------------------------------------------------------------------------
Thank you for this opportunity to file a written statement
for consideration by the committee. I, too, feel that the
reform of Social Security is of the utmost importance,
particularly in light of the evidence that in just fourteen
years, Social Security will, by all accounts, be paying out
more than it will be taking in.
Any discussion of meaningful, bipartisan, democratically
instituted reform of the Social Security System, must include
an honest, straightforward discussion of what reforms are
needed in Congress itself. All of today's testimony before this
Committee is in basic agreement on that point; it is the
actions of Congress itself that have brought about the need for
reforming the system.
This committee does not have to be reminded that a majority
in Congress have been crying out for campaign finance reform
for 30 years, yet have remained paralyzed by the very thing
that is in need of reform: money. This is directly related to
any meaningful discussions involving how our nation deals in a
truly democratic fashion, with its elderly, its sick, or with
raising the standards of living for all of its citizens.
In considering the statistics cited at this Hearing in the
statement of the Chairperson of the Social Security Advisory
Board, only 20% of Americans are even aware that they will be
laboring an additional two years before they are allowed to
rest, and 70% of our Nation's citizens would oppose the raising
of the retirement age if they had a say in it; yet, Congress
has already passed this increase in the retirement age into
law. Given the historical significance of this day, it is
difficult to interpret these statistics in any other meaningful
way, other than to raise the question as to why Congress is
doing a far better job of informing voters about the details of
a President's sex life, than it is of informing them about what
Congress is doing in their lives.
The question as it relates to meaningful Social Security
reform is not only a recognition that Congress has brought
about this need for reform, but what can be done to reform
Congress?
If we are to honestly consider meaningful reform of the
Social Security system, we must unabashedly examine the nature
of our system of transferring wealth from one segment of
society to another, coupled with the apparent paralysis of a
Congress in carrying out meaningful, democratically instituted
reforms.
The recent DNA evidence regarding one of our most cherished
national and historic figures, Thomas Jefferson, confirms that
the majority of our nation's founders were, if not comfortable
with, at least inextricably locked into a flawed system of
economics that could not function without taking advantage of
another's labor.
Historically, rising standards of living have never been
permanently arrived at by tinkering with one fund for the
benefit of another, nor by the printing of money, nor by
investing in speculation. Rising standards of living have
always been caused by broadening the base of political power,
and increasing democratic participation in the institutions of
power. How then do we do that now? And can our technology
assist us in this task?
Africans living in America did not attain a better standard
of living because slavery was reformed; they attained it
because slavery was abolished. Americans who happened to be
white and laboring under indentured servitude did not profit
from that system until they were freed from it.
The economic system adopted by our founding fathers was
something they were not strong enough to invent, like the
Declaration of Independence. It was an economic system from
which they were helpless to extricate themselves. It took less
than a decade in a new nation functioning under that flawed
economic system before an even larger revolution took place.
History records that General Washington had to muster a larger
army than he had used to throw the British out, in order to
subdue that second, American revolution; and a National
Constitution had to be formed as a result of it.\2\
---------------------------------------------------------------------------
\2\ See Shay's Rebellion, circa 1787
---------------------------------------------------------------------------
The revolution we ought to be reexamining in our national
dialog has never been the one about throwing the British out.
That revolution of 1776 with its Declaration of Independence
was a revolution concerning British subjects, rising against a
British Crown.
The revolution we ought to be debating in our national
discussion about Social Security is the revolution that reached
its climax in 1787. That was the first revolution of American
citizens, free from external rule, who were raising a
revolution against American lawyers, bankers, and speculators
who ran legislatures that controlled the printing of money.
Those same, systemic problems which gave rise to that
revolution ought to be the focus of our attention in any debate
about Social Security reform.
The first genuinely American revolution was against an
economic system which allows those with money who produce only
``services,'' to take advantage of those who produce something
tangible, but require the services of others in order to
increase their productivity. It is this revolution that forced
the drafting of a national Constitution, the Bill of Rights,
and the birth of our Nation.
In order to survive its infancy, our nation had to
compromise with seriously flawed, but very powerful economic
institutions that have never yielded their power willingly. It
was our infant nation's weakness that reached unwanted
compromises and allowed an outdated world financial system to
stay where the British had been forced to leave. Those
compromises and that weakness quickly led to the Civil War,
followed by a series of national and world wide depressions
which catapulted the world into World Wars, the Russian
Revolution, and ultimately the total waste of a 50 year cold
war. This list of human suffering will continue to expand as
long as systems are in place that allow power to take advantage
of the labor of those without power, and allows money to exert
more influence than humanity.
Had machines been available that could keep track of 400
million transactions per second in 1787, the arguments of
Hamilton, Jefferson, Washington, and the New York banking
interests would probably have been quite different. i.e., ``If
I use my ATM card, why is there a bank between me and the
Treasury where we print my money, keep track of its debits and
credits for the proper measure of my production or consumption,
and control its manufacture through a democratic process?'' Or:
``If I can attend Congress through my modem, participate in its
debates on issues that concern me, cast my vote and have it
tallied at the speed of light; what real role should a
Representative be assigned; and is there any part at all to be
played by paid lobbyists in such a democratic system, even if
they come in the guise of `think tanks'?''
These are the questions that need to be addressed here and
now, because what is conspicuously absent at these, as in most
Congressional Hearings, is the average person who will be most
affected: the citizen who actually produces something
consumable with his labor, and therefore should be most
interested in changes proposed to the Social Security System.
What could be done to make the will of the people more
audible in Hearings such as these? For the price of a used
video camera and a donated computer, this committee could make
itself available to citizens who, by right, ought to be present
here and at each and every one of Congress' meetings.
Let the Committee begin here and now. Let the American
people into these Congressional committees now, then begin to
listen to their advice.
To seriously consider the continual raising of the
retirement age of working citizens, or schemes to recalculate
the rate of inflation, or an establishment of undemocratic
institutions that funnel the funds of workers into companies
that produce the likes of cigarettes, napalm and other machines
of destruction; then allow ``fund managers'' familiar to Wall
Street and Congress to skim a percentage off the top, is not
only marching backwards in time to drums turned upside down, it
is in direct opposition to the will of the people, corrupting
of everything democratic and, in light of the statistics as
they have been laid before this committee today, deserving of a
general rebellion such as Shay's, if enacted.
Today happens to be a meaningful day in history. But it is
as ironic as it is symbolic, in that as a private citizen among
the vast majority of citizens residing outside of Washington,
D.C., I found myself having the Impeachment Hearings being
thrust upon me by commercial interests using public airways,
against my will; whereas when I voluntarily tried to attend
these Hearings on Social Security, and attend to the questions
and answers surrounding my retirement; using a publicly
financed Internet, for non-commercial reasons; I was unable to
attend despite my fervent wish to do so.
This day ought to be a historic one for other reasons: for
not only is it a day when Impeachment Hearings were opened for
only the third time in our Nation's history, it may be the
first time in American history that our Nation's citizens began
to reclaim their rightful place in Congress by way of a
computer revolution.
As one of our Nation's poets once admonished, ``Come
Senators, Congressmen, please heed the call, don't stand in the
doorway, don't block up the hall.'' \3\
---------------------------------------------------------------------------
\3\ Bob Dylan, circa 1963
---------------------------------------------------------------------------
Respectfully submitted this 19th day of November, 1998.
Edwin E. Forsman
Publisher, Futura Magazine

Statement of the Generation X Committee on Social Security, Tax Reform
and Economic Justice

