[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 TrustTM. In just the 
past few months alone, hundreds of Americans have invested well 
over $1.25 million in the RIC-E TrustTM 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 
TrustTM, 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 TrustTM: 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 TrustTM, 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 
TrustTM have been solved. Now every parent and 
grandparent who opens a RIC-E TrustTM, 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 TrustTM, 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 TrustTM. 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 TrustTM 
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 TrustTM is 
that each Trust is only established for one child. So, if an 
investor wants to provide a RIC-E TrustTM for more 
than one child, he needs to create separate RIC-E 
TrustsTM. Each child can have an unlimited number of 
RIC-E TrustsTM and an investor can create as many 
RIC-E TrustsTM for as many children as they like.
    One of my key goals as the creator of the RIC-E 
TrustTM 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 TrustTM 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 
TrustTM prepared by an attorney who's a member of 
the RIC-E TrustTM 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.

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