The Generation X Committee on Social Security, Tax Reform
and Economic Justice welcomes this opportunity to submit
comments for the record to the House Ways and Means Committee
on the process for considering legislation to save Social
Security. We believe the question of process will, in large
part, define both the debate and the mix of possible solutions
considered.
First, we are concerned that a process which starts with a
proposal from the Administration will confine the debate to
options which the White House will find politically acceptable.
Such a proposal would constitute the opening salvo in the 2000
presidential elections, including limited privatization to
reach out to moderate Republicans and measures to shore up the
current system to please the Democratic base. The response to
these proposals will be predictable, with the Vice President's
likely Democratic opponents challenging any privatization. The
likely Republican response of many Republican members and
candidates will then be attacks on the White House plan,
repeating the style of debate used to oppose the President's
health care reform proposals in 1993 and 1994. Such a limited
debate will result in much heat and very little light.
Secondly, we believe that a piecemeal debate on Social
Security reform alone, tax reform alone, Medicaid alone and
Medicare alone will result in solutions which will neither work
nor pass. Currently, there are separate discussions of each of
these issues. However, to reform one you must reform all. To
make progress on these issues, they must be considered
together.
Only a global approach will result in the comprehensive
reform needed to assure the baby boom generation of a sound
retirement without breaking the bank and the backs of the
succeeding generations, especially Generation X and those at
the tail end of the Baby Boom. Such comprehensive reform should
also make real gains in creating a more just society, both at
home and globally, taking into account the needs of the poor,
the unborn and those who come to this country as immigrants
(both legally and illegally). While we are skeptical of the
ability of the current establishment to undertake such
visionary leadership, we continue to hope that such things are
possible and will offer such a comprehensive solution.
We urge the Committee, in concert with the Senate Finance
Committee and the Administration, to initiate an open and joint
process which examines the full range of available solutions to
each of the areas mentioned above and how each area impacts the
other. However, before such a comprehensive solution is
outlined, some ground rules are necessary.
1. Any comprehensive reform must result in the retirement
of the debt held by the public by the year 2030, if not before.
2. Any privatization or partial privatization of Social
Security must duplicate the redistributional effects of the
current system, i.e., individuals who are subsidized in
retirement must be subsidized at the investment stage. Social
Security works because it operates under the myth that benefit
payments are not welfare. Initiating a needs based subsidy for
some retirees adds the stigma of welfare, which will lessen
program participation and throw some seniors into poverty.
3. Any privatization of Social Security must be economical,
with low administrative costs. Additionally, if possible,
employee stock ownership and voting control must be a component
of the system.
4. Any comprehensive health care solution must address the
problem of the uninsured and must eliminate waste from the
system, without compromising the quality of care. Any further
Medicare and Medicaid reform must include measures which spread
cost savings to the general population, as it is markedly
unfair to taxpayers with surviving parents to bear the risk of
Medicare and Medicaid system failure while taxpayers whose
parents have passed pay nothing.
5. Any tax reform must simplify or eliminate compliance for
individual middle class taxpayers and must retain some form of
progressivity, with the top wage earners in the current 36% and
39.6% brackets continuing to pay a higher rate than the general
population.
6. Any general budgetary reform must eliminate incentives
for wasteful spending and tax breaks targeted at industries
favored by narrow interests at the expense of the rest of the
nation. However, certain tax benefits must still be maintained
and strengthened, including tax advantages for child rearing,
home ownership, health insurance and education/training of the
young. Such tax advantages are necessary for the preservation
of the family. If high enough tax benefit levels are set,
abortion can be eliminated through economic incentives, rather
than punitive measures against women and doctors which some
still desire to attempt.
Adoption of these ground rules will result in reform which
benefits all segments of society and will lift up the poor and
the young, rather than favoring solely the connected and the
powerful in hope that benefits will then trickle down.
The Committee's proposed solution will now be described.
The following summary table will be followed by a description
of each of the plan elements.

------------------------------------------------------------------------
Future Revenue
Current Revenue Source Source Items funded
------------------------------------------------------------------------
Personal Income Tax revenue Business Income Discretionary
taxed at the 15%, 28% and 31% Tax with a single spending, Non-
tax rates. rate, credits for pension
family size Entitlement
(payable to the spending
employee), and
deductions for
material costs,
home mortgage
interest, health
insurance and
education/
training
(including
stipends).
Payroll Taxes for Health Business Income Unemployment
Insurance, Disability Insurance Tax with a single Insurance,
and Survivors Insurance (for rate, etc. Disability
individuals under retirement Insurance,
age). Medicare
Insurance, Senior
Medicaid,
Survivors
Insurance Trust
Funds
Corporate Profits Taxes......... Business Income Discretionary
Tax with a single spending, Non-
rate, etc. pension
Entitlement
spending
Payroll Taxes for Old Age Individually Individual
Insurance and Survivors managed pensions
Insurance (for individuals over investment
retirement age). accounts for
employee share
(with
administrative
costs paid by the
employer rather
than from
dividends), ESOP
accounts with
equal
contribution
levels for each
worker for
employer share.
Phased in over 40
years..
Personal Income Tax revenue Personal Income Interest on the
taxed at the 36% and 39.6% Tax on all debt and debt
rates. individual income retirement
from wages and
investments over
$130,000 (except
income from
municipal or
federal bonds).
Self-funded prescription costs Repayments to Prescription and
to Medicare patients. Health medical lines of optional spending
care costs born by the credit and
uninsured and hospitals (which medical savings
are then transferred to the accounts financed
system). by Business
Income Taxes.
------------------------------------------------------------------------

Business Income Taxes

The Business Income Tax combines the proposals to enact a
National Sales Tax/Value Added Tax with the most popular
provisions of the personal income tax. All business income
would be taxed, both individual and corporate, over $10,000.
The tax payment will be based on gross sales, less material
costs (similar to a VAT), with a tax credit for family size and
tax deductions for health insurance purchases, employee
mortgage interest (either paid to employees or financed through
the employer's financial institution) and education/training
costs for low and moderate income employees.
The tax rate should cover all Defense, Medicare, Social
Welfare and General Government Expenses, less revenue earned
from excise and gasoline taxes. Collection and enforcement of
this tax will be accomplished by the states. Collection and
audit functions of the Internal Revenue Service will be
abolished.
The employee family size credit would be paid directly to
employees with dependents at an equal amount per dependent-
regardless of income. The credit must be high enough to cover
all expenses and be indexed to inflation. It will be paid
directly to the employee, regardless of income. This would, in
effect, be a pro-life credit, as it would eliminate any
economic incentive for abortion for workers, wives and
daughters.
Note that all industries would be required to pay taxes, as
this tax is more a replacement for individual income taxes than
a national sales tax. There should be no exemption for food, as
both farmers, food processors and grocers pay income taxes on
employee wages.

Non-Pension Payroll Taxes

Employer and Employee contributions for Unemployment Taxes,
Disability Insurance Taxes, Health Insurance Taxes and
Survivors Insurance for individuals under 62 would be shifted
to the Business Income Tax. OASI(62+) would be privatized in
phases--with an employee contribution based on income and an
equal payment from the employer to each worker--which would
duplicate the leveling effect of the current Pension system
(see below).
The Health Insurance portion of FICA will be merged with
Business Income Taxes. Business Income Taxes will include
provisions for Health Insurance cost deductibility and family
income equity, so that all workers and employers will be able
to afford health insurance.

Corporate Income (Profit) Taxes

This tax would be abolished as a separate tax, as this
income would be taxed under the business income tax. The many
industry specific tax breaks must be ended. The importance of
this cannot be emphasized enough, as compliance will be assured
if everyone feels the pain.

Pension Investments

Most proposals privatizing Social Security ignore the
central strength (and conservative criticism) of the program,
it's leveling effect. This effect is caused by the pooling of
payments by all beneficiaries, who receive a guaranteed minimum
payment, provided they work the minimum number of quarters. The
current systems subsidizes poor workers at the expense of the
more well off, hence the criticism of the program and the
desire to tie benefits solely to income by the privitizers.
Yet, without the leveling effect, no privatization will survive
the legislative process and will fail in implementation. If
passed without leveling, privatization will throw millions of
our generation into certain poverty upon retirement and widen
the gap between rich and poor.
We propose that Old Age Insurance and Survivors Insurance
for those over 62 be privatized. The employee share will
continue to be based on individual income. However, the
employer contribution will be equal for all employees,
maintaining the current system of redistribution.
The employee share would be invested in an individual
investment account or a company sponsored fund, with the
employee having the option of investing these funds in employer
voting stock. To hold administrative costs down and preserve
funds for retirees, the employer would be required to pay
administrative costs up front, rather than have them come out
of plan investment gains. This adds an immediate cost cutting
incentive. Currently, employees contribute 5.35% of their
income to OASI. Excluding survivors of non-retirees will reduce
this base figure somewhat. However, transition to a non-
government program will lessen the resistance to an increased
contribution. We recommend that by 2040, the contribution level
should be increased to 10% (an increase of roughly 1% of income
every ten years). See the phase in schedule below.
The employer contribution would be equal for each employee,
at the national average FICA OASI contribution. This is
currently 5.35% of the average national wage (which in 1997 was
$1,442). This figure should also be increased to 10% of
national average eligible earnings, in increments of 1% every
decade. Corporations would invest these funds in their own
voting stock, with dividend reinvestment and the employees or
their representatives having control over how these shares are
voted. This proposal will provide increased funds for each
firm, which will reduce resistance to the increasing size of
the contribution. The contribution for employees of privately
held companies would go to the individually managed accounts
funded by the employee share. For small, low wage, firm, a tax
credit on the Business Income Tax will be provided if the
average company wage is below that national average. See the
following table for the phase-in schedule.

----------------------------------------------------------------------------------------------------------------
Year Employee OASI Employee Invested Employer OASI Employer Invested
----------------------------------------------------------------------------------------------------------------
2000.. 4% indiv. income......... 2% indiv. income......... 4% avg. income.......... 2% avg. income
2010.. 3% indiv. income......... 4% indiv. income......... 3% avg. income.......... 4% avg. income
2020.. 2% indiv. income......... 6% indiv. income......... 2% avg. income.......... 6% avg. income
2030.. 1% indiv. income......... 8% indiv. income......... 1% avg. income.......... 8% avg. income
2040.. none..................... 10% indiv. income........ none.................... 10% avg. income
----------------------------------------------------------------------------------------------------------------

During the transition, funds would be slowly shifted from
FICA to individual management. At the end of the transition
period, any remaining federal beneficiaries would be
capitalized with government bonds for the amount they would
have received had they participated in the plan from the start,
less withdrawals to date. Individuals over 55 at the enactment
of the plan will continue to be covered entirely under the
federal system. Individuals under 30 at the enactment of the
plan will wholly covered by the new system. Individuals between
these ages will receive mixed coverage. Federal employees would
chose from a menu similar to the current thrift savings plan,
with the same phase-in period percentages and the same level of
equality in employer contributions.
This phase-in assumes that 1% of both employer and employee
contributions will be transferred from the current Social
Security surplus. If the current surplus does not allow this,
the schedule can be altered, with a slower start and a more
rapid conversion. Additionally, this plan requires fiscal
discipline. Business income tax revenues and federal spending
(less interest on the debt) must always match, or be in surplus
to cover all retiree pension costs beyond FICA revenues.
Note that higher income individuals will receive more of
their retirement income from their own contributions, while
lower income individuals will receive more income from employer
contributions. The employer contribution provides a floor for
retirement income.

Progressive Income Taxation

Personal Income Taxes over $130,000 would remain at a lower
rate (at least the current rate less the Business Income Tax
rate) and would be dedicated to the payment of Net Interest on
the Debt and its retirement. Rates could be set higher to
facilitate earlier debt retirement. After debt retirement has
begun, additional debt may only be incurred in time of war, and
then only for defense, and to capitalize the remaining Social
Security beneficiaries in 2040.
Progressive income taxation must be preserved. The main
reason for retaining such a tax is practical. Without such a
provision, no tax reform will pass. Any tax reform will be dead
on arrival unless the wealthy continue to pay their fair share.
This proposal, unlike the others, does that.
There are also several economic reasons to maintain
progressive elements. The first is the need to encourage
consumption. Without progressive taxation, the savings sector
increases at the expense of the consumption sector--leading to
a need for risky investments of the sort taken in real estate
and junk bonds which led to the Savings and Loan Crisis and the
current Asian financial crisis. Currently, both the consumption
and savings sectors are strong, leading to healthy corporate
profits and a strong stock market. This came about partly
through an increase in the tax rate on the wealth sector from
31% to 36% and 39.6%.
This proposition can be tested empirically by comparing
growth (in percentage terms) with the financial margin, which
equals the net of net interest and the deficit or surplus
expressed as a percentage of GDP. The financial margin is
multiplied by -1 during Republican administrations to account
for tax policy (Republican presidents cut taxes on the
wealthy--requiring deficits to growth the economy, while
Democrats raise taxes on the wealthy--so that lower deficits
lead to higher growth). The slope multiplier for the financial
margin can be independently verified by examining data for each
administration without multiplying the financial margin by -1.
A final reason for progressive taxation comes from business
investment strategy: to wit, before a penny is spent on plant
and equipment there must be an available customer base with the
ability to consume. No corporate investment manager will hold
his job for any length of time if he recommends investment
because capital costs are low in the absence of such a customer
base. This is why, when consumption is high, companies invest
and growth continues.

Health Insurance

We propose dividing Medicaid into two funds
Support for poor individuals and families
(including those with HIV/AIDS), which will be transferred to a
business income tax deduction or a TANF credit. Medicaid for
the non-elderly poor can be replaced by a Catastrophic/MSA/MLC
plan, as described below.
Medicare Part C for the elderly poor. Medicare
parts A, B and C should be managed as one program
Medicare trust funds can be shorn up with increased use of
Medical Savings Accounts, Medical Lines of Credit and Long Term
Care Credit Lines (along the lines of a negative mortgage).
Medical Savings Accounts (MSA) are becoming increasingly
popular. These can be augmented by Medical Lines of Credit
(MLC), which would cover expenses not covered by MSAs (such as
chiropractic and massage therapy), any gaps between MSAs and
Catastrophic Insurance coverage and for insurance for new
employees.
Business Income Taxes must be set high enough so that some
part of the burden for the increased cost senior health is
shifted to taxpayers, ending the subsidy to those whose parents
have already passed.
The Committee thanks you for the opportunity to address
these issues. A copy of this statement will be provided to the
Administration. We welcome the opportunity to testify in the
future before the Committee on Ways and Means, the Senate
Finance Committee and any joint task force or committee
established to examine these issues. We are also available for
any questions or comments from Committee members, members of
the House, the Senate, the Administration or the general
public. Please address all such inquiries to our Chair, Michael
Bindner.

National Conference of State Legislatures
November 19, 1998

The Honorable William Archer, Chairman
Committee on Ways and Means
U.S. House of Representatives

Dear Chairman Archer:

The National Conference of State Legislatures (NCSL) commends you
and the Committee on Ways and Means for beginning the arduous task of
considering the alternatives available to reform Social Security and
the process by which the House will undertake this task. The nation's
state legislators feel very strongly about one aspect of Social
Security reform, that of the extension of mandatory Social Security
coverage to all or new state and local government employees. NCSL
vigorously opposes any efforts to extend mandatory coverage to
additional groups of state and local government employees in any
package to restore solvency and integrity to Social Security.
As you are aware, the Social Security Act of 1935 specifically
prohibited state and local government employees from coverage in part,
because state and local government retirement plans effectively
provided retirement benefits to many state and local government
employees. Most recently, the Omnibus Budget Reconciliation Act of 1990
(OBRA 1990) required mandatory coverage of state and local employees
not covered by a public pension plan. Further, OBRA 1990 ordered that
these plans maintain minimum contribution and benefit level standards
equivalent to Social Security in order to avoid mandatory coverage.
Numerous proposals intended to extend the life of Social Security
offered since the 1980s have included a menu of options for bringing
solvency to the nation's largest retirement insurance system. Many of
these proposals have included plans to extend mandatory Social Security
coverage to state and local employees under the guise of simplifying
program administration and broadening participation in an important
national program. While we agree that Social Security is a valuable
program that provides benefits to the vast majority of Americans, state
and local government retirement systems provide comparable and in many
cases superior benefits to those provided by Social Security as well as
flexibility to specific classifications of employees who are ill-suited
to participate in Social Security.
State and local government retirement systems effectively provide
retirement and supplemental benefits, such as health care, to state and
local employees and their families. These systems effectively manage
retirement funds on behalf of public employees and are models for
effective private retirement savings that should be studied for best
practices, not raided as a short term fix to extend social security for
a limited number of years.
State and local employees earned these funds, contributed to these
plans and in many cases bargained successfully for the range of
retirement benefits offered by state and local government retirement
systems. State and local employees with a proven commitment to personal
savings should not be punished for their planning and initiative. Many
of those critical of state and local government retirement plans have
stipulated that mandatory coverage is ``only fair.'' We disagree. It is
not fair to resolve the Social Security solvency problem at the expense
of public employees who have saved and planned for their retirement in
good faith and in partnership with their employers, state and local
government.
Mandatory coverage is not a sound policy. Mandatory coverage would
devastate the retirement savings of state and local employees, without
any guarantee that their Social Security benefit would be equal to
their benefit under their current savings plan. The General Accounting
Office (GAO) argues in an August 1998 report that by extending
mandatory Social Security coverage to all newly hired state and local
government employees Social Security's long-term actuarial deficit
would fall about 10 percent and the program would remain solvent for an
additional two years. GAO maintains that the ``effect on public
employers, employees, and pension plans would depend on how state and
local governments with noncovered employees respond to the additional
costs and benefits associated with Social Security coverage.'' State
and local governments, as employers, would be faced with the untenable
choice of decreasing or discontinuing benefits, raising the costs to
participate in the program, or being forced to supplement these plans
with additional funds from state revenues at the expense of other
valuable state and local programs. While states are currently
experiencing a lift in the economy, state and local governments might
be forced to increase borrowing, reduce spending, or raise revenues to
honor our commitments to public employees and to state retirement
systems if we were unable to reduce benefits or impose additional costs
on plan participants.
Similarly, the Congressional Budget Office (CBO) routinely suggests
as a means to provide funds for federal priorities or budgeting
balancing purposes that the federal government mandate coverage of
state and local employees. In March of 1997, CBO estimated that the
extension of mandatory Social Security to all State and Local workers
would generate $6.9 billion dollars to the federal government over five
years. Yet, these reports fail to examine adequately the long-term
consequences of these proposals. In the out years, as these employees
receive Social Security benefits the federal systems is again at risk
of becoming insolvent.
We understand the immediate fiscal appeal of extending mandatory
coverage, but maintain that it would totally uproot state and local
government retirement systems supported by employee contributions.
Further, reduced contributions to state and local government plans
would have a dramatic effect on the long term financing of state and
local plans, shifting the solvency problem to state and local
retirement plans that to date have performed auspiciously on behalf of
employees.
An extension of mandatory coverage would impose a tremendous cost
shift to states, which we are certain would constitute an unwieldy
unfunded mandate. While seven states--California, Colorado, Illinois,
Louisiana, Massachusetts, Ohio and Texas--account for 75 percent of the
employees who participate in government sponsored retirement plans, the
extension of mandatory coverage affects all states. (See attached
table).
State and local government retirement plans must be fully preserved
and allowed to operate without additional intrusive and
administratively cumbersome federal regulation. We urge you to consider
our concerns and resist quick fix efforts such as extending mandatory
coverage that leave so many worse off.
We appreciate your consideration of the views of the National
Conference of State Legislatures on this issue. If our staff can be of
any assistance to you, please do not hesitate to contact Gerri Madrid
at (202) 624-8670 or Sheri Steisel at (202) 624-8693.

Sincerely,
Representative Norma Anderson,
Co-Chair, NCSL Taskforce on
Social Security Reform,
Colorado House of
Representatives
Delegate John Hurson,
Co-Chair, NCSL Taskforce on
Social Security Reform,
Maryland House of
Delegates

Statement of Hon. Jim Ramstad, a Representative in Congress from the
State of Minnesota

Mr. Chairman, thank you for calling today's hearing to
discuss how to preserve and protect Social Security--a program
of vital importance to seniors and individuals with
disabilities across the nation.
As we all know, Congress faces a daunting task in working
to preserve Social Security. As the demographics of our nation
change, and more and more seniors draw benefits, the program
faces its biggest challenge.
The ``easy'' solutions of increasing taxes and cutting
benefits are not acceptable. Thus we must pursue more complex
resolutions to the financial problems facing this program. In
town meetings and other forums, my constituents have expressed
interest in directing payroll taxes into some special,
voluntary Personal Retirement Accounts, to take advantage of
the power of compound interest.
Mr. Chairman, as the demands on the Social Security system
grow, the country benefits by addressing this issue before it
is an overwhelming crisis. By acting now, we will have the time
and flexibility to make changes that will actually protect and
preserve the program for generations to come.
Like all of my colleagues, I am anxiously awaiting the
specific proposals the Administration will send to Congress to
begin this important debate. Presidential leadership will be
crucial to any potential reform program. Neither Republicans
nor Democrats can solve this problem. We must work together in
Congress and with the administration to provide a safe and
secure future for everyone.
Thank you again, Mr. Chairman, for calling this hearing. I
look forward to hearing from today's witnesses about their
thoughts for saving this crucial program.

Statement of Cynthia Wilson, President, Retired Public Employees
Association, Inc.

As the President of the Retired Public Employees
Association, an organization of more than 78,500 of New York
State and local government retirees and their spouses, I am
writing to urge that the Committee use in-depth analyses to
test reform proposals before legislation is enacted. Adequate
testing should be a significant prerequisite for development of
a ``solid and fair plan to save Social Security for all
Americans.''
1. We recommend a study of the effects of various reform
proposals on the economic status of separate demographic and
income-level groups. This would include:
identifying those adversely affected;
proposing means of reducing or eliminating the
negative effects; and
estimating the cost of such interventions.
Examples of topics that would merit this type of additional
study are:
the proposal to increase from 62 to 65 the
earliest age at which the old age pension could be collected;
and
the proposal to subject the small personal
investment accounts of low-wage workers to regular
administrative costs.
2. We recommend a detailed investigation into the
administrative issues and costs surrounding the creation and
maintenance of 147 million individual investment accounts. We
support Stanford Ross, Francis Cavanaugh and Dallas Salisbury,
experts who have already expressed concerns about this issue.
3. We recommend an explicit description of how reform
proposals will affect disability and survivors benefits.
4. We support John Cogan's recommendation for creation of
``a clear and firm set of rules'' for measuring budgetary
impacts of proposed policy alternatives. In view of the dynamic
activity of the U. S. economy in the past few years, we are
convinced that it would be appropriate to recalculate, at the
start of deliberations, the size of the deficit to be made up.
5. We recommend that estimates of the financial effects of
individual proposals reflect interactions, where possible.
6. We support Herbert Stein's suggestion of a study to
evaluate the effects of reform proposals on total national
savings.
7. We also support Stanford Ross' request to review all
parts of the retirement income system.
8. Finally, we support recommendations made by the
Technical Panel on Assumptions and Methods to the 1994-1996
Advisory Council. This group recommended that the evaluation of
the long-range financial status should put less emphasis on the
``75-year actuarial balance'' and the ``test of long-range
actuarial balance'' and more emphasis on the projected date the
Trust Fund Ratio would fall below 100 percent. They also
recommend that ``when definitive legislative revisions are
adopted, subsequent long-range evaluation should compare up-
dated projections with the intended results of legislation.''
In requesting these involved calculations, we urge that the
computer power and expertise as well as the available data of
those in the private and academic sectors be called on to
supplement what is currently available to the Social Security
Actuary and to the Committee.
Since the results of these deliberations will affect
millions of Americans, both young and old, and over many years,
the greatest care and thoroughness should be taken during the
process.

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

Mr. Chairman, I am pleased to have the opportunity to
address the committee today on Social Security -a program that
affects us all. Social Security is the nation's most successful
anti-poverty program, serving over 40 million Americans,
including retirees, disabled individuals, widows, and orphans.
While some would like for us to believe this vital program
faces a ``crisis,'' the reality is that the Trust Fund can
continue to pay out full benefits for the next 34 years, until
2032. I would not call this a crisis and neither would the 87.9
percent of American surveyed by International Communications
Research for the Institute for America's Future who prefer that
the Congress and the President take the time to better explain
the Social Security reform options before going forward with
changes. However, given the fact that our population is aging
and fewer workers will be supporting older Americans in the
future, it is imperative to take a harder look at how we can
preserve this important program for our children and
grandchildren.
I am concerned that many Social Security reform proposals
are advocating reducing benefits, raising the retirement age,
and worst of all, privatizing all or part of the program. We
need to take much less drastic steps to maintain the Social
Security system.
One area that has received little discussion in the Social
Security debate is raising or eliminating the earnings cap,
which will rise from the current $68,400 to $72,600 next year.
Currently, workers and their employers each pay a 6.2 percent
Social Security tax on earnings up to the maximum amount.
This is one of the most regressive approaches to taxation
since millionaires and billionaires stop paying all of their
Social Security taxes for the year on January 1 while everyday
working men and women pay these same taxes all 365 days a year.
Contrast the limits on the Social Security tax with the
Medicare Hospital Insurance tax (1.45 percent or 2.9 percent
for the self-employed). There is no maximum limit on the
Medicare tax and I think one option this committee and the
Congress as a whole should explore is eliminating or at least
raising the Social Security earnings cap. This would ensure
that all Americans would be paying the same tax on their
earnings. In addition to being an issue ofsimple fairness, I
believe this plan could raise enough revenue to bring needed
Social Security tax relief to low-income Americans and/or the
self-employed.
Self-employed individuals pay the full 12.4 percent Social
Security tax themselves. Often, paying the requisite 15.30
percent (including Medicare Hospital Insurance taxes) is a
major hardship for those Americans running their own
businesses. For example, the average farmer in Vermont earning
$30,000 a year pays $4590 a year in Social Security and
Medicare Hospital Insurance taxes alone before income taxes are
factored in.
The plan to raise the earnings cap is supported by a two-
to-one ratio, according to a recent poll by the nonpartisan
group, Americans Discuss Social Security. I find it interesting
that despite widespread support for raising the earnings cap,
no one seems to talk about this plan.
Eliminating the cap completely and increasing benefits
accordingly would make up 1.3 percent of the 2.19 percent
actuarial gap. That takes us more than halfway there. Factoring
in a tax break for low-income Americans and the self-employed
would cut into the 1.3 percent, but if done in a reasonable
manner, we could provide this tax relief and still make up part
of the actuarial gap. I am not contending that this will
completely take us to where we need to go, but it is a partial
solution that I believe is both fair and economically feasible.
Turning from these plausible, acceptable options, a number
of other options that have been raised as ``solutions'' to the
Social Security ``crisis'' are simply unacceptable. Cutting the
Consumer Price Index, or CPI, which determines Social Security
cost of living adjustments (COLAs), would be an outrageous
attempt to balance the budget on the backs of the elderly.
Cutting the CPI or reducing seniors' COLAs would be a disaster
for senior citizens, half of whom live on less than $15,000 a
year. In 1996, 12 percent of Vermont seniors lived below the
poverty level. In 1999, the Social Security COLA will only be
1.3 percent and cutting this small increase would be disastrous
to elderly Americans. We should not make our seniors choose
between paying for their prescriptions, heating bill, or
groceries in order to ``save Social Security.''
In addition, the majority of Americans oppose raising the
retirement age even further. Workers age 40 and younger today
will already have to wait until they are 67 to receive their
normal Social Security retirement benefit. Increasing this to
age 70 is an absurd idea. Many hardworking Americans simply
cannot labor into their 70s and cannot afford to retire early
and receive reduced benefits. I urge this committee and
Congress to stand with our constituents and reject this plan.
Finally, I am deeply concerned about efforts to privatize
all or part of the Social Security system. If Members could
guarantee that the market would never again crash or we could
educate every working American how to play the market without
risk and make a fortune off of it, it might be worth a shot.
But we know that is impossible. Arthur Levitt, the Chairman of
the Securities and Exchange Commission, has stated that ``the
gap between financial knowledge and financial responsibilities
is unacceptably wide. For example, more than half of all
Americans do not know the difference between a stock and a
bond; only 12 percent know the difference between a load and a
no-load mutual fund; only 16 percent say they have a clear
understanding of what an Individual Retirement Account is; and
only 8 percent say they completely understand the expenses that
their mutual funds charge.'' What this means is that less than
20 percent of the population has a grasp on some of the most
basic investment information. Forcing them to invest their
retirement money in the stock market instead of keeping it in
Social Security would be disastrous for a huge majority of our
constituents. We do not know what will happen to the stock
market in the future. What will happen if our workers make poor
investments and lose the money in their retirement fund? How
then do we take care of them when they retire? This is a risk
that our nation cannot afford. Privatization is a misguided
route.
I am thankful for this opportunity to address the committee
with my thoughts on a fair, rational way to reform Social
Security. Over forty million Americans depend on this vital
program and we need to ensure that it is there for them and for
generations to come.

Statement of Laurence S. Seidman, Professor of Economics at the
University of Delaware

My article and book present the case for funding social
security. Funding social security is not a new proposal; its
basic components have been recommended by other advocates of
social security reform.
There are two middle positions between our current pay-as-
you-go (PAYGO) defined-benefit social security, and privatized
defined-contribution social security. One is PAYGO social
security with supplemental individual defined-contribution
accounts. The other is funded social security.
Funded social security is a defined-benefit plan. Funded
social security is achieved by preserving the current U.S.
social security defined-benefit formula, and gradually shifting
the financing from payroll taxes to a mix of portfolio
investment income and payroll taxes.
Funding social security has two distinct essential
elements: fund accumulation, and portfolio diversification.
Fund accumulation requires gradually adjusting tax rates,
ceilings, and benefit rates to achieve substantial annual
surpluses. Protection from the payroll tax increase is given to
low-income workers by expanding the earned income tax credit. A
large permanent capital fund would then accumulate gradually
over the next century, and the fund's annual investment income
would eventually enable a permanently lower payroll tax rate.
Portfolio diversification is achieved by having the social
security administration contract with private investment firms
(under competitive bidding) to invest this capital fund in a
conservative diversified portfolio of government bonds, and
corporate stocks and bonds.
With funded social security, all investment risk is pooled:
there are no individual accounts. Private investment firms
manage social security's portfolio the way they manage the
portfolio of conservative risk-averse private clients. Funded
social security avoids excessive reliance on either government
bonds (because the yield is lower) or corporate stocks (because
the risk is higher). The investment firm handles stock voting
as it does for private clients.
Funding social security will eventually double the return
that workers obtain on their saving--from 2% to 4%. In a mature
PAYGO system, the return equals the growth rate of real
output---roughly 2%. With funded social security, the return
will be roughly 4% (the average of a 6% return from corporate
stocks, and a 2% return from government bonds). This doubling
of the return makes a tremendous difference over a person's
lifetime. For example, consider a worker age 45 saving $5,000
that year. Compounded at 2% per year it grows to $7,430 at age
65; compounded at 4% per year it grows to $10,956.
Funded social security rests on a cautious and realistic
view of the stock market. It is important to emphasize two
points. First, funded social security uses payroll taxes as
well as portfolio investment income to finance benefits.
Second, the portfolio is conservative: government bonds
constitute an important share of the social security portfolio.
Like the current U.S. social security system, funded social
security is a defined-benefit plan where each retiree's benefit
is linked to the retiree's own wage history by a legislative
formula; the benefit does not directly depend on the
performance of the portfolio. If portfolio earnings fall, then
a fraction of the portfolio must be sold to finance legislated
benefits. However, if the portfolio performs poorly for several
years, then either the legislative formula must be adjusted or
payroll taxes increased. Thus, indirectly, benefits are
eventually affected by portfolio performance: funded social
security does not eliminate stock market risk. But it minimizes
the risk for the individual retiree by pooling the risk over
all retirees, utilizing a conservative diversified portfolio
invested in government and corporate bonds as well as corporate
stocks, spreading the risk over time by selling fund assets as
a first resort while adjusting the legislated benefits formula
only as a last resort, and using payroll taxes as well as
portfolio investment income.
It is crucial to recognize that fund accumulation and
portfolio diversification are separate components. It would be
possible to have fund accumulation without portfolio
diversification: social security could accumulate a large fund,
but invest it solely in special non-marketable low-yield
government securities (as it does currently under the U.S.
Social Security system). Conversely, it would be possible to
have portfolio diversification without fund accumulation:
social security could maintain only a small fund, but invest
that fund in a mixed portfolio. The term funded social security
implies both components: a large capital fund invested in a
diversified portfolio.
Fund accumulation is the key to raising the capital
accumulation of the economy, while portfolio diversification is
the key to capturing a larger share of the economy's capital
income for the social security system.
Funded social security would be completely separated from
the Federal budget. Congress would be expected to balance the
budget without counting social security. One purpose of
converting social security from PAYGO to funding is to raise
the national saving rate. This purpose would be defeated if an
increase in the social security surplus by $100 billion
permitted Congress to increase the deficit in the rest of the
budget by $100 billion.
There is no way to escape a transition cost if the
objective is to raise the national saving rate through the
funding of social security. Raising the saving rate entails a
short run cost in order to achieve a long run gain. The cost is
borne as a combination of a transitional tax increase and a
temporary slowdown in benefit growth.
To protect the capital fund from a raid, each worker would
be sent an annual statement that provides an estimate of his
retirement benefit. The key to deterring a raid on the capital
fund is to make sure that current workers realize that it is
their future benefits that are being raided. If the fund is
drawn down, then its investment income will be lower in future
years, and so will social security benefits. If the Social
Security Administration sends each worker an annual estimate of
his expected retirement benefit, based on current tax rates,
benefit rules, and the size of the fund and its investment
income, then a raid on the fund this year would reduce each
worker's expected benefit in next year's annual statement. With
annual individual benefit estimates, members of Congress would
be deterred from voting for a raid.

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

We all have loved ones whose lives are better because of
Social Security. Over forty million elderly and disabled
Americans receive benefits. This is why we must aggressively
respond when Social Security's actuaries tell us that the
system's unfunded liability exceeds $9 trillion. The pubic is
ready for decisive action. In this year's election, they
repudiated negative campaign attacks that distorted positions
on Social Security. They voted for reform advocates like
Charlie Stenholm (D-TX) and myself, giving us victories with
comfortable margins.
Some have suggested that Social Security is financially
secure until 2032. That would be true if there was a real trust
fund. In fact, there is no real trust fund. All Social Security
taxes being paid in are immediately spent for Social Security
benefits or other government programs. For government to pay
back the unsecured borrowing from Social Security, it must do
one of three things: increase taxes, reduce other spending, or
borrow more. These are the exact three alternatives that would
have to take place if there were no trust fund even in name.
While we are in a deep hole, there is an escape ladder. We
can allow workers to put aside an increasing amount of their
payroll taxes into personally owned retirement accounts while
we simultaneously and gradually reduce the size of future
retirees' publicly financed monthly benefits. Because workers'
``nest eggs'' will grow rapidly, their total retirement income,
coming from two sources instead of one, will be higher than
under current law--even as federal spending on public Social
Security benefits is trimmed to levels that avoids payroll tax
increases.
My own bill, the Social Security Solvency Act of 1997,
shows how making just incremental changes over long periods of
time can free up enough Social Security taxes to provide funds
for prudent investments that turn workers of average means into
wealthy retirees. The Social Security Administration has
officially informed me that this can be done. Reforming Social
Security to include supplemental retirement accounts is a
popular idea. In surveys, over 60% of respondents support it.
Many opponents of personal accounts agree that investing
Social Security surpluses in the private capital markets will
reduce the amount of tax increases or benefit cuts needed to
restore the program's financial integrity. However, they
suggest that the federal government should do the investing.
This strategy has two fatal flaws.
First, the size of the government's equity investment will
eventually grow to an imposing amount that practically
guarantees unparalleled corruption. Imagine the potential for
insider trading when a few officials meet in secret to buy or
sell billions of publicly traded securities. Consider the
consequences if public officials have the ability, through
stock price manipulation, to blackmail or bribe CEOs into
making campaign contributions. In the 1930's, the architects of
Social Security, FDR and Democratic Congresses, rejected this
dangerous plan. Those who support it today must explain why the
designers of the system were wrong.
Second, government investment in the capital markets cannot
accomplish the retirement security that its advocates seek.
Under the existing generational transfer system, there is no
legal relationship whatsoever between the revenues that Social
Security takes in during the years that a worker contributes to
Social Security and the future benefits a worker will receive.
This is not subject to debate. The Supreme Court has confirmed
this in two important cases, Flemming v. Nestor (1960), and
Richardson v. Belcher (1971):
``It is apparent that the noncontractual interest
of an employee covered by the Act cannot be soundly analogized
to that of the holder of an annuity. . . To engraft upon the
Social Security system a concept of 'accrued property rights'
would deprive it of the flexibility and boldness in adjustment
to ever-changing conditions which it demands.''
``The fact that social security benefits are
financed in part by taxes on an employee's wages does not in
itself limit the power of Congress to fix the levels of
benefits under the Act or the conditions upon which they may be
paid. Nor does an expectation interest in public benefits
confer a contractual right to receive the expected amounts.''
Even the Social Security Administration has made the point
that paying Social Security taxes does not ``buy'' anyone the
right to a retirement income paid by the federal government:
``There has been a temptation throughout the program's history
for some people to suppose that their FICA payroll taxes
entitle them to a benefit in a legal, contractual sense. That
is to say, if a person makes FICA contributions over a number
of years, Congress cannot, according to this reasoning, change
the rules in such a way that deprives a contributor of a
promised future benefit. Under this reasoning, benefits under
Social Security could probably only be increased, never
decreased, if the Act could be amended at all. Congress clearly
had no such limitation in mind when crafting the law . . .''
The point is clear. With no legal link between tax payments
and retirement benefits, there is no guarantee that future
retirees would reap the benefits of any investment gains the
federal government might earn. The funds could go for any
purpose, from buying battleships to paying for abortions.
Workers still would have no legal right to a specified publicly
funded retirement income, and they would remain at risk.
Recent history shows this risk is not trivial. The 1977
reforms created ``Notch Babies'' who have received benefits
significantly less than those granted to friends just a few
years, or even weeks, older. In 1983, Congress passed
legislation that taxed up to half of a beneficiary's Social
Security income. This new tax, coupled with a six-month delay
in cost of living increases, cut benefits to some retirees by
27%. As part of the 1993 Budget Act, some seniors suffered
benefit cuts of 14% when Congress decreed that up to 85% of
these payments were taxable. The millions who were hurt by such
benefit cuts have no recourse. The only way to lock in gains
for workers' retirement is to give them ownership of their
accounts.
Opponents of personal accounts point out that investing can
be risky. Over the short run, this is true. However, there is
no twelve-year or longer period in U.S. history when investors
have lost money. Long-run investing isn't risky, but betting on
the government to keep its word decades from now surely is.
Eight Senators and six House members from both parties have
introduced reform plans that allow workers to accumulate
personal retirement savings. President Clinton has said he will
support personal accounts as part of overall reform. With both
ends of Pennsylvania Avenue committed to finding a solution, we
have the architects and the blueprints to enact meaningful
reform. It's time to act.

Statement of Society for Human Resource Management

Chairman Archer and Members of the Ways and Means
Committee:
Thank you for holding a hearing on saving social security
and for the opportunity to express the views of the Society for
Human Resource Management. The Society for Human Resource
Management (SHRM) is the leading voice of the human resource
profession. SHRM, which celebrates its 50th anniversary in
1998, provides education and information services, conferences
and seminars, government and media representation, online
services and publications to more than 100,000 professional and
student members through out the world. The Society, the world's
largest human resource management association, is a founding
member of the North American Human Resource Management
Association and a founding member and Secretariat of the World
Federation of Personnel Management Associations (WFPMA).
SHRM is currently in the process of developing social
security reform policy and principles, which we will be
releasing in early 1999.
The ability of current and future retirees in the United
States to financially sustain themselves can either be
facilitated or eroded by legislative initiatives, influenced by
the short and long-term need for tax revenue. Individuals rely
on three main sources to finance their retirement: (1) Income
from private sources (e.g. employer-sponsored retirement and
health care plans); (2) Their own personal savings; and (3)
Social Security and Medicare. A critical foundation of
retirement is the affordability and access to adequate health
care. Economic, demographic, social, accounting and regulatory
trends, as well as the demand for current income indicate that
in the long-term an increasingly large proportion of retirees
may not have sufficient income and medical coverage from each
of the three sources when they retire.
To provide a sound foundation for retirement planning, and
minimize the number of retirees on welfare, a national
retirement policy is essential to guide the various
governmental entities, businesses and individuals in their
fiscal and health care planning. Such a policy should recognize
significant trends and enable policy makers to institute and/or
revise income, taxation and retiree health care funding systems
to effectively meet longer-term challenges.

Background:

Today most individuals are able to retire comfortably. From
1971 to 1991, the elderly poverty rate fell from 22 percent to
12 percent. On average, workers retire earlier and live longer
than in the past. However, a number of trends in the economy
and workplace suggest that it may be more difficult for
American workers to retire with a reasonable standard of living
in the future. These trends are highlighted below.

Aging Population Increases the Need for Adequate Retirement
Income and Health Care Coverage:

As the U.S. population ages rapidly and the elderly live
longer, an increasing proportion of the population will depend
on retirement income and retiree health care. Without re-
enforcing the traditional retirement support systems, the
declining ratio of workers to retirees will place a huge burden
on Social Security, Medicare and Medicaid. In 1990, 13% of the
population was aged 65 or older, compared to 10% in 1970. The
Department of Labor projects that by 2050, 22% of the
population will be aged 65 or older.

Mobility Causes Inadequate Retirement Income:

Employees are likely to change jobs several times over
their careers. Those frequently changing jobs, not always
voluntarily, may be less likely to have adequate retirement
income and employer sponsored retiree health care upon retiring
since many traditional retirement programs (income and health
care) provide benefits based on length of service, and vested
benefits for shorter service terminations are frequently paid
out in cash and not saved for retirement.

Firms Without Retirement Income and Retiree Health Care Plans:

The self-employed and employees of small firms, which
create most new jobs, are less likely to have employer-provided
retirement programs than employees in larger firms. According
to the Employee Benefit Research Institute, in 1991, 19% of
workers in firms with fewer than 25 workers were covered by an
employer-sponsored retirement plan compared to 78% of employees
in companies with 1,000 or more employees. Similarly, 18% of
smaller employers provide employer sponsored retiree medical
coverage, while 44% of large employers provide medical coverage
to retirees.

Conservative Defined Contribution Plan Investments Reduce
Retirement Income:

According to the Pension and Welfare Benefits
Administration (DOL), from 1975 to 1990 most of the growth in
employer-sponsored plans can be attributed to an increase in
the number of defined contribution plans from 207,700 to
599,200. The shift to defined contribution plans may affect
retirement savings as a result of participant's conservative
investment choices, which may lead to lower than expected
retirement standards of living. Several studies have found that
participants in defined contribution plans, which generally
allow participants more discretion in investment allocation,
often choose low-risk, low-return investments.

Erosion of Pre-Retirement Fund Distributions:

Based on Employee Benefit Research Institute (EBRI) data,
most employees choose not to roll over their lump sum
distributions, particularly small distributions, into another
retirement account when they leave a job. According to EBRI's
study, only 22% of lump sum distributions are rolled-over into
other qualified plans, while most are used to fund current
consumption or other expenses. Withholding regulations
implemented in 1993 may be reducing this practice somewhat,
leading to more funds being rolled-over into other qualified
plans.

Complex Regulations Deter Employer-Sponsored Plans

The complexity of existing retirement plan regulations and
the substantial administrative cost of complying with them
discourage employers from establishing and maintaining
retirement plans. A 1991 survey conducted by the American
Academy of Actuaries found that among those actuaries whose had
been involved in a plan termination in the previous year, the
largest single reason (30%) cited was government regulations
(including complex rules, the increasing cost of compliance,
and frequent changes in the retirement plan law) as the key
reason employers terminate their defined benefit retirement
plans.
Accounting Standards Changes and Medical Inflation Deter
Employer Sponsored Retiree Health Care:

The advent of requiring corporations to establish financial
statement liabilities for retiree medical programs caused
businesses to focus on this major expense. As a result, many
businesses have reduced or eliminated their post-retirement
medical coverage. At the end of 1994, according to a recent
EBRI study, fewer than 34% of retired employees are covered by
employer sponsored medical plans.

Retirement Plans Are Not Significantly Under-Funded:

According to a recent report by the Pension Benefit
Guaranty Corporation (PBGC), which insures most private sector
defined-benefit plans, pension underfunding fell to $31 billion
in 1994 from $71 billion in 1993, and most pension plans today
are adequately funded. This represents only 1% of the $3.2
trillion held in trust to pay current and future benefits and
in spite of cutbacks in the limits on contributions that were
repeatedly enacted since 1982. Much of the under-funding may
partly be due to the highly conservative assumptions used by
the PBGC. Further, the Retirement Protection Act, which
Congress passed in 1993, may help prevent future pension plan
failures by increasing the incentives for funding underfunded
plans.

Social Security and Medicare Are Not Sufficiently Funded:

The Social Security and Medicare trust funds have been
viewed as sources of government program funding, causing them
to be unreliable sources of retirement support. Since the
Social Security system is currently generating more revenue
than it pays in benefits, the government borrows the surplus
revenue to fund other government programs. On the other hand,
Medicare benefits already exceed the taxation revenue, causing
the trust to decrease each year. However, as the population
continues to age, more workers will rely on Social Security and
Medicare benefits and proportionately fewer workers will be
funding the benefit. The Board of Trustees for the Social
Security Trust Fund advised in their 1995 Report that the
Federal Old Age and Survivors Insurance (OASDI) Trust Fund will
be able to pay benefits for about 36 years. Of more urgency is
the funding of the Medicare Trust, which its trustees report
will be depleted within 7 years.

A Source of Government Revenue:

Policy makers look to retirement funds for potential
revenue, to reduce the national deficit. The Treasury
Department estimated the government would have gained $64.9
billion in FY 1995 revenue if employers (including federal,
state, local and private) were taxed on the value of
contributions to retirement plan funds. According to EBRI, this
tax revenue loss is overstated. More than half of this is
attributable to public sector retirement plans. In addition,
tax expenditure discussions focus on current revenue impact
rather than the future value of taxes when retirement income
would be paid out in future years.

Lower Income Individuals Depend Heavily on Social Security and
Employer-Sponsored Plans:

Fifty one percent of all persons employed by private
businesses with pension plans earned less than $25,000 and 89%
earned less than $50,000. According to EBRI, because most
workers earn under $50,000, retirement programs primarily
benefit workers with income below this level. Individuals with
fewer than 50,000 will depend most heavily in their retirement
years on Social Security qualified retirement plans and
Medicare, as they are least likely to have personal savings or
private medical insurance.

Impact of the Growth in the Service Sector and the Contingent
Workforce:

Traditionally, employer-sponsored retirement income and
retiree medical plans have been more prevalent in the
manufacturing than the service sector, where the proportion of
employment has continued to increase. Economic and demographic
shifts have also contributed to a rise in the number of
seasonal, part-time, and contingent workers. These individuals
may comprise as much as one-third of the workforce and are less
likely to participate in employer-sponsored retirement income
and retiree medical plans. The above trends and current
regulatory burdens have created the need to reexamine the
employer, individual and federally funded retirement systems
and implement a uniform and consistent national retirement
policy. Below is a framework of principles and specific
recommendations to guide the formulation of such a national
policy.

General Principles

SHRM believes that government shares responsibility with
American workers to achieve adequate retirement income and have
access to adequate medical care. Moreover, to enable employers
to help support retired employees; public policy should
encourage the voluntary establishment of retirement programs.
To facilitate sound retirement planning, we have established
the following three fundamental principles:
1. Primary Individual Responsibility for Retirement
Financing: Individuals should have primary responsibility to
provide for their own adequate retirement income and health
maintenance funding. Individuals should be responsible for
planning and building their own retirement resources, including
anticipating their retirement expenses and the sources of
funding to meet their needs. To this end, the government should
encourage or otherwise facilitate retirement (financial) needs
planning of the American worker and families, including
voluntary employer education programs. Importantly, the
government should encourage individuals to provide for their
own retirement income and health maintenance, by making
available tax-favored savings vehicles.
2. Government Responsibility for Retirement Income and
Medical Coverage: Through its mandated Social Security and
Medicare programs, as public policy the government shares with
the American worker the responsibility for providing some
reliable basic retirement income and health care for all
individuals. Through taxation of, and an implied promise to,
all American workers, these programs have become fundamental
components of our country's retirement system. The government
should also facilitate the continuation and growth of employer
sponsored programs and provides consistent tax incentives and
simplified regulations to encourage employers to provide
retirement benefits that otherwise would be sought from the
government at greater cost to society. In addition, to enable
American workers to have an adequate and secure retirement, it
is incumbent on the government to maintain a fiscal policy that
ensures low inflation over the long term.
3. Employer's Role in Providing Retirement Benefits:
Employers may find themselves voluntarily able to help workers
achieve adequate retirement incomes and maintain their health
during retirement, reducing pressure on government funding for
retirees. Employers play key roles in providing retirement
income and medical coverage through payments into the Social
Security and Medicare systems and voluntarily to employer
sponsored retirement income and medical plans.
Upon these principles, we propose the following framework
for a national retirement policy:

Specific Framework Recommendations:

Individual Responsibility for Retirement Financing

1. Regulation by Individual: To avoid retirement income inequities
caused by multiple retirement plans, variability in generosity or
finances of employers, dual family incomes, and complex retirement plan
regulations, contributions set aside for retirement income and retiree
health care should be regulated, if at all, only on an individual basis
in aggregate rather than on an employer, family or retirement plan
basis. Any necessary regulations should be understandable to the
general public, and consistent with the long-term objective of
individual financial stability.
2. Limitation on Retirement Plan Contributions: To obviate the need
for non-qualified retirement plans, overly complex regulations, and
excessive plan administration costs, all arbitrarily established limits
on the dollar amounts which may be deferred for retirement income
should be eliminated. If there are concerns that a few senior employees
would inordinately benefit from tax qualified plans; limits should only
be applied to a tightly defined group of policy making executives. In
that all distributions would be taxed when received, this change would
not affect the amount of taxes paid, but only the timing of tax
revenues.
3. Regulations and Access to Retirement Plan Funds: The same
regulations on administration and investment of, and restrictions on
access to, funds set aside for retirement should apply equally to
individual retirement plans and employer sponsored plans. Access to any
plan funds for retirement income or medical expenses prior to
retirement should be limited to significant life events, including
purchase of a primary residence, funding of the taxpayer's higher
education, demonstrable severe hardship, and other similar reasons
acceptable to the plans administrators. All funds distributed prior to
retirement should require a scheduled payback into the retirement plans
within a reasonable time frame.
4. Facilitating Retiree Mobility: Recent federal legislation was
enacted which prevents states from taxing retirement benefits based on
the location earned rather than where received. To perpetuate this
legislation ERISA pre-emption also should be applied to state tax laws
to base taxation of retirement income on receipt rather than where
income liability was incurred. This will more fairly align state tax
revenues with the services required by retirees, will be more equitable
between states, and will reduce the administrative cost of retirement
plans.
5. Qualified Individual Retirement Plans: Due to increased employee
mobility, the number of employees working for multiple employers and/or
working for employers which don't sponsor retirement plans, and the
need to facilitate employee retirement savings for years when an
employee will not earn a vested retirement benefit, regulations and tax
laws should be revised to:
a. Streamline the establishment of individual savings accounts for
both retirement income and medical expenses during retirement.
b. Encourage self-employed individuals and small to medium size
employers to provide retirement income savings and retiree medical
plans,
c. Encourage personal saving for retirement, and
d. Permit retroactive contributions to individual retirement plans
to make-up contributions subsequently permitted by regulatory change or
plan operation (e.g. loss of vesting).
SHRM Board Approved Position, March 1991: SHRM supports efforts to
permit retroactive contributions to IRA's for years for which a
participant loses retirement plan vesting (e.g., short-term
employment). To provide equity with married employees, who each earn
retirement benefits from separate employers, IRA contribution
eligibility should not be precluded by a spouse's qualified retirement
plan coverage.

Federal Government Provided Basic Retirement Income and Medical Care

1. Mandatory Coverage. Coverage for every employee in a
federal government retirement program (such as the current
Social Security and Medicare programs) should be mandatory.
Current parallel plans (e.g. Federal & State Government, &
Railroad Retirement and religious body plans) should be
consolidated with Social Security into one successor program to
produce a single consistent approach toward a floor of
retirement income.
2. Maintenance of Benefit Levels: It is important to avoid
further erosion of currently accrued (hence earned) Social
Security and Medicare benefits. This is essential to ensure
workers at every level receive the total retirement income and
medical protection on which they have based their financial
planning, believing Social Security and Medicare benefits were
promised by the government throughout their careers.
Maintaining these benefits will also facilitate the
affordability of employer-sponsored retirement plans, many of
which assume retirees also receive federally sponsored
retirement income benefits.
3. Funding. In order that current workers and work force
entrants will be assured of some minimal retirement income and
retiree health care, the Social Security and Medicare trust
funds, and/or their successors, must be maintained on a
financially sound basis, in line with the funding required of
individual and employer sponsored plans. However, this should
be 10 accomplished without shifting the funding burden
substantially to employers through increased taxes.

Employer-Sponsored Retirement Programs

1. Individual Retirement Savings Accounts: To encourage
small employers to provide retirement programs, and to
facilitate transfers of retirement funds between employers of
all sizes when employees change employers, regulations should
be simplified to permit and/or facilitate employers to place
current retirement income and retiree health care contributions
into an employees qualified individual retirement plan
(savings) rather than necessarily establishing separate
participant accounts within those employers plans, regardless
of employer size.
2. Funding Restrictions: Reform of accounting rules (i.e.
FASB) and retirement plan insurance (i.e. PBGC) should
encourage faster funding of unfunded obligations and under-
funded plans for retirement income and retiree health
protection. For example, increasing maximum annual
contributions, and using realistic or actual interest and pay
assumptions would expedite funding. Public and nonprofit
organizations should have identical access to plan alternatives
and be subject to the same regulations as other employers.
Government policy and regulations affecting retirement plans
should be consistent and hence coordinated throughout all
government agencies.
3. Investment Education: For retirement plans in which the
employee bears the risk of investment return, employers should
provide employees cost-effective diversified alternatives to
direct the investment of those funds. In such plans, employers
and plan administrators should be protected from unnecessary
fiduciary liability to facilitate educating employees on the
financial impact the investment choices they make could have on
their retirement income.
Either voluntarily or involuntarily, employers should be
permitted to transfer (to other qualified plans or accounts)
vested benefits following termination of employment. Similarly,
employers should be permitted to distribute (to other qualified
plans or accounts) all vested proceeds for any pre-retirement
termination, regardless of the amount involved. Receiving plans
should be indemnified against any disqualified funds so
received. Regulations should continue to permit service based
vesting schedules, permitting employers to optimize
contributions for the benefit of employees who remain employed
for more than a few years.
SHRM Board Approved Position, March 1991: SHRM recognizes
that the lack of a comprehensive retirement plan portability
policy could adversely affect the future retirement security of
this nations workers and therefore supports efforts aimed at
enabling participants to easily transfer funds between pension
plans and retirement vehicles such as IRAs. However,
portability and preservation solutions should not interfere
with the voluntary nature of the current retirement plan
benefit system by imposing burdensome and unnecessary
obligations upon plan sponsors.